XNAS:PEBO Peoples Bancorp Inc (Marietta, OH) Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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

FORM 10-Q

(Mark One)
  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
            For the quarterly period ended June 30, 2012
                                                                                        
OR
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
            For the transition period from ____ to ____

Commission File Number: 0-16772
PEOPLES BANCORP INC.
(Exact name of Registrant as specified in its charter)
Ohio
 
 
 
31-0987416
(State or other jurisdiction of incorporation or organization)
 
 
 
(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio
 
 
 
45750
(Address of principal executive offices)
 
 
 
(Zip Code)
Registrant’s telephone number, including area code:
 
 
 
(740) 373-3155
 
 
Not Applicable
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,683,712 common shares, without par value, at July 25, 2012.



Table of Contents



2


As used in this Quarterly Report on Form 10-Q (“Form 10-Q”), “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.

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
June 30,
2012
December 31,
2011
(Dollars in thousands)
Assets
 
 
Cash and cash equivalents:
 
 
Cash and due from banks
$
30,175

$
32,346

Interest-bearing deposits in other banks
3,508

6,604

Total cash and cash equivalents
33,683

38,950

Available-for-sale investment securities, at fair value (amortized cost of $614,131 at June 30, 2012 and $617,128 at December 31, 2011)
623,986

628,571

Held-to-maturity investment securities, at amortized cost (fair value of $38,327 at June 30, 2012 and $16,705 at December 31, 2011)
37,172

16,301

Other investment securities, at cost
24,356

24,356

Total investment securities
685,514

669,228

Loans, net of deferred fees and costs
955,278

938,506

Allowance for loan losses
(19,925
)
(23,717
)
Net loans
935,353

914,789

Loans held for sale
5,173

3,271

Bank premises and equipment, net
23,754

23,905

Bank owned life insurance
49,388

49,384

Goodwill
62,852

62,520

Other intangible assets
2,531

1,955

Other assets
33,111

30,159

Total assets
$
1,831,359

$
1,794,161

Liabilities
 
 
Deposits:
 
 
Non-interest-bearing
$
272,627

$
239,837

Interest-bearing
1,145,669

1,111,243

Total deposits
1,418,296

1,351,080

Short-term borrowings
43,347

51,643

Long-term borrowings
106,471

142,312

Junior subordinated notes held by subsidiary trust
22,618

22,600

Accrued expenses and other liabilities
26,004

19,869

Total liabilities
1,616,736

1,587,504

Stockholders’ Equity
 
 
Preferred stock, no par value, 50,000 shares authorized, no shares issued at June 30, 2012 and December 31, 2011


Common stock, no par value, 24,000,000 shares authorized, 11,134,025 shares issued at June 30, 2012 and 11,122,247 shares issued at December 31, 2011, including shares in treasury
166,401

166,969

Retained earnings
62,920

53,580

Accumulated other comprehensive income, net of deferred income taxes
430

1,412

Treasury stock, at cost, 607,071 shares at June 30, 2012 and 615,123 shares at December 31, 2011
(15,128
)
(15,304
)
Total stockholders’ equity
214,623

206,657

Total liabilities and stockholders’ equity
$
1,831,359

$
1,794,161


See Notes to the Unaudited Consolidated Financial Statements


3


PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands, except per share data)
2012
2011
 
2012
2011
Interest Income:
 
 
 
 
 
Interest and fees on loans
$
12,043

$
12,389

 
$
23,803

$
25,067

Interest and dividends on taxable investment securities
4,939

6,163

 
10,446

12,366

Interest on tax-exempt investment securities
355

384

 
696

809

Other interest income
4

5

 
8

16

Total interest income
17,341

18,941

 
34,953

38,258

Interest Expense:
 
 
 
 
 
Interest on deposits
2,289

3,674

 
4,836

7,659

Interest on short-term borrowings
19

26

 
38

61

Interest on long-term borrowings
929

1,317

 
2,048

2,627

Interest on junior subordinated notes held by subsidiary trust
492

493

 
987

985

Total interest expense
3,729

5,510

 
7,909

11,332

Net interest income
13,612

13,431

 
27,044

26,926

(Recovery of) provision for loan losses
(1,120
)
2,295

 
(3,257
)
7,606

Net interest income after (recovery of) provision for loan losses
14,732

11,136

 
30,301

19,320

Other Income:
 
 
 
 
 
Deposit account service charges
2,230

2,454

 
4,467

4,628

Insurance income
2,438

2,165

 
5,389

4,997

Trust and investment income
1,449

1,409

 
2,945

2,734

Electronic banking income
1,464

1,284

 
2,952

2,505

Mortgage banking income
682

286

 
1,231

660

Bank owned life insurance
(4
)
92

 
4

179

Net gain on investment securities

56

 
3,163

416

Net loss on asset disposals and other transactions
(43
)
(556
)
 
(3,105
)
(496
)
Other non-interest income
239

201

 
592

562

Total other income
8,455

7,391

 
17,638

16,185

Other Expenses:
 
 
 
 
 
Salaries and employee benefit costs
8,415

7,953

 
16,660

15,580

Net occupancy and equipment
1,503

1,472

 
2,935

2,973

Professional fees
1,204

1,013

 
2,017

1,808

Electronic banking expense
870

685

 
1,564

1,303

Data processing and software
485

453

 
972

916

Franchise tax
414

358

 
826

759

Communication expense
288

294

 
636

608

FDIC insurance
223

450

 
532

1,112

Foreclosed real estate and other loan expenses
255

224

 
476

574

Amortization of other intangible assets
109

152

 
216

314

Other non-interest expense
1,920

1,665

 
3,868

3,390

Total other expenses
15,686

14,719

 
30,702

29,337

Income before income taxes
7,501

3,808

 
17,237

6,168

Income tax expense
(2,471
)
(887
)
 
(5,550
)
(1,378
)
Net income
$
5,030

$
2,921

 
$
11,687

$
4,790

Preferred dividends

(238
)
 

(761
)
Net income available to common shareholders
$
5,030

$
2,683

 
$
11,687

$
4,029

Earnings per common share - basic
$
0.47

$
0.26

 
$
1.10

$
0.38

Earnings per common share - diluted
$
0.47

$
0.26

 
$
1.10

$
0.38

Weighted-average number of common shares outstanding - basic
10,524,429

10,478,362

 
10,518,909

10,475,109

Weighted-average number of common shares outstanding - diluted
10,524,429

10,507,895

 
10,518,929

10,492,712

Cash dividends declared on common shares
$
1,175

$

 
$
2,347

$
1,058

Cash dividends declared per common share
$
0.11

$

 
$
0.22

$
0.10

 See Notes to the Unaudited Consolidated Financial Statements


4


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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands)
2012
2011
 
2012
2011
Net income
$
5,030

$
2,921

 
$
11,687

$
4,790

Other comprehensive income (loss):
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
Gross unrealized holding gain arising in the period
2,638

8,066

 
1,575

8,484

Related tax expense
(923
)
(2,823
)
 
(551
)
(2,969
)
Less: reclassification adjustment for net gain included in net income

56

 
3,163

416

Related tax expense

(19
)
 
(1,107
)
(145
)
Net effect on other comprehensive income (loss)
1,715

5,206

 
(1,032
)
5,244

Defined benefit plans:
 
 
 
 
 
Amortization of unrecognized loss and service cost on pension plan
39

38

 
77

77

Related tax expense
(14
)
(13
)
 
(27
)
(27
)
Net effect on other comprehensive income
25

25

 
50

50

Total other comprehensive income (loss), net of tax
1,740

5,231

 
(982
)
5,294

Total comprehensive income
$
6,770

$
8,152

 
$
10,705

$
10,084




CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
 
 
 
 
Accumulated Other
 
Total
 
Preferred
Common
Retained
Comprehensive
Treasury
Stockholders'
(Dollars in thousands)
Stock
Stock
Earnings
Income (Loss)
Stock
Equity
Balance, December 31, 2011
$

$
166,969

$
53,580

$
1,412

$
(15,304
)
$
206,657

Net income
 
 
11,687

 
 
11,687

Other comprehensive loss, net of tax
 
 
 
(982
)
 
(982
)
Repurchase of common stock warrant
 
(1,201
)
 
 
 
(1,201
)
Common stock cash dividends declared
 
 
(2,347
)
 
 
(2,347
)
Reissuance of treasury stock for deferred compensation plan
 
 
 
 
137

137

Purchase of treasury stock
 
 
 
 
(48
)
(48
)
Common shares issued under dividend reinvestment plan
 
177

 
 
 
177

Common shares issued under Board of Directors' compensation plan
 
(29
)
 
 
87

58

Stock-based compensation expense
 
485

 
 
 
485

Balance, June 30, 2012
$

$
166,401

$
62,920

$
430

$
(15,128
)
$
214,623

 
 
See Notes to the Unaudited Consolidated Financial Statements


5


PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended
 
June 30,
(Dollars in thousands)
2012
2011
Net cash provided by operating activities
$
17,593

$
23,343

Investing activities:
 
 
Available-for-sale investment securities:
 
 
Purchases
(135,031
)
(119,777
)
Proceeds from sales
63,650

30,759

Proceeds from principal payments, calls and prepayments
70,516

61,577

Held-to-maturity investment securities:
 
 
Purchases
(23,241
)

Proceeds from principal payments
2,278


Net (increase) decrease in loans
(17,467
)
11,881

Net expenditures for premises and equipment
(1,146
)
(656
)
Proceeds from sales of other real estate owned
1,387

880

Business acquisitions, net of cash received

(125
)

Investment in limited partnership and tax credit funds
(187
)
(234
)
Net cash used in investing activities
(39,366
)
(15,570
)
Financing activities:
 
 
Net increase in non-interest-bearing deposits
32,790

7,006

Net increase (decrease) in interest-bearing deposits
34,380

(9,826
)
Net decrease in short-term borrowings
(8,296
)
(12,255
)
Payments on long-term borrowings
(38,951
)
(5,999
)
Repurchase of preferred shares and common stock warrant
(1,201
)
(21,000
)
Cash dividends paid on preferred shares

(675
)
Cash dividends paid on common shares
(2,171
)
(2,034
)
Purchase of treasury stock
(48
)
(69
)
Proceeds from issuance of common shares
3

84

Net cash provided by (used in) financing activities
16,506

(44,768
)
Net decrease in cash and cash equivalents
(5,267
)
(36,995
)
Cash and cash equivalents at beginning of period
38,950

74,644

Cash and cash equivalents at end of period
$
33,683

$
37,649

 
 See Notes to the Unaudited Consolidated Financial Statements


6


PEOPLES BANCORP INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
Note 1  Summary of Significant Accounting Policies 

Basis of Presentation: The accompanying Unaudited Consolidated Financial Statements of Peoples Bancorp Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements do not contain all of the information and footnotes required by US GAAP for annual financial statements and should be read in conjunction with Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (“2011 Form 10-K”).
The accounting and reporting policies followed in the presentation of the accompanying Unaudited Consolidated Financial Statements are consistent with those described in Note 1 of the Notes to the Consolidated Financial Statements included in Peoples’ 2011 Form 10-K, as updated by the information contained in this Form 10-Q.  Management has evaluated all significant events and transactions that occurred after June 30, 2012, for potential recognition or disclosure in these consolidated financial statements.  In the opinion of management, these consolidated financial statements reflect all adjustments necessary to present fairly such information for the periods and dates indicated.  Such adjustments are normal and recurring in nature.  All significant intercompany accounts and transactions have been eliminated.  The Consolidated Balance Sheet at December 31, 2011, contained herein has been derived from the audited Consolidated Balance Sheet included in Peoples’ 2011 Form 10-K. 
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year, due in part to seasonal variations and unusual or infrequently occurring items.  Peoples’ insurance income includes contingent performance-based insurance commissions that are recognized by Peoples when received, which typically occurs during the first quarter of each year.
New Accounting Pronouncements: In June 2011, the FASB issued an accounting standards update with new guidance on the presentation of other comprehensive income (“OCI”). This standard was effective for public companies for fiscal years, and interim period within those years, beginning after December 15, 2011, and was to be applied retrospectively. The amendment now requires an entity to either present components of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. This standard is intended to improve the overall quality of financial reporting by increasing the prominence of items reported in OCI, and additionally align the presentation of OCI in financial statements prepared in accordance with U.S. GAAP with those prepared in accordance with IFRSs. Peoples adopted this new guidance on January 1, 2012, as required. As a result of the adoption, the components of OCI are presented in a separate statement following the Consolidated Statements of Income.

Note 2  Fair Value of Financial Instruments 

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.


7


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.
Assets measured at fair value on a recurring basis comprised the following at June 30, 2012:  
 
 
Fair Value Measurements at Reporting Date Using
(Dollars in thousands)
 
Quoted Prices in Active Markets for Identical Assets
Significant
Other
Observable
 Inputs
Significant Unobservable Inputs
Fair Value
(Level 1)
(Level 2)
(Level 3)
June 30, 2012
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$
30

$

$
30

$

U.S. government sponsored agencies
648


648


States and political subdivisions
39,351


39,351


Residential mortgage-backed securities
525,391

11,340

514,051


Commercial mortgage-backed securities
42,410


42,410


Bank-issued trust preferred securities
12,744


12,744


Equity securities
3,412

3,241

171


Total available-for-sale securities
$
623,986

$
14,581

$
609,405

$

December 31, 2011
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$
32

$

$
32

$

U.S. government sponsored agencies
13,037


13,037


States and political subdivisions
35,745


35,745


Residential mortgage-backed securities
527,003


527,003


Commercial mortgage-backed securities
37,289


37,289


Bank-issued trust preferred securities
12,211


12,211


Equity securities
3,254

3,126

128


Total available-for-sale securities
$
628,571

$
3,126

$
625,445

$

The fair values used by Peoples are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curves, credit spreads and prices from market makers and live trading systems (Level 2).
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  Financial assets measured at fair value on a non-recurring basis included the following:
Impaired Loans: Impaired loans are measured and reported at fair value when management believes collection of contractual interest and principal payments is doubtful.  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 and market value provided by independent, licensed or certified appraisers (Level 2 inputs).  At June 30, 2012, impaired loans with an aggregate outstanding principal balance of $5.6 million were measured and reported at a fair value of $3.9 million.  For the three and six months ended June 30, 2012, Peoples recognized losses on impaired loans of $1.3 million and $1.6 million, respectively, through the allowance for loan losses.



8



The following table presents the fair values of financial assets and liabilities carried on Peoples’ consolidated balance sheets, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
 
 
June 30, 2012
 
December 31, 2011
(Dollars in thousands)
Carrying Amount
Fair Value
 
Carrying Amount
Fair Value
Financial assets:
 
 
 
 
 
Cash and cash equivalents
$
33,683

$
33,683

 
$
38,950

$
38,950

Investment securities
685,514

686,669

 
669,228

669,632

Loans
940,526

854,552

 
918,060

828,477

Financial liabilities:
 
 
 
 
 
Deposits
$
1,418,296

$
1,430,361

 
$
1,351,080

$
1,363,742

Short-term borrowings
43,347

43,347

 
51,643

51,643

Long-term borrowings
106,471

118,905

 
142,312

157,553

Junior subordinated notes held by subsidiary trust
22,618

23,708

 
22,600

23,760

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


9


Note 3  Investment Securities 

Available-for-sale
The following table summarizes Peoples’ available-for-sale investment securities:
(Dollars in thousands)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
June 30, 2012
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$
29

$
1

$

$
30

U.S. government sponsored agencies
607

41


648

States and political subdivisions
36,188

3,178

(15
)
39,351

Residential mortgage-backed securities
521,960

13,192

(9,761
)
525,391

Commercial mortgage-backed securities
40,243

2,167


42,410

Bank-issued trust preferred securities
13,891

62

(1,209
)
12,744

Equity securities
1,213

2,249

(50
)
3,412

Total available-for-sale securities
$
614,131

$
20,890

$
(11,035
)
$
623,986

December 31, 2011
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$
32

$

$

$
32

U.S. government sponsored agencies
12,291

746


13,037

States and political subdivisions
32,763

2,982


35,745

Residential mortgage-backed securities
521,231

15,607

(9,835
)
527,003

Commercial mortgage-backed securities
35,712

1,577


37,289

Bank-issued trust preferred securities
13,886

12

(1,687
)
12,211

Equity securities
1,213

2,134

(93
)
3,254

Total available-for-sale securities
$
617,128

$
23,058

$
(11,615
)
$
628,571

Peoples’ investment in equity securities was comprised entirely of common stocks issued by various unrelated bank holding companies at both June 30, 2012 and December 31, 2011.  At June 30, 2012, there were no securities of a single issuer, other than U.S. Treasury and government agencies and U.S. government sponsored agencies, that exceeded 10% of stockholders' equity.
The gross gains and gross losses realized by Peoples from sales of available-for-sale securities for the three and six months ended June 30 were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands)
2012
2011
 
2012
2011
Gross gains realized
$

$
56

 
$
3,272

$
498

Gross losses realized


 
109

82

Net gain realized
$

$
56

 
$
3,163

$
416

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


10


The following table presents a summary of available-for-sale investment securities that had an unrealized loss:
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
Unrealized Loss
No. of Securities
 
Fair
Value
Unrealized Loss
No. of Securities
 
Fair
Value
Unrealized Loss
June 30, 2012
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
$

$


 
$
3

$

1

 
$
3

$

U.S. government sponsored agencies



 



 


States and political subdivisions
1,988

15

2

 



 
1,988

15

Residential mortgage-backed securities
90,104

1,188

19

 
81,920

8,573

16

 
172,024

9,761

Commercial mortgage-backed securities



 



 


Bank-issued trust preferred securities
1,004

15

1

 
6,272

1,194

6

 
7,276

1,209

Equity securities



 
125

50

1

 
125

50

Total
$
93,096

$
1,218

22

 
$
88,320

$
9,817

24

 
$
181,416

$
11,035

December 31, 2011
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
$

$


 
$
3

$

1

 
$
3

$

U.S. government sponsored agencies



 



 


States and political subdivisions



 



 


Residential mortgage-backed securities
60,148

756

13

 
91,400

9,079

15

 
151,548

9,835

Commercial mortgage-backed securities



 



 


Bank-issued trust preferred securities
6,872

625

4

 
4,329

1,062

5

 
11,201

1,687

Equity securities



 
83

93

1

 
83

93

Total
$
67,020

$
1,381

17

 
$
95,815

$
10,234

22

 
$
162,835

$
11,615

Management systematically evaluates available-for-sale investment securities for other-than-temporary declines in fair value on a quarterly basis. At June 30, 2012, management concluded no individual securities were other-than-temporarily impaired since Peoples did not have the intent to sell nor was it more likely than not that Peoples would be required to sell any of the securities with an unrealized loss prior to recovery. Further, the unrealized losses at both June 30, 2012 and December 31, 2011, were largely attributable to changes in market interest rates and spreads since the securities were purchased. 
At June 30, 2012, approximately 95% of the mortgage-backed securities that have been at an unrealized loss position for twelve months or more were issued by U.S. government sponsored enterprises. The remaining 5%, or seven positions, consisted of privately issued mortgage-backed securities with all of the underlying mortgages originated prior to 2004. Three of the seven positions had a fair value less than 90% of their book value, with an aggregate book and fair value of $2.1 million and $1.8 million, respectively.
Furthermore, three of the seven bank-issued trust preferred securities at an unrealized loss position were within 95% of book value, while the unrealized losses for the remaining four were primarily attributable to the floating nature of these investments, the current interest rate environment and spreads within that sector. The remaining four securities had an aggregate book value of approximately $5.1 million and fair value of $3.9 million at June 30, 2012.
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.



11


The table below presents the amortized cost, fair value and weighted-average yield of available-for-sale securities by contractual maturity at June 30, 2012.  The average yields are based on the amortized cost.  In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date.  Rates are calculated on a fully tax-equivalent basis using a 35% federal income tax rate.
 
(Dollars in thousands)
Within 1 Year
1 to 5 Years
5 to 10 Years
Over 10 Years
Total
Amortized cost
 
 
 
 
 
Obligations of:
 
 
 
 
 
U.S. Treasury and government agencies
$

$
10

$
19

$

$
29

U.S. government sponsored agencies

607



607

States and political subdivisions
1,046

2,995

11,179

20,968

36,188

Residential mortgage-backed securities
60

930

52,700

468,270

521,960

Commercial mortgage-backed securities

5,381

18,368

16,494

40,243

Bank-issued trust preferred securities



13,891

13,891

Equity securities



1,213

1,213

Total available-for-sale securities
$
1,106

$
9,923

$
82,266

$
520,836

$
614,131

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

$
10

$
20

$

$
30

U.S. government sponsored agencies

648



648

States and political subdivisions
1,055

3,115

12,315

22,866

39,351

Residential mortgage-backed securities
61

992

54,789

469,549

525,391

Commercial mortgage-backed securities

5,735

19,608

17,067

42,410

Bank-issued trust preferred securities



12,744

12,744

Equity securities



3,412

3,412

Total available-for-sale securities
$
1,116

$
10,500

$
86,732

$
525,638

$
623,986

Total average yield
6.27
%
4.18
%
4.09
%
3.12
%
3.28
%
Held-to-Maturity
The following table summarizes Peoples’ held-to-maturity investment securities:
(Dollars in thousands)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
June 30, 2012
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
3,864

$
371

$
(1
)
$
4,234

Residential mortgage-backed securities
25,344

470


25,814

Commercial mortgage-backed securities
7,964

315


8,279

Total held-to-maturity securities
$
37,172

$
1,156

$
(1
)
$
38,327

December 31, 2011
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
3,525

$
262

$

$
3,787

Residential mortgage-backed securities
12,776

230

(88
)
12,918

Total held-to-maturity securities
$
16,301

$
492

$
(88
)
$
16,705

There were no gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for the three and six months ended June 30, 2012.





12


The following table presents a summary of held-to-maturity investment securities that had an unrealized loss:
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
Unrealized Loss
No. of Securities
 
Fair
Value
Unrealized Loss
No. of Securities
 
Fair
Value
Unrealized Loss
June 30, 2012
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
341

$
1

1

 
$

$


 
$
341

$
1

Residential mortgage-backed securities



 



 


Total
$
341

$
1

1

 
$

$


 
$
341

$
1

December 31, 2011
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$

$


 
$

$


 
$

$

Residential mortgage-backed securities
6,416

88

1

 



 
6,416

88

Total
$
6,416

$
88

1

 
$

$


 
$
6,416

$
88

The table below presents the amortized cost, fair value and weighted-average yield of held-to-maturity securities by contractual maturity at June 30, 2012.  The average yields are based on the amortized cost.  In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date.  Rates are calculated on a fully tax-equivalent basis using a 35% federal income tax rate.
 
(Dollars in thousands)
Within 1 Year
1 to 5 Years
5 to 10 Years
Over 10 Years
Total
Amortized cost
 
 
 
 
 
Obligations of:
 
 
 
 
 
States and political subdivisions
$

$

$
342

$
3,522

$
3,864

Residential mortgage-backed securities



25,344

25,344

Commercial mortgage-backed securities



7,964

7,964

Total held-to-maturity securities
$

$

$
342

$
36,830

$
37,172

Fair value
 
 
 
 
 
Obligations of:
 
 
 
 
 
States and political subdivisions
$

$

$
341

$
3,893

$
4,234

Residential mortgage-backed securities



25,814

25,814

Commercial mortgage-backed securities



8,279

8,279

Total held-to-maturity securities
$

$

$
341

$
37,986

$
38,327

Total average yield
%
%
3.14
%
3.04
%
3.05
%
Other Securities
Peoples’ other investment securities on the Consolidated Balance Sheets consisted solely of restricted equity securities issued by the Federal Home Loan Bank of Cincinnati (“FHLB”) and the Federal Reserve Bank of Cleveland(“FRB”).  These securities are carried at cost since they do not have readily determinable fair values due to their restricted nature and Peoples does not exercise significant influence over the entities.
Pledged Securities
Peoples had pledged available-for-sale investment securities with a carrying value of $345.0 million and $359.1 million at June 30, 2012 and December 31, 2011, respectively, to secure public and trust department deposits and repurchase agreements in accordance with federal and state requirements.  Additionally, Peoples had pledged held-to-maturity investment securities with a carrying value of $24.9 million and $3.0 million at June 30, 2012 and December 31, 2011, 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 $56.8 million and $65.2 million at June 30, 2012 and December 31, 2011, respectively, to secure additional borrowing capacity at the FHLB and the FRB.


13


Note 4  Loans

Peoples' loan portfolio consists of various types of loans originated primarily as a result of lending opportunities within Peoples' primary market areas of central and southeastern Ohio, west central West Virginia, and northeastern Kentucky. The major classifications of loan balances, excluding loans held for sale, were as follows:
 
June 30,
December 31,
(Dollars in thousands)
2012
2011
Commercial real estate
$
394,323

$
410,352

Commercial and industrial
161,893

140,857

Real estate construction
43,775

30,577

Residential real estate
212,813

219,619

Home equity lines of credit
48,414

47,790

Consumer
92,334

87,531

Deposit account overdrafts
1,726

1,780

Total loans
$
955,278

$
938,506

Peoples has acquired various loans through business combinations for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. The carrying amounts of these loans included in the loan balances above are summarized as follows:
 
June 30,
December 31,
(Dollars in thousands)
2012
2011
Commercial real estate
$
3,011

$
3,754

Commercial and industrial
115

109

Residential real estate
13,231

14,497

Consumer
86

101

Total outstanding balance
$
16,443

$
18,461

Net carrying amount
$
15,935

$
17,954

Peoples has pledged certain loans secured by 1-4 family and multifamily residential mortgages under a blanket collateral agreement to secure borrowings from the FHLB. The amount of such pledged loans totaled $185.3 million and $184.8 million at June 30, 2012 and December 31, 2011, respectively. Peoples also had pledged commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $149.7 million and $124.0 million at June 30, 2012 and December 31, 2011, respectively.
Nonaccrual and Past Due Loans
A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. A loan may be placed on nonaccrual status regardless of whether or not such loan is considered past due. The recorded investments in loans on nonaccrual status and accruing loans delinquent for 90 days or more were as follows:
 
 
 
 
Accruing Loans
 
Nonaccrual Loans
 
90+ Days Past Due
 
June 30,
December 31,
 
June 30,
December 31,
(Dollars in thousands)
2012
2011
 
2012
2011
Commercial real estate
$
12,136

$
23,546

 
$
37

$

Commercial and industrial
474

2,262

 


Real estate construction


 


Residential real estate
3,742

3,865

 


Home equity lines of credit
215

349

 


Consumer


 
14


Total
$
16,567

$
30,022

 
$
51

$

The following table presents the aging of the recorded investment in past due loans and leases:
 
Loans Past Due
 
Current
Total
(Dollars in thousands)
30 - 59 days
60 - 89 days
90 + Days
Total
 
Loans
Loans
June 30, 2012
 
 
 
 
 
 
 
Commercial real estate
$
3,547

$
4,392

$
6,447

$
14,386

 
$
379,937

$
394,323

Commercial and industrial
448

50

35

533

 
161,360

161,893

Real estate construction




 
43,775

43,775

Residential real estate
2,144

487

3,102

5,733

 
207,080

212,813

Home equity lines of credit
155

33

216

404

 
48,010

48,414

Consumer
445

49

14

508

 
91,826

92,334

Deposit account overdrafts
64



64

 
1,662

1,726

Total
$
6,803

$
5,011

$
9,814

$
21,628

 
$
933,650

$
955,278

December 31, 2011
 
 
 
 
 
 
 
Commercial real estate
$
2,700

$
2,286

$
11,363

$
16,349

 
$
394,003

$
410,352

Commercial and industrial
230

360

37

627

 
140,230

140,857

Real estate construction




 
30,577

30,577

Residential real estate
5,750

1,187

3,082

10,019

 
209,600

219,619

Home equity lines of credit
206


349

555

 
47,235

47,790

Consumer
874

86


960

 
86,571

87,531

Deposit account overdrafts
66



66

 
1,714

1,780

Total
$
9,826

$
3,919

$
14,831

$
28,576

 
$
909,930

$
938,506

 
 
 
 
 
 
 
 
Credit Quality Indicators
As discussed in Note 1 of Peoples' 2011 Form 10-K, Peoples categorizes the majority of its loans into risk categories based upon an established risk grading matrix using a scale of 1 to 8. A description of the general characteristics of the risk grades used by Peoples is as follows:
“Pass” (grades 1 through 4): Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.
“Watch” (grade 5): Loans in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned” classification. Loans in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in Peoples' credit position.
“Substandard” (grade 6): Loans in this risk grade are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that Peoples will sustain some loss if the deficiencies are not corrected.
“Doubtful” (grade 7): Loans in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimate loss is deferred until its more exact status may be determined.
“Loss” (grade 8): Loans in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes uncollectible. Consequently, Peoples typically does not maintain a recorded investment in loans within this category.
Consumer loans and other smaller-balance loans are evaluated and categorized as “substandard”, “doubtful” or “loss” based upon the regulatory definition of these classes and consistent with regulatory requirements. All other loans not evaluated individually nor meeting the regulatory conditions to be categorized as describe above would be considered as being “not rated”.
The following table summarizes the risk category of Peoples' loan portfolio based upon the most recent analysis performed:
 
Pass Rated
Watch
Substandard
Doubtful
Not
Total
(Dollars in thousands)
(Grades 1 - 4)
(Grade 5)
(Grade 6)
(Grade 7)
Rated
Loans
June 30, 2012
 
 
 
 
 
 
Commercial real estate
$
325,222

$
35,283

$
33,289

$

$
529

$
394,323

Commercial and industrial
145,405

10,123

5,956


409

161,893

Real estate construction
38,818

2,916

1,124


917

43,775

Residential real estate
23,621

2,015

8,546


178,631

212,813

Home equity lines of credit
1,395


1,307


45,712

48,414

Consumer
93


24


92,217

92,334

Deposit account overdrafts




1,726

1,726

Total
$
534,554

$
50,337

$
50,246

$

$
320,141

$
955,278

December 31, 2011
 
 
 
 
 
 
Commercial real estate
$
310,996

$
40,165

$
56,142

$

$
3,049

$
410,352

Commercial and industrial
113,391

18,636

6,625


2,205

140,857

Real estate construction
23,710

2,932

2,062


1,873

30,577

Residential real estate
28,507

2,913

10,097

20

178,082

219,619

Home equity lines of credit
1,491

42

1,394


44,863

47,790

Consumer
72


32


87,427

87,531

Deposit account overdrafts




1,780

1,780

Total
$
478,167

$
64,688

$
76,352

$
20

$
319,279

$
938,506

Impaired Loans
The following tables summarize loans classified as impaired:
 
Unpaid
Recorded Investment
Total
 
Average
Interest
 
Principal
With
Without
Recorded
Related
Recorded
Income
(Dollars in thousands)
Balance
Allowance
Allowance
Investment
Allowance
Investment
Recognized
June 30, 2012
 
 
 
 
 
 
 
Commercial real estate
$
24,853

$
2,190

$
9,783

$
11,973

$
973

$
12,523

$

Commercial and industrial
494

428


428

22

520


Real estate construction







Residential real estate
2,520

641

1,093

1,734

289

1,948


Home equity lines of credit
420


200

200


223


Total
$
28,287

$
3,259

$
11,076

$
14,335

$
1,284

$
15,214

$

December 31, 2011
 
 
 
 
 
 
 
Commercial real estate
$
49,402

$
6,882

$
16,501

$
23,383

$
1,026

$
23,058

$

Commercial and industrial
2,290

1,801

420

2,221

407

1,098


Real estate construction







Residential real estate
3,901

323

2,226

2,549

49

2,081


Home equity lines of credit
420


269

269


332


Total
$
56,013

$
9,006

$
19,416

$
28,422

$
1,482

$
26,569

$

At June 30, 2012, Peoples' impaired loans shown in the table above included loans that were classified as troubled debt restructurings ("TDRs'). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.
In assessing whether or not a borrower is experiencing financial difficulties, Peoples considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor'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 debtor's ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to the unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by Peoples generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a temporary period of interest-only payments, and (iv) a reduction in the contractual payment amount for either a short period or the remaining term of the loan.
The following table summarizes the loans that were modified as a TDR during the three and six months ended June 30, 2012. There were no loans modified as a TDR during the three and six months ended June 30, 2011.
 
 
Three Months Ended
 
Six Months Ended
 
 
Recorded Investment (1)
 
Recorded Investment (1)
 
Number of Contracts
Pre-Modification
Post-Modification
At June 30, 2012
Number of Contracts
Pre-Modification
Post-Modification
At June 30, 2012
Commercial real estate
3

$
1,291

$
1,291

$
1,261

3

$
1,291

$
1,291

$
1,261

Residential real estate
1

$
50

$
50

$
49

1

$
50

$
50

$
49

(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.

There were no loans modified in a TDR over the last twelve months that subsequently defaulted (i.e., 90 days or more past due following a modification) during the three and six months ended June 30, 2012.
 
 
 
 
 
 
 
 
Peoples has no additional commitments to lend additional funds to any of the related debtors whose terms have been modified in a TDR.
Allowance for Loan Losses
Changes in the allowance for loan losses in the periods ended June 30, were as follows:
(Dollars in thousands)
Commercial Real Estate
Commercial and Industrial
Residential Real Estate
Real Estate Construction
Home Equity Lines of Credit
Consumer
Deposit Account Overdrafts
Total
Balance, January 1, 2012
$
18,947

$
2,434

$
1,119

$

$
541

$
449

$
227

$
23,717

Charge-offs
(2,846
)
(33
)
(561
)

(77
)
(345
)
(254
)
(4,116
)
Recoveries
2,411

148

532


14

352

124

3,581

Net (charge-offs) recoveries
(435
)
115

(29
)

(63
)
7

(130
)
(535
)
Provision for loan losses
(2,300
)
(1,025