2018
2018
ANNUAL
ANNUAL
REPORT
REPORT
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Call.
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800.374.6123
800.374.6123
peoplesbancorp.com
peoplesbancorp.com
138 Putnam Street | PO Box 738 | Marietta, OH 45750
138 Putnam Street | PO Box 738 | Marietta, OH 45750
Financial Highlights
Peoples Bancorp Inc. (Peoples) is a diversified financial services holding company with $4.0 billion in total
assets, 81 locations, including 72 full-service bank branches, and 76 ATMs in Ohio, West Virginia and Kentucky.
Peoples makes available a complete line of banking, investment, insurance and trust solutions through its
subsidiaries - Peoples Bank and Peoples Insurance Agency, LLC. Peoples’ common shares are traded on the
NASDAQ Global Select Market® under the symbol “PEBO”, and Peoples is a member of the Russell 3000 index
of U.S. publicly traded companies. Learn more about Peoples at www.peoplesbancorp.com.
Dollars in Thousands, except Per Share Data
Year-Over-Year Change
2018
2017
2016
2018
2017
Earnings and Dividends
Total revenues (1)
Total non-interest expenses
Net income
Dividends declared on common shares (2)
Per Share Data
Earnings per common share – Basic
Earnings per common share – Diluted
Cash dividends paid on common shares (2)
Book value at end of period
Tangible book value at end of period (3)
Closing stock price
At Year End
Total assets
Total investment securities
Total loans
Total deposits
Total stockholders’ equity
Trust and brokerage assets under
administration and management
155,935
106,911
31,157
12,540
12.5%
16.7%
20.2%
37.8%
$ 186,846
$ 125,977
46,255
$
22,677
$
$ 166,030
$ 107,975
38,471
$
16,455
$
$
$
$
$
$
$
2.42
2.41
1.16
26.59
18.30
30.10
$
$
$
$
$
$
2.12
2.10
0.90
25.08
17.17
32.62
$
$
$
$
$
$
$
$
$
$
1.72
1.71
0.69
23.92
15.89
32.46
$ 3,991,454
$ 871,837
$ 2,728,778
$ 2,955,465
$ 520,140
$ 3,581,686
$ 874,486
$ 2,357,137
$ 2,730,330
$ 458,592
$ 3,432,348
$
859,455
$ 2,224,936
$ 2,509,722
$ 435,261
6.5 %
1.0 %
23.5%
31.2 %
23.3 %
22.8 %
30.4 %
4.8 %
8.1 %
0.5 %
4.4 %
1.7 %
5.9 %
8.8 %
5.4 %
14.2%
14.8%
28.9%
6.0%
6.6%
-7.7%
11.4%
-0.3%
15.8%
8.2%
13.4%
$ 2,233,301
$ 2,340,262
$ 2,079,280
-4.6%
12.6 %
Financial Ratios
Return on average assets
Return on average assets adjusted for non-core items(4)
Return on average stockholders’ equity
Net interest margin
Efficiency ratio (5)
Efficency ratio adjusted for non-core items(4,5)
Total risk-based capital ratio
Tangible equity to tangible assets (3)
Nonperforming assets to total assets
1.19 %
1.32%
9.48 %
3.71 %
65.33 %
61.32%
14.60%
9.35 %
0.49 %
1.10 %
1.08%
8.54 %
3.62 %
62.20 %
61.85%
14.62 %
9.14 %
0.49 %
0.94 %
0.97%
7.20 %
3.54 %
65.13 %
64.30%
14.11 %
8.80 %
0.75 %
(1) Net interest income and total non-interest income excluding net gains/losses.
(2) Reflects amounts declared with respect to the earnings for the period indicated. Since Q2 2011, quarterly dividends are considered and declared during the first
month following quarter-end.
(3) Excludes balance sheet impact of goodwill and other intangible assets acquired through acquisitions on both total stockholders’ equity and total assets.
(4) Adjusted as defined and illustrated in the 2018 Annual Report on Form 10-K within Item 7.
(5) Total non-interest expense (less amortization of other intangible amortization) as a percentage of fully tax-equivalent net interest income plus total non-interest
income plus total non-interst income (excluding all gains and losses).
Our Promise
We will work side by side to
overcome challenges and seize
opportunities. We listen and work
with you. Together we will build
and execute thoughtful plans and
actions, blending our experience
and expertise, to move you toward
your goals. Our core difference
is providing you peace of mind,
confidence, and clarity in your
financial life.
Employee
Promise Circle
Clients First
Integrity Always
Respect for All
Commitment to Community
Lead the Way
Excellence in Everything
Financial Highlights
Peoples Bancorp Inc. (Peoples) is a diversified financial services holding company with $4.0 billion in total
assets, 81 locations, including 72 full-service bank branches, and 76 ATMs in Ohio, West Virginia and Kentucky.
Peoples makes available a complete line of banking, investment, insurance and trust solutions through its
subsidiaries - Peoples Bank and Peoples Insurance Agency, LLC. Peoples’ common shares are traded on the
NASDAQ Global Select Market® under the symbol “PEBO”, and Peoples is a member of the Russell 3000 index
of U.S. publicly traded companies. Learn more about Peoples at www.peoplesbancorp.com.
Dollars in Thousands, except Per Share Data
Year-Over-Year Change
2018
2017
2016
2018
2017
Earnings and Dividends
Total revenues (1)
Total non-interest expenses
Net income
Dividends declared on common shares (2)
Per Share Data
Earnings per common share – Basic
Earnings per common share – Diluted
Cash dividends paid on common shares (2)
Book value at end of period
Tangible book value at end of period (3)
Closing stock price
At Year End
Total assets
Total investment securities
Total loans
Total deposits
Total stockholders’ equity
Trust and brokerage assets under
administration and management
155,935
106,911
31,157
12,540
12.5%
16.7%
20.2%
37.8%
$ 186,846
$ 125,977
46,255
$
22,677
$
$ 166,030
$ 107,975
38,471
$
16,455
$
$
$
$
$
$
$
2.42
2.41
1.16
26.59
18.30
30.10
$
$
$
$
$
$
2.12
2.10
0.90
25.08
17.17
32.62
$
$
$
$
$
$
$
$
$
$
1.72
1.71
0.69
23.92
15.89
32.46
$ 3,991,454
$ 871,837
$ 2,728,778
$ 2,955,465
$ 520,140
$ 3,581,686
$ 874,486
$ 2,357,137
$ 2,730,330
$ 458,592
$ 3,432,348
$
859,455
$ 2,224,936
$ 2,509,722
$ 435,261
6.5 %
1.0 %
23.5%
31.2 %
23.3 %
22.8 %
30.4 %
4.8 %
8.1 %
0.5 %
4.4 %
1.7 %
5.9 %
8.8 %
5.4 %
14.2%
14.8%
28.9%
6.0%
6.6%
-7.7%
11.4%
-0.3%
15.8%
8.2%
13.4%
$ 2,233,301
$ 2,340,262
$ 2,079,280
-4.6%
12.6 %
Financial Ratios
Return on average assets
Return on average assets adjusted for non-core items(4)
Return on average stockholders’ equity
Net interest margin
Efficiency ratio (5)
Efficency ratio adjusted for non-core items(4,5)
Total risk-based capital ratio
Tangible equity to tangible assets (3)
Nonperforming assets to total assets
1.19 %
1.32%
9.48 %
3.71 %
65.33 %
61.32%
14.60%
9.35 %
0.49 %
1.10 %
1.08%
8.54 %
3.62 %
62.20 %
61.85%
14.62 %
9.14 %
0.49 %
0.94 %
0.97%
7.20 %
3.54 %
65.13 %
64.30%
14.11 %
8.80 %
0.75 %
(1) Net interest income and total non-interest income excluding net gains/losses.
(2) Reflects amounts declared with respect to the earnings for the period indicated. Since Q2 2011, quarterly dividends are considered and declared during the first
month following quarter-end.
(3) Excludes balance sheet impact of goodwill and other intangible assets acquired through acquisitions on both total stockholders’ equity and total assets.
(4) Adjusted as defined and illustrated in the 2018 Annual Report on Form 10-K within Item 7.
(5) Total non-interest expense (less amortization of other intangible amortization) as a percentage of fully tax-equivalent net interest income plus total non-interest
income plus total non-interst income (excluding all gains and losses).
Our Promise
We will work side by side to
overcome challenges and seize
opportunities. We listen and work
with you. Together we will build
and execute thoughtful plans and
actions, blending our experience
and expertise, to move you toward
your goals. Our core difference
is providing you peace of mind,
confidence, and clarity in your
financial life.
Employee
Promise Circle
Clients First
Integrity Always
Respect for All
Commitment to Community
Lead the Way
Excellence in Everything
A Message from the President and CEO
Dear Fellow Shareholders,
2018 was the third consecutive year that Peoples Bancorp Inc.
(Peoples) outperformed the Nasdaq Bank Index and our proxy peer
group! A key driver for all U.S. companies was the federal corporate
income tax rate change, and Peoples used the lower tax rate to
benefit shareholders, clients, communities and employees. Some of
these highlights include:
• Increasing our cash dividends per common share from $0.84 in
2017, to $1.12 in 2018,
• Committing additional dollars to technology investments over
the next three years to bring superior capabilities to clients and
Chuck Sulerzyski, President and CEO
to ensure our associates have the right tools for success,
• Contributing more than one million dollars to our communities
through direct contributions from Peoples Bank and the Peoples Bank
Foundation, Inc., and
• Raising the minimum wage for our employees to $15 by January 1, 2020.
We also successfully completed the acquisition of ASB Financial Corp. (ASB) in April
and in October announced a pending merger with First Prestonsburg Bancshares Inc.
and its subsidiary The First Commonwealth Bank of Prestonsburg, Inc. headquartered
in Prestonsburg, Kentucky. We plan to close this transaction early in the second
quarter of 2019.
Our stock price set new record highs in early 2018, with the high close being
$39.58 on June 21, 2018. Our stock price was $30.10 at December 31, 2018, which
was down 8% from 2017 year-end. On a relative basis, we outperformed our proxy
peer group by 5.6% and outperformed a number of bank indices. Stock valuations
of the banking sector, as a whole, were under pressure in the latter half of 2018
due to uncertainty around the future of the economy and the potential impact of
an economic downturn on the performance of banks. Through the first two months
of 2019, early market gains have been advantageous for our stock price which
closed at $33.34 on February 28, 2019, an increase of 10.8% from 2018 year-end.
1
$1.16
2018
CASH DIVIDENDS
(Paid on Common Shares1)
$4.0
$3.6
$3.4
2016
2017
2018
TOTAL ASSETS
($ Billions)
Our financial results during the course of the year were
impacted by acquisition-related costs of $7.5 million, or
$0.29 per share. Other notable accomplishments include:
• Earnings per diluted share increased to $2.41 for
2018, compared to $2.10 in 2017. Excluding acquisition
costs, earnings per diluted share for 2018 were $2.71.
• Average loan balances grew 14% compared to 2017,
aided by the ASB acquisition.
• Net interest income increased 14% for the year, while
the net interest margin grew from 3.62% to 3.71%.
• Return on average assets was 1.19% for 2018, up from
1.10% in 2017. Excluding the impact of non-core items,
our return on average assets was 1.32% for 2018. Our
fourth quarter return on average assets was 1.38%.
• Our tangible book value per common share for 2018
increased to $18.30, from $17.17 for 2017.
0.94%
0.97%
1.10% 1.08%
1.32%
1.19%
• Credit quality remained strong by all measures,
including net charge-offs of 0.15% of average total
loans for both 2018 and 2017.
• 2018 marked our third consecutive year of positive
operating leverage, which means our rate of total
revenue growth on a percentage basis, exceeded our
2016
2017
2018
rate of non-interest expense growth, on a percentage
RETURN ON AVERAGE ASSETS
RETURN ON AVERAGE ASSETS
ADJUSTED FOR NON-CORE ITEMS2
65.13%
64.30%
65.33%
62.20%
61.85%
61.32%
2016
2017
2018
EFFICIENCY RATIO3
EFFICIENCY RATIO ADJUSTED
FOR NON-CORE ITEMS2,3
1Reflects amounts declared with respect to the earnings for the period indicated.
2Adjusted as defined and illustrated in the 2018 Annual Report on Form 10-K
within Item 7.
3Total non-interest expense (less amortization of other intangible amortization)
as a percentage of fully tax-equivalent net interest income plus total non-interest
income (excluding all gains and losses).
2
basis.
So what drives this exceptional performance? We believe
the chief drivers are our go-to-market strategy and
our distinctive culture. Our go-to-market proposition
of investments, insurance and banking continues to be
unique in the marketplace. Less than 400 of the 5,400
U.S. banks have insurance products or services, and
fewer than 150 banks have a proprietary retirement
plan offering. Our client approach is also unique – our
experts are organized within 16 local market teams who
prospect and serve clients collaboratively across all lines
of business. While many firms in the industry do not offer
ancillary businesses, we see these as increasingly valuable
points of distinction.
$0.902017$0.692016 What do we have to show for this approach? Across our footprint, 24% of our
top 250 clients have an insurance relationship, and 22% have investment
products with us. These numbers increase to 35% and 27% respectively
across our mature markets. Our associates are executing with knowledge,
expertise and advice versus pushing product and price, and we are winning
daily. We thank our front-line associates who are active in freeing clients from
larger bureaucratic institutions, and we thank our support associates who
ensure we are delivering with excellence.
Our distinctive culture is also a unique performance driver. Our associates are
committed to a work environment that is built upon respect and integrity. We
actively coach one another and work to learn the intricacies of our various
businesses. We believe that ongoing education will make us a stronger
company and we hold ourselves to high standards for each other, our clients,
our shareholders and our communities.
Our culture also encourages associates to make a positive and meaningful
difference in the neighborhoods where we work and live. We place equal
value on corporate financial contributions and volunteerism. Highlights of
2018 efforts include the support of food assistance and hunger awareness
initiatives across our footprint; support of an industry workforce collaboration
in the Akron area between manufacturers and community college partners
to bring apprenticeship training to the region for the first time; and our
commitment to the Hershel “Woody” Williams Medal of Honor Foundation to
build Gold Star Families Memorial Monuments across our footprint.
We experienced several executive changes this year. We were delighted to
add Tonya Steele as our new chief human resources officer and Kevin Eagan
as our chief marketing officer. However, we were saddened at Terry Sweet’s
retirement from our Board of Directors for health reasons. Unfortunately,
Terry recently passed away, and our heartfelt condolences are with his family
and many friends.
Thank you for your continued support of Peoples. We look forward to a
successful 2019!
All the best,
Chuck Sulerzyski, President and CEO
Chuck Sulerzyski, President and CEO
3
Our Commitment
to Our Communities
Reflects Teamwork
and Togetherness
Our communities and our active
involvement are vital to our success.
Teamwork
Community
Peoples PRIDE
4
Unity
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 000-16772
PEOPLES BANCORP INC.
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of incorporation or organization)
31-0987416
(I.R.S. Employer Identification No.)
138 Putnam Street, P.O. Box 738, Marietta, Ohio
(Address of principal executive offices)
45750-0738
(Zip Code)
Registrant’s telephone number, including area code: (740) 373-3155
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common shares, without par value
Name of each exchange on which registered
The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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
No
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).
No
Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day
of the registrant's most recently completed second fiscal quarter:
As of June 29, 2018, the aggregate market value of the registrant’s common shares (the only common equity of the registrant) held by
non-affiliates was $706,643,000 based upon the closing price as reported on The Nasdaq Global Select Market®. For this purpose,
executive officers and directors of the registrant are considered affiliates.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:
19,681,659 common shares, without par value, at February 28, 2019.
Document Incorporated by Reference:
Portions of Registrant's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 25,
2019 ("2019 Annual Meeting of Shareholders"), are incorporated by reference into Part III of this Annual Report on Form 10-
K.
TABLE OF CONTENTS
PART I
ITEM 1
Business
ITEM 1A Risk Factors
ITEM 1B Unresolved Staff Comments
ITEM 2
ITEM 3
ITEM 4
PART II
Properties
Legal Proceedings
Mine Safety Disclosures (not applicable)
ITEM 5
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
ITEM 6
ITEM 7
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
ITEM 8
ITEM 9
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
ITEM 9A Controls and Procedures
ITEM 9B Other Information
PART III
ITEM 10
Directors, Executive Officers and Corporate Governance
ITEM 11
Executive Compensation
ITEM 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
ITEM 13
Certain Relationships and Related Transactions, and Director Independence
ITEM 14
Principal Accountant Fees and Services
PART IV
ITEM 15
Exhibits and Financial Statement Schedules
ITEM 16
Form 10-K Summary (not applicable)
SIGNATURES
4
19
30
30
31
31
31
35
37
79
79
79
79
80
148
149
149
150
150
150
151
157
3
As used in this Annual Report on Form 10-K ("Form 10-K"), "Peoples" refers to Peoples Bancorp Inc. and its
consolidated subsidiaries collectively, except where the context indicates the reference relates solely to the registrant, Peoples
Bancorp Inc. Unless otherwise indicated, all note references contained in this Form 10-K refer to the Notes to the
Consolidated Financial Statements included immediately following "ITEM 9B OTHER INFORMATION" of this Form 10-K.
PART I
ITEM 1 BUSINESS
Corporate Overview
Peoples Bancorp Inc. is a financial holding company, which was organized in 1980. Peoples operates principally
through its wholly-owned subsidiary, Peoples Bank, an Ohio state-chartered bank. Peoples' other wholly-owned
subsidiary is Peoples Investment Company ("PIC"), Peoples also holds all of the common securities of NB&T Statutory
Trust III. Peoples Bank's operating subsidiaries include Peoples Insurance Agency, LLC ("Peoples Insurance") and an
asset management company, Peoples Tax Credit Equity, LLC.
Peoples Bank was first chartered in 1902 as an Ohio banking corporation under the name "The Peoples Banking and
Trust Company" in Marietta, Ohio, and in 2000 was reorganized as a national banking association under the name
"Peoples Bank, National Association." Effective December 30, 2015, the banking subsidiary converted from a national
banking association back to an Ohio state-chartered bank, which is a member of the Federal Reserve System. As a result
of the charter conversion, the legal name of Peoples' banking subsidiary was changed to "Peoples Bank" and the
converted bank continues to operate under the trade name and federally registered service mark "Peoples Bank." Peoples
Insurance is an Ohio limited liability company that operates as a subsidiary of Peoples Bank.
PIC was formed in 2001 and Peoples Tax Credit Equity, LLC was formed in 2014, in each case to provide new
investment opportunities as a means of enhancing profitability. The common securities of NB&T Statutory Trust III were
acquired in connection with the acquisition of NB&T Financial Group, Inc. ("NB&T") on March 6, 2015.
Business Overview
Peoples makes available a complete line of commercial and consumer banking, insurance, investment and trust
solutions through its financial subsidiaries – Peoples Bank and Peoples Insurance. These products and services include
the following:
various demand deposit accounts, savings accounts, money market accounts and certificates of deposit;
commercial loans, residential real estate loans, home equity lines of credit, consumer loans and Overdraft
Privilege;
debit and automated teller machine ("ATM") cards;
credit cards for individuals and businesses;
merchant credit card transaction processing services;
corporate and personal trust services;
safe deposit rental facilities;
money orders and cashier's checks;
a full range of life, health, and property and casualty insurance products;
third-party insurance administration services;
brokerage services; and
custom-tailored fiduciary, employee benefit plan and asset management and administration services.
Peoples' financial products and services are offered through its financial service locations and ATMs in Ohio, West
Virginia and Kentucky, as well as telephone and internet-based banking through both personal computers and mobile
devices. Brokerage services are offered exclusively through an unaffiliated registered broker-dealer located at Peoples
Bank's offices. Indirect consumer lending activities are offered through approved dealerships. Peoples Bank credit card
and merchant processing services are provided through joint marketing arrangements with third parties.
Peoples' business activities are currently limited to one reporting unit and reportable operating segment, which is
community banking. For a discussion of Peoples' financial performance for the fiscal year ended December 31, 2018, see
Peoples' Consolidated Financial Statements and Notes to the Consolidated Financial Statements found immediately
following "ITEM 9B OTHER INFORMATION" of this Form 10-K.
Peoples has a history of expanding its business, including its customer base and primary market area, through a
combination of internal growth and targeted acquisitions. The internal growth may include the opening of de novo
4
banking and loan production offices located in or near Peoples' existing market area. Acquisitions have consisted of
traditional banking offices and loan production offices, both individually and as part of entire financial institutions,
insurance agencies and financial advisory books of business. The primary objectives of Peoples' expansion efforts
include: (1) providing opportunities to integrate non-traditional products and services, such as insurance and investment
administration and management, with the traditional banking products offered to its clients; (2) increasing market share in
existing markets; (3) expanding Peoples' core financial service businesses of banking, insurance and investment and
investment management; and (4) improving operating efficiency by directing resources toward offices and markets with
the greatest earnings opportunities.
Recent Corporate Developments
On October 29, 2018, Peoples entered into an agreement and plan of merger (the "First Prestonsburg Merger
Agreement") with First Prestonsburg Bancshares Inc. ("First Prestonsburg"), which calls for First Prestonsburg to merge
into Peoples. First Prestonsburg is the parent company of The First Commonwealth Bank of Prestonsburg, Inc. ("First
Commonwealth"), which operates nine full-service branches located in eastern Kentucky. Following the merger of First
Prestonsburg into Peoples, First Commonwealth will merge into Peoples Bank. This transaction is expected to close
during the second quarter of 2019, subject to the satisfaction of customary closing conditions. As of December 31, 2018,
First Prestonsburg had approximately $308.5 million in total assets, which included approximately $140.1 million in total
loans, and approximately $236.6 million in total deposits. Under the terms of the First Prestonsburg Merger Agreement,
shareholders of First Prestonsburg will be entitled to receive 12.512 Peoples common shares for each First Prestonsburg
share of common stock they own at the effective time of the merger. In addition, immediately prior to the closing of the
merger, First Prestonsburg will pay a special cash distribution of $140.30 per share to its shareholders.
On April 13, 2018, Peoples completed the acquisition of ASB Financial Corp. ("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 with ASB, Peoples paid total consideration of $41.5 million. The ASB acquisition added $239.2
million of loans, net of deferred fees and costs, and loans held for sale in the aggregate, and $198.6 million of total
deposits at the acquisition date, after acquisition accounting adjustments.
Refer to Note 19 Acquisitions of the Notes to the Consolidated Financial Statements for additional information.
Primary Market Area and Customers
Peoples considers its primary market area to be comprised of those counties where it has a physical branch presence
and their contiguous counties. This includes northeastern, central, southwestern and southeastern Ohio, west central West
Virginia and eastern Kentucky. Peoples currently operates 62 locations in Ohio, 13 locations in West Virginia and 6
locations in Kentucky. Peoples' market area consists of rural, small urban and metropolitan markets and serves a diverse
group of industries and employers. Principal industries served in Peoples' primary markets include manufacturing,
distribution, real estate, health care, education, municipal, agricultural, petrochemical, oil, gas and coal production,
wholesale and retail trade, tourism, and service-related industries. This broad-based economy provides diversity, which
helps prevent Peoples' revenue and earnings from being largely dependent upon any single industry segment.
Lending Activities
Peoples Bank originates various types of loans, including commercial loans (comprised of commercial and industrial
loans, commercial real estate loans, and commercial real estate construction loans), residential real estate loans, home
equity lines of credit, consumer loans (comprised of both indirect and direct loans) and Overdraft Privilege. Peoples
Bank's lending activities are focused principally on lending opportunities within its primary market areas, although
Peoples Bank may occasionally originate loans outside its primary markets. In general, Peoples Bank retains the majority
of loans it originates; however, certain longer-term fixed rate mortgage loan originations, primarily one-to-four family
residential mortgages, and portions of select commercial real estate loans and commercial and industrial loans are sold
into the secondary market or to other financial institutions.
Peoples Bank's loans consist of credit extensions to borrowers spread over a broad range of industrial classifications.
At December 31, 2018, Peoples Bank had no concentration of loans to borrowers engaged in the same or similar
industries that exceeded 10% of total loans (also referred to as "loans, net of deferred fees and costs"), nor did it have any
loans outstanding to non-United States ("U.S.") entities.
Commercial Lending
Commercial loans include commercial and industrial loans, commercial real estate loans, and commercial real
estate construction loans, and represented the largest portion of Peoples Bank's total loan portfolio, comprising
approximately 55.7% and 57.2% of total loans at December 31, 2018 and December 31, 2017, respectively.
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Commercial lending inherently involves a significant degree of risk of loss since commercial loan relationships
generally involve larger loan balances than other loan classes.
Commercial loan terms include amortization schedules and interest rates commensurate with the purpose of each
loan, the identified source of repayment, and the risk involved. The majority of Peoples Bank's commercial loans
carry variable interest rates equal to an underlying index rate plus a margin, although Peoples Bank also originates
commercial loans with fixed interest rates for periods generally ranging from three to ten years. At December 31,
2018, the commercial loan portfolio consisted of 76.2% in variable interest rate loans and 23.8% in fixed interest rate
loans. In determining whether to grant a commercial loan, Peoples Bank primarily reviews a schedule of cash flows
to evaluate whether the borrower's anticipated future cash flows will be adequate to service both interest and principal
due.
Peoples Bank also originates variable rate loans with interest rate swaps, where the customer enters into an
interest rate swap with Peoples Bank 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 Bank evaluates all commercial loan relationships whose aggregate credit exposure is greater than $1.0
million on an annual basis for possible credit deterioration. This loan review process provides Peoples Bank with
opportunities to identify potential problem loans and take proactive actions to assure repayment of the loan or
minimize Peoples Bank's risk of loss, such as reviewing the relationship more frequently based upon the loan quality
rating and aggregate outstanding exposure. Upon detection of the reduced ability of a borrower to meet cash flow
obligations, the loan is reviewed for possible downgrade in the loan quality rating or placement on nonaccrual status.
Peoples Bank also completes evaluation procedures for a selection of larger loan relationships on a quarterly basis.
Loan relationships whose aggregate credit exposure to Peoples Bank is equal to or less than $1.0 million are reviewed
on an event driven basis. Triggers for review include a borrower's request to renew a maturing loan or line of credit,
knowledge of adverse events affecting the borrower's business, receipt of financial statements indicating deteriorating
credit quality, or other similar events.
Commercial and Industrial Loans
Commercial and industrial loans are loans to operating companies for purposes of financing working capital
needs, fixed asset acquisitions, acquisitions of other businesses, and other business activities. Typically, these loans
are secured with business assets and, in some cases, owner-occupied real estate, and personally guaranteed by the
owners of the operating companies. The primary source of repayment of this type of loan is generally cash flows
generated from operations of the business, which can be susceptible to adverse changes in economic conditions of the
general economy as a whole or within a specific industry.
Commercial Real Estate Loans
Peoples Bank originates commercial real estate loans which are typically secured by stabilized real estate, which
can be owner-occupied commercial real estate or non-owner-occupied investment commercial real estate, and
personally guaranteed by the owners of the borrowing entities. Typically, owner-occupied commercial real estate
loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial
properties occupied by operating companies. The source of repayment of this type of loan is typically cash flow from
the operating company occupying the real estate. Investment commercial real estate generally includes office
buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as
well as other commercial or industrial real estate. Typically, the primary source of repayment of this type of loan is
rental income generated from leasing activities.
Commercial Real Estate Construction Loans
Peoples Bank originates construction loans to provide temporary financing during the construction phase for
commercial and residential properties. Peoples Bank's construction lending is focused primarily on commercial and
residential projects of select real estate developers and homebuilders. These projects include the construction of
apartment, office, retail, and industrial complexes and other commercial and residential projects. The underwriting
criteria for construction loans are generally the same as for non-construction loans.
Construction financing is generally considered to involve higher credit risk since Peoples Bank is dependent
largely upon the accuracy of the initial estimate of the property's value at the completion of construction and the
estimated cost (including interest) of construction. If the estimated construction cost proves to be inaccurate, Peoples
Bank may be required to advance funds beyond the amount originally committed to enable completion of the project.
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If the estimate of value proves inaccurate, Peoples Bank may be confronted, at or prior to the maturity of the loan,
with a property having a value insufficient to ensure full repayment, should the borrower default. In the event a
default on a construction loan occurs and foreclosure follows, Peoples Bank must take control of the project and
attempt to either arrange for completion of construction or sell the collateral of the unfinished project. In certain
cases, such as real estate development projects, repayment of construction loans occurs as a result of subsequent sales
of the developed real estate. Additional risk exists as the developer may lack funds to repay the loan if the property is
not sold upon completion.
To mitigate the risk of construction lending, Peoples Bank requires periodic site inspections, typically completed
by an independent third party, to ensure appropriate completion of the project prior to any disbursements.
Construction loans are structured to provide sufficient time to complete construction, giving consideration to weather
or other variables that influence completion time. In general, Peoples Bank typically requires the term of its
construction loans to be less than three years.
Residential Real Estate Loans
While commercial loans comprise the largest portion of Peoples Bank's loan portfolio, residential real estate
lending remains a major focus of Peoples Bank. The residential real estate loans originated by Peoples Bank may
either be retained in its loan portfolio, or sold into the secondary market with servicing either retained by Peoples
Bank or sold with the loan. Peoples Bank's portfolio of residential real estate loans comprised 21.8% of total loans at
December 31, 2018, and 20.8% at December 31, 2017. Peoples Bank also had $5.5 million of residential real estate
loans held for sale and was servicing $461.3 million of loans, consisting primarily of one-to-four family residential
mortgages, which had previously been sold into the secondary market, in each case, as of December 31, 2018.
Peoples Bank also originates and retains jumbo residential mortgage loans for primary and secondary residences,
which are nonconforming loans that are higher than the loan amounts acceptable for sale to the government-
sponsored enterprises to which Peoples Bank typically sells residential mortgage loans.
Peoples Bank originates both fixed rate and variable rate residential real estate loans. Typically, Peoples Bank
sells its longer-term fixed rate real estate loans into the secondary market. In select cases, Peoples Bank may retain
certain fixed rate real estate loans.
Peoples Bank typically requires residential real estate loan amounts to be no more than 80% of the purchase price
or the appraised value of the real estate securing the loan, whichever is lower, unless private mortgage insurance is
obtained by the borrower for the percentage exceeding 80%. In limited circumstances, Peoples Bank may lend up to
100% of the appraised value of the real estate, although such lending currently is limited to loans that qualify under
established federally-backed rural housing programs or through a designated low-to-moderate income loan program.
Numerous risk factors attributable to real estate lending are considered during underwriting for the purposes of
establishing an interest rate commensurate with the inherent risks of the loan.
Real estate loans are typically secured by first mortgages with evidence of title in favor of Peoples Bank in the
form of an attorney's opinion of the title or a title insurance policy. Peoples Bank requires insurance, with Peoples
Bank named as the mortgagee and loss payee. Peoples Bank requires evidence of insurance at the time of the loan
closing. Additionally, Peoples Bank has a blanket insurance policy to cover loans secured by real estate with
outstanding balances of less than $1 million that do not include an insurance escrow account. For loans secured by
real estate with outstanding balances over $1 million or those that include an insurance escrow account, Peoples Bank
force-places an insurance policy to cover residential real estate loans when the borrower fails to maintain adequate
insurance. Licensed appraisals are required for all real estate loans, and are completed by an independent third party.
Home Equity Lines of Credit
Peoples Bank originates home equity lines of credit that provide consumers with greater flexibility in financing
personal expenditures. At December 31, 2018, outstanding home equity lines of credit comprised 4.9% of Peoples
Bank's total loans, compared to 4.6% at December 31, 2017. Peoples Bank currently offers home equity lines of
credit with a prime-based variable rate for the entire 10-year term of the loan and fixed rate installment loans with 5
to 15-year terms. Peoples Bank also offers a home equity line of credit whose terms include a fixed rate for the first
five years, which converts to a variable interest rate for the remaining five years. At December 31, 2018, Peoples
Bank's home equity loan portfolio consisted of 95.6% in variable interest rate loans and 4.4% in fixed interest rate
loans. At December 31, 2018, 16.0% of the total home equity loan portfolio was convertible rate home equity lines
of credit, with total outstanding principal balances and available credit amounts of $21.4 million and $22.1 million,
respectively, and a weighted-average remaining maturity was 7.3 years. The average original loan amount under
these convertible rate home equity lines of credit was $37,000 at December 31, 2018.
Home equity lines of credit are generally made as second mortgages by Peoples Bank. The maximum amount of
a home equity line of credit is generally limited to 80% of the appraised value of the property less the balance of the
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first mortgage. Peoples Bank may lend up to 90% of the appraised value of the property (less the balance of the first
mortgage) at higher interest rates that are commensurate with the additional risk being assumed in these situations.
The home equity lines of credit are written with 10-year terms and are subject to underwriting review upon request
for renewal.
Consumer Lending
Peoples Bank's consumer lending activities include consumer indirect loans and consumer direct loans, which
primarily involve loans secured by automobiles, motorcycles, recreational vehicles and other personal property, as
well as unsecured loans and personal lines of credit. Consumer loans generally involve more risk as to collectability
than real estate mortgage loans because of the type and nature of the collateral or, in certain instances, the absence of
collateral. As a result, consumer lending collections are dependent upon the borrower's continued financial stability,
and are at more risk from adverse changes in personal circumstances. In addition, application of various state and
federal laws, including bankruptcy and insolvency laws, could limit the amount that may be recovered under these
loans. Credit approval for consumer loans typically requires demonstration of sufficiency of income to repay
principal and interest due, stability of employment, an established credit record and sufficient collateral for secured
loans. It is the policy of Peoples Bank to review its consumer loan portfolio monthly and to charge-off loans that do
not meet its ongoing standards, while strictly adhering to all laws and regulations governing consumer lending. A
qualified compliance officer is responsible for monitoring regulatory compliance performance and for advising and
updating loan personnel.
Consumer Indirect Loans
Peoples Bank originates consumer indirect loans through select dealerships, which generally includes loans
secured by automobiles, motorcycles and recreational vehicles. At December 31, 2018, consumer indirect loans
comprised 14.9% of Peoples Bank's total loan portfolio compared to 14.5% at December 31, 2017.
Consumer indirect loans are originated at the point of sale, or dealership, and are subject to the same pricing
structure and underwriting process as other consumer loans. Consumer indirect lending offers Peoples Bank the
opportunity to access additional customers outside of its primary office locations. Peoples Bank offers consumer
indirect lending through approved dealerships, including franchise dealerships or independent dealerships, which
specialize in new or late-model inventory. These dealerships undergo an approval process whereby Peoples Bank
reviews the dealership licensing and industry experience, evaluates customer experience with the dealership and
completes an inspection of the inventory, showroom, and general facilities. On an ongoing basis, the dealerships are
monitored based on monthly production volume, application approval rates and portfolio default rates.
Consumer Direct Loans
Peoples Bank originates consumer direct loans primarily through its office locations. Consumer direct loans
generally include loans secured by automobiles, motorcycles, recreational vehicles and other personal property, as
well as unsecured loans and personal lines of credit. Consumer direct loans differ from consumer indirect loans as
they include expanded products, such as loans secured by stock or deposits, or unsecured loans. At December 31,
2018, consumer direct loans comprised 2.7% of Peoples Bank's total loan portfolio compared to 2.9% at
December 31, 2017.
Overdraft Privilege
Peoples Bank grants Overdraft Privilege to qualified customers. Overdraft Privilege is a service that provides
overdraft protection to deposit customers, both individual and business, by establishing an Overdraft Privilege
amount. After a 60-day waiting period to verify account activity, each new checking account usually receives an
Overdraft Privilege amount of $400, $700 or $1,000 based on the type of account and other parameters, such as
previous charge-off history or loan loss. Once established, customers are permitted to overdraw their checking
account at Peoples Bank's discretion, up to their Overdraft Privilege limit, with each item being charged Peoples
Bank's regular overdraft fee, with a maximum of seven charges per day when the customer's account is overdrawn
more than $5. Customers repay the overdraft with their next deposit. Overdraft Privilege is designed to allow
Peoples Bank to fill the void between traditional overdraft protection, such as a line of credit, and "check cashing
stores." Under federal banking regulations, Peoples Bank is required to obtain the consent of its customers in order to
apply Overdraft Privilege to ATM and one-time debit card transactions. While Overdraft Privilege generates fee
income, these fees may be offset by loan loss provisioning necessary to ensure the maintenance of an appropriate
allowance for losses against overdrafts deemed uncollectable. This allowance, along with the related provision and
net charge-offs, was included in Peoples Bank's allowance for loan losses. At December 31, 2018, the unfunded
commitment related to Overdraft Privilege was $47.8 million.
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Investment Activities
At December 31, 2018, investment securities comprised 21.8% of Peoples' total assets, compared to 24.4% at
December 31, 2017. The majority of Peoples' investment activities are conducted through Peoples Bank, although
Peoples Bancorp Inc. and its non-banking subsidiary, PIC, also may engage in investment activities from time to time.
Investment activity by Peoples Bank is subject to certain regulatory guidelines and limitations on the types of securities
eligible for purchase. As a result, the investment securities owned by Peoples Bank at December 31, 2018 included
agencies and corporations of the U.S. government, including mortgage-backed securities, bank eligible obligations of any
state or political subdivision in the U.S. and bank eligible corporate obligations, including private-label mortgage-backed
securities. Peoples Bank also invests in tax credit funds. The investments owned by Peoples Bancorp Inc. are comprised
of common stocks issued by unrelated bank holding companies. The investments owned by PIC consist of tax credit
funds, municipal obligations and privately issued mortgage-backed securities.
Peoples Bank's investment activities are governed internally by a policy approved by the Board of Directors, which is
administered by Peoples Bank's Asset-Liability Management Committee ("ALCO"). The primary purpose of Peoples
Bank's investment portfolio is to: (1) employ excess funds not needed to support loan demand; (2) provide a source of
liquid assets to accommodate unanticipated deposit and loan fluctuations, and overall liquidity needs; (3) provide eligible
securities to secure public and trust funds; and (4) earn the maximum overall return commensurate with Peoples Bank's
risk appetite and liquidity needs. Investment strategies to achieve these objectives are reviewed and approved by the
ALCO. In its evaluation of investment strategies, the ALCO considers various factors, including the interest rate
environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and Peoples Bank's overall
interest rate sensitivity. The ALCO also has much broader responsibilities, which are discussed in the "Interest Rate
Sensitivity and Liquidity" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
Funding Sources
Peoples' primary sources of funds for lending and investing activities are interest-bearing and non-interest-bearing
deposits. Cash flows from both the loan and investment portfolios, which include scheduled payments, as well as
prepayments, calls and maturities, also provide a relatively stable source of funds. Peoples also utilizes a variety of short-
term and long-term borrowings to fund asset growth and satisfy liquidity needs. Peoples' funding sources are managed
through Peoples' asset-liability management process and monitored by the ALCO which is discussed further in the
"Interest Rate Sensitivity and Liquidity" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
The following is a brief description of the various sources of funds utilized by Peoples:
Deposits
Peoples Bank obtains deposits principally from individuals and businesses within its primary market area by
offering a broad selection of deposit products to clients. Deposits to individuals have account terms that vary with
respect to the minimum balance required, the time the funds must remain on deposit, and service charge schedules.
Interest rates paid on specific deposit types are determined based on (1) the interest rates offered by competitors, (2)
the anticipated amount and timing of funding needs, (3) the availability and cost of alternative sources of funding,
and (4) the anticipated future economic conditions and interest rates. Business deposits, which include traditional
commercial business as well as governmental entities, are obtained through an offering of multiple deposit account
types as well as cash management solutions. Depending on the need of the entity, these deposits could be either
interest or non-interest bearing. With the ability to offer competitive cash management solutions to its customers, it
enables Peoples Bank to obtain valuable operating account funds as well customers’ non-operating funds. Retail and
business deposits are attractive sources of funding because of their stability and cost, relative to wholesale funding
alternatives, in addition to providing opportunities for Peoples to build long-term client relationships through the
cross-selling of its other products and services.
Peoples Bank also offers its customers the ability to receive multi-million dollar federal deposit insurance
coverage for certificates of deposit ("CDs") through the Certificate of Deposit Account Registry Service ("CDARS")
program and money market deposit accounts through the Insured Cash Sweep Services ("ICS"). Under these
programs, funds from large customer deposits are placed into accounts issued by other members of the CDARS or
ICS network in increments below the federal deposit insurance limits to ensure both principal and interest remain
eligible for insurance. Peoples Bank also purchases certain "one-way buy" CDARS deposits, which are utilized as a
wholesale funding source, and these deposits are classified as brokered CDs in Note 7 Deposits of the Notes to the
Consolidated Financial Statements.
Peoples Bank occasionally obtains deposits from clients outside its primary market area, generally in the form of
CDs, and has the ability, if needed, to obtain deposits from deposit brokers. These deposits are used to supplement
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Peoples Bank's deposits to fund loans originated to customers located outside its primary market area, as well as
provide diversity in funding sources. While these deposits may carry slightly higher interest costs than other
wholesale funds, they do not require Peoples Bank to secure the funds with collateral, unlike most other borrowed
funds.
Additional information regarding the amounts and composition of Peoples Bank's deposits can be found in the
"Deposits" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" of this Form 10-K and in Note 7 Deposits of the Notes to the Consolidated
Financial Statements.
Borrowed Funds
Peoples obtains funds through a variety of short-term and long-term borrowings, which typically include
advances from the Federal Home Loan Bank of Cincinnati (the "FHLB") and repurchase agreements. Peoples also
has the ability to obtain funds, if needed, through federal funds purchased and advances from the Federal Reserve
Discount Window. In addition, Peoples has the ability to obtain funds from unrelated financial institutions in the
form of term loans or revolving lines of credit. Short-term borrowings are used generally to manage Peoples' daily
liquidity needs since they typically may be repaid, in whole or part, at any time without a penalty. In recent years,
Peoples has utilized interest rate swaps to obtain short-term borrowings at long-term fixed rates, effectively replacing
maturing long-term borrowings. Long-term borrowings provide cost-effective options for funding asset growth and
satisfying capital needs, due to the variety of pricing and maturity options available.
Additional information regarding the amounts and composition of Peoples' borrowed funds can be found in the
"Borrowed Funds" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K and in Note 8 Short-Term Borrowings and
Note 9 Long-Term Borrowings of the Notes to the Consolidated Financial Statements.
Competition
Peoples experiences intense competition within its primary market area due to the presence of several national,
regional and local financial institutions and other service providers, including finance companies, financial technology
companies, insurance agencies and mutual fund providers. Competition within the financial services industry continues to
increase as a result of mergers between, and expansion of, financial services providers within and outside of Peoples'
primary market areas. In addition, the deregulation of the financial services industry (see the discussion of the Gramm-
Leach-Bliley Act of 1999 in the section of this item captioned "Supervision and Regulation – Bank Holding Company
Regulation") has allowed securities firms and insurance companies that have elected to become financial holding
companies to acquire commercial banks and other financial institutions, which can create additional competitive pressure.
Peoples primarily competes based on client service, convenience and responsiveness to customer needs, product
characteristics, interest rates on loans and deposits, and the availability and pricing of fiduciary, employee benefit plan,
brokerage and insurance services. However, some competitors may have greater resources, including additional
technology offerings and higher lending limits than Peoples, which may adversely affect Peoples' ability to compete.
Peoples' business strategy includes the use of a "needs-based" sales and service approach to serve customers and is
intended to promote customers' continued use of multiple financial products and services. In addition, Peoples continues
to emphasize the integration of traditional commercial banking products with non-traditional financial products, such as
insurance and investment products.
Historically, Peoples has focused on providing its full range of products and services in smaller metropolitan markets
rather than major metropolitan areas. While management believes Peoples has developed a level of expertise in serving
the financial service needs of smaller communities, Peoples' primary market area has expanded into larger metropolitan
areas, such as central, southwestern and northeastern Ohio. These larger areas typically contain entrenched service
providers with existing customer bases much larger than Peoples' current position. As a result, Peoples may be forced to
compete more aggressively in order to grow its market share in these areas, which could reduce current and future profit
potential derived from such markets.
Employees
At December 31, 2018, Peoples had 871 full-time equivalent employees, compared to 774 at December 31, 2017.
The increase in full-time equivalent employees was primarily related to the acquisition of ASB.
Intellectual Property and Proprietary Rights
Peoples has registered the service marks "Peoples Bank (with logo)," "Peoples Bancorp," "Peoples Bank," Peoples in
motion logo consisting of three arched ribbons, "Working Together. Building Success.", "Peoples Insurance (with logo)"
and "peoplesbancorp.com" with the U.S. Patent and Trademark Office. These service marks currently have expiration
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dates ranging from 2021 to 2027. Additionally, Peoples has filed an application with the U.S. Patent and Trademark
Office for the service mark registrations of "Peoples Investment Services" and "Peoples Investment Services (with logo)".
Peoples may renew the registrations of service marks with the U.S. Patent and Trademark Office generally for
additional 5 to 10-year periods indefinitely, provided it continues to use the service marks and files appropriate
maintenance and renewal documentation with the U.S. Patent and Trademark Office at the times required by the federal
trademark laws and regulations. Peoples intends to continue to use its registered service marks and to timely renew the
registration of each of them.
Peoples has proprietary interests in the internet domain names "pebo.com" and "peoplesbancorp.com." Internet
domain names in the U.S. and in foreign countries are regulated, but the laws and regulations governing the internet are
continually evolving.
Supervision and Regulation
Peoples and its subsidiaries are subject to extensive supervision and regulation by federal and state agencies. The
regulation of financial holding companies and their subsidiaries is intended primarily for the protection of consumers,
depositors, borrowers, the Deposit Insurance Fund and the banking system as a whole, and not for the protection of
shareholders. Applicable laws and regulations restrict permissible activities and investments, and require actions to
protect loan, deposit, brokerage, fiduciary and other customers, as well as the Deposit Insurance Fund. They also may
restrict Peoples' ability to repurchase its common shares or to receive dividends from Peoples Bank, and impose capital
adequacy and liquidity requirements. The following is a summary of the regulatory agencies, statutes and related
regulations that have, or could have, a material impact on Peoples' business. This discussion is qualified in its entirety by
reference to such regulations and statutes.
Financial Holding Company
Peoples is a legal entity separate and distinct from its subsidiaries and affiliated companies. As a financial
holding company, Peoples is subject to regulation under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), and to inspection, examination and supervision by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board").
The Federal Reserve Board has extensive enforcement authority over financial holding companies. In general,
the Federal Reserve Board may initiate enforcement actions for violations of laws and regulations and unsafe or
unsound practices. The Federal Reserve Board may assess civil money penalties, issue cease and desist or removal
orders, and require that a financial holding company divest subsidiaries, including subsidiary banks. Peoples is
routinely required to file reports and other information with the Federal Reserve Board regarding its business
operations and those of its subsidiaries.
Subsidiary Bank
Peoples Bank is subject to regulation and examination primarily by the Ohio Division of Financial Institutions
("ODFI") and the Federal Reserve Bank of Cleveland ("FRB"). 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.
Various requirements and restrictions under the laws of the U.S, and the states of Ohio, West Virginia and
Kentucky affect the operations of Peoples Bank, including requirements to maintain reserves against deposits,
restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon,
restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks,
limitations on activities based on capital and surplus, limitations on transactions between Peoples Bank and Peoples,
limitations on the payment of dividends, and limitations on branching. Consumer laws and regulations designed to
prevent unfair, deceptive or abusive acts or practices, and to ensure that consumers have access to fair, transparent
and competitive markets for consumer financial products and services, affect the services provided to Peoples Bank's
customers.
Non-Banking Subsidiaries
Peoples' non-banking subsidiaries are also subject to regulation by the Federal Reserve Board and other
applicable federal and state agencies. Peoples Insurance, as a licensed insurance agency, is subject to regulation by
the Ohio Department of Insurance and the state insurance regulatory agencies of those states where it may conduct
business.
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Other Regulatory Agencies
Securities and Exchange Commission ("SEC") and The Nasdaq Stock Market ("Nasdaq")
Peoples is also under the jurisdiction of the SEC and certain state securities commissions for matters relating to
the offering and sale of its securities. Peoples is subject to the registration, disclosure, reporting and regulatory
requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the regulations promulgated thereunder, as administered by the SEC.
Peoples' common shares are listed with Nasdaq under the symbol "PEBO" and Peoples is subject to the rules for
Nasdaq listed companies.
Federal Home Loan Bank
Peoples Bank is a member of the FHLB, which provides credit to its members in the form of advances. As a
member of the FHLB, Peoples Bank must maintain an investment in the capital stock of the FHLB in a specified
amount. Upon the origination or renewal of an advance, the FHLB is required by law to obtain and maintain a
security interest in certain types of collateral. The FHLB is required to establish standards of community investment
or service that its members must maintain for continued access to long-term advances from the FHLB. The standards
take into account a member's performance under the Community Reinvestment Act of 1977 (the "CRA") and its
record of lending to first-time homebuyers.
Federal Deposit Insurance Corporation ("FDIC")
The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of
federally-insured banks and savings associations, and safeguards the safety and soundness of the financial institution
industry. Peoples Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC and
Peoples Bank is subject to deposit insurance assessments to maintain the Deposit Insurance Fund. The general
insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of
the United States government.
As insurer, the FDIC is authorized to conduct examinations of and to require routine reporting by insured
institutions, including Peoples Bank, to prohibit any insured institution from engaging in any activity the FDIC
determines to pose a threat to the Deposit Insurance Fund, and to take enforcement actions against insured
institutions. The FDIC may terminate insurance of deposits of any insured institution if the FDIC finds that the
insured institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition, or has violated
any applicable law, regulation, rule, order or condition imposed by the FDIC or any other regulatory agency.
Insured depository institutions are required to remit quarterly deposit insurance premiums to the FDIC, which are
used to fund the Deposit Insurance Fund. Insurance premiums for each insured depository institution are determined
based upon the institution's capital level and supervisory rating provided to the FDIC by the institution's primary
federal regulator and other information the FDIC determines to be relevant to the risk posed to the Deposit Insurance
Fund by the institution. The assessment rate determined by considering such information is then applied to the
amount of the institution's average assets minus average tangible equity to determine the institution's insurance
premium. An increase in the assessment rate could have a material adverse effect on the earnings of the affected
institution, depending on the amount of the increase.
The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk
characteristics of the institution and may also impose special assessments in emergency situations. Pursuant to the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), the FDIC has
established 2.0% as the designated reserve ratio ("DRR"), which is the amount in the Deposit Insurance Fund as a
percentage of all Deposit Insurance Fund insured deposits. In March 2016, the FDIC adopted final rules designed to
meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.
As of September 30, 2018, the DRR met the statutory minimum of 1.35%. As a result, the previous surcharge
imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits have been
determined by the FDIC for banks with assets of less than $10 billion, which had previously contributed to the
increase of the DRR to 1.35%. These credits may be redeemed beginning in the quarterly assessment period in which
the DRR reaches a minimum of 1.38%, and is not to exceed the total quarterly assessment due.
In addition, all FDIC-insured institutions are required to pay assessments to fund interest payments on bonds
issued by the Financing Corporation, which was established by the government to recapitalize a predecessor to the
Deposit Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in
September 2019. The Financing Corporation has projected that the last assessment will be collected on the March 29,
2019 FDIC invoice.
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Bank Holding Company Regulation
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling
banks, and other activities that the Federal Reserve Board has determined to be so closely related to banking as to be
a proper incident thereto. As a result of the Gramm-Leach-Bliley Act of 1999 - also known as the Financial Services
Modernization Act of 1999 - which amended the BHC Act, bank holding companies that are financial holding
companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is
either (1) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in
consultation with the Secretary of the Treasury), or (2) complementary to a financial activity, and that does not pose a
substantial risk to the safety and soundness of depository institutions or the financial system generally. Activities that
are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant
banking investments. In 2002, Peoples elected, and received approval from the Federal Reserve Board, to become a
financial holding company.
In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire
a company engaged in any new activity permitted by the BHC Act, the financial holding company must be "well
managed" and "well capitalized," and each insured depository institution subsidiary of the financial holding company
must be well capitalized under the prompt corrective action provisions, be well managed and have received a rating
of at least "satisfactory" in its most recent examination under the CRA. The CRA is more fully discussed in the
section captioned "Community Reinvestment Act" included later in this item. In addition, financial holding
companies, like Peoples, are permitted to acquire companies engaged in activities that are financial in nature and in
activities that are incidental and complementary to financial activities without prior Federal Reserve Board approval.
The BHC Act and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act
requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than 5% of the
voting shares of a commercial bank or its parent holding company. Under the federal Bank Merger Act, the prior
approval of the Federal Reserve Board is required for a state-chartered, Federal Reserve Bank member bank to merge
with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking
approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the
competitive effect and public benefits of the transactions, the capital position of the combined organization, the
applicant's performance record under the CRA and fair housing laws, and the effectiveness of the subject
organizations in combating money laundering activities.
A financial holding company is required by law and Federal Reserve Board policy to act as a source of financial
strength to each subsidiary bank and to commit resources to support each subsidiary bank. The Federal Reserve
Board may require a financial holding company to contribute additional capital to an undercapitalized subsidiary
bank and may disapprove of the payment of dividends to shareholders if the Federal Reserve Board believes the
payment of such dividends would be an unsafe or unsound practice.
Transactions with Affiliates, Directors, Executive Officers and Shareholders
Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Board Regulation W generally:
•
•
•
limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with any one
affiliate;
limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with all affiliates;
and
require that all such transactions be on terms substantially the same, or at least as favorable to the bank or
subsidiary, as those provided to a non-affiliate.
An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with
the bank. The term "covered transaction" includes the making of loans to the affiliate, the purchase of assets from the
affiliate, the issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate and
other similar types of transactions.
A bank's authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as
entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated under the Federal Reserve Act by the Federal Reserve Board. Among other things, these loans must be
made on terms (including interest rates charged and collateral required) substantially the same as those offered to
unaffiliated individuals, or be made as part of a benefit or compensation program and on terms widely available to
employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank
may make to these persons is based, in part, on the bank's capital position, and specified approval procedures must be
followed in making loans which exceed specified amounts.
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Capital Adequacy and Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things,
identifies five capital categories for insured depository institutions and requires the respective regulatory agencies to
implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. The regulatory agencies, including the Federal Reserve Board, the
ODFI, and the Office of Comptroller of the Currency, have adopted substantially similar regulatory capital guidelines
and regulations consistent with the requirements of FDICIA, as well as established a system of prompt corrective
action to resolve certain problems of undercapitalized institutions. This system is based on five capital level
categories for insured depository institutions: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
The regulatory agencies may (or in some cases must) take certain supervisory actions depending upon a bank's
capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days
after the bank becomes "critically undercapitalized" unless the bank's primary regulator determines, with the
concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise
may be significantly affected depending on a bank's capital category. For example, a bank that is not "well
capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher
than the prevailing rate in its market, and the holding company of any undercapitalized bank must guarantee, in part,
specific aspects of the bank's capital plan for the plan to be acceptable.
The Federal Reserve Board has adopted risk-based capital guidelines for financial holding companies and other
bank holding companies, as well as state member banks. The guidelines provide a systematic analytical framework
which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations,
takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives
to holding liquid, low-risk assets. Capital levels, as measured by these standards are also used to categorize financial
institutions for purposes of certain prompt corrective action regulatory provisions.
The risk-based capital guidelines adopted by the federal banking agencies are based on the "International
Convergence of Capital Measurement and Capital Standard" (Basel I), published by the Basel Committee on Banking
Supervision (the "Basel Committee"). In July 2013, the U.S. banking regulators issued new capital rules (the "Basel
III Capital Rules") applicable to smaller banking organizations which also implement certain provisions of the Dodd-
Frank Act. Community banking organizations, including Peoples and Peoples Bank, began transitioning to the new
rules on January 1, 2015. The new minimum capital requirements became effective on January 1, 2015; whereas, the
new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016 through
January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through
January 1, 2019.
The rules include (a) a minimum common equity tier 1 capital ratio of 4.5%, (b) a minimum tier 1 risk-based
capital ratio of 6.0%, (c) a minimum total risk-based capital ratio of 8.0%, and (d) a minimum tier 1 leverage ratio of
4.0%.
Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and
retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain
regulatory deductions.
Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-
cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, trust preferred
securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority
interests in the form of additional tier 1 capital instruments, less certain deductions.
Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as
subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria,
less applicable deductions.
The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax
assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments
in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial
institutions (above certain levels). The deductions phased in beginning in 2015 and were completely phased in as of
January 1, 2019.
Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk
included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet
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assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The new rules also place restrictions on the payment of capital distributions, including dividends and share
repurchases, and certain discretionary bonus payments to executive officers if the company does not hold a capital
conservation buffer of greater than 2.5% composed of common equity tier 1 capital above its minimum risk-based
capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer
ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer phased in beginning January
1, 2016, at 0.625%, and was subsequently increased to 1.25% as of January 1, 2017, 1.875% on January 1, 2018 and
2.50% on January 1, 2019.
In September 2017, the Federal Reserve Board, along with other bank regulatory agencies, proposed
amendments to its capital requirements to simplify aspects of the capital rules for community banks, including
Peoples Bank, in an attempt to reduce the regulatory burden for such smaller financial institutions. Because the
amendments were proposed with a request for comments and have not been finalized, Peoples does not yet know
what effect the final rules will have on Peoples Bank's capital calculations. In November 2017, the federal banking
agencies extended for community banks the existing capital requirements for certain items that were scheduled to
change effective January 1, 2018, in light of the simplification amendments being considered, including extending the
existing capital requirements for mortgage servicing assets and certain other items. The intent was to prevent
different rules from taking effect while the bank regulatory agencies consider a broader simplification of the capital
rules.
In November 2018, the Federal Reserve Board, along with other bank regulatory agencies, proposed a rule that
would give community banks, including Peoples Bank, the option to calculate a simple leverage ratio, rather than
multiple measures of capital adequacy, if they meet certain requirements. Under the proposal, a community bank
would be eligible to elect the Community Bank Leverage Ratio ("CBLR") framework if it has less than $10 billion in
total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than
9.0%. Provided it has a CBLR greater than 9.0%, a qualifying community bank that chooses the proposed framework
would be considered to have met the capital ratio requirements to be well capitalized for the agencies' prompt
corrective action rules. It is Peoples’ intent to analyze the final rule and then decide which capital option to select.
The federal banking agencies also adopted a rule providing banking organizations the option to phase in over a
three-year period the day-one adverse effects on regulatory capital that may result from the adoption of new current
expected credit loss methodology accounting under generally accepted accounting principles in the United States of
America ("US GAAP").
In order to be "well capitalized," a bank must have a common equity tier 1 capital ratio of at least 6.5%, a tier 1
risk-based capital ratio of at least 8.0%, a total risk-based capital of at least 10.0%, and a tier 1 leverage ratio of at
least 5.0%, and the bank must not be subject to any written agreement, order, capital directive or prompt corrective
action directive to meet and maintain a specific capital level for any capital measures. Peoples' management believes
that Peoples Bank meets the ratio requirements to be deemed "well capitalized" according to the guidelines described
above. Additional information regarding Peoples' regulatory matters can be found in Note 16 Regulatory Matters of
the Notes to the Consolidated Financial Statements.
Community Reinvestment Act
The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent
with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit
needs of its market areas by, among other things, providing credit or other financial assistance to low and moderate-
income individuals and communities. Depository institutions are periodically examined for compliance with the
CRA and are assigned ratings. As of December 31, 2018, the most recent performance evaluation by the Federal
Reserve Board (which was Peoples Bank's primary federal banking regulator at the time of the examination) of
Peoples Bank, which was conducted in 2017, resulted in an overall rating of "Satisfactory."
Dividend Restrictions
Current banking regulations impose restrictions on Peoples Bank's ability to pay dividends to Peoples. These
restrictions include a limit on the amount of dividends that may be paid in a given year without prior approval of the
Federal Reserve Board and a prohibition on paying dividends that would cause Peoples Bank's total capital to be less
than the required minimum levels under the capital requirements imposed by the Federal Reserve Board and the
amount of the capital conservation buffer. Ohio law also limits the amount of dividends that may be paid in any
given year without prior approval of the Ohio Superintendent of Financial Institutions. Peoples Bank may not declare
or pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend,
exceeds the sum of the bank's net income during the current calendar year and the retained net income of the prior
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two calendar years, unless the dividend has been approved by the ODFI and the FRB. Peoples Bank's regulators may
prohibit the payment of dividends at any time if the regulators determine the dividends represent unsafe and/or
unsound banking practices, or reduce Peoples Bank's total capital below adequate levels. For further discussion
regarding regulatory restrictions on dividends, refer to Note 16 Regulatory Matters of the Notes to the Consolidated
Financial Statements.
Peoples' ability to pay dividends to its shareholders may also be restricted. Current Federal Reserve Board policy
requires a financial holding company to act as a source of financial strength to each of its banking subsidiaries.
Under this policy, the Federal Reserve Board may require Peoples to commit resources or contribute additional
capital to Peoples Bank, which could restrict the amount of cash available for dividends.
The Federal Reserve Board has also issued a policy statement with regard to the payment of cash dividends by
financial holding companies and other bank holding companies. The policy statement provides that, as a matter of
prudent banking, a financial holding company or bank holding company should not maintain a rate of cash dividends
unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the
prospective rate of earnings retention appears to be consistent with the financial holding company's or bank holding
company's capital needs, asset quality and overall financial condition. Accordingly, a financial holding company or
bank holding company should not pay cash dividends that exceed its net income or can only be funded in ways that
weaken the financial holding company's or bank holding company's financial health, such as by borrowing.
Peoples also has entered into certain agreements that place restrictions on dividends. Specifically, Peoples Bank
is prohibited from paying dividends in an amount greater than permitted by law without requiring prior FRB or other
regulatory approval. In addition, if Peoples were to elect to defer payments of interest on the junior subordinated debt
securities held by the NB&T Statutory Trust III, or an event of default were to occur under the indenture governing
those junior subordinated debt securities, Peoples would be prohibited from declaring or paying any dividends on
Peoples' common shares. Even when the legal ability exists, Peoples or Peoples Bank may decide to limit the
payment of dividends in order to retain earnings for corporate use.
Customer Privacy and Other Consumer Protections
Peoples Bank is subject to regulations limiting the ability of financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a
nonaffiliated party. Peoples Bank is also subject to numerous federal and state laws aimed at protecting consumers,
including the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Equal Credit
Opportunity Act, the Truth in Lending Act, the Bank Secrecy Act, the Fair Credit Reporting Act and the authority
granted to banking regulators under the Federal Trade Commission Act with respect to unfair, deceptive, or abusive
acts or practices ("UDAAP"). In October 2017, the CFPB issued a final rule (the "Payday Rule") with respect to
certain consumer loans to be effective on January 16, 2018, although compliance with the most recent sections is not
required until August 19, 2019. The first major part of the Payday Rule makes it an unfair and abusive practice for a
lender to make short-term and longer-term loans with balloon payments (with certain exceptions) without reasonably
determining that the borrower has the ability to repay the loan. The second major part of the Payday Rule applies to
the same types of loans, as well as longer-term loans with an annual percentage rate greater than 36%, that are repaid
directly from the borrower's account. The Payday Rule states that it is an unfair and abusive practice for the lender to
withdraw payment from the borrower's account after two consecutive payment attempts have failed, unless the lender
obtains the consumer's new and specific authorization to make further withdrawals from the account. The Payday
Rule also requires lenders to provide certain notices to the borrower before attempting to withdraw payment on a
covered loan from the borrower's account.
On February 6, 2019, the CFPB issued two proposals with respect to the Payday Rule. First, the CFPB proposed
to delay the compliance date for the mandatory underwriting provisions of the Payday Rule to November 19, 2020.
The CFPB has requested comments on the proposed delay to be made within 30 days. Second, the CFPB proposed to
rescind provisions of the Payday Rule that (1) provide that it is an unfair and abusive practice for a lender to make a
covered short-term or longer-term balloon-payment loan without reasonably determining that the consumer has the
ability to repay the loan according to its terms; (2) prescribe mandatory underwriting requirements for making the
ability-to-repay determination; (3) provide exemptions of certain loans from the mandatory underwriting
requirements; and (4) provide related definitions, reporting and recordkeeping requirements. The CFPB has
requested comments to be made within 90 days on this proposal. These proposals do not change the provisions of the
Payday Rule that address lender payment practices with respect to covered loans. The CFPB also stated that the
CFPB will be considering other changes to the Payday Rule in response to requests received for exemptions of
certain types of lenders or loan products and may commence separate additional rulemaking initiatives.
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Peoples does not currently expect the Payday Rule to have a material effect on Peoples' financial condition or
results of operations on a consolidated basis.
USA Patriot Act
The Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the "USA Patriot Act") and related regulations, among other things, require financial
institutions to establish programs specifying procedures for obtaining identifying information from customers seeking
to establish new accounts and establishing enhanced due diligence policies, procedures and controls designed to
detect and report suspicious activity. Peoples Bank has established policies and procedures that Peoples believes
comply with the requirements of the USA Patriot Act.
Monetary Policy
The Federal Reserve Board regulates money, credit conditions and interest rates in order to influence general
economic conditions primarily through open market operations in U.S. government securities, changes in the discount
rate on bank borrowings, and changes in the reserve requirements against deposits of depository institutions. These
policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, as
well as interest rates charged on loans and paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of
financial institutions in the past and are expected to continue to have significant effects in the future. In light of the
changing conditions in the economy, the money markets and the activities of monetary and fiscal authorities, Peoples
can make no definitive predictions as to future changes in interest rates, credit availability or deposit levels.
Executive and Incentive Compensation
In June 2010, the federal banking regulatory agencies issued joint interagency guidance on incentive
compensation policies (the "Joint Guidance") intended to ensure that the incentive compensation policies of banking
organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.
This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of
an organization, either individually or as part of a group, is based upon the key principles that a banking
organization's incentive compensation arrangements should: (1) provide incentives that do not encourage risk-taking
beyond the organization's ability to effectively identify and manage risks; (2) be compatible with effective internal
controls and risk management; and (3) be supported by strong corporate governance, including active and effective
oversight by the organization's board of directors.
In 2011, federal banking regulatory agencies jointly issued proposed rules on incentive-based compensation
arrangements (the "First Proposed Joint Rules"). The First Proposed Joint Rules generally would have applied to
financial institutions with $1.0 billion or more in assets that maintain incentive-based compensation arrangements for
certain covered employees.
In May 2016, the federal banking regulatory agencies approved a second joint notice of proposed rules (the
"Second Proposed Joint Rules") designed to prohibit incentive-based compensation arrangements that encourage
inappropriate risks at financial institutions. The Second Proposed Joint Rules would apply to covered financial
institutions with total assets of $1.0 billion or more, and are still in proposed rules status.
The requirements of the Second Proposed Joint Rules would differ for each of three categories of financial
institutions:
•
•
•
Level 1 consisting of institutions with assets of $250 billion or more;
Level 2 consisting of institutions with assets of at least $50 billion and less than $250 billion; and
Level 3 consisting of institutions with assets of at least $1 billion and less than $50 billion.
Some of the requirements would apply only to Level 1 and Level 2 institutions. For all covered institutions,
including Level 3 institutions like Peoples Bank, the Second Proposed Joint Rules would:
•
•
•
prohibit incentive-based compensation arrangements that are "excessive" or "could lead to material
financial loss;"
require incentive-based compensation that is consistent with a balance of risk and reward, effective
management and control of risk, and effective governance; and
require board oversight, recordkeeping and disclosure to the appropriate regulatory agency.
Level 1 and Level 2 institutions would have additional requirements, including deferrals of awards to certain
covered persons; potential downward adjustments, forfeitures or clawbacks; and additional risk-management and
control standards, policies and procedures. In addition, certain practices and types of incentive compensation would
be prohibited.
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Pursuant to rules adopted by the stock exchanges and approved by the SEC in January 2013 under the Dodd-
Frank Act, public company compensation committee members must meet heightened independence requirements and
consider the independence of compensation consultants, legal counsel and other advisors to the compensation
committee. A compensation committee must have the authority to hire advisors and to have the public company fund
reasonable compensation of such advisors.
Public companies will be required, once stock exchanges impose additional listing requirements under the Dodd-
Frank Act, to implement "clawback" procedures for incentive compensation payments and to disclose the details of
the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial
information necessitating a restatement due to material noncompliance with financial reporting requirements. This
clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement
and would cover all executives who received incentive awards. Peoples has implemented a clawback policy and it is
posted under the "Corporate Overview - Governance Documents" tab of the "Investor Relations" page of Peoples'
Internet website.
SEC regulations require public companies such as Peoples to provide various disclosures about executive
compensation in annual reports and proxy statements, and to present to their shareholders a non-binding vote on the
approval of executive compensation.
Volcker Rule
In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision of
the Dodd-Frank Act (the "Volcker Rule"). The Volcker Rule places limits on the trading activity of insured
depository institutions and entities affiliated with a depository institution, subject to certain exceptions. The trading
activity includes a purchase or sale as principal of a security, derivative, commodity future or option on any such
instruments in order to benefit from short-term price movements or to realize short-term profits. The Volcker Rule
exempts trading in specified U.S. government, agency, state and/or municipal obligations. The Volcker Rule also
excepts (i) trading conducted in certain capacities; (ii) trading to satisfy a debt previously contracted; (iii) trading
under certain repurchase and securities lending agreements; and (iv) trading in connection with risk-mitigating
hedging activities.
The Volcker Rule also prohibits a banking entity from having an ownership interest in, or substantial
relationships with, a hedge fund or private equity fund, with a number of exceptions. To the extent that Peoples Bank
engages in any of the trading activities or has any ownership interest in or relationship with any of the types of funds
regulated by the Volcker Rule, Peoples Bank believes that its activities and relationships fall within the scope of one
or more of the exceptions provided in the Volcker Rule.
In December 2018, the five federal agencies that adopted the Volcker Rule proposed a rule that would exclude
certain community banks, including Peoples Bank, from the Volcker Rule, consistent with the Economic Growth,
Regulatory Relief, and Consumer Protection Act. Under the proposal, community banks with $10 billion or less in
total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets would be
excluded from the restrictions of the Volcker Rule. The agencies indicated that they will no longer enforce the
Volcker Rule with respect to community banks while the rulemaking is being finalized.
Effect of Environmental Regulation
Compliance with federal, state and local provisions regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures,
earnings or competitive position of Peoples and its subsidiaries. Peoples believes the nature of the operations of its
subsidiaries has little, if any, environmental impact. Peoples, therefore, anticipates no material capital expenditures
for environmental control facilities for its current fiscal year or for the foreseeable future.
Peoples believes its primary exposure to environmental risk is through the lending activities of Peoples Bank. In
cases where management believes environmental risk potentially exists, Peoples Bank mitigates its environmental
risk exposure by requiring environmental site assessments at the time of loan origination to confirm collateral quality
as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by
reference to present and past uses of the subject property and adjacent sites. In addition, environmental assessments
are typically required prior to any foreclosure activity involving non-residential real estate collateral.
Future Legislation
Various and significant legislation affecting financial institutions and the financial industry is from time to time
introduced by the U.S. Congress, as evidenced by the sweeping reforms in the Dodd-Frank Act adopted in 2010, and
the rollback of the Dodd-Frank Act that began in 2018. Many of the regulations mentioned above were adopted or
amended pursuant to the Dodd-Frank Act. Such legislation may continue to change banking statutes and regulations,
and the operating environment of Peoples and its subsidiaries in substantial and unpredictable ways, and could
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significantly increase or decrease costs of doing business, limit or expand permissible activities, or affect the
competitive balance among financial institutions. With the enactment of the Dodd-Frank Act, the subsequent rollback
and the continuing implementation of final rules and regulations thereunder, as well as political changes, the nature
and extent of future legislative and regulatory changes affecting financial institutions remains very unpredictable.
Website Access to Peoples' SEC Filings
Peoples maintains an Internet website at www.peoplesbancorp.com (this uniform resource locator, or URL, is an
inactive textual reference only and is not intended to incorporate Peoples' Internet website into this Form 10-K). Peoples
makes available free of charge on or through its website, its annual reports on Form 10-K, quarterly reports on Form 10-
Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act, as well as Peoples' definitive proxy statement filed pursuant to Section 14 of the Exchange Act, as soon
as reasonably practicable after Peoples electronically files each such report, amendment or proxy statement with, or
furnishes it to, the SEC.
ITEM 1A RISK FACTORS
The following are certain risks that management believes are specific to Peoples' business. This should not be viewed as
an all-inclusive list of risks or presenting the risk factors listed in any particular order. Additional risks that are not presently
known or that Peoples presently deems to be immaterial could also have a material, adverse impact on Peoples' business,
financial condition or results of operations.
Economic, Political and Market Risks
• Changes in economic and political conditions could adversely affect Peoples’ earnings and capital through declines
in deposits, quality of investment securities, loan demand, the ability of its customers to repay loans and the value
of the collateral securing its loans.
Peoples’ success depends, in part, on economic and political conditions, local and national, as well as governmental
fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and
monetary policy, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other
factors beyond Peoples’ control may adversely affect its deposit levels and composition, the quality of investment
securities available for purchase, demand for loans, the ability of its borrowers to repay their loans, and the value of the
collateral securing the loans it makes. Recent political developments have resulted in substantial changes in economic
and political conditions for the U.S. and the remainder of the world. Disruptions in U.S. and global financial markets, and
changes in oil production in the Middle East also affect the economy and stock prices in the U.S., which can affect
Peoples' earnings and Peoples' capital, as well as the ability of Peoples' customers to repay loans. The timing and
circumstances of the United Kingdom leaving the European Union (Brexit) and their effects on the U.S. are unknown.
The local economies of the majority of Peoples' market areas historically have been less robust than the economy of
the nation as a whole and typically are not subject to the same extent of fluctuations as the national economy. In general,
a favorable business environment and economic conditions are generally characterized by, among other factors, economic
growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong
business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic
growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of
credit and capital; increases in inflation or interest rates; high unemployment; volatility in pricing and availability of
natural resources; natural disasters; or a combination of these or other factors.
Any reversal of recent improvements in economic conditions could have an adverse effect on Peoples' asset quality,
deposit levels and loan demand, and, therefore, Peoples' financial condition and results of operations. Because a
significant amount of Peoples' loans are secured by either commercial or residential real estate, decreases in real estate
values could adversely affect the value of property used as collateral and Peoples' ability to sell the collateral upon
foreclosure.
• Changes in interest rates may adversely affect Peoples' profitability.
Peoples' earnings and cash flows are dependent to a significant degree on net interest income, which is the amount by
which interest income exceeds interest expense. Interest rates are highly sensitive to many factors that are beyond
Peoples' control, including general economic conditions and policies of various governmental and regulatory agencies
and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, not only
could influence the interest Peoples receives on loans and securities, and the amount of interest it pays on deposits and
borrowings, but such changes could also affect (1) Peoples' ability to originate loans and obtain deposits, (2) the fair value
of Peoples' financial assets and liabilities, and (3) the average duration of Peoples' mortgage-backed securities portfolio.
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If the interest rates paid on deposits and borrowings increase at a faster rate than the interest rates received on loans and
other investments, Peoples' net interest income and, therefore, earnings, could be adversely affected. Earnings could also
be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates
paid on deposits and borrowings.
Changes in interest rates may also negatively affect the ability of Peoples' borrowers to repay their loans, particularly
as interest rates rise and adjustable-rate loans become more expensive.
Management uses various measures to monitor interest rate risk and believes it has implemented effective asset and
liability management strategies to reduce the potential effects of changes in interest rates on Peoples' results of operations.
Management also periodically adjusts the mix of assets and liabilities to manage interest rate risk. However, any
substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on Peoples'
financial condition and results of operations. See the sections captioned "Interest Income and Expense" and "Interest Rate
Sensitivity and Liquidity" in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K for further discussion related to Peoples' interest
rate risk.
• A transition away from London Interbank Offered Rate ("LIBOR") as a reference rate for financial contracts
could negatively impact Peoples' income and expenses, and the value of various financial contracts.
LIBOR is used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts,
including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on
interest rate information reported by certain banks, which may stop reporting such information after 2021. It is uncertain
at this time whether LIBOR will change or cease to exist or the extent to which those entering into financial contracts will
transition to any other particular benchmark. Benchmarks that are used in place of LIBOR may perform differently than
LIBOR, and such alternative benchmarks may also perform differently in the future than they have in the past. The use of
alternative benchmarks may also have other consequences that cannot currently be anticipated. It is also uncertain what
will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding if
LIBOR ceases to exist.
Peoples' primary exposure to LIBOR relates to its promissory notes with borrowers, swap contracts with clients,
offsetting swap contracts with third parties related to the swap contracts with clients, Peoples' LIBOR-based borrowings
(if any), and Peoples Bank’s swap contracts which can be tied to LIBOR. Peoples' contracts generally include a LIBOR
term (one month, three month, one year, as an example) plus an incremental margin rate. Peoples is working through this
transition via a multi disciplinary project team.
• Adverse changes in the financial markets may adversely impact Peoples' results of operations.
While Peoples generally invests in securities issued by U.S. government agencies and sponsored entities, and U.S.
state and local governments with limited credit risk, certain investment securities Peoples holds possess higher credit risk
since they represent beneficial interests in structured investments collateralized by residential mortgages, debt obligations
and similar asset-backed assets. Even securities issued by governmental agencies and entities may entail risk depending
on political and economic changes. Regardless of the level of credit risk, all investment securities are subject to changes
in market value due to changing interest rates, implied credit spreads and credit ratings.
• Changes in market rates and economic conditions could cause the interest rate swaps Peoples Bank has entered
into to become ineffective.
The accounting treatment of the interest rate swaps entered into by Peoples as part of its interest rate management
strategy, may change if the hedging relationship is not as effective as currently anticipated. These interest rate swaps are
designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for fixed
payments from Peoples. As of December 31, 2018, Peoples had 12 interest rate swaps with an aggregate notional value of
$110.0 million.
Although Peoples expects that the hedging relationship will be highly effective as described above, it has not assumed
that there will be no ineffectiveness in the hedging relationship. As of December 31, 2018, the termination value of
derivatives in a net asset position was $1.0 million, which includes accrued interest but excludes any adjustment for
nonperformance risk. As of December 31, 2018, Peoples had no minimum collateral posting thresholds with certain of its
derivative counterparties. However, one of the counterparties had posted collateral of $130,000 against its obligations
under these agreements. If Peoples had breached any of the provisions of the agreements at December 31, 2018, it could
have been required to settle its obligations under the agreements at the termination value.
• The value of Peoples’ goodwill and other intangible assets may decline in the future.
As of December 31, 2018, Peoples had $162.1 million of goodwill and other intangible assets. A significant decline in
expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and
sustained decline in the price of Peoples’ common shares may necessitate taking charges in the future related to the
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impairment of goodwill and other intangible assets. If Peoples were to conclude that a future write-down of goodwill and
other intangible assets is necessary, the appropriate charge would be recorded, which could have a material adverse effect
on Peoples' business, financial condition and results of operations.
Business Operations Risks
• Peoples is exposed to operational risk.
Similar to any large organization, Peoples is exposed to many types of operational risk, including those discussed in
more detail in this Risk Factors section, such as reputational risk, legal and compliance risk, the risk of fraud or theft by
employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping
errors or those resulting from faulty or disabled computer or telecommunications systems.
Peoples may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond
its control, which may include, for example, computer viruses, cyber-attacks, spikes in transaction volume and/or
customer activity, electrical or telecommunications outages, or natural disasters. Peoples could be adversely affected by
operating systems disruptions if new or upgraded business management systems are defective, not installed properly or
not properly integrated into existing operations. Although Peoples has programs in place related to business continuity,
disaster recovery and information security to maintain the confidentiality, integrity and availability of its systems,
business applications and customer information, such disruptions may give rise to interruptions in service to customers,
loss of data privacy and loss or liability to Peoples.
Any failure or interruption in Peoples' operations or information systems, or any security or data breach, could cause
reputational damage, jeopardize the confidentiality of customer information, result in a loss of customer business, subject
Peoples to regulatory intervention or expose Peoples to civil litigation and financial loss or liability, any of which could
have a material adverse effect on Peoples.
Negative public opinion can result from Peoples’ actual or alleged conduct in any number of activities, including
lending practices, corporate governance and acquisitions, and actions taken by governmental regulators and community
organizations in response to those activities. Negative public opinion can adversely affect Peoples’ ability to attract and
keep customers, and can expose Peoples to potential litigation and regulatory action.
Given the volume of transactions Peoples processes, certain errors may be repeated or compounded before they are
discovered and successfully rectified. Peoples’ necessary dependence upon automated systems to record and process its
transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of
those systems will result in losses that are difficult to detect and which may give rise to disruption of service to customers
and to financial loss or liability. Peoples is further exposed to the risk that its external vendors may be unable to fulfill
their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective
employees as Peoples is) and to the risk that Peoples' (or its vendors’) business continuity and data security systems prove
to be inadequate.
• Failures or material breaches in security of Peoples' systems and telecommunications networks, or those of a third-
party service provider may have a material adverse effect on Peoples' results of operations and financial condition
and the price of Peoples' common shares.
Peoples collects, processes and stores sensitive consumer data by utilizing computer systems and telecommunications
networks operated by both Peoples and third-party service providers. Peoples' necessary dependence upon automated
systems to record and process Peoples' transactions poses the risk that technical system flaws, employee errors, tampering
or manipulation of those systems, or attacks by third parties will result in losses and may be difficult to detect. Peoples
has security and backup and recovery systems in place, as well as a business continuity plan, designed to ensure the
computer systems will not be inoperable, to the extent possible. Peoples also routinely reviews documentation of such
controls and backups related to third-party service providers. Peoples' inability to use or access those information systems
at critical points in time could unfavorably impact the timeliness and efficiency of Peoples' business operations. Risks to
Peoples' systems result from a variety of factors, including the potential for bad acts on the part of hackers, criminals,
employees or others. As one example, in recent years, some banks have experienced denial of service attacks in which
individuals or organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect
of disrupting the ability of the bank to process transactions. Other businesses have been victims of ransomware attacks in
which the business becomes unable to access its own information and is presented with a demand to pay a ransom in order
to once again have access to its information. Peoples is also at risk from the impact of natural disasters, terrorism and
international hostilities on its systems or for the effects of outages or other failures involving power or communications
systems operated by others. These risks also arise from the same types of threats to businesses with which Peoples deals.
Peoples could be adversely affected if one of its employees causes a significant operational break down or failure,
either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates Peoples’
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operations or systems. Peoples is further exposed to the risk that the third-party service providers may be unable to fulfill
their contractual obligations (or will be subject to the same risks as Peoples). These disruptions may interfere with service
to Peoples’ customers, cause additional regulatory scrutiny and result in a financial loss or liability.
Misconduct by employees could include fraudulent, improper or unauthorized activities on behalf of clients or
improper use of confidential information. Peoples may not be able to prevent employee errors or misconduct, and the
precautions Peoples takes to detect this type of activity might not be effective in all cases. Employee errors or misconduct
could subject Peoples to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on
Peoples’ business.
In addition, there have been instances where financial institutions have been victims of fraudulent activity in which
criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. Although
Peoples has policies and procedures in place to verify the authenticity of its customers, Peoples cannot ensure that such
policies and procedures will prevent all fraudulent transfers. Such activity can result in financial liability and harm to
Peoples’ reputation.
Peoples has implemented security controls to prevent unauthorized access to the computer systems and requires its
third-party service providers to maintain similar controls. However, management cannot be certain that these measures
will be successful. A security breach of the computer systems and loss of confidential information, such as customer
account numbers and related information, could result in a loss of customers’ confidence and, thus, loss of business.
Peoples could also lose revenue if competitors gain access to confidential information about Peoples’ business operations
and use it to compete with Peoples. In addition, unauthorized access to or use of sensitive data could subject Peoples to
litigation and liability, and costs to prevent further such occurrences.
Further, Peoples may be affected by data breaches at retailers and other third parties who participate in data
interchanges with Peoples and its customers that involve the theft of customer debit card data, which may include the theft
of Peoples’ debit card personal identification numbers and commercial card information used to make purchases at such
retailers and other third parties. Such data breaches could result in Peoples incurring significant expenses to reissue debit
cards and cover losses, which could result in a material adverse effect on Peoples’ results of operations. To date, Peoples
has not experienced any material losses relating to cyber-attacks or other information security breaches, but there can be
no assurance that Peoples will not suffer such attacks or attempted breaches, or incur resulting losses in the future.
Peoples' risk and exposure to these matters remains heightened because of, among other things, the evolving nature of
these threats, and Peoples' plans to continue to implement internet and mobile banking capabilities to meet customer
demand. As cyber and other data security threats continue to evolve, Peoples may be required to expend significant
additional resources to continue to modify and enhance its protective measures or to investigate and remediate any
security vulnerabilities.
Peoples’ assets at risk for cyber-attacks include financial assets and non-public information belonging to customers.
Peoples uses several third-party vendors who have access to Peoples’ assets via electronic media. Certain cybersecurity
risks arise due to this access, including cyber espionage, blackmail, ransom and theft.
All of the types of cyber incidents discussed above could result in damage to Peoples’ reputation, loss of customer
business, increased costs of incentives to customers or business partners in order to maintain their relationships, litigation,
increased regulatory scrutiny and potential enforcement actions, repairs of system damage, increased investments in
cybersecurity (such as obtaining additional technology, making organizational changes, deploying additional personnel,
training personnel and engaging consultants), increased insurance premiums, and loss of investor confidence and a
reduction in the price of Peoples’ common shares, all of which could result in financial loss and material adverse effects
on Peoples’ results of operations and financial condition.
• Peoples, inclusive of Peoples Bank, operates in a highly regulated industry, and the laws and regulations that
govern Peoples’ operations, corporate governance, executive compensation and financial accounting, or reporting,
including changes in them, or failure to comply with them, may adversely affect Peoples.
The banking industry is highly regulated. Peoples is subject to supervision, regulation and examination by various
federal and state regulators, including the Federal Reserve Board, SEC, CFPB, FDIC, Financial Industry Regulatory
Authority, Inc. (also known as FINRA), and various state regulatory agencies. The statutory and regulatory framework
that governs Peoples is generally intended to protect depositors and customers, the Deposit Insurance Fund, the U.S.
banking and financial system, and financial markets as a whole - not to protect shareholders. These laws and regulations,
among other matters, prescribe minimum capital requirements, impose limitations on Peoples’ business activities
(including foreclosure and collection practices), limit the dividends or distributions that Peoples can pay, restrict the
ability of institutions to guarantee Peoples’ debt, and impose certain specific accounting requirements that may be more
restrictive and may result in greater or earlier charges to earnings or reductions in capital than US GAAP. Compliance
with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional
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compliance costs. Both the scope of the laws and regulations and the intensity of the supervision to which Peoples is
subject have increased in recent years in response to the financial crisis, as well as other factors such as technological and
market changes. Such regulation and supervision may increase Peoples’ costs and limit the ability to pursue business
opportunities. Further, Peoples’ failure to comply with these laws and regulations, even if the failure was inadvertent or
reflects a difference in interpretation, could subject Peoples to restrictions on business activities, fines, and other penalties,
any of which could adversely affect results of operations, the capital base, and the price of Peoples’ common shares.
Further, any new laws, rules, and regulations could make compliance more difficult or expensive or otherwise adversely
affect Peoples’ business and financial condition.
• Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could cause
Peoples a material financial loss.
The Bank Secrecy Act and the USA Patriot Act contain anti-money laundering and financial transparency provisions
intended to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities.
The Bank Secrecy Act, as amended by the USA Patriot Act, requires depository institutions and their holding companies
to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients,
monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and
responding to requests for information by regulatory authorities and law enforcement agencies. Financial Crimes
Enforcement Network (also known as FinCEN), a unit of the Treasury Department that administers the Bank Secrecy Act,
is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in
coordinated enforcement efforts with the federal bank regulatory agencies, as well as the U.S. Department of Justice, Drug
Enforcement Administration, and Internal Revenue Service.
There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (also
known as OFAC). If Peoples' policies, procedures, and systems are deemed deficient or the policies, procedures, and
systems of the financial institutions that Peoples has already acquired or may acquire in the future are deficient, Peoples
would be subject to liability, including fines and regulatory actions such as restrictions on Peoples' ability to pay dividends
and the necessity to obtain regulatory approvals to proceed with certain planned business activities, including acquisition
plans, which would negatively impact Peoples' business, financial condition, and results of operations. Failure to maintain
and implement adequate programs to combat money laundering and terrorist financing could also have serious
reputational consequences for Peoples.
For a more complete discussion of the Bank Secrecy Act and the USA Patriot Act, see "Supervision and Regulation"
in "ITEM 1 BUSINESS" of this Form 10-K.
• Peoples is at risk of increased losses from fraud.
Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. In some cases,
these individuals are part of larger criminal rings, which allow them to be more effective. The fraudulent activity has
taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social
engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or
stolen credentials. Additionally, an individual or business entity may properly identify itself, yet seek to establish a
business relationship for the purpose of perpetrating fraud. An emerging type of fraud even involves the creation of
synthetic identification in which fraudsters "create" individuals for the purpose of perpetrating fraud. Further, in addition
to fraud committed directly against Peoples, Peoples may suffer losses as a result of fraudulent activity committed against
third parties. Increased deployment of technologies, such as chip card technology, defray and reduce aspects of fraud;
however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare
providers and government entities, in order to impersonate the consumer and thereby commit fraud.
• Peoples' business could be adversely affected through third parties who perform significant operational services on
behalf of Peoples.
The third parties performing operational services for Peoples are subject to risks similar to those faced by Peoples
relating to cybersecurity, breakdowns or failures of their own systems, or misconduct of their employees. Like many
other community banks, Peoples also relies, in significant part, on a single vendor for the systems which allow Peoples to
provide banking services to Peoples’ customers, with the systems being maintained on Peoples' behalf by this single
vendor.
One or more of the third parties utilized by Peoples may experience a cybersecurity event or operational disruption
and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by such third
party. Certain of these third parties may have limited indemnification obligations to Peoples in the event of a
cybersecurity event or operational disruption, or may not have the financial capacity to satisfy their indemnification
obligations.
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Financial or operational difficulties of a third-party provider could also impair Peoples' operations if those difficulties
interfere with such third party’s ability to serve Peoples. If a critical third-party provider is unable to meet the needs of
Peoples in a timely manner, or if the services or products provided by such third party are terminated or otherwise delayed
and if Peoples is not able to develop alternative sources for these services and products quickly and cost-effectively,
Peoples’ business could be materially adversely effected.
Additionally, regulatory guidance adopted by federal banking regulators addressing how banks select, engage and
manage their third-party relationships, affects the circumstances and conditions under which Peoples works with third
parties and the cost of managing such relationships.
• Peoples' failure to be in compliance with any material provision or covenant of its debt instruments could have a
material adverse effect on Peoples' liquidity and operations.
On March 4, 2016, Peoples entered into a Credit Agreement (the "RJB Credit Agreement") with Raymond James
Bank, N.A. ("Raymond James Bank"), which has a three-year term and provides Peoples with a revolving line of credit in
the maximum aggregate principal amount of $15 million. The RJB Credit Agreement imposes operating and financial
restrictions on Peoples. These restrictions may affect Peoples' operations and may limit the ability to take advantage of
potential business opportunities as they arise. Peoples' ability to comply with the covenants may be affected by events
beyond Peoples' control, including deteriorating economic conditions, and these events could require Peoples to seek
waivers or amendments of covenants, or alternative sources of financing. Peoples' ability to obtain such waivers,
amendments or alternative financing, may be on terms unfavorable to Peoples.
A breach of any of the covenants or restrictions contained in any of the existing or future financing agreements,
including the financial covenants, could result in an event of default under the agreements. Such a default could allow the
lenders under the financing agreements, if the agreements so provide, to discontinue lending, to accelerate the related
debt, and/or to declare all borrowings outstanding thereunder to be due and payable. In addition, the lenders could
terminate any commitments they have to provide Peoples with further funds. If any of these events occur, Peoples may
not have sufficient funds available to pay in full the total amount of obligations that become due as a result of any such
acceleration, or Peoples may not be able to find additional or alternative financing to refinance any such accelerated
obligations. Even if additional or alternative financing is obtained, it may be on terms that would be unfavorable to
Peoples. The RJB Credit Agreement matures on March 3, 2019. Peoples is in the process of renewing this facility and
expects that it will be renewed prior to its expiration.
• Peoples' exposure to credit risk could adversely affect Peoples' earnings and financial condition.
There are certain risks inherent in making loans. These risks include interest rate changes over the time period in
which loans may be repaid, risks resulting from changes in the economy, risks that Peoples will have inaccurate or
incomplete information about borrowers, risks that borrowers will become unable to repay loans, and, in the case of loans
secured by collateral, risks resulting from uncertainties about the future value of the collateral.
Commercial loans comprise a significant portion of Peoples' loan portfolio. Commercial loans generally are viewed
as having a higher degree of credit risk than residential real estate or consumer loans because they usually involve larger
loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. Since
Peoples' loan portfolio contains a significant number of commercial loans, the deterioration of one or a few of these loans
could cause a significant increase in nonperforming loans, and ultimately could have a material adverse effect on Peoples'
earnings and financial condition. Peoples may also have concentrated credit exposures to a particular industry, resulting
in a risk of a material adverse effect on earnings or financial condition, if there is an event adversely affecting that
industry.
• Peoples' allowance for loan losses may be insufficient to absorb the probable, incurred losses in its loan portfolio.
Peoples maintains an allowance for loan losses that is believed to be a reasonable estimate of the probable, incurred
losses within the loan portfolio based on management's quarterly analysis of the portfolio. The determination of the
allowance for loan losses requires management to make various assumptions and judgments about the collectability of
Peoples' loans, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as
collateral for the repayment of loans. Additional information regarding Peoples' allowance for loan losses methodology
and the sensitivity of the estimates can be found in the discussion of "Critical Accounting Policies" included in "ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" of this Form 10-K.
Peoples' estimation of future loan losses is susceptible to changes in economic, operating and other conditions,
including changes in regulations and interest rates, which may be beyond Peoples' control, and the losses may exceed
current estimates. Peoples cannot be assured of the amount or timing of losses, nor whether the loan loss allowance will
be adequate in the future.
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If Peoples' assumptions prove to be incorrect, Peoples' allowance for loan losses may not be sufficient to cover the
incurred losses from its loan portfolio, resulting in the need for additions to the allowance for loan losses which could
have a material adverse impact on Peoples' financial condition and results of operations. In addition, bank regulators
periodically review Peoples' allowance for loan losses as part of their examination process and may require management
to increase the allowance or recognize further loan charge-offs based on judgments different than those of management.
On June 16, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
2016-13 "Financial Instruments - Credit Losses", which replaces the incurred loss model with an expected loss model, and
is referred to as the current expected credit loss ("CECL") model. Under the incurred loss model, loans are recognized as
impaired when there is no longer an assumption that future cash flows will be collected in full under the originally
contracted terms. The new accounting guidance is effective for annual reporting periods and interim reporting periods
within those annual periods, beginning after December 15, 2019. Under the CECL model, financial institutions will be
required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the
life of the loan. The transition to the CECL model will bring with it significantly greater data requirements and changes to
methodologies to accurately account for expected losses under the new parameters.
Any significant increase in the allowance for loan losses or loan charge-offs, as required by these regulatory
authorities, might have a material adverse effect on Peoples' financial condition and results of operations.
• Peoples and Peoples Bank may elect or be compelled to seek additional capital in the future, but that capital may
not be available when it is needed.
Peoples and Peoples Bank are required by federal and state regulatory authorities to maintain adequate levels of
capital to support their operations. Federal banking agencies have adopted extensive changes to their capital
requirements, including raising required amounts and eliminating the inclusion of certain instruments from the calculation
of capital. If Peoples Bank experiences significant losses, additional capital may be needed. In addition, Peoples and
Peoples Bank may elect to raise additional capital to support the businesses or to finance acquisitions, if any, or for other
unanticipated reasons. The ability to raise additional capital, if needed, will depend on financial performance, conditions
in the capital markets, economic conditions and a number of other factors, many of which are outside of Peoples' control.
Therefore, there can be no assurance additional capital can be raised when needed or that capital can be raised on
acceptable terms. The inability to raise capital may have a material adverse effect on Peoples' financial condition, results
of operations or potential acquisitions.
• The financial services industry is very competitive.
Peoples experiences significant competition in originating loans, obtaining deposits, and maintaining and growing
insurance and trust customers, principally from other commercial banks, savings associations, credit unions, trust and
brokerage companies, insurance agencies, fintechs and online service providers. Several of Peoples' competitors have
greater resources, larger branch systems and a wider array of banking and non-banking services. This competition could
reduce Peoples' net income by decreasing the number and size of loans that Peoples originates and the interest rates it may
charge on these loans. Moreover, technology and other changes are allowing businesses and individuals to utilize
alternative methods to complete financial transactions that historically have involved banks. For example, consumers can
now maintain funds in brokerage accounts or mutual funds that in the past had been held as bank deposits. Consumers
can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The
process of eliminating the use of banks to complete financial transactions could result in the loss of fee income, as well as
the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and
lower cost deposits as a source of funding could have a material adverse effect on Peoples' financial condition and results
of operations. If Peoples is unable to compete effectively, Peoples would lose market share, which could reduce income
generated from deposits, loans and other products. For a more complete discussion of Peoples' competitive environment,
see "Competition" in "ITEM 1 BUSINESS" of this Form 10-K.
• Peoples may not be able to attract and retain skilled people.
Peoples' success depends, in large part, on its ability to attract, retain, motivate and develop key employees.
Competition for key employees is ongoing and intense, and Peoples may not be able to attract, retain or hire the key
employees who are wanted or needed, which may also negatively impact Peoples' ability to execute identified business
strategies. Many of Peoples’ offices are located in rural areas, resulting in the possible need for Peoples to offer higher
compensation than normal to attract or retain key employees, which may adversely affect salaries and benefits costs.
Various restrictions on the compensation which may be paid to certain executive officers were imposed under the
Dodd-Frank Act and other legislation and regulations. In addition, Peoples' incentive compensation structure is subject to
review by regulators, who may identify deficiencies in the structure or issue additional guidance on Peoples'
compensation practices, causing Peoples to make changes that may affect its ability to offer competitive compensation to
these individuals or that place it at a disadvantage to non-financial service competitors. Peoples' ability to attract and
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retain talented employees may be affected by these developments, or any new executive compensation limits and
regulations.
• Peoples' ability to pay dividends is limited, and Peoples may not be in the position to pay dividends in the future.
Although Peoples has paid dividends on its common shares in the past, Peoples may reduce or eliminate dividends in
the future, in the discretion of the Board of Directors, for any reason, including a determination to use funds for other
purposes, or due to regulatory constraints. Peoples is a separate and distinct legal entity from Peoples' subsidiaries.
Peoples receives nearly all of its liquidity from dividends from Peoples Bank, which are limited by federal and state
banking laws and regulations. These dividends also serve as the primary source of funds to pay dividends on Peoples'
common shares. The inability of Peoples Bank to pay sufficient dividends to Peoples could have a material, adverse
effect on its business. Further discussion of Peoples' ability to pay dividends can be found under the caption "Supervision
and Regulation - Dividend Restrictions" in "ITEM 1 BUSINESS" of this Form 10-K and Note 16 Regulatory Matters of
the Notes to the Consolidated Financial Statements.
• Anti-takeover provisions may delay or prevent an acquisition or change in control by a third party.
Provisions in the Ohio General Corporation Law and Peoples' Amended Articles of Incorporation and Code of
Regulations, including a supermajority vote requirement for significant corporate changes, could discourage potential
takeover attempts and make attempts by shareholders to remove Peoples' Board of Directors and management more
difficult. These provisions may also have the effect of delaying or preventing a transaction or change in control that might
be in the best interests of Peoples' shareholders.
• Climate change, severe weather, natural disasters, acts of war or terrorism and other external events could
significantly impact Peoples' business.
Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of
war or terrorism, and other adverse external events could have a significant impact on Peoples' ability to conduct business
or upon third parties who perform operational services for Peoples or its customers. Such events could affect the stability
of Peoples' deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing
loans, cause significant property damage, result in lost revenue or cause Peoples to incur additional expenses.
• Peoples depends upon the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, Peoples may
rely on information provided by customers and counterparties, including financial statements and other financial
information. Peoples may also rely on representations of customers and counterparties as to the accuracy and
completeness of that information and, with respect to financial statements, on reports of independent auditors. For
example, in deciding whether to extend credit to a business, Peoples Bank may assume that the customer’s audited
financial statements conform with US GAAP and present fairly, in all material respects, the financial condition, results of
operations and cash flows of the customer. Peoples Bank may also rely on the audit report covering those financial
statements. Peoples’ financial condition, results of operations and cash flows could be negatively impacted to the extent
that Peoples Bank relies on financial statements that do not comply with US GAAP or on financial statements and other
financial information that are materially misleading.
• Peoples Bank may be required to repurchase loans it has sold or indemnify loan purchasers under the terms of the
sale agreements, which could adversely affect Peoples’ liquidity, results of operations and financial condition.
When Peoples Bank sells a mortgage loan, it may agree to repurchase or substitute a mortgage loan if it is later found
to have breached any representation or warranty Peoples Bank made about the loan or if the borrower is later found to
have committed fraud in connection with the origination of the loan. While Peoples Bank has underwriting policies and
procedures designed to avoid breaches of representations and warranties as well as borrower fraud, there can be no
assurance that a breach or fraud will never occur. Required repurchases, substitutions or indemnifications could have an
adverse effect on Peoples’ liquidity, results of operations and financial condition.
• Peoples and its subsidiaries are subject to examinations and challenges by tax authorities.
In the normal course of business, Peoples and its subsidiaries are routinely subject to examinations and challenges
from federal and state tax authorities regarding positions taken regarding their respective tax returns. State tax authorities
have become increasingly aggressive in challenging tax positions taken by financial institutions, especially those positions
relating to tax compliance and calculation of taxes subject to apportionment. Any challenge or examination by a tax
authority may result in adjustments to the timing or amount of taxable net worth or taxable income, or deductions or the
allocation of income among tax jurisdictions.
Management believes it has taken appropriate positions on all tax returns filed, to be filed or not filed, and does not
anticipate any examination would have a material impact on Peoples' Consolidated Financial Statements. However, the
outcome of such examinations and ultimate resolution of any resulting assessments are inherently difficult to predict.
Thus, no assurance can be given that Peoples' tax liability for any tax year open to examination will not be different than
26
what is reflected in Peoples' current and historical Consolidated Financial Statements. Further information can be found
in the "Critical Accounting Policies - Income Taxes" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
• Peoples or one of its subsidiaries may be a defendant from time to time in the future in a variety of litigation and
other actions, which could have a material adverse effect on Peoples' financial condition, results of operations and
cash flows.
Peoples and its subsidiaries may be involved from time to time in the future in a variety of litigation arising out of
their respective businesses. The risk of litigation increases in times of increased troubled loan collection activity. Peoples'
insurance may not cover all claims that may be asserted against Peoples and its subsidiaries, and any claims asserted
against them, regardless of merit or eventual outcome, may harm their respective reputations. Should the ultimate
judgments or settlements in any litigation exceed the applicable insurance coverage, they could have a material adverse
effect on Peoples' financial condition, results of operations and cash flows. In addition, Peoples or one of its subsidiaries
may not be able to obtain appropriate types or levels of insurance in the future, nor may they be able to obtain adequate
replacement policies with acceptable terms, if at all.
• Defaults by larger financial institutions could adversely affect Peoples' business, earnings and financial condition.
The soundness of many financial institutions may be closely interrelated as a result of relationships between and
among the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to
significant market-wide liquidity and credit problems, losses or defaults by other institutions. This "systemic risk" may
adversely affect Peoples' business.
Additionally, Peoples' investment portfolio continues to include a limited amount of investments in individual bank-
issued trust preferred securities. Under current market conditions, the fair value of these security types is based
predominately on the present value of cash flows expected to be received in future periods. Significant defaults by other
financial institutions could adversely affect conditions within the financial services industry, thereby causing investors to
require higher rates of return for these investments. These factors could cause Peoples to recognize impairment losses on
its investment in bank-issued trust preferred securities in future periods.
Legislative, Regulatory and Tax Change Risks
• Legislative or regulatory changes or actions, or significant litigation, could adversely impact Peoples or the
businesses in which it is engaged.
The financial services industry is heavily regulated under both federal and state law. Peoples is subject to regulation
and supervision by the Federal Reserve Board, and Peoples Bank is subject to regulation and supervision by the ODFI, the
FRB, the FDIC and the CFPB. These regulations are primarily intended to protect depositors and the Deposit Insurance
Fund, not Peoples' common shareholders. Peoples' non-bank subsidiaries are also subject to the supervision of the Federal
Reserve Board, in addition to other regulatory and self-regulatory agencies, including the SEC, and state securities and
insurance regulators.
Regulations affecting banks and financial services businesses are undergoing continuous change, and management
cannot predict the effect of those changes. While such changes are generally intended to lessen the regulatory burden on
financial institutions, the impact of any changes to laws and regulations or other actions by regulatory agencies could
adversely affect Peoples' business. Regulatory authorities have extensive discretion in connection with their supervisory
and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of
assets held by an institution, the appropriateness of an institution's allowance for loan losses and the ability to complete
acquisitions. Additionally, actions by regulatory agencies or significant litigation against Peoples could cause Peoples to
devote significant time and resources to defending its business and may lead to penalties that materially affect Peoples and
its shareholders. Even the reduction of regulatory restrictions could have an adverse effect on Peoples and its
shareholders if such lessening of restrictions increases competition within the financial services industry or Peoples'
market area.
In light of conditions in the global financial markets and the global economy that occurred in the last decade,
regulators have increased their focus on the regulation of the financial services industry. Most recently, the government
and the federal agencies regulating the financial services industry have acted on an unprecedented scale in responding to
the stresses experienced in the global financial markets. Some of the laws enacted by the government and regulations
promulgated by federal regulatory agencies subject Peoples, Peoples Bank and other financial institutions to which such
laws and regulations apply, to additional restrictions, oversight and costs that may have an impact on Peoples' business,
results of operations or the trading price of Peoples' common shares.
In July 2013, Peoples' primary federal regulator, the Federal Reserve Board, published the Basel III Capital Rules,
establishing a new comprehensive capital framework for U.S. banking organizations. The rules implemented the Basel
27
Committee's December 2010 framework known as "Basel III" for strengthening international capital standards, as well as
certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital
requirements applicable to financial holding companies and other bank holding companies as well as depository
institutions, including Peoples and Peoples Bank, compared to the previous U.S. risk-based capital rules. The Basel III
Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions'
regulatory capital ratios. The Basel III Capital Rules also address risk-weights and other issues affecting the denominator
in banking institutions' regulatory capital ratios and replaced the existing risk-weighting approach, which was derived
from Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the
standardized approach in the Basel Committee's 2004 "Basel II" capital accords. The Basel III Capital Rules implement
the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking
agencies' rules. The Basel III Capital Rules have been fully phased in, and have not had a material impact on Peoples' or
Peoples Bank's capital ratios.
Further information about government regulation of Peoples' business can be found under the caption "Supervision
and Regulation" in "ITEM 1 BUSINESS" of this Form 10-K.
• Changes in accounting standards, policies, estimates or procedures may impact Peoples' reported financial
condition or results of operations.
The accounting standard setters, including the FASB, the SEC and other regulatory bodies, periodically change the
financial accounting and reporting standards that govern the preparation of Peoples' Consolidated Financial Statements.
The pace of change continues to accelerate and changes in accounting standards can be difficult to predict and can
materially impact how Peoples records and reports its financial condition and results of operations. In some cases,
Peoples could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period
financial statements.
The preparation of consolidated financial statements in conformity with US GAAP requires management to make
significant estimates that affect the financial statements. Due to the inherent nature of these estimates, actual results may
vary materially from management's estimates. In June 2016, FASB issued a new accounting standard for recognizing
current expected credit losses, commonly referred to as CECL. CECL will result in earlier recognition of credit losses and
requires consideration of not only past and current events but also reasonable and supportable forecasts that affect
collectability. Peoples will be required to comply with the new standard in the first quarter of 2020. Upon adoption of
CECL, credit loss allowances may increase, which would decrease retained earnings and regulatory capital. The federal
banking regulators have adopted a regulation that will allow banks to phase in the day-one impact of CECL on regulatory
capital over three years. CECL implementation poses operational risk, including the failure to properly transition internal
processes or systems, which could lead to call report errors, financial misstatements or operational losses.
In February 2016, FASB issued a new accounting standard for lease accounting, which Peoples will be required to
comply with in the first quarter of 2019. The new standard will require Peoples to recognize a right-of-use asset and a
lease liability for certain leases. Peoples owns the majority of its properties and is the lessor for a small number of
properties. Peoples recorded the right-of-use asset on January 1, 2019, which was approximately $5.2 million, and a lease
liability of approximately $5.3 million.
Additional information regarding Peoples' critical accounting policies and the sensitivity of estimates can be found in
the section captioned "Critical Accounting Policies" in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
• Changes in tax laws could adversely affect Peoples' performance, including the Tax Cuts and Jobs Act, and
uncertainty or speculation pending the enactment of such changes.
Peoples is subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise,
withholding and other taxes. Changes to tax laws could have a material adverse effect on Peoples' results of operations,
fair values of net deferred tax assets and obligations of states and political subdivisions held in Peoples' investment
securities portfolio. In addition, Peoples' customers are subject to a wide variety of federal, state and local taxes.
Changes in taxes paid by Peoples' customers may adversely affect their ability to purchase homes or consumer products,
which could adversely affect their demand for loans and deposit products. In addition, such negative effects on Peoples'
customers could result in defaults on the loans made by Peoples Bank and decrease the value of mortgage-backed
securities in which Peoples has invested.
On December 22, 2017, H.R.1, formally known as the "Tax Cuts and Jobs Act," was enacted into law. The Tax Cuts
and Jobs Act, among other changes, imposed additional limitations on the federal income tax deductions individual
taxpayers may take for mortgage loan interest payments and for state and local taxes, including real estate taxes. The Tax
Cuts and Jobs Act also imposed additional limitations on the deductibility of business interest expense, and eliminated
other deductions in their entirety, including deductions for certain home equity loan interest payments. Such limits and
28
eliminations may result in customer defaults on loans Peoples Bank has made and decrease the value of mortgage-backed
securities in which Peoples has invested. Peoples' tax benefit for certain tax advantaged assets, including obligations of
state and political subdivisions held in People's investment securities portfolio and investments in affordable housing
limited partnerships, could be negatively impacted as the tax benefit rate was reduced from 35% to 21%, and the market
value of such assets could be negatively impacted.
• Increases in FDIC insurance premiums may have a material adverse effect on Peoples' earnings.
Peoples Bank has limited ability to control the amount of premiums it is required to pay for FDIC insurance. The
Deposit Insurance Fund maintained by the FDIC to resolve bank failures is funded by fees assessed on insured depository
institutions, such as Peoples Bank. The costs of resolving bank failures increased for a period of time and decreased the
Deposit Insurance Fund balance. The FDIC collected a special assessment in 2009 to replenish the Deposit Insurance
Fund and also required a prepayment of an estimated amount of future deposit insurance premiums. If the costs of future
bank failures increase, deposit insurance premiums may also increase. Increases in FDIC insurance premiums may have a
material adverse effect on Peoples' results of operations and ability to continue to pay dividends on its common shares at
the current rate or at all.
The FDIC has adopted rules revising its assessments in a manner benefiting banks with assets totaling less than $10
billion. Effective July 1, 2016, the FDIC changed the deposit insurance premium assessment method for banks with less
than $10 billion in assets that have been insured by the FDIC for at least five years. This revision changed the assessment
method to the financial ratios method so that it is based on a statistical model estimating the probability of failure of a
bank over three years. The FDIC also updated the financial measures used in the financial ratios method consistent with
the statistical model; eliminated risk categories for established small banks; and used the financial ratios method to
determine assessment rates for all such banks (subject to minimum or maximum initial assessment rates based upon a
bank’s composite examination rating). This change to the assessment decreased Peoples' premiums beginning in late
2016. In addition, the Deposit Insurance Fund reached the 1.35% target as of September 30, 2018. This achievement may
result in credits being utilized on future FDIC insurance assessments by Peoples. However, there can be no assurance that
the assessment will continue to be at the lower rate indefinitely.
Strategic Risks
• Completion of the merger contemplated by the agreement with First Prestonsburg is subject to many conditions,
and if these conditions are not satisfied or waived, the merger between Peoples and First Prestonsburg will not be
completed.
The respective obligations of Peoples and First Prestonsburg to complete the merger contemplated by the agreement
between Peoples and First Prestonsburg are subject to the fulfillment or written waiver of many conditions, including
absence of orders prohibiting completion of the merger, the continued accuracy of the representations and warranties by
both parties, and the performance by both parties of their respective covenants and agreements. These conditions to the
consummation of the merger may not be fulfilled and, accordingly, the merger may not be completed. In addition, if the
merger is not completed by June 30, 2019, either Peoples or First Prestonsburg, by a vote of a majority of the members of
its entire board, may choose not to proceed with the merger, or the parties can mutually decide to terminate the merger
agreement at any time, before or after the approvals by the requisite vote of the First Prestonsburg shareholders. In
addition, Peoples or First Prestonsburg may elect to terminate the merger agreement in certain other circumstances.
• Peoples could experience difficulties in managing its growth and effectively integrating the operations of First
Prestonsburg and First Commonwealth.
The earnings, financial condition and prospects of Peoples after the merger of First Prestonsburg into Peoples will
depend in part on Peoples’ ability to integrate successfully the operations of First Prestonsburg and First Commonwealth,
and to continue to implement Peoples’ own business plan. Peoples may not be able to fully achieve the strategic
objectives and projected operating efficiencies anticipated in the merger. The costs or difficulties relating to the
integration of First Prestonsburg and First Commonwealth with the Peoples organization may be greater than expected or
the cost savings from any anticipated economies of scale of the combined organization may be lower or take longer to
realize than expected. Inherent uncertainties exist in integrating the operations of any acquired entity, and Peoples may
encounter difficulties, including, without limitation, loss of key employees and customers, and the disruption of its
ongoing business or possible inconsistencies in standards, controls, procedures and policies. These factors could
contribute to Peoples not fully achieving the expected benefits from the merger.
• The integration of Peoples Bank and First Commonwealth will present significant challenges that may result in the
combined business not operating as effectively as expected or in the failure to achieve some or all of the anticipated
benefits of the transaction.
The benefits and synergies expected to result from the proposed merger of First Prestonsburg into Peoples will
depend in part, on whether the operations of First Commonwealth can be integrated in a timely and efficient manner with
29
those of Peoples Bank. Peoples Bank may face challenges in consolidating its functions with those of First
Commonwealth, and integrating the organizations, procedures and operations of the two businesses. The integration of
Peoples Bank and First Commonwealth will be complex and time-consuming, and the management of both banks will
have to dedicate substantial time and resources to it. These efforts could divert management’s focus and resources from
other strategic opportunities and from day-to-day operational matters during the integration process. Failure to
successfully integrate the operations of Peoples Bank and First Commonwealth could result in the failure to fully achieve
some of the anticipated benefits from the merger, including cost savings and other operating efficiencies, and Peoples
Bank may not be able to capitalize on the existing relationships of First Commonwealth to the extent anticipated, or it
may take longer, or be more difficult or expensive than expected to achieve these goals. This could have an adverse
effect on the business, results of operations, financial condition or prospects of Peoples and/or Peoples Bank after the
merger.
• Unanticipated costs relating to the merger of First Prestonsburg into Peoples could reduce Peoples’ future earnings
per share.
Peoples and Peoples Bank believe that each has reasonably estimated the likely costs of integrating the operations of
First Prestonsburg and First Commonwealth, and the incremental costs of operating as a combined bank. However, it is
possible that unexpected transaction costs such as taxes, fees or professional expenses or unexpected future operating
expenses such as increased personnel costs or increased taxes, as well as other types of unanticipated adverse
developments, could have a material adverse effect on the results of operations and financial condition of the combined
company. If unexpected costs are incurred, the merger could have a dilutive effect on Peoples’ earnings per share. In
other words, if the merger is completed, the earnings per Peoples common share could be less than anticipated or even
less than they would have been if the merger had not been completed.
• Estimates as to the future value of the combined company after the merger of First Prestonsburg into Peoples are
inherently uncertain.
Any estimates as to the future value of the combined company, including estimates regarding the earnings per share
of the combined company, are inherently uncertain. The future value of the combined company will depend upon, among
other factors, the combined company’s ability to achieve projected revenue and earnings expectations and to realize
anticipated synergies, all of which are subject to risks and uncertainties.
• Peoples' ability to complete acquisitions and integrate completed acquisitions could have an adverse effect on
Peoples' business, earnings and financial condition.
Peoples actively evaluates opportunities to acquire other businesses. However, Peoples may not have the opportunity
to make suitable acquisitions on favorable terms in the future, which could negatively impact the growth of its business.
Peoples expects that other banking and financial companies, many of which have significantly greater resources, will
compete to acquire compatible businesses. This competition could increase prices for acquisitions that Peoples would
likely pursue, and its competitors may have greater resources to pay such acquisition prices than Peoples does. In
addition, acquisitions of regulated businesses, such as banks, are subject to various regulatory approvals. If Peoples fails
to receive the appropriate approvals, it will not be able to consummate an acquisition that it believes is in its best interest.
Peoples may not be able to integrate new acquisitions without encountering difficulties, including the loss of key
employees and customers, the disruption of ongoing businesses or possible inconsistencies in standards, controls,
procedures and policies. Peoples may not be able to fully achieve the strategic objectives and operating efficiencies
anticipated in the acquisitions it completes. Future acquisitions may also result in other unforeseen difficulties, including
integration of the combined companies. Further, benefits such as enhanced earnings anticipated from the acquisitions
may not develop and future results of the combined companies may be materially below those estimated. In addition,
Peoples may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests
of its shareholders. Recent changes in the stock price of financial institutions could impact the valuation of potential
target companies, and therefore, Peoples' ability to compete for acquisitions.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
Peoples' sole banking subsidiary, Peoples Bank, generally owns its offices, related facilities and unimproved real
property. In Ohio, Peoples Bank operates offices in Akron (2 offices), Athens (2 offices), Baltimore, Batavia, Beachwood,
Belpre, Blanchester, Byesville, Caldwell, Cambridge (2 offices), Carlisle, Cincinnati (3 offices), Coshocton, Cuyahoga Falls,
Franklin, Gallipolis, Georgetown, Heath, Hillsboro, Jackson, Lancaster (2 offices), Lebanon, Lowell, Maineville, Marietta (3
30
offices), Mason, McConnelsville, Milford (2 offices), Mount Orab, Mount Vernon, Munroe Falls, Nelsonville, New Vienna,
Newark, Norton, Pomeroy (2 offices), Portsmouth (2 offices), Reno, Sabina, Sardinia, Springboro, Waverly, Waynesville,
Wellston, Wheelersburg, Williamsburg, Wilmington (2 offices), Worthington and Zanesville. In West Virginia, Peoples Bank
operates offices in Charleston, Huntington (2 offices), New Martinsville (2 offices), Parkersburg (4 offices), Point Pleasant,
Sistersville and Vienna (2 offices). In Kentucky, Peoples Bank's office locations include Ashland (2 offices), Greenup,
Russell, and South Shore. Of these 79 offices, 19 are leased and the rest are owned by Peoples Bank.
Peoples Insurance rents office space in various Peoples Bank offices, and also leases office space from third parties in
Lyndhurst, Ohio, and in Pikeville, Kentucky.
Rent expense on the leased properties totaled $1.1 million in both 2018 and 2017, which excludes intercompany rent
expense. The following are the only properties that have a lease term expiring on or before June 2020:
Location
Address
New Martinsville Walmart Office
Akron Business Office
Charleston Office
Vienna Walmart Office
South Parkersburg Walmart Office
Sardinia Office
Lancaster Fair Avenue Office
1142 S Bridge Street
New Martinsville, West Virginia
348 South Main Street Suite 200
Akron, Ohio
135-161 Summers Street Suite 300
Charleston, West Virginia
701 Grand Central Avenue
Vienna, West Virginia
2900 Pike Street
Parkersburg, West Virginia
7110 Bachman Road
Sardinia, Ohio
2211 West Fair Avenue
Lancaster, Ohio
(a) Current lease agreement has no remaining extensions available.
(b) Current lease agreement has one five-year extension remaining.
(c) Current lease agreement has two five-year extensions remaining.
(d) Current lease agreement has one one-year extension remaining.
Lease Expiration Date
March 2019 (a)
June 2019 (a)
June 2019 (b)
June 2019 (a)
January 2020 (a)
February 2020 (c)
March 2020 (d)
Additional information concerning the property and equipment owned or leased by Peoples and its subsidiaries is
incorporated herein by reference from Note 5 Bank Premises and Equipment of the Notes to the Consolidated Financial
Statements found immediately following "ITEM 9B OTHER INFORMATION" of this Form 10-K.
ITEM 3 LEGAL PROCEEDINGS
In the ordinary course of their respective businesses or operations, Peoples or one of its subsidiaries may be named as a
plaintiff, a defendant, or a party to a legal proceeding or any of their respective properties may be subject to various pending
and threatened legal proceedings and various actual and potential claims. In view of the inherent difficulty of predicting the
outcome of such matters, Peoples cannot state what the eventual outcome of any such matters will be; however, based on
current knowledge and after consultation with legal counsel, management believes these proceedings will not have a material
adverse effect on the consolidated financial position, results of operations or liquidity of Peoples.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Peoples' common shares are traded on The Nasdaq Global Select Market® under the symbol PEBO. At December 31,
2018, Peoples had 2,514 shareholders of record. The table presented below provides the high and low sales prices for
31
Peoples' common shares as reported on The Nasdaq Global Select Market® and the cash dividends per common share
declared during the indicated periods.
2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Sales
Low
Sales
Dividends
Declared
$
35.74 $
28.35 $
39.55
39.58
36.99
34.75
34.29
32.71
$
34.62 $
30.84 $
34.60
35.43
33.56
29.55
29.71
29.81
0.30
0.28
0.28
0.26
0.22
0.22
0.20
0.20
On January 21, 2019, Peoples declared a quarterly dividend of $0.30 per common share, which was the same as that
declared in the fourth quarter of 2018. This dividend represented the payout related to the fourth quarter of 2018 earnings.
Peoples plans to continue to pay quarterly cash dividends, subject to certain regulatory restrictions described in Note 16
Regulatory Matters of the Notes to the Consolidated Financial Statements found immediately following "ITEM 9B OTHER
INFORMATION", as well as in the section captioned "Supervision and Regulation – Dividend Restrictions" of "ITEM 1
BUSINESS" of this Form 10-K.
Issuer Purchases of Equity Securities
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
December 31, 2018:
(a)
Total
Number of
Common
Shares
Purchased
780 (2)
—
$
1,634 (2)(3) $
2,414
$
(b)
Average Price
Paid per
Common Share
34.75 (2)
$
—
34.64 (2)(3)
34.68
(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)
— $
— $
— $
— $
15,049,184
15,049,184
15,049,184
15,049,184
Period
October 1 - 31, 2018
November 1 - 30, 2018
December 1 - 31, 2018
Total
(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 million of its outstanding common shares. No common shares were purchased under this share repurchase program
during the three months ended December 31, 2018. Additional information regarding the share repurchase program can be found in Note 10
Stockholders' Equity of the Notes to the Consolidated Financial Statements found immediately following "ITEM 9B OTHER INFORMATION" of
this Form 10-K.
Information includes 780 common shares and 360 common shares purchased in open market transactions during October and December, 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.
Includes 1,274 common shares withheld during December to pay income tax or other tax liabilities associated with vested restricted common shares.
(3)
(2)
32
Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with
the SEC, nor shall such information be deemed to be incorporated by reference into any future filing under the Securities Act
or the Exchange Act, except to the extent that Peoples specifically incorporates the Performance Graph by reference into
such filing.
The following line graphs compare the five-year cumulative total shareholder return of Peoples' common shares, based
on an initial investment of $100 on December 31, 2013, and assuming reinvestment of dividends, against two indices. The
first is the Russell 2000 Index, which is a leading benchmark for small cap domestic stocks and is comprised of the stocks
ranked 1,001 to 3,000 in order of descending market capitalization in the Russell 3000 Index. The second is the Russell 2000
Financial Services Index, which is comprised of the financial services companies within the Russell 2000 Index. Historically,
Peoples has included line graphs that compare the five-year cumulative total shareholder return of Peoples' common shares
against that of an index comprised of all domestic common shares traded on The Nasdaq Stock Market ("Nasdaq Stocks
(U.S. Companies)"), and an index comprised of all depository institutions (SIC Code #602) and depository institution holding
companies (SIC Code #671) that are traded on The Nasdaq Stock Market ("Nasdaq Bank Stocks"). Peoples has included the
comparison of the five-year cumulative total shareholder return of Peoples' common shares against that of the Russell 2000
Index and the Russell 2000 Financial Services Index, as management believes they are more representative of a broad equity
market index and peer group comparable to Peoples than Nasdaq Stocks (U.S. Companies) and Nasdaq Bank Stocks.
COMPARISON OF FIVE-YEAR TOTAL SHAREHOLDER RETURN AMONG
PEOPLES BANCORP INC., RUSSELL 2000 INDEX,
AND RUSSELL 2000 FINANCIAL SERVICES INDEX
Peoples Bancorp Inc.
Russell 2000 Index
Russell 2000 Financial Services Index
2013
$ 100.00 $
$ 100.00 $
$ 100.00 $
2014
118.09 $
104.90 $
108.86 $
At December 31,
2016
2015
88.17 $ 156.26 $
100.27 $ 121.61 $
109.51 $ 143.52 $
2017
161.12 $
139.45 $
151.77 $
2018
153.48
124.15
135.27
33
COMPARISON OF FIVE-YEAR TOTAL SHAREHOLDER RETURN AMONG
PEOPLES BANCORP INC., NASDAQ STOCKS (U.S. COMPANIES),
AND NASDAQ BANK STOCKS
Peoples Bancorp Inc.
NASDAQ Stocks (U.S. Companies)
NASDAQ Bank Stocks
2013
$ 100.00 $
$ 100.00 $
$ 100.00 $
2014
118.09 $
114.83 $
104.92 $
At December 31,
2016
2015
88.17 $ 156.26 $
122.99 $ 134.00 $
114.19 $ 157.49 $
2017
161.12 $
173.96 $
166.10 $
2018
153.48
169.11
139.38
34
ITEM 6 SELECTED FINANCIAL DATA
The information below has been derived from Peoples' Consolidated Financial Statements.
At or For the Year Ended December 31,
2018
2017
2016
2015
2014
Loans, net of deferred fees and costs ("total loans")
2,728,778
2,357,137
2,224,936
2,072,440
1,620,898
871,837 $
874,486 $
859,455 $
868,830 $
713,659
Operating Data (a)
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net (loss) gain on investment securities
Net loss on asset disposals and other transactions
Total non-interest income excluding net gains and losses
Total non-interest expense
Net income
Balance Sheet Data (a)
Total investment securities
$
$
Allowance for loan losses
Goodwill and other intangible assets
Total assets
Non-interest-bearing deposits
Other interest-bearing deposits
Brokered certificates of deposits
Short-term borrowings
Junior subordinated debentures held by subsidiary trust
Other long-term borrowings
Total stockholders' equity
Tangible assets (b)
Tangible equity (b)
Per Common Share Data (a)
Earnings per common share – basic
Earnings per common share – diluted
Cash dividends declared per common share
Book value per common share (c)
$
$
$
151,264 $
126,525 $
115,444 $
108,333 $
21,652
129,612
5,448
(146)
(334)
57,234
13,148
113,377
3,772
2,983
(63)
52,653
10,579
104,865
3,539
930
(1,133)
51,070
10,721
97,612
14,097
729
(1,788)
47,441
125,977
107,975
106,911
115,081
46,255 $
38,471 $
31,157 $
10,941 $
80,200
10,694
69,506
339
398
(431)
40,053
83,875
16,684
20,195
162,085
18,793
144,576
18,429
146,018
16,779
149,617
17,881
109,158
3,991,454
3,581,686
3,432,348
3,258,970
2,567,769
607,877
556,010
734,421
717,939
493,162
2,083,734
2,014,702
1,759,605
1,784,148
1,400,221
263,854
356,198
7,283
159,618
209,491
7,107
38,832
305,607
6,924
47,635
160,386
6,736
102,361
136,912
138,231
106,934
520,140
3,829,369
458,592
3,437,110
435,261
3,286,330
419,789
3,109,353
53,904
88,277
—
179,083
340,118
2,458,611
358,055 $
314,016 $
289,243 $
270,172 $
230,960
2.42 $
2.12 $
1.72 $
0.62 $
2.41
1.12
26.59
2.10
0.84
25.08
1.71
0.64
23.92
0.61
0.60
22.81
1.36
1.35
0.60
22.92
15.57
Tangible book value per common share (b)(c)
$
18.30 $
17.17 $
15.89 $
14.68 $
Weighted-average number of common shares
outstanding – basic
Weighted-average number of common shares
outstanding – diluted
18,991,768 18,050,189 18,013,693 17,555,140 12,183,352
19,122,260 18,208,684 18,155,463 17,687,795 12,306,224
Common shares outstanding at end of period
19,565,029 18,287,449 18,200,067 18,404,864 14,836,727
Closing stock price at end of period
$
30.10 $
32.62 $
32.46 $
18.84 $
25.93
35
Significant Ratios (a)
Return on average stockholders' equity
Return on average tangible equity (d)
Return on average assets
Return on average assets adjusted for non-core
items (e)
Average stockholders' equity to average assets
Average total loans to average deposits
Net interest margin
Efficiency ratio (f)
Efficiency ratio adjusted for non-core items (g)
Pre-provision net revenue to total average assets (h)
Dividend payout ratio
Total investment securities as percentage of total
assets (c)
Asset Quality Ratios (a)
Nonperforming loans as a percent of total loans (c)
(i)
Nonperforming assets as a percent of total assets (c)
(i)
Nonperforming assets as a percent of total loans and
other real estate owned ("OREO") (c)(i)
Criticized loans as a percent of total loans (c)(j)
Classified loans as a percent of total loans (c)(k)
Allowance for loan losses as a percent of total
loans (c)
Allowance for loan losses as a percent of
nonperforming loans (c)(i)
Provision for loan losses as a percent of average total
loans
Net charge-offs (recoveries) as a percent of average
total loans (l)
Capital Information (a)(c)
Common equity tier 1 capital ratio (m)
Tier 1 risk-based capital ratio
Total risk-based capital ratio (tier 1 and tier 2)
Leverage ratio
Common equity tier 1 capital
Tier 1 capital
Total capital (tier 1 and tier 2)
Total risk-weighted assets
At or For the Year Ended December 31,
2018
2017
2016
2015
2014
9.48%
14.81
1.19
1.32
12.61
89.37
3.71
65.33
61.32
1.57
46.65
8.54%
7.20%
2.69%
6.16 %
13.33
1.10
1.08
12.83
86.10
3.62
62.20
61.85
1.65
39.86
11.86
0.94
0.97
13.03
83.22
3.54
65.13
64.30
1.48
37.40
5.16
0.35
0.62
13.09
80.08
3.53
75.50
67.49
0.96
96.35
9.63
0.74
0.93
12.08
79.58
3.45
75.37
69.55
1.10
43.10
21.84%
24.42%
25.04%
26.67%
27.80 %
0.71%
0.73%
1.13%
0.94%
0.69 %
0.49
0.71
4.18
1.61
0.74
0.49
0.74
3.84
1.97
0.80
104.35
108.52
0.21
0.16
0.75
1.16
4.46
2.59
0.83
73.43
0.17
0.62
0.98
5.89
2.91
0.81
86.05
0.47
0.75
4.60
2.76
1.10
159.58
0.72
0.02
0.15%
0.15%
0.09%
0.78%
(0.03)%
13.61%
13.26%
12.91%
13.36%
N/A
13.87
14.60
13.55
14.43
13.21
14.11
13.67
14.54
14.32
15.48
9.99%
9.75%
9.66%
9.52%
9.92 %
$ 378,855
$ 327,172
$ 306,506
$ 288,416
386,138
406,333
334,279
355,977
313,430
334,957
295,151
313,974
N/A
241,707
261,371
$2,782,995
$ 2,466,620
$ 2,373,359
$ 2,158,713
$1,687,968
Total stockholders' equity to total assets
Tangible equity to tangible assets (b)
13.03%
9.35%
12.80%
9.14%
12.68%
8.80%
12.88%
8.69%
13.25 %
9.39 %
(a) Reflects the impact of the acquisition of Midwest Bancshares, Inc. ("Midwest") beginning May 30, 2014, Ohio Heritage Bancorp, Inc. ("Ohio Heritage")
beginning August 22, 2014, North Akron Savings Bank ("North Akron") beginning October 24, 2014, NB&T beginning March 6, 2015 and 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 this amount can be found in
"ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K
under the caption "Capital/Stockholders’ Equity."
36
(c) Data presented as of the end of the year indicated.
(d) 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 amount can be found in "ITEM 7 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K under the caption "Return on Average Tangible
Equity."
(e) Return on average assets adjusted for non-core items represents a non-US GAAP financial measures since it excludes the release of the deferred tax
asset valuation allowance, 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 amount can be found in "ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K under the
caption "Return on Average Assets Adjusted for Non-Core Items."
(f) 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
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 amount can be found in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K under the caption "Efficiency Ratio."
(g) 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 amounts represents a non-US GAAP financial
measure since it excludes the 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, and uses fully tax-equivalent net interest income. Additional information
regarding the calculation of this amount can be found in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" of this Form 10-K under the caption "Efficiency Ratio."
(h) 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 ratio can be found in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K under the caption "Pre-Provision Net Revenue."
(i) 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.
(j)
Includes loans categorized as special mention, substandard and doubtful.
(k)
Includes loans categorized as substandard and doubtful.
(l) Net charge-offs as a percent of average total loans increased in 2015 as Peoples recorded a $13.1 million charge-off associated with one large
commercial relationship, resulting in 0.67% of the reported amount of 0.78%.
(m) Peoples' capital conservation buffer was 6.60% at December 31, 2018, 6.43% at December 31, 2017, and 6.11% at December 31, 2016, compared to
2.50% for the fully phased in capital conservation buffer required by January 1, 2019.
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
Certain statements in this Form 10-K, which are not historical fact, are forward-looking statements within the meaning of
Section 27A of the Securities Act , Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of
1995. Words such as "anticipate," "estimate," "may," "feel," "expect," "believe," "plan," "will," "would," "should," "could,"
"project," "goal," "target," "potential," "seek," "intend," and similar expressions are intended to identify these forward-looking
statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially. Factors that might cause such a difference include, but are not
limited to:
(1)
(2)
(3)
(4)
the success, impact, and timing of the implementation of Peoples' business strategies, including the
successful integration of the acquisition of ASB and the expansion of consumer lending activity;
Peoples' ability to integrate future acquisitions, including the pending merger with First Prestonsburg, may
be unsuccessful, or may be more difficult, time-consuming or costly than expected, and expected cost
savings, synergies and other financial benefits may not be realized or take longer than anticipated;
Peoples' ability to obtain regulatory approvals of the proposed merger of Peoples with First Prestonsburg on
the proposed terms and schedule, may be unsuccessful;
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, and
Peoples' ability to attract, develop and retain qualified professionals;
37
(5)
(6)
(7)
(8)
changes in the interest rate environment due to economic conditions and/or the fiscal policies of the U.S.
government and the Federal Reserve Board, which may adversely impact interest rates, interest margins,
loan demand and interest rate sensitivity;
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 FDIC,
the Federal Reserve Board and the CFPB, 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 Act, and the Basel III regulatory capital reform;
the effects of easing restrictions on participants in the financial services industry;
local, regional, national and international economic conditions (including the impact of 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;
(9)
the existence or exacerbation of general geopolitical instability and uncertainty;
(10)
(11)
(12)
(13)
changes in policy and other regulatory and legal developments, including the Tax Cuts and Jobs Act, and
uncertainty or speculation pending the enactment of such changes;
Peoples may issue equity securities in connection with future acquisitions, including the pending merger
with First Prestonsburg if consummated, which could cause ownership and economic dilution to Peoples'
current shareholders;
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;
adverse changes in the economic conditions and/or activities, including, but not limited to, potential or
imposed tariffs, 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)
slowing or reversal of the current U.S. economic expansion;
(15)
(16)
(17)
(18)
(19)
deterioration in the credit quality of Peoples' loan portfolio, which may adversely impact the provision for
loan losses;
changes in accounting standards, policies, estimates or procedures, which may adversely affect Peoples'
reported financial condition or results of operations;
Peoples' assumptions and estimates used in applying critical accounting policies, which may prove
unreliable, inaccurate or not predictive of actual results;
the discontinuation of LIBOR and other reference rates may result in increased expenses and litigation, and
adversely impact the effectiveness of hedging strategies;
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)
Peoples' ability to receive dividends from its subsidiaries;
(21)
Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity;
(22)
the impact of minimum capital thresholds established as a part of the implementation of Basel III;
(23)
(24)
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;
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;
38
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
Peoples' ability to secure confidential information through the use of computer systems and
telecommunications networks, including those of Peoples' third-party vendors and other service providers,
which may prove inadequate, and could adversely affect customer confidence in Peoples and/or result in
Peoples incurring a financial loss;
Peoples' reliance on, and the potential failure of, a number of third-party vendors to perform as expected,
including its primary core banking system provider;
Peoples' ability to anticipate and respond to technological changes which can impact Peoples' ability to
respond to customer needs and meet competitive demands;
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;
changes in consumer spending, borrowing and saving habits, whether due to tax reform legislation, changes
in business and economic conditions, legislative or regulatory initiatives, or other factors, which may be
different than anticipated;
the adequacy of Peoples' risk management program in the event of changes in market, economic,
operational, asset/liability repricing, liquidity, credit and interest rate risks associated with Peoples' business;
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;
significant changes in the tax laws, which may adversely affect the fair values of deferred tax assets and
liabilities, and obligations of states and political subdivisions held in Peoples' investment securities
portfolio;
(33)
Peoples' continued ability to grow deposits; and
(34)
other risk factors relating to the banking industry or Peoples as detailed from time to time in Peoples' reports
filed with the SEC, including those risk factors included in the disclosures under the heading "ITEM 1A.
RISK FACTORS" of this Form 10-K.
All forward-looking statements speak only as of the filing date of this Form 10-K 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-K 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.
The following discussion and analysis of Peoples' Consolidated Financial Statements is presented to provide insight into
management's assessment of the financial position and results of operations for the periods presented. This discussion and analysis
should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, as well as the ratios and
statistics, contained elsewhere in this Form 10-K.
Summary of Significant Transactions and Events
The following is a summary of transactions or events that have impacted or are expected by management to impact
Peoples’ results of operations or financial condition:
On October 29, 2018, Peoples entered into a merger agreement with First Prestonsburg, which calls for First
Prestonsburg to merge into Peoples. First Prestonsburg is the parent company of First Commonwealth, which
operates nine full-service branches located in eastern Kentucky. Following the merger of First Prestonsburg into
Peoples, First Commonwealth will merge into Peoples Bank. This transaction is expected to close during the second
quarter of 2019, subject to the satisfaction of customary closing conditions. Refer to Note 19 Acquisitions of the
Notes to the Consolidated Financial Statements for additional information.
At the close of business on April 13, 2018, Peoples closed the acquisition of 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 acquisition added $239.2 million of
39
loans, net of deferred fees and costs, 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. Refer to Note 19 Acquisitions of the Notes to the Consolidated Financial
Statements for additional information.
Multiple items impacted Peoples' income tax expense during 2018 and 2017, 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%.
Beginning on January 1, 2018, Peoples began recognizing income tax expense at the 21% statutory federal
corporate income tax rate, which resulted in lower income tax expense for 2018, compared to the 35%
statutory federal corporate income tax rate for 2017.
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 $0.7 million 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 2017, as a result of its initial remeasurement at the new statutory federal
corporate income tax rate, Peoples' wrote down its net deferred tax assets by $0.9 million.
During 2018, Peoples incurred $7.5 million of acquisition-related costs, which included $203,000 of losses recorded
in net loss on asset disposals and other transactions, and $7.3 million in total non-interest expense. The acquisition-
related costs incurred in 2018 were primarily related to fees associated with early termination of contracts, severance
costs and write-offs associated with assets acquired. During 2017, Peoples incurred $341,000 in acquisition-related
costs, which was all recorded in total non-interest expense. The acquisition costs in 2017 and 2018 were primarily
related to the ASB acquisition.
During 2018, Peoples incurred $267,000 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. Settlement costs of $242,000 were recognized during 2017.
On July 31, 2018, Peoples entered into $50.0 million of interest rate swaps, which 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. On January 27, 2017, Peoples entered into $20.0 million of forward
starting interest rate swaps, which became effective in January and April of 2018 and mature between 2025 and 2027,
with interest rates ranging from 2.47% to 2.53%. During 2016, Peoples entered into five forward starting interest rate
swaps, with a $40 million notional value, to obtain short-term borrowings at fixed rates, with interest rates ranging
from 1.49% to 1.83%, which became effective in 2018 and mature between 2022 and 2026. 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 14
Derivative Financial Instruments of the Notes to the Consolidated Financial Statements.
During 2018, Peoples provided notification that it will be closing two full-service bank branches located in West
Virginia, which are currently leased. The lease terms for these locations expire in 2019 and will not be renewed.
Additionally, Peoples closed one insurance office located in Ohio when the lease for the location expired at the end of
January 2019. During 2017, Peoples closed six full-service bank branches, four located in Ohio, and two located in
West Virginia. Peoples continues to evaluate its bank branch network in an effort to optimize efficiency.
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. ASU 2016-01 also requires changes in the fair value of the equity
investment securities to be recorded in non-interest income instead of other comprehensive income, which resulted in
$207,000 of gains recorded in other non-interest income during 2018. During 2017, Peoples reduced its position in
certain equity investment securities. This action was taken as a result of the high appreciation in the market value of
40
these securities. The sales completed resulted in a net gain on investment securities of $3.0 million in 2017. As of
December 31, 2018, Peoples had substantially reduced its equity investment securities portfolio.
During 2017, Peoples borrowed an additional $75.0 million of long-term FHLB non-amortizing advances, which
have interest rates ranging from 1.20% to 2.03% and mature between 2018 and 2022, of which $10.0 million matured
during 2018. Peoples borrowed no additional long-term FHLB non-amortizing advances during 2018.
On October 2, 2017, Peoples Insurance acquired a property and casualty focused independent insurance agency with
annual net revenue of $0.8 million located in the Cleveland, Ohio area for total cash consideration of $1.7 million,
and recorded $1.1 million of customer relationship intangibles, and $100,000 of fixed assets, resulting in $480,000 of
goodwill.
On January 31, 2017, Peoples Insurance acquired a third-party insurance administration company located in Piketon,
Ohio for total cash consideration of $0.5 million, and recorded $0.5 million of customer relationship intangibles.
On November 7, 2016, Peoples converted to an upgraded core banking system (including the related operating
systems, data systems and products). The conversion resulted in a negative impact to pre-tax income of $1.3 million,
or $0.05 in earnings per diluted share, for the full year of 2016, which included lost revenue and additional total non-
interest expenses. Deposit account service charges were impacted by the system conversion as Peoples granted
waivers of $85,000 related to account services charges in the month of the conversion. The remainder of the $1.3
million was recorded in various expense categories, primarily in other non-interest expense, professional fees, and
salaries and employee benefit costs.
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%. The recent pace of rate increases is expected to be slower in 2019, with perhaps no
increases in 2019. The Federal Reserve Board began reducing the size of its $4.5 trillion balance sheet in the fourth
quarter of 2017. However, in February 2019, they indicated that they could pause the unwinding of the balance sheet.
If they continue to reduce the size of the balance sheet, it could result in higher interest rates. Peoples is closely
monitoring interest rates, both foreign and domestic; and potential impacts of changes in interest rates to Peoples'
operations. These rate increases drove higher loan and investment security yields as well as increases in deposit and
wholesale funding costs.
The impact of these transactions, where material, is discussed in the applicable sections of this Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Critical Accounting Policies
The accounting and reporting policies of Peoples conform to US GAAP and to general practices within the financial
services industry. A summary of significant accounting policies is contained in Note 1 Summary of Significant Accounting
Policies of the Notes to the Consolidated Financial Statements. While all of these policies are important to understanding the
Consolidated Financial Statements, certain accounting policies require management to exercise judgment and make estimates
or assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. These
estimates and assumptions are based on information available as of the date of the Consolidated Financial Statements;
accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates or
assumptions.
Management has identified the accounting policies described below as those that, due to the judgments, estimates and
assumptions inherent in the policies, are critical to an understanding of Peoples' Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Allowance for Loan Losses
In general, determining the amount of the allowance for loan losses requires significant judgment and the use of
estimates by management. Peoples maintains an allowance for loan losses based on a quarterly analysis of the loan
portfolio and estimation of the losses that are probable of occurrence within the loan portfolio. This formal analysis
determines an appropriate level and allocation of the allowance for loan losses among loan types and the resulting
provision for or recovery of loan losses by considering factors affecting losses, including specific losses, levels and trends
in impaired and nonperforming loans; historical loan loss experience; current national and local economic conditions;
volume; growth and composition of the portfolio; regulatory guidance and other relevant factors. Management
continually monitors the loan portfolio through Peoples Bank's Credit Administration Department and Loan Loss
Committee to evaluate the appropriateness of the allowance. The provision or recovery could increase or decrease each
quarter based upon the results of management's formal analysis.
41
The amount of the allowance for loan losses for the various loan types represents management's estimate of probable
losses from existing loans. Management evaluates lending relationships deemed to be impaired on an individual basis and
makes specific allocations of the allowance for loan losses for each relationship based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. For all other
loans, management evaluates pools of homogeneous loans (such as residential mortgage loans, and direct and indirect
consumer loans) and makes general allocations for each pool based upon historical loss experience, adjusted for
qualitative factors. While allocations are made to specific loans and pools of loans, the allowance is available for all loan
losses.
The evaluation of individual impaired loans requires management to make estimates of the amounts and timing of
future cash flows on impaired loans, which consist primarily of loans placed on nonaccrual status, restructured or
internally classified as substandard or doubtful. These reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, the loan cash flow characteristics, the loan quality ratings, the value of collateral,
the repayment ability of the borrower, and historical experience factors. Allowances for homogeneous loans are evaluated
based upon historical loss experience, adjusted for qualitative risk factors, such as trends in losses and delinquencies,
growth of loans in particular markets, and known changes in economic conditions in each lending market. As part of the
process of identifying the pools of homogenous loans, management takes into account any concentrations of risk within
any portfolio segment, including any significant industrial concentrations. Consistent with the evaluation of allowances
for homogenous loans, the allowance relating to the Overdraft Privilege program is based upon management's monthly
analysis of accounts in the program. This analysis considers factors that could affect losses on existing accounts,
including historical loss experience and length of overdraft.
There can be no assurance that the allowance for loan losses will be adequate to cover all losses, but management
believes the allowance for loan losses at December 31, 2018 was adequate to provide for probable losses from existing
loans based on information currently available. While management uses available information to estimate losses, the
ultimate collectability of a substantial portion of the loan portfolio, and the need for future additions to the allowance, will
be based on changes in economic conditions and other relevant factors. As such, adverse changes in economic activity
could reduce currently estimated cash flows for both commercial and individual borrowers, which would likely cause
Peoples to experience increases in problem assets, delinquencies and losses on loans in the future.
Peoples also evaluates unfunded commitments for construction loans, floor plan lines of credit, home equity lines of
credit, other credit lines and letters of credit on a quarterly basis. The calculation of the reserve for unfunded
commitments utilizes the same look back period as the allowance for loan losses, and is based on the reported losses on
unfunded commitments during this look back period. This annualized loss rate is then applied to the probable drawn
amount of the pooled unfunded commitments to determine the required reserve. Peoples also evaluates classified credit
exposures with unfunded commitments individually to determine if a loss is both probable and reasonably estimable.
Business Combinations
Peoples utilizes the acquisition method of accounting for business combinations. As of the acquisition date, Peoples
records the acquired company's net assets at fair value. The determination of fair value as of the acquisition date requires
management to consider various factors that involve judgment and estimation, including the application of discount rates,
attrition rates, future estimates of interest rates, as well as many other assumptions. These assumptions can have a
material impact on the estimated fair value, and as a result, the goodwill recorded in a business combination.
Goodwill
Peoples records goodwill as a result of acquisitions accounted for under the acquisition method of accounting. Under
the acquisition method, Peoples is required to allocate the consideration paid for an acquired company to the assets
acquired, including identified intangible assets, and liabilities assumed based on their estimated fair values at the date of
acquisition. Goodwill represents the excess cost over the fair value of net assets acquired and is not amortized but is
tested for impairment when indicators of impairment exist, and, in any case, at least annually.
The value of recorded goodwill is supported by revenue that is driven by the volume of business transacted and
Peoples' ability to provide quality, cost-effective services in a competitive market place. A decline in earnings as a result
of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of
goodwill that could adversely impact earnings in future periods. Potential goodwill impairment exists when the fair value
of the reporting unit (as defined by US GAAP) is less than its carrying value. An impairment loss is recognized in
earnings only when the carrying amount of goodwill is less than its implied fair value.
The process of evaluating goodwill for impairment involves highly subjective and complex judgments, estimates and
assumptions regarding the fair value of Peoples' reporting unit and, in some cases, goodwill itself. As a result, changes to
these judgments, estimates and assumptions in future periods could result in materially different results.
42
Peoples currently maintains a single reporting unit for goodwill impairment testing. While quoted market prices exist
for Peoples' common shares since they are publicly traded, these market prices do not necessarily reflect the value
associated with gaining control of an entity. Thus, management takes into account all appropriate fair value
measurements in determining the estimated fair value of the reporting unit.
The measurement of any actual impairment loss requires management to calculate the implied fair value of goodwill
by deducting the fair value of all tangible and separately identifiable intangible assets (including unrecognized intangible
assets), net of accumulated amortization, from the fair value of the reporting unit. The fair value of net tangible assets is
calculated using the methodologies described in Note 2 Fair Value of Financial Instruments of the Notes to the
Consolidated Financial Statements.
Peoples performs its required annual impairment test as of October 1st each year. Peoples first assesses qualitative
factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying
amount, including goodwill. In this evaluation, Peoples assesses relevant events and circumstances, which may include
macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, events specific to
Peoples, significant changes in the reporting unit, or a sustained decrease in stock price. If Peoples determines that it is
more likely than not that the fair value of the reporting unit is greater than its carrying amount, then performing the two-
step impairment test is unnecessary. However, if there are indicators of impairment, Peoples must complete a two-step
process that includes (1) determining if potential goodwill impairment exists and (2) measuring the impairment loss, if
any.
At October 1, 2018, management's qualitative analysis concluded that the estimated fair value of Peoples' single
reporting unit exceeded its carrying value.
Peoples is required to perform interim tests for goodwill impairment in subsequent quarters if events occur or
circumstances change that indicate potential goodwill impairment exists, such as adverse changes to Peoples' business or
a significant decline in Peoples' market capitalization. For further information regarding goodwill, refer to Note 6
Goodwill and Other Intangible Assets of the Notes to the Consolidated Financial Statements.
Income Taxes
Income taxes are recorded based on the liability method of accounting, which includes the recognition of deferred tax
assets and liabilities for the temporary differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. In general, Peoples records deferred tax assets when the event giving rise to the tax
benefit has been recognized in the Consolidated Financial Statements.
A valuation allowance is recognized to reduce any deferred tax asset when, based upon available information, it is
more-likely-than-not all, or any portion, of the deferred tax asset will not be realized. Assessing the need for, and amount
of, a valuation allowance for deferred tax assets requires significant judgment and analysis of evidence regarding
realization of the deferred tax assets. In most cases, the realization of deferred tax assets is dependent upon Peoples
generating a sufficient level of taxable income in future periods, which can be difficult to predict. Peoples' largest
deferred tax assets involve differences related to Peoples' allowance for loan losses, available-for-sale securities, and
accrued employee benefits. Management determined a valuation allowance of $805,000 at December 31, 2017, to be
recorded against the deferred tax assets associated with its investment in a partnership investment. In 2018, Peoples
released the valuation allowance, which reduced income tax expense by $805,000. 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. No other valuation allowances were
recorded at December 31, 2018.
The calculation of tax liabilities is complex and requires the use of estimates and judgment since it involves the
application of complex tax laws that are subject to different interpretations by Peoples and the various tax authorities.
Peoples' interpretations are subject to challenge by the tax authorities upon audit or to reinterpretation based on
management's ongoing assessment of facts and evolving case law.
From time-to-time and in the ordinary course of business, Peoples is involved in inquiries and reviews by tax
authorities that normally require management to provide supplemental information to support certain tax positions taken
by Peoples in its tax returns. Uncertain tax positions are initially recognized in the Consolidated Financial Statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions
are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts.
The amount of unrecognized tax benefits was immaterial at both December 31, 2018 and 2017.
43
Management believes it has taken appropriate positions on its tax returns, although the ultimate outcome of any tax
review cannot be predicted with certainty. Consequently, no assurance can be given that the final outcome of these
matters will not be different than what is reflected in the current and historical financial statements.
Fair Value Measurements
As a financial services company, the carrying value of certain financial assets and liabilities is impacted by the application
of fair value measurements, either directly or indirectly. In certain cases, an asset or liability is measured and reported at fair
value on a recurring basis, such as available-for-sale investment securities. In other cases, management must rely on estimates
or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a
valuation reserve should be established. Given the inherent volatility, the use of fair value measurements may have a
significant impact on the carrying value of assets or liabilities, or result in material changes to the consolidated financial
statements, from period to period.
Detailed information regarding fair value measurements can be found in Note 2 Fair Value of Financial Instruments of the
Notes to the Consolidated Financial Statements.
EXECUTIVE SUMMARY
Net income for the year ended December 31, 2018 was $46.3 million, compared to $38.5 million in 2017 and $31.2
million in 2016, representing earnings per diluted common share of $2.41, $2.10 and $1.71, respectively. The growth during
2018 was driven by increases of $16.2 million in net interest income and $1.2 million in non-interest income, coupled with a
$10.0 million decline in income tax expense. These benefits were partially offset by a $7.1 million increase in acquisition-
related costs, coupled with the ongoing costs of the ASB acquisition. The increase in earnings during 2017 was driven by
higher net interest income, which grew by $8.5 million, along with investment security gains of $3.0 million. These
increases were partially offset by a $0.9 million write-down of net deferred tax assets in connection with the Tax Cuts and
Jobs Act.
Net interest income was $129.6 million in 2018, an increase of 14%, compared to $113.4 million in 2017, which was up
8% compared to 2016. The growth during 2018 was mostly due to originated loan growth and the acquisition of ASB.
Growth during 2017 was primarily due to originated loan growth. During both years, higher yields on investment securities
and loans were tempered by an increase in deposit and borrowing costs. Net interest margin was 3.71% in 2018, an increase
from 3.62% in 2017 and 3.54% in 2016. Accretion income, net of amortization expense, from acquisitions added
approximately 6 basis points to net interest margin in 2018, compared to 10 basis points in 2017 and 11 basis points in 2016.
In 2018, proceeds of $0.9 million were received on an investment security that, in prior years, had been written-down due to
an other-than-temporary impairment, which added 3 basis points to the net interest margin, compared to $0.8 million, and 3
basis points, during 2017. Similar proceeds were not received in 2016.
In 2018, Peoples recorded provision for loan losses of $5.4 million, an increase of $1.7 million compared to the $3.8
million that was recorded in 2017 and higher than the $3.5 million recorded for 2016. The increase in 2018 from 2017 was
driven primarily by loan growth and an increase in net charge-offs of $638,000. Net charge-offs in 2018 included $827,000
related to one acquired commercial loan relationship. The provision for loan losses represented amounts needed, in
management's opinion, to maintain the appropriate level of the allowance for loan losses. Peoples recorded net charge-offs of
$4.0 million during 2018, compared to $3.4 million for 2017 and $1.9 million for 2016. Net charge-offs as a percent of
average total loans were 0.15% during 2018 and 2017, and 0.09% for 2016.
Total non-interest income increased $1.2 million, or 2%, in 2018 compared to 2017. The increase was led by higher
income from mortgage banking, electronic banking, trust and investments, and insurance. Mortgage banking income
increased because of the benefits of the mortgage origination operations acquired from ASB. In addition, other non-interest
income grew during 2018 as a result of higher income related to Small Business Administration ("SBA") loans, coupled with
the change in fair value of equity investment securities during 2018. The majority of these equity investment securities were
liquidated during 2018, and the fair value change in future periods should be minimal.
Total non-interest income increased 9% in 2017 compared to 2016, and was primarily due to the gain on investment
securities, coupled with increases in trust and investment, mortgage banking, and bank owned life insurance income. These
increases were partially offset by a decrease in deposit account service charges. The increase in trust and investment income
was due largely to the growth in the value of assets under administration and management. Mortgage banking income
increased due to customer demand. The increase in bank owned life insurance income was the result of the additional $35.0
million of bank owned life insurance policies that were purchased late in the second quarter of 2016, for which a full year of
income was recognized in 2017.
44
Total non-interest expense increased 17% during 2018, driven by the increase in acquisition-related expenses of $6.9
million compared to 2017. Also contributing to the changes were higher salaries and employee benefits costs. These costs
grew $9.0 million and were the result of a combination of the one-time expenses associated with the ASB acquisition and the
resulting increase in number of retained employees from the acquisition. Also contributing to the change were higher sales-
based and incentive compensation, and merit increases. Merit increases included the implementation of a $15 per hour
minimum wage standard established during 2018, which is expected to be fully implemented by January 1, 2020.
In 2017, total non-interest expense increased 1%, or $1.1 million, compared to 2016, largely due to higher salaries and
benefit costs. The increase in salaries and benefit costs was driven by increased incentive compensation that was tied to
corporate performance for 2017, coupled with higher medical insurance costs and pension settlement charges recognized in
2017. These increases were partially offset by declines in professional fees, communications expense, amortization of other
intangible assets and the nonrecurring $1.3 million in core banking system conversion costs that were incurred in 2016.
Income tax expense was $8.7 million in 2018 compared to $18.7 million in 2017. The reduction in income tax expense
compared to 2017 was largely a result of the Tax Cuts and Jobs Act, which lowered the federal corporate income tax rate
from 35% to 21%, combined with the release of a tax valuation allowance of $0.8 million and the final impact related to the
statutory federal corporate income tax rate change of $0.7 million during 2018. Income tax expense increased $4.6 million,
or 33%, in 2017 compared to 2016, largely due to the increase in pre-tax income in the comparison and the remeasurement of
net deferred tax assets as of December 31, 2017.
At December 31, 2018, total assets were up 11%, or $409.8 million, to $3.99 billion versus $3.58 billion at year-end
2017. The increase was primarily related to the acquisition of ASB and $213.7 million of originated loan growth. The
allowance for loan losses increased slightly to $20.2 million, or 0.74% of total loans, net of deferred fees and costs, compared
to $18.8 million and 0.80%, respectively, at December 31, 2017.
Total liabilities were $3.47 billion at December 31, 2018, up $348.2 million since December 31, 2017. At December 31,
2018, total deposits increased $225.1 million to $2.96 billion, compared to the prior year-end. Total demand deposits
increased $32.2 million, or 3%, and were 40% of total deposits at December 31, 2018 compared to 42% of total deposits at
December 31, 2017. The growth in deposits in 2018 compared to the prior year-end was primarily due to acquired ASB
deposit balances of $198.6 million. An increase in total borrowed funds of $112.3 million to $465.8 million at December 31,
2018, compared to $353.5 million at December 31, 2017, also contributed to the change in total liabilities.
At December 31, 2018, total stockholders' equity was $520.1 million, up 13%, or $61.5 million, from December 31,
2017. The increase was primarily due to earnings of $46.3 million during 2018, the issuance of $40.9 million of common
stock related to the acquisition of ASB, and equity-based compensation. Dividends of $21.6 million paid to shareholders and
reductions in the market value of investment securities, partially offset these increases.
Peoples exceeded the capital required by the Federal Reserve Board to be deemed "well capitalized." Regulatory capital
was impacted by the ASB acquisition during 2018, which created increases in capital and risk-weighted assets. Peoples' tier
1 capital ratio increased to 13.87% at December 31, 2018, versus 13.55% at December 31, 2017, while the total capital ratio
was 14.60% at December 31, 2018, versus 14.43% at December 31, 2017. The common equity tier 1 risk-based capital ratio
was 13.61% at December 31, 2018 compared to 13.26% at December 31, 2017. Peoples' book value and tangible book value
per share were $26.59 and $18.30, respectively, at December 31, 2018, compared to $25.08 and $17.17, respectively, at
December 31, 2017. Additional information regarding capital requirements can be found in Note 16 Regulatory Matters of
the Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Interest Income and Expense
Peoples earns interest income on loans and investments, and incurs interest expense on interest-bearing deposits and
borrowed funds. 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 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.
Peoples monitors net interest income performance and manages its balance sheet composition through regular ALCO
meetings. The asset-liability management process employed by the ALCO is intended to mitigate the impact of future
interest rate changes on Peoples' net interest income and earnings. However, the frequency and/or magnitude of changes in
45
market interest rates are difficult to predict, and may have a greater impact on net interest income than adjustments
management is able to make.
As part of the analysis of net interest income, management converts tax-exempt income earned on obligations of states
and political subdivisions to the pre-tax equivalent of taxable income using a statutory federal corporate income tax rate of
21% for 2018, as a result of the Tax Cuts and Jobs Act, and 35% for 2017 and 2016. Management believes the resulting fully
tax-equivalent ("FTE") net interest income allows for a more meaningful comparison of tax-exempt income and yields to
their taxable equivalents. 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
earning assets and interest-bearing liabilities.
The following table details the calculation of FTE net interest income for the years ended December 31:
(Dollars in thousands)
Net interest income
Taxable equivalent adjustments
Fully tax-equivalent net interest income
2018
2017
2016
$
$
129,612 $
113,377 $
104,865
881
130,493 $
1,912
115,289 $
2,027
106,892
46
The following table details Peoples’ average balance sheets, with corresponding income/expense and yield/cost, for the
years ended December 31:
2018
2017
2016
(Dollars in thousands)
Short-term investments
Investment Securities (a)(b):
Taxable (c)
Nontaxable
Total investment securities
Loans (b)(d):
Commercial real estate,
construction
Commercial real estate, other
Commercial and industrial
Residential real estate (e)
Home equity lines of credit
Consumer, indirect
Consumer, direct
Total loans
Less: Allowance for loan losses
Net loans
Total earning assets
Intangible assets
Other assets
Total assets
Deposits:
Savings accounts
Government deposit accounts
Interest-bearing demand accounts
Money market accounts
Retail certificates of deposit
Brokered deposits
Borrowed Funds:
Short-term FHLB advances
Repurchase agreements and other
Total short-term borrowings
Long-term FHLB advances
Wholesale repurchase agreements
Other borrowings
Total long-term borrowings
Total borrowed funds
Total interest-bearing liabilities
Non-interest-bearing deposits
Other liabilities
Total liabilities
Total stockholders’ equity
Total liabilities and
stockholders’ equity
Interest rate spread (b)
Net interest margin (b)
Average
Balance
$
19,462 $
Income/
Expense
402
Yield/
Cost
2.07 % $
Average
Balance
12,616 $
Income/
Expense
144
Yield/
Cost
1.14 % $
Average
Balance
9,667 $
Income/
Expense
50
Yield/
Cost
0.52 %
784,108
94,023
878,131
23,283
3,123
26,406
2.97 %
3.32 %
3.01 %
768,336
107,604
875,940
20,598
4,497
25,095
2.68 %
4.18 %
2.86 %
753,213
112,808
866,021
18,606
4,810
23,416
2.47 %
4.26 %
2.70 %
122,007
5,970
4.83 %
110,124
4,800
4.30 %
88,559
3,455
3.84 %
41,102
26,042
25,965
6,712
14,627
4,919
125,337
125,337
152,145
819,606
517,026
577,858
127,852
373,450
73,171
2,610,970
(19,359)
2,591,611
3,489,204
158,115
224,513
$3,871,832
35,240
19,944
22,256
4,965
10,975
5,018
103,198
103,198
128,437
743,517
4.95 %
439,178
4.97 %
514,024
4.49 %
110,910
5.25 %
306,338
3.92 %
6.72 %
69,889
4.75 % 2,293,980
(18,713)
4.80 % 2,275,267
4.33 % 3,163,823
144,696
201,755
$3,510,274
721,535
4.67 %
376,881
4.48 %
557,537
4.33 %
109,164
4.48 %
207,095
3.58 %
7.18 %
72,404
4.50 % 2,133,175
(17,564)
4.50 % 2,115,611
4.03 % 2,991,299
147,981
181,167
$3,320,447
33,651
15,769
24,279
4,853
7,432
4,566
94,005
4.59 %
4.12 %
4.35 %
4.45 %
3.59 %
6.29 %
4.41 %
94,005
117,471
4.40 %
3.90 %
$ 468,624 $
306,356
564,345
386,607
383,929
220,109
303
1,521
750
1,359
4,842
4,930
0.06 % $ 442,684 $
0.50 %
294,053
0.13 %
0.35 %
1.26 %
2.24 %
367,699
389,885
358,307
98,793
249
704
543
877
2,997
1,784
7,154
1,160
374
1,534
2,794
1,225
441
0.06 % $ 434,140 $
0.24 %
296,590
0.15 %
0.22 %
0.84 %
1.81 %
260,788
401,693
406,298
41,613
0.37 % 1,841,122
1.16 %
0.46 %
0.84 %
2.04 %
3.68 %
6.34 %
86,260
72,909
159,169
84,605
40,000
6,781
231
570
217
702
3,181
1,041
5,942
384
124
508
2,238
1,475
416
0.05 %
0.19 %
0.08 %
0.17 %
0.78 %
2.50 %
0.32 %
0.45 %
0.17 %
0.32 %
2.65 %
3.69 %
6.13 %
3.14 %
1.60 %
0.50 %
2.04 %
0.94 %
1.75 %
1.99 %
— %
7.05 %
100,205
82,042
182,247
136,799
33,315
6,977
4,494
744
5,238
2,192
—
517
2,709
7,947
21,652
219,897
79,149
299,046
109,944
—
7,338
117,282
416,328
2,746,298
591,592
45,803
3,383,693
488,139
$3,871,832
177,091
2.31 %
1.90 %
359,338
0.79 % 2,310,759
4,460
5,994
13,148
131,386
2.52 %
1.67 %
290,555
0.57 % 2,131,677
4,129
4,637
10,579
713,027
36,109
3,059,895
450,379
$3,510,274
722,291
33,813
2,887,781
432,666
$3,320,447
$130,493
3.54 %
3.71%
$115,289
3.46 %
3.62%
$106,892
3.40 %
3.54%
Total interest-bearing deposits
2,329,970
13,705
0.59 % 1,951,421
(a) Average balances are based on carrying value.
47
(b) Interest income and yields are presented on a fully tax-equivalent basis using a 21% statutory federal corporate income tax rate for 2018
and a 35% statutory federal corporate income tax rate for 2017 and 2016.
(c) Interest income and yield presented for 2018 and 2017 includes $0.9 million and $0.8 million, respectively, of proceeds on an investment
security for which an other-than-temporary-impairment had been recorded in previous years.
(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:
(Dollars in thousands)
Increase (decrease) in:
INTEREST INCOME:
Short-term investments
Investment Securities (b):
Taxable
Nontaxable
Total investment income
Loans (b):
Commercial real estate, construction
Commercial real estate, other
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Total loan income
Total interest income
INTEREST EXPENSE:
Deposits:
Savings accounts
Government deposit accounts
Interest-bearing demand accounts
Money market accounts
Retail certificates of deposit
Brokered certificates of deposit
Total deposit cost
Borrowed funds:
Short-term borrowings
Long-term borrowings
Total borrowed funds cost
Total interest expense
Changes from 2017 to 2018
Volume
Rate
Total (a)
Changes from 2016 to 2017
Volume
Rate
Total (a)
$
155 $
103 $
258
$
75 $
19 $
94
2,254
(851)
1,403
622
2,122
2,324
865
928
1,090
(329)
7,622
9,180
38
787
(59)
489
1,618
515
3,388
469
(628)
(159)
3,229
431
(523)
(92)
2,685
(1,374)
1,311
548
3,740
3,774
2,844
819
2,562
230
1,170
5,862
6,098
3,709
1,747
3,652
(99)
14,517
14,528
22,139
23,708
16
30
266
(7)
227
2,631
3,163
3,235
(1,123)
2,112
5,275
54
817
207
482
1,845
3,146
6,551
3,704
(1,751)
1,953
8,504
1,612
(94)
1,518
445
611
1,454
(138)
34
(147)
740
2,999
4,592
13
139
214
197
208
(357)
414
343
(586)
(243)
171
380
(219)
161
900
978
2,721
(1,885)
78
3,559
(157)
6,194
6,374
5
(5)
112
(22)
(392)
1,100
798
683
917
1,600
2,398
1,992
(313)
1,679
1,345
1,589
4,175
(2,023)
112
3,412
583
9,193
10,966
18
134
326
175
(184)
743
1,212
1,026
331
1,357
2,569
8,397
Net interest income
$
5,951 $
9,253 $
15,204
$
4,421 $
3,976 $
(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 for 2018 and a
35% statutory federal corporate income tax rate for 2017 and 2016.
During 2018, Peoples recognized accretion income, net of amortization expense, from acquisitions of $2.2 million,
which added approximately 6 basis points to net interest margin, compared to $3.1 million and 10 basis points in 2017, and
48
$3.5 million and 11 basis points in 2016. During 2018, proceeds of $894,000 were received on an investment security that
had been, in previous years, written-down due to an other-than-temporary impairment, which added 3 basis points to the net
interest margin, compared to $814,000, and 3 basis points, in 2017. No such amount was recorded in 2016. Additional
interest income in 2018 from prepayment fees and interest recovered on nonaccrual loans was $420,000, compared to
$826,000 in 2017 and $964,000 in 2016. The primary driver of the increase in net interest income during the past two years
has been the higher loan balances resulting from organic growth and the ASB acquisition in 2018.
During 2018 and 2017, net interest income also benefited from increases in interest rates. Funding costs increased in
2018 and 2017 as the Federal Reserve Board raised the benchmark Federal Funds Target Rate by 25 basis points in each of
December of 2016, and March, June and December of 2017, as well as March, June, September, and December of 2018.
These rate increases drove higher loan and investment security yields, which outpaced increases in deposit and wholesale
funding costs in 2018 and 2017.
Detailed information regarding changes in the Consolidated Balance Sheets can be found under appropriate captions of
the "FINANCIAL CONDITION" section of this discussion. Additional information regarding Peoples' interest rate risk and
the potential impact of interest rate changes on Peoples' results of operations and financial condition can be found later in this
discussion under the caption "Interest Rate Sensitivity and Liquidity."
Provision for Loan Losses
The following table details Peoples’ provision for loan losses recognized for the years ended December 31:
(Dollars in thousands)
Loan losses
Checking account overdrafts
Provision for loan losses
As a percent of average total loans
2018
2017
2016
$
$
$
$
4,677
771
5,448
0.21%
$
$
3,050
722
3,772
0.16%
2,890
649
3,539
0.17%
The provision for loan losses 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 recorded in 2018 was
primarily due to continued loan growth and net charge-offs of $2.0 million related to consumer indirect lending, coupled with
charge-offs of $827,000 related to one acquired commercial loan relationship. The provision for loan losses recorded in 2017
and 2016 was driven by loan growth and stable asset quality trends.
Additional information regarding changes in the allowance for loan losses and loan credit quality can be found later in
this discussion under the caption "Allowance for Loan Losses."
Net Gains (Losses) Included in Total Non-Interest Income
The following table details Peoples’ net gains and losses, recognized in total non-interest income, for the years ended
December 31:
(Dollars in thousands)
Net (loss) gain on investment securities
Net loss on asset disposals and other transactions
2018
2017
2016
$
(146) $
(334)
2,983 $
(63)
930
(1,133)
During 2017, Peoples reduced its position in certain equity investment securities, which resulted in net gains on
investment securities of $3.0 million.
49
The following table details the net loss on asset disposals and other transactions for the years ended December 31
recognized by Peoples:
(Dollars in thousands)
Net (loss) gain on other assets
Net loss on debt extinguishment
Net loss on OREO
Net (loss) gain on other transactions
$
Net loss on asset disposals and other transactions $
2018
2017
2016
(224) $
(13)
(21)
(76)
(334) $
28 $
—
(116)
25
(63) $
(188)
(707)
(34)
(204)
(1,133)
The net loss on other assets during 2018 was primarily due to the disposal of $190,000 of ASB fixed assets acquired
coupled with $198,000 of market value write-downs related to closed offices that were held for sale. The net loss on other
transactions during 2018 was due to the write-down of a limited partnership investment.
During 2017, the net loss on OREO was a result of the sale of two commercial properties. The net gain on other assets
during 2017 was due to the sale of a previously closed branch, which was offset partially by a loss on the sale of a parking lot
that was no longer being utilized.
The net loss on debt extinguishment in 2016 was mainly due to the prepayment of $20.0 million of long-term FHLB
advances. The net loss on other transactions during 2016 was related to the write-down of an investment made in an asset
that had a corresponding tax benefit to Peoples. The net loss on other assets during 2016 was due mainly to the closing of a
leased office and related disposal of leasehold improvements.
Total Non-Interest Income Excluding Net Gains and Losses
Peoples generates total non-interest income excluding net gains and losses from four primary sources: insurance income;
trust and investment income; electronic banking income ("e-banking"); and deposit account service charges. Peoples
continues to focus on revenue growth from non-interest income sources in order to maintain a diversified revenue stream
through greater reliance on total non-interest income excluding net gains and losses. As a result, total non-interest income
excluding net gains and losses accounted for 30.6% of Peoples' total revenues (defined as net interest income plus total non-
interest income excluding net gains and losses) in 2018, compared to 31.7% in 2017 and 32.8% in 2016. The slight decline
in Peoples' total non-interest income excluding net gains and losses as a percent of total revenue during 2018 from 2017 was
primarily due to increased net interest income due to originated loan growth and the acquisition of ASB, as well as interest
rate increases. The decline in the ratio in 2017 compared to 2016 was primarily due to increased net interest income resulting
from loan growth and higher interest rates.
Insurance income comprised the largest portion of Peoples' non-interest income. The following table details Peoples’
insurance income for the years ended December 31:
(Dollars in thousands)
Property and casualty insurance commissions $
2018
2017
2016
10,512 $
10,298 $
10,064
Life and health insurance commissions
2,276
1,759
Performance-based commissions
Other fees and charges
Insurance income
1,452
572
14,812 $
1,457
690
14,204 $
$
1,733
1,742
307
13,846
The majority of performance-based commissions typically are recorded annually in the first quarter and are based on a
combination of factors, such as loss experience of insurance policies sold, production volumes and overall financial
performance of the individual insurance carriers. The increase in life and health insurance commissions was primarily due to
timing of revenue recognition attributable to the implementation of ASU 2014-09. The increase in other fees and charges
during 2017 was due to the acquisition of a third-party insurance administration company that occurred in January 2017.
50
Peoples' fiduciary and brokerage revenues continue to be based primarily upon the value of assets under administration
and management. The following table details Peoples’ trust and investment income for the years ended December 31:
(Dollars in thousands)
Fiduciary
Brokerage
Employee benefits
Trust and investment income
2018
2017
2016
$
$
$
6,579 $
4,001
1,963 $
12,543 $
6,360 $
3,538
1,660 $
11,558 $
5,929
3,171
1,489
10,589
The following table details Peoples’ assets under administration and management at year-end December 31:
(Dollars in thousands)
Trust assets under administration and management
Brokerage assets under administration and management
2017
$ 1,384,113 $ 1,452,959 $ 1,301,509
777,771
Total assets under administration and management $ 2,233,301 $ 2,340,262 $ 2,079,280
$ 2,342,102 $ 2,221,747 $ 2,002,537
Annual average
849,188
887,303
2016
2018
During 2018, the increases in fiduciary and brokerage revenues were due to a combination of growth of new business,
primarily in fee-based accounts, and growth in retirement benefit plans. In recent years, Peoples has added experienced
financial advisors in previously underserved market areas, and generated new business and revenue related to retirement
plans for which it manages the assets and provides services. Average assets under administration and management during
2018 increased compared to 2017 due primarily to new assets under administration and management, coupled with an
increase in the market value of accounts. The U.S. financial markets shifted downward at the end of 2018, resulting in the
decline in end-of-period assets under administration and management at December 31, 2018 compared to December 31,
2017. During 2017, the increase in fiduciary and brokerage revenues was primarily due to the increase in assets under
administration and management, which were positively impacted by the U.S. financial markets, and retirement benefits plans.
E-banking income increased $1.1 million to $11.5 million in 2018, compared to $10.4 million in both 2017 and 2016.
Peoples' 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.
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 increase in e-
banking income in 2018 was the result of the increased usage of debit cards by more customers, which includes the impact of
additional customers and accounts related to the acquisition of ASB. In 2018, Peoples' customers used their debit cards to
complete $801 million of transactions, versus $729 million in 2017 and $728 million in 2016.
Deposit account service charges, which are based on the recovery of costs associated with services provided, comprised
a significant portion of Peoples' non-interest income. The following table details Peoples' deposit account service charges for
the years ended December 31:
(Dollars in thousands)
Overdraft and non-sufficient funds fees
Account maintenance fees
Other fees and charges
Deposit account service charges
2018
2017
2016
$
$
6,571 $
2,718
489
9,778 $
6,720 $
2,276
618
9,614 $
7,849
2,260
553
10,662
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. The slight
decline in overdraft and non-sufficient funds fees between 2018 and 2017 was partially due to changes made to the
calculation of fees to be more in line with industry practices. The increase in account maintenance fees in 2018, compared to
2017, was largely due to implementation of new consumer checking products that occurred near the end of 2017. Other fees
and charges declined in 2018, compared to 2017, mainly due to changes made in the calculation of personalized check fees.
The increase between 2017 and 2016 in account maintenance fees was the result of higher fees received on commercial and
consumer checking accounts.
51
The following table details the other items included within Peoples' total non-interest income for the years ended
December 31:
(Dollars in thousands)
Mortgage banking income
Bank owned life insurance income
Commercial loan swap fee income
Other non-interest income (a)
$
2018
2017
2016
3,333 $
1,955
681
2,655
1,872 $
1,950
1,232
1,865
1,304
1,414
1,076
1,826
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in a gain in income of $207,000 for 2018.
Mortgage banking income is comprised mostly of net gains from the origination and sale of long-term, fixed rate real
estate loans in the secondary market, as well as servicing income for sold loans. 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. Mortgage banking income increased 78.0% in 2018, largely due to gains on sale of real
estate loans originated by the mortgage origination operation acquired as part of the ASB acquisition, and increased 43.6% in
2017, due to customer demand. In 2018, Peoples sold approximately $66.3 million of loans to the secondary market with
servicing retained and sold approximately $56.4 million in loans with servicing released. Peoples sold $65.2 million of loans
to the secondary market with servicing retained during 2017 and $67.1 million in 2016.
Bank owned life insurance income was essentially flat during 2018 compared to 2017. Peoples purchased no additional
bank owned life insurance policies during 2018 and 2017; however, $4.8 million was acquired in the ASB acquisition.
During 2017, bank owned life insurance income increased to $2.0 million, compared to $1.4 million in 2016. The increase in
bank owned life insurance income was the result of the additional $35.0 million of bank owned life insurance policies that
were purchased in the second quarter of 2016, for which a full year was recognized in 2017.
Commercial loan swap fee income is largely dependent on the timing and volume of customer activity. During 2018, an
increase in the number of individual transactions was more than offset by a decline in the average size of each transaction,
resulting in lower commercial loan swap fee income in 2018, compared to 2017.
The increase in other non-interest income in 2018 compared to 2017 was primarily due to an increase of $318,000 in the
income related to the sale of SBA loans. During 2018, other non-interest income also included $207,000 recorded in
connection with the implementation of a new accounting standard, which modified how the change in the fair value of equity
investment securities was recorded effective January 1, 2018.
Total Non-Interest Expense
Salaries and employee benefit costs remain Peoples’ largest non-interest expense, accounting for over half of the total
non-interest expense. The following table details Peoples’ salaries and employee benefit costs for the years ended
December 31:
(Dollars in thousands)
Base salaries and wages
Sales-based and incentive compensation
Employee benefit costs
Stock-based compensation
Deferred personnel costs
Payroll taxes and other employment costs
Salaries and employee benefit costs
Full-time equivalent employees:
Actual at end of the period
Average during the period
2018
2017
2016
$
$
46,438 $
11,703
6,528
2,575
(2,151)
4,215
69,308 $
39,669 $
10,223
6,487
1,802
(1,835)
3,930
60,276 $
871
840
774
778
39,422
8,752
5,682
1,392
(1,779)
3,964
57,433
782
804
Base salaries and wages in 2018 included $2.2 million of one-time expenses associated with the acquisition of ASB. The
ongoing retention of ASB employees also contributed to the increase in base salaries and wages, and in the number of
employees in 2018 compared to 2017. Merit increases also contributed to the increase in base salaries and wages during
2018, which included the implementation of a $15 per hour minimum wage throughout the company, which was announced
in early 2018 and will be fully implemented by January 1, 2020.
52
Sales-based and incentive compensation increased in 2018 and 2017 largely due to higher incentive compensation
related to the mortgage banking income growth, coupled with improvement in corporate performance for 2018. Peoples'
sales-based and incentive compensation plans are designed to grow core earnings while managing risk, and do not encourage
unnecessary and excessive risk-taking that could threaten the value of Peoples. The sales-based and incentive compensation
plans reward employees for appropriate behaviors and include provisions for inappropriate practices with respect to Peoples
and its customers, including clawbacks for executives.
During 2018, employee benefit costs were relatively flat compared to 2017. Employee benefit costs increased during
2017 compared to 2016 from higher medical insurance costs and pension settlement charges recognized. Settlement charges
are largely based on the timing of retirements of plan participants and their election of lump-sum distributions. A pension
settlement charge is recognized when the aggregate amount of lump-sum distributions to participants in Peoples' defined
benefit pension plan exceeds threshold for recognizing such charges during the period. Management anticipates continued
pension settlement charges in future years as plan participants retire and elect lump-sum distributions from the pension plan.
Stock-based compensation is generally recognized over the vesting period, which can range from immediate vesting to
three-year vesting, for the portion of awards that are expected to vest, and at the vesting date, an adjustment is made to
recognize the entire expense for vested awards and reverse expense for non-vested awards. The majority of Peoples' stock-
based compensation is attributable to annual equity-based incentive awards to employees, which are awarded in the first
quarter and based upon Peoples achieving certain performance goals during the prior year. During the years presented in the
table above, Peoples granted restricted common shares to officers and key employees with performance-based vesting
periods and time-based vesting periods, generally with a three-year vesting. The increase in stock-based compensation
during the three years presented in the table above correlates to Peoples' improved performance during recent years. The
increase in 2018, compared to 2017, was also impacted by the Board of Directors granting 12,144 unrestricted common
shares to full-time and part-time employees who did not already participate in the Peoples Bancorp Inc. Third Amended and
Restated 2006 Equity Plan, which resulted in stock-based compensation of $416,000. Additional information regarding
Peoples' stock-based compensation plans and awards can be found in Note 17 Stock-Based Compensation of the Notes to the
Consolidated Financial Statements.
Deferred personnel costs represent the portion of current period salaries and employee benefit costs considered to be
direct loan origination costs. These costs are capitalized and recognized over the life of the loan as a yield adjustment in
interest income. As a result, the amount of deferred personnel costs for each year corresponds directly with the level of new
loan originations. Higher loan originations in 2018 compared to 2017 drove the increase in deferred personnel costs during
2018. Additional information regarding Peoples' loan activity can be found later in this discussion under the caption "Loans."
Payroll taxes and other employee costs increased during 2018 as a result of higher base salaries and wages, sales-based
and incentive compensation, and employee benefits compared to 2017.
Peoples’ net occupancy and equipment expense for the years ended December 31 was comprised of the following:
(Dollars in thousands)
Depreciation expense
Repairs and maintenance costs
Net rent expense
Property taxes, utilities and other costs
Net occupancy and equipment expense
2018
2017
2016
4,937 $
2,825
961
2,549
11,272 $
4,850 $
2,573
931
2,279
10,633 $
5,079
2,345
901
2,410
10,735
$
$
Net occupancy and equipment expense increased during 2018 primarily due to the increased maintenance costs, property
taxes, utilities and other costs related to the addition of seven full-service bank branches and two loan production offices from
the ASB acquisition and ongoing increased operating costs associated with the expanded footprint. Increases in depreciation
expense related to the additional branches were partially offset by the full-year impact of the closure of six full-service
branches during 2017.
During 2017, depreciation expense decreased as assets became fully depreciated, branches were closed and new fixed
asset purchases decreased. Management continues to monitor capital expenditures and explore opportunities to enhance
Peoples' operating efficiency.
53
The following table details the other items included within Peoples' total non-interest expense for the years ended
December 31:
$
(Dollars in thousands)
Professional fees
Electronic banking expense
Data processing and software expense
Amortization of other intangible assets
Franchise tax expense
Marketing expense
FDIC insurance expense
Foreclosed real estate and other loan expenses
Communication expense
Other non-interest expense
2018
2017
2016
7,862 $
6,057
5,419
3,338
2,771
1,962
1,546
1,431
1,265
13,746
6,575 $
5,874
4,441
3,516
2,246
1,714
1,816
873
1,475
8,536
7,436
5,992
3,763
4,030
2,192
1,594
1,899
859
2,261
8,717
Professional fees increased in 2018 compared to 2017 due to higher consulting expenses and an increase of $785,000 in
acquisition-related expenses (investment banking and legal fees).
Peoples' e-banking expense is comprised of costs associated with debit and ATM cards, as well as internet and mobile
banking costs. The increase in 2018 and 2017 was due to customers completing a higher volume of transactions using their
debit cards, and Peoples' internet and mobile banking service. Also contributing to the increase in 2018 was the addition of
accounts related to the ASB acquisition. These factors also produced a greater increase in the corresponding e-banking
revenues over the same period.
Data processing and software expense includes software support, maintenance and depreciation expense. These costs
increased during 2018 due to the implementation of enhanced functionalities for Peoples' core banking system, including
making certain mobile banking tools available to customers, growth in the number of accounts, implementation of customer
relationship profitability and a new floor plan system implemented at the end of 2017. The increase during 2017 was due to
the increase of software support and higher depreciation related to software and the core banking system conversion in late
2016, which provides additional customer services and capabilities.
Peoples' amortization of other intangible assets is driven by acquisition-related activity. Amortization of other intangible
assets declined during 2018 and 2017 as a result of the amortization schedules related to core deposit and customer
relationship intangible assets arising from acquisitions. The decline during 2018 was partially offset by additional
amortization related to the acquisition of ASB.
Peoples is subject to state franchise taxes, which are based largely on Peoples' equity at year-end, in the states where
Peoples has a physical presence. Franchise tax expense also includes the Ohio Financial Institution Tax ("FIT"), which is a
business privilege tax that is imposed on financial institutions organized for profit and doing business in Ohio. The Ohio FIT
is based on the total equity capital in proportion to the taxpayer's gross receipts in Ohio. Expenses related to state franchise
taxes, which includes Ohio FIT, increased in 2018 due to additional equity from the issuance of common shares related to the
acquisition of ASB and from operating results.
In 2018, marketing expense, which includes advertising, donations and other public relations costs, increased $248,000
from 2017. The increase during 2018 includes $119,000 of one-time acquisition-related expenses and additional marketing
campaigns in the new market areas. During 2017, marketing expense increased primarily due to higher donations to Peoples
Bank Foundation, Inc. Peoples formed this private foundation in 2004 to make charitable contributions to organizations
within Peoples' primary market area. Future contributions to Peoples Bank Foundation, Inc. will be evaluated on an annual
basis, with the determination of the amount of any contribution based largely on the perceived level of need within the
communities Peoples serves.
The FDIC quarterly assessment rate is applied to average total assets less average tangible equity, and is based on the
leverage ratio, net income before taxes, nonperforming loans as a percent of total assets, OREO, loan mix and asset growth.
Peoples experienced improvements in each of these categories during 2017 and 2018, leading to a reduction in the quarterly
FDIC assessment rate, which offset increases in the expense that are attributable to the asset growth experienced during the
last two years. Peoples' 2017 FDIC insurance expense also decreased slightly from 2016 as assessment changes became
effective July 1, 2016. Additional information regarding Peoples' FDIC insurance assessments may be found in "ITEM 1
BUSINESS" of this Form 10-K in the section captioned "Supervision and Regulation."
54
Foreclosed real estate and other loan expenses increased during 2018 due to higher real estate loan expense and
collection expenses. The higher real estate loan expense was due to additional mortgage processing associated with the
acquired origination group from the ASB acquisition. The increase in collection expenses was related to the growth in
indirect consumer lending.
The decrease in communication expense during 2018 was attributable to the re-negotiation of contracts with vendors.
The decrease in 2017 compared to 2016 resulted from the consolidation of traditional phone lines to a method of transmitting
all voice traffic over the internet and the discontinuation of overlapping traditional phone line contracts that occurred during
the transition.
Other non-interest expense increased $5.2 million in 2018 compared to 2017, and decreased $181,000 in 2017 compared
to 2016. The increase during 2018 was driven by $3.6 million of one-time acquisition-related expenses in 2018 compared to
$14,000 in 2017. The 2018 acquisition-related expenses related mainly to contract termination fees and other costs related to
the system conversion. The remaining increase in 2018 compared to 2017 was made up of various other small items. During
2016, Peoples recorded $0.7 million of expense related to the core system conversion costs.
Income Tax Expense
A key driver for the amount of income tax expense or benefit recognized by Peoples each year is the amount of pre-tax
income. In addition to the expense recognized, Peoples receives tax benefits from tax-exempt investments and loans, bank
owned life insurance, stock awards that settled or vested during the year, and investments in tax credit funds, which reduce
Peoples' effective tax rate. A reconciliation of Peoples' recorded income tax expense/benefit and effective tax rate to the
statutory tax rate can be found in Note 12 Income Taxes of the Notes to the Consolidated Financial Statements.
On January 1, 2018, the Tax Cuts and Jobs Act lowered the statutory federal corporate income tax rate from 35% to 21%,
and was the primary cause of the decline in Peoples' income tax expense for 2018 compared to 2017. The difference of 14%
in the statutory federal corporate income tax rate between 2018 and 2017, applied to the income before income taxes for
2018, equates to a $7.7 million reduction in income tax expense. During the fourth quarter of 2018, the final remeasurement
of deferred tax assets and deferred tax liabilities at the new statutory federal corporate income tax rate of 21%, down from
35%, resulted in a reduction to income tax expense of $0.7 million. During the fourth quarter of 2017, as a result of its initial
remeasurement of deferred tax assets and deferred tax liabilities at the new statutory federal corporate income tax rate,
Peoples wrote down its net deferred tax assets by $0.9 million, which had a direct impact on income tax expense recorded
during 2017. Additionally, as of December 31, 2017, Peoples early adopted ASU 2018-02 Income Statement - Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income and elected to reclassify, from accumulated other comprehensive income to retained earnings, the stranded income
tax effects in accumulated other comprehensive loss resulting from the Tax Cuts and Jobs Act.
In 2018, Peoples released a valuation allowance, which reduced income tax expense by $0.8 million. The valuation
allowance was related to a historic tax credit that Peoples had invested in during 2015. Peoples sold $6.7 million of equity
investment securities in 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 historic tax credit investment,
resulting in the release of the valuation allowance.
Peoples recorded a tax benefit of $332,000 in 2018 and a tax benefit of $154,000 in 2017, as the result of the adoption of
ASU 2016-09, which became effective January 1, 2017. The tax benefit related to stock awards that settled or vested during
the year, with the majority recorded in the first quarter of each year.
Pre-Provision Net Revenue (non-US GAAP)
Pre-provision net revenue ("PPNR") has become a key financial measure used by federal bank regulatory agencies when
assessing the capital adequacy of financial institutions. PPNR is defined as net interest income plus total non-interest income
(excluding all gains and losses) minus total non-interest expense and, therefore, excludes the provision for (recovery of) loan
losses and all gains and/or 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.
55
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts of income before
income taxes reported in Peoples' Consolidated Financial Statements for the periods presented:
(Dollars in thousands)
Income before income taxes
Add: provision for loan losses
Add: net loss on debt extinguishment
Add: net loss on OREO
Add: net loss on investment securities
Add: net loss on other assets
Add: net loss on other transactions
Less: net gain on debt extinguishment
Less: net gain on investment securities
Less: net gain on other assets
Less: net gain on other transactions
Pre-provision net revenue
Total average assets
Pre-provision net revenue to total average
assets
2018
54,941
5,448
13
21
146
224
76
—
—
—
—
60,869
$
$
$
$
2017
57,203
3,772
—
116
—
—
—
—
2,983
28
25
58,055
$
$
2016
45,282
3,539
707
34
—
188
204
—
930
—
—
49,024
$
$
2015
14,816
14,097
520
529
—
696
43
—
729
—
—
29,972
$
$
2014
24,178
339
—
68
—
430
—
67
398
—
—
24,550
$ 3,871,832
$ 3,510,274
$ 3,320,447
$ 3,111,853
$ 2,240,534
1.57%
1.65%
1.48%
0.96%
1.10%
During 2018, PPNR was higher while the pre-provision net revenue to total average assets ratio declined compared to
2017. The growth of average assets during the year, which was partially attributable to the ASB acquisition, outpaced the
increase in PPNR, which was diminished by $7.3 million of acquisition-related expenses. The increase in PPNR in 2017 was
due to the increase in revenue as a result of net interest income growth offset partially by a slight increase in total non-interest
expenses. The increase in the PPNR in 2016 was primarily due to an increase in revenue as a result of net interest income
growth coupled with a decrease in total non-interest expense. The increase in the PPNR in 2015 was primarily due to the
completion of the NB&T acquisition and recognition of a full year of revenue for acquisitions completed during 2014. The
decrease in the pre-provision net revenue to total average assets ratio for 2015 compared to 2014 reflected the increase of
average assets, which also was reflective of the NB&T acquisition, offsetting the increase in PPNR, which was diminished by
acquisition-related expenses of $10.7 million.
Core Non-Interest Income and Expense (non-US GAAP)
Core non-interest income and core non-interest expense are financial measures used to evaluate Peoples' recurring
revenue and expense streams. These measures are non-US GAAP since they exclude the 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.
The following tables provide reconciliations of these non-US GAAP measures to the amounts reported in Peoples'
Consolidated Financial Statements for the periods presented:
(Dollars in thousands)
2018
2017
2016
2015
2014
Core non-interest income:
Total non-interest income
Less: net (loss) gain on investment securities
Less: net loss on asset disposals and other transactions
$
56,754 $
(146)
(334)
55,573 $
2,983
(63)
50,867 $
930
(1,133)
46,382 $
729
(1,788)
40,020
398
(431)
Total non-interest income excluding net gains and
losses
Plus: core banking system conversion revenue waived
Core non-interest income excluding net gains and losses $
$
57,234 $
—
57,234 $
52,653 $
—
52,653 $
51,070 $
85
51,155 $
47,441 $
—
47,441 $
40,053
—
40,053
56
(Dollars in thousands)
Core non-interest expense:
Total non-interest expense
Less: system conversion expenses
Less: acquisition-related expenses
Less: pension settlement charges
Less: other non-core charges
Core non-interest expense
Efficiency Ratio (non-US GAAP)
2018
2017
2016
2015
2014
$ 125,977 $ 107,975 $ 106,911 $ 115,081 $
—
7,262
267
—
—
341
242
—
1,259
—
—
—
—
10,722
459
592
$ 118,448 $ 107,392 $ 105,652 $ 103,308 $
85,009
—
4,752
1,400
298
78,559
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' Consolidated Financial Statements for the periods presented:
(Dollars in thousands)
Efficiency ratio:
Total non-interest expense
Less: amortization of other intangible assets
Adjusted total non-interest expense
122,639
104,459
102,881
111,004
$ 125,977
3,338
$ 107,975
3,516
$ 106,911
4,030
$ 115,081
4,077
$
85,009
1,428
83,581
2018
2017
2016
2015
2014
Total non-interest income excluding net gains
and losses
Net interest income
Add: fully tax-equivalent adjustment (a)
Net interest income on a fully tax-equivalent
basis
57,234
52,653
51,070
47,441
40,053
129,612
881
113,377
1,912
104,865
2,027
97,612
1,978
69,506
1,335
130,493
115,289
106,892
99,590
70,841
Adjusted revenue
Efficiency ratio
$ 187,727
$ 167,942
$ 157,962
$ 147,031
$ 110,894
65.33 %
62.20 %
65.13 %
75.50 %
75.37 %
Efficiency ratio adjusted for non-core items:
Core non-interest expense
$ 118,448
$ 107,392
$ 105,652
Less: amortization of other intangible assets
Adjusted core non-interest expense
3,338
115,110
3,516
103,876
4,030
101,622
$ 103,308
4,077
$
99,231
78,559
1,428
77,131
Core non-interest income excluding net gains and
losses
Net interest income on a fully tax-equivalent
basis
57,234
52,653
51,155
47,441
40,053
130,493
115,289
106,892
99,590
70,841
Adjusted core revenue
$ 187,727
$ 167,942
$ 158,047
$ 147,031
$ 110,894
Efficiency ratio adjusted for non-core items
61.32 %
61.85 %
64.30 %
67.49 %
69.55 %
(a) Based on a 21% statutory federal corporate income tax rate for 2018 and a 35% statutory federal corporate income tax rate for 2017 and prior periods.
The increase in the efficiency ratio between 2018 and 2017 was driven by acquisition-related expenses of $7.3 million in
2018, compared to $341,000 in 2017. The continued decline in the efficiency ratio adjusted for non-core items in recent
years has been driven by acquisitions, coupled with the focus of growing revenues at a higher rate than expenses on a
57
percentage basis. Managing expenses has been a major focus over the last three years, however, during this time Peoples has
continued to make meaningful investments in its infrastructure and systems.
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 release of the deferred tax asset valuation allowance, 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 losses, core banking
system conversion revenue and expenses, acquisition-related expenses, pension settlement charges, and other non-recurring
expenses in earnings.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in
Peoples' Consolidated Financial Statements for the periods presented:
(Dollars in thousands)
2018
2017
2016
2015
2014
Return on average assets:
Net income
Total average assets
Return on average assets
Return on average assets adjusted for non-
core items:
$
46,255
3,871,832
$
38,471
3,510,274
$
31,157
3,320,447
$
10,941
3,111,853
$
16,684
2,240,534
1.19%
1.10%
0.94%
0.35%
0.74%
Net income
46,255
38,471
31,157
10,941
16,684
Add: core banking system conversion revenue
waived, net of tax (a)
Add: net loss on investment securities, net of
tax (a)
Less: net gain on investment securities, net of tax
(a)
Add: net loss on asset disposals and other
transactions, net of tax (a)
Add: system conversion expenses, net of tax (a)
Add: acquisition-related expenses, net of tax (a)
Add: pension settlement charges, net of tax (a)
Add: other non-core charges, net of tax (a)
Less: release of deferred tax asset valuation
allowance
Less: impact of Tax Cuts and Jobs Act on
deferred tax liability
Add: impact of Tax Cuts and Jobs Act on
deferred tax assets
—
115
—
264
—
5,737
211
—
(805)
(705)
—
—
—
55
—
—
—
—
—
(1,939)
(605)
(474)
(259)
41
—
222
157
—
—
—
897
736
818
—
—
—
—
—
—
1,162
—
6,969
298
385
—
—
—
280
—
3,089
910
194
—
—
—
19,281
3,111,853
$
20,898
2,240,534
Net income adjusted for non-core items
$
51,072
$
37,849
$
32,161
$
3,871,832
3,510,274
3,320,447
Total average assets
Return on average assets adjusted for non-core
items
1.32%
1.08%
0.97%
0.62%
0.93%
(a) Based on a 21% statutory federal corporate income tax rate for 2018 and a 35% statutory federal corporate income tax rate for 2017 and prior periods.
58
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. 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.
(Dollars in thousands)
Net income excluding amortization of other intangible assets:
2018
2017
2016
2015
2014
Net income
$
46,255
$
38,471
$
31,157
$ 10,941
$ 16,684
Add: amortization of other intangible assets
Less: tax effect of amortization of other
intangible assets (a)
Net income excluding amortization of other
intangible assets
Average tangible equity:
3,338
701
3,516
1,231
4,030
4,077
1,428
1,411
1,427
500
48,892
40,756
33,776
13,591
17,612
Total average stockholders' equity
$
488,139
$
450,379
$
432,666
$ 407,296
$ 270,689
Less: average goodwill and other intangible
assets
Average tangible equity
$
Return on average stockholders' equity ratio:
Net income
Average stockholders' equity
Return on average stockholders' equity
Return on average tangible equity ratio:
Net income excluding amortization of other
intangible assets
Average tangible equity
$
$
$
$
158,115
330,024
46,255
488,139
9.48%
48,892
330,024
$
$
$
$
$
144,696
305,683
38,471
450,379
8.54%
40,756
305,683
$
$
$
$
$
147,981
144,013
87,821
284,685
$ 263,283
$ 182,868
31,157
$ 10,941
$ 16,684
432,666
$ 407,296
$ 270,689
7.20%
2.69%
6.16%
33,776
$ 13,591
$ 17,612
284,685
$ 263,283
$ 182,868
Return on average tangible equity
14.81%
13.33%
11.86%
5.16%
9.63%
(a) Based on a 21% statutory federal corporate income tax rate for 2018 and a 35% statutory federal corporate income tax rate for 2017 and prior periods.
The return on average stockholders' equity and average tangible equity ratios increased in 2018 compared to 2017,
reflecting the increase in net income which outpaced the increases in average stockholders' equity and average tangible
equity. Average stockholders' equity and average tangible equity increased due mainly to net income and the ASB
acquisition, partially offset by dividends declared.
FINANCIAL CONDITION
Cash and Cash Equivalents
Peoples considers cash and cash equivalents to consist of federal funds sold, cash and balances due from banks, interest-
bearing balances in other institutions and other short-term investments that are readily liquid. The amount of cash and cash
equivalents fluctuates on a daily basis due to customer activity and Peoples' liquidity needs. At December 31, 2018, excess
cash reserves at the FRB were $11.2 million, compared to $9.3 million at December 31, 2017. 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.
In 2018, Peoples' total cash and cash equivalents increased $5.4 million, as cash provided by operating and financing
activities of $75.2 million and $60.3 million, respectively, were partially offset by cash used of $130.2 million in investing
activities. Cash used in investing activities was primarily due to funded loan growth of $134.1 million. Loan growth was
partially funded by the increase of Peoples' financing activities of short-term borrowings of $61.9 million and deposit growth,
excluding deposits acquired from the ASB acquisition, of $25.8 million. The increase in operating activities was due
primarily to $46.3 million of net income.
59
In 2017, Peoples' total cash and cash equivalents increased $6.0 million, as cash provided by financing and operating
activities of $107.7 million and $61.0 million, respectively, were partially offset by cash used of $162.7 million in investing
activities. Cash used in investing activities was primarily due to funded loan growth of $130.4 million. The loan growth was
partially funded by deposit growth of $220.6 million, which was offset by decreases of $97.5 million in short and long-term
borrowings. The increase in operating activities was due primarily to $38.5 million of net income.
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 at December 31:
2018
2017
2016
2015
2014
(Dollars in thousands)
Available-for-sale securities, at fair value:
Obligations of:
U.S. Treasury and government agencies
U.S. government sponsored agencies
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Bank-issued trust preferred securities
Equity investment securities (a)
Total fair value
Total amortized cost
Net unrealized (loss) gain
Held-to-maturity securities, at amortized cost:
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total amortized cost
Other investment securities (a)
Total investment securities:
Amortized cost
Carrying value
$
$
$
$
$
$
$
$
$
— $
—
88,587
692,608
6,707
3,989
—
791,891 $
804,655 $
(12,764) $
— $
—
101,569
673,664
6,976
5,129
7,849
795,187 $
797,732 $
(2,545) $
— $
1,000
117,230
626,567
19,291
4,899
8,953
777,940 $
777,017 $
923 $
— $
2,966
114,726
632,293
23,845
4,635
6,236
784,701 $
780,304 $
4,397 $
4,403 $
29,044
3,514
36,961 $
3,810 $
32,487
4,631
40,928 $
3,820 $
33,858
5,466
43,144 $
3,831 $
35,367
6,530
45,728 $
42,985 $
38,371 $
38,371 $
38,401 $
1
5,950
64,743
527,291
27,847
5,645
5,403
636,880
632,967
3,913
3,841
36,945
7,682
48,468
28,311
884,601 $
871,837 $
877,031 $
874,486 $
858,532 $
859,455 $
864,433 $
868,830 $
709,746
713,659
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-sale investment securities to other
investment securities. At December 31, 2018, $277,000 of equity investment securities were included in other investment securities compared to $7.8 million of equity investment
securities included in available-for-sale investment securities at December 31, 2017.
At December 31, 2018, Peoples' investment securities were approximately 21.8% of total assets, compared to 24.4% at
December 31, 2017. During 2018, Peoples acquired, in the ASB acquisition, investment securities totaling approximately
$18.8 million and subsequently sold approximately $14.6 million of acquired available-for-sale investment securities.
Proceeds from security sales were used to reduce overnight borrowing at FHLB.
Investment securities increased at December 31, 2017 from December 31, 2016 due to purchases of residential mortgage-
backed securities that were partially offset by principal paydowns during that year.
In 2015, Peoples acquired $156.4 million of investment securities as part of the NB&T acquisition, with the remaining
fluctuation due to purchases being more than offset by principal paydowns, sales, calls and maturities.
Peoples designates certain securities as "held-to-maturity" at the time of their purchase if management determines Peoples
would have the intent and ability to hold certain purchased securities until maturity. The unrealized gain or loss related to
held-to-maturity investment securities does not directly impact total stockholders' equity, in contrast to the impact from the
available-for-sale investment securities portfolio.
60
Peoples' investment in residential and commercial mortgage-backed securities largely consists of securities either
guaranteed by the U.S. government or issued by U.S. government sponsored agencies, such as Fannie Mae and Freddie Mac.
The remaining portions of Peoples' mortgage-backed securities consist of securities issued by other entities, including other
financial institutions, which are not guaranteed by the U.S. government.
The amount of these "non-agency" securities included in the residential mortgage-backed securities totals above was as
follows at December 31:
(Dollars in thousands)
Fair Value
Amortized cost
Net unrealized (loss) gain
$
$
2018
2017
2016
2015
2014
711 $
781
(70) $
1,924 $
2,109
(185) $
2,991 $
3,206
(215) $
4,201 $
4,331
(130) $
14,058
13,604
454
Management continues to reinvest the principal runoff from the non-agency securities in U.S. agency investments, which
accounted for the continued decline in these securities. At December 31, 2018, Peoples' non-agency portfolio consisted
entirely of first lien residential mortgages, with nearly all of the underlying loans in these securities originated prior to 2004
and possessing fixed interest rates. Management continues to monitor the non-agency portfolio closely for leading indicators
of increasing stress and will continue to be proactive in taking actions to mitigate such risk when necessary.
Additional information regarding Peoples' investment portfolio can be found in Note 3 Investment Securities of the Notes
to the Consolidated Financial Statements.
Loans
The following table provides information regarding outstanding loan balances at December 31:
(Dollars in thousands)
Originated loans:
2018
2017
2016
2015
2014
Commercial real estate, construction
$ 124,013
$ 107,118
$
84,626
$
63,785
$
37,901
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
Total originated loans
Acquired loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total acquired loans (a)
Total loans
632,200
756,213
530,207
296,860
93,326
407,167
71,674
478,841
595,447
702,565
438,051
304,523
88,902
340,390
67,010
407,400
531,557
616,183
378,131
307,490
85,617
252,024
67,579
319,603
471,184
534,969
288,130
288,783
74,176
165,320
61,813
227,133
434,660
472,561
249,975
254,169
62,463
112,563
57,350
169,913
583
$2,156,030
849
$ 1,942,290
1,080
$ 1,708,104
1,448
$ 1,414,639
2,933
$ 1,212,014
$
12,404
$
8,319
$
10,100
$
12,114
$
1,051
184,711
197,115
35,537
296,937
40,653
136
2,370
165,120
173,439
34,493
184,864
20,575
329
1,147
204,466
214,566
44,208
228,435
25,875
808
2,940
265,092
277,206
63,589
276,772
32,253
1,776
6,205
121,475
122,526
30,056
225,274
18,232
2,445
10,351
2,506
$ 572,748
$2,728,778
1,476
$ 414,847
$ 2,357,137
3,748
$ 516,832
$ 2,224,936
7,981
$ 657,801
$ 2,072,440
12,796
$ 408,884
$ 1,620,898
61
(Dollars in thousands)
Average total loans
Average allowance for loan losses
Average loans, net of average allowance for
loan losses
Percent of loans to total loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts (b)
Total percentage
2018
2017
2016
2015
2014
$2,610,970
$2,293,980
$2,133,175
$1,952,241
$1,364,808
(19,359)
(18,713)
(17,564)
(19,174)
(17,362)
$2,591,611
$2,275,267
$2,115,611
$1,933,067
$1,347,446
5.1 %
29.9 %
35.0 %
20.7 %
21.8 %
4.9 %
14.9 %
2.7 %
17.6 %
4.9 %
32.3 %
37.2 %
20.0 %
20.8 %
4.6 %
14.5 %
2.9 %
17.4 %
4.3 %
33.0 %
37.3 %
19.0 %
24.1 %
5.0 %
11.4 %
3.2 %
14.6 %
NM
100.0%
NM
100.0%
NM
100.0%
3.7 %
35.5 %
39.2 %
17.0 %
27.3 %
5.1 %
8.0 %
3.3 %
11.3 %
0.1 %
100.0%
2.4 %
34.2 %
36.6 %
17.3 %
29.6 %
5.0 %
7.1 %
4.2 %
11.3 %
0.2 %
100.0%
Residential real estate loans being serviced for
others
$ 461,256
$ 412,965
$ 398,134
$ 390,398
$ 352,779
(a)
Includes all loans acquired, and related loan discount recorded as part of acquisition accounting, in 2014 and 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) NM = not meaningful.
As of December 31, 2018, total loans grew 16%, or $371.6 million, compared to December 31, 2017. Total originated
loans (excluding acquired loans) grew 11%, or $213.7 million, during 2018. Originated loan growth was led by an increase
in commercial and industrial loans of $92.2 million, or 21%, and indirect consumer lending growth of $66.8 million, or 20%.
Total acquired loans grew $157.9 million during 2018, which included $208.9 million related to the ASB acquisition as of
December 31, 2018, partially offset by the continued decline of the loan balances acquired in previous acquisitions. Balances
in loan accounts acquired from ASB as of December 31, 2018 included $116.5 million in residential real estate loans, $49.6
million in commercial real estate loans, $24.5 million in home equity lines of credit, $9.5 million in commercial and
industrial loans, $7.0 million in construction loans, and $1.8 million in consumer loans.
During 2017, total loans grew 6%, or $132.2 million. The increase was primarily the result of commercial loan growth
of $95.5 million, or 8%, which includes commercial real estate and commercial and industrial loan balances. Additionally,
continued emphasis on growing indirect consumer lending led to growth of $87.9 million, or 35%, compared to December
31, 2016, and was partially offset by reductions in residential real estate loans.
During 2016, total loans grew 7%, or $152.5 million, with growth of 8% in commercial loan balances and 7% in
consumer loan balances. Continuing the trend of 2015, indirect consumer lending experienced the largest growth across all
loan categories for the year, increasing by $85.7 million, or 51%. Commercial and industrial loan growth was $70.6 million,
or 20%, for the year.
During 2015, total loans grew 28%, or $451.5 million. Total originated loans (excluding acquired loans) grew 17%, or
$202.6 million, due to increases in all categories except deposit account overdrafts. The increase in total acquired loans in
2015 was due to the NB&T acquisition.
62
The following table details the maturities of Peoples' commercial real estate and commercial and industrial loans at
December 31, 2018:
(Dollars in thousands)
Commercial real estate, construction:
Fixed
Variable
Total
Commercial real estate, other:
Fixed
Variable
Total
Commercial and industrial:
Fixed
Variable
Total
Total commercial loans:
Fixed
Variable
Total
Due in One
Year or Less
Due in One
to Five Years
Due After
Five Years
Total
% of Total
$
3,440 $
78,665
82,105
7,399 $
34,970
42,369
9,185 $
2,758
11,943
24,074
378,370
402,444
7,557
401,665
409,222
109,793
159,599
269,392
60,375
40,472
100,847
107,138
37,937
145,075
32,422
23,253
55,675
20,024
116,393
136,417
241,005
575,906
816,911
100,354
465,390
565,744
35,071
858,700
893,771 $
177,567
235,041
412,608 $
148,745
63,948
212,693 $
361,383
1,157,689
1,519,072
$
14.7%
85.3%
100.0%
29.5%
70.5%
100.0%
17.7%
82.3%
100.0%
23.8%
76.2%
100.0%
Loan Concentration
Peoples categorizes its commercial loans according to standard industry classifications and monitors for concentrations
in a single industry or multiple industries that could be impacted by changes in economic conditions in a similar manner.
Peoples' commercial lending activities continue to be spread over a diverse range of businesses from all sectors of the
economy, with no single industry comprising over 10% of Peoples' total loan portfolio.
Loans secured by commercial real estate, including commercial construction loans, continue to comprise the largest
portion of Peoples' loan portfolio.
The following table provides information regarding the largest concentrations of commercial real estate loans within the
loan portfolio at December 31, 2018:
(Dollars in thousands)
Commercial real estate, construction:
Apartment complexes
Education services
Office buildings
Assisted living facilities and nursing homes
Mixed commercial use facilities
Light industrial
Child care
Residential property
Other (a)
Commercial real estate, construction
Outstanding
Balance
Available
Loan
Commitments
Total
Exposure % of Total
$
$
40,818 $
8,655
12,726
11,756
17,059
8,509
4,348
2,619
29,927
136,417 $
29,987 $
19,895 $
10,347
10,481
3,753
—
1,722
2,140
516
78,841 $
70,805
28,550
23,073
22,237
20,812
8,509
6,070
4,759
30,443
215,258
32.9 %
13.3 %
10.7 %
10.3 %
9.7 %
4.0 %
2.8 %
2.2 %
14.1 %
100.0%
(a) All other outstanding balances are less than 2% of the total loan portfolio.
63
(Dollars in thousands)
Commercial real estate, other:
Mixed commercial use facilities:
Owner occupied
Non-owner occupied
Total mixed commercial use facilities
Office buildings and complexes:
Owner occupied
Non-owner occupied
Total office buildings and complexes
Apartment complexes
Light industrial facilities:
Owner occupied
Non-owner occupied
Total light industrial facilities
Retail facilities:
Owner occupied
Non-owner occupied
Total retail facilities
Warehouse facilities
Lodging and lodging related
Assisted living facilities and nursing homes
Land only
Other (a)
Outstanding
Balance
Available
Loan
Commitments
Total
Exposure % of Total
$
35,861 $
71,929
107,790
43,417
48,386
91,803
90,277
47,087
16,745
63,832
26,857
33,835
60,692
41,785
33,004
31,422
14,671
281,635
816,911 $
714 $
1,739
2,453
3,395
748
4,143
545
3,759
1,088
4,847
1,634
98
1,732
2,055
—
256
2,130
16,722
34,883 $
36,575
73,668
110,243
46,812
49,134
95,946
90,822
50,846
17,833
68,679
28,491
33,933
62,424
43,840
33,004
31,678
16,801
298,357
851,794
4.3 %
8.6 %
12.9 %
5.5 %
5.8 %
11.3 %
10.7 %
6.0 %
2.1 %
8.1 %
3.3 %
4.0 %
7.3 %
5.1 %
3.9 %
3.7 %
2.0 %
35.0 %
100.0%
Commercial real estate, other
$
(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 December 31, 2018 or December 31, 2017.
Additional information regarding Peoples' loan portfolio can be found in Note 4 Loans of the Notes to the Consolidated
Financial Statements.
Allowance for Loan Losses
The amount of the allowance for loan losses at the end of each period represents management's estimate of probable
losses from existing loans based upon its formal quarterly analysis of the loan portfolio described in the "Critical Accounting
Policies" section of this discussion. 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.
64
The following details management's allocation of the allowance for loan losses at December 31:
(Dollars in thousands)
Commercial real estate
Commercial and industrial
Total commercial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
Originated allowance for loan losses
Allowance for acquired loan losses
Allowance for loan losses
As a percent of total loans, net of
deferred fees and costs
2018
2017
2016
2015
2014
8,003
6,178
14,181
1,214
618
3,214
351
3,565
81
19,659
536
20,195
$
$
7,797
5,813
13,610
904
693
2,944
464
3,408
70
18,685
108
18,793
$
$
7,172
6,353
13,525
982
688
2,312
518
2,830
171
18,196
233
18,429
$
$
7,076
5,382
12,458
1,257
732
1,427
544
1,971
121
16,539
240
16,779
$
$
9,825
4,036
13,861
1,627
694
1,113
474
1,587
112
17,881
—
17,881
$
$
0.74%
0.80%
0.83%
0.81%
1.10%
The allowance for loan losses as a percent of total loans decreased 6 basis points in 2018 compared to 2017 as a result of
relatively stable asset quality metrics and trends, and the loans acquired in the ASB acquisition. In accordance with US
GAAP, at the acquisition date, acquired loans are recorded at fair value with no associated allowance for loan losses. At
December 31, 2018, the ratio included total acquired loans, from the ASB acquisition and previous acquisitions, of $572.7
million and an allowance for acquired loan losses of $0.5 million. During 2018, the increase in allowance for loan losses was
primarily related to continued loan growth in most of the originated loan portfolios. The continued decline in the allowance
for loan losses as a percent of total loans, net of deferred fees and costs, relates to the historic lookback period and the
recession-era charge-offs no longer being included in the calculation. Peoples also considers recent trends in criticized loans
and loan growth associated with each loan portfolio, as well as qualitative factors that could negatively impact these trends,
such as unemployment, rising interest rates, changes in real estate market conditions, fluctuating oil and gas prices, and the
economic impact of tariffs. Peoples believes the reserves remain appropriate to cover probable losses that exist in the current
portfolio.
The allowance for loan losses allocated to the residential real estate and consumer loan categories was 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. The increase
in the allowance for loan losses for consumer loans has been mostly driven by loan growth in indirect lending in recent
periods.
During 2017, the increase in allowance for loan losses related primarily to growth in consumer indirect loan balances.
During 2016, the increase of 9% in the allowance for loan losses related to total commercial and consumer indirect balance
growth. The reductions in the allowance for loan losses allocated to commercial real estate during 2015 and 2014 were
driven by net recoveries in then recent years reducing the historical loss rates. During 2015, increases in the commercial and
industrial, home equity lines of credit and consumer categories of the allowance for loan losses were driven by net charge-off
activity, and increases in the balances of the respective loan portfolios. The allowance for loan losses as a percent of total
loans declined during 2015 compared to 2014 as a result of the reduction in historic loss rates, and the NB&T acquisition, as
the loans acquired from NB&T were recorded at a preliminary fair value, in accordance with US GAAP, and no allowance
for loan loss related to these loans has been recorded based on an analysis of the loans as of December 31, 2015.
The significant allocations to commercial loans reflect the higher credit risk associated with these types of lending and
the size of these loan categories in relationship to the entire loan portfolio.
65
The following table summarizes the changes in the allowance for loan losses for the years ended December 31:
(Dollars in thousands)
Allowance for loan losses, January 1
Gross charge-offs:
2018
18,793
$
2017
18,429
2016
16,779
$
2015
17,881
$
2014
17,065
$
$
Commercial real estate (a)
Commercial and industrial
Residential real estate (b)
Home equity lines of credit
Consumer, indirect
Consumer, direct (c)
Consumer
Deposit account overdrafts
Total gross charge-offs
Recoveries:
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
Total recoveries
Net charge-offs (recoveries):
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
Total net charge-offs (recoveries)
$
Provision for loan losses, December 31 (d) (e)
Allowance for loan losses, December 31
$
Net charge-offs (recoveries) as a percent of average total loans:
$
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
849
38
357
107
2,515
358
2,873
965
5,189
60
18
232
14
474
140
614
205
1,143
789
20
125
93
2,041
218
2,259
760
4,046
5,448
20,195
$
0.03 %
— %
— %
— %
0.08 %
0.01 %
0.09 %
0.03 %
0.15%
408
175
637
131
2,110
379
2,489
1,038
4,878
146
1
152
13
764
179
943
215
1,470
262
174
485
118
1,346
200
1,546
823
3,408
3,772
18,793
68
1,017
611
73
2,072
583
2,655
774
5,198
1,209
306
278
56
1,059
226
1,285
175
3,309
(1,141)
711
333
17
1,013
357
1,370
599
1,889
3,539
18,429
$
$
$
$
302
13,576
631
125
931
422
1,353
774
16,761
104
98
315
119
505
250
755
171
1,562
198
13,478
316
6
426
172
598
603
15,199
14,097
16,779
$
$
203
199
478
128
745
446
1,191
516
2,715
2,060
77
169
36
434
263
697
153
3,192
(1,857)
122
309
92
311
183
494
363
(477)
339
17,881
0.01 %
0.01 %
0.02 %
— %
0.06 %
0.01 %
0.07 %
0.04 %
0.15 %
(0.05)%
0.03 %
0.02 %
— %
0.04 %
0.02 %
0.06 %
0.03 %
0.09 %
0.01 %
0.69 %
0.02 %
— %
0.02 %
0.01 %
0.03 %
0.03 %
0.78%
(0.14 )%
0.01 %
0.02 %
0.01 %
0.02 %
0.02 %
0.04 %
0.03 %
(0.03)%
Total
(a) Includes purchased credit impaired loan charge-offs of $0 in 2018, $0 in 2017, $44,000 in 2016, $60,000 in 2015 and $0 in 2014.
(b) Includes purchased credit impaired loan charge-offs of $2,000 in 2018, $0 in 2017, $23,000 in 2016, $3,000 in 2015 and $0 in 2014.
(c) Includes purchased credit impaired loan charge-offs of $0 in 2018, $7,000 in 2017, $23,000 in 2016, $3,000 in 2015, and $0 in 2014.
(d) Includes purchased credit impaired loan provision for loan losses of $0 in 2018, $117,000 in 2017, $66,000 in 2016, $303,000 in 2015 and $0 in 2014.
(e) Includes nonimpaired loan provision for loan losses of $383,000 in 2018 and $0 in 2017, 2016, 2015 and 2014.
Net charge-offs for 2018 increased $638,000 compared to 2017; however, net charge-offs as a percent of average total
loans was unchanged at 0.15%. Net charge-offs in 2018 included $827,000 related to one acquired commercial loan
66
relationship. Indirect consumer lending has provided significant growth in recent periods, resulting in the growth in the
allowance for loan losses and net charge-offs within that category. The increase in net charge-offs from 2016 to 2017 was
primarily related to a decline in recoveries of commercial loans and an increase in net charge-offs of consumer indirect loans
due to higher balances from recent loan growth.
During 2016, net charge-offs were nominal at 0.09% of average total loans and were positively impacted by a $1.0
million recovery of a prior period commercial real estate loan charge-off. Gross charge-offs totaled $5.2 million in 2016, and
were largely associated with the growth in the consumer loan portfolio.
In 2015, Peoples recorded charge-offs related to one large commercial loan relationship in the aggregate amount of $13.1
million, or 0.67% of average total loans.
The following table details Peoples’ nonperforming assets at December 31:
$
(Dollars in thousands)
Loans 90+ days past due and accruing:
Commercial real estate, other
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total loans 90+ days past due and accruing
Nonaccrual loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total nonaccrual loans
Nonaccrual troubled debt restructurings
(TDRs):
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total nonaccrual TDRs
Total nonperforming loans (NPLs)
OREO:
Commercial
Residential
Total OREO
Total nonperforming assets (NPAs)
$
2018
2017
2016
2015
2014
$
$
215
45
1,278
72
—
16
16
1,626
754
6,348
7,102
506
4,267
772
158
32
190
12,837
—
721
721
492
1,447
90
98
7
105
2,855
17,318
—
208
208
17,526
$
$
1,506
387
1,855
—
—
23
23
3,771
826
10,792
11,618
1,620
4,481
554
9
81
90
18,363
—
751
751
482
1,614
60
6
49
55
2,962
25,096
594
67
661
25,757
$
$
2,425
1,986
1,522
35
1
—
1
5,969
921
7,357
8,278
350
2,991
340
31
—
31
11,990
—
153
153
377
864
79
34
34
68
1,541
19,500
644
89
733
20,233
$
$
567
301
1,901
20
2
8
10
2,799
—
2,278
2,278
1,800
2,695
315
—
3
3
7,091
96
306
402
194
658
45
16
—
16
1,315
11,205
582
364
946
12,151
801
18
1,430
7
—
—
—
2,256
710
6,730
7,440
1,304
4,075
1,023
324
56
380
14,222
—
154
154
405
1,951
210
156
—
156
2,876
19,354
—
94
94
19,448
67
(Dollars in thousands)
Criticized loans (a)
Classified loans (b)
Asset Quality Ratios:
NPLs as a percent of total loans (c)(d)
NPAs as a percent of total assets (c)(d)
NPAs as a percent of total loans and OREO (c)(d)
Allowance for loan losses as a percent of NPLs (c)
Criticized loans as a percent of total loans (a)(c)
Classified loans as a percent of total loans (b)(c)
2018
114,188
43,818
2017
90,418
46,380
2016
99,182
57,736
2015
122,147
60,315
2014
74,545
44,723
0.71%
0.49%
0.71%
104.35%
4.18%
1.61%
0.73%
0.49%
0.74%
108.52%
3.84%
1.97%
1.13%
0.75%
1.16%
73.43%
4.46%
2.59%
0.94%
0.62%
0.98%
86.05%
5.89%
2.91%
0.69%
0.47%
0.75%
159.58%
4.60%
2.76%
(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 restructured loans and nonaccrual loans. Nonperforming assets include
nonperforming loans and OREO.
The increase in loans 90+ days past due and accruing during 2018 was driven primarily by one commercial loan, which
was in the process of renewal at December 31, 2018. During 2018, the growth in nonaccrual loans was driven primarily by
one commercial loan that was over 90 days past due.
Nonperforming loans decreased in 2017, largely due to the decrease in nonaccrual loans, coupled with declines in loans
90+ days past due and accruing. The decrease in nonaccrual loans was driven by several commercial real estate relationships
that were paid off in 2017.
Nonperforming loans increased in 2016, largely due to the increase in nonaccrual loans, which was partially offset by a
decrease in loans 90+ days past due and accruing. The increase in nonaccrual loans was driven by several relatively smaller
relationships that were placed on nonaccrual status during 2016. The significant increase in nonaccrual commercial real
estate loans during 2016 was a result of three commercial loans moving to nonaccrual status.
At December 31, 2015, loans 90+ days past due and accruing included $2.3 million of acquired loans that were
purchased credit impaired loans, as they had evidence of credit quality deterioration since acquisition. Interest income on
purchase credit impaired loans is recognized on a level-yield method over the life of the loan. The increase in nonaccrual
commercial real estate loans during 2015 was a result of one commercial real estate relationship in the skilled nursing sector
being placed on nonaccrual status.
The majority of Peoples' nonaccrual commercial real estate loans continued to consist of non-owner occupied
commercial properties and real estate development projects. In general, management believes repayment of these loans is
dependent on the sale of the underlying collateral. As such, the carrying values of these loans are ultimately supported by
management's estimate of the net proceeds Peoples would receive upon the sale of the collateral. These estimates are based
in part on market values provided by independent, licensed or certified appraisers periodically, but no less frequently than
annually. Given the volatility in commercial real estate values, management continues to monitor changes in real estate
values from quarter-to-quarter and updates its estimates as needed based on observable changes in market prices and/or
updated appraisals for similar properties.
Peoples discontinues the accrual of interest on a loan when conditions cause management to believe collection of all or
any portion of the loan's contractual interest is doubtful. Such conditions may include the borrower being 90 days or more
past due on any contractual payments or current information regarding the borrower's financial condition and repayment
ability. All unpaid accrued interest deemed uncollectable is reversed, which would reduce Peoples' net interest income.
Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured. Interest income
on loans classified as nonaccrual and renegotiated at each year-end that would have been recorded under the original terms of
the loans was $1.3 million for 2018, $2.6 million for 2017 and $1.9 million for 2016. No portion of these amounts were
recorded during 2018, 2017 or 2016.
Overall, management believes the allowance for loan losses was appropriate at December 31, 2018, based on all
significant information currently available. Still, there can be no assurance that the allowance for loan losses will be adequate
to cover future losses or that the amount of nonperforming loans will remain at current levels, especially considering
economic uncertainties that exist and the concentration of commercial loans in Peoples’ loan portfolio.
Additional information regarding Peoples' allowance for loan losses can be found in Note 4 Loans of the Notes to the
Consolidated Financial Statements.
68
Deposits
The following table details Peoples’ deposit balances at December 31:
(Dollars in thousands)
Non-interest-bearing deposits (a)
Interest-bearing deposits:
Interest-bearing demand accounts (a)
Savings accounts
Retail CDs
Money market deposit accounts
Governmental deposit accounts
Brokered CDs
Total interest-bearing deposits
Total deposits
$
2018
2017
2016
2015
2014
$
607,877 $
556,010 $
734,421 $
717,939 $
493,162
573,702
468,500
394,335
379,878
267,319
263,854
2,347,588
2,955,465 $
593,415
446,714
338,673
371,376
264,524
159,618
2,174,320
2,730,330 $
278,975
436,344
361,725
407,754
251,671
38,832
1,775,301
2,509,722 $
250,023
414,375
435,214
394,119
276,639
47,635
1,818,005
2,535,944 $
173,659
295,307
418,350
337,387
161,305
53,904
1,439,912
1,933,074
(a) The sum of amounts presented are considered total demand deposits.
The increase of $225.1 million, or 8%, in total deposits between December 31, 2018 and December 31, 2017 was largely
due to $198.6 million of balances in deposit accounts acquired from ASB on April 13, 2018, coupled with higher one-way
buy CDARS deposits, which are included in brokered CD balances. As of December 31, 2018, the acquired deposit accounts
from ASB contributed $22.7 million of non-interest-bearing deposits, $27.6 million of interest-bearing demand accounts,
$18.7 million of savings accounts, $36.7 million of retail CDs and $29.3 million of money market deposit accounts.
The increase in total deposit balances at December 31, 2017 compared to December 31, 2016 was primarily due to
increases of $314.4 million in interest-bearing demand deposits and $120.8 million in brokered CDs, offset partially by a
decrease of $178.4 million in non-interest-bearing demand deposits. Shifts in balances occurred between non-interest-
bearing deposits and interest-bearing demand account balances as Peoples migrated consumers to new products during the
second half of 2017. During this migration, customer accounts were evaluated based on certain characteristics, and some
accounts that were traditionally non-interest-bearing deposits were converted to interest-bearing demand accounts as Peoples
moved to a relationship-based deposit product. The increase in brokered CDs in 2017 was the result of adding relatively
shorter term funding on the balance sheet to secure fixed rate funding in a rising rate environment.
At December 31, 2016, total deposits decreased compared to December 31, 2015, primarily due to decreases in retail and
brokered CDs, and governmental deposit accounts. Peoples continued its deposit strategy of growing low-cost core deposits,
such as checking and savings accounts, and reducing its reliance on higher-cost, non-core deposits, such as CDs and brokered
deposits, based on the rate environment that existed in 2016. These actions accounted for much of the changes in deposit
balances in 2016 compared to 2015.
In 2015, the increases in deposits primarily related to the acquisition of NB&T.
Peoples' governmental deposit accounts represent savings and interest-bearing transaction accounts from state and local
governmental entities. These funds are subject to periodic fluctuations based on the timing of tax collections and subsequent
expenditures or disbursements. Peoples normally experiences an increase in balances annually during the first and third
quarter, corresponding with tax collections, with declines normally in the second and fourth quarter of each year,
corresponding with expenditures by the governmental entities. Peoples continues to emphasize growth of low-cost deposits
that do not require Peoples to pledge assets as collateral, which is required in the case of governmental deposit accounts.
The maturities of retail CDs with total balances of $100,000 or more at December 31 were as follows:
(Dollars in thousands)
3 months or less
Over 3 to 6 months
Over 6 to 12 months
Over 12 months
Total
2018
2017
2016
2015
2014
$
$
28,214 $
28,436
32,578
89,431
178,659 $
24,118 $
20,011
27,129
74,849
146,107 $
27,780 $
20,102
25,028
75,860
148,770 $
36,597 $
24,401
32,227
72,115
165,340 $
29,110
19,551
31,356
84,591
164,608
Additional information regarding Peoples' deposits can be found in Note 7 Deposits of the Notes to the Consolidated
Financial Statements.
69
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings at December 31:
(Dollars in thousands)
Short-term borrowings:
2018
2017
2016
2015
2014
FHLB overnight borrowings
FHLB 90-day advances
Current portion of long-term FHLB advances
Repurchase agreements
Unamortized debt issuance cost (a)
Total short-term borrowings
$
165,000 $
110,000
30,000
51,202
(4)
356,198
62,000 $
—
30,592
116,899
—
209,491
231,000 $
—
—
74,607
—
305,607
76,000 $
—
—
84,386
—
160,386
Long-term borrowings:
FHLB advances
National market repurchase agreements
Term note payable (parent company)
Unamortized debt issuance costs (a)
Junior subordinated debt securities
102,361
—
—
—
7,283
136,939
—
—
(27)
7,107
98,282
40,000
—
(51)
6,924
66,934
40,000
—
—
6,736
15,000
—
—
73,277
—
88,277
124,714
40,000
14,369
—
—
Total long-term borrowings
179,083
267,360
(a) Unamortized debt issuance costs are related to the costs associated with the Credit Agreement with Raymond James Bank, N.A. which was a short-term
144,019
353,510 $
145,155
450,762 $
109,644
465,842 $
113,670
274,056 $
Total borrowed funds
$
obligation as of December 31, 2018.
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 includes overnight borrowings, are mainly
a function of loan growth and changes in total deposit balances. Over the recent periods, Peoples has locked in longer term
funding when rates were deemed favorable because interest rates were projected to increase in future periods. FHLB 90-day
advances are used to fund interest rate swaps and are expected to be extended every 90 days through the maturity dates of the
swaps. As of December 31, 2018, Peoples had twelve effective interest rate swaps, for an aggregate notional value of $110.0
million. Additionally, long-term FHLB advances declined $30 million due to the reclassification to short-term borrowings as
the maturity of the borrowing was less than one year.
During 2017, $50.6 million of long-term FHLB advances were reclassified to short-term borrowings due to the advances
maturing within one year. Of these reclassified borrowings, $30.6 million remained as of December 31, 2017. Short-term
retail repurchase agreements and other increased due to the reclassification of repurchase agreements from long-term
borrowings, as they mature within one year.
During 2016, Peoples restructured $20.0 million of long-term FHLB advances resulting in a $700,000 loss. Peoples
replaced these borrowings with a long-term FHLB advance which matures in 2026. Peoples also borrowed an additional
$35.0 million of long-term FHLB amortizing advances which mature between 2019 and 2031.
Peoples repaid approximately $52.1 million of long-term FHLB advances during 2015 and recorded a loss on debt
extinguishment of $520,000. Due to the interest rate environment in 2015, Peoples increased its usage of FHLB overnight
borrowings due to the reduction in long-term FHLB advances.
On March 4, 2016, Peoples entered into the RJB Credit Agreement with Raymond James Bank, which has a three-year
term and provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $15 million.
Peoples is subject to certain covenants imposed by the RJB Credit Agreement and was in compliance with all of these
covenants as of December 31, 2018. The RJB Credit Agreement matures on March 3, 2019. Peoples is in the process of
renewing this facility and expects that it will be renewed prior to its expiration.
Additional information regarding Peoples' borrowed funds can be found in Note 8 Short-Term Borrowings and Note 9
Long-Term Borrowings of the Notes to the Consolidated Financial Statements.
Capital/Stockholders’ Equity
During 2018, Peoples' total stockholders' equity increased $61.5 million, or 13%, mainly due to $40.9 million of
common shares issued in connection with the acquisition of ASB. Also contributing to the increase in total stockholders'
equity was net income of $46.3 million, which was offset by dividends paid of $21.6 million, and declines in the market
value of available-for-sale investment securities. At December 31, 2018, capital levels for both Peoples and Peoples Bank
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remained substantially higher than the minimum amounts needed to be considered "well capitalized" under banking
regulations. These higher capital levels reflect Peoples' desire to maintain a strong capital position. During the first quarter
of 2015, Peoples adopted the new Basel III regulatory capital framework, as approved by the federal banking agencies. The
adoption of this new framework modified the calculations and well-capitalized thresholds of the existing risk-based capital
ratios and added the common equity tier 1 capital ratio. Additionally, under the new rules, in order to avoid limitations on
dividends, equity repurchases and compensation, Peoples must exceed the three minimum required ratios by at least the
capital conservation buffer. These three minimum required ratios are the common equity tier 1 capital ratio, tier 1 risk-based
capital ratio and total risk-based capital ratio. The capital conservation buffer was phased in from 0.625% beginning January
1, 2016 to 2.50% on January 1, 2019. Peoples had a capital conservation buffer of 6.60% at December 31, 2018, 6.43% at
December 31, 2017, and 6.11% at December 31, 2016, compared to the fully phased in capital conservation buffer of 2.50%
required at January 1, 2019. As such, Peoples exceeded the minimum ratios, including the capital conservation buffer, at
December 31, 2018.
In 2017, Peoples' total stockholders' equity increased due to higher retained earnings offset slightly by declines in the
market value of investments.
In 2016, Peoples' total stockholders' equity increased due to higher retained earnings, offset slightly by the repurchase
279,770, or $5.0 million, of treasury shares and the slight decline in the market value of investments.
In 2015, Peoples' total stockholders' equity increased primarily due to $76.0 million of common equity issued in
connection with the NB&T acquisition.
The following table details Peoples' actual risk-based capital levels and corresponding ratios at December 31:
(Dollars in thousands)
Capital Amounts:
2018
2017
2016
2015
2014
Common equity tier 1
Tier 1
Total (tier 1 and tier 2)
Net risk-weighted assets
$
$
378,855
386,138
406,333
2,782,995
$
$
327,172
334,279
355,977
2,466,620
$
$
306,506
313,430
334,957
2,373,359
$
$
288,416
295,151
313,974
2,158,713
N/A
241,707
261,371
1,687,968
$
Capital Ratios:
Common equity tier 1
Tier 1
Total (tier 1 and tier 2)
Leverage ratio
13.61%
13.87%
14.60%
9.99%
13.26%
13.55%
14.43%
9.75%
12.91%
13.21%
14.11%
9.66%
13.36%
13.67%
14.54%
9.52%
N/A
14.32%
15.48%
9.92%
In addition to traditional capital measurements, management uses tangible capital measures to evaluate the adequacy of
Peoples' total stockholders' equity. Such ratios represent non-US GAAP financial information since their calculation removes
the impact on the Consolidated Balance Sheets of goodwill and other intangible assets acquired through acquisitions.
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.
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The following table reconciles the calculation of these non-US GAAP financial measures to amounts reported in Peoples'
Consolidated Financial Statements at December 31:
(Dollars in thousands)
Tangible Equity:
Total stockholders' equity
Less: goodwill and other intangible assets
Tangible equity
Tangible Assets:
Total assets
Less: goodwill and other intangible assets
Tangible assets
2018
2017
2016
2015
2014
$
$
520,140
162,085
358,055
$
$
458,592
144,576
314,016
$
$
435,261
146,018
289,243
$
$
419,789
149,617
270,172
$
$
340,118
109,158
230,960
$ 3,991,454
162,085
$ 3,829,369
$ 3,581,686
144,576
$ 3,437,110
$ 3,432,348
146,018
$ 3,286,330
$ 3,258,970
149,617
$ 3,109,353
$ 2,567,769
109,158
$ 2,458,611
Tangible Book Value per Common Share:
Tangible equity
$
Common shares outstanding
358,055
19,565,029
$
314,016
18,287,449
$
289,243
18,200,067
$
270,172
18,404,864
$
230,960
14,836,727
Tangible book value per common share
$
18.30
$
17.17
$
15.89
$
14.68
$
15.57
Tangible Equity to Tangible Assets Ratio:
Tangible equity
Tangible assets
358,055
$
$ 3,829,369
314,016
$
$ 3,437,110
289,243
$
$ 3,286,330
270,172
$
$ 3,109,353
230,960
$
$ 2,458,611
Tangible equity to tangible assets
9.35%
9.14%
8.80%
8.69%
9.39%
The increase in the tangible equity and tangible assets ratio for 2018, 2017, and 2016 was the result of higher retained
earnings, partially offset by the decline in the market value of available-for-sale investment securities. Also contributing to
the increase in 2018 was the common shares issued in connection with the ASB acquisition. The increase in 2016 was
partially offset by the repurchase of 279,770 treasury shares.
In 2015, the decrease in the tangible equity to tangible assets ratio compared to the ratio in 2014 was due to the impact of
assets acquired in the NB&T acquisition, as well as a reduction in retained earnings as most of the net income was paid to
common shareholders as dividends.
Future Outlook
Peoples achieved success in several areas during 2018, including the acquisition of ASB, and the announcement of the
First Prestonsburg acquisition that is expected to close in April 2019. With respect to the balance sheet, loan growth was 16%
when comparing period-end balances for December 31, 2018 to December 31, 2017, which included $208.9 million of
period-end loans at December 31, 2018 from the ASB acquisition. Deposit balances grew 8% between December 31, 2018
and December 31, 2017, with total stockholders’ equity increasing 13%. Cash dividends paid during 2018 were $1.12 per
share, with the amount for 2017 being $0.84 per share, an increase of 33%. Peoples’ book value per share and tangible book
value per share both increased, 6.0% and 6.6%, respectively, when compared to December 31, 2017. As it relates to the
income statement, underlying results were muted by elevated expenses due to the acquisition-related costs incurred
associated with the ASB acquisition, and also, but to a lesser extent, by the announcement of the First Prestonsburg
acquisition. Net interest income increased 14%, with net interest margin expanding 9 basis points between 2018 and 2017.
The efficiency ratio was 65.33% for 2018, compared to 62.20% for 2017, but when adjusted for non-core items, improved to
61.32% and 61.85%, respectively.
As noted above, Peoples announced the pending acquisition of First Prestonsburg, which is expected to close in April
2019. The projections for 2019 that are included below exclude the anticipated benefits and acquisition-related costs of the
First Prestonsburg acquisition. Peoples currently anticipates one-time acquisition-related costs of approximately $8.5 million
to $9.0 million in 2019. The majority of the one-time acquisition costs will be recognized during the second quarter of 2019.
Peoples expects to carry the momentum from 2018 into 2019 related to loan growth, fee income growth and expense
management. Key strategic priorities continue to include generating positive operating leverage, maintaining superior asset
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quality, and remaining prudent with the use of capital. Overall, Peoples' key strategic objectives are to be a steady,
dependable performer for its shareholders and to take advantage of market expansion opportunities. Peoples' long-term
strategic goals include generating results in the top quartile of performance relative to Peoples' peer group, as defined in
Peoples' proxy statement for the 2019 Annual Meeting of Shareholders, and providing returns for its shareholders superior to
those of its peers, regardless of market conditions.
Net interest income comprised 69% of Peoples' revenue for 2018, and therefore, remained a major source of revenue.
Thus, Peoples' ability to grow revenue in 2019 will be impacted by the amount of net interest income generated. During
2018, Peoples benefited from the Federal Reserve Board's decision to raise interest rates, however, there is uncertainty
regarding potential increases in 2019. Long-term rates could increase but remain more volatile than in prior years. Changes
in long-term interest rates would affect reinvestment rates within the loan and investment portfolios. At December 31, 2018,
Peoples' Consolidated Balance Sheet remained positioned for a rising rate environment, meaning that net interest income
would increase to the extent interest rates increase. However, should the yield curve flatten, Peoples would have limited
opportunities to offset the impact on asset yields with a similar reduction in funding costs. Thus, Peoples' ability to produce
meaningful loan growth and the ability to attract and retain deposits remains the key driver for improving net interest income
and margin in 2019. For 2018, net interest margin was 3.71%. Net interest margin for 2019 is expected to be around 3.75%.
Loan growth will again be the key driver in stabilizing asset yields.
Management would expect both net interest income and margin to benefit from any meaningful increase in market
interest rates based upon the current interest rate risk profile. However, it remains inherently difficult to predict and manage
the future trend of Peoples' net interest income and margin due to the uncertainty surrounding the timing and magnitude of
future interest rate changes, as well as the impact of competition for loans and deposits.
Peoples has continually sought to maintain a diversified revenue stream through its strong fee-based businesses, such as
insurance and wealth management. However, Peoples' total non-interest income excluding net gains and losses as a percent
of total revenue has decreased over the last few years. In 2015 and 2016, Peoples' total non-interest income excluding net
gains and losses comprised 33% of total revenue, compared to 32% in 2017 and 31% in 2018. In 2013, Peoples' total non-
interest income excluding net gains and losses comprised 40% of total revenue, which was the highest point in the most
recent five years. The decline in recent years has been due primarily to loan growth, coupled with the rising interest rates,
and the bank acquisitions completed since 2013, only one of which had a wealth management practice. In addition, only four
relatively small insurance agencies and one small financial advisory book of business were purchased during the same period
of time. Peoples has capabilities that many banks in its market area lack, including some of the largest national banks, which
include robust retirement plan services and comprehensive insurance products. Thus, management considers Peoples to have
a competitive advantage that directly enhances revenue growth potential. For 2019, management expects growth of between
7% and 9% in total non-interest income excluding net gains and losses.
While the primary focus will be on revenue growth, management remains disciplined with operating expenses.
Management has deployed an expense management approach to control the annual growth in total non-interest expense.
Management continues to stress the importance of generating positive operating leverage, which is having the growth rate of
revenue exceed the growth rate of expenses, on a percentage basis, year-over-year. The management of the expense growth
rate is partially achieved through having various areas within the organization attempt to "self-fund" investments, meaning
that the areas must determine cost savings opportunities prior to making additional investments. Peoples continues to have
limited control over some expenses, such as employee medical and pension costs. Peoples continues to be exposed to more
pension settlement charges given the frozen status of its defined benefit plan. For 2019, management anticipates a slightly
higher volume of settlement charges compared to 2018. This expectation is based on normal retirement activity within the
defined benefit plan, but assumes all potential distributions are lump-sum payouts. Management expects total non-interest
expense growth for 2019 to be in the mid-single digits.
Given the expected revenue and expense growth, Peoples anticipates generating positive operating leverage in 2019.
Additionally, Peoples' efficiency ratio is expected to be between 59% and 61% for 2019.
During 2018, there were some unusual items that were recorded as benefits to income tax expense. No such items are
expected in 2019, and management expects the effective tax rate to be between 19.0% and 19.5%.
As previously mentioned, net interest income growth for 2019 is largely dependent upon achieving meaningful loan
growth. Management expects period-end loan balances to increase by 6% to 8% in 2019. However, management anticipates
a slow start to the year as it relates to loan growth due to the expectation of an abnormally high level of loan payoffs in the
first quarter of 2019, and therefore, minimal growth. Within Peoples' commercial lending activity, the primary emphasis
continues to be on non-mortgage commercial lending opportunities. Consumer lending activity grew significantly during
2017 and 2018, and is expected to remain a large contributor to overall loan growth in 2019, primarily in indirect lending.
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At December 31, 2018, the investment portfolio comprised 22% of total assets. In 2019, the investment portfolio is
anticipated to decrease slightly. Management can use the cash flow generated by Peoples’ significant investment in
mortgage-backed securities to fund new loan production. Peoples will continue to seek opportunities to execute a shift in the
mix on the asset side of the balance sheet to reduce the relative size of the investment portfolio. Management may adjust the
size or composition of the investment portfolio in response to other factors, such as changes in liquidity needs and interest
rate conditions.
Peoples' funding strategy continues to emphasize growth of core deposits, such as checking and savings accounts, rather
than higher-cost deposits. Given the interest rate environment, the value of core deposits has increased and will be a greater
focus of Peoples in 2019. Additionally, based on the expected increase in earning assets, borrowed funds are expected to
increase in 2019 to the extent earning asset growth is more than deposit growth. Similar to prior years, should this occur,
management would evaluate using longer-term borrowings to match the duration of the assets being funded to minimize the
long-term interest rate risk.
Peoples remains committed to sound underwriting and prudent risk management. Management believes this credit
discipline will benefit Peoples during any future economic downturns. The long-term goal is to maintain key metrics in the
top-quartile of Peoples' peer group regardless of economic conditions. The prospects of large charge-offs and recoveries are
believed to have diminished. Management anticipates Peoples' provision for loan losses and the net charge-off rate for 2019
will normalize, with the net charge-off rate closer to its long-term historical range of 0.20% to 0.30% of average loans. For
2019, management intends to remain prudent with the level of Peoples' allowance for loan losses. However, the level will
continue to be based upon management's quarterly assessment of the losses inherent in the loan portfolio, and the amount of
any provision for loan losses should be driven mostly by a combination of the net charge-off rate and loan growth.
Peoples' capital position remains strong. Given the excess capital position and the increase in Peoples' common share
price, Peoples will continue to look for ways to effectively manage its capital, including, but not limited to, bank acquisitions
and dividends. As previously noted, cash dividends paid between 2018 and 2017 increased 33%, and management will
continue to evaluate the cash dividend. Late in 2015, Peoples approved a common share repurchase program of up to $20
million, under which Peoples purchased $5.0 million in 2016. Given the pending acquisition with First Prestonsburg, Peoples
had been unable to repurchase common shares. However, given that there is a common share repurchase program still in
place, with capacity of $15.0 million remaining, Peoples will continue to evaluate additional purchase opportunities
throughout 2019.
Management has built a culture where it is paramount that the associates take care of customers and take care of each
other. Management is committed to profitable growth of the company and building long-term shareholder value. This will
require management to remain focused on four key areas: responsible risk management; extraordinary client experience;
profitable revenue growth; and maintaining a superior workforce. Success will be achieved through disciplined execution of
strategies and providing extraordinary service to Peoples' clients and communities.
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 the ALCO, which has established an IRR management policy
that sets minimum requirements and guidelines for monitoring and managing the level of IRR. The objective of Peoples'
IRR management policy is to assist the ALCO in its evaluation of the impact of changing interest rate conditions on
74
earnings and economic value of equity, as well as assist with the implementation of strategies intended to reduce Peoples'
IRR. The management of IRR involves either maintaining or changing the level of risk exposure by changing the
repricing and maturity characteristics of the cash flows for specific assets or liabilities. Additional oversight of Peoples'
IRR is provided by the Board of Directors of Peoples Bank, who reviews and approves Peoples' IRR management policy
at least annually.
The ALCO uses various methods to assess and monitor the current level of Peoples' IRR and the impact of potential
strategies or other changes. However, the ALCO predominantly relies on simulation modeling in its overall management
of IRR since it is a dynamic measure. Simulation modeling also estimates the impact of potential changes in interest rates
and balance sheet structures on future earnings and projected economic value of equity. The methods used by ALCO to
assess IRR remain largely unchanged from those disclosed at December 31, 2017. However, during the third quarter of
2018, Peoples began using new software for modeling the balance sheet and income statement, which offers increased
capabilities and functionality better suited for Peoples given the growth of the company.
The modeling process starts with a base case simulation using the current balance sheet and current interest rates held
constant for the next twenty-four months. Alternate scenarios are prepared which simulate the impact of increasing and
decreasing market interest rates, assuming parallel yield curve shifts. Comparisons produced from the simulation data,
showing the changes in net interest income from the base interest rate scenario, illustrate the risks associated with the
current balance sheet structure. Additional simulations, when deemed appropriate or necessary, are prepared using
different interest rate scenarios from those used with the base case simulation and/or possible changes in balance sheet
composition. The additional simulations include non-parallel shifts in interest rates whereby the direction and/or
magnitude of change of short-term interest rates is different from the changes applied to longer-term interest rates.
Comparisons showing the net interest income and economic value of equity variances from the base case are provided to
the ALCO for review and discussion.
The ALCO has established limits on changes in the twelve-month net interest income forecast and the economic
value of equity from the base case. The ALCO may establish risk tolerances for other parallel and non-parallel rate
movements, as deemed necessary. The following table details the current policy limits used to manage the level of
Peoples' IRR:
Immediate and
Sustained Shift in
Interest Rates
+ / - 100 basis points
+ / - 200 basis points
+ / - 300 basis points
Net Interest
Income
-5%
-10%
-15%
Economic
Value of
Equity
-10%
-15%
-20%
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 Rates
(in Basis Points) December 31, 2018
$
Estimated Increase (Decrease) in
Net Interest Income
Estimated (Decrease) Increase in
Economic Value of Equity
December 31, 2017
December 31, 2018
300
200
100
(100)
(200) (a)
7,351
5,780
3,588
(9,075)
(23,712)
5.5 % $
4.3 %
2.7 %
(6.8)%
(17.6)%
4,114
3,368
2,252
(8,352)
NM
3.5 % $ (22,088)
(7,191)
2.9 %
3,926
1.9 %
(44,512)
(7.1)%
(130,769)
NM
(2.1)% $ (83,466)
(56,377)
(0.7)%
(27,710)
0.4 %
10,317
(4.2)%
NM
(12.4)%
December 31, 2017
(11.9)%
(8.0)%
(4.0)%
1.5 %
NM
(a) NM = not meaningful.
This table uses a standard, parallel shock analysis for assessing the IRR to net interest income and the economic
value of equity. A parallel shock means all points on the yield curve (one year, two year, three year, etc.) are directionally
changed the same amount of basis points. Management regularly assesses the impact of both increasing and decreasing
interest rates, the table above reflects the impact of upward parallel shocks, and a downward parallel shock of 100 and
200 basis points. Downward parallel shocks of 300 basis points are excluded from the table above, as they are not
probable given the current interest rate environment. As of December 31, 2017, downward parallel shocks of 200 basis
points were excluded from the table above, as they were not probable given the interest rate environment at that time. At
December 31, 2018, the weighted average rate on Peoples' non maturity deposits was roughly 28 basis points. In the
event of a parallel downward shift of 200 basis points, the expense on Peoples' non maturity deposits would reach a floor
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at zero, unable to experience the full benefit of falling rates. This floor at zero is consistent with an assumption of non-
negative deposit rates. On the asset side of the balance sheet, a significant majority of the floating rate loans (primarily
tied to prime and LIBOR) would be impacted by the downward 200 basis point shock.
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 also considers the interest rate risk impact of a bull flattener scenario in addition to analyzing the impact of
parallel yield curve shifts. The bull flattener scenario is a yield curve shift in which long-term rates decline while short-
term rates remain stable. The degree to which long-term rates fall and which maturities along the yield curve are affected
is subjective. The bull flattener scenario provides an estimate of interest rate risk which may be more realistic in unusual
interest rate environments. At December 31, 2018, the U.S. Treasury and LIBOR swap curves were relatively flat
compared to historical norms, and some inversion was present for maturities less than five years. Given the shape of
market yield curves at December 31, 2018, consideration of the bull flattener scenario yields insights which were not
captured by parallel shifts. The key insight presented by the bull flattener scenario highlights the risk to net interest
income when long term yields fall while short-term rates remain constant. In such a scenario, Peoples’ funding costs,
which are correlated with short-term rates, remain constant, while asset yields correlated with long-term rates decline.
During 2018, Peoples' Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of
potential impact on net interest income. The table illustrates this point as changes to net interest income increase in the
rising rate scenarios. The increase in asset sensitivity from December 31, 2017 was largely attributable to the 90-day
advances Peoples entered into to fund the interest rate swaps, effectively reducing the interest rate sensitivity of the
liabilities on the balance sheet. However, there was a slight reduction of asset sensitivity as a result of the ASB
acquisition. While parallel interest rate shock scenarios are useful in accessing the level of IRR inherent in the balance
sheet, interest rates typically move in a nonparallel 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
Board increasing short-term interest rates in the future could be offset by an inverse movement in long-term rates.
The table also illustrates a significant reduction in long-term interest rate risk as is evidenced by the drop in the
negative impact of rising interest rates on economic value of equity. The reduction is largely attributable to the increased
functionality of the new interest rate risk model employed by Peoples during 2018, primarily the ability to apply enhanced
pre-payment estimates on loans.
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 December 31, 2018, Peoples had twelve interest rate swap contracts,
with an aggregate notional value of $110.0 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.
An asset/liability model, used to produce the analysis above, requires assumptions to be made such as prepayment
rates on interest-earning assets and repricing impact on non-maturity deposits. These business assumptions are based on
business plans, economic and market trends, and available industry data. Management believes that its methodology for
developing such assumptions is reasonable; however, there can be no assurance that modeled results will be achieved.
Liquidity
In addition to IRR management, another major objective of the ALCO is to maintain sufficient levels of liquidity.
The ALCO defines liquidity as the ability to meet anticipated and unanticipated operating cash needs, loan demand and
deposit withdrawals without incurring a sustained negative impact on profitability.
A primary source of liquidity for Peoples is deposits. Liquidity is also provided by cash generated from earning
assets such as maturities, calls, and principal and interest payments from loans and investment securities. Peoples also
uses various wholesale funding sources to supplement funding from customer deposits. These external sources provide
Peoples with the ability to obtain large quantities of funds in a relatively short time period in the event of sudden
unanticipated cash needs. However, an over-utilization of external funding sources can expose Peoples to greater
liquidity risk, as these external sources may not be accessible during times of market stress. Additionally, Peoples may be
exposed to the risk associated with providing excess collateral to external funding providers, commonly referred to as
76
counterparty risk. As a result, the ALCO's liquidity management policy sets limits on the net liquidity position and the
concentration of non-core funding sources, which includes wholesale funding and brokered deposits.
In addition to external sources of funding, Peoples considers certain types of deposits to be less stable or "volatile
funding." These deposits include special money market products, large CDs and public funds. Peoples has established
volatility factors for these various deposit products, and the liquidity management policy establishes a limit on the total
level of volatile funding. Additionally, Peoples measures the maturities of external sources of funding for periods of one
month, three months, six months and twelve months, and has established policy limits for the amounts maturing in each of
these periods. The purpose of these limits is to minimize exposure to what is commonly termed rollover risk.
An additional strategy used by Peoples in the management of liquidity risk is maintaining a targeted level of liquid
assets. These are assets that can be converted into cash in a relatively short period of time. Management defines liquid
assets as unencumbered cash (including cash on deposit at the FRB), and the market value of U.S. government and
agency securities that are not pledged. Excluded from this definition are pledged securities, non-government and agency
securities, municipal securities and loans. Management has established a minimum level of liquid assets in the liquidity
management policy, which is expressed as a percentage of total loans and unfunded loan commitments. Peoples also has
established a policy limit around the level of liquefiable assets also expressed as a percentage of total loans and unfunded
loan commitments. Liquefiable assets are defined as liquid assets plus the market value of unpledged securities not
included in the liquid asset measurement. Peoples remained within these two parameters throughout 2018.
An essential element in the management of liquidity risk is a forecast of the sources and uses of anticipated cash
flows. On a monthly basis, Peoples forecasts sources and uses of cash for the next twelve months. To assist in the
management of liquidity, management has established a liquidity coverage ratio, which is defined as the total sources of
cash divided by the total uses of cash. A ratio of greater than 1.0 times indicates that forecasted sources of cash are
adequate to fund forecasted uses of cash. The liquidity management policy establishes a minimum limit of 1.0 times. As
of December 31, 2018, Peoples had a ratio of 1.5 times, which was within policy limits. Peoples also forecasts secondary
or contingent sources of cash, and this includes external sources of funding and liquid assets. These sources of cash
would be required if and when the forecasted liquidity coverage ratio dropped below the policy limit of 1.0 times. An
additional liquidity measurement used by management includes the total forecasted sources of cash and the contingent
sources of cash divided by the forecasted uses of cash. Management has established a minimum ratio of 3.0 times for this
liquidity management policy limit. As of December 31, 2018, Peoples had a ratio of 3.8 times, which was within policy
limits.
Disruptions in the sources and uses of cash can occur which can drastically alter the actual cash flows and negatively
impact Peoples' ability to access internal and external sources of cash. Such disruptions might occur due to increased
withdrawals of deposits, increases in the funding required for loan commitments, a decrease in the ability to access
external funding sources and other factors that would increase the need for funding and limit Peoples' ability to access
needed funds. As a result, Peoples maintains a liquidity contingency funding plan ("LCFP") that considers various
degrees of disruptions and develops action plans around these scenarios.
Peoples' LCFP identifies scenarios where funding disruptions might occur and creates scenarios of varying degrees of
severity. The disruptions considered include an increase in funding of unfunded loan commitments, unanticipated
withdrawals of deposits, decreases in the renewal of maturing CDs and reductions in cash earnings. Additionally, the
LCFP creates stress scenarios where access to external funding sources, or contingency funding, is suddenly limited,
which includes a significant increase in the margin requirements where securities or loans are pledged, limited access to
funding from other banks and limited access to funding from the FHLB and the FRB. Peoples' LCFP scenarios include a
base scenario, a mild stress scenario, a moderate stress scenario and a severe stress scenario. Each of these is defined as
to the severity, and action plans are developed around each.
Liquidity management also requires the monitoring of risk indicators that may alert the ALCO to a developing
liquidity situation or crisis. Early detection of stress scenarios allows Peoples to take actions to help mitigate the impact
to Peoples Bank's business operations. The LCFP contains various indicators, termed key risk indicators ("KRI's") that
are monitored on a monthly basis, at a minimum. The KRI's include both internal and external indicators and include loan
delinquency levels, criticized and classified loan levels, non-performing loans to loans and to total assets, the total loan to
total deposit ratio, the level of net non-core funding dependence, the level of contingency funding sources, the liquidity
coverage ratio, changes in regulatory capital levels, forecasted operating loss and negative media concerning Peoples,
irrational competitor pricing that persists, and an increase in rates for external funding sources. The LCFP establishes
levels that define each of these KRI's under base, mild, moderate and severe scenarios.
The LCFP is reviewed and updated at least on an annual basis by the ALCO and Peoples Bank's Board of Directors.
Additionally, testing of the LCFP is required on an annual basis. Various stress scenarios and the related actions are
simulated according to the LCFP. The results are reviewed and discussed, and changes or revisions are made to the LCFP
77
accordingly. Additionally, every two years, the LCFP is subjected to a third-party review for effectiveness and regulatory
compliance.
Overall, management believes the current balance of cash and cash equivalents, and anticipated cash flows from the
investment portfolio, along with the availability of other funding sources, will allow Peoples to meet anticipated cash
obligations, as well as special needs and off-balance sheet commitments.
Off-Balance Sheet Activities and Contractual Obligations
Peoples routinely engages in activities that involve, to varying degrees, elements of risk that are not reflected in whole or
in part in the Consolidated Financial Statements. These activities are part of Peoples' normal course of business and include
traditional off-balance sheet credit-related financial instruments, interest rate contracts and commitments to make additional
capital contributions in low-income housing tax credit investments.
The following is a summary of Peoples’ significant off-balance sheet activities and contractual obligations. Detailed
information regarding these activities and obligations can be found in the Notes to the Consolidated Financial Statements as
follows:
Activity or Obligation
Off-balance sheet credit-related financial instruments
Operating lease obligations
Long-term borrowing obligations
Note
15
5
9
Traditional off-balance sheet credit-related financial instruments are primarily commitments to extend credit and standby
letters of credit. These activities are necessary to meet the financing needs of customers and could require Peoples to make
cash payments to third parties in the event certain specified future events occur. The contractual amounts represent the extent
of Peoples’ exposure in these off-balance sheet activities. However, since certain off-balance sheet commitments, particularly
standby letters of credit, are expected to expire or only partially be used, the total amount of commitments does not
necessarily represent future cash requirements.
Peoples continues to lease certain facilities and equipment under noncancellable operating leases with terms providing
for fixed monthly payments over periods generally ranging from two to ten years. Several of Peoples’ leased facilities are
inside retail shopping centers or office buildings and, as a result, are not available for purchase. Management believes these
leased facilities increase Peoples’ visibility within its markets and afford sales associates additional access to current and
potential clients.
For certain acquisitions, often those involving insurance businesses and wealth management books of business, a portion
of the consideration is contingent upon revenue metrics being achieved. US GAAP requires that the amounts be recorded
upon acquisition based on the best estimate of the future amounts to be paid at the time of acquisition. Any subsequent
adjustment to the estimate is recorded in earnings. Based on the acquisitions completed to date, management does not expect
contingent consideration to have a material impact on Peoples' future performance.
The following table details the aggregate amount of future payments Peoples is required to make under certain
contractual obligations as of December 31, 2018:
(Dollars in thousands)
Time deposits
Long-term borrowings (a)
Operating leases
Contingent consideration related to acquisitions (b)
$
Total
$
(a) Amounts reflect solely the minimum required principal payments.
(b) Amounts assume projected revenue metrics are achieved.
Payments due by period
Total
658,189 $
109,644
3,310
717
771,860 $
Less than 1
year
432,270 $
3,512
975
717
437,474 $
1-3 years
3-5 years
More than
5 years
177,685 $
47,543
1,362
—
226,590 $
47,043 $
17,678
750
—
65,471 $
1,191
40,911
223
—
42,325
Management does not anticipate that Peoples’ current off-balance sheet activities will have a material impact on its future
results of operations and financial condition based on historical experience and recent trends.
78
Effects of Inflation on Financial Statements
Substantially all of Peoples’ assets relate to banking and are monetary in nature. As a result, inflation does not impact
Peoples to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period
of rising prices, a net monetary asset position results in a loss in purchasing power and conversely a net monetary liability
position results in an increase in purchasing power. The opposite would be true during a period of decreasing prices. In the
banking industry, monetary assets typically exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation has had little impact on Peoples’ net assets.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the section captioned "Interest Rate Sensitivity and Liquidity" under "ITEM 7 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K,
which is incorporated herein by reference.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and accompanying notes, and the report of independent registered public
accounting firm, are set forth immediately following "ITEM 9B OTHER INFORMATION" of this Form 10-K.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
No response required.
ITEM 9A 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 Exchange Act) as of December 31, 2018. Based upon that evaluation,
Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer
have concluded that:
(a)
(b)
(c)
information required to be disclosed by Peoples in this Form 10-K 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;
information required to be disclosed by Peoples in this Form 10-K 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
Peoples’ disclosure controls and procedures were effective as of the end of the period covered by this Form
10-K.
Management's Annual Report on Internal Control Over Financial Reporting
The "Report of Management's Assessment of Internal Control Over Financial Reporting” required by Item 308(a) of SEC
Regulation S-K is included on page 81 of this Form 10-K.
Attestation Report of Independent Registered Public Accounting Firm
The “Report of Independent Registered Public Accounting Firm on Effectiveness of Internal Control Over Financial
Reporting” required by Item 308(b) of SEC Regulation S-K is included on page 82 of this Form 10-K.
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 the fiscal quarter ended December 31, 2018, that have materially affected, or are
reasonably likely to materially affect, Peoples’ internal control over financial reporting.
79
ITEM 9B OTHER INFORMATION
None.
80
Report of Management's Assessment of Internal Control Over Financial Reporting
Peoples' management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Peoples' internal control
over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation, integrity, and fair presentation of Peoples' Consolidated Financial Statements for external purposes in
accordance with United States generally accepted accounting principles.
With the supervision and participation of its President and Chief Executive Officer and its Executive Vice President, Chief
Financial Officer and Treasurer, management evaluated the effectiveness of Peoples' internal control over financial reporting
as of December 31, 2018, using the Internal Control-Integrated Framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework).
No matter how well designed, internal control over financial reporting may not prevent or detect all misstatements.
Projection of the evaluation of effectiveness to future periods is subject to risks, including but not limited to (a) controls may
become inadequate due to changes in conditions; (b) a deterioration may occur in the degree of compliance with policies or
procedures; and (c) the possibility of control circumvention or override occurring, any of which may lead to misstatements
due to undetected error or fraud. Effective internal control over financial reporting can provide only a reasonable assurance
with respect to financial statement preparation and financial reporting.
Management assessed the effectiveness of Peoples' internal control over financial reporting as of December 31, 2018, and,
based on this assessment, has concluded Peoples' internal control over financial reporting was effective at a reasonable
assurance level as of that date.
Peoples' independent registered public accounting firm, Ernst & Young LLP has audited the Consolidated Financial
Statements included in this Annual Report on Form 10-K and has issued an attestation report on Peoples' internal control over
financial reporting.
By: /s/ CHARLES W. SULERZYSKI
Charles W. Sulerzyski
President and Chief Executive Officer
By: /s/ JOHN C. ROGERS
John C. Rogers
Executive Vice President,
Chief Financial Officer and Treasurer
81
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Peoples Bancorp Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Peoples Bancorp Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Peoples Bancorp Inc. and subsidiaries
(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31,
2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of Peoples Bancorp Inc. and subsidiaries as of December 31, 2018 and 2017, and
the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2018, and the related notes and our report dated March 1, 2019 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of
Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 1, 2019
82
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Peoples Bancorp Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Peoples Bancorp Inc. and subsidiaries (the Company) as
of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) and our report dated March 1, 2019 expressed an unqualified opinion thereon.
Basis of opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risk of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audit also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1995.
Charleston, West Virginia
March 1, 2019
83
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Assets
Cash and cash equivalents:
Cash and due from banks
Interest-bearing deposits in other banks
Total cash and cash equivalents
Available-for-sale investment securities, at fair value (amortized cost of
$804,655 at December 31, 2018 and $797,732 at December 31, 2017) (a)
Held-to-maturity investment securities, at amortized cost (fair value of $36,963
at December 31, 2018 and $41,213 at December 31, 2017)
Other investment securities (a)
Total investment securities
Loans, net of deferred fees and costs (b)
Allowance for loan losses
Net loans
Loans held for sale
Bank premises and equipment, net of accumulated depreciation
Bank owned life insurance
Goodwill
Other intangible assets
Other assets
Total assets
Liabilities
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Long-term borrowings
Accrued expenses and other liabilities (c)
Total liabilities
Stockholders’ Equity
Preferred stock, no par value, 50,000 shares authorized, no shares issued at
December 31, 2018 and December 31, 2017
Common stock, no par value, 24,000,000 shares authorized, 20,124,378 shares
issued at December 31, 2018 and 18,952,385 shares issued at December 31,
2017, including shares in treasury
Retained earnings (a)(c)(d)
Accumulated other comprehensive loss, net of deferred income taxes (a)(d)
Treasury stock, at cost, 601,289 shares at December 31, 2018 and 702,449
shares at December 31, 2017
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
December 31,
2018
2017
61,775 $
15,837
77,612
58,121
14,073
72,194
791,891
795,187
36,961
40,928
42,985
871,837
2,728,778
(20,195)
2,708,583
5,470
56,542
68,934
151,245
10,840
40,391
3,991,454 $
607,877 $
2,347,588
2,955,465
356,198
109,644
50,007
3,471,314
38,371
874,486
2,357,137
(18,793)
2,338,344
2,510
52,510
62,176
133,111
11,465
34,890
3,581,686
556,010
2,174,320
2,730,330
209,491
144,019
39,254
3,123,094
—
—
386,814
345,412
160,346
(12,933)
(14,087)
134,362
(5,215)
(15,967)
520,140
3,991,454 $
458,592
3,581,686
$
(a) As of January 1, 2018, Peoples adopted Accounting Standard Update ("ASU") 2016-01, resulting in the reclassification of equity investment securities (including those
held in participant accounts in the Peoples Bancorp Inc. Nonqualified Deferred Compensation Plan) from available-for-sale investment securities to other investment
securities. At December 31, 2017, $7.8 million of equity investment securities were included in available-for-sale investment securities. Also on January 1, 2018, ASU
2016-01 resulted in Peoples reclassifying $5.0 million in net unrealized gains on equity securities from accumulated other comprehensive loss to retained earnings.
(b) Also referred to throughout this document as "total loans."
(c) As of January 1, 2018, Peoples adopted ASU 2014-09, which resulted in a reduction to retained earnings of $3.7 million, net of statutory federal corporate income taxes,
and an increase in accrued expenses and other liabilities of $4.7 million, to reflect uncompleted contracts in the initial application of the guidance.
(d) As of December 31, 2017, Peoples early adopted ASU 2018-02, reclassifying income tax effects of the Tax Cuts and Jobs Act of $0.9 million from accumulated other
comprehensive loss to retained earnings.
See Notes to the Consolidated Financial Statements
84
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Interest income:
Interest and fees on loans
Interest and dividends on taxable investment securities
Interest on tax-exempt investment securities
Other interest income
Total interest income
Interest expense:
Interest on deposits
Interest on short-term borrowings
Interest on long-term borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Insurance income
Trust and investment income
Electronic banking income
Deposit account service charges
Mortgage banking income
Bank owned life insurance income
Commercial loan swap fees
Net (loss) gain on investment securities
Net loss on asset disposals and other transactions
Other non-interest income (a)
Total non-interest income
Non-interest expense:
Salaries and employee benefit costs
Net occupancy and equipment expense
Professional fees
Electronic banking expense
Data processing and software expense
Amortization of other intangible assets
Franchise tax expense
Marketing expense
FDIC insurance expense
Foreclosed real estate and other loan expenses
Communication expense
Other non-interest expense
Total non-interest expense
Income before income taxes
Income tax expense
Net income
207,000 for the year ended December 31, 2018.
See Notes to the Consolidated Financial Statements
85
2018
2017
2016
$
125,263 $
23,132
2,467
402
151,264
103,043 $
20,415
2,923
144
126,525
13,705
5,238
2,709
21,652
129,612
5,448
124,164
14,812
12,543
11,477
9,778
3,333
1,955
681
(146)
(334)
2,655
56,754
7,154
1,534
4,460
13,148
113,377
3,772
109,605
14,204
11,558
10,358
9,614
1,872
1,950
1,232
2,983
(63)
1,865
55,573
93,845
18,423
3,126
50
115,444
5,942
508
4,129
10,579
104,865
3,539
101,326
13,846
10,589
10,353
10,662
1,304
1,414
1,076
930
(1,133)
1,826
50,867
69,308
11,272
7,862
6,057
5,419
3,338
2,771
1,962
1,546
1,431
1,265
13,746
125,977
54,941
8,686
46,255 $
2.42 $
2.41 $
$
$
$
60,276
10,633
6,575
5,874
4,441
3,516
2,246
1,714
1,816
873
1,475
8,536
107,975
57,203
18,732
38,471 $
2.12 $
2.10 $
57,433
10,735
7,436
5,992
3,763
4,030
2,192
1,594
1,899
859
2,261
8,717
106,911
45,282
14,125
31,157
1.72
1.71
18,013,693
18,155,463
Earnings per common share - basic
Earnings per common share - diluted
Weighted-average number of common shares outstanding - basic
Weighted-average number of common shares outstanding - diluted
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in realized and unrealized gains on equity investment securities recorded in other non-interest income of
18,991,768
19,122,260
18,050,189
18,208,684
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income
Other comprehensive (loss) income:
Available-for-sale investment securities:
Gross unrealized holding loss arising in the period
Related tax benefit
Less: reclassification adjustment for net (loss) gain included in net income
Related tax benefit (expense)
Amounts reclassified out of accumulated other comprehensive loss per
ASU 2018-02 (a)
Amounts reclassified out of accumulated other comprehensive loss per
ASU 2016-01 (b)
Net effect on other comprehensive (loss) income
Defined benefit plans:
Net gain (loss) arising during the period
Related tax (expense) benefit
Amortization of unrecognized loss and service cost on benefit plans
Related tax expense
Recognition of loss due to settlement and curtailment
Related tax expense
Amounts reclassified out of accumulated other comprehensive loss per
ASU 2018-02 (a)
Net effect on other comprehensive income (loss)
Cash flow hedges:
Net (loss) gain arising during the period
Related tax benefit (expense)
2018
2017
2016
$
46,255 $
38,471 $
31,157
(3,910)
821
(146)
31
(555)
195
2,983
(1,044)
(2,590)
906
930
(326)
—
(370)
—
(5,020)
(7,994)
—
(2,669)
—
(2,288)
325
(69)
99
(21)
267
(56)
—
545
(341)
72
(616)
216
96
(34)
242
(85)
(754)
(935)
(395)
138
(232)
81
89
(31)
—
—
—
(93)
1,824
(638)
Amounts reclassified out of accumulated other comprehensive loss per
ASU 2018-02 (a)
Net effect on other comprehensive (loss) income
Total other comprehensive loss, net of tax
—
1,186
(1,195)
29,962
Total comprehensive income
(a) As of December 31, 2017, Peoples early adopted ASU 2018-02, reclassifying income tax effects of the Tax Cuts and Jobs Act of $0.9 million from accumulated other
—
(269)
(7,718)
38,537 $
200
(57)
(3,661)
34,810 $
$
comprehensive loss to retained earnings.
(b) 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 Consolidated Financial Statements
86
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Balance, December 31, 2015
Net income
Other comprehensive loss, net of tax
Cash dividends declared
Exercise of stock appreciation rights
Reissuance of treasury stock for common stock awards
Tax benefit from exercise of stock options
Reissuance of treasury stock for deferred compensation plan for
Boards of Directors
Repurchase of treasury stock in connection with employee
incentive plan and under compensation plan for Boards of
Directors
Common shares repurchased under share repurchase program
Common shares issued under dividend reinvestment plan
Common shares issued under compensation plan for Board of
Directors
Stock-based compensation
Common shares issued under employee stock purchase plan
Balance, December 31, 2016
Net income
Other comprehensive loss, net of tax (a)
Cash dividends declared
Exercise of stock appreciation rights
Reissuance of treasury stock for common stock awards
Reissuance of treasury stock for deferred compensation plan for
Boards of Directors
Repurchase of treasury stock in connection with employee
incentive plan and under compensation plan for Boards of
Directors
Common shares issued under dividend reinvestment plan
Common shares issued under compensation plan for Board of
Directors
Stock-based compensation
Common shares issued under employee stock purchase plan
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Total
Stockholders'
Equity
$ 343,948 $
90,790 $
(359) $
(14,590) $
419,789
—
—
31,157
—
— (11,653)
(40)
(1,297)
26
—
—
—
437
(18)
1,332
16
—
—
—
—
—
—
—
—
—
—
—
(1,195)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
40
1,297
—
232
31,157
(1,195)
(11,653)
—
—
26
232
(515)
(515)
(4,965)
(4,965)
—
263
—
355
437
245
1,332
371
$ 344,404 $ 110,294 $
(1,554) $
(17,883) $
435,261
—
—
38,471
924
— (15,327)
(6)
(1,455)
—
—
525
88
1,747
109
—
—
—
—
—
—
—
—
—
(3,661)
—
—
—
—
—
—
—
—
—
—
—
—
6
1,455
500
38,471
(2,737)
(15,327)
—
—
500
(508)
(508)
—
207
—
256
525
295
1,747
365
Balance, December 31, 2017
$ 345,412 $ 134,362 $
(5,215) $
(15,967) $
458,592
87
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
(Dollars in thousands)
Net income
Other comprehensive loss, net of tax (b)
Cash dividends declared
Exercise of stock appreciation rights
Reissuance of treasury stock for common stock awards
Reissuance of treasury stock for deferred compensation plan for
Boards of Directors
Repurchase of treasury stock in connection with employee
incentive plan and under compensation plan for Boards of
Directors
Common shares issued under dividend reinvestment plan
Common shares issued under compensation plan for Board of
Directors
Stock-based compensation
Common shares issued under employee stock purchase plan
Issuance of common shares related to acquisition of ASB Financial
Corp. ("ASB")
Amounts reclassified out of retained earnings, net of tax, per ASU
2014-09 (c)
Balance, December 31, 2018
Common
Stock
Retained
Earnings
—
—
46,255
5,020
— (21,578)
(2)
(2,748)
—
—
668
104
2,359
123
40,898
—
—
—
—
—
—
—
—
—
—
(3,713)
Accumulated
Other
Comprehensive
Loss
—
(7,718)
—
—
—
—
—
—
—
—
—
—
—
Treasury
Stock
Total
Stockholders'
Equity
—
—
—
2
2,748
46
(1,380)
—
194
—
270
—
—
46,255
(2,698)
(21,578)
—
—
46
(1,380)
668
298
2,359
393
40,898
(3,713)
$ 386,814 $ 160,346 $
(12,933) $
(14,087) $
520,140
(a) As of December 31, 2017, Peoples early adopted ASU 2018-02, reclassifying income tax effects of the Tax Cuts and Jobs Act of $0.9 million from accumulated other comprehensive
loss to retained earnings.
(b) 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.
(c) As of January 1, 2018, Peoples adopted ASU 2014-09, which resulted in a reduction to retained earnings of $3.7 million, net of statutory federal corporate income taxes, and an
increase in accrued expenses and other liabilities of $4.7 million, to reflect uncompleted contracts in the initial application of the guidance.
See Notes to the Consolidated Financial Statements
88
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2018
2017
2016
$
46,255 $
38,471 $
31,157
Depreciation, amortization and accretion, net
Provision for loan losses
Bank owned life insurance income
Net loss (gain) on investment securities
Loss on debt extinguishment
Fair value adjustment on equity investment securities
Loans originated for sale
Proceeds from sales of loans
Net gains on sales of loans
Deferred income tax benefit
Increase in accrued expenses
Increase in interest receivable
Excess tax benefit from share-based payments
(Decrease) increase in other assets
Other, net
Net cash provided by operating activities
Investing activities:
Available-for-sale investment securities:
Purchases
Proceeds from sales
Proceeds from principal payments, calls and prepayments
Held-to-maturity investment securities:
Purchases
Proceeds from principal payments
Other investment securities:
Purchases
Proceeds from sales
Net increase in loans held for investment
Net expenditures for premises and equipment
Proceeds from sales of other real estate owned
Purchase of bank owned life insurance
Business acquisitions, net of cash received
(Investment in) return of limited partnership and tax credit funds
Net cash used in investing activities
Financing activities:
Net increase (decrease) in non-interest-bearing deposits
Net increase (decrease) in interest-bearing deposits
Net increase (decrease) in short-term borrowings
Proceeds from long-term borrowings
Payments on long-term borrowings
Cash dividends paid
Repurchase of treasury stock under share repurchase program
Repurchase of treasury stock in connection with employee incentive program and
compensation plan for Boards of Directors to be held as treasury stock
Proceeds from issuance of common shares
Contingent consideration payments made after a business combination
Excess tax benefit from share-based payments
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
89
18,204
5,448
(1,955)
146
13
(207)
(123,134)
124,796
(2,846)
(309)
147
(854)
—
(533)
10,072
75,243
18,142
3,772
(1,950)
(2,983)
—
—
(63,730)
66,025
(1,445)
(2,779)
950
(807)
—
6,050
1,311
61,027
19,169
3,539
(1,414)
(930)
707
—
(69,123)
67,421
(1,047)
(2,462)
3,972
(1,278)
(26)
6,974
3,999
60,658
(137,818)
14,489
122,986
(180,109)
8,355
143,000
(166,241)
30,734
127,824
—
4,281
(1,310)
3,142
—
2,167
(2,689)
7,622
(134,071)
(4,531)
278
—
4,695
(5,398)
(130,156)
22,380
3,449
61,883
—
(4,591)
(20,915)
—
—
—
(130,397)
(4,865)
556
—
(1,069)
9
(162,688)
(178,411)
398,991
(146,721)
55,000
(5,738)
(14,706)
—
—
—
(148,951)
(5,436)
240
(35,000)
(244)
(3,451)
(198,358)
16,482
(42,655)
145,221
55,000
(24,361)
(11,173)
(4,965)
(1,380)
25
(520)
—
60,331
5,418
72,194
77,612 $
(508)
9
(207)
—
107,709
6,048
66,146
72,194 $
(515)
18
(347)
26
132,731
(4,969)
71,115
66,146
$
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental cash flow information:
Interest paid
Income taxes paid
Supplemental noncash disclosures:
Transfers from loans to other real estate owned
Available-for-sale investment security sales settled in a subsequent period
$
$
$
$
19,920 $
6,135 $
13,001 $
14,036 $
10,756
11,890
90 $
— $
219 $
229 $
202
—
See Notes to the Consolidated Financial Statements
90
PEOPLES BANCORP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Peoples Bancorp Inc. is a financial holding company that offers a full range of financial services and products, including
commercial and retail banking, insurance, brokerage and trust services, through its principal operating subsidiary, Peoples Bank.
Services are provided through 81 financial service locations, including 72 full-service bank branches and 71 automated teller
machines in Ohio, West Virginia and Kentucky, as well as internet-based and mobile banking.
Note 1 Summary of Significant Accounting Policies
The accounting and reporting policies of Peoples Bancorp Inc. and 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.) conform to generally accepted accounting principles in the United States of America ("US GAAP") and to
general practices within the banking 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 differ from those estimates. Certain items in prior financial statements have been
reclassified to conform to the current presentation, which had no impact on net income, total comprehensive income, net cash
provided by operating activities or total stockholders' equity.
The following is a summary of significant accounting policies followed in the preparation of the financial statements:
Consolidation: Peoples' Consolidated Financial Statements include subsidiaries in which Peoples has a controlling
financial interest, principally defined as owning a voting interest of greater than 50%. In addition, entities not controlled
by voting interest or in which the equity investors do not bear the residual economic risks, but for which Peoples is the
primary beneficiary are also consolidated.
The Consolidated Financial Statements include the accounts of Peoples and its consolidated subsidiaries, Peoples
Bank and Peoples Investment Company, along with their wholly-owned subsidiaries, and NB&T Statutory Trust III, for
which Peoples holds all of the common securities. All significant intercompany accounts and transactions have been
eliminated.
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. Peoples had no restricted funds at December 31, 2018 and $1.0 million of restricted funds at December 31,
2017, in interest-bearing deposits in other banks. which were being used as collateral and not available for withdrawal.
Investment Securities: Investment securities are recorded initially at cost, which includes premiums and discounts if
purchased at other than par or face value. Peoples amortizes premiums and accretes discounts as an adjustment to interest
income on a level yield basis. The cost of investment securities sold, and any resulting gain or loss, is based on the
specific identification method and recognized as of the trade date.
Management determines the appropriate classification of investment securities at the time of purchase. Held-to-
maturity securities are those securities that Peoples has the positive intent and ability to hold to maturity and are recorded
at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in
response to Peoples' liquidity needs, changes in market interest rates, and asset-liability management strategies, among
other considerations. Available-for-sale securities are reported at fair value, with unrealized gains and losses reported in
total stockholders' equity as a separate component of accumulated other comprehensive income or loss, net of applicable
deferred income taxes.
Certain restricted equity investment securities that do not have readily determinable fair values and for which Peoples
does not exercise significant influence, are carried at cost. These cost method securities are reported in other investment
securities on the Consolidated Balance Sheets and consist primarily of shares of the Federal Home Loan Bank of
Cincinnati (the "FHLB") and the Federal Reserve Bank of Cleveland (the "FRB").
Management systematically evaluates investment securities for other-than-temporary declines in fair value on a
quarterly basis. This analysis requires management to consider various factors, which include (1) the duration and
magnitude of the decline in value, (2) the financial condition of the issuer or issuers, and (3) the structure of the security.
An impairment loss is recognized in earnings only when (1) Peoples intends to sell the debt security, (2) it is more
likely than not that Peoples will be required to sell the security before recovery of its amortized cost basis, or (3) Peoples
91
does not expect to recover the entire amortized cost basis of the security. In situations where Peoples intends to sell or
when it is more likely than not that Peoples will be required to sell the security, the entire impairment loss must be
recognized in earnings. In all other situations, only the portion of the impairment loss representing the credit loss must be
recognized in earnings, with the remaining portion being recognized in total stockholders' equity as a component of
accumulated other comprehensive income, net of applicable deferred income taxes.
Fair Value Measurements: The measurement of fair value under US GAAP uses a hierarchy intended to maximize the
use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to
measure the fair value of assets and liabilities as follows:
Level 1: Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S.
Treasury and other U.S. government and agency securities actively traded in over-the-counter markets.
Level 2: Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in
less active markets, or other observable inputs that can be corroborated by observable market data; also includes
derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived
principally from, or corroborated by, observable market data. This category generally includes certain U.S.
government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans
held for sale.
Level 3: Unobservable inputs supported by little or no market activity for financial instruments whose value is
determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments
for which the determination of fair value requires significant management judgment or estimation; also includes
observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category
generally includes certain private equity investments, retained interests from securitizations, and certain collateralized
debt obligations.
Securities Sold Under Agreements to Repurchase ("Repurchase Agreements"): Peoples enters into Repurchase
Agreements with customers and other financial service companies, which are considered financings. As such, these
obligations are recorded as a liability on the Consolidated Balance Sheets and disclosed in Note 8 Short-Term Borrowings
and Note 9 Long-Term Borrowings, as appropriate. Securities pledged as collateral under Repurchase Agreements are
included in investment securities on the Consolidated Balance Sheets and are disclosed in Note 3 Investment Securities.
The fair value of the collateral pledged to a third party is continually monitored and additional collateral is pledged or
returned, as deemed appropriate.
Loans: Loans originated that Peoples has the positive intent and ability to hold for the foreseeable future or to maturity or
payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, charge-offs and an allowance
for loan losses. The foreseeable future is based upon current market conditions and business strategies, as well as balance
sheet management and liquidity. As the conditions change, so may management's view of the foreseeable future. Net
deferred loan origination costs were $9.5 million and $7.5 million at December 31, 2018 and 2017, respectively.
A loan is considered impaired when information and events indicate it is probable that collection of all contractual
principal and interest payments is doubtful. Impairment is evaluated collectively for smaller balance loans of a similar
nature, primarily consumer and residential real estate loans, and on an individual loan basis for all loans to borrowers with
an aggregate unpaid principal balance in excess of $1 million, for which an annual evaluation is performed for possible
credit deterioration. This loan review process provides Peoples with opportunities to identify potential problem loans and
take proactive actions to assure repayment of the loan or minimize Peoples' risk of loss, such as reviewing the relationship
more frequently based upon the loan quality rating and aggregate debt outstanding. Upon detection of the reduced ability
of a borrower to meet cash flow obligations, the loan is reviewed for possible downgrade or placement on nonaccrual
status. Loan relationships whose aggregate debt to Peoples is equal to or less than $1 million are reviewed on an event
driven basis. Peoples also completes evaluation procedures for a selection of larger loan relationships on a quarterly
basis. Triggers for review include knowledge of adverse events affecting the business, receipt of financial statements
indicating deteriorating credit quality and other events. Peoples typically places any loan deemed to be impaired on
nonaccrual status and allocates a specific portion of the allowance for loan losses, if necessary, to reduce the net carrying
value of the loan to its estimated net realizable value. Impaired loans, or portions thereof, are charged off when deemed
uncollectable. Upon detection of the reduced ability of a borrower to meet cash flow obligations, consumer and
residential real estate loans typically are charged down to the net realizable value, with the residual balance placed on
nonaccrual status.
Loans acquired in a business combination that have evidence of deterioration of credit quality, commonly referred to
as "purchased credit impaired" loans, since origination and for which it is probable, at acquisition, that Peoples will be
unable to collect all contractually required payments are initially recorded at fair value (the present value of the amounts
expected to be collected) with no valuation allowance. The difference between the undiscounted cash flows expected at
92
acquisition and the investment in the loan is recognized as interest income on a level yield method over the life of the
loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at
acquisition are not recognized. Over the life of these acquired loans, management continues to monitor each acquired
purchased credit impaired loan portfolio for changes in credit quality. Increases in expected cash flows subsequent to
acquisition are recognized prospectively over the remaining life of the acquired purchased credit impaired loans as a yield
adjustment on the loans. Subsequent decreases in expected cash flows are recognized as an impairment, with the amount
of the expected loss included in provision for loan losses in the period in which it is identified, and establishes an
allowance for loan losses for the expected losses. These purchased credit impaired loans are considered to be accruing
and performing even though collection of contractual payments on the loans may be in doubt, as income continues to be
accreted as long as expected cash flows can be reasonably estimated.
Loans acquired in a business combination that are not impaired are recorded at fair value, with no valuation
allowance, and the difference between the acquisition date fair value and the contractual amounts due at the acquisition
date represents the discount or premium to a loan's cost basis and is accreted or amortized to interest income over the
loan's remaining life using the level yield method. Subsequent to the acquisition date, the method utilized to estimate the
required allowance for loan losses for these loans is similar to originated loans; however, Peoples records a provision for
loan losses only when the required allowance exceeds the remaining fair value adjustment.
Loans Held for Sale: Loans originated and intended to be sold in the secondary market, generally one-to-four family
residential loans, are carried at the lower of cost or estimated fair value determined on an aggregate basis. Gains and
losses on sales of loans held for sale are included in mortgage banking income.
Loans originated with the intent to be held in the portfolio are subsequently transferred to held for sale when a
decision is made to sell these loans. At the time of a loan's transfer to the held for sale classification, the loan is recorded
at the lower of cost or its fair value. Any reduction in the loan's fair value is reflected as a write-down of the recorded
investment resulting in a new cost basis, with a corresponding charge against the allowance for loan losses. If the fair
value of a loan classified as held for sale in subsequent periods is less than its cost basis, the carrying value of the loan is
adjusted accordingly, with the corresponding loss recognized in earnings.
Interest Rate Lock Commitments: Peoples enters into interest rate lock commitments with borrowers and best efforts
commitments with investors on mortgage loans originated for sale into the secondary markets to manage the inherent
interest rate and pricing risk associated with selling loans. An interest rate lock commitment generally terminates once the
loan is funded, the lock period expires or the borrower decides not to contract for the loan. A best efforts commitment
generally terminates once the loan is sold, the commitment period expires or the borrower decides not to contract for the
loan. These commitments are considered derivatives, which are generally accounted for by recognizing their estimated
fair value on the Consolidated Balance Sheets as either an other asset or an other liability. The valuation of such
commitments does not consider expected cash flows related to the servicing of the future loan. Management has
determined these derivatives do not have a material effect on Peoples' financial position, results of operations or cash
flows.
Allowance for Loan Losses: The allowance for loan losses is a valuation reserve established through provisions for loan
losses charged against income. The allowance for loan losses is maintained at a level that management deems sufficient
to absorb probable losses inherent in the loan portfolio. Loans deemed to be uncollectable are charged against the
allowance for loan losses, while recoveries of previously charged off amounts are credited to the allowance for loan
losses.
The allowance for loan losses is comprised of specific valuation allowances for loans evaluated individually for
impairment and general allocations for pools of homogeneous loans with similar risk characteristics and trends. Peoples'
homogenous loan pools include similarly risk-graded commercial and industrial loans, similarly risk-graded commercial
real estate loans, real estate construction loans (both commercial and residential), residential real estate loans, consumer
home equity loans, and indirect and other consumer loans. Management's evaluation of the appropriateness of the
allowance for loan losses and the related provision for loan losses is based upon a quarterly analysis of the portfolio.
While portions of the allowance for loan losses may be allocated to specific loans, the entire allowance for loan losses is
available for any loan charged off by management.
The allowance for loan losses related to specific loans is based on management's estimate of potential losses on
impaired loans as determined by (1) the present value of expected future cash flows, (2) the fair value of collateral if the
loan is determined to be collateral dependent, or (3) the loan's observable market price. The general allocations to specific
loan pools are based on the historical loss rates for specific loan types and the internal risk grade, if applicable, adjusted
for both internal and external qualitative risk factors. The calculation of historical loss rates for pools of similar loans
with similar characteristics is based upon the proportion of actual charge-offs experienced to the total population of loans
in the pool. The historical loss rates are periodically updated based on actual charge-off experience. The qualitative
93
economic and business conditions and developments that affect the collectibility of the portfolio, including the condition
of various market segments, which are considered by management include, among other factors, (1) changes in
international, national, regional and local economic and business conditions, (2) changes in asset quality, (3) changes in
loan portfolio volume, (4) the composition and concentrations of credit, (5) changes in the value of underlying collateral
due to economic or market conditions, and (6) effectiveness of Peoples' loan policies, procedures and internal controls.
The allowance for loan losses established for each homogenous loan pool represents the product of the historical loss rate,
adjusted for qualitative factors, and the total dollar amount of the loans in the pool.
Peoples categorizes loans involving commercial borrowers into risk categories based upon an established grading
matrix. This system is used to manage the risk within its commercial lending activities, evaluate changes in the overall
credit quality of the loan portfolio and evaluate the appropriateness of the allowance for loan losses. Loan grades are
assigned at the time a new loan or lending commitment is extended by Peoples and may be changed at any time when
circumstances warrant. Loans to borrowers with an aggregate unpaid principal balance in excess of $1 million are
reviewed on an annual basis for possible credit deterioration. Loan relationships whose aggregate credit exposure to
Peoples is equal to or less than $1 million are reviewed on an event driven basis. Triggers for review include knowledge
of adverse events affecting the borrower's business, receipt of financial statements indicating deteriorating credit quality
or other similar events. Adversely classified loans are generally reviewed on a quarterly basis.
The primary factors considered when assigning a risk grade to a loan include (1) reliability and sustainability of the
primary source of repayment, (2) past, present and projected financial condition of the borrower, and (3) current economic
and industry conditions. Other factors that could influence the risk grade assigned include the type and quality of
collateral and the strength of guarantors. The primary source of repayment for commercial real estate loans and
commercial and industrial loans is normally the operating cash flow of the business available to repay debt.
Management's analysis of operating cash flow for commercial real estate loans secured by non-owner occupied properties
takes into account factors such as rent rolls and vacancy statistics. Management's analysis of operating cash flow for
commercial real estate loans secured by owner occupied properties and all commercial and industrial loans considers the
profitability, liquidity and leverage of the business. The evaluation of construction loans includes consideration of the
borrower's ability to complete construction within the established budget.
The primary factors considered when classifying residential real estate, home equity lines of credit and consumer
loans include the loan's past due status and declaration of bankruptcy by the borrower(s). The classification of residential
real estate and home equity lines of credit also takes into consideration the current value of the underlying collateral.
Peoples also evaluates unfunded commitments for construction loans, floor plan lines of credit, home equity lines of
credit, other credit lines and letters of credit on a quarterly basis. The calculation of the reserve for unfunded
commitments utilizes the same look back period as the allowance for loan losses, and is based on the reported losses on
unfunded commitments during this look back period. This annualized loss rate is then applied to the probable drawn
amount of the pooled unfunded commitments to determine the required reserve. Peoples also evaluates classified credit
exposures with unfunded commitments individually to determine if a loss is both probable and reasonably estimable.
Troubled Debt Restructuring ("TDR"): The restructuring of a loan is considered a TDR if both (1) the borrower is
experiencing financial difficulties and (2) the creditor has granted a concession. Loans acquired that are restructured after
acquisition are not considered TDRs if the loans evidenced credit deterioration as of the acquisition date and are
accounted for in pools of purchased credit impaired loans.
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 (1)
the borrower is currently in payment default on any of the borrower's debt; (2) a payment default is probable in the
foreseeable future without the modification; (3) the borrower has declared or is in the process of declaring bankruptcy;
and (4) the borrower's projected cash flow is insufficient to satisfy contractual payments due under the original terms of
the loan without a modification.
Peoples considers all aspects of the modification to loan terms to determine whether or not a concession has been
granted to the borrower. Key factors considered by Peoples include the borrower's ability to access funds at a market rate
for loans with similar risk characteristics, the significance of the modification relative to the unpaid principal loan balance
or collateral value underlying the loan, 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 (1) a reduction in the interest rate for the remaining life of the loan, (2) an
extension of the maturity date at an interest rate lower than the current market rate for a new loan with similar risk, (3) a
temporary period of interest-only payments, and (4) a reduction in the contractual payment amount for either a short
period or the remaining term of the loan. All TDRs are considered impaired loans and are evaluated individually to
determine if a write-down is required and if they should be on accrual or nonaccrual status.
94
Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful lives of the related assets owned. Major
improvements to leased facilities are capitalized and included in bank premises at cost less accumulated depreciation,
which is calculated on the straight-line method over the lesser of the remaining term of the leased facility or the estimated
economic life of the improvement.
Investments in Affordable Housing Limited Partnerships: Investments in affordable housing consist of investments in
limited partnerships that operate qualified affordable housing projects or that invest in other limited partnerships formed
to operate affordable housing projects. These investments are considered variable interest entities for which Peoples is
not the primary beneficiary. Peoples generally utilizes the effective yield method to account for these investments with
the tax credits, net of the amortization of the investment, reflected in the Consolidated Statements of Income as a
reduction in income tax expense. The unamortized amount of the investments is recorded in other assets and totaled $9.6
million and $4.7 million at December 31, 2018 and 2017, respectively.
Other Real Estate Owned ("OREO"): 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. Peoples had OREO totaling $94,000 at December 31, 2018 and $208,000 at December 31, 2017.
Business Combinations: Business combinations are accounted for using the acquisition method of accounting. Under
this accounting method, the acquired company's net assets are recorded at fair value on the date of acquisition, and the
results of operations of the acquired company are combined with Peoples' from the acquisition date forward. Costs
related to the acquisition are expensed as incurred. The purchase price paid over the fair value of the net assets acquired,
including intangible assets with finite lives, is recorded as goodwill.
Goodwill and Other Intangible Assets: Goodwill represents the excess of the cost of an acquisition over the fair value of
the net assets acquired in the business combination. Goodwill is not amortized but is tested for impairment when
indicators of impairment exist, or at least annually on October 1. Based upon the most recently completed goodwill
impairment test, Peoples concluded the recorded value of goodwill was not impaired as of December 31, 2018, based
upon the estimated fair value of Peoples' single reporting unit.
Peoples' other intangible assets include customer relationship intangible assets, core deposit intangible assets and
servicing rights representing the net present value of future economic benefit to be earned from acquired customer
relationships with definite useful lives. These intangible assets are amortized on an accelerated basis over their estimated
lives ranging from 7 to 10 years.
Servicing Rights: Servicing rights represent the right to service loans sold to third-party investors. Loans that are sold are
primarily mortgage loans, but also include small business and agricultural loans. Servicing rights are recognized
separately as a servicing asset or liability whenever Peoples undertakes an obligation to service financial assets. Servicing
rights are reported in other intangible assets on the Consolidated Balance Sheets. Serviced loans that have been
completely sold are not included on the Consolidated Balance Sheets. Loan servicing income included in mortgage
banking income includes servicing fees received from the third-party investors and certain charges collected from the
borrowers.
Peoples initially records servicing rights at fair value at the time of the sale of the loans to the third-party investor.
Peoples follows the amortization method for the subsequent measurement of each class of separately recognized servicing
assets and liabilities. Under the amortization method, Peoples amortizes the value of servicing assets or liabilities in
proportion to, and over the period of, estimated net servicing income or net servicing loss, and assesses servicing assets or
liabilities for impairment or increased obligation based on the fair value at each reporting date. 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.
Trust Assets Under Administration and Management: Peoples manages certain assets held in a fiduciary or agency
capacity for customers. These assets under administration and management, other than cash on deposit at Peoples, are not
included in the Consolidated Balance Sheets since they are not assets of Peoples.
Interest Income Recognition: Interest income on loans and investment securities is recognized by methods that result in
level rates of return on principal amounts outstanding, including yield adjustments resulting from the amortization of loan
costs and premiums on investment securities, and accretion of loan fees and discounts on investment securities. Since
mortgage-backed securities comprise a sizable portion of Peoples' investment portfolio, a significant increase in principal
payments on those securities can impact interest income due to the corresponding acceleration of premium amortization or
discount accretion.
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Peoples discontinues the accrual of interest on a loan when conditions cause management to believe collection of all
or any portion of the loan's contractual interest is doubtful. Such conditions may include the borrower being 90 days or
more past due on any contractual payments, or current information regarding the borrower's financial condition and
repayment ability. All unpaid accrued interest deemed uncollectable is reversed, which reduces Peoples' net interest
income. Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured.
Revenue Recognition: Peoples recognizes revenues as they are earned based on contractual terms, or as services are
provided and collectability is reasonably assured. Peoples’ principal source of revenue is interest income, which is
recognized on an accrual basis primarily according to formulas in written contracts, such as loan agreements or securities
contracts.
As of January 1, 2018, Peoples adopted ASU 2014-09 - Revenue from Contracts with Customers (Topic 606), and all
subsequent updates that modified Accounting Standards Codification ("ASC") 606. Peoples elected to adopt this new
accounting guidance using the modified retrospective approach. The modified retrospective approach uses a cumulative-
effect adjustment to retained earnings to reflect uncompleted contracts in the initial application of the guidance. As of
January 1, 2018, Peoples recorded a cumulative-effect adjustment for uncompleted contracts, which resulted in a
reduction to retained earnings and an increase in accrued expenses and other liabilities of $3.7 million, which was net of
federal income taxes. The impact during 2018 was an increase in insurance income and a decrease in retained earnings of
$369,000 as a result of applying ASC 606. Prior period amounts are not adjusted and continue to be reported under the
accounting standards in effect for those respective periods.
Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal
of cumulative revenue will not occur, once the uncertainty is resolved. Peoples' contracts with customers are short-term in
nature, and are recognized under the following revenue streams:
Insurance Income: Insurance income generally consists of commissions and fees from the sale of insurance policies,
fees related to third-party administration services and performance-based commissions from insurance companies.
Peoples recognizes commission income from the sale of insurance policies when it acts as an agent between the
insurance carrier and policyholder, arranging for the insurance carrier to provide policies to policyholders, and acts on
behalf of the insurance carrier by providing customer service to the policyholders during the respective policy
periods. Commission income is recognized over time, using the output method of time elapsed, which corresponds
with the underlying insurance policy period, for which Peoples is obligated to perform under contract with the
insurance carrier. Commission income is variable, as it is comprised of a certain percentage of the underlying policy
premium. Peoples estimates the variable consideration based upon the "most likely amount" method, and does not
expect or anticipate a significant reversal of revenue in future periods, based upon historical experience. Payment is
due from the insurance carrier for commission income once the insurance policy has been sold. Peoples has elected
to apply a practical expedient related to capitalizable costs, which are the commissions paid to insurance producers,
and will expense these commissions paid to insurance producers as incurred, as these costs are related to the
commission income and would have been amortized within one year or less if they had been capitalized, the same
period over which the commission income was earned.
Fees related to third-party administration services performed are recognized over time, during the period in which
services have been provided, and are recognized monthly in the month the services were performed.
Performance-based commissions from insurance companies are recognized at a point in time, when received, and no
contingencies remain.
Trust and Investment Income: Trust and investment income consists of revenue from fiduciary and brokerage
activities, which includes fees for services such as asset management, record keeping, retirement services and estate
management, and investment commissions and fees related to the sale of investments. Trust and investment income
is recognized over time, which reflects the duration of the contract period for which services have been provided.
Trust and investment income is variable as it is based on the value of assets under administration and management,
and specific transactions. Peoples estimates the variable consideration based upon the most likely amount method,
and does not expect or anticipate a significant reversal of revenue in future periods. Payment is due from the
customer when billed, which is typically a monthly or quarterly billing for services rendered in the most recent
period, for which the performance obligation has been satisfied. Peoples has elected to apply a practical expedient of
right to invoice when recognizing trust and investment income, as Peoples has fulfilled the performance obligation,
the customer has consumed the service, and Peoples has a right to the related income. Peoples has also elected to
apply a practical expedient related to capitalizable costs, which are the commissions paid to financial advisors, and
will expense these commissions paid to financial advisors as incurred, as these costs are related to the trust and
investment income and would have been amortized within one year or less if they had been capitalized, the same
period over which the income was earned.
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Electronic Banking Income: Electronic banking income consists of two revenue streams related to interchange
income, and promotional and usage income.
Peoples recognizes interchange income over time, on a monthly basis, which is based on the transactional
volume of debit card activity completed by its customers during the month in which income is recognized. Peoples is
obligated, based on its contracts with third parties, to meet certain volumes of debit card activities, which are
performed by Peoples' customers, over a certain period of time. Interchange income is variable as it is based on the
transaction volume of debit card activity completed by Peoples' customers. Peoples estimates the variable
consideration based upon the most likely amount method, and does not expect or anticipate a significant reversal of
revenue in future periods. Payment is due from the vendor within one month of the completed customer debit card
activity. Peoples has elected to apply a practical expedient of right to invoice when recognizing interchange income,
as Peoples has fulfilled the required performance obligations, the vendor has consumed the service, and Peoples has a
right to the related income.
Peoples also recognizes promotional and usage income over time, on a monthly basis, which is related to
branding of debit cards and promotion or use of certain services provided by third-party vendors. Peoples is
obligated to brand its debit cards in a certain manner, and promote and use services provided by third-party vendors.
Promotional and usage income is variable as it is based on certain metrics achieved for promotion and usage of
services provided by the third-party vendors. Peoples estimates the variable consideration based upon the most likely
amount method, and does not expect or anticipate a significant reversal of revenue in future periods. Payment is due
from the third-party vendors within 45 days of the monthly fulfillment of Peoples' performance obligation. Peoples
has elected to apply a practical expedient of right to invoice when recognizing promotional and usage income, as
Peoples has fulfilled the required performance obligations, the vendor has consumed the service, and Peoples has a
right to the related income.
Deposit Account Service Charges: Deposit account service charges consist of two revenue streams related to ongoing
maintenance fees for deposit accounts and transactional-based fees.
Ongoing maintenance fees are recognized on a monthly basis, generally with the monthly period beginning on
the day of the month on which the account was opened. Ongoing maintenance fee income is variable as these fees
can be reduced if a customer meets certain qualifying metrics. Peoples estimates the variable consideration based
upon the most likely amount method, and does not expect or anticipate a significant reversal of revenue in future
periods. For accounts that are assessed maintenance fees through the account analysis process, payment is due from
the customer within one month after the monthly period in which the account activity occurred. For all other
accounts, monthly maintenance fees are assessed to the account on the last day of the monthly period. Peoples has
elected to apply a practical expedient of right to invoice when recognizing ongoing maintenance fees for deposit
accounts, as Peoples has fulfilled the required performance obligations, the customer has consumed the service, and
Peoples has a right to the related income.
Transactional-based fees are recognized at a point in time, which is at the completion of the relevant transaction.
Peoples is obligated to perform certain transactions as requested by its consumer and business deposit account
customers, which are outside of the normal maintenance requirements. Transactional-based fee income is variable as
these fees are directly related to a service request from the customer. Peoples estimates the variable consideration
based upon the most likely amount method, and does not expect or anticipate a significant reversal of revenue in
future periods. Payment is due from the customer at the time of completion of the requested transaction.
Commercial Loan Swap Fees: Commercial loan swap fees consist of income related to transactions in which Peoples
acts as an agent between a third-party vendor and certain Peoples' commercial loan customers for which an interest
rate swap occurs. Commercial loan swap fees are recognized at a point in time, when the transaction has been
completed, and there is no recourse or further performance obligation required of Peoples. Commercial loan swap
fee income is variable as these fees are a certain percentage of the total swap fee collected on a completed transaction.
Peoples estimates the variable consideration based upon the most likely amount method, and does not expect or
anticipate a significant reversal of revenue in future periods. Payment is due from the customer at the time of
completion of the requested transaction.
Other Non-Interest Income: Other non-interest income includes certain revenues that are transactional-based, such
as wire transfer fees, money order fees and other ancillary fees or services. These transactional-based fees are
recognized as income at a point in time, at the completion of the relevant transaction. Transactional-based fee income
is variable as these fees are directly related to a service request from the customer. Peoples estimates the variable
consideration based upon the most likely amount method, and does not expect or anticipate a significant reversal of
revenue in future periods. Payment is due from the customer at the time of completion of the requested transaction.
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Income Taxes: Peoples and its subsidiaries file a consolidated federal income tax return. Deferred income tax assets and
liabilities are provided as temporary differences between the tax basis of an asset or liability and its reported amount in the
Consolidated Financial Statements at the statutory federal corporate income tax rate. A valuation allowance, if needed,
reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is
dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years.
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017, and Peoples' Consolidated Financial
Statements fully reflect the impact of the Act as of December 31, 2018. As a result of the final impact of this guidance,
Peoples recorded a reduction to income tax expense of $0.7 million during 2018.
At December 31, 2017, Peoples had completed the accounting for the tax effects of enactment of the Act; however, in
certain cases, Peoples made reasonable estimates of the effects of a reduced statutory federal corporate income tax rate on
its existing deferred tax balances. Peoples also early adopted and retrospectively applied the reclassification of stranded
income tax effects from accumulated other comprehensive loss to retained earnings as of December 31, 2017, as permitted
by ASU 2018-02.
A tax position is initially recognized in the financial statements when it is more likely than not the position will be
sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the
largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax
authority assuming full knowledge of the position and all relevant facts. Penalties and interest incurred under the
applicable tax law are classified as income tax expense. The amount of Peoples' uncertain income tax positions and
unrecognized benefits are disclosed in Note 12 Income Taxes.
Advertising Costs: Advertising costs are expensed as incurred.
Earnings per Share ("EPS"): Basic and diluted EPS are calculated using the two-class method since Peoples has issued
share-based payment awards considered participating securities because they entitle holders the rights to dividends during
the vesting term. The two-class method is an earnings allocation formula that determines net income per share for each
class of common stock and participating security according to dividends declared and participation rights in undistributed
earnings. Basic EPS is computed by dividing net earnings allocated to common shareholders by the weighted-average
number of common shares outstanding. Diluted EPS is computed by dividing net earnings allocated to common
shareholders by the weighted-average number of common shares outstanding adjusted to include the effect of potentially
dilutive common shares. Potentially dilutive common shares include incremental common shares issuable upon exercise
of outstanding stock appreciation rights and non-vested restricted common shares using the treasury stock method.
Operating Segments: Peoples' business activities are currently confined to one reporting unit and reportable segment,
which is community banking. As a community banking entity, Peoples offers its customers a full range of products
including a complete line of banking, insurance, investment and trust solutions.
Stock-Based Compensation: Stock-based compensation for restricted stock awards is measured at the fair value of these
awards on their grant date. Stock-based compensation is recognized over the restriction period for restricted stock
awards. Only the expense for the portion of the awards expected to vest is recognized. For service-based awards, stock-
based compensation for awards granted to employees who are eligible for retirement is recognized to the date the
employee is first eligible to retire.
New Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the FASB or other
standard setting bodies that are adopted by Peoples as of the required effective dates. Unless otherwise discussed,
management believes the impact of any recently issued standards, including those issued but not yet effective, will not
have a material impact on Peoples' financial statements taken as a whole.
ASU 2018-15 - Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): The amendments in this
update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
This ASU will become effective for interim and annual reporting periods beginning after December 15, 2019 (effective
January 1, 2020 for Peoples). Peoples is currently evaluating the impact of this update.
ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): This
update modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement
plans. This update will remove some current disclosure requirements and require an explanation of the reasons for
significant gains and losses related to changes in the benefit obligation, the projected benefit obligation and fair value of
plan assets for plans with projected benefit obligations in excess of plan assets, and the accumulated benefit obligation
and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets. This ASU will
become effective for interim and annual reporting periods beginning after December 15, 2020 (effective January 1, 2021
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for Peoples). Peoples is currently reviewing the new disclosure requirements in this update and will adopt this new
accounting guidance as required.
ASU 2018-13 - Fair Value Measurement (Topic 820): The amendment in this update removes, modifies and adds to
required disclosures related to certain fair value measurements. This ASU will become effective for interim and annual
reporting periods beginning after December 15, 2019 (effective January 1, 2020 for Peoples). Peoples is currently
reviewing the new disclosure requirements in this update and will adopt this new accounting guidance as required.
ASU 2018-07 - Compensation - Stock Compensation (Topic 718): This update has been issued as part of a
simplification initiative, which will expand the scope of Topic 718 to include share-based payment transactions for
acquiring goods and services from non-employees and improve aspects of the accounting for non-employee share-based
payment transactions. The amendments will be effective for interim and annual reporting periods beginning after
December 15, 2018 (effective January 1, 2019 for Peoples). Peoples adopted this new accounting guidance as required,
and it will not have a material impact on Peoples' consolidated financial statements.
ASU 2018-05 - Income Taxes (Topic 740): The amendments in this ASU clarify required disclosures in situations
where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to
complete the accounting under ASC 740 for certain income tax effects of the Tax Cuts and Jobs Act for the reporting
period. As of December 31, 2018, Peoples completed the accounting for the income tax effects of the enactment of the
Tax Cuts and Jobs Act, resulting in a reduction to income tax expense of $0.7 million during 2018.
ASU 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income. Peoples early adopted ASU 2018-02, reclassifying income tax
effects of the Tax Cuts and Jobs Act of $0.9 million from accumulated other comprehensive loss to retained earnings as of
December 31, 2017.
ASU 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
The objective of the amendments in this ASU is to better align an entity’s risk management activities and financial
reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying
hedging relationships, and the presentation of hedge results. To meet that objective, the amendments expand and refine
hedge accounting for both nonfinancial and financial risk components, and align the recognition and presentation of the
effects of the hedging instrument and the hedged item in the financial statements. The FASB issued an update in October
of 2018, in order to facilitate the London Interbank Offered Rate ("LIBOR") to Secured Overnight Financing Rate
transition and provide lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk
management and hedge accounting purposes. The amendments will be effective for interim and annual reporting periods
beginning after December 15, 2018 (effective January 1, 2019 for Peoples). As of December 31, 2018, Peoples was party
to cash flow hedges in an effort to manage interest rate risk, which are relatively low complexity hedges, and Peoples does
not intend to enter into highly complex derivative or hedging arrangements.
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 will early adopt this new accounting guidance as of January 1, 2019, and it will be
incorporated in the October 1, 2019 annual goodwill 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 debt 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
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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.
The new 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 will utilize the tool to run test
calculations throughout 2019 in anticipation of the full implementation at the beginning of 2020. 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 is presently
evaluating the impact that the CECL model will have on Peoples' financial statements and expects to recognize a one-time
cumulative-effect adjustment to the allowance for loan loss provision 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. Peoples is currently evaluating the potential impact at adoption, which 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.
ASU 2016-02 - Leases (Topic 842): The amendments in this ASU were issued to improve the financial reporting of
leasing activities and provide a faithful representation of leasing transactions and improve understanding and
comparability of a lessee's financial statements. Under ASU 2016-02 and the related updates, a lessee will be required to
recognize assets and liabilities for leases with terms of more than 12 months. These ASUs will become effective for
interim and annual reporting periods affected beginning after December 15, 2018 (effective January 1, 2019 for Peoples).
Peoples has identified the population of leases that will be impacted by ASU 2016-02, and assessed the impact of the
guidance provided in the subsequent updates, and will adopt this new accounting guidance as required. Peoples will use
the modified retrospective approach at implementation. Peoples recorded the right-of-use asset on January 1, 2019, which
was approximately $5.2 million, and a lease liability of approximately $5.3 million.
Note 2 Fair Value of Financial Instruments
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.
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.
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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
December 31, 2017
December 31, 2018
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
(Dollars in thousands)
Assets:
Available-for-sale investment securities:
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Bank-issued trust preferred securities
Equity investment securities (a)
Total available-for-sale securities
Equity investment securities (a)
Derivative assets (b)
$
$
$
Liabilities:
88,587 $
— $
— 692,608
6,707
—
3,989
—
—
—
— $ 791,891 $
94 $
183 $
—
4,544
— $
—
—
—
—
— $
— $
—
— $ 101,569 $
— 673,664
6,976
—
5,129
—
7,694
155
7,694 $ 787,493 $
— $
— $
—
4,594
—
—
—
—
—
—
—
—
—
Derivative liabilities (c)
— $
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-sale
3,241 $
3,562 $
— $
— $
$
investment securities to other investment securities. As of December 31, 2017, equity investment securities had a net unrealized gain of $6.5 million.
(b) Included in other assets on the Consolidated Balance Sheets. For additional information, see Note 14 Derivative Financial Instruments.
(c) Included in other liabilities on the Consolidated Balance Sheets. For additional information, see Note 14 Derivative Financial Instruments.
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/liabilities. 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 Consolidated Balance Sheets by level in the fair value hierarchy.
Non-Recurring Fair Value Measurements at Reporting Date
(Dollars in thousands)
Impaired loans
OREO
December 31, 2018
Level 2
Level 1
Level 3
Level 1
December 31, 2017
Level 2
Level 3
$
— $
—
— $
—
24,129
94
$
— $
—
— $
—
20,602
208
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 December 31, 2018, impaired loans with an aggregate outstanding
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principal balance of $30.1 million were measured and reported at a fair value of $24.1 million. For the year ended
December 31, 2018, Peoples recognized a reduction of $207,000 in the specific reserve on impaired loans, through the
allowance for loan losses.
Other Real Estate Owned: 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).
Financial Instruments Not Required to be Measured and 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.
(Dollars in thousands)
Assets:
Cash and cash equivalents
Held-to-maturity investment securities:
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total held-to-maturity securities
Other investment securities:
FHLB stock
FRB stock
Nonqualified deferred compensation (a)
Federal Home Loan Mortgage Corp
("FHLMC") stock
Other investment securities (b)
Net loans
Loans held for sale
Bank owned life insurance
Servicing rights (c)
Financial liabilities:
Deposits
Short-term borrowings
Long-term borrowings
Fair Value Measurements of Other Financial Instruments
December 31, 2017
December 31, 2018
Fair Value
Hierarchy
Level
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
1
2
2
2
2
2
2
2
3
2
3
3
2
2
2
$
77,612 $
77,612
$
72,194 $
72,194
4,403
29,044
3,514
36,961
29,367
12,294
987
4,896
28,603
3,464
36,963
29,367
12,294
987
3,810
32,487
4,631
40,928
28,132
10,179
—
4,417
32,227
4,569
41,213
28,132
10,179
—
60
42,708
2,708,583
5,470
68,934
2,655
60
42,708
2,907,537
5,492
68,934
4,568
60
38,371
2,338,344
2,510
62,176
2,305
60
38,371
2,274,194
2,569
62,176
3,866
$ 2,955,465 $ 2,953,452
349,994
101,736
356,198
109,644
$ 2,730,330 $ 2,730,071
209,628
142,108
209,491
144,019
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities (including those held in
participant accounts in the Peoples Bancorp Inc. Nonqualified Deferred Compensation Plan) from available-for-sale investment securities to other
investment securities.
(b) Other investment securities, as reported on the 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.
(c) Included in other intangible assets on the 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: The carrying amount for cash and due from banks is a reasonable estimate of fair
value (Level 1).
102
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 (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
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 one-to-four
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 intangible assets, core deposit intangible assets
and other information required to compute Peoples’ aggregate fair value, which are not included in the above
information. Accordingly, the above fair values are not intended to represent the aggregate fair value of Peoples.
103
Note 3 Investment Securities
Available-for-sale
The following table summarizes Peoples’ available-for-sale investment securities at December 31:
(Dollars in thousands)
2018
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Bank-issued trust preferred securities
Total available-for-sale securities
2017
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Bank-issued trust preferred securities
Equity investment securities (a)
Total available-for-sale securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
$
$
88,358 $
705,289
6,812
4,196
804,655 $
787 $
2,720
—
75
3,582 $
(558) $
(15,401)
(105)
(282)
(16,346) $
88,587
692,608
6,707
3,989
791,891
100,039 $
684,100
7,004
5,195
1,394
797,732 $
1,786 $
2,582
11
141
6,520
11,040 $
(256) $
(13,018)
(39)
(207)
(65)
(13,585) $
101,569
673,664
6,976
5,129
7,849
795,187
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-
sale investment securities to other investment securities.
The unrealized losses related to residential mortgage-backed securities at December 31, 2018 and 2017 were attributed to
changes in market interest rates and spreads since the securities were purchased.
The gross gains and gross losses realized by Peoples from sales of available-for-sale securities for the years ended
December 31 were as follows:
(Dollars in thousands)
Gross gains realized
Gross losses realized
Net (loss) gain realized
2018
2017
2016
$
$
6 $
152
(146) $
2,999 $
16
2,983 $
933
3
930
The cost of investment securities sold, and any resulting gain or loss, were based on the specific identification method
and recognized as of the trade date.
104
The following table presents a summary of available-for-sale investment securities that had an unrealized loss at
December 31:
(Dollars in thousands)
2018
Obligations of:
Less than 12 Months
Unrealized
Loss
No. of
Securities
Fair
Value
12 Months or More
Unrealized
Loss
No. of
Securities
Fair
Value
Total
Fair
Value
Unrealized
Loss
States and political subdivisions $ 10,173 $
Residential mortgage-backed
securities
Commercial mortgage-backed
securities
Bank-issued trust preferred
securities
Total
2017
Obligations of:
Residential mortgage-backed
securities
Commercial mortgage-backed
securities
Bank-issued trust preferred
securities
Equity investment securities (a)
47,562
—
—
18
226
—
—
$ 57,735 $
244
274,998
3,462
2,487
—
276
23
—
1
3,575
States and political subdivisions $ 16,985 $
89
17
50
—
—
67
18
77
1
—
1
97
$ 19,918 $
540
20
$ 30,091 $
558
517,335
15,175
170
564,897
15,401
6,707
1,718
105
282
3
2
6,707
1,718
105
282
$ 545,678 $
16,102
195
$ 603,413 $
16,346
$
5,308 $
167
1
$ 22,293 $
256
291,812
9,556
88
566,810
13,018
1,274
2,792
112
$ 301,298 $
16
207
64
10,010
1
3
1
94
3,761
2,792
388
$ 596,044 $
39
207
65
13,585
Total
$ 294,746 $
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-sale
investment securities to other investment securities.
Management systematically evaluates available-for-sale investment securities for other-than-temporary declines in fair
value on a quarterly basis. At December 31, 2018, 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
December 31, 2018 and 2017 were attributable to changes in market interest rates and spreads since the securities were
purchased.
At December 31, 2018, approximately 99% of the fair value of mortgage-backed securities that had been at an unrealized
loss position for twelve months or more were issued by U.S. government sponsored agencies. The remaining 1%, or two
positions, consisted of privately issued mortgage-backed securities with all of the underlying mortgages originated prior to
2004. Both of the two positions had a fair value of less than 90% of their book value, with an aggregate book and fair value
of $216,000 and $145,000, respectively. Management has analyzed the underlying credit quality of these securities and
concluded the unrealized losses were primarily attributable to the floating rate nature of these investments and the low
number of loans remaining in these securities.
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 December 31, 2018 were primarily attributable to the subordinated nature of the debt.
105
The table below presents the amortized cost, fair value and total weighted-average yield of available-for-sale securities
by contractual maturity at December 31, 2018. 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)
Amortized cost
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Bank-issued trust preferred securities
Total available-for-sale securities
Fair value
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Bank-issued trust preferred securities
Total available-for-sale securities
Total weighted-average yield
$
$
$
$
Within 1
Year
1 to 5
Years
5 to 10
Years
Over 10
Years
Total
891
782
—
—
1,673
$ 15,910
12,194
5,666
—
$ 33,770
$ 23,094
51,284
—
4,196
$ 78,574
$ 48,463
641,029
1,146
—
$ 690,638
$ 88,358
705,289
6,812
4,196
$ 804,655
888
778
—
—
1,666
2.26%
$ 15,900
12,031
5,587
—
$ 33,518
$ 23,188
50,164
—
3,989
$ 77,341
$ 48,611
629,635
1,120
—
$ 679,366
$ 88,587
692,608
6,707
3,989
$ 791,891
2.35%
2.77%
2.93%
2.89%
Held-to-Maturity
The following table summarizes Peoples’ held-to-maturity investment securities at December 31:
(Dollars in thousands)
2018
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total held-to-maturity securities
2017
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total held-to-maturity securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
$
$
4,403 $
29,044
3,514
36,961 $
3,810 $
32,487
4,631
40,928 $
493 $
191
—
684 $
607 $
269
—
876 $
— $
(632)
(50)
(682) $
4,896
28,603
3,464
36,963
— $
(529)
(62)
(591) $
4,417
32,227
4,569
41,213
There were no gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for the years
ended December 31, 2018, 2017 and 2016.
106
The following table presents a summary of held-to-maturity investment securities that had an unrealized loss at
December 31:
(Dollars in thousands)
2018
Residential mortgage-backed
securities
Commercial mortgage-backed
securities
Total
2017
Residential mortgage-backed
securities
Commercial mortgage-backed
securities
Total
Less than 12 Months
Unrealized
Loss
No. of
Securities
Fair
Value
12 Months or More
Unrealized
Loss
No. of
Securities
Fair
Value
Total
Fair
Value
Unrealized
Loss
$
$
— $
—
— $
$
1,476 $
—
$
1,476 $
—
—
—
4
—
4
— $ 13,102 $
—
3,464
— $ 16,566 $
2
$ 12,098 $
—
4,569
2
$ 16,667 $
632
50
682
525
62
587
5
1
6
3
1
4
$ 13,102 $
3,464
$ 16,566 $
$ 13,574 $
4,569
$ 18,143 $
632
50
682
529
62
591
The table below presents the amortized cost, fair value and total weighted-average yield of held-to-maturity securities by
contractual maturity at December 31, 2018. 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)
Amortized cost
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total held-to-maturity securities
Fair value
Obligations of:
States and political subdivisions
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total held-to-maturity securities
Total weighted-average yield
Within 1
Year
1 to 5
Years
5 to 10
Years
Over 10
Years
Total
$
$
$
$
— $
—
—
— $
— $
—
—
— $
—%
308
422
—
730
$
2,982
8,027
—
$ 11,009
$
1,113
20,595
3,514
$ 25,222
$
4,403
29,044
3,514
$ 36,961
308
416
—
724
2.43%
$
3,466
8,163
—
$ 11,629
$
1,122
20,024
3,464
$ 24,610
$
4,896
28,603
3,464
$ 36,963
2.89%
2.78%
2.80%
Other Investment Securities
Peoples' other investment securities on the Consolidated Balance Sheet consist largely of shares of FHLB and FRB, and
equity investment securities. As of 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.
107
The following table summarizes the carrying value of Peoples' other investment securities at December 31:
(Dollars in thousands)
FHLB stock
FRB stock
Nonqualified deferred compensation
Equity investment securities (a)
FHLMC stock
Other investment securities
2018
2017
29,367 $
12,294
987
277
60
42,985 $
28,132
10,179
—
—
60
38,371
$
$
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-sale investment
securities to other investment securities.
During the year ended December 31, 2018, Peoples recorded the change in the fair value of equity investment securities
held at December 31, 2018 in other non-interest income, resulting in unrealized losses of $206,000.
At December 31, 2018, 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 a carrying value of $430.0 million and $522.7 million
at December 31, 2018 and 2017, respectively, and held-to-maturity investment securities with a carrying value of $16.9
million and $18.3 million at December 31, 2018 and 2017, 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 $60.1 million and $6.7 million at December 31, 2018 and 2017, respectively,
and held-to-maturity securities with carrying values of $16.7 million and $19.9 million at December 31, 2018 and 2017,
respectively, to secure additional borrowing capacity at the FHLB and the FRB.
108
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
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 at December 31:
(Dollars in thousands)
Originated loans:
Commercial real estate, construction $
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
Total originated loans
$
Acquired loans:
Commercial real estate, construction $
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total acquired loans
Total loans
$
$
2018
2017
124,013 $
632,200
756,213
530,207
296,860
93,326
407,167
71,674
478,841
583
2,156,030 $
12,404 $
184,711
197,115
35,537
296,937
40,653
136
2,370
2,506
572,748 $
2,728,778 $
107,118
595,447
702,565
438,051
304,523
88,902
340,390
67,010
407,400
849
1,942,290
8,319
165,120
173,439
34,493
184,864
20,575
329
1,147
1,476
414,847
2,357,137
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 at December 31:
(Dollars in thousands)
Commercial real estate
Commercial and industrial
Residential real estate
Consumer
Total outstanding balance
Net carrying amount
2018
2017
11,955 $
1,287
20,062
58
33,362 $
22,475 $
8,117
767
19,532
33
28,449
19,564
$
$
$
109
Changes in the accretable yield for purchased credit impaired loans during the year ended December 31 were as follows:
(Dollars in thousands)
Balance, beginning of period
Reclassification from nonaccretable to accretable
Additions:
ASB
Accretion
Balance, December 31
$
$
2018
2017
6,704 $
2,019
2,047
(1,815)
8,955 $
7,132
1,285
—
(1,713)
6,704
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 loans accounted
for 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 and loans that have become past due. Prepayments affect the estimated life
of the loans and could change the amount of interest income, and possibly the amount of principal, expected to be collected. In
reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Peoples evaluates changes quarterly
and compares the new estimated cash flows to those at the previous cash flow re-estimation date and the related materiality of the
changes, and when compared to the total loan portfolio, the differences in estimated cash flows at the most recent cash flow re-
estimation date compared to the previous cash flow 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,
resulting in the reclassification from nonaccretable to accretable yield shown in the table above.
Cash flows expected to be collected on purchased credit impaired loans are estimated by incorporating several key
assumptions similar to those used in the initial estimate of fair value. These key assumptions include probability of default, and
the amount of actual prepayments after the acquisition date. In reforecasting future estimated cash flows, credit loss expectations
are adjusted as necessary.
Pledged Loans
Peoples has pledged certain loans secured by one-to-four family and multifamily residential mortgages under a blanket
collateral agreement to secure borrowings from the FHLB. The amount of such pledged loans totaled $505.7 million and $487.2
million at December 31, 2018 and 2017, respectively. Peoples also had pledged commercial loans to secure borrowings with the
FRB. The outstanding balances of these loans totaled $180.9 million and $74.0 million at December 31, 2018 and 2017,
respectively.
Related Party Loans
In the normal course of its business, Peoples Bank has granted loans to certain directors and officers of Peoples Bancorp Inc.,
including their affiliates, families and entities in which they are principal owners. At December 31, 2018, no related party loan
was past due 90 or more days, renegotiated or on nonaccrual status. Activity in related party loans is presented in the table below.
Other changes primarily consist of changes in related party status, and the addition and exit of directors during the year, as
applicable.
(Dollars in thousands)
Balance, December 31, 2017
New loans and disbursements
Repayments
Other changes
Balance, December 31, 2018
$
$
15,102
5,508
(3,720)
(101)
16,789
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.
110
The recorded investments in loans on nonaccrual status and loans delinquent for 90 days or more and accruing were as
follows at December 31:
(Dollars in thousands)
Originated loans:
Nonaccrual Loans
Accruing Loans
90+ Days Past Due
2018
2017
2018
2017
Commercial real estate, construction
$
710 $
754
$
— $
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total originated loans
Acquired loans:
Commercial real estate, other
Commercial and industrial
Residential real estate
Home equity lines of credit
Total acquired loans
Total loans
6,565
7,275
1,673
4,105
596
480
56
536
14,185 $
319 $
36
1,921
637
2,913 $
6,877
7,631
739
3,546
550
256
39
295
12,761
192
259
2,168
312
2,931
17,098 $
15,692
$
$
$
$
$
$
$
$
786
786
—
398
7
—
—
—
1,191 $
15 $
18
1,032
—
1,065 $
2,256 $
—
—
—
—
548
50
—
16
16
614
215
45
730
22
1,012
1,626
The following tables present the aging of the recorded investment in past due loans at December 31:
(Dollars in thousands)
2018
Originated loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
Total originated loans
Loans Past Due
30 - 59 days 60 - 89 days
90 + Days
Total
Current
Total
$
123,303 $
624,301
747,604
523,712
288,489
92,334
403,248
71,274
474,522
583
124,013
632,200
756,213
530,207
296,860
93,326
407,167
71,674
478,841
583
$ 2,127,244 $ 2,156,030
$
$
— $
12
12
1,678
4,457
531
3,266
308
3,574
—
10,252 $
— $
736
736
3,520
1,319
30
488
50
538
—
6,143 $
710 $
7,151
7,861
1,297
2,595
431
165
42
207
—
12,391 $
710
7,899
8,609
6,495
8,371
992
3,919
400
4,319
—
28,786
111
(Dollars in thousands)
2018
Acquired loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total acquired loans
Total loans
2017
Originated loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
Total originated loans
Acquired loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total acquired loans
Total loans
Loans Past Due
30 - 59 days 60 - 89 days
90 + Days
Total
Current
Total
$
$
$
$
$
$
$
$
511 $
523
1,034
111
6,124
238
—
23
23
7,530 $
17,782 $
— $
990
990
1,423
4,562
502
2,153
417
2,570
—
10,047 $
— $
775
775
—
4,656
126
3
10
13
5,570 $
15,617 $
— $
457
457
13
1,823
233
—
6
6
2,532 $
8,675 $
— $
—
—
92
1,234
80
648
46
694
—
2,100 $
— $
948
948
1
1,391
—
—
11
11
2,351 $
4,451 $
— $
233
233
18
1,885
534
—
—
—
2,670 $
15,061 $
— $
6,492
6,492
706
2,408
395
105
48
153
—
10,154 $
— $
312
312
171
1,910
301
—
—
—
2,694 $
12,848 $
511
1,213
1,724
142
9,832
1,005
—
29
29
12,732
41,518
$
11,893 $
183,498
195,391
35,395
287,105
39,648
136
2,341
2,477
560,016 $
12,404
184,711
197,115
35,537
296,937
40,653
136
2,370
2,506
572,748
$
$ 2,687,260 $ 2,728,778
— $
107,118 $
587,965
695,083
435,830
296,319
87,925
337,484
66,499
403,983
849
107,118
595,447
702,565
438,051
304,523
88,902
340,390
67,010
407,400
849
$ 1,919,989 $ 1,942,290
8,319 $
8,319
165,120
173,439
34,493
184,864
20,575
329
1,147
1,476
414,847
$
$ 2,324,221 $ 2,357,137
163,085
171,404
34,321
176,907
20,148
326
1,126
1,452
404,232 $
7,482
7,482
2,221
8,204
977
2,906
511
3,417
—
22,301
2,035
2,035
172
7,957
427
3
21
24
10,615
32,916
— $
Delinquency trends remained stable as 98.5% of Peoples' portfolio was considered "current" at December 31, 2018,
compared to 98.6% at December 31, 2017.
Credit Quality Indicators
As discussed in Note 1 Summary of Significant Accounting Policies, 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 category would possess sufficient
mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the loans if required,
for any weakness that may exist.
112
"Special Mention" (grade 5): Loans in this risk category are the equivalent of the regulatory "Other Assets Especially
Mentioned" classification. 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 the secondary source of repayment. If left uncorrected, these potential weaknesses may
result in noticeable deterioration of the repayment prospects for the loans or in Peoples' credit position.
"Substandard" (grade 6): Loans in this risk category are inadequately protected by the borrower's current financial
condition and payment capability, or by the collateral pledged, if any. Loans so classified have one or more well-defined
weaknesses that jeopardize the orderly repayment of the loans. 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 category have all the weaknesses inherent in those classified as substandard,
with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current
existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but
because of certain important and reasonably specific factors that may work to the advantage and strengthening of the
exposure, classification of these loans as an estimate loss is deferred until their more exact status may be determined.
"Loss" (grade 8): Loans in this risk category are considered to be non-collectible and of such little value that their
continuance as bankable assets is not warranted. This does not mean each such loan has absolutely no recovery value,
but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained
in the future. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes
uncollectible. Consequently, Peoples typically does not maintain a recorded investment in loans within this risk
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 tables summarize the risk category of Peoples' loan portfolio based upon the most recent analysis performed at
December 31:
(Dollars in thousands)
2018
Originated loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
Total originated loans
Pass Rated
Special
Mention
Substandard Doubtful
(Grades 1 - 4)
(Grade 5)
(Grade 6)
(Grade 7)
Not
Rated
Total
$
121,457 $
612,099
733,556
476,290
14,229
453
8
30
38
—
$
1,224,566 $
— $
10,898
10,898
45,990
500
—
—
—
—
—
57,388 $
1,472 $
9,203
10,675
7,692
11,971
—
—
—
—
—
30,338 $
— $
—
—
—
409
—
—
—
—
—
409 $
1,084 $
—
1,084
235
269,751
92,873
407,159
71,644
478,803
583
124,013
632,200
756,213
530,207
296,860
93,326
407,167
71,674
478,841
583
843,329 $ 2,156,030
113
(Dollars in thousands)
2018
Acquired loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total acquired loans
Total loans
2017
Originated loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Deposit account overdrafts
Total originated loans
Acquired loans:
Commercial real estate, construction
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total acquired loans
Total loans
Pass Rated
Special
Mention
Substandard Doubtful
(Grades 1 - 4)
(Grade 5)
(Grade 6)
(Grade 7)
Not
Rated
Total
$
8,976 $
$
$
$
$
$
169,260
178,236
32,471
17,370
33
4
31
35
228,145 $
1,452,711 $
100,409 $
561,320
661,729
420,477
17,896
454
55
33
88
—
1,100,644 $
8,267 $
149,486
157,753
32,011
12,543
124
12
35
47
$
$
202,478 $
1,303,122 $
1,795 $
7,241
9,036
2,008
1,938
—
—
—
—
12,982 $
70,370 $
5,502 $
17,189
22,691
13,062
1,000
—
8
—
8
—
36,761 $
— $
6,527
6,527
157
593
—
—
—
—
7,277 $
44,038 $
1,633 $
8,114
9,747
1,058
2,033
—
—
—
—
12,838 $
43,176 $
754 $
16,938
17,692
4,512
11,371
—
—
—
—
—
33,575 $
52 $
9,107
9,159
2,325
1,105
—
—
—
—
12,589 $
46,164 $
12,404
— $
— $
184,711
—
96
197,115
—
96
35,537
—
—
296,937
275,459
137
40,653
40,620
—
136
132
—
2,370
2,339
—
2,506
2,471
—
233 $
572,748
318,550 $
642 $ 1,161,879 $ 2,728,778
— $
—
—
—
216
—
—
—
—
—
216 $
— $
—
—
—
—
—
—
—
—
— $
216 $
453 $
—
453
—
274,040
88,448
340,327
66,977
407,304
849
107,118
595,447
702,565
438,051
304,523
88,902
340,390
67,010
407,400
849
771,094 $ 1,942,290
8,319
— $
165,120
—
173,439
—
34,493
—
184,864
170,623
20,575
20,451
329
317
1,147
1,112
1,476
1,429
192,503 $
414,847
963,597 $ 2,357,137
During 2018, Peoples' classified loans, which are loans categorized as substandard or doubtful, declined compared to the
balances at December 31, 2017 mostly due to paydowns on classified loans, which were partially offset by acquired ASB loans.
114
Impaired Loans
The following table summarizes loans classified as impaired at December 31:
(Dollars in thousands)
2018
Unpaid
Principal
Balance
Recorded Investment
Without
Allowance Allowance
With
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Commercial real estate, construction $
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total
2017
$
Commercial real estate, construction $
Commercial real estate, other
Commercial real estate
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total
$
2,376 $
15,464
17,840
3,305
25,990
2,291
496
79
575
50,001 $
821 $
14,909
15,730
1,690
24,743
1,707
273
87
360
44,230 $
— $
274
274
790
644
424
—
22
22
2,154 $
— $
14
14
951
477
81
70
56
126
1,649 $
2,376 $
14,946
17,322
2,436
24,034
1,869
503
57
560
46,221 $
754
13,606
14,360
572
22,626
1,624
206
28
234
39,416 $
2,376 $
15,220
17,596
3,226
24,678
2,293
503
79
582
48,375 $
754 $
13,620
14,374
1,523
23,103
1,705
276
84
360
41,065 $
— $
119
119
157
154
73
—
6
6
509 $
— $
1
1
199
58
18
26
37
63
339 $
1,732 $
14,043
15,775
2,423
22,769
1,832
278
63
341
43,140 $
788 $
14,392
15,180
1,668
23,195
1,505
184
79
263
41,811 $
74
455
529
72
1,134
109
15
20
35
1,879
—
503
503
65
1,246
85
20
7
27
1,926
Peoples' loans classified as impaired shown in the table above, included loans that were classified as TDRs.
115
The following table summarizes the loans that were modified as TDRs during the years ended December 31, 2018 and 2017.
Commercial real estate, construction
1 $
50 $
50 $
Recorded Investment (1)
Number
of
Contracts
Pre-
Modification
Post-
Modification
Remaining
Recorded
Investment
1 $
714 $
714 $
9
8
27
5
32
50 $
904
666
485
32
904
666
485
32
517
2,801 $
517
2,801 $
15
6
1,258
196
1,258
196
22 $
1,504 $
1,504 $
1 $
14 $
14 $
4
7
6
15
2
17
210
483
296
218
10
228
210
483
296
218
10
228
714
899
660
412
29
441
2,714
45
1,226
193
1,464
14
149
473
289
201
8
209
(Dollars in thousands)
2018
Originated loans:
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total
Acquired loans:
Residential real estate
Home equity lines of credit
Total
2017
Originated loans:
Commercial real estate, other
Commercial and industrial
Residential real estate
Home equity lines of credit
Consumer, indirect
Consumer, direct
Consumer
Total
Acquired loans:
35 $
1,231 $
1,231 $
1,134
Commercial real estate, construction
Residential real estate
Home equity lines of credit
3 $
9
5
288 $
288 $
442
328
442
328
280
412
320
Consumer, direct
Total
18 $
(1) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that
were fully paid down, charged-off or foreclosed upon by period end are not reported.
1,060 $
1,060 $
2
2
1
—
1,012
116
The following table presents those loans modified into a TDR during the year that subsequently defaulted (i.e., 90 days or
more past due following a modification) during the years ended December 31:
(Dollars in thousands)
Originated loans:
Residential real estate
Home equity lines of credit
Total
Acquired loans:
Residential real estate
Home equity lines of credit
Total
Number
of
Contracts
2018
Recorded
Investment
(1)
Impact on the
Allowance for
Loan Losses
Number
of
Contracts
Recorded
Investment
(1)
Impact on the
Allowance for
Loan Losses
2017
1 $
1
2 $
— $
1
1 $
56 $
32
88 $
— $
10
10 $
—
—
—
—
—
—
— $
—
— $
2 $
—
2 $
— $
—
— $
64 $
—
64 $
—
—
—
—
—
—
(1) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were fully paid down,
charged-off or foreclosed upon by period end are not reported.
Peoples had no commitments to lend additional funds to the related borrowers whose loan terms have been modified in a
TDR.
117
Allowance for Loan Losses
Changes in the allowance for loan losses in the periods ended December 31 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, 2018
$
7,797 $
5,813 $
904 $
693 $
2,944 $
464 $
70 $18,685
Charge-offs
Recoveries
Net charge-offs
Provision for loan losses
Balance, December 31, 2018
Period-end amount allocated to:
Loans individually evaluated for
impairment
Loans collectively evaluated for
impairment
Balance, December 31, 2018
Balance, January 1, 2017
Charge-offs
Recoveries
Net charge-offs
Provision for (recovery of) loan
losses
Balance, December 31, 2017
Period-end amount allocated to:
Loans individually evaluated for
impairment
Loans collectively evaluated for
impairment
Balance, December 31, 2017
$
$
$
$
$
$
$
(849)
60
(789)
995
(38)
18
(20)
385
(355)
232
(123)
433
(107)
(2,515)
14
(93)
18
474
(2,041)
2,311
(358)
140
(218)
105
(965)
(5,187)
205
1,143
(760)
(4,044)
771
5,018
8,003 $
6,178 $
1,214 $
618 $
3,214 $
351 $
81 $19,659
119 $
157 $
154 $
73 $
— $
6 $
— $
509
7,884
6,021
1,060
545
3,214
8,003 $
6,178 $
1,214 $
618 $
3,214 $
345
351 $
81
19,150
81 $19,659
7,172 $
6,353 $
982 $
688 $
2,312 $
518 $
171 $18,196
(637)
152
(485)
(131)
13
(118)
(2,110)
764
(1,346)
(372)
179
(193)
(1,038)
(4,871)
215
1,470
(823)
(3,401)
(408)
146
(262)
887
(175)
1
(174)
(366)
7,797 $
5,813 $
904 $
693 $
2,944 $
407
123
1,978
139
464 $
722
3,890
70 $18,685
1 $
199 $
58 $
18 $
26 $
37 $
— $
339
7,796
5,614
846
675
2,918
7,797 $
5,813 $
904 $
693 $
2,944 $
427
464 $
70
18,346
70 $18,685
The increase in total allowance for loan losses in 2018 was primarily due to total loan growth of 16%, or $371.6 million. The
increase was primarily the result of commercial loan growth of $170.5 million, or 13%, which includes commercial real estate
and commercial and industrial loan balances. Additionally, indirect consumer lending had growth of $66.6 million, or 20%,
compared to December 31, 2017, and was partially offset by reductions in residential real estate loans.
Historical loss rates are calculated using charge-offs and recoveries within each portfolio over the past five years.
Allowance for Acquired Loan Losses
Acquired loans are recorded at their fair value as of the acquisition date with no valuation allowance, and monitored for
changes in credit quality and subsequent increases or decreases in expected cash flows. Decreases in expected cash flows of
acquired 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 nonimpaired acquired loans are similar to those utilized for originated loans; however, Peoples
records a provision for loan losses only when the computed allowance for loan losses exceeds the remaining fair value
adjustment.
118
The following table presents activity in the allowance for loan losses for acquired loans as of December 31:
(Dollars in thousands)
Nonimpaired loans:
Balance, January 1
Provision for loan losses
Balance, December 31
Purchased credit impaired loans:
Balance, January 1
Charge-offs
Provision for (recovery of) loan losses
Balance, December 31
2018
2017
$
$
$
$
— $
383
383 $
—
—
—
108 $
233
(2)
47
153 $
(7)
(118)
108
During 2018, as a result of the ASB acquisition, Peoples recorded provision for loan losses for nonimpaired loans. The
remaining fair value adjustment recorded for the nonimpaired loans acquired from ASB was not sufficient based on the
calculation of the allowance for loan losses as of December 31, 2018. During 2017, Peoples recognized a recovery of loan losses
that was related to an acquired purchased credit impaired loan that was paid off.
Note 5 Bank Premises and Equipment
The major categories of bank premises and equipment, net of accumulated depreciation, at December 31 are summarized
as follows:
(Dollars in thousands)
Land
Building and premises
Furniture, fixtures and equipment
Total bank premises and equipment
Accumulated depreciation
Net book value
2018
2017
$
13,776
$
68,245
28,523
110,544
(54,002)
56,542
$
$
12,871
61,729
27,137
101,737
(49,227)
52,510
Peoples depreciates its building and premises, and furniture, fixtures and equipment over estimated useful lives generally
ranging from 5 to 40 years and 2 to 10 years, respectively. Depreciation expense was $4.9 million in 2018 and 2017 and $5.1
million in 2016.
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 ten years. Certain leases contain renewal options and rent
escalation clauses calling for rent increases over the term of the lease. All leases which contain a rent escalation clause are
accounted for on a straight-line basis. Rent expense on the leased properties and equipment was $1.2 million in 2018, $1.1
million in both 2017 and 2016. The future minimum payments under noncancellable operating leases with initial or
remaining terms of one year or more consisted of the following at December 31, 2018:
(Dollars in thousands)
Payments
$
2019
2020
2021
2022
2023
Thereafter
Total future operating lease payments
$
119
975
756
606
455
295
223
3,310
Note 6 Goodwill and Other Intangible Assets
The following table details changes in the recorded amount of goodwill for the years ended December 31:
(Dollars in thousands)
Goodwill, beginning of year
Goodwill recorded from acquisitions
Goodwill, end of year
2018
2017
$
$
133,111 $
18,134
151,245 $
132,631
480
133,111
Peoples performed the required annual goodwill impairment test as of October 1, 2018, and concluded there was no
impairment in the recorded value of goodwill, based upon the estimated fair value of the single reporting unit. During the
annual goodwill impairment test, Peoples assessed qualitative factors, including relevant events and circumstances, to
determine that it was more likely than not that the fair value of the reporting unit exceeded the carrying value.
On April 13, 2018, Peoples completed its acquisition of ASB, for which Peoples recorded $18.1 million of goodwill. For
additional information on the ASB acquisition, refer to Note 19 Acquisitions.
During 2017, Peoples Insurance Agency, LLC acquired a third-party insurance administration company, for which no
goodwill was recorded, and a property and casualty focused independent insurance agency for which Peoples recorded
$480,000 of goodwill.
Other intangible assets
Other intangible assets were comprised of the following at December 31:
(Dollars in thousands)
Core Deposits
Customer
Relationships
Total
2018
Gross intangibles
Intangibles recorded from acquisitions
Accumulated amortization
Total acquisition-related intangibles
Servicing rights
Total other intangibles
2017
Gross intangibles
Intangibles recorded from acquisitions
Accumulated amortization
Total acquisition-related intangibles
Servicing rights
Total other intangibles
$
$
$
$
15,636
$
7,480
$
2,363
(12,540)
5,459
16,150
—
(10,281)
5,869
$
$
$
—
(4,754)
2,726
5,373
1,593
(3,675)
3,291
$
$
$
$
$
23,116
2,363
(17,294)
8,185
2,655
10,840
21,523
1,593
(13,956)
9,160
2,305
11,465
Peoples performed other intangible assets impairment testing and concluded there was no impairment in the recorded
value of other intangible assets as of December 31, 2018, based upon estimated fair value. During the annual other intangible
assets impairment test, Peoples assessed qualitative factors, including relevant events and circumstances, to determine that it
was more likely than not that the fair value of other intangible assets exceeded the carrying value.
Other intangible assets recorded from the ASB acquisition were $2.6 million in 2018, which included $2.4 million in core
deposit intangible assets and $276,000 in servicing rights. Other intangible assets recorded from acquisitions of $1.6 million
in 2017 related to the acquisitions of a third-party insurance administration company and a property and casualty focused
independent insurance agency. Refer to Note 19 Acquisitions for additional information.
120
The following table details estimated aggregate future amortization of other intangible assets at December 31, 2018:
(Dollars in thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Core
Deposits
Customer
Relationships
Total
$
1,999
$
1,438
911
437
236
$
779
629
470
318
217
438
5,459
$
$
313
2,726
$
2,778
2,067
1,381
755
453
751
8,185
The following is an analysis of activity of servicing rights for the years ended December 31:
(Dollars in thousands)
Balance, beginning of year
Amortization
Servicing rights originated
Servicing rights acquired
Balance, end of year
2018
2017
2016
$
$
2,305
(1,623)
1,697
276
2,655
$
$
2,305
(741)
741
—
2,305
$
$
2,387
(762)
680
—
2,305
No valuation allowances were required at December 31, 2018, 2017 and 2016 for Peoples’ servicing rights since, at each
date, the fair value equaled or exceeded the book value.
The fair value of servicing rights was $4.6 million and $3.9 million at December 31, 2018 and 2017, respectively. Fair
value at December 31, 2018 was determined using discount rates ranging from 10.5% to 13.0%, prepayment speeds ranging
from 8.7% to 11.6%, depending on the stratification of the specific right, utilizing state delinquency to calculate the default
rate. Fair value at December 31, 2017 was determined using discount rates ranging from 9.3% to 11.8%, prepayment speeds
ranging from 8.9% to 22.6%.
Note 7 Deposits
Peoples’ deposit balances were comprised of the following at December 31:
(Dollars in thousands)
Retail CDs:
$100,000 or more
Less than $100,000
Retail CDs
Interest-bearing deposit accounts
Savings accounts
Money market deposit accounts
Governmental deposit accounts
Brokered CDs
Total interest-bearing deposits
Non-interest-bearing deposits
Total deposits
2018
2017
$
182,717 $
149,105
211,618
394,335
573,702
468,500
379,878
267,319
263,854
189,568
338,673
593,415
446,714
371,376
264,524
159,618
2,347,588
2,174,320
607,877
556,010
$ 2,955,465 $ 2,730,330
121
The contractual maturities of CDs for each of the next five years and thereafter are as follows:
(Dollars in thousands)
2019
Retail
Brokered
Total
$
196,849 $
235,421 $
432,270
2020
2021
2022
2023
Thereafter
Total CDs
84,416
69,399
19,268
23,212
1,191
394,335 $
$
18,330
5,540
4,081
482
—
263,854 $
102,746
74,939
23,349
23,694
1,191
658,189
Deposits from related parties were $11.3 million and $12.0 million at December 31, 2018 and 2017, respectively.
Note 8 Short-Term Borrowings
Peoples utilizes various short-term borrowings as sources of funds, which are summarized as follows at December 31:
(Dollars in thousands)
2018
Ending balance
Average balance
Highest month-end balance
Interest expense
Weighted-average interest rate:
End of year
During the year
2017
Ending balance
Average balance
Highest month-end balance
Interest expense
Weighted-average interest rate:
End of year
During the year
2016
Ending balance
Average balance
Highest month-end balance
Interest expense
Weighted-average interest rate:
End of year
During the year
(a) NM = not meaningful.
Retail
Repurchase
Agreements
FHLB
Advances
National
Market
Repurchase
Agreements Other (a)
$
$
$
$
$
$
51,202
64,519
72,822
194
0.48%
0.30%
76,899
75,344
80,649
128
0.17%
0.17%
74,607
72,886
81,353
124
$
$
$
$
$
$
305,000
219,897
307,561
4,494
2.32%
2.04%
92,592
100,205
208,000
1,160
1.91%
1.16%
231,000
86,260
231,000
384
$
$
$
$
$
$
0.17%
0.17%
0.64%
0.45%
— $
14,329
30,000
527
—%
3.68%
40,000
6,685
40,000
246
$
$
$
(4)
301
1,553
23
—%
NM
—
13
—
—
3.68%
3.68%
—%
1.30%
— $
—
—
— $
—%
—%
—
23
—
—
—%
1.11%
Peoples’ retail repurchase agreements consist of overnight agreements with Peoples’ commercial customers and serve as
a cash management tool.
122
The FHLB advances consist of overnight borrowings, 90-day advances used to fund interest rate swaps, other advances
with an original maturity of one year or less, and the current portion of long-term advances due in less than one year. These
advances, along with the long-term advances disclosed in Note 9 Long-Term Borrowings, are collateralized by residential
mortgage loans and investment securities. Peoples’ borrowing capacity with the FHLB is based on the amount of collateral
pledged and the amount of FHLB common stock owned. Peoples reclassified $30.0 million and $50.6 million of FHLB
advances from long-term borrowings to short-term borrowings in 2018 and 2017, respectively, due to maturity dates of less
than one year, of which $40.0 million and $20.0 million matured in 2018 and 2017, respectively.
Peoples' national market repurchase agreements consist of agreements with unrelated financial service companies.
Additional information regarding the national market repurchase agreements can be found in Note 9 Long-Term Borrowings.
The $40.0 million of national market repurchase agreements were reclassified from long-term borrowings to short-term
borrowings during 2017 and matured in 2018.
Other short-term borrowings consist primarily of federal funds purchased and advances from the Federal Reserve
Discount Window. Federal funds purchased are short-term borrowings from correspondent banks that typically mature
within one to ninety days. Interest on federal funds purchased is set daily by the correspondent bank based on prevailing
market rates. The Federal Reserve Discount Window provides credit facilities to financial institutions, which are designed to
ensure adequate liquidity by providing a source of short-term funds. Federal Reserve Discount Window advances are
typically overnight and must be secured by collateral acceptable to the FRB. At December 31, 2018, Peoples had available
Federal Reserve Discount Window credit of $107.9 million. Other short-term borrowings also includes the unamortized debt
issuance costs related to the costs associated with the Credit Agreement (the "RJB Credit Agreement") with Raymond James
Bank, N.A. which was a short-term obligation as of December 31, 2018. For further information on the RJB Credit
Agreement, refer to Note 9 Long-term Borrowings.
Note 9 Long-Term Borrowings
Long-term borrowings consisted of the following at December 31:
(Dollars in thousands)
FHLB putable, non-amortizing, fixed rate advances
FHLB amortizing, fixed rate advances
Junior subordinated debt securities
Unamortized debt issuance cost
Long-term borrowings
2018
2017
Balance
85,000
17,361
7,283
—
109,644
$
$
Weighted-
Average
Rate
Weighted-
Average
Rate
Balance
2.05 % $
2.09 %
7.83 %
— %
2.44% $
115,000
21,939
7,107
(27)
144,019
1.86 %
2.02 %
4.97 %
— %
2.04%
The putable, non-amortizing, fixed rate FHLB advances have maturities ranging from one to nine years that may be
repaid prior to maturity, subject to termination fees. 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.
These advances require monthly interest payments, with no repayment of principal until the earlier of either an option to
terminate exercised by the FHLB or the stated maturity.
The amortizing, fixed rate FHLB advances have a fixed rate for the term of each advance, with maturities ranging from
one 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. Long-term FHLB advances are collateralized by assets owned by Peoples.
Peoples continually evaluates the overall balance sheet position given the interest rate environment. During 2018,
Peoples borrowed no additional long-term advances from the FHLB. At December 31, 2018, outstanding long-term FLHB
non-amortizing advances, which have interest rates ranging from 1.26% to 2.17%, mature between 2020 and 2027. During
2018, $30.0 million of long-term FHLB non-amortizing advances were reclassified to short-term borrowing as the maturity
became less than one year. As of December 31, 2018, Peoples had 12 interest rate swaps with a notional value of $110.0
123
million, of which $60.0 million of the swaps roughly coincided with the 2018 maturity of existing FHLB advances, while
$50.0 million was new.
During 2017, Peoples borrowed an additional $75.0 million of long-term FHLB non-amortizing advances, which have
interest rates ranging from 1.20% to 2.03% and mature between 2018 and 2022. Peoples also entered into two additional
interest rate swaps in 2017 with a notional value of $20.0 million associated with People' cash outflows for various FHLB
advances. The swaps become effective in 2018, roughly to coincide with the maturity of existing FHLB advances. During
2017, $40.0 million in callable national market repurchase agreements and $50.6 million in long-term FHLB non-amortizing
advances were reclassified to short-term borrowings as the maturity became less than one year.
Additional information regarding Peoples' interest rate swaps can be found in Note 14 Derivative Financial Instruments.
Peoples' callable national market repurchase agreements consist of agreements with unrelated financial service
companies and have original maturities ranging from five to ten years. In general, these agreements may not be terminated
by Peoples prior to maturity without incurring additional costs. The callable national market repurchase agreements contain
call option features, in which the buyer has the right, at its discretion, to terminate the repurchase agreement after an initial
period ranging from three months to five years. After the initial call period, the buyer has a one-time option to terminate the
repurchase agreement. If the buyer exercises its option, Peoples would be required to repay the repurchase agreement in full
at the quarterly date. As of December 31, 2018, Peoples' callable national market repurchase agreements had no remaining
callable options. Peoples is required to make quarterly interest payments.
On March 4, 2016, Peoples entered into the RJB Credit Agreement, with Raymond James Bank, N.A. ("Raymond James
Bank") which has a three-year term and provides Peoples with a revolving line of credit in the maximum aggregate principal
amount of $15.0 million (the "RJB Loan Commitment") for the purpose of: (i) to the extent that any amounts remained
outstanding, paying off the then outstanding $15.0 million revolving credit loan of Peoples; (ii) making acquisitions; (iii)
making stock repurchases; (iv) working capital needs; and (v) other general corporate purposes. On March 4, 2016, Peoples
paid fees of $70,600, representing 0.47% of the RJB Loan Commitment.
The RJB Credit Agreement is unsecured. However, the RJB Credit Agreement contains negative covenants which
preclude Peoples from: (i) taking any action which could, directly or indirectly, decrease Peoples' ownership (alone or
together with any of Peoples' subsidiaries) interest in Peoples Bank (Peoples' Ohio state-chartered subsidiary bank) or any of
Peoples Bank's subsidiaries to a level below the percentage of equity interests held as of March 4, 2016; (ii) taking any action
to or allowing Peoples Bank or any of Peoples Bank's subsidiaries to take any action to directly or indirectly create, assume,
incur, suffer or permit to exist any pledge, encumbrance, security interest, assignment, lien or charge of any kind or character
on the equity interests of Peoples Bank or any of Peoples Bank's subsidiaries; or (iii) taking any action to or allow Peoples
Bank or any of Peoples Bank's subsidiaries to sell, transfer, issue, reissue or exchange, or grant any option with respect to,
any equity interest of Peoples Bank or any of Peoples Bank's subsidiaries. There are also negative covenants limiting the
actions which may be taken with respect to the authorization or issuance of additional shares of any class of equity interests
of Peoples Bank or any of Peoples Bank's subsidiaries or the grant to any person other than Raymond James Bank of any
proxy for existing equity interests of Peoples Bank or any of Peoples Bank's subsidiaries.
The RJB Credit Agreement contains covenants which are usual and customary for comparable transactions. In addition
to the negative covenants affecting the equity interests of Peoples Bank and Peoples Bank's subsidiaries discussed above,
under the RJB Credit Agreement, the following covenants must be complied with:
(a) neither Peoples nor any of its subsidiaries may create, incur or suffer to exist additional indebtedness with
an aggregate principal amount which exceeds $10 million at any time outstanding, subject to specific
negotiated carve-outs;
(b) neither Peoples nor any of its subsidiaries may be a party to certain material transactions (such as mergers
or consolidations with third parties, liquidations or dissolutions, sales of assets, acquisitions, investments
and sale/leaseback transactions), subject to transactions in the ordinary course of the banking business of
Peoples Bank and new investments in an aggregate amount not exceeding $10 million being permitted as
well as specific negotiated carve-outs;
(c) neither Peoples nor any of its subsidiaries may voluntarily prepay, defease, purchase, redeem, retire or
otherwise acquire any subordinated indebtedness issued by them; subject to specific negotiated carve-outs
and the consent of Raymond James Bank; and
(d) neither Peoples nor any of its subsidiaries may make any Restricted Payments (as defined in the RJB Credit
Agreement), except that, to the extent legally permissible, (i) any subsidiary may declare and pay dividends
to Peoples or a wholly-owned subsidiary of Peoples and (ii) Peoples may declare and pay dividends on its
124
common shares provided that no event of default exists before or after giving effect to the dividend and
Peoples is in compliance (on a pro forma basis) with the financial covenants specified in the RJB Credit
Agreement, after giving effect to the dividend.
Peoples and Peoples Bank are also required to satisfy certain financial covenants including:
(i) Peoples (on a consolidated basis) and Peoples Bank must be "well capitalized" at all times, as defined and
determined by the applicable governmental authority having jurisdiction over Peoples or Peoples Bank;
(ii) Peoples (on a consolidated basis) and Peoples Bank must maintain a total risk-based capital ratio (as
defined by the applicable governmental authority having regulatory authority over Peoples or Peoples
Bank) of at least 12.50% as of the last day of any fiscal quarter;
(iii) Peoples Bank must maintain a ratio of "Non-Performing Assets" to "Tangible Primary Capital" of not more
than 20% as of the last day of any fiscal quarter;
(iv) Peoples Bank must maintain a ratio of "Loan Loss Reserves" to "Non-Performing Loans" of not less than
70% at all times; and
(v) Peoples (on a consolidated basis) must maintain a "Fixed Charge Coverage Ratio" that equals or exceeds
1.00 to 1.25 as of the end of each fiscal quarter, with the items used in this ratio being determined on a
trailing four-fiscal quarter basis.
As of December 31, 2018, Peoples was in compliance with the applicable covenants imposed by the RJB Credit
Agreement. The RJB Credit Agreement matures on March 3, 2019. Peoples is in the process of renewing this facility and
expects that it will be renewed prior to its expiration.
On March 6, 2015, Peoples completed its acquisition of NB&T Financial Group, Inc. ("NB&T"), which included the
assumption of Fixed/Floating Rate Junior Subordinated Debt Securities due in 2037 (the "junior subordinated debt
securities") at an acquisition-date fair value of $6.6 million, held in a wholly-owned statutory trust whose common securities
were wholly-owned by NB&T. The sole assets of the statutory trust are the junior subordinated debt securities and related
payments. The junior subordinated debt securities and the back-up obligations, in the aggregate, constitute a full and
unconditional guarantee of the obligations of the statutory trust under the Capital Securities held by third-party investors.
Distributions on the Capital Securities are payable at the annual rate of 1.50% over the 3-month LIBOR. Distributions on the
Capital Securities are included in interest expense in the Consolidated Financial Statements. These securities are considered
tier I capital (with certain limitations applicable) under current regulatory guidelines. The junior subordinated debt securities
are subject to mandatory redemption, in whole or in part, upon repayment of the Capital Securities at maturity or their earlier
redemption at the liquidation amount. Subject to prior approval of the FRB, the Capital Securities are redeemable prior to the
maturity date of September 6, 2037, and are redeemable at par. Since September 6, 2012, the Capital Securities have been
redeemable at par, subject to such approval. Distributions on the Capital Securities can be deferred from time to time for a
period not to exceed 20 consecutive semi-annual periods.
At December 31, 2018, the aggregate minimum annual retirements of long-term borrowings in future periods were as
follows:
(Dollars in thousands)
Balance
Weighted-
Average Rate
2019
2020
2021
2022
2023
Thereafter
Long-term borrowings
$
$
3,512
25,564
21,979
16,521
1,157
40,911
109,644
1.53 %
1.83 %
1.73 %
1.95 %
1.01 %
3.51 %
2.44%
125
Note 10 Stockholders’ Equity
The following table details the activity in Peoples’ common stock and treasury stock during the years ended
December 31:
Shares at December 31, 2015
Changes related to stock-based compensation awards:
Grant of restricted common shares
Release of restricted common shares
Cancellation of restricted common shares
Exercise of stock options for common shares
Grant of common shares
Changes related to deferred compensation plan for Boards of Directors:
Purchase of treasury stock
Reissuance of treasury stock
Common shares purchased under repurchase program
Common shares issued under dividend reinvestment plan
Common shares issued under compensation plan for Boards of Directors
Common shares issued under employee stock purchase plan
Shares at December 31, 2016
Changes related to stock-based compensation awards:
Grant of restricted common shares
Release of restricted common shares
Cancellation of restricted common shares
Grant of common shares
Exercise of stock options for common shares
Changes related to deferred compensation plan for Boards of Directors:
Purchase of treasury stock
Reissuance of treasury stock
Common shares issued under dividend reinvestment plan
Common shares issued under compensation plan for Board of Directors
Common shares issued under employee stock purchase plan
Shares at December 31, 2017
Changes related to stock-based compensation awards:
Release of restricted common shares
Cancellation of restricted common shares
Exercise of stock options for common shares
Grant of restricted common shares
Grant of common shares
Changes related to deferred compensation plan for Board of Directors:
Purchase of treasury stock
Sale of treasury stock
Reissuance of treasury stock
Common shares issued under dividend reinvestment plan
Common shares issued under compensation plan for Board of Directors
Common shares issued under employee stock purchase plan
Issuance of common shares related to acquisition of ASB
Shares at December 31, 2018
Common
Stock
18,931,200
Treasury
Stock
586,686
—
—
(11,820)
—
—
—
—
—
19,711
—
—
18,939,091
—
—
(3,554)
—
—
—
—
16,848
—
—
18,952,385
—
—
—
—
—
—
—
—
19,282
—
—
1,152,711
20,124,378
(56,000)
17,220
1,000
(1,775)
(350)
8,396
(12,012)
279,770
—
(11,450)
(15,727)
795,758
(68,707)
10,452
5,050
(300)
(266)
5,413
(24,634)
—
(9,092)
(11,225)
702,449
32,082
2,011
(102)
(106,805)
(16,544)
6,526
(10)
(2,089)
—
(4,699)
(11,530)
—
601,289
On November 3, 2015, Peoples announced that its Board of Directors approved and adopted a share repurchase program
authorizing Peoples to purchase, from time to time, up to an aggregate of $20 million of its outstanding common shares. No
126
common shares were repurchased in 2015. During 2016, Peoples repurchased 279,770 common shares at a cost of $5.0
million under the program. No common shares were repurchased in 2017 and 2018.
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 December 31, 2018, Peoples had no preferred shares issued or outstanding.
The following table details the cash dividends declared per common share for the year ended December 31:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total dividends declared
2018
2017
0.26 $
0.28
0.28
0.30
1.12 $
0.20
0.20
0.22
0.22
0.84
$
$
Accumulated Other Comprehensive (Loss) Income
The following details the change in the components of Peoples’ accumulated other comprehensive (loss) income for the
years ended December 31:
(Dollars in thousands)
Balance, December 31, 2015
Reclassification adjustments to net income:
Realized gain on sale of securities, net of tax
Other comprehensive (loss) income, net of reclassifications
and tax
Balance, December 31, 2016
Reclassification adjustments to net income:
Realized gain on sale of securities, net of tax
Realized loss due to settlement and curtailment, net of tax
Amounts reclassified out of accumulated other
comprehensive (loss) income per ASU 2018-02
Other comprehensive loss, net of reclassifications and tax
Balance, December 31, 2017
Reclassification adjustments to net income:
Realized gain on sale of securities, net of tax
Realized loss due to settlement and curtailment, net of tax
Amounts reclassified out of accumulated other
comprehensive loss per ASU 2016-01
Other comprehensive (loss) income, net of reclassifications
and tax
Balance, December 31, 2018
Unrealized
Gain
(Loss) on
Securities
$
2,869 $
(604)
(1,684)
$
581 $
$
(1,939)
—
(370)
(360)
(2,088) $
115
—
(5,020)
(3,089)
Unrecognized
Net Pension
and
Postretirement
Costs
Unrealized
Gain
(Loss) on
Cash Flow
Hedge
Accumulated
Other
Comprehensive
(Loss) Income
(3,228) $
— $
—
—
(93)
(3,321) $
1,186
1,186 $
—
157
—
—
(754)
(338)
(4,256) $
200
(257)
1,129 $
—
211
—
334
—
—
—
(269)
(359)
(604)
(591)
(1,554)
(1,939)
157
(924)
(955)
(5,215)
115
211
(5,020)
(3,024)
$
(10,082) $
(3,711) $
860 $
(12,933)
As of December 31, 2017, Peoples elected to early adopt and retrospectively apply the reclassification of stranded
income tax effects from accumulated other comprehensive loss to retained earnings, as permitted under ASU 2018-02.
As of January 1, 2018, Peoples adopted ASU 2016-01, which resulted in reclassifying $5.0 million in net unrealized
gains on equity securities from accumulated other comprehensive loss to retained earnings.
127
Note 11 Employee Benefit Plans
Peoples sponsors a noncontributory defined benefit pension plan that covers substantially all employees hired before
January 1, 2010. The plan provides retirement benefits based on an employee’s years of service and compensation. For
employees hired before January 1, 2003, the amount of postretirement benefit is based on the employee’s average monthly
compensation pay over the highest five consecutive years out of the employee’s last ten years with Peoples while an eligible
employee. For employees hired on or after January 1, 2003, the amount of postretirement benefit is based on 2% of the
employee’s annual compensation 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 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.
128
The following tables provide a reconciliation of the changes in the benefit obligations and fair value of assets of the plans
for the years ended December 31, 2018 and 2017, and a statement of the funded status as of December 31, 2018 and 2017:
(Dollars in thousands)
Change in benefit obligation:
Obligation at January 1
Interest cost
Plan participants’ contributions
Actuarial (gain) loss
Benefit payments
Settlements
Obligation at December 31
Pension Benefits
Post-retirement Benefits
2018
2017
2018
2017
$ 12,991
$ 12,127
$
423
—
(1,519)
(197)
(703)
$ 10,995
451
—
1,207
(189)
(605)
$ 12,991
Accumulated benefit obligation at December 31
$ 10,995
$ 12,991
Change in plan assets:
Fair value of plan assets at January 1
Actual (loss) return on plan assets
Employer contributions
Plan participants’ contributions
Benefit payments
Settlements
Fair value of plan assets at December 31
Funded status at December 31
Amounts recognized in Consolidated Balance Sheets:
Accrued benefit liability
Net amount recognized
$
$
8,493
(554)
3,195
7,582
1,140
565
—
(197)
(703)
$ 10,234
—
(189)
(605)
8,493
$
(761) $ (4,498)
(761) $ (4,498)
(761) $ (4,498)
$
$
$
Amounts recognized in Accumulated Other Comprehensive Loss:
Unrecognized prior service cost
Unrecognized net loss (gain)
Total
Weighted-average assumptions at year-end:
$
$
— $
— $
3,761
3,761
$
4,311
4,311
$
$
$
$
$
$
$
$
91
3
46
—
(57)
—
83
83
$
$
$
— $
—
11
46
(57)
—
— $
(83) $
(83) $
(83) $
(1) $
(52)
(53) $
103
3
46
(4)
(57)
—
91
91
—
—
11
46
(57)
—
—
(91)
(91)
(91)
(1)
(56)
(57)
Discount rate
3.55%
3.40%
3.40%
3.40%
The estimated costs relating to Peoples’ pension benefits that will be amortized from accumulated other comprehensive
loss into net periodic cost over the next fiscal year are $78,000.
129
Net Periodic Cost (Benefit)
The following table details the components of the net periodic cost (benefit) for the plans at December 31:
(Dollars in thousands)
Interest cost
Expected return on plan assets
Amortization of net loss (gain)
Settlement of benefit obligation
Net periodic cost (benefit)
Weighted-average assumptions:
Discount rate
Expected return on plan assets
Rate of compensation increase
$
$
$
$
Pension Benefits
2017
451
(553)
102
242
242
$
$
2018
423
(640)
104
267
154
2016
438
(492)
95
—
41
$
Post-retirement Benefits
2016
2018
4
3
$
—
—
(6)
(5)
—
—
(2)
(2) $
2017
3
—
(6)
—
(3) $
$
$
3.55%
7.50%
n/a
3.80%
7.50%
n/a
3.90% 3.40%
n/a
7.50%
n/a
n/a
3.80%
n/a
n/a
3.90%
n/a
n/a
For measurement purposes, a 5.5% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost
trend rate) was assumed for 2018, grading down to an ultimate rate of 4.0% in 2064. The health care trend rate assumption
does not have a significant effect on the contributory defined benefit postretirement plan; therefore, a one percentage point
increase or decrease in the trend rate is not material in the determination of the accumulated postretirement benefit obligation
or the ongoing expense.
Under US GAAP, Peoples is required to recognize a settlement gain or loss when the aggregate amount of lump-sum
distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension
cost. The amount of settlement gain or loss recognized is the pro rata amount of the unrealized gain or loss existing
immediately prior to the settlement. In general, both the projected benefit obligation and fair value of plan assets are required
to be remeasured in order to determine the settlement gain or loss.
Settlement charges recorded were $267,000 in 2018 compared to $242,000 in 2017, and none in 2016.
Determination of Expected Long-term Rate of Return
The expected long-term rate of return on the pension plan's total assets is based on the expected return of each category
of the pension plan's assets. Peoples' investment strategy for the pension plan's assets continues to allocate 60% to 75% to
equity securities. The returns generated by equity securities over the last 10 years have been significantly lower than their
long-term historical annual returns due in part to unfavorable economic conditions.
Plan Assets
Peoples' investment strategy, as established by Peoples' Retirement Plan Committee, is to invest assets of the pension
plan based upon established target allocations, which include a target range of 60-75% allocation in equity securities, 20-40%
in debt securities and 0-15% of other investments. The assets are reallocated periodically to meet the target allocations. The
investment policy is reviewed periodically, under the advisement of a certified investment advisor, to determine if the policy
should be changed.
130
The following table provides the fair values of investments held in Peoples' pension plan at December 31, by major asset
category:
(Dollars in thousands)
2018
Equity securities:
Mutual funds - equity
Debt securities:
Mutual funds - taxable income
Total fair value of pension assets
2017
Equity securities:
Mutual funds - equity
Debt securities:
Mutual funds - taxable income
Total fair value of pension assets
$
$
$
$
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Fair Value
6,750
$
6,750
$
2,746
9,496
$
2,746
9,496
$
6,131
$
6,131
$
2,248
8,379
$
2,248
8,379
$
—
—
—
—
—
—
Pension plan assets also included cash and cash equivalents of $680,000 and accrued income of $58,000 at December 31,
2018. Cash and cash equivalents were $113,000 and accrued income was $1,000 at December 31, 2017. For further
information regarding levels of input used to measure fair value, refer to Note 2 Fair Value of Financial Instruments.
Equity securities held as investments in Peoples' pension plan did not include any securities of Peoples or related parties
in 2018 or 2017.
Cash Flows
Peoples expects to make between $10,000 to $15,000 of contributions to its pension plan in 2019; however, actual
contributions are made at the discretion of the Retirement Plan Committee and Peoples' Board of Directors. During 2018,
Peoples elected to make an additional contribution to take advantage of tax savings related to the Act that was enacted on
December 22, 2017.
Estimated future benefit payments, which reflect benefits attributable to estimated future service, for the years ending
December 31 are as follows:
(Dollars in thousands)
Pension Benefits
Post-retirement
Benefits
2019
2020
2021
2022
2023
2024 to 2028
Total
$
$
1,000
1,095
1,283
740
774
3,091
7,983
$
$
11
10
10
9
9
34
83
Retirement Savings Plan
Peoples also maintains a retirement savings plan, or 401(k) plan, which covers substantially all employees. The plan
provides participants the opportunity to save for retirement on a tax-deferred basis. Beginning January 1, 2011, matching
contributions equaled 100% of participants' contributions that did not exceed 3% of the participants' compensation, plus 50%
of participants' contributions between 3% and 5% of the participants' compensation. Matching contributions made by
Peoples totaled $1.7 million in 2018, $1.5 million in 2017 and $1.5 million in 2016.
131
Note 12 Income Taxes
The Act was enacted on December 22, 2017 and required Peoples to reflect the changes associated with the Act’s
provisions in the fourth quarter of 2017. Peoples was not able to make reasonable estimates for all items based on its
knowledge of accounting under ASC 740, and the provisions of the tax laws that were in effect immediately prior to
enactment. As of December 31, 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 $0.7 million in
2018. The final adjustment was mainly due to Peoples' contribution of $3.2 million to Peoples' defined benefit pension plan
during 2018.
As of December, 2017, Peoples had made reasonable estimates for the reduced statutory federal corporate income tax rate
on its deferred tax balances and recognized a provisional amount of $0.9 million, which was included as a component of
income tax expense from continuing operations for 2017.
The reported income tax expense and effective tax rate in the Consolidated Statements of Income differ from the amounts
computed by applying the statutory federal corporate income tax rate as follows for the years ended December 31:
(Dollars in thousands)
2018
2017
2016
Income tax computed at statutory federal
corporate income tax rate
Differences in rate resulting from:
Release of valuation allowance
Tax Cuts and Job Act
Tax-exempt interest income
Bank owned life insurance
Stock awards
Investments in tax credit funds
Other, net
Income tax expense
Amount
Rate
Amount
Rate
Amount
Rate
$ 11,505
21.0 % $ 20,045
35.0 % $ 15,785
35.0 %
(805)
(705)
(554)
(393)
(332)
(125)
95
8,686
$
(1.5)%
—
— %
—
(1.3)%
(1.0)%
(0.7)%
897
(1,092)
(683)
(154)
(221)
(60)
0.2 %
15.9 % $ 18,732
(0.2)%
(0.6)%
1.6 %
(1.9)%
(1.2)%
—
(1,170)
(495)
—
(164)
(0.1)%
169
32.7 % $ 14,125
(0.4)%
(0.3)%
— %
— %
(2.6)%
(1.1)%
— %
(0.4)%
0.4 %
31.3 %
On January 1, 2018, Peoples began recognizing income tax expense at the 21% statutory federal corporate income tax
rate, which resulted in lower income tax expense for 2018, compared to recognition at the 35% statutory federal corporate
income tax rate for 2017.
During 2018, Peoples released a valuation allowance which reduced income tax expense by $0.8 million. The valuation
allowance was related to a historic tax credit that Peoples had invested in during 2015. Peoples sold $6.7 million of equity
investment securities in 2018, which resulted in a capital gain for tax purposes. This capital gain was large enough to offset an
anticipated future capital loss expected to be recognized due to the structure of the historic tax credit investment, resulting in
the release of the valuation allowance.
Peoples' reported income tax expense consisted of the following for the years ended December 31:
(Dollars in thousands)
Current income tax expense
Deferred income tax benefit
Income tax expense
2018
2017
2016
$
$
8,995
(309)
8,686
$
$
21,511
(2,779)
18,732
$
$
16,587
(2,462)
14,125
132
The significant components of Peoples' deferred tax assets and liabilities consisted of the following at December 31:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses
Available-for-sale securities
Accrued employee benefits
Tax credit investments
Other
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Purchase accounting adjustments
Deferred loan income
Bank premises and equipment (a)
Derivative instruments
Tax credit investments
Other
Total deferred tax liabilities
Net deferred tax asset
$
$
$
$
$
$
$
2018
2017
$
8,559
2,678
1,843
805
73
13,958
$
— $
$
13,958
5,839
3,061
2,047
228
82
673
11,930
2,028
$
$
$
6,992
555
2,569
1,560
116
11,792
805
10,987
6,092
2,459
307
300
—
484
9,642
1,345
(a) Peoples elected Internal Revenue Code Section 179 bonus depreciation, which increased the
bonus depreciation percentage from 50% to 100% for qualified properties acquired and placed in
service after September 27, 2017, and before January 1, 2023.
As of December 31, 2018, Peoples had no operating loss carryforwards for tax purposes.
The federal income tax benefit from sales of investment securities was $31,000 in 2018. Sales of investment securities
resulted in tax expense of $1.0 million in 2017 and $326,000 in 2016.
Income tax benefits are recognized in the Consolidated Financial Statements for a tax position only if it is considered
"more likely than not" of being sustained in an audit, based solely on the technical merits of the income tax position. If the
recognition criteria are met, the amount of income tax benefits to be recognized are measured based on the largest income tax
benefit that is more than 50 percent likely to be realized on ultimate resolution of the tax position. The following table
provides a reconciliation of uncertain tax positions at December 31:
(Dollars in thousands)
2018
2017
Uncertain tax positions, beginning of year
Gross increase based on tax positions related to current year
Gross increase for tax position taken during prior years
Gross decrease due to the statute of limitations
Uncertain tax positions, end of year
$
$
550 $
55
13
(195)
423 $
522
42
20
(34)
550
Peoples is subject to U.S. federal income tax, as well as to tax in various state income tax jurisdictions. Peoples' income
tax returns are subject to review and examination by federal and state taxing authorities. Peoples is currently open to audit
under the applicable statutes of limitations by the Internal Revenue Service for the years ended December 31, 2015 through
2017. The years open to examination by state taxing authorities vary by jurisdiction.
133
Note 13 Earnings Per Common Share
The calculations of basic and diluted earnings per common share for the years ended December 31 were as follows:
(Dollars in thousands, except per common share data)
2018
2017
2016
Distributed earnings allocated to common shareholders
Undistributed earnings allocated to common shareholders
Net earnings allocated to common shareholders
$
$
21,334 $
15,159 $
24,660
23,115
45,994 $
38,274 $
11,532
19,483
31,015
Weighted-average common shares outstanding
18,991,768
18,050,189
18,013,693
Effect of potentially dilutive common shares
130,492
158,495
141,770
Total weighted-average diluted common shares outstanding
19,122,260
18,208,684
18,155,463
Earnings per common share:
Basic
Diluted
$
$
2.42 $
2.41 $
2.12 $
2.10 $
1.72
1.71
Anti-dilutive common shares excluded from calculation:
Restricted shares, stock options and stock appreciation rights
1,748
453
20,769
Note 14 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 value 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 were designated as cash flow hedges and involved the
receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. Peoples acquired three
interest rate swaps with the ASB acquisition in the second quarter of 2018, which had an aggregate notional value of $7.0
million, and all of which matured in July 2018. On July 31, 2018, Peoples entered into $50.0 million of interest rate swaps,
which will mature between 2021 and 2028, with interest rates ranging from 2.92% to 3.00%. As of December 31, 2018,
Peoples had twelve interest rate swaps with an aggregate notional value of $110.0 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 rate on the rolling three-month FHLB advances.
Amounts reported in accumulated other comprehensive loss 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 year ended
December 31, 2018, Peoples had reclassifications to interest expense of $38,000, which were a reduction to interest expense.
134
No interest expense was recorded during 2017. During the next twelve months, Peoples estimates that minimal interest
expense will be reclassified.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of each derivative is
reported in accumulated other comprehensive loss (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 used to fund the swaps are matched to the reset dates and payment
dates on the receipt of the three-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. During the year ended December 31,
2018, Peoples had reclassifications to earnings of $18,000 due to ineffectiveness of the cash flow hedges.
The following table summarizes information about the interest-rate swaps designated as cash flow hedges at December
31:
(Dollars in thousands)
Notional amount
Weighted average pay rates
Weighted average receive rates
Weighted average maturity
Unrealized gains
$
$
2018
2017
110,000
$
60,000
2.37%
2.57%
2/24/2025
1.88%
2.30%
12/29/2024
860
$
1,129
The following table presents net gains recorded in accumulated other comprehensive income and in the Consolidated
Statements of Income related to the cash flow hedges for the years ended December 31:
(Dollars in thousands)
Amount of loss recognized in accumulated other comprehensive income, net of tax
Amount of gain recognized in other non-interest income
$
2018
2017
341 $
18
72
—
The following table reflects the cash flow hedges included in the Consolidated Balance Sheets at December 31:
(Dollars in thousands)
2018
2017
Notional Amount
Fair Value
Notional Amount
Fair Value
Included in other assets:
Interest rate swaps related to debt
Total included in other assets
Included in liabilities:
Interest rate swaps related to debt
Total included in other liabilities
$
$
$
$
60,000
60,000
50,000
50,000
$
$
2,093
2,093
1,111
1,111
$
$
40,000
40,000
20,000
20,000
1,623
1,623
270
270
(a) Reclassifications to interest expense and reclassifications to earnings for ineffectiveness were minimal.
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 notional value of $453.4 million and fair
value of $2.5 million of equally offsetting assets and liabilities at December 31, 2018 and a notional value of $363.3 million
and fair value of $3.0 million of equally offsetting assets and liabilities at December 31, 2017. 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 included in the Consolidated Balance Sheets at December 31:
135
(Dollars in thousands)
2018
2017
Notional Amount
Fair Value
Notional Amount
Fair Value
Included in other assets:
Interest rate swaps related to commercial
loans
Total included in other assets
Included in liabilities:
Interest rate swaps related to commercial
loans
Total included in other liabilities
$
$
226,662
226,662
226,662
226,662
$
$
$
$
2,451
2,451
2,451
2,451
181,659
181,659
181,659
181,659
$
$
2,971
2,971
2,971
2,971
Fair Values of Derivative Instruments on the Balance Sheet
Peoples' fair value of the derivative financial instruments was $4.5 million in an asset position and $3.6 million in a liability
position at December 31, 2018, and there was a fair value of $4.6 million in an asset position and $3.2 million in a liability
position at December 31, 2017. The amounts are recorded in other assets, and accrued expenses and other liabilities on the
Consolidated Balance Sheet at the dates indicated.
Note 15 Off-Balance Sheet Risk
Loan Commitments and Standby Letters of Credit
Loan commitments are made to accommodate the financial needs of Peoples' customers. Standby letters of credit are
instruments issued by Peoples Bank guaranteeing the beneficiary payment by Peoples Bank in the event of default by Peoples
Bank's customer in the nonperformance of an obligation or service. Historically, most loan commitments and standby letters
of credit expire unused. Peoples' exposure to credit loss in the event of nonperformance by the counter-party to the financial
instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments.
Peoples uses the same underwriting standards in making commitments and conditional obligations as it does for on-balance
sheet instruments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral
held varies, but may include accounts receivable; inventory; property, plant, and equipment; and income-producing
commercial properties.
The total amounts of loan commitments and standby letters of credit at December 31 are summarized as follows:
(Dollars in thousands)
Home equity lines of credit
Unadvanced construction loans
Other loan commitments
Loan commitments
Standby letters of credit
2018
2017
$
$
101,265 $
74,734
314,271
490,270
10,214 $
83,949
112,475
260,552
456,976
20,873
Note 16 Regulatory Matters
The following is a summary of certain regulatory matters affecting Peoples and its subsidiaries:
Federal Reserve Board Requirements
Peoples Bank is required to maintain a minimum level of reserves, consisting of cash on hand and non-interest-bearing
balances with the FRB, based on the amount of total deposits. Average required reserve balances were approximately $16.4
million and $17.7 million in 2018 and 2017, respectively.
136
Limits on Dividends
The primary source of funds for the dividends paid by Peoples is dividends received from Peoples Bank. The payment
of dividends by Peoples Bank is subject to various banking regulations. The most restrictive provision requires regulatory
approval if dividends declared in any calendar year exceed the total net profits of that year plus the retained net profits of the
preceding two years. At December 31, 2018, Peoples Bank had approximately $61.9 million of net profits available for
distribution to Peoples as dividends without regulatory approval.
Capital Requirements
Peoples and Peoples Bank are subject to various regulatory capital guidelines administered by the banking regulatory
agencies. Under capital adequacy requirements and the regulatory framework for prompt corrective action, Peoples and
Peoples Bank must meet specific capital guidelines that involve quantitative measures of each entity's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. Peoples' and Peoples Bank's capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and
other factors. Failure to meet future minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by the regulators that, if undertaken, could have a material effect on Peoples' financial results.
Quantitative measures established by regulation to ensure capital adequacy, and in effect at December 31, 2018, required
Peoples and Peoples Bank to maintain minimum amounts and ratios of common equity tier 1 capital, tier 1 capital and total
capital (as defined in the regulations) to risk-weighted assets (as defined), and of tier I capital (as defined) to average assets
(as defined). Peoples and Peoples Bank met all capital adequacy requirements at December 31, 2018.
As of December 31, 2018, the most recent notifications from the banking regulatory agencies categorized Peoples Bank
as well capitalized under the regulatory framework for prompt corrective action applicable to Peoples Bank. Peoples
maintained the capital required by the Federal Reserve Board to be deemed well capitalized and remain a financial holding
company. To be categorized as well capitalized, Peoples and Peoples Bank must maintain minimum common equity tier 1,
tier 1 risk-based, total risk-based and tier I leverage ratios as set forth in the table below. There are no conditions or events
since these notifications that management believes have changed Peoples' or Peoples Bank's category.
137
Peoples' and Peoples Bank's actual capital amounts and ratios as of December 31 are also presented in the following
table:
2018
2017
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
PEOPLES
Common Equity Tier 1 (a)
Actual
For capital adequacy
To be well capitalized
Tier 1 (b)
Actual
For capital adequacy
To be well capitalized
Total Capital (c)
Actual
For capital adequacy
To be well capitalized
Tier 1 Leverage (d)
Actual
For capital adequacy
To be well capitalized
Capital Conservation Buffer
Fully phased in minimum
Net Risk-Weighted Assets
$
$
$
378,855
125,235
180,895
386,138
166,980
222,640
406,333
222,640
278,300
$
386,138
154,615
193,269
183,693
69,575
$ 2,782,995
$
365,063
124,870
180,367
365,063
166,493
221,990
$
$
PEOPLES BANK
Common Equity Tier 1 (a)
Actual
For capital adequacy
To be well capitalized
Tier 1 (b)
Actual
For capital adequacy
To be well capitalized
Total Capital (c)
Actual
For capital adequacy
To be well capitalized
Tier 1 Leverage (d)
Actual
For capital adequacy
To be well capitalized
Capital Conservation Buffer
Fully phased in minimum
Net Risk-Weighted Assets
(a) Ratio represents common equity tier 1 capital to net risk-weighted assets
(b) Ratio represents tier 1 capital to net risk-weighted assets
(c) Ratio represents total capital to net risk-weighted assets
(d) Ratio represents tier 1 capital to average assets
$
$
$
365,063
154,357
192,947
163,268
69,372
$ 2,774,879
385,258
221,990
277,488
138
13.6% $
4.5%
6.5%
13.9% $
6.0%
8.0%
14.6% $
8.0%
10.0%
327,172
110,998
160,330
334,279
147,997
197,330
355,977
197,330
246,662
10.0% $
4.0%
5.0%
6.6% $
2.5%
334,279
137,119
171,399
158,647
61,666
$ 2,466,620
13.2% $
4.5%
6.5%
13.2% $
6.0%
8.0%
13.9% $
8.0%
10.0%
305,216
110,654
159,833
305,216
147,539
196,718
324,026
196,718
245,898
9.5% $
4.0%
5.0%
5.9% $
2.5%
305,216
136,939
171,174
127,308
61,474
$ 2,458,975
13.3%
4.5%
6.5%
13.6%
6.0%
8.0%
14.4%
8.0%
10.0%
9.8%
4.0%
5.0%
6.4%
2.5%
12.4%
4.5%
6.5%
12.4%
6.0%
8.0%
13.2%
8.0%
10.0%
8.9%
4.0%
5.0%
5.2%
2.5%
Note 17 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 shares awards, stock
appreciation rights, 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. In 2007 and 2008, Peoples granted stock appreciation rights ("SARs") to employees to be settled in
common shares. 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 2017, Peoples
granted performance units to certain officers. In general, common shares issued in connection with stock-based awards are
issued from treasury shares to the extent available. If no treasury shares are available, common shares are issued from
authorized but unissued common shares.
Stock Appreciation Rights
SARs granted to employees had an exercise price equal to the fair market value of Peoples’ common shares on the date
of grant and were settled using common shares of Peoples. Additionally, the SARs granted to employees vested three years
after the respective grant dates and expired ten years from the respective date of grant. The most recent grant of SARs
occurred in 2008 and these SARs were exercised immediately prior to their expiration on February 20, 2018.
The following summarizes the changes to Peoples' outstanding SARs for the year ended December 31, 2018:
Number of
Common
Shares
Subject to
SARs
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Outstanding at January 1
Exercised
Forfeited
Outstanding at December 31
Exercisable at December 31
$
314
314
—
— $
— $
23.77
23.77
—
—
—
— $
— $
—
—
Restricted Common Shares
Under the 2006 Equity Plan, Peoples may award restricted common shares to officers, key employees and non-
employee directors. In general, the restrictions on restricted common shares awarded to employees expire after periods
ranging from one to three years. Prior to 2017, the restrictions on restricted common shares awarded to non-employee
directors expired after six months; however, the practice of granting restricted common shares ceased in 2017 and the
common shares awarded to non-employee directors in 2017 and 2018 were granted with no restrictions. In 2018, Peoples
granted an aggregate of 84,876 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. In addition, during 2018, Peoples granted, to certain key employees,
an aggregate of 21,929 restricted common shares subject to time-based vesting with restrictions that will lapse three years
after the grant date.
139
The following summarizes the changes to Peoples’ outstanding restricted common shares for the year ended
December 31, 2018:
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
Awarded
Released
Forfeited
Outstanding at December 31
33,082 $
21,929
11,332
—
43,679 $
22.85
36.38
22.84
—
29.64
176,218 $
84,876
83,311
2,011
175,772 $
25.50
35.43
23.62
34.34
31.08
The total intrinsic value of restricted common shares released was $2.8 million, $1.1 million and $1.0 million in 2018,
2017 and 2016, respectively.
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 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. 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 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 summarizes the amount of stock-based compensation and related tax benefit recognized for the
years ended December 31:
(Dollars in thousands)
Stock-based compensation
Recognized tax benefit
Net expense recognized
2018
2017
2016
$
$
2,575 $
(541)
2,034 $
1,802 $
(378)
1,424 $
1,392
(487)
905
Restricted common shares were the primary form of stock-based compensation awards granted by Peoples in 2018, 2017
and 2016. 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 related to unvested restricted common share awards was $2.3 million at
December 31, 2018, which will be recognized over a weighted-average period of 1.8 years. In 2018, the Board of Directors
granted 3,600 unrestricted common shares to non-employee directors, with related stock-based compensation of $128,000,
and 12,144 unrestricted common shares to full-time and part-time employees who did not already participate in the 2006
140
Equity Plan, with related stock-based compensation of $416,000. During 2018, Peoples also recorded $156,000 of stock-
based compensation associated with the performance unit awards, which represented a new form of award in 2018 and for
which no stock-based compensation was recognized in 2017 or 2016. Additionally, Peoples recognized $60,000, $55,000 and
$60,000 of stock-based compensation associated with the employee stock purchase plan, based on purchases by employees
thereunder, in 2018, 2017 and 2016, respectively.
Note 18 Revenue
The following table details Peoples' revenue from contracts with customers for the year ended December 31, 2018:
(Dollars in thousands)
Insurance income:
Commission and fees from sale of insurance policies (a)
$
Fees related to third-party administration services (a)
Performance-based commissions (b)
Trust and investment income (a)
Electronic banking income:
Interchange income (a)
Promotional and usage income (a)
Deposit account service charges:
Ongoing maintenance fees for deposit accounts (a)
Transactional-based fees (b)
Commercial loan swap fees (b)
Other non-interest income transactional-based fees (b)
Total
Timing of revenue recognition:
Services transferred over time
Services transferred at a point in time
Total
(a) Services transferred over time.
(b) Services transferred at a point in time.
$
$
$
12,787
573
1,452
12,543
9,721
1,756
2,718
7,060
681
961
50,252
40,098
10,154
50,252
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 December 31, 2018:
(Dollars in thousands)
Balance, January 1, 2018 (a)
Additional income receivable
Additional deferred income
Recognition of income previously deferred
Balance, December 31, 2018
$
$
Contract Assets
Contract Liabilities
4,700
—
— $
207
—
—
207 $
5,055
(4,700)
5,055
(a) The amount of $3.7 million reported elsewhere throughout this Form 10-K is the $4.7 million noted above, net of statutory federal corporate
income taxes.
141
Note 19 Acquisitions
On October 29, 2018, Peoples entered into an agreement and plan of merger (the "First Prestonsburg Merger
Agreement") with First Prestonsburg Bancshares Inc. ("First Prestonsburg"), which calls for First Prestonsburg to merge into
Peoples. First Prestonsburg is the parent company of The First Commonwealth Bank of Prestonsburg, Inc. ("First
Commonwealth"), which operates nine full-service branches located in eastern Kentucky. Following the merger of First
Prestonsburg into Peoples, First Commonwealth will merge into Peoples Bank. This transaction is expected to close during
the second quarter of 2019, subject to the satisfaction of customary closing conditions. As of December 31, 2018, First
Prestonsburg had approximately $308.5 million in total assets, which included approximately $140.1 million in total loans,
and approximately$236.6 million in total deposits. Under the terms of the First Prestonsburg Merger Agreement,
shareholders of First Prestonsburg will be entitled to receive12.512 common shares of Peoples for each First Prestonsburg
share of common stock they own at the effective time of the merger. In addition, immediately prior to the closing of the
merger, First Prestonsburg will pay a special cash distribution of $140.30 per share to its shareholders.
On April 13, 2018, Peoples completed its acquisition of ASB for total consideration of $41.5 million, which reflected the
conversion of each of the 1,979,034 outstanding ASB common shares into $20.00 in cash or 0.592 in Peoples' common
shares. ASB merged into Peoples, and ASB's wholly-owned subsidiary, American Savings Bank, fsb, which operated seven
full-service branches in southern Ohio and eastern Kentucky, merged into Peoples Bank. Per the applicable accounting
guidance for business combinations, the acquisition date fair values of the assets purchased, liabilities assumed and related
identifiable intangible assets are preliminary and subject to refinement for up to one year after the closing date of the
acquisition as additional information relative to closing date fair values becomes available.
142
The following table provides the purchase price calculation as of the date of acquisition of ASB, and the assets
acquired and liabilities assumed at their estimated fair values.
(Dollars in thousands, except per share data)
Purchase Price
Common shares electing cash consideration
Cash purchase price per share
Cash consideration
Common shares electing stock consideration
Number of common shares of Peoples issued for each common share of acquired company
Price per Peoples' common share, as of April 13, 2018
Common share consideration
Cash in lieu of fractional common shares of Peoples
Total consideration
Net Assets at Fair Value
Assets
Cash and due from banks
Available-for-sale investment securities
Held-to-maturity investment securities
Other investment securities
Total investment securities
Loans, net of deferred fees and costs
Loans held for sale
Bank premises and equipment, net of accumulated depreciation
Bank owned life insurance
Other intangible assets
Other assets
Total assets
Liabilities
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Accrued expenses and other liabilities
Total liabilities
Net assets
Goodwill
$
$
$
$
$
$
$
31,763
20.00
635
1,947,271
0.592
35.48
40,898
2
41,535
5,332
18,155
649
1,596
20,400
236,628
2,539
3,485
4,803
2,639
3,112
$
278,938
$
29,487
169,142
198,629
54,824
2,084
255,537
23,401
18,134
$
$
$
The estimated fair values presented in the above table reflect additional information that was obtained during the three
months ended December 31, 2018, which resulted in changes to certain fair value estimates made as of the date of
acquisition. Adjustments to acquisition date estimated fair values are recorded during the period in which they occur and, as
a result, previously recorded results have changed. After considering the additional information, bank premises and
equipment, net of accumulated depreciation, increased $165,000; other assets decreased $369,000; and accrued expenses and
other liabilities decreased $632,000, in each case from balances reported as of September 30, 2018. These revised fair value
estimates resulted in a net decrease to goodwill of $428,000 from $18.6 million reported as of September 30, 2018, to $18.1
million which was recognized in the December 31, 2018 Consolidated Balance Sheet.
143
Acquired loans, excluding acquired overdrafts of $438,000, 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, except per share data)
Nonimpaired Loans
Contractual cash flows
Nonaccretable difference
Expected cash flows
Accretable yield
Fair value
Credit Impaired Loans
Contractual cash flows
Nonaccretable difference
Expected cash flows
Accretable yield
Fair value
$
$
$
$
342,087
59,967
282,120
54,029
228,091
16,054
5,908
10,146
2,047
8,099
Peoples recorded non-interest expenses related to acquisitions of $7.3 million and net losses on asset disposals and other
transactions of $203,000 in the Consolidated Statement of Income during 2018. The $7.3 million was included in the
following line items on the Consolidated Statement of Income for the year ended December 31, 2018: $2.4 million of salaries
and employee benefit costs, $1.1 million of professional fees, $59,000 of data processing expenses, $119,000 of marketing
expense, and $3.6 million of other non-interest expense. The $2.4 million of salaries and employee benefit costs related to
change in control agreements, retention and severance bonuses, and regular payroll and taxes after conversion.
144
Note 20 Parent Company Only Financial Information
Condensed Balance Sheets
(Dollars in thousands)
Assets:
Cash and due from other banks
Interest-bearing deposits in subsidiary bank
Due from subsidiary bank
Available-for-sale investment securities, at fair value (amortized cost of $615 at December 31,
2017) (a)
Other investment securities (a)
Investments in subsidiaries:
Bank
Non-bank
Other assets
Total assets
Liabilities:
Accrued expenses and other liabilities
Dividends payable
Mandatorily redeemable capital securities of subsidiary trust
Total liabilities
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2018
2017
$
50 $
13,750
584
—
216
50
9,270
9,486
6,933
—
506,200
8,298
2,808
531,906 $
431,482
1,812
1,700
460,733
1,898 $
1,471
291
9,577
11,766
520,140
531,906 $
270
400
2,141
458,592
460,733
$
$
$
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of $6.9 million of equity investment securities from available-for-
sale investment securities to other investment securities.
Condensed Statements of Income
(Dollars in thousands)
Income:
Dividends from subsidiary bank
Dividends from non-bank subsidiary
Net gain on investment securities
Interest and other income
Total income
Expenses:
Trust preferred securities expense
Intercompany management fees
Other expense
Total expenses
Year Ended December 31,
2018
2017
2016
$
13,500 $
27,000 $
2,500
—
357
16,357
520
1,561
4,647
6,728
20,000
2,602
237
49,839
346
1,361
3,380
5,087
20,500
1,250
—
209
21,959
397
1,131
3,154
4,682
17,277
(1,718)
12,162
31,157
Income before federal income taxes and equity in (excess dividends from)
undistributed earnings of subsidiaries
Applicable income tax expense
Equity in (excess dividends from) undistributed earnings of subsidiaries
Net income
9,629
(2,511)
34,115
46,255 $
44,752
(1,309)
(7,590)
38,471 $
$
145
Statements of Cash Flows
(Dollars in thousands)
Operating activities
Net income
Adjustment to reconcile net income to cash provided by operations:
Depreciation, amortization and accretion, net
(Equity in) excess dividends from undistributed earnings of subsidiaries
Gain on investment securities
Other, net
Net cash provided by operating activities
Investing activities
Net proceeds from sales and maturities of investment securities
Investment in subsidiaries
(Increase) decrease in receivable from subsidiary
Business combinations, net of cash received
Other, net
Net cash (used in) provided by investing activities
Financing activities
Purchase of treasury stock
Proceeds from issuance of common stock
Cash dividends paid
Excess tax benefit for share-based payments
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of year
Cash and cash equivalents at the end of year
Supplemental cash flow information:
Interest paid
Year Ended December 31,
2018
2017
2016
$
46,255 $
38,471 $
31,157
9,177
(34,115)
—
31
21,348
5,388
(31,813)
32,236
(637)
228
5,402
(1,380)
—
(20,915)
25
(22,270)
4,480
(6,525)
7,590
(2,602)
2,810
39,744
2,359
(50,883)
25,496
—
(229)
(23,257)
(508)
9
(14,706)
—
(15,205)
1,282
9,320
13,800 $
8,038
9,320 $
190
(12,162)
—
355
19,540
—
(22,769)
23,389
—
—
620
(5,480)
18
(11,173)
26
(16,609)
3,551
4,487
8,038
513 $
364 $
433
$
$
146
Note 21 Summarized Quarterly Information (Unaudited)
(Dollars in thousands, except per share data)
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net gain (loss) on investment securities
Net gain (loss) on asset disposals and other transactions
Total non-interest income excluding net gains and losses
Amortization of other intangible assets
Acquisition-related expenses
Total non-interest expense excluding amortization of other
intangible assets and acquisition-related expenses
Income tax expense
Net income
Earnings per common share - basic
Earnings per common share - diluted
$
$
$
2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
33,226
$
37,769
$
39,631
$
3,867
29,359
1,983
1
74
14,894
754
149
27,318
2,383
11,741
0.64
0.64
$
$
$
4,961
32,808
1,188
(147)
(405)
13,807
861
6,056
29,054
1,012
7,892
0.41
0.41
$
$
$
6,307
33,324
1,302
—
12
14,341
862
675
29,292
2,821
12,725
0.65
0.65
$
$
$
Weighted-average common shares outstanding - basic
18,126,089
19,160,728
19,325,457
19,337,403
Weighted-average common shares outstanding - diluted
18,256,035
19,293,381
19,466,865
19,483,452
(Dollars in thousands, except per share data)
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net gain on investment securities
Net (loss) gain on asset disposals and other transactions
Total non-interest income excluding net gains and losses
Amortization of other intangible assets
Acquisition-related expenses
Total non-interest expense excluding amortization of other
intangible and system conversion expenses
Income tax expense
Net income
Earnings per common share - basic
Earnings per common share - diluted
2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
32,728
$
$
29,817
$
2,872
26,945
624
340
(3)
13,334
863
—
31,208
3,118
28,090
947
18
109
13,590
871
—
26,468
25,809
3,852
8,809
0.49
0.48
$
$
$
4,414
9,766
0.54
0.53
$
$
$
$
$
$
3,508
29,220
1,086
1,861
(25)
12,610
869
—
25,689
5,127
10,895
0.60
0.60
$
$
$
Weighted-average common shares outstanding - basic
18,029,991
18,044,574
18,056,202
18,069,467
Weighted-average common shares outstanding - diluted
18,192,957
18,203,752
18,213,533
18,240,092
147
40,638
6,517
34,121
975
—
(15)
14,192
861
382
29,713
2,470
13,897
0.71
0.71
32,772
3,650
29,122
1,115
764
(144)
13,119
913
341
26,152
5,339
9,001
0.50
0.49
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning (a) directors of Peoples Bancorp Inc. ("Peoples"), (b) the procedures by which shareholders
of Peoples may recommend nominees to Peoples' Board of Directors, (c) the Audit Committee of Peoples' Board of Directors
and (d) the Board of Directors' determination that Peoples has an "audit committee financial expert" serving on its Audit
Committee required by Items 401, 407(c)(3), 407(d)(4) and 407(d)(5) of SEC Regulation S-K will be included in the sections
captioned "PROPOSAL NUMBER 1: ELECTION OF DIRECTORS," "THE BOARD AND COMMITTEES OF THE
BOARD" and "NOMINATING PROCEDURES" of the definitive Proxy Statement of Peoples Bancorp Inc. relating to the
Annual Meeting of Shareholders to be held on April 25, 2019 ("Peoples' Definitive Proxy Statement"), which sections are
incorporated herein by reference. The procedures by which shareholders of Peoples may recommend nominees to Peoples'
Board of Directors have not changed materially from those described in Peoples' definitive Proxy Statement for the 2018
Annual Meeting of Shareholders held on April 26, 2018.
The information regarding Peoples' executive officers required by Item 401 of SEC Regulation S-K will be included in
the section captioned "EXECUTIVE OFFICERS" of Peoples' Definitive Proxy Statement, which section is incorporated
herein by reference.
The information required by Item 405 of SEC Regulation S-K will be included under the caption "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" of Peoples' Definitive Proxy Statement, which section is
incorporated herein by reference.
The Board of Directors of Peoples has adopted charters for each of the Audit Committee, the Compensation Committee,
the Executive Committee, the Governance and Nominating Committee, and the Risk Committee.
In accordance with the requirements of Rule 5610 of the Nasdaq Stock Market Corporate Governance Requirements, the
Board of Directors of Peoples has adopted a Code of Ethics covering the directors, officers and employees of Peoples and its
subsidiaries, including, without limitation, the principal executive officer, the principal financial officer, the principal
accounting officer and the controller of Peoples. Peoples intends to disclose the following events, if they occur, in a Current
Report on Form 8-K and on the "Investor Relations" page of Peoples' Internet website at www.peoplesbancorp.com within
four business days following their occurrence:
(A) the date and nature of any amendment to a provision of Peoples' Code of Ethics that
(i) applies to the principal executive officer, principal financial officer, principal accounting officer or
controller of Peoples, or persons performing similar functions,
(ii) relates to any element of the code of ethics definition set forth in Item 406(b) of SEC Regulation S K, and
(iii) is not a technical, administrative or other non-substantive amendment; and
(B) a description (including the nature of the waiver, the name of the person to whom the waiver was granted and the
date of the waiver) of any waiver, including an implicit waiver, from a provision of the Code of Ethics granted to the
principal executive officer, principal financial officer, principal accounting officer or controller of Peoples, or
persons performing similar functions, that relates to one or more of the elements of the code of ethics definition set
forth in Item 406(b) of SEC Regulation S-K.
In addition, Peoples will disclose any waivers from the provisions of the Code of Ethics granted to a director or
executive officer of Peoples in a Current Report on Form 8-K within four business days following their occurrence.
Each of the Code of Ethics, the Audit Committee Charter, the Compensation Committee Charter, the Executive
Committee Charter, the Governance and Nominating Committee Charter and the Risk Committee Charter is posted under the
"Corporate Profile - Governance Documents" tab of the "Investor Relations" page of Peoples' Internet website. Interested
persons may also obtain copies of the Code of Ethics without charge by writing to Peoples Bancorp Inc., Attention: Corporate
Secretary, 138 Putnam Street, P.O. Box 738, Marietta, Ohio 45750-0738.
148
ITEM 11 EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in the sections captioned "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION," "EXECUTIVE COMPENSATION: COMPENSATION DISCUSSION
AND ANALYSIS," "SUMMARY COMPENSATION TABLE FOR 2018," "GRANTS OF PLAN-BASED AWARDS FOR
2018," "OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2018," "OPTION EXERCISES AND STOCK
VESTED FOR 2018," "PENSION BENEFITS FOR 2018," "NON-QUALIFIED DEFERRED COMPENSATION FOR
2018," "OTHER POTENTIAL POST EMPLOYMENT PAYMENTS," "DIRECTOR COMPENSATION" and
"COMPENSATION COMMITTEE REPORT" of Peoples' Definitive Proxy Statement, which sections are incorporated
herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 regarding the security ownership of certain beneficial owners and management
will be included in the section captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" of Peoples' Definitive Proxy Statement, which section is incorporated herein by reference.
Equity Compensation Plan Information
The table below provides information as of December 31, 2018, with respect to compensation plans under which
common shares of Peoples are authorized for issuance to directors, officers or employees in exchange for consideration in the
form of goods or services. These compensation plans include:
the Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan (the "2006 Equity Plan");
(i)
(ii) the Peoples Bancorp Inc. Third Amended and Restated Deferred Compensation Plan for Directors of Peoples
Bancorp Inc. and Subsidiaries (the "Directors' Deferred Compensation Plan"); and
(iii) the Peoples Bancorp Inc. Employee Stock Purchase Plan (the "ESPP").
All of these compensation plans were approved by the shareholders of Peoples.
(a)
Number of
common shares
to be issued
upon exercise
of outstanding
options,
warrants and
rights
(b)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(c)
Number of common
shares remaining
available for future
issuance under equity
compensation plans
(excluding common
shares reflected in
column (a))
254,424 (1) $
— (2)
728,603 (3)
—
254,424
$
—
—
—
728,603
Plan Category
Equity compensation plans
approved by shareholders
Equity compensation plans not
approved by shareholders
Total
(1) Includes an aggregate of 219,451 restricted common shares subject to time-based or performance-based vesting
restrictions granted under the 2006 Equity Plan, and 34,973 common shares allocated to participants' bookkeeping
accounts under the Directors' Deferred Compensation Plan.
(2) The weighted-average exercise price does not take into account the common shares allocated to participants' time-
based or performance-based restricted common share awards granted under the 2006 Equity Plan or bookkeeping
accounts under the Directors' Deferred Compensation Plan.
(3) Includes 481,879 common shares remaining available for future grants under the 2006 Equity Plan at December 31,
2018, as well as 246,724 common shares remaining available for issuance and delivery under the ESPP. No amount
is included for potential future allocations to participants' bookkeeping accounts under the Directors' Deferred
Compensation Plan since the terms of the Directors' Deferred Compensation Plan do not provide for a specified
limit on the number of common shares which may be allocated to participants' bookkeeping accounts.
149
Additional information regarding Peoples' stock-based compensation plans can be found in Note 17 Stock-Based
Compensation of the Notes to the Consolidated Financial Statements.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included in the sections captioned "TRANSACTIONS WITH
RELATED PERSONS," "PROPOSAL NUMBER 1: ELECTION OF DIRECTORS," "THE BOARD AND COMMITTEES
OF THE BOARD" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" of Peoples'
Definitive Proxy Statement, which sections are incorporated by reference.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 will be included in the section captioned "INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM" of Peoples' Definitive Proxy Statement, which section is incorporated herein by reference.
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
The following reports of the independent registered public accounting firm and consolidated financial statements of
Peoples Bancorp Inc. and subsidiaries are filed as required by Item 8 Financial Statements and Supplementary Data
and set forth immediately following "ITEM 9B OTHER INFORMATION" of the Form 10-K:
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) on Effectiveness of Internal
Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) on Consolidated Financial
Statements
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income for each of the fiscal years in the three-year period ended December 31, 2018
Consolidated Statements of Comprehensive Income for each of the fiscal years in the three-year period ended
December 31, 2018
Consolidated Statements of Stockholders’ Equity for each of the fiscal years in the three-year period ended
December 31, 2018
Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended December 31,
2018
Notes to the Consolidated Financial Statements
Peoples Bancorp Inc. Parent Company Only Financial Information is included in Note 20 of the Notes to the
Consolidated Financial Statements
Page
82
83
84
85
86
87
89
91
145
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(a)(3) Exhibits
The documents listed in the Index to Exhibits that immediately precedes the signature page of this Annual Report on
Form 10-K, are filed/furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual
Report on Form 10-K by reference as noted. Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K is identified as such in the list below.
150
(b) Exhibits
The documents listed in the Index to Exhibits that immediately precedes the signature page of this Annual Report on
Form 10-K are filed/furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual
Report on Form 10-K by reference as noted.
(c) Financial Statement Schedules
None
ITEM 16 FORM 10-K SUMMARY
Not applicable.
151
INDEX TO EXHIBITS
Exhibit
Number
Description
Exhibit Location
2.1
2.2
2.3
2.4
2.5
2.6
Agreement and Plan of Merger, dated as of January 21, 2014,
between Peoples Bancorp Inc. and Midwest Bancshares, Inc.+
Agreement and Plan of Merger, dated as of April 4, 2014, between
Peoples Bancorp Inc. and Ohio Heritage Bancorp, Inc.+
Agreement and Plan of Merger, dated as of April 21, 2014, as
amended effective as of July 25, 2014, among Peoples Bancorp Inc.,
Peoples Bank, National Association and North Akron Savings Bank+
Agreement and Plan of Merger, dated as of August 4, 2014, as
amended, between Peoples Bancorp Inc. and NB&T Financial Group,
Inc.+
Agreement and Plan of Merger, dated as of October 23, 2017,
between Peoples Bancorp Inc. and ASB Financial Corp.+
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.+
3.1(a)
Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed
with the Ohio Secretary of State on May 3, 1993) P
3.1(b)
Certificate of Amendment to the Amended Articles of Incorporation
of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on
April 22, 1994)
Included as Annex A to the definitive proxy
statement/prospectus which forms a part of the
Registration Statement of Peoples Bancorp Inc. on
Form S-4/A (Registration No. 333-194626)
Included as Annex A to the definitive proxy
statement/prospectus which forms a part of the
Registration Statement of Peoples Bancorp Inc. on
Form S-4/A (Registration No. 333-196872)
Included as Annex A to the definitive proxy
statement/prospectus which forms a part of the
Registration Statement of Peoples Bancorp Inc. on
Form S-4/A (Registration No. 333-197736)
Included as Annex A to the definitive proxy
statement/prospectus which forms a part of the
Registration Statement of Peoples Bancorp Inc. on
Form S-4/A (Registration No. 333-199152)
Included as Annex A to the definitive proxy
statement/prospectus which forms a part of the
Registration Statement of Peoples Bancorp Inc. on
Form S-4/A (Registration No. 333-222054)
Included as Annex A to the definitive proxy
statement/prospectus which forms a part of the
Registration Statement of Peoples Bancorp Inc. on
Form S-4/A (Registration No. 333-228745)
Incorporated herein by reference to Exhibit 3(a) to
the Registration Statement of Peoples Bancorp
Inc. on Form 8-B filed on July 20, 1993 (File No.
0-16772)
Incorporated herein by reference to Exhibit 3.1(b)
to the Quarterly Report on Form 10-Q of Peoples
Bancorp Inc. for the quarterly period ended
September 30, 2017 (File No. 0-16772) ("Peoples'
September 30, 2017 Form 10-Q")
3.1(c)
Certificate of Amendment to the Amended Articles of Incorporation
of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on
April 9, 1996)
Incorporated herein by reference to Exhibit 3.1(c)
to Peoples’ September 30, 2017 Form 10-Q
3.1(d)
Certificate of Amendment to the Amended Articles of Incorporation
of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on
April 23, 2003)
3.1(e)
Certificate of Amendment by Shareholders to the Amended Articles
of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio
Secretary of State on January 22, 2009)
Incorporated herein by reference to Exhibit 3(a) to
the Quarterly Report on Form 10-Q of Peoples
Bancorp Inc. for the quarterly period ended March
31, 2003 (File No. 0-16772) (“Peoples’ March 31,
2003 Form 10-Q”)
Incorporated herein by reference to Exhibit 3.1 to
the Current Report of Peoples Bancorp Inc. on
Form 8-K dated and filed on January 23, 2009
(File No. 0-16772)
+Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of SEC Regulation S-K. A copy of any omitted schedules or
exhibits will be furnished supplementally to the SEC upon request.
PFiled the exhibit with the SEC in paper originally and has not been filed with the SEC in electronic format.
152
Exhibit
Number
Description
Exhibit Location
3.1(f)
Certificate of Amendment by Directors to Articles filed with the Ohio
Secretary of State on January 28, 2009, evidencing adoption of
amendments by the Board of Directors of Peoples Bancorp Inc. to
Article FOURTH of the 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
the Current Report of Peoples Bancorp Inc. on
Form 8-K dated and filed on February 2, 2009
(File No. 0-16772)
3.1(g)
Amended Articles of Incorporation of Peoples Bancorp Inc. [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 the Annual Report of Peoples Bancorp Inc. on
Form 10-K for the fiscal year ended December 31,
2008 (File No. 0-16772) (“Peoples’ 2008 Form 10-
K”)
3.2(a)
Code of Regulations of Peoples Bancorp Inc.P
Incorporated herein by reference to Exhibit 3(b) to
the Registration Statement of Peoples Bancorp
Inc. on Form 8-B filed July 20, 1993 (File No.
0-16772)
3.2(b)
Certified Resolutions Regarding Adoption of Amendments to
Incorporated herein by reference to Exhibit 3(c) 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
Peoples’ March 31, 2003 Form 10-Q
3.2(c)
Certificate regarding adoption of amendments to Sections 3.01, 3.03,
3.04, 3.05, 3.06, 3.07, 3.08 and 3.11 of the Code of Regulations of
Peoples Bancorp Inc. by shareholders on April 8, 2004
3.2(d)
Certificate regarding adoption of amendments to Sections 2.06, 2.07,
3.01 and 3.04 of Peoples Bancorp Inc.’s Code of Regulations by the
shareholders on April 13, 2006
3.2(e)
Certificate regarding adoption of an amendment to Section 2.01 of
Peoples Bancorp Inc.'s Code of Regulations by the shareholders on
April 22, 2010
3.2(f)
Certificate regarding Adoption of Amendment to Division (D) of
Section 2.02 of the Code of Regulations of Peoples Bancorp Inc. by
the Shareholders at the Annual Meeting of Shareholders on April 26,
2018
3.2(g)
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(a) to
the Quarterly Report of Peoples Bancorp Inc. on
Form 10-Q for the quarterly period ended March
31, 2004 (File No. 0-16772)
Incorporated herein by reference to Exhibit 3.1 to
the Current Report of Peoples Bancorp Inc. on
Form 8-K dated and filed on April 14, 2006 (File
No. 0-16772)
Incorporated herein by reference to Exhibit 3.2(e)
to the Quarterly Report of Peoples Bancorp Inc.
on Form 10-Q/A (Amendment No. 1) for the
quarterly period ended June 30, 2010 (File No.
0-16772)
Incorporated herein by reference to Exhibit 3.1 to
the Current Report of Peoples Bancorp Inc. on
Form 8-K dated and filed on June 28, 2018 (File
No. 0-16772) ("Peoples' June 28, 2018 Form 8-
K")
Incorporated herein by reference to Exhibit 3.2 to
Peoples' June 28, 2018 Form 8-K
4.1
Agreement to furnish instruments and agreements defining rights of
holders of long-term debt
Filed herewith
4.2(a)
4.2(b)
Indenture, dated as of June 25, 2007, between NB&T Financial
Group, Inc., as issuer, and Wilmington Trust Company, as trustee,
relating to Fixed/Floating Rate Junior Subordinated Debt Securities
due 2037
First Supplemental Indenture, dated June 5, 2015, and made to be
effective as of 6:00 p.m., Eastern Standard Time, on March 6, 2015,
between Wilmington Trust Company, as trustee, and Peoples Bancorp
Inc., as successor to NB&T Financial Group, Inc.
Incorporated herein by reference to Exhibit 4.1(a)
to the Quarterly Report of Peoples Bancorp Inc. on
Form 10-Q for the quarterly period ended June 30,
2015 (File No. 0-16772) ("Peoples' June 30, 2015
Form 10-Q")
Incorporated herein by reference to Exhibit 4.1(b)
to Peoples' June 30, 2015 Form 10-Q
P Filed the exhibit with the SEC in paper originally and has not been filed with the SEC in electronic format.
153
Exhibit
Number
4.3(a)
4.3(b)
4.3(c)
4.4
Description
Exhibit Location
Amended and Restated Declaration of Trust of NB&T Statutory Trust
III, dated and effective as of June 25, 2007
NOTE: Pursuant to the First Supplemental Indenture, dated June 5,
2015, and made to be effective as of 6:00 p.m., Eastern Standard
Time, on March 6, 2015, between Wilmington Trust Company, as
trustee, and Peoples Bancorp Inc., Peoples Bancorp Inc. succeeded to
and was substituted for NB&T Financial Group, Inc. as "Sponsor"
Notice of Removal of Administrators and Appointment of
Replacements, dated June 5, 2015, delivered to Wilmington Trust
Company by the Successor Administrators named therein and
Peoples Bancorp Inc.
Notice of Removal of Administrator and Appointment of
Replacement, dated February 24, 2016, delivered to Wilmington
Trust Company by the Continuing Administrators and the Successor
Administrator named therein and Peoples Bancorp Inc.
Guarantee Agreement, dated as of June 25, 2007, between NB&T
Financial Group, Inc. and Wilmington Trust Company, as guarantee
trustee, relating to the Capital Securities (as defined therein)
NOTE: Pursuant to the First Supplemental Indenture, dated June 5,
2015, and made to be effective as of 6:00 p.m., Eastern Standard
Time, on March 6, 2015, between Wilmington Trust Company, as
trustee, and Peoples Bancorp Inc., Peoples Bancorp Inc. succeeded to
and was substituted for NB&T Financial Group, Inc. as "Guarantor"
Incorporated herein by reference to Exhibit 4.2(a)
to Peoples' June 30, 2015 Form 10-Q
Incorporated herein by reference to Exhibit 4.2(b)
to Peoples' June 30, 2015 Form 10-Q
Incorporated herein by reference to Exhibit 4.9 to
the Annual Report of Peoples Bancorp Inc. on
Form 10-K for the fiscal year ended December 31,
2015 (File No. 0-16772) ("Peoples' 2015 Form 10-
K")
Incorporated herein by reference to Exhibit 4.3 to
Peoples' June 30, 2015 Form 10-Q
10.1(a)
Peoples Bancorp Inc. Third Amended and Restated Deferred
Compensation Plan for Directors of Peoples Bancorp Inc. and
Subsidiaries (Amended and Restated Effective June 26, 2014)*
Incorporated herein by reference to Exhibit 10.1(a)
to Peoples' 2015 Form 10-K
10.1(b)
Rabbi Trust Agreement, made January 6, 1998, between Peoples
Bancorp Inc. and The Peoples Banking and Trust Company
(predecessor to Peoples Bank, National Association and now known
as Peoples Bank following conversion to state-chartered bank) as
Trustee*
Incorporated herein by reference to Exhibit 10.1(c)
to the Annual Report of Peoples Bancorp Inc. on
Form 10-K for the fiscal year ended December 31,
2007 (File No. 0-16772)
10.2
10.3
10.4
10.5
10.6
10.7
Peoples Bancorp Inc. Amended and Restated Incentive Award Plan
(Amended and Restated Effective December 11, 2008) [Effective for
the fiscal year ended December 31, 2009]*
Incorporated herein by reference to Exhibit 10.2 of
Peoples’ 2008 Form 10-K
Summary of Incentive Award Plan for Executive Officers and other
employees of Peoples Bancorp Inc. [Effective for the fiscal year
ended December 31, 2010]*
Summary of Peoples Bancorp Inc. Annual Incentive Program for
Executive Officers and other employees of Peoples Bancorp Inc.
[Effective beginning with the fiscal year beginning January 1, 2012]*
Incorporated herein by reference to Exhibit
10.2(b) to the Annual Report of Peoples Bancorp
Inc. on Form 10-K for the fiscal year ended
December 31, 2009 (File No. 0-16772) ("Peoples'
2009 Form 10-K")
Incorporated herein by reference to Exhibit 10.2(c)
to the Annual Report of Peoples Bancorp Inc. on
Form 10-K for the fiscal year ended December 31,
2011 (File No. 0-16772) ("Peoples’ 2011 Form 10-
K")
Summary of Peoples Bancorp Inc. Long Term Incentive Program for
Executive Officers and other employees of Peoples Bancorp Inc.
[Effective beginning with the fiscal year beginning January 1, 2012]*
Incorporated herein by reference to Exhibit
10.2(d) to Peoples’ 2011 Form 10-K
Summary of Perquisites for Executive Officers of Peoples Bancorp
Inc.*
Filed herewith
Summary of Base Salaries for Executive Officers of Peoples Bancorp
Inc.*
Filed herewith
10.8
Summary of Compensation for Directors of Peoples Bancorp Inc.*
Filed herewith
*Management Compensation Plan or Agreement
154
Exhibit
Number
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Description
Exhibit Location
Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan
(approved by the shareholders of Peoples Bancorp Inc. on April 26,
2018; successor to the Peoples Bancorp Inc. Second Amended and
Restated 2006 Equity Plan, the Peoples Bancorp Inc. Amended and
Restated 2006 Equity Plan and the Peoples Bancorp Inc. 2006 Equity
Plan)*
Incorporated herein by reference to Exhibit 99 to
the Current Report of Peoples Bancorp Inc. on
Form 8-K dated and filed on April 30, 2018 (File
No. 0-16772)
Peoples Bancorp Inc. Second Amended and Restated 2006 Equity
Plan Time-Based Restricted Stock Award Agreement (for Executives)
used for grants on and after June 27, 2013 and prior to July 31, 2018*
Incorporated herein by reference to Exhibit 10.2 to
Peoples' June 30, 2013 Form 10-Q
Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan
Time-Based Restricted Stock Award Agreement (for Executives) used
and to be used to evidence awards of time-based restricted stock
granted to executives of Peoples Bancorp Inc. on and after July 31,
2018 *
Incorporated herein by reference to Exhibit 10.1 to
the Quarterly Report of Peoples Bancorp Inc. on
Form 10-Q for the quarterly period ended
September 30, 2018 (File No. 0-16772) ("Peoples'
September 30, 2018 Form 10-Q")
Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan
Performance-Based Restricted Stock Award Agreement (for
Executives) used and to be used to evidence awards of performance-
based restricted stock granted to executives of Peoples Bancorp Inc.
on and after July 31, 2018*
Incorporated herein by reference to Exhibit 10.2 to
Peoples' September 30, 2018 Form 10-Q
Peoples Bancorp Inc. Nonqualified Deferred Compensation Plan
(adopted effective July 25, 2013)*
Incorporated herein by reference to Exhibit 10.4 to
Peoples' June 30, 2013 Form 10-Q
Peoples Bancorp Inc. Amended and Restated Change in Control
Agreement between Peoples Bancorp Inc. and Carol A. Schneeberger
(amended and restated effective December 11, 2008)*
Incorporated herein by reference to Exhibit 10.21
to Peoples’ 2008 Form 10-K
Peoples Bancorp Inc. Amended and Restated Change in Control
Agreement between Peoples Bancorp Inc. and Charles W. Sulerzyski
(adopted April 4, 2011)*
Incorporated herein by reference to Exhibit 10.2 to
the Quarterly Report of Peoples Bancorp Inc. on
Form 10-Q for the quarterly period ended June 30,
2011 (File No. 0-16772)
10.16
Peoples Bancorp Inc. Change in Control Agreement between Peoples
Bancorp Inc. and John C. Rogers (adopted November 30, 2015)*
Incorporated herein by reference to Exhibit 10.35
to Peoples' 2015 Form 10-K
10.17
Peoples Bancorp Inc. Employee Stock Purchase Plan*
10.18
Peoples Bancorp Inc. Change in Control Agreement between Peoples
Bancorp Inc. and Robyn A. Stevens (adopted June 17, 2016)*
Incorporated herein by reference to Exhibit 10.1 to
the Current Report of Peoples Bancorp Inc. on
Form 8-K dated and filed on April 28, 2014 (File
No. 0-16772)
Incorporated herein by reference to Exhibit 10.1 to
the Quarterly Report of Peoples Bancorp Inc. on
Form 10-Q for the quarterly period ended June 30,
2016 (File No. 0-16772)
10.19
10.20
Form of Peoples Bancorp Inc. Second Amended and Restated 2006
Equity Plan Performance-Based Restricted Stock Agreement used
and to be used to evidence awards of performance-based restricted
stock granted to employees of Peoples Bancorp Inc. on and after
January 29, 2015*
Incorporated herein by reference to Exhibit 10.2 to
the Quarterly Report of Peoples Bancorp Inc. on
Form 10-Q for the quarterly period ended March
31, 2017 (File No. 0-16772) ("Peoples' March 31,
2017 Form 10-Q")
Form of Peoples Bancorp Inc. Second Amended and Restated 2006
Equity Plan Performance-Based Restricted Stock Award Agreement
used to evidence awards of performance-based restricted stock
granted to executive officers of Peoples Bancorp Inc. on and after
January 29, 2015 and prior to January 1, 2018*
Incorporated herein by reference Exhibit 10.1 to
the Quarterly Report of Peoples Bancorp Inc. on
Form 10-Q for the quarterly period ended March
31, 2015 (File No. 0-16772)
10.21
Form of Peoples Bancorp Inc. Change in Control Agreement to be
adopted by Peoples Bancorp Inc. and individuals who are first elected
as executive officers of Peoples Bancorp Inc. after March 24, 2016*
Incorporated herein by reference to Exhibit 10.3 to
the Quarterly Report of Peoples Bancorp Inc. on
Form 10-Q for the quarterly period ended March
31, 2016 (File No. 0-16772) ("Peoples' March 31,
2016 Form 10-Q")
*Management Compensation Plan or Agreement
155
Exhibit
Number
10.22
10.23
10.24
10.25
21
23
24
Description
Exhibit Location
Peoples Bancorp Inc. Change in Control Agreement between Peoples
Bancorp Inc. and Douglas Wyatt (adopted May 2, 2016)*
Incorporated herein by reference to Exhibit 10.1 to
Peoples' March 31, 2017 Form 10-Q
Credit Agreement, dated as of March 4, 2016, between Peoples
Bancorp Inc., as Borrower, and Raymond James Bank, N.A., as
Lender
Revolving Note issued by Peoples Bancorp Inc. on March 4, 2016 to
Raymond James Bank, N.A., in the maximum aggregate principal
amount of $15,000,000
Incorporated herein by reference to Exhibit 10.1 to
the Current Report of Peoples Bancorp Inc. on
Form 8-K dated and filed on March 8, 2016 (File
No. 0-16772) ("Peoples' March 8, 2016 Form 8-
K")
Incorporated herein by reference to Exhibit 10.2 to
Peoples' March 8, 2016 Form 8-K
Form of Peoples Bancorp Inc. Second Amended and Restated 2006
Equity Plan Performance Unit Award Agreement used and to be used
to evidence grants of performance units to executive officers of
Peoples Bancorp Inc. on and after July 26, 2017*
Incorporated herein by reference to Exhibit 10.1 to
the Quarterly Report of Peoples Bancorp Inc. on
Form 10-Q for the quarterly period ended June 30,
2017 (File No. 0-16772)
Subsidiaries of Peoples Bancorp Inc.
Consent of Independent Registered Public Accounting Firm - Ernst &
Young LLP
Filed herewith
Filed herewith
Powers of Attorney of Directors and Executive Officers of Peoples
Bancorp Inc.
Filed herewith
31.1
Rule 13a-14(a)/15d-14(a) Certifications [President and Chief
Filed herewith
Executive Officer]
31.2
Rule 13a-14(a)/15d-14(a) Certifications [Executive Vice President,
Filed herewith
Chief Financial Officer and Treasurer]
32
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code [President and Chief Executive Officer; and
Executive Vice President, Chief Financial Officer and Treasurer]
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 #
*Management Compensation Plan or Agreement
# Attached as Exhibit 101 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 of Peoples Bancorp Inc. are
the following documents formatted in XBRL (eXtensive Business Reporting Language): (i) Consolidated Balance Sheets at December
31, 2018 and December 31, 2017; (ii) Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016; (iii)
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016; (iv) Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2018, 2017 and 2016; (v) Consolidated Statements of Cash Flows
for the years ended December 31, 2018, 2017, and 2016 and (vi) Notes to the Consolidated Financial Statements.
156
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 1, 2019
PEOPLES BANCORP INC.
By: /s/ CHARLES W. SULERZYSKI
Charles W. Sulerzyski
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
/s/ CHARLES W. SULERZYSKI
Charles W. Sulerzyski
/s/ JOHN C. ROGERS
John C. Rogers
/s/ TARA M. ABRAHAM*
Tara M. Abraham
/s/ S. CRAIG BEAM*
S. Craig Beam
/s/ GEORGE W. BROUGHTON*
George W. Broughton
President, Chief Executive Officer and Director
Executive Vice President, Chief Financial Officer
and Treasurer (Principal Financial and Accounting Officer)
Director
Director
Director
/s/ DAVID F. DIERKER*
Director
David F. Dierker
/s/ JAMES S. HUGGINS*
James S. Huggins
Director
/s/ BROOKE W. JAMES*
Director
Brooke W. James
/s/ DAVID L. MEAD*
David L. Mead
/s/ SUSAN D. RECTOR*
Susan D. Rector
Chairman of the Board and Director
Director
Date
3/1/2019
3/1/2019
3/1/2019
3/1/2019
3/1/2019
3/1/2019
3/1/2019
3/1/2019
3/1/2019
3/1/2019
* The above-named directors of the Registrant sign this Annual Report on Form 10-K by Charles W. Sulerzyski, their
attorney-in-fact, pursuant to Powers of Attorney signed by the above-named directors, which Powers of Attorney are
filed with this Annual Report on Form 10-K in Exhibit 24, in the capacities indicated and on the 1st day of March,
2019.
By:
/s/ CHARLES W. SULERZYSKI
Charles W. Sulerzyski
President and Chief Executive Officer
Attorney-in-Fact
157
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Market Makers
Stockholder Information
Stock Listing
Nasdaq Symbol: PEBO
The Nasdaq Global Select Market®, CUSIP 709789101
Alternate Newspaper Listings: PEBOOH and PeBcOh
Corporate Offices
Peoples’ Headquarters:
138 Putnam Street, PO Box 738
Marietta, OH 45750-0738
Investor Relations: 740.374.6136
peoplesbancorp.com
Stock Transfer Agent, Registrar
EQ Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
800.468.9716 • shareowneronline.com
General Shareholder Inquiries
Peoples Bancorp Inc.
Attn: Investor Relations
138 Putnam Street, PO Box 738
Marietta, OH 45750-0738
Market Makers in Peoples Bancorp Inc. Stock
UBS Securities LLC
800.421.6172
Merrill Lynch
800.937.0516
Boenning &
Scattergood, Inc.
800.883.1212
Goldman Sachs & Co.
800.221.8320
Raymond James & Associates
800.248.8863
Hovde Group, LLC
847.991.6622
Credit Suisse
212.325.2000
Sandler O’Neill and Partners
800.635.6851
D.A. Davidson
800.322.5915
Keefe, Bruyette,
and Woods Inc.
212.887.7777
JP Morgan
212.270.6000
Citigroup Global Markets Inc.
800.223.7743
Barclays Capital
212.412.4000
Cantor Fitzgerald, L.P.
212.938.5000
5
Peoples Bancorp Inc.
and Peoples Bank Directors
TARA M. ABRAHAM
Chairman and Co-CEO
Accel, Inc.
S. CRAIG BEAM
Owner
Thorobeam Farm, LLC
GEORGE W. BROUGHTON
Vice Chairman, Peoples Bancorp Inc.
and Peoples Bank
Owner and President
Broughton Commercial Properties, LLC
BROOKE W. JAMES
Partner
WMSALL Farms
DAVID L. MEAD
Chairman, Peoples Bancorp Inc. and Peoples Bank
Professor (Retired)
Marietta College
SUSAN D. RECTOR
Attorney-At-Law
Peterson Conners LLP
GWB Oil & Gas, LLC
CHUCK SULERZYSKI
President and Chief Executive Officer
Peoples Bancorp Inc. and Peoples Bank
DAVID F. DIERKER
Banking Executive (Retired)
SunTrust Banks, Inc.
JAMES S. HUGGINS
Attorney-At-Law
Theisen Brock, LPA
6
Officers and Directors Emeritus
Peoples Bank
Director Emeritus
HAROLD D. LAUGHLIN
Peoples Bancorp Inc.
Directors Emeritus
DAVE M. ARCHER
CARL L. BAKER, JR.
FRANK L. CHRISTY
WILFORD D. DIMIT
RICHARD FERGUSON
BRENDA F. JONES, M.D.
FRED R. PRICE
ROBERT W. PRICE
T. PAT SAUBER
TERRY T. SWEET
PAUL T. THEISEN
THOMAS J. WOLF
Peoples Bancorp Inc. Officers
CHUCK SULERZYSKI
President and Chief Executive Officer
JOHN C. ROGERS
Executive Vice President
Chief Financial Officer and Treasurer
CAROL A. SCHNEEBERGER
Executive Vice President
Chief Administrative Officer
ROBYN A. STEVENS
Executive Vice President
Chief Credit Officer
DOUGLAS V. WYATT
Executive Vice President
Chief Commercial Banking Officer
M. RYAN KIRKHAM
Executive Vice President
General Counsel and Corporate Secretary
DAVID A. GROSSMAN
Vice President
Controller
KRISTEN K. HAYNES-WICKLINE
Assistant Controller
AMY M. AUCH
Assistant Corporate Secretary
ANNE P. GILLILAND
Assistant Corporate Secretary
CATHY M. LAWRENCE
Assistant Corporate Secretary
7
Maps and
Locations
OHIO
Athens County
Athens
Nelsonville
Brown County
Georgetown
Mount Orab
Sardinia
Clermont County
Batavia
Milford
Williamsburg
Clinton County
Blanchester
New Vienna
Sabina
Wilmington
Coshocton County
Coshocton
Cuyahoga County
Beachwood
Lyndhurst
Fairfield County
Baltimore
Lancaster
Franklin County
Worthington
Gallia County
Gallipolis
Guernsey County
Byesville
Cambridge
Hamilton County
Cincinnati
Madeira
Montgomery
Highland County
Hillsboro
Jackson County
Jackson
Wellston
8
Cleveland
Cleveland
Lyndhurst
Lyndhurst
Beachwood
Beachwood
Munroe Falls
Munroe Falls
CuyaHoga Falls
Cuyahoga Falls
Akron
Akron
Norton
Norton
77
Mount Vernon
Mount Vernon
Newark
Newark
Heath
Heath
Baltimore
Baltimore
Lancaster
Lancaster
33
Nelsonville
Nelsonville
Coshocton
Coshocton
Cambridge
Cambridge
Zanesville
Zanesville
McConnelsville
McConnelsville
Lowell
Lowell
Belpre
Belpre
Athens
Athens
Worthington
Worthington
70
Columbus
Columbus
71
Waynesville
Waynesville
Sabina
Sabina
Wilmington
Wilmington
Hamilton Township
Hamilton Township
Blanchester
Blanchester
New Vienna
New Vienna
Waverly
Waverly
Milford
Milford
Hillsboro
Hillsboro
Carlisle
Carlisle
Franklin
Franklin
Springboro
Springboro
Lebanon
Lebanon
MasonMason
Montgomery
Montgomery
Cincinnati
Cincinnati
Madeira
Madera
Batavia
Batavia
Williamsburg
Williamsburg
Sardinia
Sardinia
Mount Orab
Mount Orab
Jackson
Jackson
Wellston
Wellston
Pomeroy
Pomeroy
32
Byesville
Byesville
Caldwell
Caldwell
New Martinsville
New Martinsville
Sistersville
Sistersville
Marietta
Marietta
Reno
Reno
Vienna
Vienna
Parkersburg
Parkersburg
50
Morgantown
Morgantown
79
Georgetown
Georgetown
Portsmouth
Portsmouth
Gallipolis
Gallipolis
Wheelersburg
Wheelersburg
Point Pleasant
Point Pleasant
South Shore
South Shore
Greenup
Greenup
Russell
Russell
Ashland
Ashland
Summit
Summit
Huntington
Huntington
Charleston
Charleston
64
77
Pikeville
Pikeville
WEST
VIRGINIA
Cabell County
Huntington
Kanawha County
Charleston
Mason County
Point Pleasant
Tyler County
Sistersville
Wetzel County
New Martinsville
Wood County
Parkersburg
Vienna
Knox County
Mount Vernon
Licking County
Heath
Newark
Meigs County
Pomeroy
Morgan County
McConnelsville
Muskingum County
Zanesville
Noble County
Caldwell
Pike County
Waverly
Scioto County
Portsmouth
Wheelersburg
Summit County
Akron
Cuyahoga Falls
Munroe Falls
Norton
Warren County
Carlisle
Franklin
Hamilton Township
Lebanon
Mason
Springboro
Waynesville
Washington County
Belpre
Lowell
Marietta
Reno
KENTUCKY
Boyd County
Ashland
Summit
Greenup County
Greenup
Russell
South Shore
Pike County
Pikeville
Financial Highlights
Peoples Bancorp Inc. (Peoples) is a diversified financial services holding company with $4.0 billion in total
assets, 81 locations, including 72 full-service bank branches, and 76 ATMs in Ohio, West Virginia and Kentucky.
Peoples makes available a complete line of banking, investment, insurance and trust solutions through its
subsidiaries - Peoples Bank and Peoples Insurance Agency, LLC. Peoples’ common shares are traded on the
NASDAQ Global Select Market® under the symbol “PEBO”, and Peoples is a member of the Russell 3000 index
of U.S. publicly traded companies. Learn more about Peoples at www.peoplesbancorp.com.
Dollars in Thousands, except Per Share Data
Year-Over-Year Change
2018
2017
2016
2018
2017
Earnings and Dividends
Total revenues (1)
Total non-interest expenses
Net income
Dividends declared on common shares (2)
Per Share Data
Earnings per common share – Basic
Earnings per common share – Diluted
Cash dividends paid on common shares (2)
Book value at end of period
Tangible book value at end of period (3)
Closing stock price
At Year End
Total assets
Total investment securities
Total loans
Total deposits
Total stockholders’ equity
Trust and brokerage assets under
administration and management
155,935
106,911
31,157
12,540
12.5%
16.7%
20.2%
37.8%
$ 186,846
$ 125,977
46,255
$
22,677
$
$ 166,030
$ 107,975
38,471
$
16,455
$
$
$
$
$
$
$
2.42
2.41
1.16
26.59
18.30
30.10
$
$
$
$
$
$
2.12
2.10
0.90
25.08
17.17
32.62
$
$
$
$
$
$
$
$
$
$
1.72
1.71
0.69
23.92
15.89
32.46
$ 3,991,454
$ 871,837
$ 2,728,778
$ 2,955,465
$ 520,140
$ 3,581,686
$ 874,486
$ 2,357,137
$ 2,730,330
$ 458,592
$ 3,432,348
$
859,455
$ 2,224,936
$ 2,509,722
$ 435,261
6.5 %
1.0 %
23.5%
31.2 %
23.3 %
22.8 %
30.4 %
4.8 %
8.1 %
0.5 %
4.4 %
1.7 %
5.9 %
8.8 %
5.4 %
14.2%
14.8%
28.9%
6.0%
6.6%
-7.7%
11.4%
-0.3%
15.8%
8.2%
13.4%
$ 2,233,301
$ 2,340,262
$ 2,079,280
-4.6%
12.6 %
Financial Ratios
Return on average assets
Return on average assets adjusted for non-core items(4)
Return on average stockholders’ equity
Net interest margin
Efficiency ratio (5)
Efficency ratio adjusted for non-core items(4,5)
Total risk-based capital ratio
Tangible equity to tangible assets (3)
Nonperforming assets to total assets
1.19 %
1.32%
9.48 %
3.71 %
65.33 %
61.32%
14.60%
9.35 %
0.49 %
1.10 %
1.08%
8.54 %
3.62 %
62.20 %
61.85%
14.62 %
9.14 %
0.49 %
0.94 %
0.97%
7.20 %
3.54 %
65.13 %
64.30%
14.11 %
8.80 %
0.75 %
(1) Net interest income and total non-interest income excluding net gains/losses.
(2) Reflects amounts declared with respect to the earnings for the period indicated. Since Q2 2011, quarterly dividends are considered and declared during the first
month following quarter-end.
(3) Excludes balance sheet impact of goodwill and other intangible assets acquired through acquisitions on both total stockholders’ equity and total assets.
(4) Adjusted as defined and illustrated in the 2018 Annual Report on Form 10-K within Item 7.
(5) Total non-interest expense (less amortization of other intangible amortization) as a percentage of fully tax-equivalent net interest income plus total non-interest
income plus total non-interst income (excluding all gains and losses).
Our Promise
We will work side by side to
overcome challenges and seize
opportunities. We listen and work
with you. Together we will build
and execute thoughtful plans and
actions, blending our experience
and expertise, to move you toward
your goals. Our core difference
is providing you peace of mind,
confidence, and clarity in your
financial life.
Employee
Promise Circle
Clients First
Integrity Always
Respect for All
Commitment to Community
Lead the Way
Excellence in Everything
2018
2018
ANNUAL
ANNUAL
REPORT
REPORT
Call.
Call.
Click.
Click.
800.374.6123
800.374.6123
peoplesbancorp.com
peoplesbancorp.com
138 Putnam Street | PO Box 738 | Marietta, OH 45750
138 Putnam Street | PO Box 738 | Marietta, OH 45750