UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
138 Putnam Street, PO Box 738, Marietta, Ohio 45750-0738
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Shares,
No Par Value
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Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [ X ]
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
As of June 30, 2005, the aggregate market value of the Registrant's Common
Shares (the only common equity of the Registrant) held by non-affiliates was
$251,891,000 based upon the closing price as reported on The NASDAQ National
Market. For this purpose, executive officers and directors of the Registrant are
considered affiliates.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, at March 10, 2006: 10,534,768 common shares, without par value.
Document Incorporated by Reference:
Portions of Registrant's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 13, 2006, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I Page
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Item 1. Business 3
Item 1A. Risk Factors 16
Item 1B. Unresolved Staff Comments 18
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Executive Officers of the Registrant 19
PART II
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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 42
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
Item 9A. Controls and Procedures 42
Item 9B. Other Information 43
PART III
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Item 10. Directors and Executive Officers of the Registrant 73
Item 11. Executive Compensation 73
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 74
Item 13. Certain Relationships and Related Transactions 74
Item 14. Principal Accountant Fees and Services 75
PART IV
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Item 15. Exhibits and Financial Statement Schedules 76
Signatures 77
Exhibit Index 78
PART I
ITEM 1. BUSINESS.
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General
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Peoples Bancorp Inc. ("Peoples") is a financial holding company organized in
1980. Peoples' wholly-owned subsidiaries include Peoples Bank, National
Association ("Peoples Bank"), Peoples Investment Company, PEBO Capital Trust I
and PEBO Capital Trust II. Peoples Bank also owns an insurance agency subsidiary
and an asset management subsidiary. Peoples Investment Company also owns a
capital management subsidiary. Peoples Bank was first charted as an Ohio banking
corporation under the name "The Peoples Banking and Trust Company" in Marietta,
Ohio, in 1902. In March 2000, Peoples Bank was reorganized as a national banking
association under its current name.
Peoples' principal executive office is located at 138 Putnam Street, Marietta,
Ohio 45750, and its telephone number is (740) 373-3155. Peoples' common shares
are traded on The NASDAQ National Market under the symbol PEBO and its web site
is www.peoplesbancorp.com (this uniform resource locator, or URL, is an inactive
textual reference only and is not intended to incorporate Peoples' website into
this Form 10-K).
Peoples' primary business activities currently are confined to the financial
services industry, which are conducted through Peoples Bank, its principal
operating subsidiary. Peoples Bank is a full service community bank that makes
available an array of financial products and services to its customers, which
include the following:
o various interest-bearing and non-interest-bearing demand deposit
accounts
o savings and money market accounts
o certificates of deposit
o commercial, installment, and real estate mortgage loans (both
commercial and residential)
o credit and debit cards
o corporate and personal trust services
o safe deposit rental facilities
Peoples also sells travelers checks, money orders and cashier's checks. Services
are provided through Peoples Bank's 48 financial service locations and 34
automated teller machines ("ATMs") in Ohio, West Virginia and Kentucky, as well
as banking by telephone, and internet-based banking. Peoples Bank offers a full
range of life, health, property and casualty insurance products through its
subsidiary Peoples Insurance Agency, Inc. ("Peoples Insurance Agency") and makes
available custom-tailored solutions for asset management needs through its
Peoples Financial Advisors division, including investment products offered
through an unaffiliated registered broker-dealer.
Peoples Investment Company and its subsidiary, Peoples Capital Corporation, were
formed in 2001 to optimize Peoples' consolidated capital position and improve
profitability by providing new investment opportunities that are either limited
or restricted at the bank level. These investments include, but are not limited
to, low-income housing tax credit funds or projects, venture capital, and other
higher risk investments. Presently, the operations of both companies do not
represent a significant part of Peoples overall business activities.
At December 31, 2005, Peoples and its subsidiaries had 531 full-time equivalent
employees, total assets of $1.86 billion, total loans of $1.07 billion, total
deposits of $1.09 billion, and total stockholders' equity of $183.1 million.
Peoples Bank held trust assets with an approximate market value of $659 million
at December 31, 2005. For the year ended December 31, 2005, Peoples' return on
average assets was 1.12% and return on average stockholders' equity was 11.52%.
For the five-year period ended December 31, 2005, Peoples' assets grew at a
10.3% compound annual growth rate, while stockholders' equity grew at a compound
annual growth rate of 17.1%. Peoples also has a history of earnings and dividend
growth, as earnings and dividends per share grew at compound rates of 7.8% and
12.1%, respectively, for the five-year period ended December 31, 2005. Over that
same period, Peoples' annual return on average assets and annual return on
average stockholders' equity averaged 1.13% and 12.63%, respectively.
Peoples has experienced significant growth in assets and increased its capital
position through a combination of internal and external growth. In December 2002
and January 2003, Peoples increased its capital position through the sale of 1.7
million common shares, which generated capital of nearly $37 million. In
addition to core organic growth, Peoples has undertaken a controlled and steady
expansion and acquisition strategy. In the past five years, Peoples has opened
one de novo banking office and two loan production offices in its market area
and has completed two branch acquisitions, three bank acquisitions and two
insurance agency acquisitions. Since year-end 2000, Peoples has acquired $388
million of assets, which included $202 million of loans, $301 million of
deposits, and 14 financial service offices. These acquisitions produced
benefits, including the expansion of Peoples' customer base, and provided
opportunities to integrate non-traditional products and services, such as
insurance and investments, with the traditional banking products currently
offered to clients in Peoples' markets. These acquisitions also enabled Peoples
to expand into new markets.
Peoples routinely explores opportunities for additional growth and expansion of
its core financial service businesses, including the acquisition of companies
engaged in similar activities. Management also focuses on internal growth as a
method for reaching performance goals and reviews key performance indicators on
a regular basis to measure Peoples' success. There can be no assurance, however,
that Peoples will be able to grow, or if it does, that any such growth or
expansion will result in an increase in Peoples' earnings, dividends, book value
or the market value of its common shares.
Recent Acquisitions and Expansion
---------------------------------
In April 2005, Peoples Bank expanded its activities in Central Ohio with the
opening of a new loan production office in Westerville, Ohio. The focus of this
new office is the commercial lending needs of customers in the greater Columbus,
Ohio area.
At the close of business on December 3, 2004, Peoples Bank completed the
acquisition of two full-service offices in the Ashland, Kentucky area from an
unaffiliated financial institution. In the acquisition, Peoples acquired
approximately $65 million in deposits and $43 million of loans. Concurrent with
the acquisition, Peoples Bank consolidated some of its Ashland, Kentucky area
banking offices. The Flatwoods, Kentucky, office and the acquired office in
downtown Ashland were consolidated into nearby Peoples Bank offices at the close
of business on December 3, 2004. Also, the Peoples Bank Cedar Knoll office
ceased operations at the close of business on December 27, 2004, with clients
redirected to Peoples Bank's newly-acquired office in nearby Summit, Kentucky.
In mid-2004, Peoples expanded its insurance activities with the acquisition of
Barengo Insurance Agency, Inc. ("Barengo"), based in Marietta, Ohio, and
substantially all of the assets of Putnam Agency, Inc. (the "Putnam Agency"),
with offices in Ashland, Kentucky and Huntington, West Virginia. Both Barengo
and the Putnam Agency were full-service insurance agencies that offered a wide
range of insurance products to both commercial and individual clients. Peoples
operates the former agencies as divisions of Peoples Insurance Agency, using the
"Barengo Insurance Agency" and "Putnam Agency" trade names. For further
discussion regarding these acquisitions, see Note 15 of the Notes to the
Consolidated Financial Statements included in Item 8 of this Form 10-K.
Customers and Markets
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Peoples has expanded from its roots in Washington County, Ohio, where it
maintains nine financial service locations, to a market area that encompasses 18
counties in southeastern Ohio and neighboring areas of Kentucky and West
Virginia, focusing on mostly non-major urban areas. The primary market area
possesses a diverse economic base, with no single dominant industry or employer.
Principal industries in the market area include health care, education and other
social services; plastics and petrochemical manufacturing; oil, gas and coal
production; and tourism, and other service-related industries. Consequently,
Peoples is not dependent upon any single industry segment for its business
opportunities, and management believes Peoples' market area is somewhat
insulated from some of the fluctuations of national economic cycles as a result
of the diverse economic base.
Peoples Bank originates various types of loans, including commercial and
commercial real estate loans, residential real estate loans, home equity lines
of credit, real estate construction loans, and consumer loans (including loans
to individuals and indirect loans). In general, Peoples Bank retains the
majority of loans it originates; however, certain fixed-rate mortgage loan
originations, primarily one-to-four family residential mortgages, are sold into
the secondary market. In prior years, Peoples Bank also originated various
credit card loans. In late 2003, Peoples Bank sold its existing credit card
portfolio and entered into a joint marketing alliance to serve the credit card
needs of its customers and prospects, which reduces Peoples Bank's risks since
it does not own the loans.
Loans are spread over a broad range of industrial classifications. Management
believes Peoples Bank has no significant concentrations of loans to borrowers
engaged in the same or similar industries and no loans to foreign entities. The
lending market areas served are concentrated primarily in southeastern Ohio,
northeastern Kentucky and northwestern West Virginia. In addition, loan
production offices and full-service banking offices in central Ohio provide
opportunities to serve customers in that economic region.
Legal Lending Limit
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At December 31, 2005, Peoples Bank's legal lending limit was approximately $22.5
million. In 2005, Peoples Bank did not extend credit to any one borrower in
excess of its legal lending limit.
Commercial Loans
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At December 31, 2005, Peoples Bank had $641.3 million in commercial, financial
and agricultural loans ("commercial loans"), including loans secured by
commercial real estate outstanding, representing approximately 59.8% of the
total aggregate loan portfolio. Loans secured by commercial real estate,
excluding construction loans, totaled $504.9 million at December 31, 2005.
LENDING PRACTICES. Commercial lending entails significant additional risks
compared to consumer lending (i.e., single-family residential mortgage lending,
installment lending, credit card loans and indirect lending). In addition, the
payment experience on commercial loans typically depends on adequate cash flow
of a business and thus may be subject, to a greater extent, to adverse
conditions in the general economy or in a specific industry. Loan terms include
amortization schedules commensurate with the purpose of each loan, the source of
repayment and the risk involved. The primary analytical technique used in
determining whether to grant a commercial loan is the review of a schedule of
cash flows to evaluate whether anticipated future cash flows will be adequate to
service both interest and principal due. Additionally, collateral is reviewed to
determine its value in relation to the loan.
The Peoples Bank Board of Directors is required to approve loans secured by real
estate in excess of $3.0 million and loans secured by all other assets in excess
of $1.5 million; however, approval of the Board of Directors is required for all
loans, regardless of amount, to borrowers whose aggregate debt to Peoples Bank,
including the principal amount of the proposed loan, exceeds $4.0 million.
Peoples Bank periodically evaluates all new commercial loan relationships
greater than $250,000 and, on an annual basis, all loan relationships greater
than $500,000. If deterioration of the loan has occurred, Peoples Bank takes
effective and prompt action designed to assure repayment of the loan. Upon
detection of the reduced ability of a borrower to meet cash flow obligations,
the loan is considered an impaired loan and reviewed for possible downgrading or
placement on non-accrual status.
Consumer Loans
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At December 31, 2005, Peoples Bank had outstanding consumer loans (including
indirect loans but excluding real estate loans and overdrafts) in an aggregate
amount of $62.7 million, or 5.9% of the aggregate total loan portfolio.
LENDING PRACTICES. Consumer loans generally involve more risk as to
collectibility than mortgage loans because of the type and nature of the
collateral and, in certain instances, the absence of collateral. As a result,
consumer lending collections are dependent upon the borrower's continued
financial stability, and thus are at more risk from adverse personal
circumstances. In addition, application of various state and federal laws,
including bankruptcy and insolvency laws, could limit the amount that may be
recovered under these loans. Credit approval for consumer loans typically
requires demonstration of sufficiency of income to repay principal and interest
due, stability of employment, a positive credit record and sufficient collateral
for secured loans. It is the policy of Peoples Bank to review its consumer loan
portfolio monthly and to charge-off loans that do not meet its standards, and to
adhere strictly to all laws and regulations governing consumer lending. A
qualified compliance officer is responsible for monitoring regulatory compliance
performance and for advising and updating loan personnel.
Peoples Bank makes credit life insurance and accident and health insurance
available to all qualified borrowers, thus reducing risk of loss when a
borrower's income is terminated or interrupted due to accident, disability or
death.
Real Estate Loans
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At December 31, 2005, Peoples Bank had $366.8 million of real estate loans
outstanding (including home equity and construction loans), representing 34.2%
of total loans outstanding. Home equity lines of credit and construction
mortgages totaled $46.6 million and $50.7 million, respectively. Peoples also
had approximately $1.1 million of real estate loans (primary one-to-four family
residential mortgages) held for sale into the secondary market at December 31,
2005. Peoples was servicing $144.3 million of real estate loans (primary
one-to-four family residential mortgages) previously sold into the secondary
market at December 31, 2005.
LENDING PRACTICES. Peoples Bank requires residential real estate loan amounts to
be no more than 90% of the purchase price or the appraised value of the real
estate securing the loan, unless private mortgage insurance is obtained by the
borrower for the percentage exceeding 90%. On occasion, Peoples Bank may lend up
to 100% of the appraised value of the real estate. The risk conditions of these
loans are considered during underwriting for the purposes of establishing an
interest rate compatible with the risks inherent in mortgage lending and
remaining equity of the home, if any. Peoples Bank originates both fixed rate
and one-to-five year adjustable rate, fully amortizing real estate loans.
Typically, the fixed rate real estate loans are sold in the secondary market,
with Peoples Bank retaining servicing rights on those loans. In select cases,
Peoples Bank may retain certain fixed rate real estate loans. Real estate loans
are typically secured by first mortgages with evidence of title in favor of
Peoples Bank in the form of an attorney's opinion of the title or a title
insurance policy. Peoples Bank also requires proof of hazard insurance, with
Peoples Bank named as the mortgagee and as the loss payee. Licensed appraisals
are required for loans in excess of $250,000.
HOME EQUITY LOANS. Home equity lines of credit, or Equilines, are generally made
as second mortgages by Peoples Bank. The maximum amount of a home equity line of
credit is generally limited to 80% of the appraised value of the property less
the balance of the first mortgage. Peoples Bank will lend up to 100% of the
appraised value of the property at higher interest rates that are considered
compatible with the additional risk assumed in these types of equilines. The
home equity lines of credit are written with ten-year terms, but are subject to
review upon request for renewal. Peoples Bank offers home equity loans with a
fixed rate for the first five years and converting to a variable interest rate
for the remaining five years. Peoples Bank also offers a home equity line of
credit with a variable rate for the entire term of the loan.
CONSTRUCTION LOANS. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, Peoples Bank may be
required to advance funds beyond the amount originally committed to permit
completion of the project.
Overdraft Privilege
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Since 2001, Peoples Bank has granted Overdraft Privilege to qualified customers.
Overdraft Privilege is a service that provides virtually automatic overdraft
protection to retail customers by establishing an Overdraft Privilege amount.
After a 30-day waiting period to verify deposit ability, each new checking
account usually receives an Overdraft Privilege amount of either $400 or $700,
based on the type of account and other parameters. Once established, customers
are permitted to overdraw their checking account, up to their Overdraft
Privilege limit, with each item being charged Peoples' regular overdraft fee.
Customers repay the overdraft with their next deposit. Overdraft Privilege is
designed to allow Peoples to fill the void between traditional overdraft
protection, such as a line of credit, and "check cashing stores". While
Overdraft Privilege generates fee income, Peoples maintains an allowance for
losses from checking accounts with overdrafts deemed uncollectible. This
allowance, along with the related provision and net charge-offs, is included in
Peoples' allowance for loan losses.
Website Access to Peoples' Securities and Exchange Commission Filings
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Peoples makes available free of charge on or through its website, its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") as soon as
reasonably practicable after Peoples electronically files each such report or
amendment with, or furnishes it to, the Securities and Exchange Commission
("SEC").
Corporate Governance
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Peoples' Board of Directors and management have instituted a series of actions
to enhance Peoples' already strong corporate governance practices. Included in
those actions was adoption of a Code of Ethics, a revision of the charter of the
Audit Committee and the formation two new committees: the Disclosure Committee
for Financial Reporting and the Governance and Nominating Committee. The current
charters of these committees and the Compensation Committee can be found on
Peoples' website under the "Corporate Governance & Ethics" section.
Additionally, Peoples Bank has maintained a conflict of interest policy
applicable to its officers and employees for over 30 years.
Code of Ethics
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In 2003, Peoples' Board of Directors adopted a formal Code of Ethics applicable
to all directors, officers and employees of Peoples and its affiliates. The
Board of Directors adopted Peoples' Code of Ethics to demonstrate to the public
and Peoples' shareholders the importance the Board and management place on
ethical conduct, and to continue to set forth Peoples' expectations for the
conduct of ethical business practices. Peoples' Code of Ethics is available,
free of charge, to the public on Peoples' website on the "Corporate Governance &
Ethics" page. Please also see Item 10 of Part III of this Form 10-K.
Disclosure Committee for Financial Reporting
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In 2003, Peoples established the Disclosure Committee for Financial Reporting
(the "Disclosure Committee") to formalize Peoples' process of establishing and
monitoring Peoples' disclosure controls and procedures and communicating the
results of such controls and procedures. The Disclosure Committee consists of
key members of executive management as well as senior professional support staff
from the Legal Department, Risk Management group and Controller. The Disclosure
Committee complements Peoples' longstanding committee structure and process,
which has consistently provided an invaluable tool for communication of
disclosure information.
The Disclosure Committee has the responsibility to:
o ensure that Peoples' Chief Executive Officer and Chief Financial
Officer can evaluate the effectiveness of Peoples' disclosure controls
and procedures, for the purpose of improving these controls and
procedures as necessary and disclosing the results of the evaluation
in the reports Peoples files with the SEC.
o ensure management has timely access to all information which is
necessary or desirable to disclose in Peoples' reports for the purpose
of discharging Peoples' responsibilities in providing accurate and
complete information to shareholders, including, but not limited to, a
fair presentation of Peoples' financial condition, results of
operations and cash flows.
o facilitate determinations regarding the appropriate disclosure of the
results of Peoples' disclosure controls and procedures in Peoples'
reports, including the determination of the materiality of risks or
events for the purposes of disclosure in reports.
o provide a process on which Peoples' Chief Executive Officer and Chief
Financial Officer can rely in providing the certifications required
under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 to be
filed, or furnished, with each report.
Each key element of operation is subject to oversight by a committee to ensure
proper administration, risk management and an up-streaming of critical
management information and disclosures to finance and control areas, executive
management and the Board of Directors. The Disclosure Committee agenda is
designed to capture information from all components of Peoples' business. It is
believed that the addition of these processes has brought with it a broader and
more in-depth analysis to Peoples' already effective and detailed disclosure
process, as well as enhanced Peoples' overall disclosure control environment.
Governance and Nominating Committee
-----------------------------------
In 2003, the Board of Directors formally developed a Governance and Nominating
Committee consisting of at least three independent members of the Board. The
purpose of the Governance and Nominating Committee is to identify qualified
candidates for election, nomination or appointment to Peoples' Board of
Directors and recommend to the Board a slate of director nominees for each
annual meeting of the shareholders of Peoples' or as vacancies occur. In
addition, the Governance and Nominating Committee oversees matters of corporate
governance, including the evaluation of Board performance and processes, and
makes recommendations to the Board and the Chairman of the Board regarding
assignment and rotation of members and chairs of committees of the Board. The
goal of the Governance and Nominating Committee is to assure that the
composition, practices and operation of the Board contribute to value creation
and to the effective representation of Peoples' shareholders.
Competition
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The financial services industry is highly competitive, especially in Peoples'
primary markets. Continued deregulation and other dynamic changes in the
financial services industry subject Peoples to intense competition by providing
customers the opportunity to select from a growing variety of traditional and
nontraditional alternatives. Competition in Peoples Bank's lending activities
comes principally from other commercial banks, savings associations, insurance
companies, governmental agencies, credit unions, brokerage firms and pension
funds. The primary factors in competing for loans are interest rates charged and
overall lending services. Competition for deposits comes from other commercial
banks, savings associations, money market and mutual funds, credit unions,
insurance companies and brokerage firms. The primary factors in competing for
deposits are interest rates paid on deposits, account liquidity, convenience of
office location, quality of service provided and overall financial condition.
Peoples Bank also faces competition for wealth management and insurance products
from other commercial banks, brokerage firms and insurance agencies. Peoples
believes that its size provides flexibility, which enables Peoples Bank to offer
an array of banking products and services. Peoples' financial condition also
contributes to a favorable competitive position in the markets Peoples serves.
Peoples primarily focuses on smaller metropolitan markets in which to provide a
full range of products and services. Management believes Peoples has developed a
niche and a certain level of expertise in serving these communities, although
Peoples has recently expanded in the more metropolitan area of central Ohio with
loan production offices. Peoples historically has operated under a "needs-based"
selling approach that management believes has proven successful in serving the
financial needs of many customers. Management anticipates Peoples will continue
to increase its investment in sales training and education in future periods to
assist in the development of Peoples' associates and their identification of
customer service opportunities.
It is not Peoples' strategy to compete solely on the basis of price. Management
believes a focus on customer relationships, speed and quality of the delivery of
service and incentives to promote customers' continued use of multiple financial
products and services will lead to enhanced revenue opportunities. Management
believes the integration of traditional financial products with non-traditional
financial products, such as insurance and investment products, will lead to
enhanced revenues through complementary product offerings.
Supervision and Regulation
--------------------------
The following is a summary of certain statutes and regulations affecting Peoples
and its subsidiaries and is qualified in its entirety by reference to such
statutes and regulations:
General
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SECURITIES LAWS. Peoples is under the jurisdiction of the SEC and certain state
securities commissions in regard to the offering and sale of its securities.
Peoples is subject to the disclosure and regulatory requirements of the
Securities Act of 1933, as amended, and the Exchange Act, as administered by the
SEC. Peoples' common shares are traded on The NASDAQ National Market under the
trading symbol "PEBO" and Peoples is subject to the NASDAQ rules for listed
companies.
BANK HOLDING COMPANY ACT. Peoples is subject to examination and supervision by
the Board of Governors of the Federal Reserve System as provided under the Bank
Holding Company Act of 1956, as amended, (the "BHC Act"). Peoples is required to
file reports with the Federal Reserve Board and such additional information as
the Federal Reserve Board may require. Further, the BHC Act requires the prior
approval of the Federal Reserve Board for Peoples to acquire or hold, directly
or indirectly, more than 5% of the voting shares of any bank that is not already
majority-owned by it, acquire all or substantially all of the assets of another
bank or bank holding company; or merge or consolidate with any other bank
holding company.
FINANCIAL HOLDING COMPANY. The Gramm-Leach-Bliley Act (also known as the
Financial Services Modernization Act of 1999) established a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers through the creation of
a "financial holding company" entity. Bank holding companies that elect to
become financial holding companies have the ability to expand their activities
from those historically permissible for bank holding companies and engage in
activities that are financial in nature or complementary to financial
activities, including securities underwriting and market making; insurance
underwriting and agency, sponsoring mutual funds and investment companies, and
merchant banking. Financial holding companies are also permitted to acquire,
without regulatory approval, a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental to
activities that are deemed financial in nature by the Federal Reserve Board.
In order to become a financial holding company, a bank holding company must file
a declaration with the Federal Reserve Bank indicating its desire to become a
financial holding company. In addition, all subsidiary banks of the bank holding
company must be well-capitalized, well managed and have at least a satisfactory
rating under the Community Reinvestment Act. Failure to maintain the
"well-capitalized" standard or the other criteria for a financial holding
company may result in requirements to correct the deficiency or limit activities
to those allowed bank holding companies.
In 2002, Peoples elected, and received approval from the Federal Reserve Board,
to become a financial holding company.
BANKING SUBSIDIARY. Peoples Bank is a national banking association chartered
under the National Banking Act and is regulated by the Office of the Comptroller
of the Currency ("OCC"). Peoples Bank provides Federal Deposit Insurance
Corporation ("FDIC") insurance on its deposits, up to prescribed statutory
limits, and is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati. As
a national bank, Peoples Bank may engage, subject to limitations on investment
and capital requirements, in activities that are financial in nature, other than
insurance underwriting, insurance company portfolio management, real estate
development and real estate investment, through a financial subsidiary of
Peoples Bank, as long as Peoples Bank remains well-capitalized, well managed and
continues to have at least a satisfactory Community Reinvestment Act rating.
Peoples Bank is also subject to restrictions imposed by the Federal Reserve Act
on transactions with affiliates, including any loans or extensions of credit to
Peoples or its subsidiaries; investments in the stock or other securities
thereof, and the taking of such stock or securities as collateral for loans to
any borrower; the issuance of guarantees, acceptances or letters of credit on
behalf of Peoples or its subsidiaries; purchases or sales of securities or other
assets to Peoples or its subsidiaries; and the payment of money or furnishing of
services to Peoples and other subsidiaries.
Peoples Bank's authority to extend credit to executive officers, directors and
greater than 10% shareholders, as well as entities such persons control, is
subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated thereunder by the Federal Reserve Board. Among other things, these
loans must be made on terms substantially the same as those offered to
unaffiliated individuals or be made as part of a benefit or compensation program
and on terms widely available to employees, and must not involve a greater than
normal risk of repayment. In addition, the amount of loans Peoples Bank may make
to these persons is based, in part, on the bank's capital position, and specific
approval procedures must be followed in making loans which exceed specified
amounts.
Peoples Bank and its subsidiaries are subject to examination and supervision by
the OCC as well as other federal and state agencies.
Federal Reserve Board
---------------------
Peoples is subject to the reporting requirements of, and examination and
regulation by, the Federal Reserve Board. In addition, the Federal Reserve Board
has adopted risk-based capital guidelines for financial holding companies. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning assets and
off-balance sheet items to broad risk categories. Peoples' non-banking
subsidiaries also are subject to the regulation by the Federal Reserve Board.
Federal Deposit Insurance Corporation
-------------------------------------
The FDIC insures the deposits of Peoples Bank up to prescribed statutory limits,
subject to the applicable provisions of the Federal Deposit Insurance Act.
Insurance of deposits may be terminated by the FDIC upon a finding that the
insured institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition enacted or imposed by the bank's regulatory
agency.
Deposit Insurance Reform Act of 2005
------------------------------------
In February 2006, President Bush signed into law the Deposit Insurance Reform
Act of 2005 and its companion bill, the Deposit Insurance Reform Conforming
Amendments Act of 2005 (collectively, the "Deposit Insurance Reform Acts"),
which provide for the Bank Insurance Fund (BIF) and the Savings Association
Insurance Fund (SAIF) to be merged into a new Deposit Insurance Fund (DIF). The
Deposit Insurance Reform Acts provide for several additional changes to the
deposit insurance system, including the following: o Increasing the deposit
insurance limit for retirement accounts from $100,000 to $250,000;
o Adjusting the deposit insurance limits (currently $100,000 for most
accounts) every five years based on an inflation index, with the first
adjustment to be effective on January 1, 2011;
o Providing pass-through deposit insurance for the deposits of employee
benefit plans (but prohibiting undercapitalized depository
institutions from accepting employee benefit plan deposits);
o Allocating an aggregate of $4.7 billion of one-time credits to offset
the premiums of depository institutions based on their assessment
bases at the end of 1996;
o Establishing rules for awarding cash dividends to depository
institutions, based on their relative contributions to the DIF and its
predecessor funds, when the DIF reserve ratio reaches certain levels;
and
o Revising the rules and procedures for risk-based premium assessments.
The FDIC is required to adopt rules implementing the various provisions of the
Deposit Insurance Reform Acts. The BIF and the SAIF are required to be merged
into the DIF by July 1, 2006, while most of the other provisions are required to
be implemented by November 5, 2006. Peoples is not yet able to determine the
effect the Deposit Insurance Reform Acts will have on Peoples and Peoples Bank.
Federal Home Loan Bank
----------------------
The FHLBs provides credit to their members in the form of collateralized
advances. As a member of the FHLB of Cincinnati, Peoples Bank must maintain an
investment in the capital stock of that FHLB in an amount equal to the greater
of 1% of the aggregate outstanding principal amount of its respective
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB. At December 31,
2005, Peoples Bank held 177,647 shares of the FHLB of Cincinnati, which exceeded
the required investment of 158,434 shares.
Upon the origination or renewal of a loan or advance, each FHLB is required by
law to obtain and maintain a security interest in certain types of collateral,
primarily one or more of the following categories: fully-disbursed, whole first
mortgage loans on improved residential property not more than 90 days delinquent
or securities representing a whole interest in such loans; securities issued,
insured or guaranteed by the US Government or an agency thereof; deposits in any
FHLB or other real estate collateral acceptable to the applicable FHLB, if such
collateral has a readily ascertainable value and the FHLB can perfect its
security interest in the collateral.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLB. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time homebuyers.
All long-term advances by each FHLB must be made only to provide funds for
residential housing finance.
Capital Requirements
--------------------
Peoples and its banking subsidiary are subject to various regulatory capital
requirements administered by the banking regulatory agencies. The Federal
Reserve Board, the OCC and the FDIC have substantially similar risk-based
capital ratio and leverage ratio guidelines for banking organizations. The
guidelines are intended to ensure that banking organizations have adequate
capital given the risk levels of assets and off-balance sheet financial
instruments. For further discussion regarding Peoples and Peoples Bank's
risk-based capital requirements, see Note 13 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Form 10-K.
Limits on Dividends
-------------------
Peoples' ability to pay dividends depends largely on the amount of dividends
declared by Peoples Bank and Peoples' other subsidiaries. However, the Federal
Reserve Board expects Peoples to serve as a source of strength to Peoples Bank
and may require Peoples to retain capital for further investment in Peoples
Bank, rather than pay dividends to Peoples' shareholders. Since Peoples is a
financial holding company, Peoples Bank is required to maintain capital
sufficient to meet the "well-capitalized" standard set by the regulators and
will be able to pay dividends only so long as its capital continues to exceed
these levels. Peoples Bank is also limited in the total amount of dividends it
may pay in any year without prior approval from the Office of the Comptroller of
Currency. For further discussion regarding regulatory restrictions on dividends,
see Note 13 of the Notes to the Consolidated Financial Statements included in
Item 8 of this Form 10-K.
Even when the legal ability exists, Peoples or Peoples Bank may decide to limit
the payment of dividends in order to retain earnings for corporate use.
Additionally, Peoples has established two trust subsidiaries, which issued
preferred securities. If Peoples suspends interest payments relating to the
trust preferred securities issued by either of the two trust subsidiaries,
Peoples will be prohibited from paying dividends on its common shares. For
further discussion regarding Peoples' trust subsidiaries, see Note 9 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Federal and State Laws
----------------------
Peoples Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of Peoples Bank to open
a new branch or engage in a merger transaction. Community reinvestment
regulations evaluate how well and to what extent Peoples Bank lends and invests
in its designated service area, with particular emphasis on low-to-moderate
income communities and borrowers in such areas. Privacy Provisions of
Gramm-Leach-Bliley Act Under the Gramm-Leach-Bliley Act, federal banking
regulators were required to adopt rules that limit the ability of banks and
other financial institutions to disclose non-public information about consumers
to nonaffiliated third parties. These limitations require disclosure of privacy
policies to consumers and, in some circumstances, allow consumers to prevent
disclosure of certain personal information to a nonaffiliated third party.
Patriot Act
-----------
In response to terrorist events of September 11, 2001, the Uniting and
Strengthening of America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorist Act of 2001 (the "Patriot Act") was signed into law in
October 2001. The Patriot Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. Title III of the Patriot Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions. Among other requirements, Title III
and related regulations require regulated financial institutions to establish a
program specifying procedures for obtaining identifying information from
customers seeking to open new accounts and establish enhanced due diligence
policies, procedures and controls designed to detect and report suspicious
activity. Peoples Bank has established policies and procedures to comply with
the requirements of the Patriot Act.
Future Legislation
------------------
Various legislation affecting financial institutions and the financial services
industry is from time to time introduced in Congress. Such legislation may
change banking statutes and the operating environment of Peoples and its
subsidiaries in substantial and unpredictable ways, and could increase or
decrease the cost of doing business, limit or expand permissible activities or
affect the competitive balance among banks, savings associations, credit unions
and other financial institutions. Peoples cannot predict whether any of this
potential legislation will be enacted, and, if enacted, the effect it, or any
implementing regulations, would have on the financial condition or results of
operations of Peoples or any of its subsidiaries.
Monetary Policy and Economic Conditions
---------------------------------------
The business of financial institutions is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
agencies, including the Federal Reserve Board. The Federal Reserve Board
regulates money and credit conditions and interest rates in order to influence
general economic conditions primarily through open market operations in U.S.
government securities, changes in the discount rate on bank borrowings, and
changes in the reserve requirements against depository institutions' deposits.
These policies and regulations significantly affect the overall growth and
distribution of loans, investments and deposits, as well as interest rates
charged on loans and paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of financial institutions in the past and are expected
to continue to have significant effects in the future. In view of the changing
conditions in the economy, the money markets and the activities of monetary and
fiscal authorities, Peoples can make no definitive predictions as to future
changes in interest rates, credit availability or deposit levels.
Effect of Environmental Regulation
----------------------------------
Peoples' primary exposure to environmental risk is through Peoples Bank's
lending activities. When management believes environmental risk potentially
exists, Peoples mitigates its environmental risk exposures by requiring
environmental site assessments at the time of loan origination to confirm
collateral quality as to commercial real estate parcels posing higher than
normal potential for environmental impact, as determined by reference to present
and past uses of the subject property and adjacent sites. Environmental
assessments are typically required prior to any foreclosure activity involving
non-residential real estate collateral. Management reviews residential real
estate loans with inherent environmental risk on an individual basis and makes
decisions based on the dollar amount of the loan and the materiality of the
specific credit.
Peoples anticipates no material effect on capital expenditures, earnings or the
competitive position of itself or any subsidiary as a result of compliance with
federal, state or local environmental protection laws or regulations.
Statistical Financial Information Regarding Peoples
---------------------------------------------------
The following listing of statistical financial information provides comparative
data for Peoples over the past three and five years, as appropriate. These
tables should be read in conjunction with Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operation, of this Form 10-K and
the Consolidated Financial Statements of Peoples and its subsidiaries found at
pages 23 through 42 of this Form 10-K.
Loan Maturities at December 31, 2005:
------------------------------------
Due in
(Dollars in Thousands) Due in One Year Due
One Year Through After
Loan Type Or Less Five Years Five Years Total
-------------- -------------- -------------- --------------
Commercial loans:
Fixed $ 25,987 $ 93,724 $ 52,712 $ 172,423
Variable 109,535 64,817 294,479 468,831
----------------------------------------------------------------------------------------------------------------------
Total commercial loans 135,522 158,541 347,191 641,254
----------------------------------------------------------------------------------------------------------------------
Construction loans:
Fixed 65 2,350 1,846 4,261
Variable 7,519 5,698 33,267 46,484
----------------------------------------------------------------------------------------------------------------------
Total real estate loans 7,584 8,048 35,113 50,745
----------------------------------------------------------------------------------------------------------------------
Mortgage real estate loans:
Fixed 239 6,601 73,147 79,987
Variable 1,310 9,550 225,234 236,094
----------------------------------------------------------------------------------------------------------------------
Total real estate loans 1,549 16,151 298,381 316,081
----------------------------------------------------------------------------------------------------------------------
Consumer loans:
Fixed 4,616 46,086 12,272 62,974
Variable 344 146 332 822
----------------------------------------------------------------------------------------------------------------------
Total consumer loans 4,960 46,232 12,604 63,796
----------------------------------------------------------------------------------------------------------------------
Total loans $ 149,615 $ 228,972 $ 693,289 $ 1,071,876
======================================================================================================================
Maturities of Certificates of Deposit $100,000 or More at December 31:
---------------------------------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001
----------- ---------- ---------- ----------- -----------
3 months or less $ 25,884 $ 17,772 $ 10,316 $ 11,559 $ 15,478
Over 3 to 6 months 25,628 17,923 18,964 23,793 25,279
Over 6 to 12 months 34,207 14,163 40,701 9,277 7,515
Over 12 months 82,174 76,267 49,765 50,181 28,270
----------------------------- ----------- ---------- ---------- ----------- -----------
Total $ 167,893 $ 126,125 $ 119,746 $ 94,810 $ 76,542
============================= =========== ========== ========== =========== ===========
Loan Portfolio Analysis:
-----------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Year-end loan balances:
Commercial, financial and agricultural $ 641,254 $ 576,743 $ 512,069 $ 392,528 $ 343,800
Real estate, mortgage 316,081 349,965 301,726 330,840 295,944
Real estate, construction 50,745 35,423 21,056 16,231 14,530
Consumer 63,796 60,927 79,926 103,635 111,912
Credit card - - 221 6,549 6,670
----------------------------------------------------------------------------------------------------------------------------
Total $ 1,071,876 $ 1,023,058 $ 914,998 $ 849,783 $ 772,856
----------------------------------------------------------------------------------------------------------------------------
Percent of loans to total loans at December 31:
Commercial, financial and agricultural 59.8% 56.3% 56.0% 46.1% 44.5%
Real estate, mortgage 29.5 34.2 33.0 39.0 38.3
Real estate, construction 4.7 3.5 2.3 1.9 1.9
Consumer 6.0 6.0 8.7 12.2 14.5
Credit card - - - 0.8 0.8
----------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
----------------------------------------------------------------------------------------------------------------------------
Average total loans 1,040,029 942,761 894,419 824,731 753,777
Average allowance for loan losses (14,930) (14,974) (14,093) (12,779) (12,164)
----------------------------------------------------------------------------------------------------------------------------
Average loans, net of allowance $ 1,025,099 $ 927,787 $ 880,326 $ 811,952 $ 741,613
----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Allowance for loan losses, January 1 $ 14,760 $ 14,575 $ 13,086 $ 12,357 $ 10,930
Allowance for loan losses acquired - - 573 304 967
Loans charged off:
Commercial, financial and agricultural 1,745 961 1,036 1,935 1,048
Real estate 827 677 449 268 154
Consumer 656 886 1,113 1,054 1,188
Overdrafts 965 1,130 967 880 -
Credit card - 133 221 191 248
----------------------------------------------------------------------------------------------------------------------------
Total 4,193 3,787 3,786 4,328 2,638
----------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 1,155 487 352 41 124
Real estate 223 186 66 58 5
Consumer 394 431 399 387 286
Overdrafts 327 308 263 175 -
Credit card 26 14 21 25 24
----------------------------------------------------------------------------------------------------------------------------
Total 2,125 1,426 1,101 686 439
----------------------------------------------------------------------------------------------------------------------------
Net charge-offs:
Commercial, financial and agricultural 590 474 684 1,894 924
Real estate 604 491 383 210 149
Consumer 262 455 714 667 902
Overdrafts 638 822 704 705 -
Credit card (26) 119 200 166 224
----------------------------------------------------------------------------------------------------------------------------
Total 2,068 2,361 2,685 3,642 2,199
----------------------------------------------------------------------------------------------------------------------------
Provision for loan losses, December 31 2,028 2,546 3,601 4,067 2,659
----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 14,720 $ 14,760 $ 14,575 $ 13,086 $ 12,357
----------------------------------------------------------------------------------------------------------------------------
Allocation of allowance for loan losses at December 31:
Commercial, financial and agricultural $ 11,883 $ 11,751 $ 11,232 $ 8,846 $ 7,950
Real estate 1,400 1,175 1,234 1,617 1,602
Consumer 1,149 1,394 1,594 2,075 2,447
Overdrafts 288 327 283 206 -
Credit card - 113 232 342 358
----------------------------------------------------------------------------------------------------------------------------
Total $ 14,720 $ 14,760 $ 14,575 $ 13,086 $ 12,357
----------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans:
Commercial, financial and agricultural 0.06% 0.05% 0.08% 0.23% 0.12%
Real estate 0.06 0.05 0.04 0.03 0.02
Consumer 0.03 0.05 0.08 0.08 0.12
Overdrafts 0.06 0.09 0.08 0.09 -
Credit card - 0.01 0.02 0.02 0.03
----------------------------------------------------------------------------------------------------------------------------
Total 0.21% 0.25% 0.30% 0.45% 0.29%
----------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Loans 90+ days past due $ 251 $ 285 $ 188 $ 407 $ 686
Renegotiated loans - 1,128 - 2,439 425
Nonaccrual loans 6,284 5,130 6,556 4,617 4,380
----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 6,535 6,543 6,744 7,463 5,491
Other real estate owned 308 1,163 392 148 181
----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 6,843 $ 7,706 $ 7,136 $ 7,611 $ 5,672
------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percent of total loans 0.61% 0.64% 0.73% 0.88% 0.71%
------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets as a percent of total assets 0.37% 0.43% 0.41% 0.55% 0.48%
------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percent of total loans 1.37% 1.44% 1.59% 1.54% 1.60%
------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percent of nonperforming 225.2% 225.6% 216.1% 175.3% 225.0%
loans
------------------------------------------------------------------------------------------------------------------------------
Interest income on nonaccrual and renegotiated loans that would have been
recorded under the original terms of the loans for 2005, 2004 and 2003 was
$393,000 ($97,000 was actually recorded), $338,000 ($68,000 was actually
recorded) and $387,000 ($59,000 was actually recorded), respectively.
Peoples discontinues the accrual of interest on loans when management believes
collection of all or a portion of contractual interest has become doubtful,
which generally occurs when a loan is 90 days past due. A nonaccrual loan is
restored to accrual status when it is brought current, has performed in
accordance with contractual terms for a reasonable period of time, and the
collectibility of the total contractual principal and interest is no longer in
doubt. Interest on a nonaccrual loan is recorded on a cash basis and if
principal recovery is reasonably assured.
Average Balances and Analysis of Net Interest Income:
----------------------------------------------------
(Dollars in Thousands) 2005 2004 2003
------------------------------------------------------------------- ---------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------------------------------
Securities (1):
Taxable $ 533,983 $ 23,676 4.43% $ 576,502 $ 24,237 4.20% $ 609,453 $ 26,429 4.34%
Nontaxable (2) 66,772 4,367 6.54% 63,589 4,274 6.72% 66,232 4,433 6.69%
-------------------------------- ------------ ------------------- ------------ ------------------
Total 600,755 28,043 4.67% 640,091 28,511 4.45% 675,685 30,862 4.57%
Loans (3) (4):
Commercial 641,651 42,489 6.62% 559,762 33,388 5.96% 471,145 29,786 6.32%
Real estate (5) 337,892 21,525 6.37% 313,234 20,303 6.48% 324,778 22,970 7.07%
Consumer 60,486 5,294 8.75% 69,765 6,323 9.06% 98,496 9,514 9.66%
Valuation reserve (14,930) (14,974) (14,093)
-------------------------------- ------------ ------------------- ------------ ------------------
Total 1,025,099 69,308 6.76% 927,787 60,014 6.47% 880,326 62,270 7.07%
Short-term Investments:
Interest-bearing
deposits
in other banks 2,260 57 2.56% 2,610 21 0.80% 2,917 21 0.72%
Federal funds sold 484 15 3.27% 9,204 114 1.24% 15,453 164 1.06%
-------------------------------- ------------ ------------------- ------------ ------------------
Total 2,744 72 2.68% 11,814 135 1.14% 18,370 185 1.01%
-------------------------------- ------------ ------------------- ------------ ------------------
Total 1,628,598 97,423 5.98% 1,579,692 88,660 5.61% 1,574,381 93,317 5.93%
earning assets
Other assets 200,087 180,843 135,661
------------- ------------ ------------
Total assets $ 1,828,685 $ 1,760,535 $ 1,710,042
============= ============ ============
Deposits:
Savings $ 144,700 $ 1,039 0.72% $ 171,705 $ 1,140 0.66% $ 172,240 $ 1,733 1.01%
Interest-bearing
demand 297,652 5,426 1.82% 262,206 2,359 0.90% 272,800 2,667 0.98%
Time 494,590 16,085 3.25% 454,793 13,498 2.97% 453,488 14,171 3.12%
-------------------------------- ------------ ------------------- ------------ ------------------
Total 936,942 22,550 2.41% 888,704 16,997 1.91% 898,528 18,571 2.07%
-------------------------------- ------------ ------------------- ------------ ------------------
Borrowed Funds:
Short-term 128,313 4,224 3.29% 87,051 1,130 1.30% 54,219 793 1.46%
Long-term 410,544 16,695 4.07% 454,898 17,033 3.74% 457,858 18,686 4.08%
-------------------------------- ------------ ------------------- ------------ ------------------
Total 538,857 20,919 3.85% 541,949 18,163 3.32% 512,077 19,479 3.78%
-------------------------------- ------------ ------------------- ------------ ------------------
Total interest-bearing
liabilities 1,475,799 43,469 2.94% 1,430,653 35,160 2.45% 1,410,605 38,050 2.69%
-------------------------------- ------------ ------------------- ------------ ------------------
Non-interest-bearing
demand deposits 158,693 144,564 124,574
Other liabilities 16,253 12,919 8,223
------------- ------------ ------------
Total liabilities 1,650,745 1,588,136 1,543,402
Stockholders' equity 177,940 172,399 166,640
============= ============= ============
Total liabilities
and stockholders'
equity $ 1,828,685 $ 1,760,535 $ 1,710,042
============= ============= =============
Interest rate spread $ 53,954 3.04% $ 53,500 3.16% $ 55,267 3.87%
=========== ------- =========== ------- =========== -------
Interest income/earning assets 5.98% 5.93% 7.16%
Interest expense/earning assets 2.66% 2.41% 2.99%
-------- -------- --------
Net yield on earning assets (net interest
margin) 3.32% 3.39% 3.52%
-------- -------- --------
(1) Average balances of investment securities are based on carrying value.
(2) Computed on a fully-tax equivalent basis using a tax rate of 35%. Interest
income was increased by $1,648; $1,630 and $1,662 for 2005; 2004 and 2003,
respectively, for the impact of the tax equivalent adjustment.
(3) Nonaccrual and impaired loans are included in the average balances listed.
Related interest income on nonaccrual loans prior to the loan being put on
nonaccrual is included in loan interest income.
(4) Loan fees included in interest income for 2005; 2004 and 2003 were $475;
$482 and $698, respectively.
(5) Loans held for sale are included in the average balances listed. Related
interest income on loans originated for sale prior to the loan being sold
is included in real estate loan interest income.
Rate Volume Analysis:
--------------------
(Dollars in Thousands)
Change from 2004 to 2005 (1) Change from 2003 to 2004 (1)
----------------------------------------- -----------------------------------------
Increase (decrease) in: Volume Rate Total Volume Rate Total
---------------------------------- ----------- ---------- ---------- ------------- ---------- ----------
Investment income: (2)
Taxable $ (1,844) $ 1,283 $ (561) $ (1,401) $ (791) $ (2,192)
Nontaxable 210 (117) 93 (178) 19 (159)
---------------------------------- ----------- ---------- ---------- ------------- ---------- ----------
Total (1,634) 1,166 (468) (1,579) (772) (2,351)
---------------------------------- ----------- ---------- ---------- ------------- ---------- ----------
Loan Income:
Commercial 5,191 3,910 9,101 5,359 (1,757) 3,602
Real estate 1,576 (354) 1,222 (796) (1,871) (2,667)
Consumer (1,010) (19) (1,029) (2,634) (557) (3,191)
---------------------------------- ----------- ---------- ---------- ------------- ---------- ----------
Total 5,757 3,537 9,294 1,929 (4,185) (2,256)
---------------------------------- ----------- ---------- ---------- ------------- ---------- ----------
Short-term investments (154) 91 (63) (72) 22 (50)
---------------------------------- ----------- ---------- ---------- ------------- ---------- ----------
Total interest income 3,969 4,794 8,763 278 (4,935) (4,657)
===========================================================================================================================
Interest expense:
Savings deposits (189) 88 (101) (5) (588) (593)
Interest-bearing demand
deposits 357 2,710 3,067 (101) (207) (308)
Time deposits 1,235 1,352 2,587 41 (714) (673)
Short-term borrowings 730 2,364 3,094 435 (98) 337
Long-term borrowings (1,737) 1,399 (338) (120) (1,533) (1,653)
---------------------------------- ----------- ---------- ---------- ------------- ---------- ----------
Total interest expense 396 7,913 8,309 250 (3,140) (2,890)
===========================================================================================================================
Net interest income $ 3,573 $ (3,119) $ 454 $ 28 $ (1,795) $ (1,767)
===========================================================================================================================
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the dollar
amounts of the change in each.
(2) Presented on a fully-tax equivalent basis.
ITEM 1A. RISK FACTORS.
----------------------
The following are certain risks that management believes are specific to
Peoples' business. This should not be viewed as an all inclusive list or in any
particular order.
o CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT PEOPLES' PROFITABILITY.
Peoples' earnings are dependent to a significant degree on net interest
income, which is the amount by which interest income exceeds interest
expense. Interest rates are highly sensitive to many factors that are
beyond Peoples' control, including general economic conditions and policies
of various governmental and regulatory agencies and, in particular, the
Board of Governors of the Federal Reserve System. Changes in monetary
policy, including changes in interest rates, could influence not only the
interest Peoples receives on loans and securities and the amount of
interest it pays on deposits and borrowings, but such changes could also
affect (i) Peoples' ability to originate loans and obtain deposits, (ii)
the fair value of Peoples' financial assets and liabilities, and (iii) the
average duration of Peoples' mortgage-backed securities portfolio. If the
interest rates paid on deposits and other borrowings increase at a faster
rate than the interest rates received on loans and other investments,
Peoples' net interest income, and therefore earnings, could be adversely
affected. Earnings could also be adversely affected if the interest rates
received on loans and other investments fall more quickly than the interest
rates paid on deposits and other borrowings.
Management uses various measures to monitor interest rate risk and believes
it has implemented effective asset and liability management strategies to
reduce the potential effects of changes in interest rates on Peoples'
results of operations. Management also periodically adjusts the mix of
assets and liabilities to manage interest rate risk. However, any
substantial, unexpected, prolonged change in market interest rates could
have a material adverse effect on Peoples' financial condition and results
of operations. See the sections captioned "Interest Income and Expense" and
"Interest Rate Risk and Liquidity" in Item 7 of this Form 10-K for further
discussion related to Peoples' interest rate risk.
o PEOPLES' EXPOSURE TO CREDIT RISK COULD ADVERSELY AFFECT PEOPLES' EARNINGS
AND FINANCIAL CONDITION. There are certain risks inherent in making loans.
These risks include interest rate changes over the time period in which
loans may be repaid, risks resulting from changes in the economy, risks
inherent in dealing with borrowers and, in the case of loans secured by
collateral, risks resulting from uncertainties about the future value of
the collateral.
Commercial and commercial real estate loans comprise a significant portion
of Peoples' loan portfolio. Commercial loans generally are viewed as having
a higher credit risk than residential real estate or consumer loans because
they usually involve larger loan balances to a single borrower and are more
susceptible to a risk of default during an economic downturn. Since
Peoples' loan portfolio contains a significant number of commercial and
commercial real estate loans, the deterioration of one or a few of these
loans could cause a significant increase in non-performing loans, and
ultimately could have a material adverse effect on Peoples' earnings and
financial condition.
o PEOPLES' ALLOWANCE FOR LOAN LOSSES MAY BE INSUFFICIENT. Peoples maintains
an allowance for loan losses to provide for probable loan losses based on
management's quarterly analysis of the loan portfolio. There can be no
assurance on the timing or amount of actual loan losses or that charge-offs
in future periods will not exceed the allowance for loan losses. In
addition, federal and state regulators periodically review Peoples'
allowance for loan losses as part of their examination process and may
require management to increase the allowance or recognize further loan
charge-offs based on judgments different than those of management. Any
increase in the provision for loan losses would decrease Peoples' pretax
and net income.
o ADVERSE ECONOMIC CONDITIONS MAY ADVERSELY IMPACT PEOPLES' RESULTS OF
OPERATIONS. Peoples' success depends primarily on the general economic
conditions in the specific local markets in which it operates. The local
economies of Peoples' market area historically have been less robust than
the economy of the nation as a whole and are not subject to the same
fluctuations as the national economy. Adverse economic conditions in
Peoples' market area, including the loss of certain significant employers,
could reduce Peoples' growth rate, affect its borrowers' ability to repay
their loans and generally affect Peoples' financial condition and results
of operations. Furthermore, a downturn in real estate values in Peoples'
market area could cause many of its loans to become inadequately
collateralized.
o THE FINANCIAL SERVICES INDUSTRY IS VERY COMPETITIVE. Peoples experiences
significant competition in originating loans, principally from other
commercial banks, savings associations and credit unions. Several of
Peoples' competitors have greater resources, larger branch systems and a
wider array of banking services. This competition could reduce Peoples' net
income by decreasing the number and size of loans that it originates and
the interest rates it may charge on these loans. For a more complete
discussion of Peoples' competitive environment, see "Business--Competition"
in Item 1 of this Form 10-K. If Peoples is unable to compete effectively,
Peoples will lose market share and income from deposits, loans and other
products may be reduced.
o PEOPLES' ABILITY TO PAY DIVIDENDS IS LIMITED. Peoples is a separate and
distinct legal entity from its subsidiaries. Peoples receives nearly all of
its revenue from dividends from Peoples Bank, which are limited by federal
banking laws and regulations. These dividends also serve as the primary
source of funds to pay dividends on Peoples' common shares and interest and
principal on Peoples' debt. The inability of Peoples Bank to pay sufficient
dividends to Peoples could have a material, adverse effect on Peoples'
business. Further discussion of Peoples' ability to pay dividends can be
found under the caption "Supervision and Regulation-Limits on Dividends" in
Item 1 of this Form 10-K and Note 13 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Form 10-K.
o GOVERNMENT REGULATION SIGNIFICANTLY AFFECTS OUR BUSINESS. The banking
industry is heavily regulated under both federal and state law. Peoples is
subject to regulation and supervision by the Federal Reserve Board, and
Peoples Bank is subject to regulation and supervision by the Office of the
Comptroller of the Currency. These regulations are primarily intended to
protect depositors and the federal deposit insurance funds, not Peoples'
shareholders. Peoples' non-bank subsidiaries are also subject to the
supervision of the Federal Reserve Board, in addition to other regulatory
and self-regulatory agencies including the Securities and Exchange
Commission and state securities and insurance regulators. Regulations
affecting banks and financial services businesses are undergoing continuous
change, and management cannot predict the effect of those changes.
Regulations and laws may be modified at any time, and new legislation may
be enacted that affects Peoples and its subsidiaries. Any modifications or
new laws could adversely affect Peoples' business. Further information
about government regulation of Peoples' business can be found under the
caption "Supervision and Regulation" in Item 1 of this Form 10-K.
o PEOPLES AND ITS SUBSIDIARIES ARE SUBJECT TO EXAMINATIONS AND CHALLENGES BY
TAX AUTHORITIES. In the normal course of business, Peoples and its
subsidiaries are routinely subject to examinations and challenges from
federal and state tax authorities regarding positions taken in their tax
returns. State tax authorities have become increasingly aggressive in
challenging tax positions taken by financial institutions, especially those
positions relating to tax compliance and calculation of taxes subject to
apportionment. Any challenge or examination by a tax authority may result
in adjustments to the timing or amount of taxable income or deductions or
the allocation of income among tax jurisdictions. While management believes
it has taken appropriate positions on the tax returns filed, any
examination or challenge made that is not resolved in our favor could have
a material adverse effect on Peoples' financial condition and results of
operation.
Peoples Bank is currently undergoing an examination by the Ohio Department
of Taxation of its 2002 Ohio Corporation Franchise Tax Reports. Management
has agreed to a one-year extension of the statue of limitations for the
2002 year. However, the administrative process is not yet complete and
Peoples Bank has not received a notice of any proposed adjustment. Due to
the fact the Ohio Department of Taxation is in the early stages of its
administrative process, management cannot accurately make an estimate of
potential exposure, if any, although no assurance can be given that the
ultimate outcome of this examination will not have a material impact on
Peoples' financial condition and results of operation.
o ANTI-TAKEOVER PROVISIONS MAY DELAY OR PREVENT AN ACQUISITION OR CHANGE IN
CONTROL BY A THIRD PARTY. Provisions in the Ohio General Corporation Law
and Peoples' amended articles of incorporation and code of regulations,
including a staggered board and a supermajority vote requirement for
significant corporate changes, could discourage potential takeover attempts
and make attempts by shareholders to remove Peoples' board of directors and
management more difficult. These provisions may also have the effect of
delaying or preventing a transaction or change in control that might be in
the best interests of Peoples' shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
-----------------------------------
None.
ITEM 2. PROPERTIES.
--------------------
Peoples' sole banking subsidiary, Peoples Bank, generally owns its offices,
related facilities and unimproved real property. In Ohio, Peoples Bank operates
offices in Marietta (4 offices), Belpre (2 offices), Lowell, Lower Salem, Reno,
Nelsonville (2 offices), Athens (3 offices), The Plains, Middleport, Rutland,
Pomeroy (2 offices), Gallipolis, Cambridge (2 offices), Byesville, Quaker City,
Flushing, Caldwell, Chesterhill, McConnelsville, Baltimore, Lancaster, Delaware
and Westerville. In West Virginia, Peoples Bank operates offices in Huntington,
Parkersburg (3 offices), Vienna, Point Pleasant (2 offices), New Martinsville (2
offices) and Steelton. In Kentucky, Peoples Bank's office locations include
Greenup, Summit, South Shore, Grayson, Ashland and Russell. Of these 48 offices,
12 are leased and the rest are owned by Peoples Bank.
Peoples Insurance Agency rents office space in various Peoples Bank's offices.
In addition, Peoples Insurance Agency leases office buildings in Marietta, Ohio;
Huntington, West Virginia and Ashland, Kentucky.
Rent expense on the leased properties totaled $833,000 in 2005. The following
are the only properties that have a lease term expiring on or before June 2007:
Location Address Lease Expiration Date (a)
-------------------------------- -------------------------------- -------------------------
Delaware Loan Production Office 351 West Central Avenue March 2006
Delaware, Ohio
Peoples Insurance Agency Huntington Office 1439 6th Avenue March 2006
Huntington, West Virginia
Athens Mall Office 801 East State Street June 2007
Athens, Ohio
------------------------------------------ -------------------------------- -------------------------
(a) Information represents the ending date of the current lease period. Peoples
may have the option to renew the lease beyond this date under the terms of the
lease agreement and intends to renew all expiring leases unless otherwise
disclosed in this Item 2.
Additional information concerning the property and equipment owned or leased by
Peoples and its subsidiaries is incorporated herein by reference from Note 5 of
the Notes to the Consolidated Financial Statements included in Item 8 of this
Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
--------------------------
In the ordinary course of business or operations, Peoples and its subsidiaries
may be named as plaintiff, defendant, party or to which any of it subsidiaries'
property is subject to various pending and threatened legal proceedings. In view
of the inherent difficulty of predicting the outcome of such matters, Peoples
cannot state what the eventual outcome of any such matters will be; however,
based on current knowledge and after consultation with legal counsel, management
believes that these proceedings will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of Peoples.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
------------------------------------
Pursuant to General Instruction G of Form 10-K and Instruction 3 to Item 401(b)
of Regulation S-K, the following information regarding Peoples' executive
officers is included as an unnumbered item in Part I of this Form 10-K in lieu
of being included in the Peoples' definitive Proxy Statement relating to
Peoples' Annual Meeting of Shareholders to be held April 13, 2006 ("Peoples'
2006 Definitive Proxy Statement").
The executive officers of Peoples as of February 13, 2006, are as follows:
Name Age Position
----------------------- ---- --------------------------------------
Mark F. Bradley 36 President and Chief Executive Officer
John (Jack) W. Conlon 60 Chief Financial Officer and Treasurer
Larry E. Holdren 58 Executive Vice President
Carol A. Schneeberger 49 Executive Vice President/Operations
David T. Wesel 44 Executive Vice President
Joseph S. Yazombek 52 Executive Vice President/Chief Lending Officer
Mr. Bradley has been Chief Executive Officer of Peoples since May 2005 and
President of Peoples since June 2004. Mr. Bradley also has been Chief Executive
Officer of Peoples Bank since May 2005, and President since July 2002. Prior
thereto, Mr. Bradley served as of Chief Operating Officer of Peoples from July
2003 to May 2005, and Executive Vice President and Chief Integration Officer
from April 2002 to July 2003. He also served as Chief Operating Officer of
Peoples Bank from July 2002 to May 2005. Between 1997 and 2001, Mr. Bradley
served as Controller of Peoples and Peoples Bank. Mr. Bradley joined Peoples in
1991. In January 2006, Mr. Bradley was appointed President of Peoples Insurance
Agency, Inc. Mr. Bradley has been a director of Peoples since 2003 and Peoples
Bank since 2002.
Mr. Conlon has been Chief Financial Officer of Peoples since April 1991. He
became Treasurer of Peoples in April 1999. He has also served as Peoples Bank's
Chief Financial Officer since 1991 and Treasurer since 1985. Between 1982 and
1985, Mr. Conlon served as Controller of Peoples Bank. In July 2005, Mr. Conlon
notified Peoples that he would retire and resign his positions as Chief
Financial Officer and Treasurer of both Peoples and Peoples Bank effective July
31, 2006.
Mr. Holdren became Executive Vice President of Peoples in February 1999. He has
also been President of the Retail and Banking Division for Peoples Bank since
January 1998. Between 1987 and 1998, Mr. Holdren served as Executive Vice
President/Director of Human Resources for Peoples Bank. Mr. Holdren joined
Peoples Bank in 1982.
Ms. Schneeberger became Executive Vice President/Operations of Peoples in April
1999. Since February 2000, Ms. Schneeberger has also been Executive Vice
President/Operations of Peoples Bank. Prior thereto, she was Vice
President/Operations of Peoples from October 1988 to April 1999. Prior thereto,
she was Auditor of Peoples from August 1987 to October 1988 and Auditor of
Peoples Bank from January 1986 to October 1988. Ms. Schneeberger joined Peoples
Bank in 1977.
Mr. Wesel became Executive Vice President of Peoples in January 2006. Mr. Wesel
was also appointed as President of Peoples Bank's Peoples Financial Advisors
division in January 2006. Prior thereto, Mr. Wesel served as Sales Manager of
Peoples Financial Advisors since joining Peoples in February 2004. Prior to
joining Peoples, Mr. Wesel had over 20 years experience in executive management
and sales administration, including experience with a regional brokerage firm.
Mr. Wesel is the son of Joseph H. Wesel, Chairman of the Board and a Director of
Peoples and Director of Peoples Bank.
Mr. Yazombek was appointed Executive Vice President/Chief Lending Officer of
Peoples in January 2000. Mr. Yazombek has also held the position of Executive
Vice President and Chief Lending Officer of Peoples Bank since October 1998. He
was an Executive Vice President of Peoples Bank's Consumer and Mortgage Lending
areas from May 1996 to October 1998, where he also directly managed Peoples
Bank's collections efforts. Mr. Yazombek joined Peoples Bank in 1983 and served
as a real estate lender until May 1996.
Each executive officer of Peoples is appointed by the Board of Directors and
serves at the pleasure of the Board.
In August 2004, Peoples offered Change in Control Agreements to the executive
officers of Peoples and entered into agreements ("Agreement" or "Agreements")
with Robert E. Evans, Mark F. Bradley, David B. Baker, John W. Conlon, Larry E.
Holdren and Carol A. Schneeberger. Each Agreement provides that, if the
executive officer is terminated by Peoples or its successors for any reason
other than cause or by the executive officer for good reason, within six (6)
months prior to or within twenty-four (24) months after a defined change in
control, Peoples will pay a specified change in control benefit to the executive
officer. If the executive officer receives a change in control benefit as
previously described, he or she is subject to a non-compete agreement covering
the same period of time as the benefit is paid. The Agreement with Mr. Evans was
terminated effective May 31, 2005, concurrent with his retirement as Chief
Executive Officer.
Effective January 1, 2006, David B. Baker assumed a non-executive sales position
with Peoples and the Agreement with Mr. Baker was terminated. Mr. Baker
previously served as an Executive Vice President of Peoples since February 1999.
Also effective January 1, 2006, Peoples entered into an Agreement with David T.
Wesel and the terms of his Agreement are the same as those in the Agreements of
John W. Conlon, Larry E. Holdren and Carol A. Schneeberger.
Additional information required by Item 401(b) of Regulation S-K regarding the
Agreements are incorporated herein by reference to the section captioned
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS - Change in Control
Arrangements" on pages 29 through 31 of Peoples' 2006 Definitive Proxy Statement
and the forms of Change in Control Agreements incorporated by reference in this
Annual Report of Form 10-K as Exhibits 10(u) and 10(v).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
-----------------------------------------------------------------------------
Peoples' common shares are traded on The NASDAQ National Market under the symbol
PEBO. At December 31, 2005, Peoples had 1,261 shareholders of record. The table
presented below provides the high and low bids for Peoples' common shares and
the cash dividends per share declared for the indicated periods. Bid information
has been obtained directly from The NASDAQ National Market.
Dividends
High Bid Low Bid Declared
---------- ---------- -------------
2005
Fourth Quarter $ 30.10 $ 25.40 $ 0.20
Third Quarter 30.53 26.33 0.20
Second Quarter 28.86 24.99 0.20
First Quarter 27.68 25.42 0.19
----------------------------------------------------------------------------
2004
Fourth Quarter $ 32.44 $ 26.21 $ 0.18
Third Quarter 26.67 23.27 0.18
Second Quarter 28.10 27.52 0.18
First Quarter 32.05 26.92 0.18
----------------------------------------------------------------------------
Peoples plans to continue to pay quarterly cash dividends, subject to certain
regulatory restrictions described in Note 13 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Form 10-K, as well as the
"Limits on Dividends" section under Item 1 of this Form 10-K.
The following table details Peoples' repurchases and purchases by "affiliated
purchasers" as defined in Rule 10b-18(a)(3) of Peoples' common shares during the
three months ended December 31, 2005:
(c) Total Number of (d) Maximum Number
Common Shares of Common Shares
(a) Total Number of Purchased as Part of that May Yet Be
Common Shares (b) Average Price Publicly Announced Purchased Under the
Period Purchased Paid per Share Plans or Programs (1) Plans or Programs (1)(2)
------ --------- -------------- ---------------- ------------------------
October 1 - 31, 2005 593(3) $28.21(3) - 465,300
November 1 - 30, 2005 529(4) $29.28(4) - 465,300
December 1 - 31, 2005 570(3) $28.84(3) - -(5)
------------------------------------------------------------------------------------------------------------------
Total 1,692 $28.76 - -
------------------------------------------------------------------------------------------------------------------
(1) Information reflects solely the 2005 Stock Repurchase Program originally
announced on December 10, 2004, which authorized the repurchase of 525,000
common shares, with an aggregate purchase price of not more than $17.0
million. The 2005 Stock Repurchase Program expired on December 31, 2005.
(2) Information reflects maximum number of common shares that may be purchased
at the end of the period indicated.
(3) Information reflects solely common shares purchased in open market
transactions by Peoples Bank under the Rabbi Trust Agreement establishing a
rabbi trust holding assets to provide payment of the benefits under the
Peoples Bancorp Inc. Deferred Compensation Plan for Directors of Peoples
Bancorp Inc. and Subsidiaries (the "Rabbi Trust").
(4) Information reflects solely common shares acquired in connection with the
exercise of stock options under Peoples' stock option plans.
(5) The 2005 Stock Repurchase Program expired on December 31, 2005, and as
such, no additional common shares could be purchased under that Program at
the end of the period. However, Peoples is authorized to repurchase up to
425,000 of its common shares, with an aggregate purchase price of not more
than $11.5 million, in 2006 under the 2006 Stock Repurchase Program
announced January 17, 2006, which expires December 31, 2006.
ITEM 6. SELECTED FINANCIAL DATA.
--------------------------------
The information below has been derived from Peoples' Consolidated Financial
Statements.
(Dollars in Thousands, except Per Share Data) 2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
Operating Data For the year ended:
Total interest income $ 95,775 $ 87,030 $ 91,655 $ 82,968 $ 86,107
Total interest expense 43,469 35,160 38,050 35,316 45,560
Net interest income 52,306 51,870 53,605 47,652 40,547
Provision for loan losses 2,028 2,546 3,601 4,067 2,659
Net gain (loss) on securities transactions 539 (3,040) (1,905) 216 29
Other income exclusive of securities transactions 28,628 25,248 19,443 15,020 10,621
Goodwill and other intangible asset amortization 2,669 2,219 1,493 646 2,347
Other expense 48,673 44,979 44,410 32,975 28,479
Net income $ 20,499 $ 18,275 $ 16,254 $ 18,752 $ 12,335
---------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
At year end:
Total assets $ 1,855,277 $ 1,809,086 $ 1,736,104 $ 1,394,361 $ 1,193,966
Total intangible assets 69,280 71,118 48,705 30,738 17,010
Investment securities 589,313 602,364 641,464 412,100 330,364
Net loans 1,057,156 1,008,298 900,423 836,697 760,499
Total deposits 1,089,286 1,069,421 1,028,530 955,877 814,368
Short-term borrowings 173,696 51,895 108,768 39,083 56,052
Long-term borrowings 362,466 464,864 388,647 212,929 192,448
Junior subordinated notes 29,350 29,263 29,177 29,090 29,056
Stockholders' equity 183,077 175,418 170,880 147,183 93,854
Tangible assets (1) 1,785,997 1,737,968 1,687,399 1,363,623 1,176,956
Tangible equity (2) 113,797 $ 104,300 $ 122,175 $ 116,445 $ 76,844
---------------------------------------------------------------------------------------------------------------------------------
Significant Ratios
Return on average assets 1.12 % 1.04 % 0.95 % 1.46 % 1.06 %
Return on average stockholders' equity 11.52 10.60 9.75 17.69 13.60
Net interest margin 3.32 3.39 3.52 4.17 3.87
Efficiency ratio (3) 59.05 57.18 51.06 51.24 54.50
Average stockholders' equity to average assets 9.73 9.79 9.74 8.23 7.80
Average loans to average deposits 94.92 91.24 87.42 92.63 92.93
Allowance for loan losses to total loans 1.37 1.44 1.59 1.54 1.60
Risk-based capital ratio 12.90 12.30 15.43 16.79 14.21
Dividend payout ratio 40.01 % 41.66 % 42.06 % 24.91 % 33.08 %
---------------------------------------------------------------------------------------------------------------------------------
Per Share Data(4)
Earnings per share - Basic 1.96 $ 1.74 $ 1.56 $ 2.25 $ 1.49
Earnings per share - Diluted 1.94 1.71 1.52 2.19 1.47
Cash dividends paid 0.78 0.72 0.65 0.56 0.49
Book value at end of period 17.40 16.81 16.11 14.97 11.43
Tangible book value at end of period (5) 10.82 $ 10.00 $ 11.76 $ 11.85 $ 9.36
Weighted-average shares outstanding:
Basic 10,444,854 10,529,332 10,433,708 8,329,109 8,277,035
Diluted 10,581,019 10,710,114 10,660,083 8,557,591 8,403,773
Common shares outstanding at end of period: 10,518,980 10,435,102 10,603,792 9,829,965 8,213,115
---------------------------------------------------------------------------------------------------------------------------------
(1) Total assets less goodwill and other intangible assets.
(2) Total stockholders' equity less goodwill and other intangible assets.
(3) Non-interest expense (less intangible amortization) as a percentage of
fully-tax equivalent net interest income plus non-interest income.
(4) Adjusted for all stock dividends and splits.
(5) Tangible book value per share reflects capital calculated for banking
regulatory requirements and excludes the balance sheet impact of intangible
assets acquired through purchase accounting for acquisitions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
------------------------------------------------------------------------
Introduction
------------
The following discussion and analysis of the Consolidated Financial Statements
of Peoples Bancorp Inc. and Subsidiaries ("Peoples") is presented to provide
insight into management's assessment of the financial results. This discussion
and analysis should be read in conjunction with the audited Consolidated
Financial Statements and Notes thereto, as well as the ratios and statistics,
contained elsewhere in this Form 10-K.
References will be found in this Form 10-K to the following transactions that
have impacted or will impact Peoples' results of operations:
o As discussed in Note 15 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K, Peop completed the
acquisition of Putnam Agency, Inc. ("Putnam") on April 30, 2004 and
Barengo Insurance Agency, Inc. ("Bareng on May 28, 2004,
(collectively, the "Insurance Agency Acquisitions"). In addition,
Peoples Bank acquired two full-servic banking offices in the Ashland,
Kentucky area at the close of business on December 3, 2004 (the
"Ashland Banking Acquisition"). In conjunction with the Ashland
Banking Acquisition, Peoples Bank consolidated two of its existing
office the Ashland area market into other Peoples Bank offices and
closed one of the acquired offices. In 2003, Peoples acquire Kentucky
Bancshares Incorporated ("Kentucky Bancshares"), the holding company
of Kentucky Bank & Trust, and closed two of Peoples Bank's existing
offices, due to the proximity of the acquired offices.
o On December 29, 2005, the Compensation Committee of the Board of
Directors of Peoples Bancorp Inc. ("Peoples Bancorp") approved the
acceleration of the vesting schedule with regard to all unvested stock
options previously granted to employees of Peoples and its
subsidiaries, including executive officers of Peoples, and subsidiary
directors pursuant to Peoples' various stock option plans (the "Stock
Option Acceleration"). No unvested stock options held by directors of
Peoples Bancorp were accelerated. As a result, an aggregate of 161,514
options became exercisable as of that date. Peoples recorded a
one-time, non-cash compensation expense of $122,000 in 2005 due to the
Stock Option Acceleration.
o On December 10, 2004, Peoples Bancorp announced the authorization to
repurchase up to 525,000, or approximately 5%, of Peoples Bancorp's
outstanding common shares in 2005 from time to time in open market or
privately negotiated transactions (the "2005 Stock Repurchase
Program"). Peoples Bancorp repurchased a total of 59,700 common shares
(or 11% of the total authorized) under the 2005 Stock Repurchase
Program, at an average price of $26.78 per share. The repurchased
common shares are held as treasury shares and are to be used for
future exercises of options granted under Peoples Bancorp's stock
option plans, future issuances of common shares in connection with
Peoples Bancorp's deferred compensation plans and other general
corporate purposes. The 2005 Stock Repurchase Program expired on
December 31, 2005.
o In December 2004, Peoples sold approximately $85 million of fixed-rate
securities, consisting primarily of mortgage-backed securities
purchased in a historically low interest rate environment, and
reinvested the net proceeds in other investment securities, primarily
variable rate mortgage-backed securities (the "2004 Investment
Portfolio Repositioning"). The securities sold were selected because
management wanted to shorten the estimated life of the portfolio and
expected those securities selected to underperform in a rising rate
environment. While the 2004 Investment Portfolio Repositioning had a
minimal impact on short-term yields, the new securities have shorter
estimated lives and duration and better cash flow characteristics in a
rising rate environment than the securities sold.
o In December 2003, Peoples Bank sold its credit card portfolio to
InfiCorp Holdings, Inc. ("InfiCorp"). In addition to the sale, Peoples
Bank and InfiCorp entered into a joint marketing agreement to serve
the credit card needs of Peoples' customers and prospective customers.
o In December 2003, Peoples sold $55 million of mortgage-backed
investment securities due to the high rate of prepayments on those
securities and the corresponding downward pressure on yields from
accelerated amortization of bond premiums. Peoples reinvested the
proceeds from the sales into other mortgage-backed securities that
were anticipated to produce a higher yield with estimated lives
similar to those of the securities that were sold (collectively, the
"2003 Investment Portfolio Restructuring"). Approximately $27 million
of the reinvestment settled in late December 2003 and the remaining
reinvestment of approximately $26 million settled in late January
2004.
o On December 16, 2003, Peoples prepaid $63 million of long-term,
convertible rate borrowings from the Federal Home Loan Bank ("FHLB")
and reborrowed the funds using a short-term, repurchase agreement
advance (collectively, the "Long-Term Debt Restructuring"). Peoples
incurred prepayment penalties totaling $6.8 million as part of this
transaction. The prepaid borrowings had a weighted-average rate of
5.14% and weighted-average remaining maturity of 5.4 years. The new
short-term advance had a significantly lower initial interest rate,
yet had somewhat similar interest rate sensitivity characteristics in
a rising interest rate environment.
o On December 17, 2003, Peoples Bancorp announced the authorization to
repurchase up to 425,000, or approximately 4%, of Peoples Bancorp's
outstanding common shares in 2004 from time to time in open market or
privately negotiated transactions. On August 13, 2004, Peoples Bancorp
announced the authorization to repurchase an additional 200,000
shares, or approximately 2%, of Peoples Bancorp's outstanding common
shares in 2004 from time to time in open market or privately
negotiated transactions (collectively, the "2004 Stock Repurchase
Program"). Peoples Bancorp repurchased 511,348 common shares (or 82%
of the total authorized) under the 2004 Stock Repurchase Program, at
an average price of $26.53. Peoples Bancorp has reissued 309,221 of
the repurchased shares in connection with stock option exercises in
2004 and 2005 and the Insurance Agency Acquisitions. The remaining
repurchased shares, which are held as treasury shares, are anticipated
to be used for future exercises of stock options granted under
Peoples' stock option plans, issuances of common shares for Peoples
Bancorp's deferred compensation plans, and other general corporate
purposes. The 2004 Stock Repurchase Program expired on December 31,
2004.
The impact of these transactions, where significant, is discussed in the
applicable sections of this Management's Discussion and Analysis.
Critical Accounting Policies
----------------------------
The accounting and reporting policies of Peoples conform to accounting
principles generally accepted in the United States ("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 described
below as those that, due to the judgments, estimates and assumptions inherent in
those policies, are critical to an understanding of Peoples' consolidated
financial statements and management's discussion and analysis.
Income Recognition
------------------
Interest income on loans and investment securities is recognized by methods that
result in level rates of return on principal amounts outstanding, including
yield adjustments resulting from the amortization of loan costs and premiums on
investment securities and accretion of loan fees and discounts on investment
securities. Since mortgage-backed securities comprise a sizable portion of
Peoples' investment portfolio, a significant increase in principal payments on
those securities could negatively impact interest income due to the
corresponding acceleration of premium amortization.
In the event management believes collection of all or a portion of contractual
interest on a loan has become doubtful, which generally occurs after the loan is
90 days past due, Peoples discontinues the accrual of interest. In addition,
previously accrued interest deemed uncollectible that was recognized in income
in the current year is reversed, while amounts recognized in income in the prior
year are charged against the allowance for loan losses. Interest received on
nonaccrual loans is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status after appropriate
review by lending and/or loan review personnel indicates the collectibility of
the total contractual principal and interest is no longer considered doubtful.
Allowance for Loan Losses
-------------------------
In general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples maintains
an allowance for loan losses to absorb probable losses based on a quarterly
analysis of the loan portfolio and estimation of the losses that have been
incurred within the loan portfolio. This formal analysis determines an
appropriate level and allocation of the allowance for loan losses among loan
types and resulting provision for loan losses by considering factors affecting
losses, including specific losses, levels and trends in impaired and
nonperforming loans, historical loan loss experience, current national and local
economic conditions, volume, growth and composition of the portfolio, regulatory
guidance and other relevant factors. Management continually monitors the loan
portfolio through its Loan Review Department and Loan Loss Committee to evaluate
the adequacy of the allowance. The provision could increase or decrease each
quarter based upon the results of management's formal analysis.
The amount of the allowance for loan losses for the various loan types
represents management's estimate of expected losses from existing loans based
upon specific allocations for individual lending relationships and historical
loss experience for each category of homogeneous loans. The allowance for loan
losses related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans. This evaluation requires management to make
estimates of the amounts and timing of future cash flows on impaired loans,
which consists primarily of nonaccrual and restructured loans. While allocations
are made to specific loans and pools of loans, the allowance is available for
all loan losses.
Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, the loan cash flow characteristics,
loan quality ratings, value of collateral, repayment ability of borrowers, and
historical experience factors. The historical experience factors utilized for
individual loan reviews are based upon past loss experience, known trends in
losses and delinquencies, the growth of loans in particular markets and
industries, and known changes in economic conditions in particular lending
markets. Allowances for homogeneous loans (such as residential mortgage loans,
personal loans, etc.) are evaluated based upon historical loss experience,
trends in losses and delinquencies, growth of loans in particular markets, and
known changes in economic conditions in each lending market. Consistent with the
evaluation of allowances for homogenous loans, the allowance relating to the
Overdraft Privilege program is based upon management's monthly analysis of
accounts in the program. This analysis considers factors that could affect
losses on existing accounts, including historical loss experience and length of
overdraft.
There can be no assurance the allowance for loan losses will be adequate to
cover all losses, but management believes the allowance for loan losses of $14.7
million at December 31, 2005, is adequate to provide for probable losses from
existing loans based on information currently available. While management uses
available information to provide for loan losses, the ultimate collectibility of
a substantial portion of the loan portfolio, and the need for future additions
to the allowance, will be based on changes in economic conditions and other
relevant factors. As such, adverse changes in economic activity could reduce
cash flows for both commercial and individual borrowers, which would likely
cause Peoples to experience increases in problem assets, delinquencies and
losses on loans.
Investment Securities
---------------------
Investment securities represent the second largest component of Peoples' assets,
accounting for 32% of total assets at December 31, 2005. Presently, Peoples
classifies its entire investment portfolio as available-for-sale and records
changes in the estimated fair value of the portfolio in stockholders' equity as
a component of comprehensive income. As a result, both the investment and equity
sections of Peoples' balance sheet are more sensitive to changes in the overall
market value of the investment portfolio, due to changes in market interest
rates, investor confidence and other factors affecting market values, than if
the investment portfolio was classified as held-to-maturity.
While temporary changes in the market value of available-for-sale securities are
not recognized in earnings, a decline in fair value below amortized cost deemed
to be "other-than-temporary" results in an adjustment to the cost basis of the
investment, with a corresponding loss charged against earnings. Management
systematically evaluates Peoples' investment securities on a quarterly basis to
identify potential other-than-temporary losses. This analysis requires
management to consider various factors that can involve judgment and estimation,
including duration and magnitude of the decline in value, the financial
condition of the issuer, and Peoples' ability and intent to continue holding the
investment for a period of time sufficient to allow for any anticipated recovery
in market value.
At December 31, 2005, there were no investment securities identified by
management to be other-than-temporarily impaired. If investments decline in fair
value due to adverse changes in the financial markets, additional charges to
income could occur in future periods.
Goodwill and Other Intangible Assets
------------------------------------
Over the past several years, Peoples has grown through mergers and acquisitions
accounted for under the purchase method of accounting. Under the purchase
method, Peoples is required to allocate the cost of an acquired company to the
assets acquired, including identified intangible assets, and liabilities assumed
based on their estimated fair values at the date of acquisition. At December 31,
2005, Peoples had $8.7 million of identifiable intangible assets acquired in
acquisitions, subject to amortization, and $59.8 million of goodwill, not
subject to periodic amortization.
The determination of fair value and subsequent allocation of the cost of an
acquired company generally involves management making estimates based on third
party valuations, such as appraisals, or internal valuations based on discounted
cash flow analyses or other valuation techniques. In addition, the valuation and
amortization of intangible assets representing the present value of future net
income to be earned from customers (commonly referred to as "customer
relationship intangibles" or "core deposit intangibles") requires significant
judgment and the use of estimates by management. While management feels the
assumptions and variables used to value recent acquisitions were reasonable, the
use of different, but still reasonable, assumptions could produce materially
different results.
Customer relationship intangibles are required to be amortized over their
estimated useful lives. The method of amortization should reflect the pattern in
which the economic benefits of the intangible assets are consumed or otherwise
used up. Since Peoples' acquired customer relationships are subject to routine
customer attrition, the relationships are more likely to produce greater
benefits in the near-term than in the long-term, which typically supports the
use of an accelerated method of amortization for the related intangible assets.
Management is required to evaluate the useful life of customer relationship
intangibles to determine if events or circumstances warrant a change in the
estimated life. Should management determine in future periods the estimated life
of any intangible asset is shorter than originally estimated, Peoples would
adjust the amortization of that asset, which could increase future amortization
expense.
Goodwill arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Goodwill recorded
by Peoples in connection with its acquisitions relates to the inherent value in
the businesses acquired and this value is dependent upon Peoples' ability to
provide quality, cost effective services in a competitive market place. As such,
goodwill value is supported ultimately by revenue that is driven by the volume
of business transacted. A decline in earnings as a result of a lack of growth or
the inability to deliver cost effective services over sustained periods can lead
to impairment of goodwill that could adversely impact earnings in future
periods.
Peoples has reviewed its recorded goodwill and concluded that no indicators of
impairment existed as of December 31, 2005. However, future events could cause
management to conclude that impairment indicators exist and re-evaluate
goodwill. If such re-evaluation indicated impairment, Peoples would recognize
the loss, if any. Any resulting impairment loss could have a material, adverse
impact on Peoples' financial condition and results of operations.
Income Taxes
------------
Income taxes are provided based on the liability method of accounting. The
calculation of tax liabilities is complex and requires the use of estimates and
judgment since it involves the application of complex tax laws that are subject
to different interpretations by Peoples and the various tax authorities. These
interpretations are subject to challenge by the tax authorities upon audit or to
reinterpretation based on management's ongoing assessment of facts and evolving
case law.
From time-to-time and in the ordinary course of business, Peoples is involved in
inquiries and reviews by tax authorities that normally require management to
provide supplemental information to support certain tax positions taken by
Peoples in its tax returns. Management believes that it has taken appropriate
positions on its tax returns, although the ultimate outcome of any tax review
cannot be predicted with certainty. To the extent management determines
additional taxes may be due, Peoples recognizes liabilities for such tax
exposures when losses associated with the claims are judged to be probable and
the loss can be reasonably estimated. On a quarterly basis, management assesses
Peoples' tax exposures based on the most recent information available and
adjusts the related liability as deemed prudent and necessary. No assurance can
be given that the final outcome of these matters will not be different than what
is reflected in the current and historical financial statements.
RESULTS OF OPERATION
Overview of the Income Statement
--------------------------------
In 2005, Peoples' net income was $20,499,000, or $1.94 per diluted share, up
from $18,275,000, or $1.71 per diluted share, a year ago. This improvement is
due in large part to balance sheet restructuring and other charges of $2,090,000
after-tax (or $0.20 per diluted share) that occurred in 2004. Return on average
equity improved to 11.52% in 2005, from 10.60% a year ago, while return on
average assets was 1.12% and 1.04% in 2005 and 2004, respectively.
In December 2005, Peoples determined that the yearly amount of lump sum payments
to participants from Peoples' defined benefit pension plan during 2005 exceeded
the allowable threshold of annual service cost plus interest and, accordingly,
settlement charges of $578,000 ($421,000 after tax, or $0.04 per diluted share)
should have been reflected in the results for the second quarter of 2005.
Although Peoples deems the impact of the settlement charge on its financial
statements to be immaterial, it has revised second quarter results and reduced
second quarter net income per share by $0.04. These amounts are more fully
presented in Note 18 of the Notes to the Consolidated Financial Statements
included in Item 8 of this Form 10-K.
For the year ended December 31, 2005, net interest income improved to $52.3
million, compared to $51.9 million for the same period in 2004, due to earning
asset growth and the related interest income that more than exceeded the
increase in interest-bearing liabilities and associated funding costs. Net
interest margin dropped seven basis points to 3.32% in 2005 as a result of the
flattening yield curve.
Other income totaled $29.2 million compared to $22.2 million a year ago and was
up 31% due primarily to increased insurance commissions of $3.2 million
attributable to the Insurance Agency Acquisitions. Other income was also
impacted by securities transactions and asset disposals, which resulted in a net
gain of $0.7 million in 2005 versus a net loss of $3.2 million in 2004. In 2005,
other expense grew 9% to $51.3 million, from $47.2 million for the year ended
December 31, 2004. A full-year's impact of the costs attributable to the
Insurance Agency Acquisitions accounted for much of this increase.
Interest Income and Expense
---------------------------
Peoples earns interest income on loans and investments and incurs interest
expense on interest-bearing deposits and borrowed funds. Net interest income,
the amount by which interest income exceeds interest expense, remains Peoples'
largest source of revenue. The amount of net interest income earned by Peoples
is affected by various factors, including changes in both market interest rates
due to the Federal Reserve Board's monetary policy, the level and degree of
pricing competition for both in market loans and deposits and the amount and
composition of Peoples' earning assets and interest-bearing liabilities.
Peoples monitors net interest income performance and manages its balance sheet
mix through regular Asset-Liability Committee ("ALCO") meetings. The
asset/liability management process employed by the ALCO is intended to minimize
the impact of future interest rate changes on Peoples' earnings. However, the
frequency and/or magnitude of changes in market interest rates are difficult to
predict, much less react to, and may have a greater impact on net interest
income than adjustments by management. Further discussion of Peoples' interest
rate risk management can be found later in this discussion under the caption
"Interest Rate Risk and Liquidity".
As part of the analysis of net interest income, management converts tax-exempt
income to the pre-tax equivalent of taxable income using an effective tax rate
of 35%. Management believes the resulting fully-tax equivalent ("FTE") net
interest income allows for a more meaningful comparison of tax-exempt income and
yields to their taxable equivalents. Net interest margin, calculated by dividing
FTE net interest income by average interest-earning assets, serves as the
primary measure used in evaluating the net revenue stream generated by the mix
and pricing of Peoples' earning assets and interest-bearing liabilities. The
following table details the calculation of FTE net interest income and margin
for the years ended December 31:
(Dollars in thousands) 2005 2004 2003
------------ ------------- -------------
Net interest income, as reported $ 52,306 $ 51,870 $ 53,605
Taxable equivalent adjustments 1,648 1,630 1,662
--------------------------------------------------------------------------------------------
Fully-tax equivalent net interest income $ 53,954 $ 53,500 $ 55,267
--------------------------------------------------------------------------------------------
Average earning assets $ 1,628,598 $ 1,579,692 $ 1,574,381
--------------------------------------------------------------------------------------------
Net interest margin 3.32% 3.39% 3.52%
--------------------------------------------------------------------------------------------
Since mid-2004, the Federal Reserve's Open Market Committee has increased the
target Fed funds rate 300 basis points through year-end 2005, causing short-term
market interest rates to increase. During the same period, longer-term market
interest rates have risen at a much slower pace, compressing the difference
between short-term and longer-term interest rates. This flattening of the yield
curve, coupled with intense competition for loans and deposits, have been
factors in the compression of the net interest margins for many financial
institutions in 2005, and Peoples is no exception. For the year ended December
31, 2005, the FTE yield on earning assets of 5.98% was a 37 basis point
improvement over 2004's average yield of 5.61%. However, the average interest
cost of earning assets increased 25 basis points to 2.66% in 2005, from 2.41% in
2004.
In the second half of 2005, Peoples experienced some improvement in asset yields
from upward repricing of certain variable rate loans and origination of new
loans at current market rates. In the fourth quarter of 2005, Peoples' net
interest margin improved 7 basis points, versus the prior quarter and 10 basis
points over 2004's fourth quarter. The FTE yield on earning assets was 6.22% for
the fourth quarter of 2005, compared to 6.02% and 5.69% for the third quarter of
2005 and the fourth quarter of 2004, respectively, while the average interest
cost of earning assets was 2.83%, 2.70% and 2.40%, for the same periods,
respectively.
Net loans comprise the largest portion of Peoples' earning assets, averaging
$1.03 billion in 2005, compared to $927.8 million in 2004. The increased loan
volume in 2005 is largely the result of commercial loan originations and loans
acquired in the Ashland Banking Acquisition. The FTE yield on net loans was
6.76% in 2005, versus 6.47% a year ago. Loan yields have increased in 2005 due
to new loans being originated at higher rates, coupled with repricing of
variable rate, prime based loans as a result of the Federal Reserve's action to
increase interest rates, although competition for commercial loans and repayment
of higher rate loans have tempered these improvements.
Investment securities averaged $600.8 million in 2005, down from $640.1 million
last year, with FTE yields of 4.67% and 4.45%, respectively. The decrease in
average balances from a year ago is largely attributable to management using a
portion of the principal runoff to manage liquidity, fund loan growth and for
other corporate purposes.
Peoples' interest-bearing liabilities averaged $1.48 billion in 2005, at an
average cost of 2.94%, up from $1.43 billion and average cost of 2.45% last
year. Traditional deposits comprise the majority of Peoples' interest-bearing
liabilities, averaging $936.9 million for the year ended December 31, 2005,
compared to $888.7 million a year ago. The higher volume of deposits was due
primarily to the impact of deposits acquired in the Ashland Banking Acquisition
and additional brokered deposits. In 2005, the average cost of interest-bearing
deposits was 2.41%, up from 1.91% in 2004. Competition for deposits has both
impacted Peoples' ability to retain some deposits and increased the overall cost
of interest-bearing deposits. In the fourth quarter of 2005, average
interest-bearing deposits dropped to $932.4 million, from $939.1 million, while
the average cost increased 15 basis points to 2.59%.
Peoples also utilizes a variety of borrowings as complementary funding sources
to traditional deposits. In 2005, total borrowed funds averaged $538.9 million
compared to $541.9 million in 2004. Peoples' overall cost of borrowed funds
increased to 3.85% in 2005, from 3.32% last year, due to higher short-term rates
resulting from the Federal Reserve's actions to increase the Federal Funds rate.
Advances from the FHLB, both short-term and long-term, remain a key source of
funding for asset growth, as well as a means of managing Peoples' interest rate
risk. Peoples also accesses wholesale repurchase agreements and other borrowings
from unrelated institutions to diversify funding sources. While included in
borrowed funds, Peoples' retail repurchase agreements are marketed and managed
as a cash management tool for commercial customers that maintain higher balances
and have a need for a daily interest-bearing sweep account. Additional
information regarding Peoples' borrowed funds can be found later in this
discussion under the caption "FINANCIAL CONDITION-Funding Sources". The
Following details the average balance and rate of Peoples' borrowed funds:
2005 2004 2003
-------------------- --------------------- ---------------------
(Dollars in thousands) Average Rate Average Average
Balance Balance Rate Balance Rate
------------ ------- ------------ ------- ------------- -------
Short-term borrowings:
FHLB advances $ 107,184 3.36% $ 70,246 1.35% $ 26,900 1.47%
Retail repurchase agreements 21,129 2.67% 16,805 0.95% 19,774 0.87%
Other short-term borrowings - - - - 7,545 2.89%
--------------------------------------------------------------------------------------------------------------
Total short-term borrowings $ 128,313 3.29% $ 87,051 1.30% $ 54,219 1.46%
--------------------------------------------------------------------------------------------------------------
Long-term borrowings:
FHLB advances $ 200,820 4.11% $ 178,475 4.21% $ 219,233 4.64%
Wholesale repurchase agreements 166,058 3.12% 231,137 2.89% 200,032 2.91%
Other long-term borrowings 43,666 7.19% 45,286 6.18% 38,593 6.73%
--------------------------------------------------------------------------------------------------------------
Total long-term borrowings $ 410,544 4.07% $ 454,898 3.74% $ 457,858 4.08%
--------------------------------------------------------------------------------------------------------------
The higher level of short-term FHLB advances compared to prior years was
partially attributable to Peoples replacing other longer-term borrowings with
short-term advances. Management, at times, will use longer term FHLB borrowings
to match-fund selected three- and five-year adjustable rate commercial loans
with advances that have similar amortization and repricing characteristics. The
average cost of Peoples' borrowed funds has steadily increased since mid-2004 in
response to the Federal Reserve's action to increase rates. Management may make
adjustments to the mix of borrowed funds in the future, as deemed desirable, to
manage liquidity and position the balance sheet for potential changes in
interest rates.
Even with the challenges of the current interest rate environment and intense
competition for loans and deposits, Peoples experienced some improvement in
asset yields in the latter half of 2005 due to repricing of variable rate loans
and reinvestments of investment portfolio cash flows into higher yielding
securities. However, management believes net interest margin compression could
occur in the first half of 2006 due to various factors, including the current
slope of the yield curve and an increase in rates in the first half of 2006 for
funding to replace certain maturing liabilities. Still, management is taking
steps to adjust the mix of Peoples' balance sheet with the goal of minimizing
the impact of future interest rate changes on net interest income. At December
31, 2005, Peoples' interest rate risk position and asset-liability simulations
indicate that an immediate and sustained increase in both short-term and
long-term interest rates would reduce net interest income. Management does not
believe such shifts are representative of actual changes that occur in the yield
curve. Consequently, Peoples' net interest margin and income remain difficult to
predict and manage.
Provision for Loan Losses
-------------------------
Peoples' provision for loan losses was $2,028,000 in 2005, down from $2,546,000
in the prior year. The lower overall provision was the based on management's
quarterly evaluation of the loan portfolio and estimation of losses incurred and
is directionally consistent with Peoples' loan quality and recent loss
experience net of recoveries of previously charged-off loans. A portion of the
provision relates to the Overdraft Privilege program, which totaled $599,000 in
2005, compared to $866,000 in 2004.
When expressed as a percentage of average loans, the provision was 0.19% in 2005
compared to 0.27% in 2004. Management believes the provisions were appropriate
for the overall quality, inherent risk and volume concentrations of Peoples'
loan portfolio. Future provisions will continue to be based on management's
quarterly procedural discipline described in the "Critical Accounting Policies"
section of this discussion.
Gains and/or Losses on Securities Transactions
----------------------------------------------
In 2005, Peoples recognized a net gain of $539,000 on investment securities
transactions compared to a net loss of $3,040,000 a year ago. The net gain in
2005 was largely attributable to the sale of two separate equity investments in
unaffiliated companies due to changes in their corporate structure. The net loss
in 2004 was largely the result of the 2004 Investment Portfolio Repositioning
during the fourth quarter, coupled with the $490,000 other-than-temporary
impairment charge on Fannie Mae preferred stock.
Non-Interest Income
-------------------
Peoples generates non-interest income from six primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking ("e-banking"), mortgage banking and business owned life
insurance ("BOLI"). In recent years, Peoples has focused on reducing its
reliance on net interest income by growing non-interest income, especially
fee-based revenues not affected by interest rate changes. Non-interest income,
which excludes gains and losses on securities transactions and asset disposals,
grew 12% in 2005 and accounted for 35% of total revenues, compared to 33% in
2004 and 25% in 2003. Non-interest income growth also occurred in 2005 as a
result of increased insurance revenues of $3.2 million attributable to the
Insurance Agency Acquisitions.
Service charges and other fees on deposit accounts, which are based on the
recovery of costs associated with services provided, are Peoples' largest source
of non-interest income. For the year ended December 31, 2005, deposit account
service charges totaled $9,801,000 compared to $9,636,000 in 2004. Management
periodically evaluates its cost recovery fees to ensure they are reasonable
based on operational costs, as well as similar to fees charged in Peoples'
markets by competitors. The following table details Peoples' deposit account
service charges:
(Dollars in Thousands) 2005 2004 2003
--------- --------- ---------
Overdraft fees $ 6,595 $ 6,366 $ 5,292
Non-sufficient funds fees 1,895 1,844 1,481
Other fees and charges 1,311 1,426 1,419
-----------------------------------------------------------------------------
Total $ 9,801 $ 9,636 $ 8,192
-----------------------------------------------------------------------------
Insurance and investment commissions are also a significant component of
Peoples' non-interest income, totaling $9,243,000 in 2005 versus $6,152,000 in
2004. This increase was the result of higher insurance commissions, primarily
from sales of property and casualty insurance, due to a full-year's impact of
the Insurance Agency Acquisitions completed in mid-2004. The following table
details Peoples' insurance and investment commissions:
(Dollars in Thousands) 2005 2004 2003
--------- --------- ---------
Property and casualty insurance $ 7,908 $ 4,929 $ 452
Life and health insurance 547 404 152
Brokerage 439 402 286
Fixed annuities 207 277 444
Credit life and A&H insurance 142 140 131
-------------------------------------------------------------------------------
Total $ 9,243 $ 6,152 $ 1,465
-------------------------------------------------------------------------------
Peoples' e-banking services include ATM and debit cards, direct deposit services
and Internet banking and serve as alternative delivery channels to traditional
sales offices for providing services to clients. For the year ended December 31,
2005, Peoples' e-banking income was up 17% over the prior year total. Peoples'
e-banking revenues have remained strong due in large part to an increase in the
number of debit cards issued to customers and higher volumes of debit card
activity. At December 31, 2005, Peoples had 87,183 cards issued, with 49% of all
eligible deposit accounts having a debit card, compared to 69,733 cards and a
45% penetration rate a year ago. Peoples' customers used their debit cards to
complete $162 million of transactions in 2005, up 29% from $126 million a year
ago.
Peoples' mortgage banking involves the origination and selling of long-term,
fixed-rate real estate loans into the secondary market. The amount of associated
revenue recognized is dependent largely on customer demand for long-term
fixed-rate mortgage loans. In 2005, mortgage banking produced revenues of
$826,000 compared to $931,000 in the prior year. The reduction in mortgage
banking income is attributable to Peoples' sale of $11.6 million in fixed-rate
loans, acquired in the Ashland Banking Acquisition in the first quarter of 2005.
The sale, which was due to the loans' associated interest rate risk, resulted in
a net loss of $187,000.
Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. In 2005, BOLI produced modestly lower income due to the
impact of a flatter yield curve on the associated investment funds. Still,
management believes BOLI continues to provide a better long-term vehicle for
funding future benefit costs, and offsetting the related expense, than
alternative investment opportunities with similar risk characteristics.
Non-Interest Expense
--------------------
In 2005, non-interest expense totaled $51,342,000, up 9% from $47,198,000 a year
ago. A full-year's impact of costs associated with the Insurance Agency
Acquisitions accounted for $2.5 million of additional expense in 2005, primarily
salaries and benefits expense, occupancy and equipment costs and intangible
amortization.
Salaries and benefits remain Peoples' largest non-interest expense, which is
inherent in a service-based industry such as financial services, totaling
$26,591,000 and $24,574,000 in 2005 and 2004, respectively. A full-year's impact
of the Insurance Agency Acquisitions comprised $1.4 million, or 67% of the
overall increase. Peoples also incurred higher sales-related compensation of
$0.6 million, while costs related to Peoples' defined benefit pension plan and
performance-based incentive plan each grew $0.5 million.
In the fourth quarter of 2005, salaries and benefits were down compared to the
third quarter of 2005 and fourth quarter of 2004, decreasing 9% and 8%,
respectively. Lower medical insurance costs were the key driver of the reduction
in fourth quarter salaries and benefits. Fourth quarter 2005 salaries and
benefits also included non-cash compensation expense of $122,000 relating to the
acceleration of certain stock options on December 29, 2005. Management expects
salaries and benefits to be modestly higher in 2006, as medical insurance costs
return to more historic levels and normal annual salary adjustments are made.
For the year ended December 31, 2005, net occupancy and equipment expense
totaled $5,311,000 versus $5,134,000 a year ago. This increase was largely
attributable to higher utility, maintenance and lease costs of $389,000, which
were partially offset by lower depreciation expense of $187,000. The decline in
depreciation expense was attributable to existing assets becoming fully
depreciated, coupled with fewer shorter-lived assets, such as computers and
other office equipment, being placed in service.
Intangible asset amortization expense grew 20% in 2005, due to a full-year's
amortization of the customer relationship intangibles acquired in the Insurance
Agency Acquisitions and core deposit intangibles from the Ashland Banking
Acquisition. Since Peoples uses an accelerated method of amortization for its
customer-related intangibles, amortization expense will be lower in subsequent
years based on the intangible assets included on Peoples' consolidated balance
sheet at December 31, 2005.
Professional fees, which include accounting, legal and other professional
expenses, were up 12% in 2005, totaling $2,276,000 versus $2,030,000 in 2004.
Higher audit fees associated with the new regulatory reporting environment under
Sarbanes-Oxley was the primary factor driving the increased professional fees.
Marketing expense, which includes the cost of advertising, public relations and
charitable contributions, increased 38% in 2005. Nearly half of this increase is
attributable to additional contributions of $200,000 to Peoples Bancorp
Foundation, Inc., an independent non-profit entity formed in 2004 to make
charitable distributions to organizations in Peoples' primary market areas. In
addition, Peoples' efforts to promote new deposit products and increase brand
awareness in various markets during 2005 were contributing reasons for the
higher marketing costs.
In 2005, Peoples' bankcard costs, which consist primarily of debit card and ATM
processing fees, decreased 19% from the prior year. Even though ATM and debit
card activity produced modest growth, the expected corresponding increase in
costs was offset by a reduction in various transaction-based charges beginning
in early 2005 due to a new processing contract with the existing provider of
Peoples' ATM and debit card services. In the fourth quarter of 2005, bankcard
costs totaled $317,000, which was down from $355,000 for 2004's fourth quarter,
but up from $284,000 for the third quarter of 2005, due to increased customer
activity. Management believes bankcard costs will approximate 2005's fourth
quarter expense throughout 2006, based on current customer activity levels.
Peoples is subject to franchise taxes, which are based largely on Peoples Bank's
equity at year-end, in the states where it has a physical presence. In 2005,
state franchise taxes totaled $1,793,000, up 23% from $1,458,000 in 2004. This
increase was primarily attributable to additional equity at Peoples Bank
resulting from the Insurance Agency Acquisitions. Management believes that the
stronger capital level at Peoples Bank positions the company for strategic
growth opportunities even though there is a negative impact to franchise taxes.
Peoples' management and Board of Directors regularly evaluates the capital
position of Peoples' direct and indirect subsidiaries from both a cost and
leverage perspective. Ultimately, management seeks to optimize Peoples'
consolidated capital position through allocation of capital, which is intended
to enhance profitability and shareholder value.
Return on Equity
----------------
In 2005, Peoples' return on average equity ("ROE") was 11.52% versus 10.60% in
2004. Management uses ROE to evaluate Peoples' long-term performance, but
management believes earnings per share ("EPS") serves as a more meaningful
measurement of short-term performance due to the volatility that can occur in
equity from changes in the estimated fair values of Peoples' investment
portfolio.
Return on Assets
----------------
Return on average assets ("ROA") was 1.12% in 2005 compared to 1.04% a year ago.
In recent years, Peoples' primary focus has shifted to EPS enhancement and ROE
while reducing the emphasis on ROA as a key performance indicator. However,
management continues to monitor ROA and considers it a measurement of the
effectiveness of Peoples' asset utilization.
Income Tax Expense
------------------
In 2005, Peoples' effective income tax rate was 27.1%, up from 24.9% a year ago.
Peoples' higher effective tax rate in 2005 is primarily attributable to higher
pre-tax income. A reconciliation of the effective tax rate to the statutory tax
rate can be found in Note 11 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
Peoples continues to make tax-advantaged investments in order to manage its
effective tax rate and overall tax burden. At December 31, 2005, the amount of
tax-advantaged investments totaled $56.7 million compared to $53.4 million at
December 31, 2004. Depending on economic and regulatory conditions, Peoples may
make additional investments in various tax credit pools and other tax-advantaged
assets.
FINANCIAL CONDITION
Overview of Balance Sheet
-------------------------
At December 31, 2005, total assets were $1.86 billion, up $46.2 million from
$1.81 billion at year-end 2004. This increase was the result of internal loan
growth of $48.8 million in 2005, with gross loans totaling $1.07 billion at
December 31, 2005 versus $1.02 billion at December 31, 2004. Investment
securities totaled $589.3 million at December 31, 2005 versus $602.4 million at
year-end 2004.
Total liabilities were $1.67 billion at December 31, 2005, compared to $1.63
billion at year-end 2004. At December 31, 2005, deposit balances totaled $1.09
billion, up $19.9 million from the prior year-end, while borrowed funds totaled
$565.5 million, up $19.5 million from $546.0 million at December 31, 2004.
Stockholders' equity totaled $183.1 million at December 31, 2005, versus $175.4
million at December 31, 2004, an increase of $7.7 million. This increase is due
to Peoples' earnings, net of dividends paid, and change in accumulated
comprehensive income.
Cash and Cash Equivalents
-------------------------
Peoples considers cash and cash equivalents to consist of Federal Funds sold,
cash and balances due from banks, interest-bearing balances in other
institutions and other short-term investments that are readily liquid. The
amount of cash and cash equivalents fluctuates on a daily basis due to customer
activity and Peoples' liquidity needs. At December 31, 2005, cash and cash
equivalents totaled $39.6 million, up $8.2 million from $31.4 million at
December 31, 2004. Cash and balances due from banks comprised the largest
portion of Peoples' cash and cash equivalents, totaling $35.6 million at
year-end 2005 versus $30.7 million a year ago. This increase was due to normal
daily fluctuations in the amount of items in process of collection and cash on
hand caused by customer activity. Peoples also had Federal Funds sold of $3.0
million at December 31, 2005, compared to no funds sold at year-end 2004.
Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, will allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments, such as unfunded
loan commitments, undrawn lines of credit, construction loans and letters of
credit, as they come due. Peoples will actively manage the principal runoff from
the investment and loan portfolios and seek to use those funds productively,
based on loan demand and investment opportunities, while maintaining adequate
liquidity and acceptable level of borrowings. Further information regarding
Peoples' liquidity can be found later in this discussion under "Interest Rate
Sensitivity and Liquidity."
Investment Securities
---------------------
At December 31, 2005, the amortized cost of Peoples' investment securities
totaled $591.0 million compared to $594.5 million at year-end 2004, while the
fair market value of the investment portfolio was $589.3 million and $602.4
million, respectively. The difference in amortized cost and market value at
December 31, 2005, resulted in unrealized depreciation of $1.7 million and a
corresponding decrease in Peoples' equity of $1.1 million, net of deferred
taxes. In comparison, the difference in amortized cost and market value at
December 31, 2004, resulted in unrealized appreciation of $7.9 million and a
corresponding increase in Peoples' equity of $5.1 million, net of deferred
taxes. The following table details Peoples' investment portfolio, at estimated
fair value, at December 31:
(Dollars in Thousands) 2005 2004 2003
-------------- -------------- --------------
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 110,373 $ 62,770 $ 65,441
Obligations of states and political subdivisions 69,482 62,234 66,288
Mortgage-backed securities 353,084 418,094 447,341
Other securities 56,374 59,266 62,394
--------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 589,313 $ 602,364 $ 641,464
--------------------------------------------------------------------------------------------------
Overall, the composition of Peoples' investment portfolio at December 31, 2005,
was comparable to recent year-end portfolios. Peoples' investment in
mortgage-backed securities has declined from the prior year-end amount due to
management using a portion of the principal runoff to fund loan growth and for
other corporate purposes. Management has also reinvested some of the cash flows
from mortgage-backed securities into U.S. agency and municipal securities to
improve the diversification and overall performance of the investment portfolio
in a changing rate environment. Additional information regarding the composition
of the investment portfolio can be found in Note 3 of the Notes to the
Consolidated Financial Statements included in Item 8 of this Form 10-K.
Management regularly evaluates the performance and liquidity of the investment
portfolio. In 2006, management plans to utilize a portion of the cash flows from
the investment portfolio to fund loan growth or reduce borrowed funds, as deemed
appropriate from a net earnings perspective. While Peoples' investment portfolio
is used to prudently leverage excess capital, it serves, first and foremost, as
a means of maintaining liquidity to satisfy cash flow requirements and managing
interest rate risk by adjusting the timing of cash flows and repricing of
Peoples' earning assets to mitigate similar changes to Peoples' interest-bearing
liabilities.
Loans
-----
Peoples Bank originates various types of loans, including commercial, financial
and agricultural loans ("commercial loans"), real estate loans and consumer
loans, focusing primarily on lending opportunities in central and southeastern
Ohio, northwestern West Virginia, and northeastern Kentucky markets. At December
31, 2005, gross loans totaled $1.07 billion, up $48.8 million compared to
year-end 2004 due to internal loan originations. Commercial real estate loans
were the key driver of loan growth in 2005.
Commercial loans, including loans secured by commercial real estate, represent
the largest portion of Peoples' total loan portfolio. At December 31, 2005,
commercial loan balances were $641.3 million, or 59.8% of total loans, up $64.5
million from $576.7 million, or 56.4% of total loans, at year-end 2004. The
portion of commercial loan balances secured by commercial real estate, excluding
construction loans, totaled $504.9 million, or 47.1% of total loans, at December
31, 2005, versus $450.3 million, or 44.0% of total loans, at December 31, 2004.
Future commercial lending activities will be dependent on economic and related
conditions, such as general demand for loans in Peoples' primary markets,
interest rates offered by Peoples and normal underwriting requirements. In
addition to in-market opportunities, Peoples will continue to lend selectively
to creditworthy customers outside its primary markets.
While commercial loans comprise the largest portion of Peoples' loan portfolio,
generating residential real estate loans remains a major focus of Peoples'
lending efforts, whether the loans are ultimately sold into the secondary market
or retained on Peoples' balance sheet. At December 31, 2005, real estate loans,
which include construction loans but exclude loans secured by commercial real
estate, totaled $366.8 million compared to $385.4 million at December 31, 2004,
a decrease of $18.6 million. Real estate loans comprised 34.2% of Peoples' total
loan portfolio at December 31, 2005, versus 37.7% at year-end 2004. Included in
real estate loans are home equity credit line balances of $46.6 million at
December 31, 2005, versus $43.7 million at December 31, 2004. A shift in client
preference for home equity loans over more traditional consumer loans, due in
part to Peoples' marketing and sales efforts, was a driving factor in the higher
balance of home equity loans.
Growth of real estate loan balances in recent periods has been impacted by
customer demand for long-term, fixed-rate mortgages, which Peoples generally
sells to the secondary market with servicing rights retained. In 2005, Peoples
originated 501 long-term, fixed-rate mortgage loans, with total loan amounts of
$42 million, versus 467 loans, with total loan amounts of $37 million, in 2004.
At December 31, 2005, Peoples was servicing $144.3 million of real estate loans
previously sold to the secondary market compared to $106.4 million at year-end
2004. In addition, Peoples had $1.1 million of fixed-rate real estate loans held
for sale to the secondary market at December 31, 2005.
In 2005, consumer loan balances, including overdrafts, grew $2.8 million,
totaling $63.8 million at December 31, 2005. Excluding overdrafts, consumer
loans grew $3.1 million during 2005 to $62.7 million, from $59.6 million at
year-end 2004. Peoples' indirect lending area contributed a significant portion
of Peoples' consumer loans and 2005 growth, with balances of $28.2 million and
$23.6 million at December 31, 2005 and 2004, respectively. Peoples' ability to
maintain, or even grow, consumer loans in future quarters continues to be
impacted by strong competition for various types of consumer loans, especially
automobile loans, as well as availability of alternative credit products, such
as home equity credit lines. Additionally, Peoples' commitment to originate
quality loans based on sound underwriting practices and appropriate loan pricing
discipline remains the paramount objective and could limit any future growth
Loan Concentration
------------------
Peoples' largest concentration of commercial loans are credits to assisted
living facilities and nursing homes, which comprised approximately 8.9% of
Peoples' outstanding commercial loans at year-end 2005, compared to 10.2% at
December 31, 2004. Loans to lodging and lodging-related companies also
represented a significant portion of Peoples' commercial loans, comprising 8.8%
of Peoples' outstanding commercial loans at December 31, 2005, versus 11.4% at
year-end 2004.
These lending opportunities typically have arisen due to the growth of these
industries in markets served by Peoples or in contiguous areas, and also from
sales associates' efforts to develop these lending relationships. Management
believes Peoples' loans to lodging and lodging-related companies, as well as
loans to assisted living facilities and nursing homes, do not pose abnormal risk
when compared to risk assumed in other types of lending since these credits have
been subjected to Peoples' normal underwriting standards, which includes an
evaluation of the financial strength, market expertise and experience of the
borrowers and principals in these business relationships. In addition, a
sizeable portion of the loans to lodging and lodging-related companies is spread
over various geographic areas and is guaranteed by principals with substantial
net worth.
Allowance for Loan Losses
-------------------------
Peoples' allowance for loan losses totaled $14.7 million at December 31, 2005,
down slightly compared to $14.8 million at year-end 2004. When expressed as a
percentage of total loans, the allowance was 1.37% at year-end 2005, down from
1.44% at December 31, 2004, a result of loan growth and overall improved asset
quality and credit risk profile of the loan portfolio.
In 2005, net charge-offs were down 12% compared to 2004, totaling $2,068,000
versus $2,361,000. This decline was attributable to increased recoveries that
offset higher charge-offs. Net charge-offs relating to the Overdraft Privilege
Program comprised the largest portion of Peoples' net charge-offs, totaling
$639,000 in 2005 versus $822,000 in 2004. Net charge-offs of commercial and real
estate loans also comprised a significant portion of net charge-offs.
The allowance is allocated among the loan categories based upon the consistent,
quarterly procedural discipline described in the "Critical Accounting Policies"
section of this discussion. However, the entire allowance for loan losses is
available to absorb future loan losses in any loan category. The following
schedule details the allocation of the allowance for loan losses at December 31:
2005 2004 2003
------------------------------ ------------------------------ ------------------------------
(Dollars in thousands) Percent Percent Percent
Allocation of Loans Allocation of Loans Allocation of Loans
of in Each of in Each of in Each
Allowance Category Allowance Category Allowance Category
for Loan to Total for Loan to Total for Loan to Total
Losses Loans Losses Loans Losses Loans
------------ ----------- ------------ ----------- ------------- -----------
Commercial $ 11,883 59.8 % $ 11,751 56.3 % $ 11,232 56.0 %
Real estate 1,400 34.2 1,175 37.7 1,234 35.3
Consumer 1,149 5.9 1,394 5.9 1,594 8.5
Overdrafts 288 0.1 327 0.1 283 0.2
Credit card - - 113 - 232 -
--------------------------------------------------------------------------------------------------------------------------
Total $ 14,720 100.0 % $ 14,760 100.0 % $ 14,575 100.0 %
--------------------------------------------------------------------------------------------------------------------------
The allowance allocated to commercial loans has increased in recent periods,
reflecting the higher credit risk associated with this type of lending and
continued growth in this portfolio. The allowance allocated to the real estate
and consumer loan portfolios is based upon Peoples' allowance methodology for
homogeneous pools of loans, which includes a consideration of changes in total
balances in those portfolios. In prior periods, Peoples had maintained an
allowance for credit cards that reflected an estimate of the loss from the
retained recourse on the business cards included in the credit card portfolio
sale. This recourse arrangement expired during the second quarter of 2005,
eliminating the need for an allocation for credit cards. While allocations are
made to specific loans and pools of loans, the entire allowance is available for
all loan losses existing as of December 31, 2005.
Asset quality remains a key focus, as management continues to stress quality
rather than growth. At December 31, 2005, nonperforming assets totaled
$6,843,000, or 0.37% of total assets, versus $7,706,000, or 0.43% of total
assets, at year-end 2004. This decrease was largely the result of Peoples
selling other real estate owned ("OREO") of $752,000, representing the banking
offices closed as part of the Ashland Banking Acquisition and transferred to
OREO in late 2004.
A loan is considered impaired when, based on current information and events, it
is probable that Peoples will be unable to collect the scheduled payments of
principal or interest according to the contractual terms of the loan agreement.
The measurement of potential impaired loan losses is generally based on the
present value of expected future cash flows discounted at the loan's contractual
effective interest rate, or the fair value of the collateral if the loan is
collateral dependent. If foreclosure is probable, impairment loss is measured
based on the fair value of the collateral.
At December 31, 2005, the recorded investment in loans that were considered
impaired was $11.8 million, of which $9.3 million were accruing interest and
$2.5 million were nonaccrual loans. Included in this amount were $4.8 million of
impaired loans for which the related allowance for loan losses was $1.9 million.
The remaining impaired loan balances do not have a related allocation of the
allowance for loan losses because the loans have previously been written-down,
are well secured or possess characteristics indicative of the ability to repay
the loan. In 2005, Peoples' average recorded investment in impaired loans was
approximately $10.8 million and interest income of $668,000 was recognized on
impaired loans during the period, representing 0.7% of Peoples' total interest
income. This compares to average impaired loans of approximately $17.7 million
and interest income of $513,000, or 0.6% of Peoples' total interest income, in
2004.
Funding Sources
---------------
Peoples considers a number of sources when evaluating funding needs, including
but not limited to deposits, short-term borrowings and long-term borrowings.
Deposits, both interest-bearing and non-interest-bearing, continue to be the
most significant source of funds for Peoples, totaling $1.09 billion at December
31, 2005 versus $1.07 billion at year-end 2004.
Non-interest-bearing deposits serve as a core funding source. At December 31,
2005, non-interest-bearing deposit balances totaled $162.7 million, up $9.8
million compared to the prior year-end. The majority of this increase is
attributable to Peoples' efforts to grow non-interest-bearing deposits and
reduce its reliance on high cost funding. In addition, Peoples implemented a
marketing strategy in the fourth quarter of 2005 designed to attract new
customers and increase non-interest-bearing deposits. In November and December
2005, Peoples experienced an overall 27% increase in checking account sales over
the same periods in 2004, which exceeds the targets set for this program for
that period.
Since customer activity can result in significant temporary changes in deposit
balances at end of periods, management believes a comparison of average balances
to be a more meaningful reflection of the trend in non-interest-bearing
deposits. In 2005, non-interest-bearing deposits averaged $158.7 million versus
$144.6 million in 2004, reflecting Peoples' efforts to increase
non-interest-bearing deposits. Peoples' strategies include continued emphasis on
core deposit growth in products such as non-interest-bearing checking accounts.
Interest-bearing deposits totaled $926.6 million at December 31, 2005, compared
to $916.4 million at December 31, 2004, with additional brokered deposits of
$14.9 million accounting for this increase. Intense competition for deposits,
particularly certificates of deposits and other high-cost deposit funds during
this period of rising interest rates, has challenged Peoples' ability to grow
interest-bearing deposit balances. The following details Peoples'
interest-bearing deposits at December 31:
(Dollars in thousands) 2005 2004 2003
------------ ------------ -------------
Retail certificates of deposit $ 465,148 $ 456,850 $ 451,923
Interest-bearing transaction accounts 178,030 165,144 157,410
Savings accounts 131,221 157,145 171,488
Money market deposit accounts 110,372 107,394 104,019
Brokered certificates of deposit 41,786 29,909 9,981
----------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 926,557 $ 916,442 $ 894,821
----------------------------------------------------------------------------------------------
Peoples also accesses other funding sources, including short-term and long-term
borrowings, to fund asset growth and satisfy liquidity needs. Advances from the
FHLB comprise a sizeable portion of Peoples' borrowed funds. Typically,
short-term FHLB advances, consisting of overnight repo advances or variable cash
management advances, are used to manage Peoples' daily liquidity needs since
they may be repaid, in whole or part, at anytime without a penalty. Peoples also
utilizes a combination of long-term FHLB advances to help manage its interest
rate sensitivity and liquidity. In most cases, the early repayment of long-term
FHLB advances requires Peoples to incur a prepayment penalty. In addition to
FHLB advances, Peoples accesses national market repurchase agreements to
diversify its funding sources. The repurchase agreements may not be repaid prior
to maturity and must remain sufficiently collateralized during the entire term.
As a result, a decline in the market value of the investment securities
associated with these agreements would require Peoples to allocate additional
investment securities to these repurchase agreements. Further information
regarding Peoples' management of interest rate sensitivity can be found later in
this discussion under "Interest Rate Sensitivity and Liquidity."
At December 31, 2005, borrowed funds totaled $565.5 million, up from $546.0
million at year-end 2004. FHLB advances represented the largest component of
borrowed funds, totaling $328.8 million and $248.2 million at year-end 2005 and
2004, respectively. In 2005, the amount of wholesale repurchase agreements
decreased $80.9 million, as Peoples repaid maturing advances using short-term
FHLB advances rather than extending the agreements at current market rates.
Capital/Stockholders' Equity
----------------------------
At December 31, 2005, stockholders' equity was $183.1 million, versus $175.4
million at December 31, 2004, an increase of $7.7 million, attributable to
Peoples' earnings, net of dividends paid, of $12.3 million and a reduction in
comprehensive income of $6.1 million.
For the year ended December 31, 2005, Peoples declared dividends of $8.2
million, representing a dividend payout ratio of 40.0% of earnings, compared to
$7.6 million, and a payout ratio of 41.7%, a year ago. While management
anticipates Peoples continuing its 40-year history of consistent dividend growth
in future periods, Peoples Bancorp's ability to pay dividends on its common
shares is largely dependent upon dividends from Peoples Bank. In addition, other
restrictions and limitations may prohibit Peoples from paying dividends even
when sufficient cash is available. Further discussion regarding restrictions on
Peoples' ability to pay future dividends can be found in Note 13 of the Notes to
the Consolidated Financial Statements included in Item 8 of this Form 10-K, as
well as the "Limits on Dividends" section under Item 1 of this Form 10-K.
Included in Peoples' equity is accumulated comprehensive income, net of deferred
taxes, which consists of the adjustment for the net unrealized holding gains or
loss on available-for-sale securities. At December 31, 2005, accumulated
comprehensive loss totaled $1.1 million versus income of $5.0 million at
December 31, 2004, a change of $6.1 million. Since all the investment securities
in Peoples' portfolio are classified as available-for-sale, both the investment
and equity sections of Peoples' consolidated balance sheet are more sensitive to
the changing market values of investments than if the investment portfolio was
classified as held-to-maturity.
At December 31, 2005, Peoples had treasury stock totaling $8.8 million compared
to $10.3 million at year-end 2004. During 2005, Peoples repurchased 59,700
common shares (or 11% of the total authorized), at an average price of $26.78
per share, under the 2005 Stock Repurchase Program, and 5,625 common shares, at
an average price of $27.65, in conjunction with the deferred compensation plan
for directors of Peoples and subsidiaries. During the same period, Peoples
reissued 115,329 treasury shares in connection with the Insurance Agency
Acquisitions and stock option exercises. Peoples may repurchase additional
common shares in 2006 as authorized under the 2006 Stock Repurchase Program and
deemed appropriate by management.
Management uses the tangible capital ratio as one measure of the adequacy of
Peoples' equity. The ratio, defined as tangible equity as a percentage of
tangible assets, excludes the balance sheet impact of intangible assets acquired
through acquisitions. At December 31, 2005, Peoples' tangible capital ratio was
6.37% compared to 6.00% at December 31, 2004. The higher ratio compared to the
prior year-end is the result of a 9% increase in tangible equity that exceeded
the 3% increase in tangible assets.
In addition to monitoring performance through traditional capital measurements
(i.e., dividend payout ratios and ROE), Peoples has also complied with the
capital adequacy standards mandated by the banking regulators. Peoples and
Peoples Bank were categorized as well-capitalized institutions at December 31,
2005, based on the most recent regulatory notification. Further information
regarding Peoples and Peoples Bank's risk-based capital ratios can be found in
Note 13 of the Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K.
Interest Rate Sensitivity and Liquidity
---------------------------------------
While Peoples is exposed to various business risks, the risks relating to
interest rate sensitivity and liquidity are typically the most complex and
dynamic risks that can materially impact future results of operations and
financial condition. 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 for Peoples, and
the entire financial services industry, primarily arising in the normal course
of business of offering a wide array of financial products to its customers,
including loans and deposits, as well as the diversity of its own investment
portfolio and borrowed funds. 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 charged the ALCO with the overall management of IRR. To this end,
the ALCO has established an IRR management policy that sets minimum requirements
and guidelines for monitoring and managing the level and amount of IRR. The
objective of the IRR policy is to encourage adherence to sound fundamentals of
banking while allowing sufficient flexibility to meet the challenges and
opportunities of changing markets.
Peoples' ALCO relies on different methods of assessing IRR, including
simulations, to project future net interest income streams and to monitor the
sensitivity of the net present estimated fair value of equity and the
difference, or "gap", between maturing or repricing rate-sensitive assets and
liabilities over various time periods. The ALCO places emphasis on simulation
modeling as the most beneficial measurement of IRR because it is a dynamic
measure. By employing a simulation process that estimates the impact of
potential changes in interest rates and by establishing limits on these
estimated changes to net income and net market value, the ALCO is better able to
evaluate interest rate risks and their potential impact to earnings and the
projected fair value of equity.
The modeling process starts with a base case simulation using the current
balance sheet and current interest rates held constant for the next twelve
months. Alternate scenarios are prepared which illustrate the impact of
increasing and decreasing market interest rates. Comparisons produced from the
simulation data, showing the changes in net interest income from the base
interest rate scenario, illustrate the risks associated with the current balance
sheet structure. Additional simulations, when deemed appropriate or necessary,
are prepared using different interest rate scenarios than those used with the
base case simulation and/or possible changes in balance sheet composition.
Comparisons showing the earnings and equity value variance from the base case
are provided to the ALCO for review and discussion.
As part of the evaluation of IRR, the ALCO has established limits on changes in
net interest income and the economic value of equity. The ALCO limits the
decrease in net interest income to 15% or less from base case for each 200 basis
point shift in interest rates measured over a twelve- and twenty-four-month
period. The ALCO limits the negative impact on net equity to 30% or less given
an immediate and sustained 200 basis points shift in interest rates. The
difference between rate sensitive assets and rate sensitive liabilities for
specified time periods is known as the gap. The ALCO also reviews static gap
measures for specific periods focusing on a one-year cumulative gap. Based on
historical trends and performance, the ALCO has determined the ratio of the
one-year cumulative gap should be within +/-15% of earning assets at the date of
measurement. Results that are outside of any of these limits will prompt a
discussion by the ALCO of appropriate actions, if any, which should be taken.
At December 31, 2005, Peoples' one-year cumulative gap amount was negative 6.1%
of earning assets, which represented $101.9 million more in liabilities than
assets that are contractually scheduled to reprice or mature during that period.
Management believes a portion of interest-bearing liabilities are not likely to
reprice at their first opportunity, based on current rates and management's
control over the pricing of most deposits. Excluding those liabilities, Peoples'
adjusted one-year cumulative gap amount at quarter-end was negative 5.8% of
earning assets, which represented $96.4 million more in liabilities than assets
that mature or may reprice during the next twelve months.
The following table is provided to illustrate the estimated earnings at risk and
value at risk positions of Peoples, on a pre-tax basis, at December 31, 2005
(dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in Increase (Decrease) Decrease in Economic Value of
Basis Points In Net Interest Income Equity
--------------------------- ----------------------------- --------------------------------
200 $ (5,217) (10.1) % $ (26,538) (10.2) %
100 (1,811) (3.5) (13,528) (5.2)
(100) 448 0.9 3,217 1.2
(200) $ (1,481) (2.9) % $ (2,921) (1.1) %
Peoples is within the established IRR policy limits for all simulations and all
scenarios shown in the above table. The interest rate risk analysis shows that
Peoples is liability sensitive, which means that increasing interest rates
should negatively impact Peoples' net interest income while decreasing interest
rates should positively impact net interest income, based on the assumptions
used. However, the variability of cash flows from the investment and loan
portfolios continues to have a significant influence on future net interest
income and earnings, especially during periods of changing interest rates. In
addition, many variable rate loans contain features limiting the amount of
annual and lifetime changes in interest rates that can mitigate the impact of
changes in interest rates.
Liquidity
---------
In addition to IRR management, a primary objective of the ALCO is to maintain a
sufficient level of liquidity. The ALCO defines liquidity as the ability to meet
anticipated and unanticipated operating cash needs, loan demand and deposit
withdrawals, without incurring a sustained negative impact on profitability. The
ALCO's liquidity management policy sets limits on the net liquidity position of
Peoples and the concentration of non-core funding sources, both wholesale
funding and brokered deposits.
Typically, the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided by cash generated from earning assets such as maturities,
calls, principal payments and net income from loans and investment securities.
In 2005, cash provided by financing activities totaled $32.4 million, due
primarily to deposit growth of $20.5 million. In comparison, in 2004, cash used
in financing activities was $23.3 million as deposits declined $23.0 million in
2004. Cash used in investing activities totaled $56.1 million in 2005 versus
$51.4 million last year, primarily due to lower net cash flows from the
investment portfolio.
When appropriate, Peoples takes advantage of external sources of funds, such as
advances from the FHLB, national market repurchase agreements and brokered
deposits. These external sources often provide attractive interest rates and
flexible maturity dates that enable Peoples to match-fund the payment,
amortization and pricing characteristics of corresponding earning assets. At
December 31, 2005, Peoples had available borrowing capacity of approximately
$133 million through these external sources, along with unpledged investment
securities of approximately $134 million that can be utilized as an additional
source of liquidity.
The net liquidity position of Peoples is calculated by subtracting volatile
funds from liquid assets. Peoples' volatile funds consist of deposits that are
considered short-term in nature along with a variable-rate loan from an
unrelated institution. Liquid assets include short-term investments and
unpledged available-for-sale securities. At December 31, 2005, Peoples' net
liquidity position was $104.3 million, or 5.6% of total assets, compared to
$141.4 million, or 7.8% of total assets, at December 31, 2004. The liquidity
position as of December 31, 2005, was within Peoples' policy limit of negative
10% of total assets.
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, operating leases, long-term debt and
commitments to make additional capital contributions in low-income housing tax
credit investments.
Traditional off-balance sheet credit-related financial instruments are primarily
commitments to extend credit, and standby letters of credit. These activities
are necessary to meet the financing needs of customers and could require Peoples
to make cash payments to third parties in the event certain specified future
events occur. The contractual amounts represent the extent of Peoples' exposure
in these off-balance sheet activities. However, since certain off-balance sheet
commitments, particularly standby letters of credit, are expected to expire or
only partially be used, the total amount of commitments does not necessarily
represent future cash requirements.
Peoples also enters into interest rate contracts where cash will either be paid
to or received from counter parties depending on changes in interest rates.
Peoples utilizes interest rate contracts to help manage the risk of changing
interest rates. Interest rate contracts are carried at fair value on the
consolidated balance sheet, with the fair value representing the net present
value of expected future cash receipts or payments based on market interest
rates as of the balance sheet date. As a result, the amounts recorded on the
balance sheet at December 31, 2005, do not represent the amounts that may
ultimately be paid or received under these contracts.
Peoples also has commitments to make additional capital contributions in
low-income housing tax credit funds, consisting of a pool of low-income housing
projects. As a limited partner in these funds, Peoples receives federal income
tax benefits, which assist Peoples in managing its overall tax burden. Since the
future contributions are conditioned on certain future events occurring, the
total amount of delayed equity contributions is not reflected on the
consolidated balance sheet at December 31, 2005. Further information regarding
Peoples' delayed equity contributions can be found in Note 12 of the Notes to
the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Management does not anticipate Peoples' current off-balance sheet activities
will have a material impact on future results of operations and financial
condition based on past experience. Further information regarding Peoples'
financial instruments with off-balance sheet risk can be found in Note 12 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Peoples continues to lease certain facilities and equipment under noncancelable
operating leases with terms providing for fixed monthly payments over periods
ranging from two to ten years. Many of Peoples' leased facilities are inside
retail shopping centers and, as a result, are not available for purchase.
Management believes these leased facilities increase Peoples' visibility within
its markets and afford sales associates additional access to current and
potential clients.
The following table details the aggregate amount of future payments Peoples is
required to make under certain contractual obligations as of December 31, 2005:
Payments due by period
-----------------------------------------------------------
(Dollars in thousands) More
Less than than 5
Total 1 year 1-3 years 3-5 years years
----------- ----------- ----------- ---------- ----------
Long-term debt (1) $ 362,466 $ 94,550 $ 154,033 $ 81,336 $ 32,547
Operating leases 5,908 631 1,241 1,100 2,936
Time deposits 502,934 223,551 249,596 29,764 23
-----------------------------------------------------------------------------------------------------------
Total $ 871,308 $ 318,732 $ 404,870 $ 112,200 $ 35,506
-----------------------------------------------------------------------------------------------------------
(1) Amounts reflect the minimum principal payments required under Peoples'
long-term debt agreements.
Effects of Inflation on Financial Statements
--------------------------------------------
Substantially all of Peoples' assets relate to banking and are monetary in
nature. As a result, inflation does not impact Peoples to the same degree as
companies in capital-intensive industries in a replacement cost environment.
During a period of rising prices, a net monetary asset position results in a
loss in purchasing power and conversely a net monetary liability position
results in an increase in purchasing power. The opposite would be true during a
period of decreasing prices. In the banking industry, monetary assets typically
exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation
has had little impact on Peoples' net assets.
Future Outlook
--------------
Peoples' 2005 results reflect continued growth and positive trends in key areas,
including strong loan production, modest improvement in net interest income and
stable levels of non-interest expense. Management expects interest rate
challenges will persist in 2006, due to continued competition for both loans and
deposits and the flatter slope of the yield curve. To offset some of the
expected compression in net interest margin, Peoples is taking steps to adjust
the balance sheet mix by funding loan growth using cash flows from, and
gradually reducing the level of, the investment portfolio.
Another key focus of Peoples in 2006 is growth of core deposit funding sources
in order to reduce the reliance on higher-costing wholesale funding. Initial
results from the deposit growth marketing campaign established in early fourth
quarter 2005 are encouraging. While sales efforts have exceeded the program's
target for November and December, the challenge in 2006 will be to build on this
success by developing long-term relationships and uncovering other financial
needs of these new customers. Peoples' sales associates are also focused on
expanding relationships with existing customers, working to deliver the right
financial products and services to Peoples' growing customer base.
Loan growth remains a key component of Peoples' long-term strategic goals.
Management believes some lending opportunities exist in Peoples' markets,
although some significant commercial loan payoffs are expected to occur in first
half of 2006, as customers move loans to the capital markets or directly to
investors, such as insurance companies, for long term, fixed rate pricing.
Consequently, loan growth will be challenged in the early parts of the year, and
management expects loan growth to be, at best, flat in the early part of 2006,
as lenders diligently work to originate quality loans in sufficient volume to
offset this expected runoff.
In recent years, Peoples has been successful at growing its business and
revenues through strategic acquisitions and expansion. Economic conditions in
several markets served by Peoples remain vibrant, and, consequently management
believes attractive opportunities for above average growth potential exist in
these markets. In 2006, management will continue to evaluate possible
opportunities to expand Peoples' presence in focus markets, such as Lancaster,
Ohio and Huntington, West Virginia, and open new full-service banking offices.
Ultimately, any future expansion will be driven by growth opportunities in both
deposits and loans.
Peoples' capital position remains at levels management believes will support
balance sheet growth opportunities. While the need to generate short-term
results is understood, management believes its disciplined, long-term approach
to improving earnings through diversification of the revenue base will allow
Peoples' to build the greatest value for shareholders. Peoples remains a
service-oriented company with a sales focus that strives to satisfy clients
through a relationship sales process. Through this process, sales associates
work to anticipate, uncover, and solve their clients' every financial need, from
insurance to banking to investment services.
Forward-Looking Statements
--------------------------
Certain statements in this Form 10-K which are not historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. Words such as
"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) competitive pressures among depository institutions which may increase
significantly;
(2) changes in the interest rate environment which may adversely impact
interest margins;
(3) prepayment speeds, loan originations and sale volumes, charge-offs and
loan loss provisions may be less favorable than expected;
(4) general economic conditions may be less favorable than expected;
(5) political developments, wars or other hostilities may disrupt or
increase volatility in securities markets or other economic
conditions;
(6) legislative or regulatory changes or actions may adversely affect
Peoples' business;
(7) changes and trends in the securities markets;
(8) a delayed or incomplete resolution of regulatory issues that could
arise;
(9) the impact of reputational risk created by these developments on such
matters as business generation and retention, funding and liquidity;
(10) the costs and effects of regulatory and legal developments, including
the outcome of regulatory or other governmental inquiries and legal
proceedings and results of regulatory examinations; and
(11) other risk factors relating to the banking industry or Peoples as
detailed from time to time in reports filed with the Securities and
Exchange Commission ("SEC").
All forward-looking statements speak only as of the execution date of this Form
10-K and are expressly qualified in their entirety by the cautionary statements.
Although management believes the expectations in these forward-looking
statements are based on reasonable assumptions within the bounds of management's
knowledge of Peoples' business and operations, it is possible that actual
results may differ materially from these projections. Additionally, Peoples
undertakes no obligation to release revisions to these forward-looking
statements to reflect events or circumstances after the date of this Form 10-K.
Copies of documents filed with the SEC are available free of charge at the SEC
website at http://www.sec.gov and/or from Peoples' website.
Comparison of 2004 to 2003 Results of Operation
-----------------------------------------------
In 2004, Peoples' net income totaled $18.3 million, or $1.71 per diluted share,
up from $16.3 million, or $1.52 per diluted share, in 2003. The increase was the
result of higher non-interest revenues of $4.7 million, which more than offset
the $1.3 million increase in non-interest expense and $1.7 million decrease in
net interest income. Return on average equity improved to 10.60% in 2004, from
9.75% in 2003, while return on average assets was 1.04% and 0.95% for the same
periods, respectively.
Balance sheet restructuring and other charges reduced earnings in both 2004 and
2003. In December 2004, Peoples recorded a loss on sale of securities totaling
$2,596,000 (or $1,688,000 after-tax) relating to the repositioning of a portion
the investment portfolio; a write down of $128,000 ($83,000 after-tax) on real
estate values of banking offices consolidated in conjunction with the Ashland
Banking Acquisition and an other-than-temporary impairment charge of $490,000
(or $319,000 after-tax) on an investment in Fannie Mae ("FNMA") preferred stock.
The aggregate impact of these transactions resulted in a charge to income of
$3,214,000 (or $2,090,000 after-tax) in 2004. Comparatively, Peoples recorded a
net charge of $7,462,000 (or $5,372,000, after-tax) in 2003 relating to the 2003
Investment Portfolio Restructuring and Long-Term Debt Restructuring.
Net interest income totaled $51.9 million in 2004 and net interest margin was
3.39% compared to $53.6 million and 3.52% in 2003. Both net interest income and
margin were negatively impacted by very competitive pricing for loans and
deposits, as well as Peoples' management of its interest rate risk position,
which included extending the maturities of funding liabilities resulted in
increased interest expense.
In 2004, Peoples' non-interest revenues benefited from acquisitions, especially
the Insurance Agency Acquisitions. Other income grew 27% to $22.2 million in
2004, from $17.5 million last year, due largely to increased insurance and
investment commissions of $4.7 million and deposit account service charges of
$1.4 million. Net losses on securities transactions reduced other income by $3.2
million and $2.2 million in 2004 and 2003, respectively, while other income in
2003 also benefited from a $1.4 million gain from the sale of Peoples' credit
card portfolio.
Deposit account service charges grew 18% in 2004 due to higher volumes of
overdraft and non-sufficient funds fees and an increase in the number of
checking accounts, as well as an increase in the per item amount of certain cost
recovery fees. In 2004, insurance and investment commissions totaled $6.2
million compared to $1.5 million the previous year, reflecting the revenues
generated by the acquired insurance agencies. E-banking revenues remained strong
in 2004, growing 16% to $2.4 million, due to additional debit cards issued to
customers and higher volumes of transactions completed using Peoples' debit
cards.
Other expense totaled $47.2 million in 2004 versus $45.9 the previous year, an
increase of $1.3 million. Salaries and benefits were up $4.9 million in 2004,
with over half of this increase attributable to the Insurance Agency
Acquisitions and full-year's impact of the Kentucky Bancshares acquisition. Net
occupancy and equipment costs totaled $5.1 million in 2004 versus $4.6 million,
while intangible amortization was $2.2 million in 2004 versus $1.5 million in
2003. Both increases reflect additional costs associated with acquisitions
completed in 2003 and 2004. Bankcard costs increased 26% in 2004, largely the
result of Peoples' increased customer base and additional cards issued, coupled
with increased customer activity. These 2004 expense increases were offset by
the decline in expense that occurred as a result of the Federal Home Loan Bank
advance prepayment fees of $6.8 million incurred in late 2003 as the Long-Term
Debt Restructuring.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------------------
Please refer to the section captioned "Interest Rate Sensitivity and Liquidity"
on pages 37 through 39 under Item 7 of this Form 10-K, which section is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
----------------------------------------------------
The Consolidated Financial Statements and accompanying notes, and the report of
independent registered public accounting firm, are set forth immediately
following Item 9B of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
--------------------------------------------------------------------------
No response required.
ITEM 9A. CONTROLS AND PROCEDURES.
--------------------------------
Disclosure Controls and Procedures
----------------------------------
Peoples' management, with the participation of Peoples' President and Chief
Executive Officer and Peoples' Chief Financial Officer and Treasurer has
evaluated the effectiveness of Peoples' disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended) as of December 31, 2005. Based upon that evaluation, Peoples'
President and Chief Executive Officer and Peoples' Chief Financial Officer and
Treasurer have concluded that:
(a) information required to be disclosed by Peoples in this Annual Report
on Form 10-K and other reports Peoples files or submits under the
Exchange Act would be accumulated and communicated to Peoples'
management, including its President and Chief Executive Officer and
Chief Financial Officer and Treasurer, as appropriate, to allow timely
decisions regarding required disclosure;
(b) information required to be disclosed by Peoples in this Annual Report
on Form 10-K and other reports Peoples files or submits under the
Exchange Act would be recorded, processed, summarized and reported
within the timeframe specified in the SEC's rules and forms; and
(c) Peoples' disclosure controls and procedures are effective as of the
end of the fiscal year covered by this Annual Report on Form 10-K to
ensure that material information relating to Peoples and its
consolidated subsidiaries is made known to them, particularly during
the period in which Peoples' periodic reports, including this Annual
Report on Form 10-K, are being prepared.
Management's Annual Report on Internal Control Over Financial Reporting
-----------------------------------------------------------------------
The "Report of Management's Assessment of Internal Control Over Financial
Reporting" required by Item 308(a) of SEC Regulation S-K is included on page 44
of this Annual Report on Form 10-K.
Attestation Report of Independent Registered Public Accounting Firm
-------------------------------------------------------------------
The "Report of Independent Registered Public Accounting Firm on Effectiveness of
Internal Control Over Financial Reporting" required by Item 308(b) of SEC
Regulation S-K is included on page 45 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
----------------------------------------------------
During the fourth quarter of Peoples' fiscal year ended December 31, 2005, no
significant changes were made in Peoples' internal control over financial
reporting in connection with the above evaluation that has materially effected,
or is reasonably likely to materially effect, Peoples' internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION.
---------------------------
No response required.
Report of Management's Assessment of Internal Control Over Financial Reporting
------------------------------------------------------------------------------
Peoples' management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as
amended. Peoples' internal control over financial reporting has been
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation, integrity, and fair presentation
of Peoples' consolidated financial statements for external reporting
purposes in accordance with United States generally accepted accounting
principles.
With the supervision and participation of Peoples' President and Chief
Executive Officer and Peoples' Chief Financial Officer, management
evaluated the effectiveness of Peoples' internal control over financial
reporting as of December 31, 2005, using the framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission.
No matter how well designed, internal control over financial reporting may
not prevent or detect all misstatements. Projection of the evaluation of
effectiveness to future periods is subject to risks, including but not
limited to (a) controls may become inadequate due to changes in
conditions; (b) a deterioration in the degree of compliance with policies
or procedures; and (c) the possibility of control circumvention or
override, any of which may lead to misstatements due to undetected error
or fraud. Effective internal control over financial reporting can provide
only a reasonable assurance with respect to financial statement
preparation and reporting.
Management assessed the effectiveness of Peoples' internal control over
financial reporting as of December 31, 2005, and, based on this
assessment, has concluded Peoples' internal control over financial
reporting is effective as of that date.
Peoples' independent registered public accounting firm, Ernst & Young LLP
has audited the consolidated financial statements included in this Annual
Report and has issued an audit report on management's assessment of
Peoples' internal control over financial reporting.
/s/ MARK F. BRADLEY
-------------------------------------
Mark F. Bradley
President and Chief Executive Officer
/s/ JOHN W. CONLON
--------------------------------------
John W. Conlon
Chief Financial Officer and Treasurer
Report of Independent Registered Public Accounting Firm on Effectiveness of
Internal Control Over Financial Reporting
---------------------------------------------------------------------------
The Board of Directors and Shareholders of Peoples Bancorp Inc.
We have audited management's assessment, included in the accompanying
Report of Management's Assessment of Internal Control Over Financial
Reporting, that Peoples Bancorp Inc. maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria
established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Peoples Bancorp Inc.'s management is responsible for
maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as
we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management's assessment that Peoples Bancorp Inc.
maintained effective internal control over financial reporting as of
December 31, 2005, is fairly stated, in all material respects, based on
the COSO criteria. Also, in our opinion, Peoples Bancorp Inc. maintained,
in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets of Peoples Bancorp Inc. as of December 31, 2005 and 2004,
and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December
31, 2005 of Peoples Bancorp Inc., and our report dated March 10, 2006
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Charleston, West Virginia
March 10, 2006
Report of Independent Registered Public Accounting Firm on Consolidated
Financial Statements
-----------------------------------------------------------------------
The Board of Directors and Shareholders of Peoples Bancorp Inc.
We have audited the accompanying consolidated balance sheets of Peoples
Bancorp Inc. and subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2005.
These financial statements are the responsibility of Peoples Bancorp
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Peoples
Bancorp Inc. and subsidiaries at December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Peoples Bancorp Inc.'s internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 10,
2006, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Charleston, West Virginia
March 10, 2006
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
---------------------------------------
2005 2004
---------------- -----------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 35,564 $ 30,670
Interest-bearing deposits in other banks 1,084 779
Federal funds sold 3,000 -
------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 39,648 31,449
------------------------------------------------------------------------------------------------------------------------------
Available-for-sale investment securities, at estimated fair value (amortized
cost of $591,022 and $594,457 at December 31, 2005 and 2004, respectively) 589,313 602,364
------------------------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees and costs 1,071,876 1,023,058
Allowance for loan losses (14,720) (14,760)
------------------------------------------------------------------------------------------------------------------------------
Net loans 1,057,156 1,008,298
------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 1,103 612
Bank premises and equipment, net 23,486 22,640
Business owned life insurance 46,993 45,253
Goodwill 59,767 59,096
Other intangible assets 9,513 12,022
Other assets 28,298 27,352
------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,855,277 $ 1,809,086
==============================================================================================================================
LIABILITIES
Deposits:
Non-interest-bearing $ 162,729 $ 152,979
Interest-bearing 926,557 916,442
------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,089,286 1,069,421
------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 35,896 14,495
Federal Home Loan Bank advances 137,800 37,400
------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 173,696 51,895
------------------------------------------------------------------------------------------------------------------------------
Long-term borrowings 362,466 464,864
Junior subordinated notes held by subsidiary trusts 29,350 29,263
Accrued expenses and other liabilities 17,402 18,225
------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,672,200 1,633,668
------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, no par value, 24,000,000 shares authorized,
10,869,655 shares issued and 10,850,641 shares issued at December 31, 2005
and 2004, respectively, including shares in treasury 162,231 162,284
Retained earnings 30,740 18,442
Accumulated comprehensive (loss) income, net of deferred income taxes (1,116) 4,958
Treasury stock, at cost, 350,675 shares and 415,539 shares at December 31, 2005
and 2004, respectively (8,778) (10,266)
------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 183,077 175,418
------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,855,277 $ 1,809,086
==============================================================================================================================
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data) Year ended December 31,
----------------------------------------------------------
2005 2004 2003
------------- ------------ -------------
Interest Income:
Interest and fees on loans $ 69,188 $ 59,880 $ 62,159
Interest on taxable investment securities 23,676 24,237 26,429
Interest on tax-exempt investment securities 2,839 2,778 2,882
Other interest income 72 135 185
------------------------------------------------------------------------------------------------------------------------------
Total interest income 95,775 87,030 91,655
------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 22,550 16,997 18,571
Interest on short-term borrowings 4,224 1,130 793
Interest on long-term borrowings 14,217 14,678 16,344
Interest on junior subordinated notes held by subsidiary trusts 2,478 2,355 2,342
------------------------------------------------------------------------------------------------------------------------------
Total interest expense 43,469 35,160 38,050
------------------------------------------------------------------------------------------------------------------------------
Net interest income 52,306 51,870 53,605
Provision for loan losses 2,028 2,546 3,601
------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 50,278 49,324 50,004
------------------------------------------------------------------------------------------------------------------------------
Other Income:
Service charges on deposit accounts 9,801 9,636 8,192
Investment and insurance commissions 9,243 6,152 1,465
Income from fiduciary activities 3,366 3,471 3,363
Electronic banking income 2,790 2,390 2,055
Business owned life insurance 1,740 1,899 1,403
Mortgage banking income 826 931 1,352
Gain (loss) on securities transactions 539 (3,040) (1,905)
Gain on sale of credit card portfolio - - 1,423
Other 862 769 190
------------------------------------------------------------------------------------------------------------------------------
Total other income 29,167 22,208 17,538
------------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Salaries and employee benefits 26,591 24,574 19,636
Net occupancy and equipment 5,311 5,134 4,561
Amortization of other intangible assets 2,669 2,219 1,493
Professional fees 2,276 2,030 1,938
Data processing and software 1,924 1,849 1,596
Franchise tax 1,793 1,458 1,126
Marketing 1,554 1,128 1,053
Bankcard costs 1,188 1,461 1,160
Communications 1,148 1,116 993
Loss on early debt extinguishment - - 6,858
Other 6,888 6,229 5,489
------------------------------------------------------------------------------------------------------------------------------
Total other expenses 51,342 47,198 45,903
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 28,103 24,334 21,639
------------------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 8,539 4,483 4,055
Deferred (935) 1,576 1,330
------------------------------------------------------------------------------------------------------------------------------
Total income taxes 7,604 6,059 5,385
------------------------------------------------------------------------------------------------------------------------------
Net income $ 20,499 $ 18,275 $ 16,254
==============================================================================================================================
Earnings per share:
Basic $ 1.96 $ 1.74 $ 1.56
------------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.94 $ 1.71 $ 1.52
------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares outstanding:
Basic 10,444,854 10,529,332 10,433,708
------------------------------------------------------------------------------------------------------------------------------
Diluted 10,581,019 10,710,114 10,660,083
------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, except Per Share Data) Accumulated
Common Stock Retained Comprehensive Treasury
Shares Amount Earnings Income (Loss) Stock Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 9,421,222 $ 129,173 $ 12,650 $ 6,446 $ (1,086) $ 147,183
-----------------------------------------------------------------------------------------------------------------------------------
Net income 16,254 16,254
Other comprehensive loss, net of tax (2,191) (2,191)
Cash dividends declared of $0.65 per share (6,837) (6,837)
Purchase of treasury stock, 157,222 shares (4,092) (4,092)
Distribution of treasury stock for deferred
compensation plan (reissued 304 treasury 6 6
shares)
Exercise of common stock options (issued 68,505
shares - reissued 46,274 treasury shares) 22,231 (406) 1,194 788
Tax benefit from exercise of stock options 257 257
Common stock issued under dividend reinvestment 16,403 411 411
plan
5% stock dividend 466,127 13,128 (14,286) 1,158 -
Issuance of common stock 216,000 4,794 4,794
Issuance of common stock to purchase Kentucky
Bancshares Incorporated (issued 592,648
shares -
reissued 29,693 treasury shares) 562,955 13,648 659 14,307
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 10,704,938 $ 161,005 $ 7,781 $ 4,255 $ (2,161) $ 170,880
-----------------------------------------------------------------------------------------------------------------------------------
Net income 18,275 18,275
Other comprehensive income, net of tax 703 703
Cash dividends declared of $0.72 per share (7,614) (7,614)
Purchase of treasury stock, 516,735 shares (13,709) (13,709)
Distribution of treasury stock for deferred
compensation plan (reissued 8,450 treasury 153 153
shares)
Exercise of common stock options
(reissued 127,310 treasury shares) (2,421) 3,539 1,118
Tax benefit from exercise of stock options 300 300
Common stock issued under dividend reinvestment 18,257 498 498
plan
Issuance of common stock to purchase Putnam
Agency, Inc. (reissued 66,582 treasury shares) (327) 1,912 1,585
Issuance of common stock to purchase Barengo
Insurance Agency, Inc. 127,446 3,229 3,229
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 10,850,641 $ 162,284 $ 18,442 $ 4,958 $ (10,266) $ 175,418
-----------------------------------------------------------------------------------------------------------------------------------
Net income 20,499 20,499
Other comprehensive loss, net of tax (6,074) (6,074)
Cash dividends declared of $0.78 per share (8,201) (8,201)
Purchase of treasury stock, 65,325 shares (1,754) (1,754)
Distribution of treasury stock for deferred
compensation plan (reissued 14,860 treasury 284 284
shares)
Exercise of common stock options
(reissued 106,989 treasury shares) (1,003) 2,750 1,747
Stock-based compensation expense 122 122
Tax benefit from exercise of stock options 305 305
Common stock issued under dividend reinvestment 19,014 513 513
plan
Issuance of common stock related to
acquisitions:
Putnam Agency, Inc. (reissued 4,662 treasury
shares) 3 116 119
Barengo Insurance Agency, Inc. (reissued
3,678
treasury shares) 7 92 99
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 10,869,655 $ 162,231 $ 30,740 $ (1,116) $ (8,778) $ 183,077
===================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands) 2005 2004 2003
Net income $ 20,499 $ 18,275 $ 16,254
Other comprehensive income:
Unrealized loss on available-for-sale securities arising in the period (9,078) (1,852) (5,300)
Less: reclassification adjustment for net securities gains (losses) included in net
income 539 (3,040) (1,905)
Unrealized gain (loss) on cash flow hedge derivatives arising in the period 22 (106) 24
Less: reclassification adjustment for derivative losses included in net income (250) - -
----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income (9,345) 1,082 (3,371)
Income tax expense (benefit) 3,271 379 (1,180)
----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income, net of tax (6,074) 703 (2,191)
----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 14,425 $ 18,978 $ 14,063
==================================================================================================================================
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year ended December 31,
----------------------------------------------------------
2005 2004 2003
--------------- --------------- --------------
Cash flows from operating activities:
Net income $ 20,499 $ 18,275 $ 16,254
Adjustments to reconcile net income to net cash provided:
Depreciation, amortization, and accretion, net 9,672 7,735 6,610
Provision for loan losses 2,028 2,546 3,601
Business owned life insurance income (1,740) (1,899) (1,403)
Net (Gain) loss on securities transactions (539) 3,040 1,905
Loss on early debt extinguishment - - 6,858
Loans originated for sale (42,201) (39,415) (69,182)
Proceeds from sales of loans 42,058 42,245 68,274
Net gain on sale of loans (757) (882) (1,349)
Deferred income tax (benefit) expense (935) 1,576 1,330
Increase (decrease) in accrued expenses 654 630 (2,102)
Other, net 3,185 (996) (2,568)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,924 32,855 28,228
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities (110,521) (200,507) (622,808)
Proceeds from sales of available-for-sale securities 995 83,026 153,333
Proceeds from maturities, calls and prepayments of
available-for- sale securities 111,971 152,366 254,650
Proceeds from sales of portfolio loans 11,415 - -
Net (increase) decrease in loans (64,766) (67,528) 6,997
Net expenditures for premises and equipment (3,642) (2,110) (2,996)
Net proceeds (expenditures) from sales of other real estate owned 3,490 (38) (502)
Acquisitions, net of cash received (1,157) 6,074 12,015
Investment in business owned life insurance - (20,000) -
Investment in limited partnership and tax credit funds (3,919) (2,672) (1,752)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (56,134) (51,389) (201,063)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in non-interest-bearing deposits 9,750 17,259 (757)
Net increase (decrease) in interest-bearing deposits 10,726 (40,308) (39,805)
Net increase (decrease) in short-term borrowings 121,801 (56,873) 69,685
Proceeds from long-term borrowings - 89,275 249,958
Payments on long-term borrowings (102,398) (13,059) (84,156)
Cash dividends paid (7,463) (7,146) (5,704)
Purchase of treasury stock (1,754) (13,709) (4,092)
Proceeds from issuance of common stock 1,747 1,118 5,582
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 32,409 (23,443) 190,711
-----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 8,199 (41,977) 17,876
Cash and cash equivalents at beginning of year 31,449 73,426 55,550
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 39,648 $ 31,449 $ 73,426
===================================================================================================================================
Supplemental cash flow information:
Interest paid $ 42,475 $ 34,561 $ 36,054
-----------------------------------------------------------------------------------------------------------------------------------
Income taxes paid 3,248 2,108 6,492
-----------------------------------------------------------------------------------------------------------------------------------
Value of shares issued for acquisitions $ 218 $ 4,814 $ 14,307
-----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Peoples Bancorp Inc. ("Peoples Bancorp") is a financial holding company that
offers a full range of financial services and products, including commercial and
retail banking, insurance, brokerage and trust services, through its principal
operating subsidiary, Peoples Bank, National Association ("Peoples Bank").
Services are provided through Peoples Bank's 48 offices and 34 automated teller
machines in Ohio, West Virginia and Kentucky, as well internet based banking.
1. Summary of Significant Accounting Policies:
------------------------------------------
The accounting and reporting policies of Peoples Bancorp Inc. and
Subsidiaries (collectively, "Peoples") conform to accounting principles
generally accepted in the United States ("US GAAP") and to general
practices within the banking industry. The preparation of the financial
statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates. Certain reclassifications have been made to prior
period amounts to conform to the 2005 presentation. Such reclassifications
had no impact on net income.
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
CONSOLIDATION: Accounting Research Bulletin No. 51 ("ARB 51") requires
a company's consolidated financial statements to include subsidiaries
in which the company has a controlling financial interest, principally
defined as owning a voting interest greater than 50%. This requirement
usually has been applied to subsidiaries in which a company has a
majority voting interest.
The voting interest approach of ARB 51 is not applicable to entities
not controlled by voting interests or in which the equity investors do
not bear the residual economic risks. For such entities, the Financial
Accounting Standards Board ("FASB") Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") provides
guidance on how to identify a variable interest entity and determine
when assets, liabilities, non-controlling interests and results of
operations of a variable interest entity need to be included in a
company's consolidated financial statements.
The consolidated financial statements include the accounts of Peoples
Bancorp and its consolidated subsidiaries, Peoples Bank and Peoples
Investment Company, along with their wholly-owned subsidiaries. Peoples
Bancorp has two statutory business trusts described in Note 9 that are
variable interest entities under FIN 46 for which Peoples Bancorp is
not the primary beneficiary. As a result, the accounts of these trusts
are not included in Peoples' consolidated financial statements. All
significant intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash and
due from banks, interest-bearing deposits in other banks, federal funds
sold and other short-term investments, all with original maturities of
ninety days or less.
INVESTMENT SECURITIES: Investment securities are recorded initially at
cost, which includes premiums and discounts if purchased at other than
par or face value. Peoples amortizes premiums and accretes discounts as
an adjustment to interest income over the estimated life of the
security. The cost of investment securities sold, and any resulting
gain or loss, is based on the specific identification method.
Management determines the appropriate classification of investment
securities at the time of purchase. Held-to-maturity securities are
those securities that Peoples has the positive intent and ability to
hold to maturity and are recorded at amortized cost. Available-for-sale
securities are those securities that would be available to be sold in
the future in response to Peoples' liquidity needs, changes in market
interest rates, and asset-liability management strategies, among other
considerations. Available-for-sale securities are reported at fair
value, with unrealized holding gains and losses reported in
stockholders' equity as a separate component of other comprehensive
income, net of applicable deferred income taxes. Trading securities are
those securities bought and held principally for the purpose of selling
in the near term. Trading securities are reported at fair value, with
holding gains and losses recognized in earnings. Presently, Peoples
classifies its entire investment portfolio as available-for-sale.
Certain restricted equity securities, such as stock of the Federal Home
Loan Bank ("FHLB") of Cincinnati, are included in investment securities
and carried at cost.
Securities Sold Under Agreements to Repurchase: Peoples enters into
sales of securities under agreements to repurchase ("Repurchase
Agreements") with customers and other financial service companies,
which are treated as financings. The obligations to repurchase
securities sold are recorded as a liability on the Consolidated Balance
Sheets and disclosed in Notes 7 and 8. Securities pledged as collateral
under Repurchase Agreements are included in investment securities on
the Consolidated Balance Sheets. The fair value of the collateral
pledged to a third party is continually monitored and additional
collateral is pledged or returned, as deemed appropriate.
Loans: Loans originated that Peoples has the positive intent and
ability to hold to maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an
allowance for loan losses. Net unearned loan fees were $1,056,000 and
$1,368,000 at December 31, 2005 and 2004, respectively.
LOANS HELD FOR SALE: Loans originated and intended to be sold in the
secondary market, generally one-to-four family residential loans, are
carried at the lower of cost or estimated fair value determined on an
aggregate basis. Gains and losses on sales of loans held for sale are
included in mortgage banking income.
Peoples enters into interest rate lock commitments with borrowers and
best efforts commitments with investors on loans originated for sale
into the secondary markets. Peoples uses these commitments to manage
the inherent interest rate and pricing risk associated with selling
loans in the secondary market. The interest rate lock commitments
generally terminate once the loan is funded, the lock period expires or
the borrower decides not to contract for the loan. The best efforts
commitments generally terminate once the loan is sold, the commitment
period expires or the borrower decides not to contract for the loan.
These commitments are considered derivatives which are generally
accounted for by recognizing their estimated fair value on the balance
sheet as either a freestanding asset or liability. The valuation of
such commitments does not consider expected cash flows related to the
servicing of the future loan. Management has determined these
derivatives do not have a material effect on Peoples' financial
position, results of operations or cash flows.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for management's estimate of the probable credit losses
inherent in the loan portfolio. Management's evaluation of the adequacy
of the allowance for loan loss and the appropriate provision for loan
losses is based upon a quarterly evaluation of the portfolio. This
formal analysis is inherently subjective and requires management to
make significant estimates of factors affecting loan losses, including
specific losses, levels and trends in impaired and nonperforming loans,
historical loan loss experience, current national and local economic
conditions, volume, growth and composition of the portfolio, regulatory
guidance and other relevant factors. Loans deemed to be uncollectible
are charged against the allowance for loan losses, while recoveries of
previously charged-off amounts are credited to the allowance for loan
losses.
The amount of the allowance for the various loan types represents
management's estimate of expected losses from existing loans based upon
specific allocations for individual lending relationships and
historical loss experience for each category of homogeneous loans. The
allowance for loan losses related to impaired loans is based on
discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent
loans. This evaluation requires management to make estimates of the
amounts and timing of future cash flows on impaired loans, which
consists primarily of nonaccrual and restructured loans. While
allocations are made to specific loans and pools of loans, the
allowance is available for all loan losses.
BANK PREMISES AND EQUIPMENT: Bank premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed on the
straight-line method over the estimated useful lives of the related
assets owned. Major improvements to leased facilities are capitalized
and included in bank premises at cost less accumulated depreciation,
which is calculated on the straight-line method over the lesser of the
remaining term of the leased facility or the estimated economic life of
the improvement.
BUSINESS OWNED LIFE INSURANCE: Business owned life insurance ("BOLI")
represents life insurance on the lives of certain employees who have
provided positive consent allowing Peoples Bank to be the beneficiary
of such policies. These policies are recorded at their cash surrender
value, or the amount that can be realized. Income from these policies
and changes in the cash surrender value are recorded in other income.
OTHER REAL ESTATE OWNED: Other real estate owned ("OREO"), included in
other assets on the Consolidated Balance Sheet, is comprised primarily
of commercial and residential real estate properties acquired by
Peoples Bank in satisfaction of a loan. OREO also includes bank
premises qualifying as held for sale under Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." OREO obtained in satisfaction of a loan
is recorded at the lower of cost or estimated fair value based on
appraised value at the date actually or constructively received, less
estimated costs to sell the property. Bank premises are transferred at
the lower of carrying value or estimated fair value, less estimated
costs to sell the property.
Goodwill and Other Intangible Assets: Goodwill represents the excess of
the cost of an acquisition over the fair value of the net assets
acquired in business combinations. Goodwill is not amortized but is
tested for impairment at least annually. Currently, Peoples' goodwill
is confined to a single reporting unit for impairment testing. Peoples
performed the required goodwill impairment tests and concluded the
recorded value of goodwill was not impaired as of December 31, 2005,
based upon the estimated fair value of the reporting unit.
Other Intangible Assets consist of customer relationship intangible
assets, primarily core deposit intangibles, representing the present
value of future net income to be earned from acquired customer
relationships and are amortized over their estimated lives ranging from
7 to 10 years. Customer relationship intangible assets totaled $19.3
million, net of accumulated amortization of $10.6 million and $7.9
million, at December 31, 2005 and 2004, respectively. The estimated
aggregate amortization expense related to customer relationship
intangible assets for the each of the next five years is estimated as
follows: $2.2 million in 2006; $1.9 million in 2007; $1.5 million in
2008; $1.2 million in 2009; and $0.9 million in 2010.
MORTGAGE SERVICING ASSETS: Mortgage servicing assets are recognized for
loan originations when there is a definitive plan to sell the
underlying loan and retain the servicing. Mortgage servicing assets are
reported in other intangible assets and are amortized into mortgage
banking income in proportion to, and over the period of, the estimated
future net servicing income of the underlying mortgage loans. Mortgage
servicing assets are evaluated for impairment based on the fair value
of those rights and recorded at the lower of cost or fair value, with
write-downs reflected in a valuation reserve and recognized through
mortgage banking income. The fair value of the mortgage servicing
rights is determined by using a discounted cash flow model, which
estimates the present value of the future net cash flows of the
servicing portfolio based on various factors, such as servicing costs,
expected prepayment speeds and discount rates. Mortgage servicing
assets totaled $813,000 and $653,000 at December 31, 2005 and 2004,
respectively.
TRUST ASSETS UNDER MANAGEMENT: Peoples Bank manages certain assets held
by the bank in a fiduciary or agency capacity for customers. These
assets under management, other than cash on deposit at Peoples Bank,
are not included in the Consolidated Balance Sheets since they are not
assets of Peoples Bank.
INTEREST INCOME RECOGNITION: Interest income on loans and investment
securities is recognized by methods that result in level rates of
return on principal amounts outstanding. Amortization of premiums has
been deducted from, and accretion of discounts has been added to, the
related interest income. Nonrefundable loan fees and direct loan costs
are deferred and recognized over the life of the loan as an adjustment
of the yield.
Peoples discontinues the accrual of interest on loans when management
believes collection of all or a portion of contractual interest has
become doubtful, which generally occurs when a contractual payment on a
loan is 90 days past due. When interest is deemed uncollectible,
amounts accrued in the current year are reversed and amounts accrued in
prior years are charged against the allowance for loan losses. Interest
received on nonaccrual loans is included in income only if principal
recovery is reasonably assured. A nonaccrual loan is restored to
accrual status when it is brought current, has performed in accordance
with contractual terms for a reasonable period of time, and the
collectibility of the total contractual principal and interest is no
longer in doubt.
OTHER INCOME RECOGNITION: Service charges on deposits include cost
recovery fees associated with services provided, such as overdraft and
non-sufficient funds. Income from fiduciary activities includes fees
for services such as asset management, record keeping, retirement
services and estate management. Income from these activities is
recognized at the time the related services are performed.
Insurance and investment income includes commissions and fees relating
to the sales of policies and investments as well as fees for related
insurance services. Insurance commission income is recognized as of the
effective date of the insurance policy, net of adjustments, including
policy cancellations. Such adjustments are recorded when the amount can
be reasonably estimated, which is generally in the period in which they
occur. Contingent performance-based commissions from insurance
companies are recognized when earned and no contingencies remain.
INCOME TAXES: Deferred income tax assets and liabilities are provided
for temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements at the
statutory tax rate. A valuation allowance, if needed, reduces deferred
tax assets to the expected amount most likely to be realized.
Realization of deferred tax assets is dependent upon the generation of
a sufficient level of future taxable income and recoverable taxes paid
in prior years. The components of other comprehensive income included
in the Consolidated Statements of Stockholders' Equity have been
computed based upon a 35% effective tax rate.
EARNINGS PER SHARE: Basic earnings per share are determined by dividing
net income by the weighted-average number of common shares outstanding.
Diluted earnings per share is determined by dividing net income by the
weighted-average number of common shares outstanding increased by the
number of common shares that would be issued assuming the exercise of
stock options. The dilutive effect of stock options approximated
136,165; 180,782 and 226,375 in 2005, 2004 and 2003, respectively.
OPERATING SEGMENTS: Peoples' business activities are currently confined
to one reportable segment which is community banking. As a community
banking entity, Peoples offers its customers a full range of products
through various delivery channels. Peoples aggregated its operating
segments due to similar economic characteristics, products and
services, production processes, type of customer, distribution channels
and regulatory environment.
DERIVATIVE FINANCIAL INSTRUMENTS: Peoples enters into derivative
transactions principally to protect against the risk of adverse
interest rate movements. Peoples carries all derivative financial
instruments at fair value on the Consolidated Balance Sheets as a
component of other assets. Peoples' derivative financial instruments
did not have a material effect on Peoples' financial position at
December 31, 2005 or 2004, and results of operations or cash flows in
2005, 2004 and 2003. US GAAP provides special hedge accounting
provisions, which permit the change in the fair value of the hedged
item related to the risk being hedged to be recognized in earnings in
the same period and in the same income statement line as the change in
fair value of the derivative.
Derivative financial instruments designated in a hedge relationship to
mitigate exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow
hedges. Cash flow hedges are accounted for by recording the fair value
of the derivative financial instrument on the balance sheet as either a
freestanding asset or liability, with a corresponding offset recorded
in other comprehensive income within stockholders' equity, net of
deferred tax. Amounts are reclassified from other comprehensive income
to the income statement in the period or periods the hedged forecasted
transaction affects earnings.
Derivative gains and losses not effective in hedging the expected cash
flows of the hedged item are recognized immediately in the income
statement. At the hedge's inception and at least quarterly thereafter,
a formal assessment is performed to determine whether changes in cash
flows of the derivative financial instruments have been highly
effective in offsetting changes in cash flows of the hedged items and
whether they are expected to be highly effective in the future. If it
is determined a derivative financial instrument has not been or will
not continue to be highly effective as a hedge, hedge accounting is
discontinued prospectively. Basis adjustments recorded on hedged assets
and liabilities are amortized over the remaining life of the hedged
item no later than when hedge accounting ceases. Peoples considers its
derivative financial instruments to be immaterial and recognizes
changes in estimated fair value in earnings.
STOCK-BASED COMPENSATION: Peoples has various stock option plans, which
are detailed in Note 16. Peoples accounts for stock-based compensation
using the intrinsic value method.
Under the provisions of the stock option plans, the option price per
share cannot be less than the fair market value of the underlying
common shares on the date of grant. As a result, Peoples does not
recognize any stock-based employee compensation expense in net income.
The following table illustrates the effect on net income and earnings
per share had Peoples applied fair value recognition to stock-based
employee compensation, assuming the estimated fair value of the options
is amortized to expense over the vesting period:
(Dollars in Thousands, except Per Share Data) 2005 2004 2003
--------- -------- --------
Net Income, as reported $ 20,499 $ 18,275 $ 16,254
Addback: stock-based compensation expense included
in net income, net of tax 79 - -
Deduct: stock-based compensation expense determined
under fair value based method, net of tax 733 527 474
--------------------------------------------------------------------------------------------------
Pro forma net income $ 19,845 $ 17,748 $ 15,780
--------------------------------------------------------------------------------------------------
(Dollars in Thousands, except Per Share Data) 2005 2004 2003
--------- -------- --------
Basic Earnings Per Share:
- As Reported $ 1.96 $ 1.74 $ 1.56
--------------------------------------------------------------------------------------------------
- Pro forma 1.90 1.69 1.51
--------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
- As Reported $ 1.94 $ 1.71 $ 1.52
--------------------------------------------------------------------------------------------------
- Pro forma 1.88 1.66 1.48
--------------------------------------------------------------------------------------------------
The fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
2005 2004 2003
----------- ---------- ----------
Risk-free interest rate 4.37% 4.14% 3.65%
Dividend yield 2.61% 2.62% 2.47%
Volatility factor of the market price of parent stock 26.0% 27.8% 29.8%
Weighted average expected life of options 6.5 years 7.0 years 7.0 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Peoples' employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NEW ACCOUNTING PRONOUNCEMENTS: On February 16, 2006, the FASB issued
Statement of Financial Accounting Standards No. 155, "Accounting for
Certain Hybrid Instruments - an amendment of FASB Statements No. 133
and 140" ("SFAS 155"). SFAS 155 amends FASB Statements No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and resolves issues addressed in
Statement 133 Implementation Issue No. D1, "Application of Statement
133 to Beneficial Interests in Securitized Financial Assets." SFAS 155
is effective for all financial instruments acquired or issued after the
beginning of the first fiscal year that begins after September 15,
2006. The adoption of SFAS 155 is not expected to have a material
impact on Peoples' financial condition, results of operations or cash
flows.
In November 2005, the FASB issued FASB Staff Position 115-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("FSP 115-1"). FSP 115-1 provides additional
guidance on when an investment in a debt or equity security should be
considered impaired and when that impairment should be considered
other-than-temporary and recognized as a loss in earnings.
Specifically, the guidance clarifies that an investor should recognize
an impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell has not been made. FSP
115-1 also requires certain disclosures about unrealized losses that
have not been recognized as other-than-temporary impairments.
Management applied the guidance in FSP 115-1 in 2005.
On June 1, 2005, the FASB issued Statement of Financial Accounting
Standards No. 154, "Accounting Changes and Error Corrections" ("SFAS
154"). SFAS 154 replaces APB Opinion No. 20, "Accounting Changes", and
FASB Statement No. 3, "Reporting Accounting Changes in Interim
Financial Statements", and changes the requirements for the accounting
for and reporting of a change in accounting principle. SFAS 154 applies
to all voluntary changes in accounting principle, as well as changes
required by an accounting pronouncement in the unusual instance that
the pronouncement does not include specific transition provisions. SFAS
154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. Earlier application
is permitted for accounting changes and corrections of errors made in
fiscal years beginning after June 1, 2005. The adoption of this
standard is not expected to have a material impact on Peoples'
financial condition, results of operations or cash flows.
On December 16, 2004, the FASB issued a revision of Statement No. 123,
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires the
compensation cost relating to share-based payment transactions to be
recognized in financial statements based on the fair value of the
equity or liability instruments issued. SFAS 123(R) replaces SFAS 123
and supercedes APB 25. SFAS 123 (R) was originally effective for public
companies that do not file as small business issuers as of the
beginning of the first interim or annual reporting period that begins
after June 15, 2005. On April 15, 2005, the SEC adopted a new rule that
amends the compliance date for SFAS 123 (R) to allow public companies
that do not file as small business issuers to implement SFAS 123 (R) at
the beginning of their next fiscal year that begins after June 15,
2005. For Peoples, SFAS 123(R) now becomes effective for the fiscal
year beginning January 1, 2006. The impact of adopting Statement 123(R)
on Peoples' financial statements will depend on the method of adoption,
the level of stock-based compensation awards and the valuation method
selected by management.
In December 2004, the FASB issued Statement No. 153 "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions." This statement amends the principle that
exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged and more broadly provides for exceptions
regarding exchanges of nonmonetary assets that do not have commercial
substance. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption
of this standard is not expected to have a material impact on financial
condition, results of operations or liquidity.
2. Fair Values of Financial Instruments:
------------------------------------
Peoples used the following methods and assumptions in estimating its fair
value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheet for these captions approximate their fair values.
INVESTMENT SECURITIES: Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices of
comparable securities.
LOANS: The fair value of performing variable rate loans that reprice
frequently and performing demand loans, with no significant change in
credit risk, is based on carrying value. The fair value of performing
loans is estimated using discounted cash flow analyses and interest
rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
The fair value of significant nonperforming loans is based on either
the estimated fair value of underlying collateral or estimated cash
flows, discounted at a rate commensurate with the risk. Assumptions
regarding credit risk, cash flows, and discount rates are determined
using available market information and specific borrower information.
DEPOSITS: The carrying amounts of demand deposits, savings accounts and
certain money market deposits approximate their fair values. 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.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
FHLB advances, and securities sold overnight under repurchase
agreements approximate their fair values. The fair value of term
national market repurchase agreements is estimated using a discounted
cash flow calculation based on rates currently available to Peoples for
repurchase agreements with similar terms.
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.
JUNIOR SUBORDINATED NOTES: The fair value of the junior subordinated
notes is estimated using discounted cash flow analysis based on current
market rates of securities with similar risk and remaining maturity.
INTEREST RATE CONTRACTS: Fair values for interest rate contracts are
based on quoted market prices.
FINANCIAL INSTRUMENTS: The fair value of loan commitments and standby
letters of credit is estimated using the fees currently charged to
enter into similar agreements considering the remaining terms of the
agreements and the counter parties' credit standing. The estimated fair
value of these commitments approximates their carrying value.
The estimated fair values of Peoples' financial instruments at December
31 are as follows:
2005 2004
------------------------------ ------------------------------
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
------------ ---------- ------------ -----------
Financial assets:
Cash and cash equivalents $ 39,648 $ 39,648 $ 31,449 $ 31,449
Investment securities 589,313 589,313 602,364 602,364
Loans 1,057,156 1,055,134 1,008,298 1,010,378
Financial liabilities:
Deposits $ 1,089,286 $ 1084,130 $ 1,069,421 $ 1,072,906
Short-term borrowings 173,696 173,696 51,895 51,895
Long-term borrowings 362,466 361,417 464,864 469,000
Junior subordinated notes 29,350 27,553 29,263 31,945
Other financial instruments:
Interest rate contracts $ 97 $ 97 $ 133 $ 133
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.
3. Investment Securities:
The following tables present the amortized costs, gross unrealized gains
and losses and estimated fair value of securities available-for-sale at
December 31.
Gross Gross
(Dollars in Thousands) Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------- -------------- --------------- -------------
2005
----
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 112,305 $ 327 $ (2,259) $ 110,373
Obligations of states and political subdivisions 67,693 1,901 (112) 69,482
Mortgage-backed securities 359,330 328 (6,574) 353,084
Other securities 51,694 4,926 (246) 56,374
-------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 591,022 $ 7,482 $ (9,191) $ 589,313
-------------------------------------------------------------------------------------------------------------
2004
----
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 63,817 $ 163 $ (1,210) $ 62,770
Obligations of states and political subdivisions 59,134 3,103 (3) 62,234
Mortgage-backed securities 417,040 2,391 (1,337) 418,094
Other securities 54,466 5,087 (287) 59,266
-------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 594,457 $ 10,744 $ (2,837) $ 602,364
-------------------------------------------------------------------------------------------------------------
At December 31, 2005, Peoples held investment securities issued by Chase
Mortgage Finance Corporation with an aggregate book value of $20,166,000
and estimated fair value of $19,847,000, which was the only single issue
(excluding U.S. government and U.S. agency securities) that exceeded 10%
of stockholders' equity. In 2005, 2004 and 2003, gross gains of $539,000,
$62,000 and $580,000 and gross losses of $0, $3,102,000 and $2,485,000
were realized, respectively. At December 31, 2005 and 2004, investment
securities having a carrying value of $455,206,000 and $449,162,000,
respectively, were pledged to secure public and trust department deposits
and repurchase agreements in accordance with federal and state
requirements.
Declines in estimated fair value of investment securities below their cost
that are deemed to be other-than-temporary are recorded in earnings as
realized losses. Management systematically evaluates investment securities
for other-than-temporary declines in fair value on a quarterly basis. This
analysis requires management to consider various factors, which include
(1) duration and magnitude of the decline in value, (2) the financial
condition of the issuer, and (3) Peoples' ability and intent to continue
holding the investment for a period of time sufficient to allow for any
anticipated recovery in market value. The following table presents a
summary of available-for-sale investment securities that had an unrealized
loss at December 31:
(Dollars in Thousands) Obligations of Obligations
U.S. Treasury and of states and Mortgage-
government political backed Other
agencies subdivisions securities securities Total
------------------- --------------- ---------------- ---------------- ----------------
2005
----
Less than 12 months
Estimated fair value $ 87,693 $ 10,926 $ 278,712 $ 1,540 $ 378,871
Unrealized loss 1,928 104 5,075 120 7,227
12 months or more
Estimated fair value $ 16,290 $ 492 $ 53,034 $ 3,100 $ 72,916
Unrealized loss 331 8 1,499 126 1,964
----------------------------------------------------------------------------------------------------------------------
Total
Estimated fair value $ 103,983 $ 11,418 $ 331,746 $ 4,640 $ 451,787
Unrealized loss 2,259 112 6,574 246 9,191
----------------------------------------------------------------------------------------------------------------------
2004
----
Less than 12 months
Estimated fair value $ 26,556 $ 685 $ 134,498 $ - $ 161,739
Unrealized loss 1,178 3 1,007 - 2,188
12 months or more
Estimated fair value $ 4,128 $ - $ 30,855 $ 7,700 $ 42,683
Unrealized loss 32 - 330 287 649
----------------------------------------------------------------------------------------------------------------------
Total
Estimated fair value $ 30,684 $ 685 $ 165,353 $ 7,700 $ 204,422
Unrealized loss 1,210 3 1,337 287 2,837
----------------------------------------------------------------------------------------------------------------------
The majority of the unrealized losses at both December 31, 2005 and 2004,
related to securities, including mortgage-backed securities, issued by
U.S. agencies and corporations and U.S. government sponsored entities.
These losses were attributable to changes in market interest rates since
the securities were purchased given the negligible inherent credit risk
for these securities. Management does not believe any individual
unrealized loss at December 31, 2005, represents an other-than-temporary
impairment since Peoples has the ability and intent to hold those
securities for a period of time sufficient to recover the amortized cost.
The following table presents the amortized costs, fair value and weighted
average yield of securities by contractual maturity at December 31, 2005.
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) Obligations of Obligations Total
U.S. Treasury of states Mortgage- available-
and government and political backed Other for-sale
agencies subdivisions securities securities securities
------------------ --------------- ------------- ------------- -------------
Within one year
Amortized cost $ 45,154 $ 6,778 $ 14 $ 1,537 $ 53,483
Fair value 44,574 6,832 15 1,569 52,990
Average yield 4.37 % 7.13 % 6.74 % 7.44 % 4.81 %
1 to 5 years
Amortized cost $ 28,185 $ 44,538 $ 2,815 $ 17,546 $ 93,084
Fair value 28,088 45,657 2,805 18,276 94,826
Average yield 4.53 % 6.59 % 4.95 % 8.04 % 6.19 %
5 to 10 years
Amortized cost $ 13,446 $ 16,167 $ 31,105 $ - $ 60,718
Fair value 13,270 16,783 30,830 - 60,883
Average yield 4.06 % 6.70 % 4.69 % - % 5.09 %
Over 10 years
Amortized cost $ 25,520 $ 210 $ 325,396 $ 32,611 $ 383,737
Fair value 24,441 210 319,434 36,529 380,614
Average yield 5.29 % 6.91 % 4.28 % 6.38 % 4.53 %
-----------------------------------------------------------------------------------------------------------------
Total amortized cost $ 112,305 $ 67,693 $ 359,330 $ 51,694 $ 591,022
Total fair value $ 110,373 $ 69,482 $ 353,084 $ 56,374 $ 589,313
Total average yield 4.58 % 6.67 % 4.32 % 6.97 % 4.87 %
-----------------------------------------------------------------------------------------------------------------
4. Loans:
-----
Peoples Bank originates various types of loans, including commercial,
financial and agricultural loans ("commercial loans"), real estate loans
and consumer loans, focusing primarily on lending opportunities in central
and southeastern Ohio, northwestern West Virginia, and northeastern
Kentucky markets. Loans are comprised of the following at December 31:
(Dollars in Thousands) 2005 2004
------------ ------------
Commercial, mortgage $ 504,923 $ 450,270
Commercial, other 136,331 126,473
Real estate, construction 50,745 35,423
Real estate, mortgage 316,081 349,965
Consumer 63,796 60,927
------------------------------------------------------------------------
Total loans $ 1,071,876 $ 1,023,058
------------------------------------------------------------------------
Excluded from the loan balances above are $1.1 million and $0.6 million of
real estate loans originated and held for sale in the secondary market at
December 31, 2005 and 2004, respectively. Peoples Bank has pledged certain
loans secured by 1-4 family and multifamily residential mortgages and
commercial mortgages under a blanket collateral agreement to secure
borrowings from the FHLB as discussed in Note 8. At December 31, 2005, the
amount of such pledged loans totaled $508.5 million. Peoples Bank has also
pledged certain commercial loans totaling $8.9 million at December 31,
2005, to the Federal Reserve Bank of Cleveland to secure advances from the
discount window.
NONACCRUAL/PAST DUE LOANS: Nonaccrual loans totaled $6,284,000 and
$5,130,000 at December 31, 2005 and 2004, respectively. Accruing loans past
due 90 or more days totaled $251,000 and $285,000 at December 31, 2005 and
2004, respectively.
Impaired Loans: At December 31, 2005, impaired loans totaled $11,849,000,
including $4,849,000 of impaired loans for which the related allowance for
loan losses was $1,898,000. Impaired loans totaled $10,467,000 at December
31, 2004, including $4,901,000 of impaired loans for which the related
allowance for loan losses was $1,965,000. The remaining impaired loan
balances do not have a related allocation of the allowance for loan losses.
Peoples' average investment in impaired loans was $10,751,000, $17,681,000
and $13,686,000 and interest income recognized on impaired loans was
$668,000, $513,000 and $1,097,000 in 2005, 2004 and 2003, respectively.
Interest received on impaired loans is included in income if principal
recovery is reasonably assured.
LOAN CONCENTRATIONS: Peoples' loans consist of credits to borrowers spread
over a broad range of industrial classifications, with no loans to foreign
entities. Peoples' largest concentration of commercial loans consist of
credits to assisted living facilities and nursing homes, which totaled
$57,343,000 and $58,793,000 at December 31, 2005 and 2004, respectively.
Loans to lodging and lodging related companies also represent a significant
portion of Peoples' commercial loans, totaling $56,174,000 and $65,752,000
at December 31, 2005 and 2004, respectively. These credits were subjected
to Peoples' normal commercial underwriting standards and did not present
more than the normal amount of risk assumed in other lending areas. Peoples
does not extend credit to any single borrower or group of related borrowers
in excess of the legal lending limit of its subsidiary bank.
RELATED PARTY LOANS: In the normal course of its business, Peoples Bank has
granted loans to executive officers and directors of Peoples and to their
affliliates. Related party loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable loans with unrelated persons and did not involve more than
normal risk of collectibility. The following is an analysis of activity of
related party loans for the year ended December 31, 2005:
(Dollars in Thousands)
Balance, January 1, 2005 $ 20,667
New loans and disbursements 23,358
Repayments (21,153)
Other changes 1,509
----------------------------------------------------------------
Balance, December 31, 2005 $ 24,381
----------------------------------------------------------------
Allowance for Loan Losses: Changes in the allowance for loan losses for
each of the three years in the period ended December 31, 2005, were as
follows:
(Dollars in Thousands) 2005 2004 2003
---------- ---------- -----------
Balance, beginning of year $ 14,760 $ 14,575 $ 13,086
Charge-offs (4,193) (3,787) (3,786)
Recoveries 2,125 1,426 1,101
-------------------------------------------------------------------------
Net charge-offs (2,068) (2,361) (2,685)
Provision for loan losses 2,028 2,546 3,601
Allowance for loan losses acquired - - 573
-------------------------------------------------------------------------
Balance, end of year $ 14,720 $ 14,760 $ 14,575
-------------------------------------------------------------------------
Included in the allowance for loan losses was an allocation for credit
cards of $113,000 and $232,000 at December 31, 2004 and 2003, respectively,
relating to the credit card recourse disclosed in Note 12. There was no
allocation at December 31, 2005, due to the expiration of the recourse
during 2005.
5. Bank Premises and Equipment:
---------------------------
The major categories of bank premises and equipment and accumulated
depreciation are summarized as follows at December 31:
(Dollars in Thousands) 2005 2004
----------- -----------
Land $ 4,577 $ 4,610
Building and premises 27,020 24,778
Furniture, fixtures and equipment 15,616 15,448
------------------------------------------------------------------
47,213 44,836
Accumulated depreciation (23,727) (22,196)
------------------------------------------------------------------
Net book value $ 23,486 $ 22,640
------------------------------------------------------------------
Peoples depreciates its building and premises and furniture, fixtures and
equipment over estimated useful lives generally ranging from 5 to 40 years
and 2 to 10 years, respectively. Depreciation expense was $2,264,000,
$2,451,000 and $2,240,000, in 2005, 2004 and 2003, respectively.
LEASES: Peoples leases certain banking facilities and equipment under
various agreements with original terms providing for fixed monthly
payments over periods ranging from two to ten years. Certain leases
contain renewal options and rent escalation clauses calling for rent
increases over the term of the lease. All leases which contain a rent
escalation clause are accounted for on a straight-line basis. Rent expense
was $854,000, $550,000 and $349,000 in 2005, 2004 and 2003, respectively.
Peoples leases certain properties from related parties. Payments related
to these leases totaled $153,000, $71,000 and $0 for 2005, 2004 and 2003,
respectively. The terms of these leases are substantially the same as
those offered for comparable transactions with non-related parties at the
time the lease transactions were consummated.
The future minimum payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at December
31, 2005:
(Dollars in Thousands)
2006 $ 631
2007 625
2008 616
2009 573
2010 527
Thereafter 2,936
-----------------------------------------------
Total $ 5,908
-----------------------------------------------
6. Deposits:
--------
Included in interest-bearing deposits are various time deposit products.
The maturities of time deposits for each of the next five years and
thereafter are as follows: $227,551,000 in 2006; $162,767,000 in 2007;
$86,829,000 in 2008; $17,988,000 in 2009; $11,776,000 in 2010 and $23,000
thereafter. Deposits from related parties approximated $10.2 million and
$9.0 million at December 31, 2005 and 2004, respectively.
7. Short-term Borrowings:
---------------------
Peoples utilizes various short-term borrowings as sources of funds,
including FHLB advances and retail Repurchase Agreements with customers.
The FHLB advances are collateralized by residential and non-residential
mortgage loans and investment securities. Other short-term borrowings
represented a short-term loan from an unrelated financial institution to
fund an acquisition. Short-term borrowings are summarized as follows:
(Dollars in Thousands) Retail Other
Federal Funds Repurchase FHLB Short-Term
Purchased Agreements Advances Borrowings
-------------- ---------------- ------------ ---------------
2005
----
Ending balance $ - $ 35,896 $ 137,800 $ -
Average balance - 21,129 107,184 -
Highest month end balance - 35,896 167,000 -
Interest expense - 572 3,652 -
Weighted-average interest rate:
End of year - % 3.57 % 4.12 % - %
During the year - 2.71 3.36 -
2004
----
Ending balance $ - $ 14,495 $ 37,400 $ -
Average balance 420 16,385 70,246 -
Highest month end balance 6,500 18,788 99,700 -
Interest expense 8 155 967 -
Weighted-average interest rate:
End of year - % 1.52 % 2.23 % - %
During the year 1.82 0.95 1.38 -
2003
----
Ending balance $ - $ 16,468 $ 92,300 $ -
Average balance 1 20,151 26,900 7,545
Highest month end balance - 24,342 92,300 17,000
Interest expense - 175 400 218
Weighted-average interest rate:
End of year - % 0.53 % 1.23 % - %
During the year 1.20 0.87 1.49 2.89
8. Long-term Borrowings:
--------------------
Long-term borrowings consisted of the following at December 31:
(Dollars in Thousands) 2005 2004
------------- -------------
Term note payable, at LIBOR (parent company) $ 13,600 $ 15,300
National market repurchase agreements, bearing interest
at rates ranging from 2.09% to 4.08% 157,850 238,750
FHLB convertible rate advances, bearing interest at rates
ranging from 4.36% to 5.63% 102,000 107,000
FHLB non-amortizing, fixed rate advances, bearing interest at
rates ranging from 1.94% to 4.48% 41,000 43,500
FHLB amortizing, fixed rate advances, bearing interest at rates
ranging from 2.01% to 5.00% 48,016 60,314
-----------------------------------------------------------------------------------------------------
Total long-term borrowings $ 362,466 $ 464,864
-----------------------------------------------------------------------------------------------------
Peoples' national market Repurchase Agreements consist of agreements with
high quality, financially secure financial service companies and have
original maturities ranging from 2 to 5 years.
The FHLB advances consist of various borrowings with original maturities
ranging from 10 to 20 years and generally may not be repaid prior to
maturity without a penalty. The rate on the convertible rate advances are
fixed from initial periods ranging from one to four years, depending on
the specific advance. After the initial fixed rate period, the FHLB has
the option to convert each advance to a LIBOR based, variable rate
advance. If the FHLB exercises its option, Peoples may repay the advance
in whole or in part on the conversion date or any subsequent repricing
date without a prepayment fee. At all other times, early repayment of any
convertible rate advance would result in Peoples incurring a prepayment
penalty.
All FHLB advances, including short-term advances, are collateralized by
Peoples Bank's real estate mortgage portfolio and other bank assets.
Peoples' borrowing capacity with the FHLB is based on the amount of FHLB
common stock owned by Peoples Bank and the amount of collateral pledged.
The most restrictive requirement of the debt agreement requires Peoples to
provide commercial real estate mortgage loans as collateral in an amount
not less than 300% of advances outstanding.
The aggregate minimum annual retirements of long-term borrowings in the
next five years and thereafter are as follows:
(Dollars in Thousands)
2005 $ 94,550
2006 83,729
2007 70,304
2008 81,308
2009 28
Thereafter 32,547
--------------------------------------------
Total $ 362,466
--------------------------------------------
9. Junior Subordinated Notes Held By Subsidiary Trusts:
---------------------------------------------------
Peoples Bancorp has two statutory business trusts (the "Trusts") that were
formed for the purpose of issuing or participating in pools of
corporation-obligated mandatorily redeemable capital securities (the
"Capital Securities" or "Trust Preferred Securities"), with 100% of the
common equity in the Trusts owned by Peoples Bancorp. The proceeds from
the Capital Securities and common equity were invested in junior
subordinated debt securities of Peoples Bancorp (the "Debentures").
The Debentures held by the trusts are the sole assets of those trusts.
Distributions on the Capital Securities are payable semiannually at a rate
per annum equal to the interest rate being earned by the Trusts on the
Debentures and are recorded as interest expense by Peoples. Since the
Trusts are variable interest entities and Peoples Bancorp is not deemed to
be the primary beneficiary, the Trusts are not included in Peoples'
consolidated financial statements. As a result, Peoples includes the
Debentures as a separate category of long-term debt on the Consolidated
Balance Sheets entitled "Junior Subordinated Notes Held by Subsidiary
Trusts" and the related expense as interest expense on the Consolidated
Statements of Income.
Under the provisions of the subordinated debt, Peoples Bancorp has the
right to defer payment of interest on the subordinated debt at any time,
or from time to time, for periods not exceeding five years. If interest
payments on the subordinated debt are deferred, the dividends on the
Capital Securities are also deferred. Interest on the subordinated debt is
cumulative. Peoples Bancorp has entered into agreements which, taken
collectively, fully and unconditionally guarantee the Capital Securities
subject to the terms of each of the guarantees.
The Capital Securities are subject to mandatory redemption, in whole or in
part, upon repayment of the debentures. The Debentures held by PEBO
Capital Trust I are first redeemable, in whole or in part, by Peoples
Bancorp on May 1, 2009. The Debentures held by PEBO Capital Trust II are
first redeemable, in whole or in part, by Peoples Bancorp on April 22,
2007. The Capital Securities issued by the Trusts are summarized as
follows at December 31:
(Dollars in thousands) 2005 2004
------------ ------------
Capital securities of PEBO Capital Trust I, 8.62%, due May 1, 2029, net $ 22,415 $ 22,380
of unamortized issuance costs
Capital securities of PEBO Capital Trust II, 6-month LIBOR + 3.70%, due
April 22, 2032, net of unamortized issuance costs 6,935 6,883
---------------------------------------------------------------------------------------------------------
Total capital securities 29,350 29,263
---------------------------------------------------------------------------------------------------------
Total capital securities qualifying for Tier 1 capital 29,350 29,263
---------------------------------------------------------------------------------------------------------
The Trust Preferred Securities currently qualify as Tier 1 capital for
regulatory capital purposes, subject to certain quantitative limits and
qualitative standards. On March 1, 2005, the Board of Governors of the
Federal Reserve System (the "Federal Reserve") adopted final rules
amending its risk-based capital standards for bank holding companies
regarding the continued inclusion of trust preferred securities in the
Tier 1 capital of bank holding companies. The new rules, which include a
five-year transition period, limit the aggregate amount of trust preferred
securities and certain other capital elements to 25% of core capital
elements, net of goodwill. The excess amount of trust preferred securities
not qualifying for Tier 1 capital may be included in Tier 2 capital.
Additionally, trust preferred securities no longer qualify for Tier 1
capital within five years of their maturity. The Capital Securities will
continue to qualify as Tier 1 capital under the new rules until they are
within five years of maturity.
10. Employee Benefit Plans:
----------------------
Peoples sponsors a noncontributory defined benefit pension plan that
covers substantially all employees hired before January 1, 2003, and
noncontributory defined contribution plan that covers substantially all
employees hired on or after January 1, 2003. These plans provide
retirement benefits based on an employee's years of service and
compensation. Peoples also has a contributory benefit postretirement plan
for former employees who were retired as of December 31, 1992. The plan
provides health and life insurance benefits. Peoples' policy is to fund
the cost of the benefits as they are incurred.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period
ending December 31, 2005, and a statement of the funded status as of
December 31, 2005 and 2004:
Pension
Benefits Postretirement Benefits
-------------------------- ------------------------
(Dollars in Thousands) 2005 2004 2005 2004
-----------------------------------------------------
Change in plan assets:
---------------------
Fair value of plan assets at January 1 13,358 10,307 - -
Actual return on plan assets 867 1,183 - -
Employer contributions 1,500 2,600 97 75
Plan participants' contributions - - 125 119
Benefit payments (175) (732) (222) (194)
Settlements (1,944) - - -
---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 13,606 13,358 - -
---------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
----------------------------
Obligation at January 1 $ 13,526 $ 12,010 $ 584 $ 616
Service cost 867 903 - -
Interest cost 717 772 32 35
Plan participants' contributions - - 125 119
Actuarial loss (gain) 370 544 (4) 8
Benefit payments (175) (732) (222) (194)
Acquisition - 29 - -
Settlements (1,944) - - -
---------------------------------------------------------------------------------------------------------------
Obligation at December 31 13,361 13,526 515 584
---------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation at December 31 10,611 10,495 - -
---------------------------------------------------------------------------------------------------------------
Funded status:
-------------
Funded status at December 31 246 (168) (515) (584)
Unrecognized prior-service cost 39 41 - 11
Unrecognized net loss 3,883 4,159 75 80
---------------------------------------------------------------------------------------------------------------
Net amount recognized 4,168 4,032 (440) (493)
---------------------------------------------------------------------------------------------------------------
Amounts recognized in Consolidated Balance Sheets:
-------------------------------------------------
Prepaid benefit costs 4,168 4,032 - -
Accrued benefit liability - - (440) (493)
---------------------------------------------------------------------------------------------------------------
Net amount recognized $ 4,168 $ 4,032 $ (440) $ (493)
---------------------------------------------------------------------------------------------------------------
The assumptions used in the measurement of Peoples' benefit obligation at
December 31 are shown in the following table:
Pension Postretirement
Benefits Benefits
-------------------- --------------------
2005 2004 2005 2004
Discount rate 6.00 % 6.00 % 5.75 % 6.00 %
Expected return on plan assets 8.50 8.50 n/a n/a
Rate of compensation increase 3.50 3.50 n/a n/a
DETERMINATION OF EXPECTED LONG-TERM RATE OF RETURN: The expected long-term
rate of return on the plans' total assets is based on the expected return
of each category of the plan's assets. Management considers the long-term
historical returns of the assets within the portfolio and adjusts the
rate, as necessary, for expected future returns on the assets in the plans
in determining the rate.
NET PERIODIC BENEFIT COST: The following table provides the components of
net periodic benefit cost for the plans:
Pension Benefits Postretirement Benefits
--------------------------------------- ---------------------------------
(Dollars in Thousands) 2005 2004 2003 2005 2004 2003
--------------------------------------- ---------------------------------
Service cost $ 867 $ 903 $ 708 $ - $ - $ -
Interest cost 717 772 688 32 35 40
Expected return on plan assets (1,127) (972) (861) - - -
Amortization of prior service cost 2 2 (6) 11 11 11
Amortization of net loss 226 208 89 1 - 4
Settlements 679 - - - - -
----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,364 $ 913 $ 618 $ 44 $ 46 $ 55
----------------------------------------------------------------------------------------------------------------
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed
for 2005, grading down 1% per year to an ultimate rate of 5%. The health
care trend rate assumption does not have a significant effect on the
contributory defined benefit postretirement plan; therefore, a one
percentage point increase or decrease in the trend rate is not material in
the determination of the accumulated postretirement benefit obligation or
the ongoing expense.
PLAN ASSETS: Peoples' investment strategy, as established by the
Retirement Plan Committee, is to invest assets per established target
allocations. The assets are reallocated periodically to meet the above
target allocations. The investment policy is reviewed periodically, under
the advisement of a certified investment advisor, to determine if the
policy should be changed. Peoples' pension plan target and actual
weighted-average asset allocations by asset category at December 31 are as
follows:
Target 2005 2004
---------- ---------- ----------
Equity securities 60 - 75% 64 % 69 %
Debt securities 24 - 39% 30 26
Real estate - 3 -
Other 1% 3 5
---------------------------------------------------------------------------
Total 100% 100 % 100 %
---------------------------------------------------------------------------
Equity securities of Peoples' pension plan did not include any securities
of Peoples Bancorp or related parties in 2005 or 2004.
CASH FLOWS: Peoples anticipates contributing $1.2 million to its pension
plan in 2006; however, actual contributions are made at the discretion of
the Retirement Plan Committee and Peoples' Board of Directors. Estimated
future benefit payments, which reflect benefits attributable to estimated
future service, for the years ending December 31 are as follows:
(Dollars in Thousands)
2006 $ 772
2007 995
2008 849
2009 1,209
2010 1,755
2011 to 2015 7,548
RETIREMENT SAVINGS PLAN: Peoples also maintains a retirement savings plan,
or 401(k) plan, which covers substantially all employees. The plan
provides participants the opportunity to save for retirement on a
tax-deferred basis. In addition, Peoples makes matching contributions
equal to 100% of participants' contributions that do not exceed 3% of the
participants' compensation, plus 50% of participants' contributions
between 3% and 5% of the participants' compensation. Matching
contributions made by Peoples totaled $628,000, $601,000 and $480,000 for
the years ended December 31, 2005, 2004 and 2003, respectively.
11. Federal Income Taxes:
--------------------
The effective federal income tax rate in the Consolidated Statement of
Income is less than the statutory corporate tax rate due to the following:
Year ended December 31
----------------------------------------
2005 2004 2003
---------- ---------- ----------
Statutory corporate tax rate 35.0 % 35.0 % 35.0 %
Differences in rate resulting from:
Interest on obligations of state and political (3.4) (4.0) (4.5)
subdivisions
Investments in low-income housing tax credit funds (2.8) (3.6) (3.4)
Business owned life insurance (2.2) (2.7) (2.3)
Other, net 0.5 0.2 0.1
-------------------------------------------------------------------------------------------------------
Effective federal income tax rate 27.1 % 24.9 % 24.9 %
-------------------------------------------------------------------------------------------------------
The significant components of Peoples' deferred tax assets and liabilities
consisted of the following at December 31:
(Dollars in Thousands) 2005 2004
---------- ---------
Deferred tax assets:
Allowance for loan losses $ 6,033 $ 5,741
Accrued employee benefits (593) (490)
Deferred loan fees and costs 375 487
Available-for-sale securities 601 -
Tax credit carryforward 1,741 -
Other 455 357
---------------------------------------------------------------------
Total deferred tax assets 8,612 6,095
---------------------------------------------------------------------
Deferred tax liabilities:
Bank premises and equipment 1,173 975
Deferred income 4,408 4,057
Investments 2,668 2,367
Available-for-sale securities - 2,670
Other 647 516
---------------------------------------------------------------------
Total deferred tax liabilities 8,896 10,585
---------------------------------------------------------------------
Net deferred tax liability $ (284) $ (4,490)
---------------------------------------------------------------------
No valuation allowance for deferred tax assets was required at December
31, 2005 and 2004 as it is more likely than not that all of the deferred
tax assets will be realized because they of recoverable taxes paid in
prior years. The related federal income tax expense (benefit) on
securities transactions approximated $189,000 in 2005, $(1,064,000) in
2004 and $(667,000) in 2003.
12. Financial Instruments with Off-Balance Sheet Risk:
-------------------------------------------------
In the normal course of business, Peoples is party to financial
instruments with off-balance sheet risk necessary to meet the financing
needs of customers and to manage its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, standby letters of credit, and interest rate caps. The instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the Consolidated Balance Sheets. The
contract or notional amounts of these instruments express the extent of
involvement Peoples has in these financial instruments.
LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT: Loan commitments are made
to accommodate the financial needs of Peoples' customers. Standby letters
of credit are instruments issued by Peoples Bank guaranteeing the
beneficiary payment by the bank in the event of default by Peoples Bank's
customer in the non-performance of an obligation or service. Historically,
most loan commitments and standby letters of credit expire unused.
Peoples' exposure to credit loss in the event of nonperformance by the
counter-party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amount of those
instruments. Peoples uses the same underwriting standards in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained is based on management's
credit evaluation of the customer. Collateral held varies, but may include
accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
The total amounts of loan commitments and standby letters of credit are
summarized as follows at December 31:
Contractual Amount
--------------------------
(Dollars in Thousands) 2005 2004
---------- ----------
Loan commitments $ 162,065 $ 139,731
Standby letters of credit 29,803 31,612
INTEREST RATE CONTRACTS: At December 31, 2005, Peoples held an option to
initiate an interest rate swap beginning on October 19, 2002, and
continuing on a quarterly basis until its expiration in July 2009. Under
the terms of the interest rate swap, Peoples would receive LIBOR based
variable rate payments and pay fixed rate payments to a counter-party,
computed on a notional amount of $17 million. Peoples entered into this
interest rate contract to hedge a $17 million long-term, fixed rate FHLB
advance, which could convert to a variable rate at the FHLB's discretion.
At December 31, 2005, Peoples had not exercised its option under this
interest rate contract since the advance remained a fixed rate advance.
Changes in estimated fair value of this interest rate contract are
recorded in earnings.
OTHER: Peoples also has commitments to make additional capital
contributions in low-income housing projects. Such commitments
approximated $2.5 million at December 31, 2005, and $6.3 million at
December 31, 2004. The maximum aggregate amounts Peoples could be required
to make for each of the next five years are as follows: $0.7 million in
2006; $0.6 million in 2007 and 2008; and $0.2 million in 2009 and 2010.
In the fourth quarter of 2003, Peoples provided credit recourse on the
approximately $0.9 million of business credit card loans sold to an
unrelated third party in connection with the sale of the entire credit
card portfolio. This recourse expired in the second quarter of 2005. Prior
to expiration, Peoples was required to reimburse the third party in the
event of customer default, pursuant to the recourse provided on the
business credit cards. No loss was incurred by Peoples in 2005 or 2004 as
a result of this credit card recourse.
13. Regulatory Matters:
------------------
The following is a summary of certain regulatory matters affecting Peoples
Bancorp and its subsidiaries:
LIMITS ON DIVIDENDS: The primary source of funds for the dividends paid by
Peoples Bancorp is dividends received from Peoples Bank. The payment of
dividends by Peoples Bank is subject to various banking regulations. The
most restrictive provision requires regulatory approval if dividends
declared in any calendar year exceed the total net profits of that year
plus the retained net profits of the preceding two years. At December 31,
2005, Peoples Bank's had no retained net profits available for
distribution to Peoples Bancorp as dividends without regulatory approval.
During 2006, only Peoples Bank's retained net profits of 2006 through the
dividend date will be available for distribution to Peoples Bancorp as
dividends without regulatory approval.
CAPITAL REQUIREMENTS: Peoples and Peoples Bank are subject to various
regulatory capital requirements administered by the banking regulatory
agencies. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Peoples and its banking subsidiary must meet
specific capital guidelines that involve quantitative measures of each
entity's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Peoples' and Peoples
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Peoples and Peoples Bank to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets
(as defined). Peoples and Peoples Bank met all capital adequacy
requirements at December 31, 2005.
As of December 31, 2005, the most recent notifications from the banking
regulatory agencies categorized Peoples and Peoples Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, Peoples and Peoples Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table below. There are no conditions or events
since these notifications that management believes have changed Peoples'
or its banking subsidiary's category.
Peoples' and Peoples Bank's actual capital amounts and ratios as of
December 31 are also presented in the following table:
For Capital To Be Well
(Dollars in Thousands) Actual Adequacy Capitalized
----------------------------- ------------------------------ ------------------------------
2005 Amount Ratio Amount Ratio Amount Ratio
------------ -------- ------------- --------- ------------ ---------
Total Capital (1)
Peoples $ 161,226 12.9 % $ 99,950 8.0 % $ 124,938 10.0 %
Peoples Bank 150,430 12.1 99,196 8.0 123,994 10.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 (2)
Peoples 144,994 11.6 49,975 4.0 74,963 6.0
Peoples Bank 135,709 10.9 49,598 4.0 74,397 6.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 Leverage (3)
Peoples 144,994 8.1 71,614 4.0 89,518 5.0
Peoples Bank 135,709 7.7 70,828 4.0 88,535 5.0
------------------------------------------------------------------------------------------------------------------------
2004
Total Capital (1)
Peoples $ 145,135 12.3 % $ 94,386 8.0 % $ 117,983 10.0 %
Peoples Bank 142,222 12.2 93,287 8.0 116,609 10.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 (2)
Peoples 129,194 11.0 47,193 4.0 70,790 6.0
Peoples Bank 127,643 11.0 46,643 4.0 69,965 6.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 Leverage (3)
Peoples 129,194 7.6 68,468 4.0 85,585 5.0
Peoples Bank 127,643 7.5 68,034 4.0 85,042 5.0
------------------------------------------------------------------------------------------------------------------------
(1) Ratio represents total capital to net risk-weighted assets.
(2) Ratio represents Tier 1 capital to net risk-weighted assets.
(3) Ratio represents Tier 1 capital to average assets.
14. Federal Reserve Requirements:
----------------------------
Peoples Bank is required to maintain a certain level of reserves
consisting of non-interest-bearing balances with the Federal Reserve Bank
and cash on hand. The reserve requirement is calculated on a percentage of
total deposit liabilities and averaged $6.2 million for the year ended
December 31, 2005.
15. Acquisitions:
------------
At the close of business on December 3, 2004, Peoples Bank completed the
acquisition of two full-service offices in the Ashland, Kentucky area from
an unaffiliated institution. In the acquisition, Peoples acquired $65
million in deposits and $43 million of loans. As part of the initial
purchase price allocation, Peoples recorded goodwill of $6.6 million and
core deposit intangible of $1.7 million. Concurrent with the acquisition,
Peoples Bank consolidated some of its Ashland, Kentucky area banking
offices. The Flatwoods office and the acquired office in downtown Ashland
were consolidated into nearby Peoples Bank offices at the close of
business on December 3, 2004. Also, the Peoples Bank Cedar Knoll office
ceased operations at the close of business on December 27, 2004, with
clients redirected to Peoples Bank's newly acquired office in Summit,
Kentucky.
At the close of business on May 28, 2004, Peoples completed the
acquisition of Barengo Insurance Agency, Inc., ("Barengo"), based in
Marietta, Ohio, for initial consideration of $6.2 million ($3.0 million in
cash and $3.2 million in Peoples Bancorp's common shares). The agreement
also provides for additional consideration of up to $2.7 million ($1.3
million in cash and $1.4 million in Peoples Bancorp's common shares) to be
paid by Peoples over the next three years, contingent on Barengo achieving
certain revenue growth goals. As part of the initial purchase price
allocation, Peoples recorded goodwill of $4.8 million and customer
relationship intangible of $2.0 million. In 2005, contingent consideration
of $194,000 was earned and paid by Peoples, of which 51% was paid in
Peoples Bancorp's common shares and 49% in cash.
At the close of business on April 30, 2004, Peoples completed the
acquisition of substantially all of the assets of Putnam Agency, Inc.
("Putnam Agency"), with offices in Ashland, Kentucky and Huntington, West
Virginia, for initial consideration of $8.6 million ($6.6 million in cash
and $2.0 million in Peoples Bancorp's common shares), of which $1.5
million is being paid out in three annual installments beginning April
2005. The agreement also provides for additional consideration of up to
$4.4 million in cash to be paid by Peoples over the next three years,
contingent on the Putnam Agency achieving certain revenue growth goals.
Peoples accounted for this transaction under the purchase method of
accounting. As part of the initial purchase price allocation, Peoples
recorded goodwill of $5.5 million and customer relationship intangible of
$3.2 million. In 2005, contingent consideration of $668,000 was earned and
paid by Peoples, of which all was paid in cash.
Both Barengo and the Putnam Agency were full-service insurance agencies
that offered a wide range of insurance products to both commercial and
individual clients. Peoples operates the former agencies as divisions of
Peoples Insurance Agency, Inc., using the "Barengo Insurance Agency" and
"Putnam Agency" trade names. Peoples has retained all key producers and
managers, with the exception of one producer with the Putnam Agency who
has retired.
The balances and operations of the acquired businesses are included in
Peoples' financial statements from the date of acquisition and do not
materially impact Peoples' financial position, results of operations or
cash flows for any period presented. In addition, Peoples made several
other acquisitions in prior years accounted for under the purchase method
of accounting. The purchase prices of these acquisitions were allocated to
the identifiable tangible and intangible assets acquired based upon their
fair value at the acquisition date.
The changes in the carrying amount of goodwill for the years ended
December 31, were as follows:
(Dollars in Thousands) 2005 2004
----------- -----------
Balance at January 1 $ 59,096 $ 41,407
Goodwill acquired - 16,759
Contingent consideration earned 862 -
(Reductions) additions resulting from valuation
adjustments in final purchase price allocations (191) 930
-----------------------------------------------------------------------------------------
Balance at December 31 $ 59,767 $ 59,096
-----------------------------------------------------------------------------------------
16. Stock Options:
-------------
Peoples' stock option plans provide for the granting of both incentive
stock options and non-qualified stock options covering up to 1,614,339
common shares. Under the provisions of the plans, the option price per
share shall not be less than the fair market value of the common shares on
the date of grant of an option; therefore, no compensation expense is
recognized. Recent options granted to employees vest over periods ranging
from three to six years. Options granted to directors of Peoples Bancorp
and Peoples Bank vest in one year. All granted options to both employees
and directors expire ten years from the date of grant.
On December 29, 2005, Peoples accelerated the vesting schedule with regard
to all unvested stock options previously granted to employees of Peoples
and its subsidiaries, including executive officers of Peoples, and
subsidiary directors pursuant to Peoples' various stock option plans. No
unvested stock options held by directors of Peoples Bancorp were
accelerated. As a result, an aggregate of 161,514 options became
exercisable on that date. These options were originally scheduled to vest
over a period of six years, with a significant portion due to vest in
2006. Peoples recognized non-cash compensation expense of $122,000 in 2005
as a result of this acceleration.
The following summarizes Peoples' stock options as of December 31, 2005,
2004 and 2003, and the changes for the years then ended:
2005 2004 2003
--------------------------- --------------------------- ---------------------------
Number Weighted Number Weighted Number Weighted
Average Average Average
Exercise Exercise Exercise
of Shares Price Of Shares Price of Shares Price
--------------------------- --------------------------- ---------------------------
Outstanding at January 1 545,882 $ 19.11 661,228 $ 16.78 622,978 $ 15.09
Granted 45,371 27.11 40,275 27.85 120,103 22.57
Exercised 92,940 16.71 139,776 10.36 72,957 11.82
Canceled 22,481 17.65 15,845 21.24 8,896 17.20
----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 475,832 20.41 545,882 19.11 661,228 16.78
----------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 464,282 20.27 269,145 16.67 346,426 14.20
----------------------------------------------------------------------------------------------------------------------
Weighted average estimated fair value of
options granted during the year $ 7.28 $ 8.15 $ 7.01
----------------------------------------------------------------------------------------------------------------------
The following summarizes information concerning Peoples' stock options
outstanding at December 31, 2005:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Option Remaining Average Average
Range of Shares Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------------------------------------------- -------------------------------
$11.87 to $13.59 79,968 3.6 years $ 13.41 79,968 $ 13.41
$13.59 to $18.98 133,478 2.8 years 16.88 133,478 16.88
$18.98 to $22.32 110,773 5.8 years 22.17 110,773 22.17
$22.33 to $27.74 123,181 7.0 years 25.28 111,631 25.20
$27.74 to $29.48 28,432 8.2 years 28.66 28,432 28.66
17. Parent Company Only Financial Information:
-----------------------------------------
CONDENSED BALANCE SHEETS
December 31,
-----------------------------
(Dollars in Thousands) 2005 2004
----------- ------------
Assets:
Cash $ 50 $ 50
Interest-bearing deposits in subsidiary bank 15,381 5,021
Receivable from subsidiary bank 302 630
Available-for-sale investment securities, at estimated fair value (amortized
cost of $1,393 and $1,768 at December 31, 2005 and 2004, respectively) 4,751 5,543
Investments in subsidiaries:
Bank 186,635 187,733
Non-bank 28,828 27,370
Other assets 884 1,085
---------------------------------------------------------------------------------------------------------------
Total assets $ 236,831 $ 227,432
===============================================================================================================
Liabilities:
Accrued expenses and other liabilities $ 8,690 $ 5,562
Dividends payable 2,114 1,889
Long-term borrowings 13,600 15,300
Junior subordinated debentures held by subsidiary trusts 29,350 29,263
---------------------------------------------------------------------------------------------------------------
Total liabilities 53,754 52,014
---------------------------------------------------------------------------------------------------------------
Stockholders' equity 183,077 175,418
---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 236,831 $ 227,432
===============================================================================================================
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
-------------------------------------------
(Dollars in Thousands) 2005 2004 2003
---------- ----------- -----------
Income:
Dividends from subsidiary bank $ 18,300 $ 24,500 $ 17,750
Interest 270 166 221
Rental income from subsidiaries 32 55 55
Other income 528 34 41
--------------------------------------------------------------------------------------------------------------------------
Total income 19,130 24,755 18,067
--------------------------------------------------------------------------------------------------------------------------
Expenses:
Interest expense on junior subordinated notes held by subsidiary trusts 2,564 2,441 2,429
Intercompany management fees 744 685 576
Interest 696 483 474
Other expense 1,070 836 677
--------------------------------------------------------------------------------------------------------------------------
Total expenses 5,074 4,445 4,156
--------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and equity in undistributed earnings of
(excess dividends from) subsidiaries 14,056 20,310 13,911
Applicable income tax benefit (1,178) (1,322) (1,285)
Equity in undistributed earnings of (excess dividends from) subsidiaries 5,265 (3,357) 1,058
--------------------------------------------------------------------------------------------------------------------------
Net income $ 20,499 $ 18,275 $ 16,254
==========================================================================================================================
STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------------
(Dollars in Thousands) 2005 2004 2003
---------- ---------- -----------
Cash flows from operating activities:
Net income $ 20,499 $ 18,275 $ 16,254
Adjustment to reconcile net income to cash provided by operations:
Amortization and depreciation 33 32 35
(Equity in undistributed earnings of) excess dividends from subsidiaries (5,265) 3,357 (1,058)
Other, net 4,003 2,058 (1,264)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,270 23,722 13,967
--------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from sales and maturity (purchases) investment securities 907 90 (1,603)
Net proceeds from sale of premises and equipment 182 - -
Investment in subsidiaries - (4,095) (17,475)
Acquisitions, net of cash received (1,157) (6,948) (15,683)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (68) (10,953) (34,761)
--------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on short-term borrowings - - (17,000)
Net (payments on) proceeds from long-term borrowings (1,700) (1,700) 15,500
Purchase of treasury stock (1,754) (13,709) (4,092)
Change in receivable from subsidiary 328 (209) (212)
Proceeds from issuance of common stock 1,747 1,118 5,582
Cash dividends paid (7,463) (7,146) (5,704)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (8,842) (21,646) (5,926)
--------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 10,360 (8,877) (26,720)
Cash and cash equivalents at the beginning of the year 5,071 13,948 40,668
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 15,431 $ 5,071 $ 13,948
==========================================================================================================================
Supplemental cash flow information:
Interest paid $ 684 $ 478 $ 486
--------------------------------------------------------------------------------------------------------------------------
18. Summarized Quarterly Information (Unaudited):
--------------------------------------------
A summary of selected quarterly financial information for 2005 and 2004
follows:
(Dollars in Thousands, except Per Share 2005
Data)
--------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- ------------
Interest income $ 22,643 $ 23,397 $ 24,355 $ 25,380
Interest expense 9,931 10,481 11,205 11,852
Net interest income 12,712 12,916 13,150 13,528
Provision for loan losses 941 40 485 562
Net gain on securities transactions 233 3 - 303
Net gain (loss) on asset disposals 8 113 46
(9)
Other income 7,127 7,202 7,127 7,014
Intangible asset amortization 688 674 661 646
Other expenses 12,059 12,766 11,875 11,973
Income tax expense 1,700 1,876 1,979 2,049
Net income 4,692 4,878 5,268 5,661
Earnings per share - Basic 0.45 0.47 0.54
0.50
Earnings per share - Diluted $ 0.44 $ 0.46 $ $ 0.53
0.50
Weighted-average shares outstanding:
Basic 10,419,189 10,405,989 10,451,578 10,501,679
Diluted 10,558,003 10,541,774 10,591,470 10,631,310
In December, Peoples determined that the yearly amount of lump sum
payments to participants from Peoples' defined benefit pension plan during
2005 exceeded the allowable threshold of annual service cost plus interest
and, accordingly, settlement charges of $578,000 ($421,000 after taxes, or
$0.04 per diluted share) should have been reflected in the results for the
second quarter of 2005. The following are the revised Consolidated
Statements of Income reflecting the pension settlement charges in the
second quarter of 2005:
(Dollars in Thousands, except Three Months Ended Six Months Ended Nine Months Ended
Per Share Data) June 30, 2005 June 30, 2005 September 30, 2005
----------------------------- ---------------------------- ---------------------------
Previously Corrected Previously Corrected Previously Corrected
Reported Reported Reported
-------------- ------------- ------------- ------------- ------------ -------------
Net income $ 5,299 $ 4,878 $ 9,991 $ 9,570 $ 15,259 $ 14,838
Earnings per share - Basic 0.51 0.47 0.96 0.92 1.46 1.42
Earnings per share - Diluted $ 0.50 $ 0.46 $ 0.95 $ 0.91 $ 1.44 $ 1.40
(Dollars in Thousands, except Per Share
Data) 2004
--------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- ------------
Interest income $ 21,586 $ 21,145 $ 21,850 $ 22,449
Interest expense 8,038 8,448 8,959 9,715
Net interest income 13,548 12,697 12,891 12,734
Provision for loan losses 794 616 605 531
Net gain (loss) on securities transactions 32 5 (7) (3,070)
Net gain (loss) on asset disposals 30 17 (25) (141)
Other income 4,825 6,245 7,248 7,049
Intangible asset amortization 401 526 635 657
Other expenses 9,889 11,005 11,909 12,176
Income tax expense 1,985 1,764 1,820 490
Net income 5,366 5,053 5,138 2,718
Earnings per share - Basic 0.51 0.48 0.49 0.26
Earnings per share - Diluted $ 0.50 $ 0.47 $ 0.48 $ 0.26
Weighted-average shares outstanding:
Basic 10,560,241 10,603,510 10,524,304 10,430,408
Diluted 10,808,007 10,766,289 10,669,798 10,595,211
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
------------------------------------------------------------
The information concerning (a) directors of Peoples Bancorp Inc. ("Peoples"),
(b) the Board of Directors' determination that Peoples has an "audit committee
financial expert" serving on its Audit Committee, (c) the Audit Committee of
Peoples' Board of Directors and (d) the procedures by which shareholders of
Peoples may recommend nominees to Peoples' Board of Directors required by Item
401 of Regulation S-K is included in the section captioned "ELECTION OF
DIRECTORS" on pages 8 through 11 of the definitive Proxy Statement of Peoples
Bancorp Inc. relating to the Annual Meeting of Shareholders to be held April 13,
2006 ("Peoples' Definitive Proxy Statement"), which section is incorporated
herein by reference.
The information regarding Peoples' executive officers required by Item 401 is
included under Part I of this Form 10-K in the section captioned "Executive
Officers Of The Registrant".
The information required by Item 405 of Regulation S-K is included under the
caption "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 7 of
Peoples' Definitive Proxy Statement, which section is incorporated herein by
reference.
The Board of Directors of Peoples has adopted charters for each of the Audit
Committee, the Compensation Committee and the Governance and Nominating
Committee.
In accordance with the requirements of Rule 4350(n) of The NASDAQ Stock Market,
Inc. Corporate Governance Rules, the Board of Directors of Peoples has adopted a
Code of Ethics covering the directors, officers and employees of Peoples and its
affiliates, including, without limitation, the principal executive officer, the
principal financial officer and principal accounting officer of Peoples. Peoples
intends to disclose the following on the "Corporate Governance and Code of
Ethics and Ethics Hotline" page of its Internet website within four business
days following their occurrence:
(A) the date and nature of any amendment to a provision of its Code of
Ethics that
(i) applies to the principal executive officer, principal financial
officer, principal accounting officer or controller of Peoples,
or persons performing similar functions,
(ii) relates to any element of the code of ethics definition set forth
in Item 406(b) of SEC Regulation S-K, and (iii) is not a
technical, administrative or other non-substantive amendment; and
(B) a description (including the nature of the waiver, the name of the
person to whom the waiver was granted and the date of the waiver) of
any waiver, including an implicit waiver, from a provision of the Code
of Ethics to the principal executive officer, principal financial
officer, principal accounting officer or controller of Peoples, or
persons performing similar functions, that relates to one or more of
the elements of the code of ethics definition set forth in Item 406(b)
of SEC Regulation S-K.
Each of the Code of Ethics, the Audit Committee Charter, the Governance and
Nominating Committee Charter and the Compensation Committee Charter is posted on
the "Corporate Governance and Code of Ethics and Ethics Hotline" page of
Peoples' Internet website at www.peoplesbancorp.com. Interested persons may also
obtain copies of the Code of Ethics without charge by writing to Peoples Bancorp
Inc., Attention: Corporate Secretary, 138 Putnam Street, P.O. Box 738, Marietta,
Ohio 45750-0738.
ITEM 11. EXECUTIVE COMPENSATION.
--------------------------------
The information required by this Item 11 is included in the section captioned
"Compensation Committee Interlocks and Insider Participation" on pages 22 and 23
of Peoples' Definitive Proxy Statement and the section captioned "COMPENSATION
OF EXECUTIVE OFFICERS AND DIRECTORS" on pages 24 through 31 of Peoples'
Definitive Proxy Statement, which sections are incorporated herein by reference.
Such incorporation by reference shall not be deemed to specifically incorporate
by reference the information referred to in Item 402(a)(8) of SEC Regulation
S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------------
The information required by this Item 12 regarding the security ownership of
certain beneficial owners and management is included in the section captioned
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 4
through 7 of Peoples' Definitive Proxy Statement, which section is incorporated
herein by reference.
Equity Compensation Plan Information
------------------------------------
The table below provides information as of December 31, 2005, with respect to
compensation plans under which common shares of Peoples are authorized for
issuance to directors, officers or employees in exchange for consideration in
the form of goods or services. These compensation plans include:
(i) the Peoples Bancorp Inc. Amended and Restated 1993 Stock Option Plan
(the "1993 Plan");
(ii) the Peoples Bancorp Inc. 1995 Stock Option Plan (the "1995 Plan");
(iii) the Peoples Bancorp Inc. 1998 Stock Option Plan (the "1998 Plan");
(iv) the Peoples Bancorp Inc. 2002 Stock Option Plan (the "2002 Plan"); and
(v) the Peoples Bancorp Inc. Deferred Compensation Plan for Directors of
Peoples Bancorp Inc. and Subsidiaries (the "Deferred Compensation
Plan").
All of these compensation plans were approved by the shareholders of Peoples.
(c)
Number of
common shares
remaining available
(a) for future
Number of common (b) issuance under
shares to be issued Weighted-average equity compensation
upon exercise of exercise price of plans (excluding common
outstanding options, outstanding options, shares reflected in
Plan Category warrants and rights warrants and rights column (a))
-----------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
shareholders 531,144(1) $20.41(2) 311,731(3)
Equity compensations plans not approved
by shareholders - - -
-----------------------------------------------------------------------------------------------------------------
Total 531,144 $20.41 311,731
------------------------------------------------------------------------------------------------------------------
(1) Includes an aggregate of 475,832 common shares issuable upon exercise
of options granted under the 1993 Plan, the 1995 Plan, the 1998 Plan
and the 2002 Plan and 55,312 common shares credited to participants'
accounts under the Deferred Compensation Plan.
(2) Represents weighted-average exercise price of outstanding options
under the 1993 Plan, the 1995 Plan, the 1998 Plan and the 2002 Plan.
(3) Includes 33,423 common shares, 250,851 common shares and 27,457 common
shares remaining available for issuance under the 1998 Plan, the 2002
Plan and the Deferred Compensation Plan, respectively, at December 31,
2005. No common shares were available for issuance under the 1993 Plan
and 1995 Plan at December 31, 2005.
Additional information regarding Peoples' stock option plans can be found in
Note 16 of the Notes to the Consolidated Financial Statements included in Item 8
of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
--------------------------------------------------------
The information required by this Item 13 is included in the section captioned
"TRANSACTIONS INVOLVING MANAGEMENT" on pages 7 and 8 of Peoples' Definitive
Proxy Statement, the section captioned "ELECTION OF DIRECTORS" on pages 8
through 11 of Peoples' Definitive Proxy Statement and the section captioned
"Compensation Committee Interlocks and Insider Participation" on pages 22 and 23
of Peoples' Definitive Proxy Statement, which sections are incorporated by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
------------------------------------------------
The information required by this Item 14 is included in the section captioned
"AUDIT COMMITTEE MATTERS-Pre-Approval Policy" and "AUDIT COMMITTEE
MATTERS-Services of the Independent Registered Public Accounting Firm" on pages
50 and 51 of Peoples' Definitive Proxy Statement, which sections are
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
----------------------------------------------------
(a)(1)Financial Statements:
--------------------
The following consolidated financial statements of Peoples Bancorp Inc. and subsidiaries are included in Item 8:
Page
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) on Consolidated
Financials Statements 46
Consolidated Balance Sheets as of December 31, 2005 and 2004 47
Consolidated Statements of Income for each of the three years ended December 31, 2005 48
Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 2005 49
Consolidated Statements of Comprehensive Income for each of the three years ended
December 31, 2005 49
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2005 50
Notes to the Consolidated Financial Statements 51
Peoples Bancorp Inc. (Parent Company Only Financial Information is included in Note 17 of the
Notes to the Consolidated Financial Statements) 70
(a)(2)Financial Statement Schedules
-----------------------------
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have
been omitted.
(a)(3)Exhibits
--------
Exhibits filed with this Annual Report on Form 10-K are attached hereto
or incorporated herein by reference. For a list of such exhibits, see
"Exhibit Index" beginning at page 78. The Exhibit Index specifically
identifies each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(b) Exhibits
--------
Exhibits filed with this Annual Report on Form 10-K are attached hereto
or incorporated herein by reference. For a list of such exhibits, see
"Exhibit Index" beginning at page 78.
(c) Financial Statement Schedules
-----------------------------
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEOPLES BANCORP INC.
Date: March 7, 2006 By: /s/ MARK F. BRADLEY
------------------------------
Mark F. Bradley, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ MARK F. BRADLEY President, Chief Executive Officer and March 7, 2006
------------------------------------------- Director --------------------
Mark F. Bradley
/s/ JOHN W. CONLON Chief Financial Officer and Treasurer March 11, 2006
------------------------------------------- (Principal Financial Officer --------------------
John W. Conlon
/s/ DONALD J. LANDERS, JR. Director of Finance and Chief Accounting March 7, 2006
------------------------------------------- Officer (Principal Accounting Officer) --------------------
Donald J. Landers, Jr.
/S/ CARL L. BAKER, JR. Director March 7, 200
------------------------------------------- --------------------
Carl L. Baker, Jr.
/s/ GEORGE W. BROUGHTON Director March 7, 2006
------------------------------------------- --------------------
George W. Broughton
/s/ FRANK L. CHRISTY Director March 7, 2006
------------------------------------------- --------------------
Frank L. Christy
/s/ WILFORD D. DIMIT Director March 7, 2006
------------------------------------------- --------------------
Wilford D. Dimit
/s/ RICHARD FERGUSON Director March 7, 2006
------------------------------------------- --------------------
Richard Ferguson
Director
------------------------------------------- --------------------
Robert W. Price
/s/ THEODORE P. SAUBER Director March 7, 2006
------------------------------------------- --------------------
Theodore P. Sauber
Vice Chairman of the Board and Leadership
------------------------------------------- Director --------------------
Paul T. Theisen
/s/ JOSEPH H. WESEL Chairman of the Board and Director March 7, 2006
------------------------------------------- --------------------
Joseph H. Wesel
/s/ THOMAS J. WOLF Director March 7, 2006
------------------------------------------- --------------------
Thomas J. Wolf
EXHIBIT INDEX
PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2005
Exhibit
Number Description Exhibit Location
----------- ------------------------------------------------------- --------------------------------------------------
3(a)(1) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit 3(a) to
Inc. (as filed with the Ohio Secretary of State on Peoples' Registration Statement on Form 8-B filed
May 3, 1993). July 20, 1993 (File No. 0-16772).
3(a)(2) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a)(2)
Incorporation of Peoples Bancorp Inc. (as filed with to Peoples' Annual Report on Form 10-K for the
the Ohio Secretary of State on April 22, 1994). fiscal year ended December 31, 1997 (File No.
0-16772) ( "Peoples' 1997 Form 10-K").
3(a)(3) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a)(3)
Incorporation of Peoples Bancorp Inc. (as filed with to Peoples' 1997 Form 10-K.
the Ohio Secretary of State on April 9, 1996).
3(a)(4) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a) to
Incorporation of Peoples Bancorp Inc. (as filed with Peoples' Quarterly Report on Form 10-Q for the
the Ohio Secretary of State on April 23, 2003). quarterly period ended March 31, 2003 (File No.
0-16772)("Peoples' March 31, 2003 Form 10-Q").
3(a)(5) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit 3(b) to
Inc. (reflecting amendments through April 23, 2005) Peoples' March 31, 2003 Form 10-Q.
[For SEC reporting compliance purposes only not
filed with Ohio Secretary of State].
3(b)(1) Code of Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b) to
Peoples' Registration Statement on Form 8-B filed
July 20, 1993 (File No. 0-16772).
3(b)(2) Certified Resolutions Regarding Adoption of Incorporated herein by reference to Exhibit 3(c) to
Amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, Peoples' March 31, 2003 Form 10-Q.
1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code
of Regulations of Peoples Bancorp Inc. by
shareholders on April 10, 2003.
3(b)(3) Certified Resolutions Regarding Adoption of Incorporated herein by reference to Exhibit 3(a) to
Amendments to Article THREE of the Code of Peoples' Quarterly Report on Form 10-Q for the
Regulations of Peoples Bancorp Inc. by Shareholders quarterly period ended March 31, 2004, filed on May
on April 8, 2004. 10, 2004 (File No. 0-16772)("Peoples' March 31, 2004
Form 10-Q").
3(b)(4) Code of Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b) to
(reflecting amendments through April 8, 2004) [For Peoples' March 31, 2004 Form 10-Q.
SEC reporting compliance purposes only].
4(a) Agreement to furnish instruments and agreements Filed herewith.
defining rights of holders of long-term debt.
4(b) Indenture, dated as of April 20, 1999, between Incorporated herein by reference to Exhibit 4.1 to
Peoples Bancorp Inc. and Wilmington Trust Company, the Registration Statement on Form S-4 (Registration
as Debenture Trustee, relating to Junior No. 333-81251) filed on June 22, 1999 by Peoples
Subordinated Deferrable Interest Debentures. Bancorp Inc. and PEBO Capital Trust I ("Peoples'
1999 Form S-4").
4(c) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.5 to
Capital Trust I, dated as of April 20, 1999. Peoples' 1999 Form S-4.
4(d) Series B Capital Securities Guarantee Agreement, Incorporated herein by reference to Exhibit 4 (i) of
dated as of September 23, 1999, between Peoples Peoples' Annual Report on Form 10-K for the fiscal
Bancorp Inc. and Wilmington Trust Company, as year ended December 31, 1999. (File No. 0-16772)
Guarantee Trustee, relating to Series B 8.62%
Capital Securities.
4(e) Indenture, dated as of April 10, 2002, between Incorporated herein by reference to Exhibit 4.1 to
Peoples Bancorp Inc. and Wilmington Trust Company, Peoples' Quarterly Report on Form 10-Q for the
as Trustee, relating to Floating Rate Junior quarterly period ended September 30, 2002(File No.
Subordinated Debt Securities due 2032. 0-16772) ("Peoples' September 30, 2002 Form 10-Q").
4(f) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.2 to
Capital Trust II, dated as of April 10, 2002. Peoples' September 30, 2002 Form 10-Q.
4(g) Guarantee Agreement, dated as of April 10, 2002, by Incorporated herein by reference to Exhibit 4.3 to
and between Peoples Bancorp Inc. and Wilmington Peoples' September 30, 2002 Form 10-Q.
Trust Company, as Guarantee Trustee, relating to
Floating Rate MMCaps(SM) Capital Securities.
4(h) Loan Agreement dated as of June 12, 2003, by and Incorporated herein by reference to Exhibit 10(a) to
between Peoples Bancorp Inc. and First Tennessee Peoples' Quarterly Report on Form 10-Q for the
Bank National Association. quarterly period ended June 30, 2003 (File No.
0-16772) (the "June 30, 2003 Form 10-Q").
4(i) Promissory note executed by Peoples Bancorp Inc., as Incorporated herein by reference to Exhibit 10(b) to
Maker in the principal amount of $17,000,000 dated Peoples' June 30, 2003 Form 10-Q.
June 12, 2003.
4(j) Commercial Pledge Agreement dated as of June 12, Incorporated herein by reference to Exhibit 10(c) to
2003, by and between Peoples Bancorp Inc. and First Peoples' June 30, 2003 Form 10-Q.
Tennessee Bank National Association.
4(k) Registration Rights Agreement, dated as of April 30, Incorporated herein by reference to Exhibit 4.1 to
2004, among Putnam Agency, Inc.; Thomas G. Chaffin, Peoples' Registration Statement on Form S-3
Dana N. Conley, Charles R. Lowe, Clarence C. Massey, (Registration No. 333-116683) filed on June 21, 2004
Laura A. Morris, Thomas E. Phipps, Donald H. Putnam, ("People' 2004 Form S-3").
Jr. and Donald H. Putnam, Jr. Trustee U/A DTD May 7,
1993, FBO Donald H. Putnam, Jr. Revocable Trust and
Erland P. Stevens, Jr., the shareholders of Putnam
Agency, Inc.; and Peoples Bancorp Inc.
4(l) Registration Rights Agreement, dated as of May 28, Incorporated herein by reference to Exhibit 4.2 to
2004, among James Barengo, Randall T. Barengo and Peoples' 2004 Form S-3.
Peoples Bancorp Inc.
10(a) Deferred Compensation Agreement, dated November 18, Incorporated herein by reference to Exhibit 6(g) to
1976, between Robert E. Evans and The Peoples Registration Statement No. 2-68524 on Form S-14 of
Banking and Trust Company (now known as Peoples Peoples Bancorp Inc., a Delaware corporation,
Bank, National Association), as amended December 26, Peoples' predecessor.
1978 and March 22, 1979.*
10(b)(1) Peoples Bancorp Inc. Deferred Compensation Plan for Incorporated herein by reference to Exhibit 10(a) of
Directors of Peoples Bancorp Inc. and Subsidiaries Peoples' Registration Statement on Form S-8 filed
(Amended and Restated Effective January 2, 1998.)* December 31, 1997 (Registration No. 333-43629).
10(b)(2) Amendment No. 1 to Peoples Bancorp Inc. Deferred Incorporated herein by reference to Exhibit 10(b) of
Compensation Plan for Directors of Peoples Bancorp Peoples' Post-Effective Amendment No. 1 to Form S-8
Inc. and Subsidiaries effective January 2, 1998.* filed September 4, 1998 (Registration No. 333-43629).
10(c) Summary of the Performance Compensation Program for Incorporated herein by reference to Exhibit 10(c) of
Peoples Bancorp Inc. effective for calendar years Peoples' Annual Report on Form 10-K for the fiscal
beginning on or after January 1, 2002.* year ended December 31, 2003 (File No. 0-16772).
10(d) Amended and Restated Peoples Bancorp Inc. 1993 Stock Incorporated herein by reference to Exhibit 4 of
Option Plan.* Peoples' Registration Statement on Form S-8 filed
August 25, 1993 (Registration Statement No.
33-67878).
10(e) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(g) of
with grant of non-qualified stock options under Peoples' Annual Report on Form 10-K for the fiscal
Amended and Restated Peoples Bancorp Inc. 1993 Stock year ended December 31, 1995 (File No. 0-16772)
Option Plan.* ("Peoples' 1995 Form 10-K").
10(f) Form of Stock Option Agreement, dated May 20, 1993, Incorporated herein by reference to Exhibit 10(h) of
used in connection with grant of incentive stock Peoples' 1995 Form 10-K.
options under Amended and Restated Peoples Bancorp
Inc. 1993 Stock Option Plan.*
10(g) Form of Stock Option Agreement dated November 10, Incorporated herein by reference to Exhibit 10(i) of
1994, used in connection with grant of incentive Peoples' 1995 Form 10-K.
stock options under Peoples Bancorp Inc. Amended and
Restated 1993 Stock Option Plan.*
10(h) Peoples Bancorp Inc. 1995 Stock Option Plan.* Incorporated herein by reference to Exhibit 4 of
Peoples' Form S-8 filed May 24, 1995 (Registration
Statement No. 33-59569).
10(i) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(k) of
with grant of non-qualified stock options to Peoples' 1995 Form 10-K.
non-employee directors of Peoples under Peoples
Bancorp Inc. 1995 Stock Option Plan.*
10(j) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(l) of
with grant of non-qualified stock options to Peoples' 1995 Form 10-K.
non-employee directors of Peoples' subsidiaries
under Peoples Bancorp Inc. 1995 Stock Option Plan.*
10(k) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(m) of
with grant of incentive stock options under Peoples Peoples' Annual Report on Form 10-K for the fiscal
Bancorp Inc. 1995 Stock Option Plan.* year ended December 31, 1998 (File No. 0-16772)
("Peoples' 1998 Form 10-K").
10(l) Peoples Bancorp Inc. 1998 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of
Peoples' Form S-8 filed September 4, 1998
(Registration Statement No. 333-62935).
10(m) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o) of
with grant of non-qualified stock options to Peoples' 1998 Form 10-K.
non-employee directors of Peoples under Peoples
Bancorp Inc. 1998 Stock Option Plan.*
10(n) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(p) of
with grant of non-qualified stock options to Peoples' 1998 Form 10-K.
consultants/advisors of Peoples under Peoples
Bancorp Inc. 1998 Stock Option Plan.*
10(o) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o) of
with grant of incentive stock options under Peoples Peoples' Annual Report on Form 10-K for the fiscal
Bancorp Inc. 1998 Stock Option Plan.* year ended December 31, 1999(File No. 0-16772).
10(p) Peoples Bancorp Inc. 2002 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of
Peoples' Form S-8 filed April 15, 2002 (Registration
Statement No. 333-86246).
10(q) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(r) to
with grant of non-qualified stock options to Annual Report on Form 10-K for the fiscal year ended
directors of Peoples under Peoples Bancorp Inc. 2002 December 31, 2003 (File No. 0-16772)("Peoples' 2002
Stock Option Plan.* Form 10-K').
10(r) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(s) to
with grant of non-qualified stock options to Peoples' 2002 Form 10-K.
subsidiary directors of Peoples under Peoples
Bancorp Inc. 2002 Stock Option Plan.*
10(s) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(t) to
with grant of non-qualified stock options to Peoples' 2002 Form 10-K.
employees of Peoples under Peoples Bancorp Inc. 2002
Stock Option Plan.*
10(t) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(u) to
with grant of incentive stock options under Peoples Peoples' 2002 Form 10-K.
Bancorp Inc. 2002 Stock Option Plan.*
10(u) Form of Change in Control Agreement applicable to Incorporated herein by reference to Exhibit 10(a) to
Robert E. Evans and Mark F. Bradley* Peoples' Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004, filed
November 8, 2004 (File No. 0-16772) (the "September
30, 2004 Form 10-Q").
10(v) Form of Change in Control Agreement applicable to Incorporated herein by reference to Exhibit 10(b) to
David B. Baker, Larry E. Holdren, Carol A. Peoples' September 30, 2004 Form 10-Q.
Schneeberger and John W. Conlon*
10(w) Summary of Perquisites for Executive Officers of Incorporated herein by reference to Exhibit 10(w) of
Peoples Bancorp Inc. Peoples' Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 (File No. 0-16772).
10(x) Summary of Base Salaries for Executive Officers of Filed herewith.
Peoples Bancorp Inc.
10(y) Summary of Cash Compensation for Directors of Incorporated herein by reference to Exhibit 10.1 to
Peoples Bancorp Inc. Peoples' Current Report of Form 8-K filed April 19,
2005.
12 Statements of Computation of Ratios. Filed herewith.
21 Subsidiaries of Peoples Bancorp Inc. Filed herewith.
23 Consent of Independent Registered Public Accounting Filed herewith.
Firm - Ernst & Young LLP.
31(a) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith.
[President and Chief Executive Officer]
31(b) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith.
[Chief Financial Officer and Treasurer]
32 Section 1350 Certifications Filed herewith.
*Management Compensation Plan