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PEOPLES BANCORP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
[April 23, 2014]

PEOPLES BANCORP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


(Edgar Glimpses Via Acquire Media NewsEdge) SELECTED FINANCIAL DATA The following data should be read in conjunction with the Unaudited Consolidated Financial Statements and the Management's Discussion and Analysis that follows: At or For the Three Months Ended March 31, 2014 2013 SIGNIFICANT RATIOS Return on average stockholders' equity 8.56 % 9.18 % Return on average assets 0.95 % 1.06 % Net interest margin 3.35 % 3.10 % Efficiency ratio (a) 71.13 % 71.61 % Pre-provision net revenue to average assets (b) 1.38 % 1.24 % Average stockholders' equity to average assets 11.05 % 11.58 % Average loans to average deposits 76.94 % 65.36 % Dividend payout ratio 33.91 % 25.79 % ASSET QUALITY RATIOS Nonperforming loans as a percent of total loans (c)(d) 0.73 % 1.32 % Nonperforming assets as a percent of total assets (c)(d) 0.47 % 0.71 % Nonperforming assets as a percent of total loans and other real estate owned (c)(d) 0.79 % 1.41 % Allowance for loan losses as a percent of loans, net of deferred fees and costs (c)(d) 1.38 % 1.78 % Allowance for loan losses to nonperforming loans (c)(d) 188.19 % 133.96 % Provision for (recovery of) loan losses as a percent of average total loans - % (0.44 )% Net charge-offs (recoveries) as a percentage of average total loans (annualized) 0.07 % (0.29 )% CAPITAL RATIOS (d) Tier 1 12.56 % 14.69 % Total (Tier 1 and Tier 2) 13.92 % 16.05 % Tier 1 leverage 8.56 % 8.90 % Tangible equity to tangible assets (e) 7.66 % 8.35 % PER SHARE DATA Earnings per share - Basic $ 0.45 $ 0.47 Earnings per share - Diluted 0.44 0.47 Cash dividends declared per share 0.15 0.12 Book value per share (d) 21.63 21.39 Tangible book value per share (d)(e) $ 14.38 $ 14.77 Weighted-average number of shares outstanding - Basic 10,636,089 10,556,261 Weighted-average number of shares outstanding - Diluted 10,740,884 10,571,383 Shares outstanding at end of period 10,657,569 10,568,147 (a) Non-interest expense (less intangible asset amortization) as a percentage of fully tax-equivalent net interest income plus non-interest income (excluding gains or losses on investment securities and asset disposals and other transactions).



(b) These amounts represent non-GAAP financial measures since they exclude the provision for loan losses and all gains and losses included in earnings. Additional information regarding the calculation of these measures can be found later in this section under the caption "Pre-Provision Net Revenue".

(c) 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.


(d) Data presented as of the end of the period indicated.

21-------------------------------------------------------------------------------- Table of Contents (e) These amounts represent non-GAAP financial measures since they exclude the balance sheet impact of intangible assets acquired through acquisitions on both total stockholders' equity and total assets. Additional information regarding the calculation of these measures can be found later in this discussion under the caption "Capital/Stockholders' Equity".

Forward-Looking Statements Certain statements in this Form 10-Q, which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act , Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. Words such as "anticipate", "estimates", "may", "feels", "expects", "believes", "plans", "will", "would", "should", "could" and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. Factors that might cause such a difference include, but are not limited to: (1) the success, impact, and timing of the implementation of Peoples' business strategies, including the successful integration of the recently completed acquisitions and the expansion of consumer lending activity; (2) Peoples' ability to complete and, if completed, successfully integrate future acquisitions, including the pending mergers of Midwest, Ohio Heritage and North Akron with and into Peoples; (3) competitive pressures among financial institutions or from non-financial institutions may increase significantly, including product and pricing pressures and Peoples' ability to attract, develop and retain qualified professionals; (4) changes in the interest rate environment due to economic conditions and/or the fiscal policies of the U.S. government and Federal Reserve Board, which may adversely impact interest margins and interest rate sensitivity; (5) changes in prepayment speeds, loan originations and charge-offs, which may be less favorable than expected and adversely impact the amount of interest income generated; (6) adverse changes in the economic conditions and/or activities, including impacts from the implementation of the BudgetControl Act of 2011 and the American Taxpayer Relief Act of 2012, as well as continuing economic uncertainty in the U.S., the European Union, and other areas, which could decrease sales volumes and increase loan delinquencies and defaults; (7) legislative or regulatory changes or actions, including in particular the Dodd-Frank Act and the regulations promulgated and to be promulgated thereunder by the OCC, the Federal ReserveBoard 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 theirrespective businesses; (8) deterioration in the credit quality of Peoples' loan portfolio, which may adversely impact the provision for loan losses; (9) changes in accounting standards, policies, estimates or procedures, which may adversely affect Peoples' reported financialcondition or results of operations; (10) 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; (11) Peoples' ability to receive dividends from its subsidiaries; (12) Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity; (13) 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; (14) the costs and effects of regulatory and legal developments, including the outcome of potential regulatory or othergovernmental inquiries and legal proceedings and results of regulatory examinations; (15) Peoples' ability to secure confidential information through the use of computer systems and telecommunications networks, including those of Peoples' third-party vendors and other service providers, may prove inadequate, which could adversely affect customer confidence in Peoples and/or result in Peoples incurring a financial loss; 22-------------------------------------------------------------------------------- Table of Contents (16) the overall adequacy of Peoples' risk management program; and (17) 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 disclosure under "ITEM 1A. RISK FACTORS" of Peoples' 2013 Form 10-K.

All forward-looking statements speak only as of the filing date of this Form 10-Q and are expressly qualified in their entirety by the cautionary statements. Although management believes the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management's knowledge of Peoples' business and operations, it is possible that actual results may differ materially from these projections. Additionally, Peoples undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the filing date of this Form 10-Q or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements. Copies of documents filed with the SEC are available free of charge at the SEC's website at www.sec.gov and/or from Peoples Bancorp Inc.'s website - www.peoplesbancorp.com under the "Investor Relations" section.

This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements, and notes thereto, contained in Peoples' 2013 Form 10-K, as well as the Unaudited Consolidated Financial Statements, ratios, statistics and discussions contained elsewhere in this Form 10-Q.

Business Overview The following discussion and analysis of Peoples' Unaudited Consolidated Financial Statements is presented to provide insight into management's assessment of the financial condition and results of operations.

Peoples offers diversified financial products and services through 49 financial service locations and 47 ATMs in northeastern, central and southeastern Ohio, west central West Virginia and northeastern Kentucky through its financial service units - Peoples Bank, National Association ("Peoples Bank") and Peoples Insurance Agency, LLC ("Peoples Insurance"), a subsidiary of Peoples Bank. Peoples Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency.

Peoples' products and services include traditional banking products, such as deposit accounts, lending products and trust services. Peoples provides services through traditional offices, ATMs and telephone and internet-based banking. Peoples also offers a complete array of insurance products and makes available custom-tailored fiduciary and wealth management services. Brokerage services are offered by Peoples exclusively through an unaffiliated registered broker-dealer.

Critical Accounting Policies The accounting and reporting policies of Peoples conform to US GAAP and to general practices within the financial services industry. The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management has identified the accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to understanding Peoples' Unaudited Consolidated Financial Statements and Management's Discussion and Analysis at March 31, 2014, which were unchanged from the policies disclosed in Peoples' 2013 Form 10-K.

Summary of Recent Transactions and Events The following is a summary of recent transactions and events that have impacted or are expected to impact Peoples' results of operations or financial condition: • On April 21, 2014, Peoples entered into an Agreement and Plan of Merger (the "North Akron Agreement") with North Akron, which operates four full-service branches in Akron, Cuyahoga Falls, Munroe Falls and Norton, Ohio. The North Akron Agreement calls for North Akron to merge into Peoples' wholly-owned subsidiary, Peoples Bank. Under the terms of the North Akron Agreement, shareholders of North Akron will receive $7,655 per share, or approximately $20.1 million total value, with 80% of the total consideration to be paid in Peoples' shares and the remaining 20% to be paid in cash. The exchange ratio for the stock component of the transaction will be determined based on the Peoples' average closing stock price during the 20 consecutive trading days immediately preceding the closing of the transaction. The North Akron transaction is expected to be completed during the fourth quarter of 2014 and add $0.06 to $0.08 to Peoples' annual earnings per share starting in 2015. One-time acquisition costs will more than offset the incremental earnings in 2014.

• On April 4, 2014, Peoples entered into an Agreement and Plan of Merger (the "Ohio Heritage Agreement") with Ohio Heritage. The Ohio Heritage Agreement calls for Ohio Heritage to merge into Peoples, and for Ohio Heritage's 23-------------------------------------------------------------------------------- Table of Contents wholly-owned subsidiary, Ohio Heritage Bank, an Ohio-chartered savings bank, which operates six full-service branches in Coshocton, Newark, Heath, Mount Vernon and New Philadelphia, Ohio, to merge into Peoples' wholly-owned subsidiary, Peoples Bank. Under the terms of the Ohio Heritage Agreement, shareholders of Ohio Heritage will have the right to receive merger consideration equal to $110.00 per share, or approximately $37.6 million total value, of which $93.50 per share is to be paid in Peoples' stock and the remaining $16.50 is to be paid in cash. The exchange ratio for the Peoples shares component of the consideration will be determined based on Peoples' volume weighted-average closing share price during the 20 consecutive trading days immediately preceding the closing of the merger. The Ohio Heritage transaction is expected to be completed during the third quarter of 2014, pending adoption of the Ohio Heritage Agreement by the shareholders of Ohio Heritage, the satisfaction of various closing conditions, including the receipt of all necessary bank regulatory approvals, the accuracy of the representations and warranties of each party (subject to certain exceptions), the performance in all material respects by each party of its obligations under the Ohio Heritage Agreement, and other conditions customary for transactions of this type. The Ohio Heritage transaction is expected to add $0.10 to $0.12 to Peoples' annual earnings per share starting in 2015. One-time acquisition costs are expected to offset incremental earnings in 2014.

• On January 21, 2014, Peoples entered into an Agreement and Plan of Merger (the "Midwest Agreement") with Midwest. The Midwest Agreement calls for Midwest to merge into Peoples, and for Midwest's wholly-owned subsidiary, First National Bank of Wellston, which operates two full-service branches in Wellston and Jackson, Ohio, to merge into Peoples' wholly-owned subsidiary, Peoples Bank. Under the terms of the Midwest Agreement, shareholders of Midwest will have the right to receive merger consideration equal to $65.50 per share, or $12.6 million total value, with between 50% and 75% of the total consideration to be paid in Peoples' shares and the remainder to be paid in cash, with the actual mix to be based on the elections of the shareholders of Midwest and subject to proration. The exchange ratio for the stock component of the transaction will be determined based on the Peoples' average closing stock price during the 20 consecutive trading days immediately preceding the closing of the transaction. The Midwest transaction is expected to be completed during the second quarter of 2014.

• At the close of business on October 11, 2013, Peoples Bank completed the acquisition of Ohio Commerce Bank ("Ohio Commerce") and its single full-service office in Beachwood, Ohio. Under the terms of the agreement, Peoples Bank paid $13.75 in cash for each share of Ohio Commerce stock for a total cash consideration of $16.5 million. The acquisition added $96.6 million of loans and $110.9 million of deposits.

• Peoples periodically has taken actions to reduce interest rate exposure within the investment portfolio and the entire balance sheet, which have included the sale of low yielding investment securities and repayment of high-cost borrowings. These actions included the sale of $68.8 million of investment securities, primarily low or volatile yielding residential mortgage-backed securities, during the first quarter of 2013. Some of the proceeds from these investment sales were reinvested in securities during the first quarter with the remaining reinvested early in the second quarter of 2013. During the first quarter of 2014, Peoples used the cash flow generated from the investment portfolio to fund loan growth.

• Since the second quarter of 2011, Peoples has experienced generally improving trends in several asset quality metrics, after a three-year trend of higher credit losses and nonperforming assets than Peoples' long-term historical levels. Additionally, the amount of criticized loans has decreased due in part to Peoples upgrading the loan quality ratings of various commercial loans. These conditions have resulted in recoveries of or lower provisions for loan losses.

• Peoples' net interest income and margin are impacted by changes in market interest rates based upon actions taken by the Federal Reserve Board either directly or through its Open Market Committee. These actions include changing its target Federal Funds Rate (the interest rate at which banks lend money to each other), Discount Rate (the interest rate charged to banks for money borrowed from the Federal Reserve Bank) and longer-term market interest rates (primarily U.S. Treasury securities). Longer-term market interest rates also are affected by the demand for U.S. Treasury securities. The resulting changes in the yield curve slope have a direct impact on reinvestment rates for Peoples' earning assets.

• The Federal Reserve Board has maintained its target Federal Funds Rate at a historically low level of 0% to 0.25% since December 2008 and has maintained the Discount Rate at 0.75% since December 2010. The Federal Reserve Board has indicated the possibility these short-term rates could start to be raised as early as 2015.

• From late 2008 until year-end 2012, the Federal Reserve Board took various actions to lower longer-term market interest rates as a means of stimulating the economy - a policy commonly referred to as "quantitative easing". These actions included the buying and selling of mortgage-backed and other debt securities through its open market 24-------------------------------------------------------------------------------- Table of Contents operations. In December 2013, the Federal Reserve Board announced plans to taper its quantitative easing efforts. As a result, the slope of the U.S. Treasury yield curve has fluctuated significantly. Substantial flattening occurred in late 2008, in mid-2010 and early third quarter of 2011 through 2012, while moderate steepening occurred in the second half of 2009, late 2010 and mid-2013.

The curve has remained relatively steep since mid-2013, primarily as a reaction to the Federal Reserve's announcement of a reduction in monthly asset purchases and generally improving economic conditions.

The impact of these transactions and events, where material, is discussed in the applicable sections of this Management's Discussion and Analysis.

EXECUTIVE SUMMARY Net income for the quarter ended March 31, 2014 was $4.8 million, or $0.44 per diluted share, compared to $5.0 million and $0.47 per diluted share a year ago and $5.1 million or $0.47 per diluted share in the fourth quarter of 2013. The lower earnings in the first quarter of 2014 reflect Peoples recording a nominal provision for loan losses in the first quarter of 2014 while recording $1.1 million and $1.0 million of recoveries of loan losses a year ago and in the linked quarter, respectively.

Peoples' provision for loan losses for the three months ended March 31, 2014 was $8,000, compared to recoveries of loan losses of $1.1 million and $1.0 million during the three months ended March 31, 2013 and December 31, 2013, respectively. Asset quality metrics remained favorable during the first quarter of 2014. However, the recoveries experienced in the first quarter of 2014 were lower than the previous year, and resulted in a minimal net charge-off position.

Net interest income was $15.5 million in the first quarter of 2014, compared to $13.0 million for the first quarter of 2013, while net interest margin was 3.35% and 3.10%, respectively. The improvement over the prior year was driven by a 10% increase in earning assets due to higher loan balances, and normal accretion of $231,000 from the recent acquisition of Ohio Commerce. Compared to the linked quarter, net interest margin declined 8 basis points and was the result of recognition by Peoples of $427,000 of income in the fourth quarter of 2013 for prepayment fees and interest recovered on nonaccrual loans.

Non-interest income, which excludes gains and losses on investment securities, asset disposals and other transactions, for the first quarter of 2014 was up 10% from the linked quarter and 13% over the prior year. This increase was primarily from increased insurance income due to higher annual contingent performance-based commissions typically recognized in the first quarter. In addition, insurance business acquisitions completed during 2013 provided another $387,000 of income during the first quarter of 2014. Peoples also experienced 8% year-over-year growth in both investment and electronic banking income, while mortgage banking income declined significantly as secondary market loan origination volumes have declined in response to the higher long-term interest rates.

Total non-interest expense was $18.8 million for the quarter ended March 31, 2014, 2% higher than the linked quarter and 16% higher than the prior year. In the first quarter of 2014, Peoples recognized $486,000 of pension settlement charges, acquisition-related expenses for legal and professional services of $150,000, increased employee benefit costs and stock-based compensation expense totaling $1.2 million. In comparison, during the first quarter of 2013, acquisition-related expenses totaled $65,000 and Peoples did not incur any pension settlement charges. Compared to the linked quarter, salary and employee benefit costs increased 14% due largely to annual merit increases and a difference in the timing of certain benefit costs, such as pension and employee medical plan expenses.

At March 31, 2014, total assets were $2.08 billion, up $19.1 million from year-end 2013. The largest increase was due to higher loan balances, which grew $30.3 million from year-end 2013 primarily from organic loan growth within commercial and consumer lending. The allowance for loan losses was $16.9 million, or 1.38% of loans (net of deferred fees and costs), compared to $17.1 million and 1.43% of loans (net of deferred fees and costs) at December 31, 2013.

Total liabilities were $1.85 billion at March 31, 2014, up $10.1 million since year-end 2013. Retail deposit balances grew 4% since year-end, primarily due to seasonal increases in governmental deposits and a 2% increase in non-interest-bearing deposits. The growth in deposits allowed Peoples to reduce its total borrowed funds 20% from the year-end level.

At March 31, 2014, total stockholders' equity was $230.6 million, up $9.0 million since December 31, 2013. The primary driver was an increase in the fair value of the available-for-sale investment portfolio, coupled with earnings exceeding dividends declared for the quarter. Regulatory capital ratios remained significantly higher than "well capitalized" minimums. Peoples' Tier 1 Common Capital ratio remained stable at 12.56% at March 31, 2014, versus 12.42% at December 31, 2013, while the Total Risk-Based Capital ratio was 13.92% versus 13.78% at December 31, 2013. In addition, Peoples' tangible equity to tangible asset ratio was 7.66% and tangible book value per share was $14.38 at March 31, 2014, versus 7.26% and $13.57 at December 31, 2013, respectively.

25-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Net Interest Income Net interest income, the amount by which interest income exceeds interest expense, remains Peoples' largest source of revenue. The amount of net interest income earned by Peoples each quarter is affected by various factors, including changes in market interest rates due to the Federal Reserve Board's monetary policy, the level and degree of pricing competition for both loans and deposits in Peoples' markets, and the amount and composition of Peoples' earning assets and interest-bearing liabilities.

The following tables detail Peoples' average balance sheets for the periods presented: 26-------------------------------------------------------------------------------- Table of Contents For the Three Months Ended March 31, 2014 December 31, 2013 March 31, 2013 Income/ Income/ Income/(Dollars in thousands) Average Balance Expense Yield/Cost Average Balance Expense Yield/Cost Average Balance Expense Yield/Cost Short-term investments $ 7,058 $ 20 1.15 % $ 8,652 $ 30 1.38 % $ 39,099 $ 18 0.20 % Other long-term investments 2,254 3 0.54 % 2,948 2 0.27 % - - - % Investment Securities (1): Taxable 623,444 4,383 2.81 % 639,584 4,400 2.75 % 657,319 4,262 2.59 % Nontaxable (2) 51,867 641 4.94 % 51,781 640 4.94 % 48,213 583 4.84 % Total investment securities 675,311 5,024 2.98 % 691,365 5,040 2.92 % 705,532 4,845 2.75 % Loans (3): Commercial real estate, 51,839 498 3.84 % 48,485 542 4.37 % 30,574 337 4.41 % construction Commercial real estate, 454,107 5,114 4.50 % 422,866 5,396 4.99 % 379,391 4,367 4.60 % other Commercial and industrial 236,741 2,570 4.34 % 213,953 2,431 4.45 % 179,435 1,793 4.00 % Residential real estate 270,739 3,069 4.53 % 268,641 3,112 4.63 % 238,332 3,062 5.14 % Home equity lines of credit 60,029 545 3.63 % 59,099 536 3.63 % 50,232 501 3.99 % Consumer 141,209 1,614 4.73 % 134,241 1,602 4.83 % 107,092 1,435 5.58 % Total loans 1,214,664 13,410 4.43 % 1,147,285 13,619 4.69 % 985,056 11,495 4.69 % Less: Allowance for loan (17,228 ) (17,439 ) (18,783 ) losses Net loans 1,197,436 13,410 4.49 % 1,129,846 13,619 4.75 % 966,273 11,495 4.81 % Total earning assets 1,882,059 18,457 3.93 % 1,832,811 18,691 4.04 % 1,710,904 16,358 3.83 % Intangible assets 77,448 77,025 69,988 Other assets 91,095 102,016 133,827 Total assets $ 2,050,602 $ 2,011,852 $ 1,914,719 Deposits: Savings accounts $ 220,935 $ 30 0.06 % $ 211,116 $ 29 0.05 % $ 190,769 $ 25 0.05 % Governmental deposit 149,057 123 0.33 % 141,181 131 0.37 % 145,714 202 0.56 % accounts Interest-bearing demand 137,026 28 0.08 % 128,877 26 0.08 % 126,763 25 0.08 % accounts Money market accounts 278,413 111 0.16 % 256,398 104 0.16 % 288,161 96 0.14 % Brokered deposits 47,335 436 3.74 % 49,320 462 3.72 % 54,134 476 3.57 % Retail certificates of deposit 360,457 840 0.95 % 360,733 890 0.98 % 381,650 1,115 1.18 % Total interest-bearing 1,193,223 1,568 0.53 % 1,147,625 1,642 0.57 % 1,187,191 1,939 0.66 % deposits Borrowed Funds: Short-term FHLB advances 63,733 16 0.10 % 75,538 31 0.16 % 2,000 1 0.20 % Retail repurchase agreements 39,141 15 0.15 % 44,597 18 0.16 % 31,975 12 0.15 % Total short-term borrowings 102,874 31 0.12 % 120,135 49 0.16 % 33,975 13 0.15 % Long-term FHLB advances 62,380 521 3.39 % 63,382 539 3.37 % 64,538 541 3.40 % Wholesale repurchase agreements 40,000 363 3.63 % 40,000 371 3.71 % 40,000 363 3.63 % Other borrowings 19,137 188 3.93 % 20,331 205 3.95 % 23,883 235 3.94 % Total long-term borrowings 121,517 1,072 3.55 % 123,713 1,115 3.58 % 128,421 1,139 3.57 % Total borrowed funds 224,391 1,103 1.98 % 243,848 1,164 1.89 % 162,396 1,152 2.86 % Total interest-bearing 1,417,614 2,671 0.76 % 1,391,473 2,806 0.80 % 1,349,587 3,091 0.93 % liabilities Non-interest-bearing deposits 385,471 370,962 319,994 Other liabilities 20,876 26,108 23,381 Total liabilities 1,823,961 1,788,543 1,692,962 Total stockholders' equity 226,641 223,309 221,757 Total liabilities and stockholders' equity $ 2,050,602 $ 2,011,852 $ 1,914,719 Interest rate spread $ 15,786 3.17 % $ 15,885 3.24 % $ 13,267 2.90 % Net interest margin 3.35 % 3.43 % 3.10 % (1) Average balances are based on carrying value.

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

27-------------------------------------------------------------------------------- Table of Contents (3) Average balances include nonaccrual and impaired loans. Interest income includes interest earned on nonaccrual loans prior to the loans being placed on nonaccrual status. Loan fees included in interest income were immaterial for all periods presented.

(4) Loans held for sale are included in the average loan balance listed. Related interest income on loans originated for sale prior to the loan being sold is included in loan interest income.

Net interest margin, which is calculated by dividing fully tax-equivalent ("FTE") net interest income by average interest-earning assets, serves as an important measurement of the net revenue stream generated by the volume, mix and pricing of earning assets and interest-bearing liabilities. FTE net interest income is calculated by increasing interest income to convert tax-exempt income earned on obligations of states and political subdivisions to the pre-tax equivalent of taxable income using a 35% federal statutory tax rate. The following table details the calculation of FTE net interest income: Three Months Ended March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013Net interest income, as reported $ 15,480 $ 13,155 $ 12,975 Taxable equivalent adjustments 306 2,730 292 Fully tax-equivalent net interest income $ 15,786 $ 15,885 $ 13,267 The following table provides an analysis of the changes in FTE net interest income: 28-------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, 2014 Compared to (Dollars in thousands) December 31, 2013 March 31, 2013 Increase (decrease) in: Rate Volume Total (1) Rate Volume Total (1) INTEREST INCOME: Short-term investments $ (5 ) $ (5 ) $ (10 ) $ 110 $ (108 ) $ 2 Other long-term investments $ 4 $ (3 ) $ 1 $ - $ - $ - Investment Securities: (2) Taxable 404 (421 ) (17 ) 1,165 (1,044 ) 121 Nontaxable - 1 1 13 45 58 Total investment income 404 (420 ) (16 ) 1,178 (999 ) 179 Loans: Commercial real estate, (215 ) 171 (44 ) (267 ) 428 161 construction Commercial real estate, (1,938 ) 1,656 (282 ) (607 ) 1,354 747 other Commercial and industrial (334 ) 473 139 165 612 777 Residential real estate (174 ) 131 (43 ) (1,542 ) 1,549 7 Home equity lines of credit - 9 9 (233 ) 277 44 Consumer (195 ) 207 12 (1,184 ) 1,363 179 Total loan income (2,856 ) 2,647 (209 ) (3,668 ) 5,583 1,915 Total interest income (2,453 ) 2,219 (234 ) (2,380 ) 4,476 2,096 INTEREST EXPENSE: Deposits: Savings accounts - 1 1 1 4 5 Government deposit accounts (41 ) 33 (8 ) (111 ) 32 (79 ) Interest-bearing demand accounts 1 1 2 1 2 3 Money market accounts - 7 7 35 (20 ) 15 Brokered certificates of 13 (39 ) (26 ) 122 (162 ) (40 ) deposit Retail certificates of (49 ) (1 ) (50 ) (216 ) (59 ) (275 ) deposit Total deposit cost (76 ) 2 (74 ) (168 ) (203 ) (371 ) Borrowed funds: Short-term borrowings (12 ) (6 ) (18 ) (4 ) 22 18 Long-term borrowings - (43 ) (43 ) (2 ) (65 ) (67 ) Total borrowed funds cost (12 ) (49 ) (61 ) (6 ) (43 ) (49 ) Total interest expense (88 ) (47 ) (135 ) (174 ) (246 ) (420 ) Net interest income $ (2,365 ) $ 2,266 $ (99 ) $ (2,206 ) $ 4,722 $ 2,516 (1) The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the dollar amounts of the changes in each.

(2) Presented on a fully tax-equivalent basis.

Both net interest income and margin have been impacted by additional interest income for prepayment fees and interest recovered on nonaccrual loans, plus normal accretion income associated with the Ohio Commerce acquisition. In the first quarter of 2014, this additional income was $231,000, or 14 basis points of margin, consisting entirely of accretion income. In comparison, fourth quarter 2013 included $697,000 of additional income, which consisted of $427,000 for prepayment fees and interest recoveries and $270,000 of accretion income.

These amounts added another 10 basis points and 6 basis points, respectively, to the linked quarter net interest margin.

Absent this one-time income, both net interest income and margin have continued to improve due to the combination of higher average loan balances and continued reduction in total funding cost. These benefits more than offset the downward pressure on loan and investment yields from market interest rates remaining at relatively low levels compared to historical rates.

29-------------------------------------------------------------------------------- Table of Contents Average loan balances have benefited from double-digit annualized organic loan growth in each of the last four quarters, plus the additional of the Ohio Commerce loans. The solid start to 2014 positions Peoples to meet, if not surpass, its goal of 15% to 20% year-over-year increase in average loan balances for the full year of 2014.

Average investment securities were lower in the first quarter of 2014, as Peoples began to execute on its strategy to fund a portion of 2014 loan growth with principal cash flows from the investment portfolio. The overall portfolio yield continued to improve in the first quarter of 2014 due to a sustained decline in premium amortization corresponding with prepayments within Peoples' mortgage-backed securities held as investments.

Peoples' funding costs continued to decline during the first quarter of 2014, driven by an ongoing strategy of replacing higher-cost funding with low-cost deposits. The majority of the first quarter loan growth was funded by the investment portfolio cash flow. Thus, the higher deposit balances allowed Peoples to reduce the amount of wholesale funding.

Overall, management has not changed its overall balance sheet strategies of reducing the size of the investment portfolio relative to total earning assets and minimizing Peoples' long-term interest rate risk by potentially match funding some of 2014 loan growth.

The pending acquisitions could provide management with additional opportunities to make meaningful progress with these balance sheet strategies. Specifically, Peoples could elect to sell some, or all, of the investment securities currently held by the acquired banks and use the proceeds to repay wholesale borrowings.

Such action, if taken, would result in a smaller increase in total earning assets and net interest income due to the acquisitions.

Additional 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 (Recovery of) Loan Losses The following table details Peoples' provision for, or recovery of, loan losses: Three Months Ended March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013 Provision for (recovery of) checking account overdrafts $ 8 $ 102 $ (15 ) Recovery of other loan losses - (1,066 ) (1,050 ) Net provision for (recovery of) loan $ 8 $ (964 ) $ (1,065 ) losses As a percentage of average gross loans (a) - % (0.33 )% (0.44 )% (a) Presented on an annualized basis The provision for, or recovery of, loan losses recorded represents the amount needed to maintain the adequacy of the allowance for loan losses based on management's quarterly analysis of the loan portfolio and procedural methodology that estimates the amount of probable credit losses. This process considers various factors that affect losses, such as changes in Peoples' loan quality, historical loss experience and current economic conditions. During the first quarter of 2014, Peoples did not experience the large recoveries as it had in previous quarters, but determined the allowance for loan losses was adequate and therefore recorded a small provision for, or recoveries of loan losses for the period. The recoveries of loan losses recorded during the linked quarter and prior year were driven by large recoveries of amounts incurred on previously charged-off commercial real estate loans. Peoples continues to experience improving trends in various credit quality metrics, including historical loss trends and the level of criticized loans.

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".

30-------------------------------------------------------------------------------- Table of Contents Net Other Gains (Losses) The following table details the other gains and losses recognized by Peoples: Three Months Ended March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013 Net gain (loss) on OREO $ 18 $ - $ (5 ) Net loss on bank premises and equipment (7 ) (125 ) - Net other gains (losses) $ 11 $ (125 ) $ (5 ) The net gain on other real estate owned ("OREO") recorded during the first quarter of 2014 was the result of a sale of residential property held, and the loss on bank premises and equipment was from the disposal of certain fixed assets during the quarter. The net loss on bank premises and equipment in the linked quarter were disposals of assets related to the Ohio Commerce acquisition and a write-down in the fair value of a closed office location.

Non-Interest Income Insurance income comprised the largest portion of first quarter 2014 non-interest income. The following table details Peoples' insurance income: Three Months Ended March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013Property and casualty insurance commissions $ 2,453 $ 2,302 $ 2,171 Performance-based commissions 1,183 94 504 Life and health insurance commissions 425 383 146 Credit life and A&H insurance commissions 7 14 23 Other fees and charges 48 49 34 Total insurance income $ 4,116 $ 2,842 $ 2,878 The growth in property and casualty insurance commissions was primarily driven by higher premiums throughout the industry, successful integration of acquisitions, and referrals between lines of business at Peoples. The increase in life and health insurance commissions was the result of acquisitions completed during the second quarter of 2013. The bulk of performance-based commissions typically are recorded annually in the first quarter and are based on a combination of factors, such as loss experience of insurance policies sold, production volumes, and overall financial performance of the individual insurance carriers.

Deposit account service charges continued to comprise a sizable portion of Peoples' non-interest income. The following table details Peoples' deposit account service charges: Three Months Ended March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013 Overdraft and non-sufficient funds fees $ 1,544 $ 1,903 $ 1,605 Account maintenance fees 377 336 290 Other fees and charges 190 46 162Total deposit account service charges $ 2,111 $ 2,285 $ 2,057 The amount of deposit account service charges, particularly fees for overdrafts and non-sufficient funds, is largely dependent on the timing and volume of customer activity. Peoples typically experiences a lower volume of overdraft and non-sufficient funds fees annually in the first quarter attributable to customers receiving income tax refunds, while volumes generally increase in the fourth quarter in connection with the holiday shopping season.

31-------------------------------------------------------------------------------- Table of Contents Peoples' fiduciary and brokerage revenues continue to be based primarily upon the value of assets under management, with additional income generated from transaction commissions. The following tables detail Peoples' trust and investment income and related assets under management: Three Months Ended March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013 Fiduciary $ 1,329 $ 1,358 $ 1,189 Brokerage 518 539 513Total trust and investment income $ 1,847 $ 1,897 $ 1,702 March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Trust assets under management $ 995,861 $ 1,000,171 $ 994,683 $ 939,292 $ 927,675 Brokerage assets under management 494,246 474,384 449,196 433,651 433,217 Total managed assets $ 1,490,107 $ 1,474,555 $ 1,443,879 $ 1,372,943 $ 1,360,892 Quarterly average $ 1,479,110 $ 1,455,429 $ 1,417,707 $ 1,373,135 $ 1,332,353 Over the last several years, Peoples has continued to attract new managed funds, due in part to the addition of experienced financial advisors in previously underserved market areas. In addition, Peoples added new business related to the retirement plans for which it manages the assets and provides services. The U.S.

financial markets have experienced a general increase in market value since the beginning of 2013, which have also contributed to the increase in managed assets.

Mortgage banking income decreased significantly from 2013 due to reduced refinancing activity, which is driven by mortgage interest rates available in the secondary market and customers' preference for long-term, fixed-rate loans.

In the first quarter of 2014, Peoples sold approximately $7.8 million of loans to the secondary market compared to $12.8 million in the fourth quarter of 2013 and $31.7 million in the first quarter of 2013.

Non-Interest Expense Salaries and employee benefit costs remain Peoples' largest non-interest expense, accounting for more than half of total non-interest expense.

The following table details Peoples' salaries and employee benefit costs: Three Months Ended March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013 Base salaries and wages $ 6,513 $ 6,435 $ 5,632 Sales-based and incentive compensation 1,503 1,933 1,525 Employee benefits 1,760 709 982 Stock-based compensation 490 310 297 Deferred personnel costs (366 ) (611 ) (494 ) Payroll taxes and other employment costs 892 687 775 Total salaries and employee benefit costs $ 10,792 $ 9,463 $ 8,717 Full-time equivalent employees: Actual at end of period 557 546 517 Average during the period 549 543 509 32-------------------------------------------------------------------------------- Table of Contents For the three months ended March 31, 2014, base salaries and wages were higher than the linked quarter and prior year due to annual base salary adjustments that typically occur at the beginning of the year. Also increasing base salaries and wages compared to the prior year was the addition of new sales talent in several markets and recently completed acquisitions that have increased the number of full-time equivalent employees. Sales-based and incentive compensation was impacted by a lower expense accrual during the first quarter of 2014 associated with corporate incentive plans, which are tied in part to Peoples' performance. Compared to the prior periods, first quarter 2014 employee benefit costs increased due to a one-time pension settlement charge of $486,000, employee medical benefit costs and additional stock-based compensation in connection with awards granted in 2014. Given the nature of the pension settlement, it is inherently difficult to estimate the amount or exact timing of future pension settlement charges.

Peoples' net occupancy and equipment expense was comprised of the following: Three Months Ended March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013 Depreciation $ 685 $ 637 $ 767 Repairs and maintenance costs 458 428 446 Net rent expense 241 235 221 Property taxes, utilities and other costs 432 419 424 Total net occupancy and equipment expense $ 1,816 $ 1,719 $ 1,858 Net occupancy and equipment expense increased over the linked quarter period as higher depreciation expense was recorded on branch refresh projects recently completed, coupled with the timing of repairs and maintenance costs, such as snow removal.

Professional fees declined from the linked quarter as a result of a reduction in exam and audit fees, coupled with lower legal expenses.

Electronic banking expense, which is comprised of bankcard and internet-based banking costs, continued to increase compared to the link quarter and prior year. The primary reason for the increase was customers completing a higher volume of transactions using their debit cards and Peoples' internet banking service.

Peoples' efficiency ratio, calculated as non-interest expense less amortization of other intangible assets divided by FTE net interest income plus non-interest income, was 71.13% for the first quarter of 2014, lower than the linked quarter of 71.80% and the prior year of 71.61%. Management continues to target an efficiency ratio in the range of 68% to 70%, absent acquisition-related costs and other one-time expenses, such as pension settlement charges.

Income Tax Expense For the three months ended March 31, 2014, Peoples recorded income tax expense of $2.1 million, for an effective tax rate of 31.0%. This effective tax rate represents management's current estimate of the rate for the entire year. In comparison, Peoples recorded income tax expense of $2.3 million for the same period in 2013, for an effective tax rate of 31.6%.

Pre-Provision Net Revenue 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 non-interest income minus non-interest expense and therefore excludes the provision for loan losses and all gains and losses included in earnings. As a result, PPNR represents the earnings capacity that can be either retained in order to build capital or used to absorb unexpected losses and preserve existing capital.

33-------------------------------------------------------------------------------- Table of Contents The following table provides a reconciliation of this non-GAAP financial measure to the amounts reported in Peoples' consolidated financial statements for the periods presented: Three Months Ended March 31, December 31, March 31, (Dollars in thousands) 2014 2013 2013 Pre-Provision Net Revenue: Income before income taxes $ 6,931 $ 7,415 $ 7,340 Add: provision for loan losses 8 - - Add: net loss on loans held-for-sale and OREO - - 5 Add: net loss on securities transactions 30 - - Add: net loss on other assets 7 125 - Less: recovery of loan losses - 964 1,065 Less: net gain on loans held-for-sale and OREO 18 - - Less: net gain on securities transactions - 46 418 Pre-provision net revenue $ 6,958 $ 6,530 $ 5,862 Pre-provision net revenue $ 6,958 $ 6,530 $ 5,862 Total average assets 2,050,602 2,011,852 1,914,719 Pre-provision net revenue to total average assets (a) 1.38 % 1.29 % 1.24 % (a) Presented on an annualized basis.

PPNR increased compared to the linked quarter and prior year due mostly to the recognition of a provision for loan losses compared to previously recorded recoveries of loan losses.

FINANCIAL CONDITION Cash and Cash Equivalents At March 31, 2014, Peoples' interest-bearing deposits in other banks increased compared to December 31, 2013. These balances included $4.8 million of excess cash reserves being maintained at the Federal Reserve Bank at March 31, 2014, compared to $0.3 million at December 31, 2013. The amount of excess cash reserves maintained is dependent upon Peoples' daily liquidity position, which is driven primarily by changes in deposit and loan balances.

Through three months of 2014, Peoples' total cash and cash equivalents increased $10.9 million, as cash provided by operating and financing activities totaling $14.4 million exceeded the cash used in investing activities. Within Peoples' investing activities, the net $24.2 million provided by activities related to available-for-sale securities was used to partially fund the $30.0 million net loan growth. Within Peoples' financing activities, proceeds from increases in interest-bearing deposits were used to paydown short-term borrowings.

Through the first three months of 2013, Peoples' total cash and cash equivalents increased $62.9 million, as cash provided by Peoples' operating activities, investing and financing activities were $10.8 million, $33.8 million and $18.3 million, respectively. Investing activities contributed $33.8 million of cash as proceeds from sales and principal payments of investment securities exceeded the purchases of investment securities by $30.0 million. Within Peoples' financing activities, deposit growth generated $36.6 million of cash which was used primarily to reduce borrowed funds by $17.1 million.

Further information regarding the management of Peoples' liquidity position can be found later in this discussion under "Interest Rate Sensitivity and Liquidity." 34-------------------------------------------------------------------------------- Table of Contents Investment Securities The following table provides information regarding Peoples' investment portfolio: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Available-for-sale securities, at fair value: Obligations of: U.S. Treasury and government agencies $ 19 $ 20 $ 22 $ 23 $ 25 U.S. government sponsored agencies 295 319 356 400 459 States and political subdivisions 51,668 50,962 51,061 50,579 47,165 Residential mortgage-backed securities 500,516 510,097 519,387 503,574 495,135 Commercial mortgage-backed securities 26,750 32,304 33,135 33,606 48,072 Bank-issued trust preferred securities 7,995 7,829 7,868 7,811 7,879 Equity securities 4,854 4,577 4,207 4,335 3,910 Total fair value $ 592,097 $ 606,108 $ 616,036 $ 600,328 $ 602,645 Total amortized cost $ 598,445 $ 621,126 $ 623,024 $ 606,441 $ 592,005 Net unrealized (loss) gain $ (6,348 ) $ (15,018 ) $ (6,988 ) $ (6,113 ) $ 10,640 Held-to-maturity securities, at amortized cost: Obligations of: States and political subdivisions $ 3,848 $ 3,850 $ 3,853 $ 3,855 $ 3,857 Residential mortgage-backed securities 37,151 37,536 38,046 36,361 36,547 Commercial mortgage-backed securities 7,804 7,836 7,859 7,882 7,903 Total amortized cost $ 48,803 $ 49,222 $ 49,758 $ 48,098 $ 48,307 Total investment portfolio: Amortized cost $ 647,248 $ 670,348 $ 672,782 $ 654,539 $ 640,312 Carrying value $ 640,900 $ 655,330 $ 665,794 $ 648,426 $ 650,952 During the first quarter of 2014, residential and commercial mortgage-backed securities were reduced by principal paydowns, which were used to fund loan growth in an effort to reduce the size of the investment portfolio. The unrealized loss position of the available-for-sale portfolio improved during the first quarter of 2014 compared to year-end. In recent quarters, Peoples has maintained the size of the held-to-maturity securities portfolio, for which the unrealized gain or loss does not directly impact stockholders' equity, contrary to the available-for-sale securities portfolio.

Peoples' investment in residential and commercial mortgage-backed securities largely consists of securities either guaranteed by the U.S. government or issued by U.S. government sponsored agencies, such as Fannie Mae and Freddie Mac. The remaining portions of Peoples' mortgage-backed securities consist of securities issued by other entities, including other financial institutions, which are not guaranteed by the U.S. government.

The amount of these "non-agency" securities included in the residential mortgage-backed securities totals above was as follows: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Residential $ 21,351 $ 23,446 $ 25,573 $ 30,065 $ 32,748 Total fair value $ 21,351 $ 23,446 $ 25,573 $ 30,065 $ 32,748 Total amortized cost $ 20,562 $ 22,926 $ 24,430 $ 28,820 $ 31,915 Net unrealized gain $ 789 $ 520 $ 1,143 $ 1,245 $ 833 Management continues to reinvest the principal runoff from the non-agency securities into U.S agency investments, which has accounted for the continued decline in the fair value of these securities. At March 31, 2014, Peoples' non-agency portfolio consisted entirely of first lien residential and commercial 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.

35-------------------------------------------------------------------------------- Table of Contents Loans The following table provides information regarding outstanding loan balances: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Gross portfolio loans: Commercial real estate, construction $ 55,935 $ 47,539 $ 39,969 $ 30,770 $ 24,108 Commercial real estate, other 458,580 450,170 374,953 389,281 381,331 Commercial real estate 514,515 497,709 414,922 420,051 405,439 Commercial and industrial 233,329 232,754 192,238 184,981 174,982 Residential real estate 268,794 268,617 262,602 252,282 237,193 Home equity lines of credit 60,319 60,076 55,341 52,212 50,555 Consumer 143,541 135,018 127,785 119,029 108,353 Deposit account overdrafts 6,008 2,060 4,277 1,674 3,996 Total portfolio loans $ 1,226,506 $ 1,196,234 $ 1,057,165 $ 1,030,229 $ 980,518 Percent of loans to total loans: Commercial real estate, 4.6 % construction 4.0 % 3.8 % 3.0 % 2.4 % Commercial real estate, 37.4 % other 37.6 % 35.5 % 37.8 % 38.9 % Commercial real estate 42.0 % 41.6 % 39.3 % 40.8 % 41.3 % Commercial and industrial 19.0 % 19.5 % 18.2 % 17.9 % 17.8 % Residential real estate 21.9 % 22.5 % 24.8 % 24.5 % 24.2 % Home equity lines of credit 4.9 % 5.0 % 5.2 % 5.1 % 5.2 % Consumer 11.7 % 11.3 % 12.1 % 11.5 % 11.1 % Deposit account overdrafts 0.5 % 0.1 % 0.4 % 0.2 % 0.4 % Total percentage 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Residential real estate loans being serviced for others $ 340,057 $ 341,183 $ 339,557 $ 338,854 $ 343,769 The increase in construction loans was largely due to advances on loans with current relationships. Commercial real estate loan balances increased partially due to the origination of a $5.8 million loan, coupled with other organic loan growth. Consumer loan balances, which consist mostly of loans to finance automobile purchases, have continued to increase in recent quarters due largely to Peoples placing greater emphasis on its consumer lending activity.

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.

36-------------------------------------------------------------------------------- Table of Contents The following table provides information regarding the largest concentrations of commercial real estate loans within the loan portfolio at March 31, 2014: Outstanding (Dollars in thousands) Balance Loan Commitments Total Exposure % of Total Commercial real estate, other: Lodging and lodging related $ 58,129 $ - $ 58,129 12.4 % Apartment complexes 54,805 141 54,946 11.8 % Office buildings and complexes: Owner occupied 13,228 696 13,924 3.0 % Non-owner occupied 30,908 106 31,014 6.6 % Total office buildings and complexes 44,136 802 44,938 9.6 % Light industrial facilities: Owner occupied 28,194 454 28,648 6.1 % Non-owner occupied 1,743 - 1,743 0.4 % Total light industrial facilities 29,937 454 30,391 6.5 % Retail facilities: Owner occupied 14,732 115 14,847 3.2 % Non-owner occupied 30,874 62 30,936 6.6 % Total retail facilities 45,606 177 45,783 9.8 % Assisted living facilities and nursing homes 46,286 253 46,539 10.0 % Mixed commercial use facilities: Owner occupied 21,357 2,633 23,990 5.1 % Non-owner occupied 15,933 296 16,229 3.5 % Total mixed commercial use facilities 37,290 2,929 40,219 8.6 % Day care facilities - owner occupied 16,121 - 16,121 3.5 % Health care facilities: Owner occupied 6,054 14 6,068 1.3 % Non-owner occupied 16,000 300 16,300 3.5 % Total health care facilities 22,054 314 22,368 4.8 % Restaurant facilities: Owner occupied 12,868 2 12,870 2.8 % Non-owner occupied 1,479 - 1,479 0.3 % Total restaurant facilities 14,347 2 14,349 3.1 % Other 89,869 3,413 93,282 19.9 % Total commercial real estate, other $ 458,580 $ 8,485 $ 467,065 100.0 % 37-------------------------------------------------------------------------------- Table of Contents Outstanding (Dollars in thousands) Balance Loan Commitments Total Exposure % of Total Commercial real estate, construction: Apartment complexes $ 30,162 $ 4,423 $ 34,585 43.7 % Office buildings and complexes: Owner occupied 1,280 288 1,568 2.0 % Non-owner occupied 3 4,800 4,803 6.1 % Total office buildings and complexes 1,283 5,088 6,371 8.1 % Light industrial facilities: Owner occupied 806 26 832 1.0 % Non-owner occupied 213 - 213 0.3 % Total light industrial facilities 1,019 26 1,045 1.3 % Assisted living facilities and nursing homes 5,092 4,931 10,023 12.7 % Mixed commercial use facilities: Owner occupied 1,257 1,819 3,076 3.9 % Non-owner occupied 2,892 - 2,892 3.6 % Total mixed commercial use facilities 4,149 1,819 5,968 7.5 % Day care facilities - owner occupied 2,161 331 2,492 3.1 % Restaurant facilities - owner occupied 3,606 - 3,606 4.6 % Residential property 6,115 4,442 10,557 13.3 % Other 2,348 2,170 4,518 5.7 %Total commercial real estate, construction $ 55,935 $ 23,230 $ 79,165 100.0 % Peoples' commercial lending activities continue to focus on lending opportunities inside its primary and secondary market areas within Ohio, West Virginia and Kentucky. In all other states, the aggregate outstanding balances of commercial loans in each state were less than $4.0 million at both March 31, 2014 and December 31, 2013.

Allowance for Loan Losses The amount of the allowance for loan losses at the end of each period represents management's estimate of expected losses from existing loans based upon its quarterly analysis of the loan portfolio. While this process involves allocations being made to specific loans and pools of loans, the entire allowance is available for all losses incurred within the loan portfolio. The following details management's allocation of the allowance for loan losses: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Commercial real estate $ 13,327 $ 13,215 $ 12,826 $ 12,568 $ 13,973 Commercial and 2,130 2,174 industrial 2,195 2,188 1,750 Total commercial 15,457 15,389 15,021 14,756 15,723 Residential real estate 782 881 826 1,005 783 Home equity lines of 329 343 credit 337 490 485 Consumer 198 316 564 740 383 Deposit account 104 136 overdrafts 154 122 65 Total allowance for loan $ 16,870 $ 17,065 $ 16,902 $ 17,113 $ 17,439 losses As a percent of loans, net of deferred fees and costs 1.38 % 1.43 % 1.60 % 1.66 % 1.78 % During the first quarter of 2014, Peoples extended the historical loss period from three years to five years for its quantitative calculation of the allowance for loan losses. Management believes this change more appropriately reflects inherent losses in the portfolio.

The significant allocations to commercial loans reflect the higher credit risk associated with this type of lending and the size of this loan category in relationship to the entire loan portfolio. In the first quarter of 2014, the allowance for loan losses was maintained at a similar balance to recent quarters due to the overall credit quality of the loan portfolio. Specifically, Peoples has experienced a steady decrease in criticized loans, which are those classified as watch, substandard or doubtful, due to principal paydowns and improvements in borrowers' financial conditions. Total criticized loans decreased $22.1 38-------------------------------------------------------------------------------- Table of Contents million or 28% since year-end 2013, reflecting $13.3 million in principal paydowns. Peoples upgraded $7.7 million in loans during 2014 based upon the financial condition of the borrowers. Net charge-offs also remained at or below Peoples' long-term historical rate. These factors had a direct impact on the estimated loss rates used to determine the appropriate allocations for commercial loans.

The allowance allocated to the residential real estate and consumer loan categories is based upon Peoples' allowance methodology for homogeneous pools of loans. The fluctuations in these allocations have been directionally consistent with the changes in loan quality, loss experience and loan balances in these categories.

The following table summarizes Peoples' net charge-offs and recoveries: Three Months Ended March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Gross charge-offs: Commercial real estate, construction $ - $ - $ - $ - $ - Commercial real estate, - 71 other 199 217 566 Commercial real estate - 71 199 217 566 Commercial and industrial 49 33 - 11 - Residential real estate 137 181 218 88 134 Home equity lines of credit 20 - 160 - 2 Consumer 302 439 301 185 159 Deposit account overdrafts 110 147 135 115 130 Total gross charge-offs 618 871 1,013 616 991 Recoveries: Commercial real estate, - - construction - - - Commercial real estate, 112 1,526 other 1,507 1,432 1,374 Commercial real estate 112 1,526 1,507 1,432 1,374 Commercial and industrial 5 12 7 4 17 Residential real estate 38 236 39 145 116 Home equity lines of credit 6 6 7 5 8 Consumer 184 191 125 132 104 Deposit account overdrafts 70 27 36 34 65 Total recoveries 415 1,998 1,721 1,752 1,684 Net charge-offs (recoveries): Commercial real estate, construction - - - - - Commercial real estate, (112 ) other (1,455 ) (1,308 ) (1,215 ) (808 ) Commercial real estate (112 ) (1,455 ) (1,308 ) (1,215 ) (808 ) Commercial and industrial 44 21 (7 ) 7 (17 ) Residential real estate 99 (55 ) 179 (57 ) 18 Home equity lines of credit 14 (6 ) 153 (5 ) (6 ) Consumer 118 248 176 53 55 Deposit account overdrafts 40 120 99 81 65 Total net charge-offs (recoveries) $ 203 $ (1,127 ) $ (708 ) $ (1,136 ) $ (693 ) Ratio of net charge-offs (recoveries) to average loans (annualized): Commercial real estate, construction - % - % - % - % - % Commercial real estate, (0.04 )% (0.51 )% other (0.50 )% (0.48 )% (0.33 )% Commercial real estate (0.04 )% (0.51 )% (0.50 )% (0.48 )% (0.33 )% Commercial and industrial 0.02 % 0.01 % - % - % (0.01 )% Residential real estate 0.03 % (0.02 )% 0.07 % (0.02 )% 0.01 % Home equity lines of credit 0.01 % - % 0.06 % - % - % Consumer 0.04 % 0.09 % 0.07 % 0.03 % 0.02 % Deposit account overdrafts 0.01 % 0.04 % 0.04 % 0.02 % 0.02 % Total 0.07 % (0.39 )% (0.26 )% (0.45 )% (0.29 )% 39-------------------------------------------------------------------------------- Table of Contents During the first quarter of 2014, charge-offs exceeded recoveries and resulted in a ratio of net charge-offs to average loans of 0.07%, which was well below the long-term historical average of 0.30% to 0.50%.

The following table details Peoples' nonperforming assets: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Loans 90+ days past due and accruing: Commercial real estate $ - $ - $ - $ 36 $ - Commercial and industrial - - 950 - - Residential real estate 29 37 - - - Home equity 129 873 1,615 1,484 1,212 Consumer 1 - 32 - 3 Total 159 910 2,597 1,520 1,215 Nonaccrual loans: Commercial real estate, 96 construction 96 76 80 - Commercial real estate 2,913 2,801 3,593 4,922 5,739 Commercial and industrial 640 708 323 297 327 Residential real estate 3,294 2,565 3,012 3,136 3,166 Home equity 323 81 61 32 78 Consumer - 58 60 62 9 Total 7,266 6,309 7,125 8,529 9,319 Troubled debt restructurings: Commercial real estate 897 916 1,193 1,879 2,208 Commercial and industrial - - - - - Residential real estate 637 650 195 175 276 Home equity 6 6 24 24 - Total 1,540 1,572 1,412 2,078 2,484 Total nonperforming loans (NPLs) 8,965 8,791 11,134 12,127 13,018 Other real estate owned (OREO) Commercial 465 465 - - 815 Residential 308 428 120 120 - Total 773 893 120 120 815 Total nonperforming assets $ 9,738 $ 9,684 $ 11,254 $ 12,247 $ 13,833 (NPAs) NPLs as a percent of total loans 0.73 % 0.73 % 1.05 % 1.17 % 1.32 % NPAs as a percent of total 0.47 % 0.47 % assets 0.59 % 0.64 % 0.71 % NPAs as a percent of total loans 0.79 % 0.81 % and OREO 1.06 % 1.18 % 1.41 % Allowance for loan losses as a percent of NPLs 188.19 % 194.13 % 151.79 % 141.11 % 133.96 % Nonperforming assets remained steady during the first quarter of 2014, as reductions in loans 90+ days past due and accruing were offset by increases in nonaccrual loans. The reduction in OREO was due to the recent sale of a residential property. The reduction contributed to the decrease in total criticized loans, which were down 28% at March 31, 2014 versus year-end 2013.

The majority of Peoples' nonaccrual commercial real estate loans continues 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.

40-------------------------------------------------------------------------------- Table of Contents Deposits The following table details Peoples' deposit balances: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Interest-bearing deposits: Retail certificates of $ 355,345 $ 363,226 deposit $ 334,910 $ 349,511 $ 353,894 Money market deposit 276,226 275,801 accounts 224,400 238,554 288,538 Governmental deposit 177,590 132,379 accounts 151,910 146,817 167,441 Savings accounts 227,695 215,802 196,293 199,503 200,549 Interest-bearing demand 133,508 134,618 accounts 123,966 125,875 124,969 Total retail 1,170,364 1,121,826 1,060,260 1,135,391 interest-bearing deposits 1,031,479 Brokered certificates of 45,072 49,041 deposits 49,620 50,393 52,648 Total interest-bearing 1,215,436 1,170,867 1,110,653 1,188,039 deposits 1,081,099 Non-interest-bearing 417,629 409,891 deposits 356,767 325,125 340,887 Total deposits $ 1,633,065 $ 1,580,758 $ 1,437,866 $ 1,435,778 $ 1,528,926 During the first quarter of 2014, retail deposit accounts grew 4% compared to year-end from seasonal increases in governmental deposits and consumer deposit balances, both savings and non-interest-bearing, which typically occur during this period. Retail certificates of deposit declined from year-end, as Peoples maintained 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.

Borrowed Funds The following table details Peoples' short-term and long-term borrowings: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Short-term borrowings: FHLB advances $ 15,000 $ 71,000 $ 64,000 $ 59,000 $ - Retail repurchase agreements 53,777 42,590 42,843 33,521 32,395 Total short-term borrowings 68,777 113,590 106,843 92,521 32,395 Long-term borrowings: FHLB advances 62,211 62,679 63,806 64,180 64,348 National market repurchase 40,000 40,000 agreements 40,000 40,000 40,000 Term note payable (parent 17,953 19,147 20,340 22,726 company) 21,534 Total long-term borrowings 120,164 121,826 124,146 125,714 127,074 Total borrowed funds $ 188,941 $ 235,416 $ 230,989 $ 218,235 $ 159,469 Peoples' short-term FHLB advances generally consist of overnight borrowings being maintained in connection with the management of Peoples' daily liquidity position.

As disclosed in Peoples' 2013 Form 10-K, Peoples entered into a loan agreement in 2012, and is subject to certain covenants. At March 31, 2014, Peoples was in compliance with the applicable material covenants imposed by this agreement, as explained in more detail in Note 10 of the Notes to the Consolidated Financial Statements included in Peoples' 2013 Form 10-K.

41-------------------------------------------------------------------------------- Table of Contents Capital/Stockholders' Equity During the first quarter of 2014, Peoples' total stockholders' equity benefited from earnings exceeding dividends declared and an increase in the market value of available-for-sale investment securities. At March 31, 2014, capital levels for both Peoples and Peoples Bank remained substantially higher than the minimum amounts needed to be considered "well capitalized" institutions under banking regulations. These higher capital levels reflect Peoples' desire to maintain strong capital positions to provide greater flexibility to grow the company.

The following table details Peoples' actual risk-based capital levels and corresponding ratios: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Capital Amounts: Tier 1 170,677 166,217 168,254 166,576 164,329 Total (Tier 1 and Tier 2) 189,145 184,457 184,550 182,706 179,569 Net risk-weighted assets $ 1,358,691 $ 1,338,811 $ 1,194,016 $ 1,175,647 $ 1,118,644 Capital Ratios: Tier 1 12.56 % 12.42 % 14.09 % 14.17 % 14.69 % Total (Tier 1 and Tier 2) 13.92 % 13.78 % 15.46 % 15.54 % 16.05 % Leverage ratio 8.56 % 8.52 % 9.14 % 9.04 % 8.90 % In addition to traditional capital measurements, management uses tangible capital measures to evaluate the adequacy of Peoples' stockholders' equity. Such ratios represent non-GAAP financial information since their calculation removes the impact of intangible assets acquired through acquisitions on the Consolidated Balance Sheets. Management believes this information is useful to investors since it facilitates the comparison of Peoples' operating performance, financial condition and trends to peers, especially those without a similar level of intangible assets to that of Peoples. Further, intangible assets generally are difficult to convert into cash, especially during a financial crisis, and could decrease substantially in value should there be deterioration in the overall franchise value. As a result, tangible equity represents a conservative measure of the capacity for a company to incur losses but remain solvent.

The following table reconciles the calculation of these non-GAAP financial measures to amounts reported in Peoples' Consolidated Financial Statements: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Tangible Equity: Total stockholders' equity, $ 230,576 $ 221,553 as reported $ 222,247 $ 219,147 $ 226,079 Less: goodwill and other 77,288 77,603 intangible assets 71,417 71,608 69,977 Tangible equity $ 153,288 $ 143,950 $ 150,830 $ 147,539 $ 156,102 Tangible Assets: Total assets, as reported $ 2,078,253 $ 2,059,108 $ 1,919,705 $ 1,899,841 $ 1,938,722 Less: goodwill and other 77,288 77,603 intangible assets 71,417 71,608 69,977 Tangible assets $ 2,000,965 $ 1,981,505 $ 1,848,288 $ 1,828,233 $ 1,868,745 Tangible Book Value per Share: Tangible equity $ 153,288 $ 143,950 $ 150,830 $ 147,539 $ 156,102 Shares outstanding 10,657,569 10,605,782 10,596,797 10,583,161 10,568,147 Tangible book value per $ 14.38 $ 13.57 $ 14.23 $ 13.94 $ 14.77 share Tangible Equity to Tangible Assets Ratio: Tangible equity $ 153,288 $ 143,950 $ 150,830 $ 147,539 $ 156,102 Tangible assets $ 2,000,965 $ 1,981,505 $ 1,848,288 $ 1,828,233 $ 1,868,745 Tangible equity to tangible 7.66 % 7.26 % 8.16 % 8.07 % 8.35 % assets The increase in the linked quarter tangible equity to tangible assets ratio during the first quarter of 2014 was primarily caused by higher tangible equity in connection with an increase in the market value of the available-for-sale investment portfolio, 42-------------------------------------------------------------------------------- Table of Contents and earnings exceeding dividends paid. When compared to the first quarter of 2013, the increase in tangible assets caused by loan production and acquisitions has reduced the tangible equity to tangible assets ratio.

Interest Rate Sensitivity and Liquidity While Peoples is exposed to various business risks, the risks relating to interest rate sensitivity and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature. The objective of Peoples' asset/liability management ("ALM") function is to measure and manage these risks in order to optimize net interest income within the constraints of prudent capital adequacy, liquidity and safety. This objective requires Peoples to focus on interest rate risk exposure and adequate liquidity through its management of the mix of assets and liabilities, their related cash flows and the rates earned and paid on those assets and liabilities. Ultimately, the ALM function is intended to guide management in the acquisition and disposition of earning assets and selection of appropriate funding sources.

Interest Rate Risk Interest rate risk ("IRR") is one of the most significant risks arising in the normal course of business of financial services companies like Peoples. IRR is the potential for economic loss due to future interest rate changes that can impact both the earnings stream as well as market values of financial assets and liabilities. Peoples' exposure to IRR is due primarily to differences in the maturity or repricing of earning assets and interest-bearing liabilities. In addition, other factors, such as prepayments of loans and investment securities or early withdrawal of deposits, can expose Peoples to IRR and increase interest costs or reduce revenue streams.

Peoples has assigned overall management of IRR to its Asset-Liability Committee (the "ALCO"), which has established an IRR management policy that sets minimum requirements and guidelines for monitoring and managing the level and amount of IRR. The methods used by the ALCO to assess IRR remain unchanged from those disclosed in Peoples' 2013 Form 10-K.

The following table shows the estimated changes in net interest income and the economic value of equity based upon a standard, parallel shock analysis (dollars in thousands): Increase in Interest Estimated Increase in Rate Net Interest Income Estimated (Decrease) Increase in Economic Value of Equity (in Basis Points) March 31, 2014 December 31, 2013 March 31, 2014 December 31, 2013 300 $ 6,778 11.1 % $ 5,473 8.9 % $ (48,979 ) (17.7 )% $ (65,867 ) (24.8 )% 200 5,391 8.9 % 4,494 7.3 % (32,792 ) (11.8 )% (46,077 ) (17.4 )% 100 3,361 5.5 % 2,885 4.7 % (15,428 ) (5.6 )% (23,910 ) (9.0 )% At March 31, 2014, Peoples' Consolidated Balance Sheet remained positioned for a rising interest rate environment, as illustrated by the potential increase in net interest income shown in the above table. The benefit of the actions taken late in the first quarter of 2013 within the investment portfolio to reduce interest rate exposure were fully reflected in the analysis above. While parallel interest rate shock scenarios are useful in assessing the level of IRR inherent in Peoples' Consolidated Balance Sheet, interest rates typically move in a non-parallel manner, with differences in the timing, direction and magnitude of changes in short-term and long-term interest rates. Thus, any benefit that could occur as a result of the Federal Reserve Board increasing short-term interest rates in future quarters could be offset by an inverse movement in long-term interest rates.

Liquidity In addition to IRR management, another major objective of the ALCO is to maintain a sufficient level of liquidity. The methods used by the ALCO to monitor and evaluate the adequacy of Peoples' liquidity position remain unchanged from those disclosed in Peoples' 2013 Form 10-K.

At March 31, 2014, Peoples had liquid assets of $216.5 million, which represented 9.7% of total assets and unfunded commitments. This amount exceeded the minimal level of $44.6 million, or 2% of total loans and unfunded commitments, currently required under Peoples' liquidity policy. Peoples also had an additional $37.1 million of unpledged securities not included in the measurement of liquid assets.

Management believes the current balance of cash and cash equivalents and anticipated cash flows from the investment portfolio, along with the availability of other funding sources, will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments.

43-------------------------------------------------------------------------------- Table of Contents 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. Traditional off-balance sheet credit-related financial instruments continue to represent the most significant off-balance sheet exposure.

The following table details the total contractual amount of loan commitments and standby letters of credit: March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 2014 2013 2013 2013 2013 Home equity lines of credit $ 49,918 $ 49,533 $ 45,655 $ 43,956 $ 44,124 Unadvanced construction loans 23,231 30,203 25,923 25,646 19,092 Other loan commitments 136,805 137,661 129,418 138,783 127,665 Loan commitments 209,954 217,397 200,996 208,385 190,881 Standby letters of credit $ 33,555 $ 33,998 $ 34,804 $ 35,845 $ 34,771 Management does not anticipate 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.

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