SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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, P. O. Box 738, Marietta, Ohio 45750
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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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Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
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 ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 10,669,561 common shares,
without par value, at October 31, 2006.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION................................................2
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ITEM 1: FINANCIAL STATEMENTS..............................................2
CONSOLIDATED BALANCE SHEETS (Unaudited)...............................2
CONSOLIDATED STATEMENTS OF INCOME (Unaudited).........................3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)............4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)...........4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)...........5
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS..............6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION..............................................10
SELECTED FINANCIAL DATA..............................................10
RESULTS OF OPERATIONS................................................14
FINANCIAL CONDITION..................................................20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......28
ITEM 4: CONTROLS AND PROCEDURES..........................................28
PART II - OTHER INFORMATION..................................................30
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ITEM 1: LEGAL PROCEEDINGS...............................................30
ITEM 1A: RISK FACTORS...................................................30
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.....31
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.................................31
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............31
ITEM 5: OTHER INFORMATION...............................................31
ITEM 6: EXHIBITS........................................................32
SIGNATURES...................................................................34
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EXHIBIT INDEX................................................................35
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
----------------------------
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
September 30, December 31,
Assets 2006 2005
---------------- ---------------
Cash and cash equivalents:
Cash and due from banks $ 32,477 $ 35,564
Interest-bearing deposits in other banks 1,036 1,084
Federal funds sold 1,300 3,000
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Total cash and cash equivalents 34,813 39,648
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $558,886 at September 30, 2006 and $591,022 at December 31, 2005) 557,137 589,313
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Loans, net of deferred fees and costs 1,139,852 1,071,876
Allowance for loan losses (16,134) (14,720)
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Net loans 1,123,718 1,057,156
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Loans held for sale 980 1,103
Bank premises and equipment, net 22,848 23,486
Business owned life insurance 48,203 46,993
Goodwill 61,260 59,767
Other intangible assets 7,793 9,513
Other assets 29,782 28,298
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Total assets $ 1,886,534 $ 1,855,277
===============================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 166,505 $ 162,729
Interest-bearing 1,061,099 926,557
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Total deposits 1,227,604 1,089,286
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Short-term borrowings 226,281 173,696
Long-term borrowings 188,107 362,466
Junior subordinated notes held by subsidiary trusts 29,391 29,350
Accrued expenses and other liabilities 18,270 17,402
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Total liabilities 1,689,653 1,672,200
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Stockholders' Equity
Common stock, no par value, 24,000,000 shares authorized,
10,884,241 shares issued at September 30, 2006 and 10,869,655 shares issued
at December 31, 2005, including shares in treasury 162,506 162,231
Retained earnings 40,918 30,740
Accumulated comprehensive loss, net of deferred income taxes (1,141) (1,116)
Treasury stock, at cost, 219,638 shares at September 30, 2006 and 350,675 shares
at December 31, 2005 (5,402) (8,778)
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Total stockholders' equity 196,881 183,077
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Total liabilities and stockholders' equity $ 1,886,534 $ 1,855,277
===============================================================================================================================
See Notes to the Consolidated Unaudited Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data) For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
Interest Income:
Interest and fees on loans $ 20,830 $ 17,607 $ 59,768 $ 50,580
Interest on taxable investment securities 6,047 5,997 18,331 17,667
Interest on tax-exempt investment securities 718 730 2,172 2,097
Other interest income 54 21 132 51
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Total interest income 27,649 24,355 80,403 70,395
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Interest Expense:
Interest on deposits 8,795 5,770 22,872 16,464
Interest on short-term borrowings 3,120 1,301 7,643 2,573
Interest on long-term borrowings 2,135 3,511 8,197 10,745
Interest on junior subordinated notes held by subsidiary trusts 656 623 1,940 1,835
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Total interest expense 14,706 11,205 40,652 31,617
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Net interest income 12,943 13,150 39,751 38,778
Provision for loan losses 929 485 1,770 1,466
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Net interest income after provision for loan losses 12,014 12,665 37,981 37,312
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Other Income:
Service charges on deposit accounts 2,682 2,533 7,747 7,279
Investment and insurance commissions 2,177 2,266 8,028 7,186
Income from fiduciary activities 829 794 2,524 2,466
Electronic banking income 792 706 2,288 2,087
Business owned life insurance 404 423 1,209 1,314
Mortgage banking income 165 275 578 656
Gain on securities transactions 2 - 6 236
Gain on sale of banking office 232 - 232 -
Other 267 121 661 580
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Total other income 7,550 7,118 23,273 21,804
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Other Expenses:
Salaries and employee benefits 6,445 6,608 19,789 20,530
Net occupancy and equipment 1,377 1,215 3,829 3,842
Amortization of other intangible assets 556 661 1,705 2,023
Professional fees 547 454 1,822 1,669
Data processing and software 457 487 1,401 1,411
Franchise tax 445 425 1,336 1,254
Marketing 398 299 1,286 1,088
Bankcard costs 333 284 940 871
Other 2,208 2,103 6,281 6,035
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Total other expenses 12,766 12,536 38,389 38,723
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Income before income taxes 6,798 7,247 22,865 20,393
Income taxes 1,476 1,979 6,076 5,555
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Net income $ 5,322 $ 5,268 $ 16,789 $ 14,838
===============================================================================================================================
Earnings per share:
Basic $ 0.50 $ 0.50 $ 1.59 $ 1.42
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Diluted $ 0.50 $ 0.50 $ 1.57 $ 1.40
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Weighted-average number of shares outstanding:
Basic 10,638,824 10,451,578 10,587,462 10,425,704
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Diluted 10,748,996 10,591,470 10,709,312 10,563,753
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Cash dividends declared $ 2,252 $ 2,108 $ 6,611 $ 6,087
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Cash dividends declared per share $ 0.21 $ 0.20 $ 0.62 $ 0.58
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See Notes to the Consolidated Unaudited Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except per share data)
Common Stock Accumulated
-------------------------- Retained Comprehensive Treasury
Shares Amount Earnings Loss Stock Total
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Balance, December 31, 2005 10,869,655 $ 162,231 $ 30,740 $ (1,116) $ (8,778) $ 183,077
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Net income 16,789 16,789
Other comprehensive loss, net of tax (25) (25)
Cash dividends declared of $0.62 per share (6,611) (6,611)
Stock-based compensation expense 225 225
Purchase of treasury stock, 17,312 shares (490) (490)
Exercise of common stock options (reissued
129,623 treasury shares) (791) 3,376 2,585
Tax benefit from stock option exercises 352 352
Issuance of common stock under dividend
reinvestment and stock purchase plan 14,586 429 429
Issuance of common stock related to acquisition
of Putnam Agency, Inc. (reissued 4,662
treasury
shares) 19 121 140
Issuance of common stock related to acquisition
of Barengo Insurance Agency, Inc. (reissued
14,064 treasury shares) 41 369 410
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Balance, September 30, 2006 10,884,241 $ 162,506 $ 40,918 $ (1,141) $ (5,402) $ 196,881
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands) For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- ------------------------
2006 2005 2006 2005
------------ ----------- ----------- -----------
Net income $ 5,322 $ 5,268 $ 16,789 $ 14,838
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities arising in the 8,662 (5,749) (32) (7,199)
period
Less: reclassification adjustment for net securities gains included in 2 - 6 236
net income
Unrealized loss on cash flow hedge derivatives arising in the period - 44 - 22
Less: reclassification adjustment for derivative losses included in - (250) - (250)
net income
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Total other comprehensive income (loss) 8,660 (5,455) (38) (7,163)
Income tax expense (benefit) 3,031 (1,909) (13) (2,507)
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Total other comprehensive income (loss), net of tax 5,629 (3,546) (25) (4,656)
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Total comprehensive income $ 10,951 $ 1,722 $ 16,764 $ 10,182
==============================================================================================================================
See Notes to the Consolidated Unaudited Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) For the Nine Months
Ended September 30,
--------------------------------
2006 2005
-------------- --------------
Net cash provided by operating activities $ 22,958 $ 35,358
Cash flows from investing activities:
Purchases of available-for-sale securities (25,334) (96,676)
Proceeds from sales of available-for-sale securities - 596
Proceeds from maturities, calls and prepayments of available-for-sale securities 57,316 86,268
Net increase in portfolio loans (68,602) (52,913)
Net expenditures for premises and equipment (1,577) (3,292)
Net proceeds from sales of other real estate owned 643 1,426
Business acquisitions, net of cash received (1,453) (1,157)
Sale of banking office (5,144) -
Investment in limited partnership and tax credit funds (899) (3,519)
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Net cash used in investing activities (45,050) (69,267)
Cash flows from financing activities:
Net increase in non-interest-bearing deposits 4,270 5,913
Net increase in interest-bearing deposits 138,734 22,048
Net increase in short-term borrowings 52,585 113,949
Payments on long-term borrowings (174,357) (98,555)
Cash dividends paid (6,066) (5,491)
Purchase of treasury stock (490) (1,721)
Repurchase of trust preferred securities (25) -
Proceeds from issuance of common stock 2,606 1,248
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Net cash provided by financing activities 17,257 37,391
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Net (decrease) increase in cash and cash equivalents (4,835) 3,482
Cash and cash equivalents at beginning of period 39,648 31,449
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Cash and cash equivalents at end of period $ 34,813 $ 34,931
========================================================================================================================
Supplemental cash flow information:
Interest paid $ 39,454 $ 31,100
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Income taxes paid 4,353 1,654
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See Notes to the Consolidated Unaudited Financial Statements
NOTES TO THE CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
-------------------------
The accounting and reporting policies of Peoples Bancorp Inc. ("Peoples
Bancorp") and Subsidiaries (collectively, "Peoples") conform to accounting
principles generally accepted in the United States ("US GAAP") and to
general practices within the financial services industry. Peoples considers
all of its principal activities to be financial services related. The
accompanying unaudited consolidated financial statements of Peoples reflect
all adjustments (which include normal recurring adjustments) necessary to
present fairly such information for the periods and dates indicated. 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. To conform to
the 2006 presentation, certain reclassifications have been made to prior
period amounts, which had no impact on net income, comprehensive income, net
cash provided by operating activities or stockholders' equity. Results of
operations for the three and nine months ended September 30, 2006, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2006.
Certain information and footnotes typically included in the annual financial
statements prepared in conformity with US GAAP have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The balance sheet at December 31, 2005 contained herein has been
derived from the audited balance sheet included in Peoples Bancorp's Annual
Report on Form 10-K for the fiscal year ended December 31, 2005 ("2005 Form
10-K"). These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the 2005 Form 10-K.
The consolidated financial statements include the accounts of Peoples
Bancorp and its consolidated subsidiaries, Peoples Bank, National
Association ("Peoples Bank") and Peoples Investment Company, along with
their wholly-owned subsidiaries. Peoples Bancorp has two statutory business
trusts that are variable interest entities 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.
2. New Accounting Pronouncements:
----------------------------------
On March 17, 2006, the Financial Accounting Standards Board ("FASB") issued
Statement No. 156, "Accounting for Servicing of Financial Assets - an
amendment of FASB Statement No. 140" ("SFAS 156"). SFAS 156 amends FASB
Statement No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities-a replacement of FASB Statement
No. 125" ("SFAS 140"). SFAS 156 permits entities the option to measure
servicing rights at fair value and report changes in fair value in earnings
rather than amortize servicing rights in proportion to and over the
estimated net servicing income or loss and assess the rights for impairment
or the need for an increased obligation as required under SFAS 140.
SFAS 156 is effective as of the beginning of an entity's first fiscal year
that begins after September 15, 2006. Earlier adoption of the Statement is
permitted as of the beginning of an entity's fiscal year, provided the
entity has not yet issued financial statements for any interim period of
that fiscal year. Peoples has elected to adopt SFAS 156 on January 1, 2007,
and has not changed its method of accounting for its mortgage servicing
rights. Management does not expect the adoption of SFAS 156 to have a
material impact on Peoples' financial condition, results of operations or
cash flows.
On July 13, 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes -an interpretation of FASB Statement No.
109", which is effective for fiscal years beginning after December 15, 2006
with earlier adoption encouraged. This interpretation was issued to clarify
the accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Management is currently
evaluating the potential impact of this interpretation but does not expect
the impact of adoption to be material to Peoples' financial statements taken
as a whole.
On September 15, 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157"), which defines fair value and establishes a
consistent framework for using fair value to measure assets and liabilities.
SFAS 157 applies whenever a company is required or permitted to use fair
value measurements under other accounting pronouncements and does not
require any new fair value measurements. However, SFAS 157 requires expanded
disclosures about the use of fair value to measure assets and liabilities in
interim and annual periods subsequent to initial recognition.
SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity
has not yet issued financial statements for that fiscal year, including
financial statements for an interim period within that fiscal year.
Management does not expect the impact of adoption to be material to Peoples'
financial statements taken as a whole.
On September 29, 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS
158 requires entities to recognize an asset for a defined benefit
postretirement plan's overfunded status or a liability for a plan's
underfunded status. In addition, entities must measure a defined benefit
postretirement plan's assets and obligations that determine its funded
status as of the end of the employer's fiscal year, and recognize changes in
the funded status of a defined benefit postretirement plan in comprehensive
income in the year in which the changes occur. Certain effects on net
periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and
transition asset or obligation are to be disclosed in the notes to the
financial statements.
The requirement to recognize the funded status of a defined benefit
postretirement plan and other disclosure requirements are effective for
fiscal years ending after December 15, 2006, for public entities. The
requirement to measure plan assets and benefit obligations as of the date of
the employer's fiscal year-end statement of financial position is effective
for fiscal years ending after December 15, 2008. Earlier application of the
recognition or measurement date provisions is encouraged; however, early
application must be for all of an employer's benefit plans. Management is
currently evaluating the potential impact of this interpretation but does
not expect the impact of adoption to be material to Peoples' financial
statements taken as a whole.
3. Stock-Based Compensation:
-----------------------------
On January 1, 2006, Peoples adopted the fair value recognition provisions of
FASB Statement No. 123(R), "Share-Based Payment" ("SFAS123 (R)"), using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized beginning in 2006 includes: (a) the
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated
in accordance with the original provisions of FASB Statement No. 123, and
(b) the compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123(R). Results for prior periods have not been
restated. Prior to January 1, 2006, Peoples accounted for stock-based
compensation using the intrinsic value method. Under the provisions of
Peoples Bancorp's stock option plans, the exercise price per share of each
option granted cannot be less than the fair market value of the underlying
common shares on the date of grant. As a result, Peoples previously did not
recognize any stock-based employee compensation expense in net income prior
to January 1, 2006.
As a result of adopting SFAS 123(R), Peoples' income before income taxes and
net income for the nine months ended September 30, 2006, were $225,000 and
$146,000 lower, respectively, than if Peoples had continued to account for
share-based compensation using the intrinsic value method.
The following table illustrates the effect on net income and earnings per
share for the periods presented had Peoples applied fair value recognition
to stock-based employee compensation, assuming the estimated fair value of
the options as of the grant date is amortized to expense over the vesting
period:
(Dollars in thousands, except Per Share Data) Three Nine
Months Ended Months Ended
September 30, September 30,
2005 2005
------------------ ------------------
Net income, as reported $ 5,268 $ 14,838
Deduct: stock-based compensation expense determined under
fair value based method not included in net income, net of tax 99 359
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Pro forma net income $ 5,169 $ 14,479
==============================================================================================================
Basic Earnings Per Share:
As reported $ 0.50 $ 1.42
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Pro forma $ 0.49 $ 1.39
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Diluted Earnings Per Share:
As reported $ 0.50 $ 1.40
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Pro forma $ 0.49 $ 1.37
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The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
2006 2005
------------- -------------
Risk-free interest rate 4.56% 4.19%
Dividend yield 2.65% 2.72%
Volatility factor of the market price of parent stock 25.8% 26.6%
Weighted-average expected life of options 6.4 years 6.4 years
The following table summarizes the changes to Peoples' stock options for the
nine months ended September 30, 2006:
Weighted
Average
Number Exercise
of Shares Price
-------------------------
Outstanding at January 1, 2006 475,832 $ 20.41
Granted 65,615 28.59
Exercised 131,931 20.11
Forfeited 1,862 28.53
--------------------------------------------------------------------------------
Outstanding at September 30, 2006 407,654 21.78
================================================================================
Exercisable at September 30, 2006 345,436 20.55
================================================================================
Weighted-average estimated fair value of options granted
during the period $ 7.37
================================================================================
The following summarizes information concerning Peoples' stock options
outstanding at September 30, 2006:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted-
Average Weighted- Weighted-
Options Remaining Average Average
Range of Shares Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
----------------------------------------------------------------------------- -------------------------------
$11.87 to $13.59 61,577 2.7 years $ 13.38 61,577 $ 13.38
$14.92 to $18.70 63,019 2.6 years 15.53 63,019 15.53
$18.98 to $22.32 96,976 4.7 years 21.24 96,976 21.24
$23.59 to $27.74 98,005 7.0 years 25.47 98,005 25.47
$28.25 to $30.00 88,077 8.9 years 28.61 25,859 28.66
---------------- ---------------- ------------ -------------- ------------
407,654 5.5 years $ 21.78 345,436 $ 20.55
4. Employee Benefit Plans:
---------------------------
Components of Net Periodic Benefit Costs
----------------------------------------
Peoples Bancorp sponsors a noncontributory defined benefit pension plan that
covers substantially all employees hired before January 1, 2003, and a
noncontributory defined contribution plan that covers substantially all
employees hired on or after January 1, 2003. Peoples Bancorp also sponsors a
contributory postretirement benefit plan for former employees who were
retired as of December 31, 1992. The following table details the components
of the net periodic benefit cost for the plans:
Pension Benefits:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
(Dollars in thousands) 2006 2005 2006 2005
------------------------ -------------------------
Service cost $ 218 $ 227 $ 652 $ 682
Interest cost 189 204 566 612
Expected return on plan assets (291) (296) (873) (887)
Amortization of prior service cost 1 1 2 2
Amortization of net loss 64 59 192 176
Settlements - - - 578
----------------------------------------------------------------------------------------
Net periodic benefit cost $ 181 $ 195 $ 539 $ 1,163
========================================================================================
Postretirement Benefits:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
(Dollars in thousands) 2006 2005 2006 2005
------------------------ -------------------------
Interest cost $ 6 $ 8 $ 19 $ 24
Amortization of prior service cost - 3 - 8
----------------------------------------------------------------------------------------
Net periodic benefit cost $ 6 $ 11 $ 19 $ 33
========================================================================================
Employer Contributions
----------------------
Through September 30, 2006, Peoples Bancorp contributed $1.2 million to its
pension plan upon the recommendation of and approval by Peoples Bancorp's
Retirement Plan Committee and Board of Directors.
5. Goodwill:
-------------
In 2004, Peoples completed the acquisition of two insurance agencies. Under
the terms of the agreements, additional consideration may be paid by
Peoples over the subsequent three years, contingent on the acquired
agencies achieving certain revenue goals. In 2006, the acquired agencies
achieved revenue goals that resulted in contingent consideration totaling
$1.5 million being earned and paid by Peoples, a portion of which was paid
in Peoples Bancorp's common shares and the remainder in cash in accordance
with the agreements.
The additional consideration increased the carrying amount of goodwill as
follows:
(Dollars in thousands)
Balance at January 1, 2006 $ 59,767
Contingent consideration earned 1,493
-------------------------------------------------------------
Balance at September 30, 2006 $ 61,260
=============================================================
Peoples performed its annual goodwill impairment tests as of June 30, 2006,
and concluded the recorded value of goodwill was not impaired based upon the
estimated fair value of the reporting unit. During the third quarter of
2006, Peoples reviewed its recorded goodwill and concluded no indicators of
impairment existed.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION
AND FINANCIAL CONDITION
--------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited consolidated
financial statements and management's discussion and analysis that follows:
At or For the Three Months At or For the Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
SIGNIFICANT RATIOS 2006 2005 2006 2005
-------------- -------------- -------------- --------------
Return on average equity 11.05% 11.61 % 11.97% 11.19%
Return on average assets 1.13% 1.14 % 1.20% 1.09%
Net interest margin (a) 3.20% 3.32 % 3.29% 3.30%
Efficiency ratio (b) 59.04% 57.37 % 57.30% 59.72%
Average stockholders' equity to average assets 10.20% 9.77 % 10.05% 9.74%
Average loans to average deposits 93.99% 95.22 % 95.51% 94.09%
Cash dividends to net income 42.31% 40.02 % 39.38% 41.02%
------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS
Nonperforming loans to total loans (c) 1.25% 0.56 % 1.25% 0.56%
Nonperforming assets to total assets (d) 0.76% 0.44 % 0.76% 0.44%
Allowance for loan losses to loans net of unearned interest 1.42% 1.39 % 1.42% 1.39%
Allowance for loan losses to nonperforming loans (c) 113.5% 248.1 % 113.5% 248.1%
Provision for loan losses to average loans (period only) 0.08% 0.05 % 0.16% 0.14%
Net (recoveries) charge-offs to average loans 0.04% 0.19 % 0.04% 0.20%
------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS (end of period)
Tier I capital ratio 11.72% 11.34 % 11.72% 11.34%
Total risk-based capital ratio 13.02% 12.65 % 13.02% 12.65%
Leverage ratio 8.79% 7.92 % 8.79% 7.92%
------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Earnings per share - basic $ 0.50 $ 0.50 $ 1.59 $ 1.42
Earnings per share - diluted 0.50 0.50 1.57 1.40
Cash dividends declared per share 0.21 0.20 0.62 0.58
Book value per share (end of period) 18.46 17.17 18.46 17.17
Tangible book value per share (end of period) (e) $ 11.99 $ 10.50 $ 11.99 $ 10.50
Weighted-average shares outstanding - Basic 10,638,824 10,451,578 10,587,462 10,425,704
Weighted-average shares outstanding - Diluted 10,748,996 10,591,470 10,709,312 10,563,753
Common shares outstanding at end of period 10,664,603 10,487,752 10,664,603 10,487,752
------------------------------------------------------------------------------------------------------------------------------
(a) Fully-tax equivalent net interest income as a percentage of average earning
assets.
(b) Non-interest expense (less intangible amortization) as a percentage of
fully-tax equivalent net interest income plus non-interest income.
(c) Nonperforming loans include loans 90 days past due and accruing,
renegotiated loans and nonaccrual loans.
(d) Nonperforming assets include nonperforming loans and other real estate
owned.
(e) Tangible book value per share reflects capital calculated for banking
regulatory requirements and excludes balance sheet impact of intangible
assets acquired through acquisitions.
Forward-Looking Statements
--------------------------
Certain statements in this Form 10-Q which are not historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. 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 financial institutions or from non-financial
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 which may be less favorable than expected;
(4) general economic conditions which may be less favorable than expected;
(5) political developments, wars or other hostilities which 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 in the conditions 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 the developments discussed above
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 Peoples' reports filed with the Securities and
Exchange Commission ("SEC"), including those risk factors included in the
disclosure under the heading "ITEM 1A. RISK FACTORS" of Part I of Peoples'
2005 Form 10-K and in the disclosure in "ITEM 1A. RISK FACTORS" of Part II
of this Quarterly Report on Form 10-Q.
All forward-looking statements speak only as of the execution date of this Form
10-Q and are expressly qualified in their entirety by the cautionary statements.
Although management believes the expectations in these forward-looking
statements are based on reasonable assumptions within the bounds of management's
knowledge of Peoples' business and operations, it is possible that actual
results may differ materially from these projections. Additionally, Peoples
undertakes no obligation to update these forward-looking statements to reflect
events or circumstances after the date of this Form 10-Q or to reflect the
occurrence of unanticipated events except as may be required by applicable legal
requirements. Copies of documents filed with the SEC are available free of
charge at the SEC's website at http://www.sec.gov and/or from Peoples Bancorp's
website.
Business Overview
-----------------
The following discussion and analysis of the unaudited consolidated financial
statements of Peoples is presented to provide insight into management's
assessment of the financial condition and results of operations. Peoples
Bancorp's primary subsidiaries are Peoples Bank, National Association ("Peoples
Bank"), Peoples Investment Company, PEBO Capital Trust I and PEBO Capital Trust
II. Peoples Bank also operates Peoples Insurance Agency, Inc. ("Peoples
Insurance"), PBNA L.L.C. and Peoples Loan Services, Inc. Peoples Investment
Company also owns Peoples Capital Corporation.
Peoples Bank is a member of the Federal Reserve System and subject to
regulation, supervision and examination by the Office of the Comptroller of the
Currency. Peoples Bank offers financial products and services through 48
financial service locations and 35 ATMs in Ohio, West Virginia and Kentucky.
Peoples Bank's internet-banking service, Peoples OnLine Connection, can be found
on the Internet at www.peoplesbancorp.com (this uniform resource locator (URL)
is an inactive, textual reference only). Peoples Bank makes available an array
of financial products and services to customers that include traditional banking
products such as deposit accounts, lending products, credit and debit cards,
corporate and personal trust services, and safe deposit rental facilities.
Peoples provides services through traditional walk-in offices and automobile
drive-in facilities, automated teller machines, banking by phone, and the
Internet.
Peoples Bank also makes available other financial services through Peoples
Financial Advisors, which provides customer-tailored services for fiduciary
needs, investment alternatives, financial planning, retirement plans and other
asset management needs. Brokerage services are offered exclusively through an
unaffiliated registered broker-dealer located at Peoples Bank offices. Peoples
Bank also offers a full range of life, health, property and casualty insurance
products through Peoples Insurance.
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.
This discussion and analysis should be read in conjunction with the audited
consolidated financial statements, and notes thereto, contained in Peoples' 2005
Form 10-K, as well as the ratios, statistics and discussions contained elsewhere
in this Form 10-Q.
Critical Accounting Policies
----------------------------
The accounting and reporting policies of Peoples conform to US GAAP and to
general practices within the financial services industry. The preparation of the
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could materially differ from
those estimates. Management has identified the accounting policies that, due to
the judgments, estimates and assumptions inherent in those policies, are
critical to an understanding of Peoples' consolidated financial statements and
management's discussion and analysis at September 30, 2006, which were unchanged
from the policies disclosed in Peoples' 2005 Form 10-K.
Summary of Recent Transactions and Events
-----------------------------------------
The following is a summary of recent transactions that have impacted or are
expected to impact Peoples' results of operations or financial condition:
o On January 17, 2006, Peoples Bancorp announced the authorization to
repurchase up to 425,000, or approximately 4%, of Peoples Bancorp's
outstanding common shares in 2006 from time to time in open market or
privately negotiated transactions (the "2006 Stock Repurchase
Program"). Any repurchased common shares will be held as treasury
shares and are anticipated to be used for future exercises of stock
options granted under Peoples Bancorp's stock option and equity-based
compensation plans, future issuances of common shares in connection
with Peoples Bancorp's deferred compensation plans, and other general
corporate purposes. Through September 30, 2006, Peoples Bancorp had
repurchased 14,000 common shares, at an average price of $28.00, under
the 2006 Stock Repurchase Program. No common shares were repurchased
during the third quarter of 2006.
o On May 15, 2006, Peoples Bank opened a new full-service banking office
in Lancaster, Ohio. This new office includes an ATM and drive-through
banking with a focus on providing banking and related financial
services to prospective and current clients in the Lancaster area.
o On May 31, 2006, Peoples Bank announced it had signed a purchase and
assumption agreement with First National Bank of McConnelsville
("First National Bank") that provides for Peoples Bank to acquire
First National Bank's Carroll, Ohio office, and its associated
deposits of approximately $6 million, and First National Bank to
acquire Peoples Bank's Chesterhill, Ohio office, and its associated
deposits of approximately $5 million. The agreement provides for a
deposit premium of 6% to be paid on any difference in deposits
acquired. Loans will be retained at the originating financial
institution. The transaction is expected to be completed at the close
of business on November 10, 2006. Management does not expect this
transaction to have a material impact on Peoples' financial condition,
results of operations, capital or cash flows.
o At the close of business on September 29, 2006, Peoples Bank completed
the previously announced sale of its South Shore, Kentucky banking
office (the "South Shore Office" or "South Shore Office Sale") to
American Savings Bank, fsb. This sale was consistent with Peoples'
strategic plan to optimize its branch network for better growth
opportunities. The transaction included the sale of $4.6 million in
deposits at a 5% premium and $0.6 million of loans at book value,
resulting in a gain of $232,000. The South Shore Office Sale did not
have a material impact on Peoples' financial condition, results of
operations, capital or cash flows.
The impact of these transactions, where material, is discussed in the applicable
sections of this management's discussion and analysis.
Effective August 1, 2006, John W. Conlon retired and resigned from his position
as Chief Financial Officer and Treasurer of both Peoples Bancorp and Peoples
Bank. As part of the succession plan announced in July 2005, Donald J. Landers,
Jr., who had served as Director of Finance and Chief Accounting Officer, was
appointed Chief Financial Officer and Treasurer of both Peoples Bancorp and
Peoples Bank effective with Mr. Conlon's retirement.
As previously disclosed in "ITEM 1A. RISK FACTORS" and "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -
Critical Accounting Policies - Income Taxes" of Peoples' 2005 Form 10-K, Peoples
Bank has been undergoing an examination by the Ohio Department of Taxation (the
"Department") of its 2002 Ohio Corporation Franchise Tax Report related to the
fiscal year ended December 31, 2001 (the "2002 tax year"). On August 23, 2006,
the Department issued a Notice of Assessment in the amount of approximately $1.4
million in regards to Peoples Bank's corporate franchise tax liability for the
2002 tax year. Management disagrees with this assessment in its entirety, and on
September 22, 2006, Peoples Bank filed a Petition for Reassessment with the
Department objecting to the assessment. Peoples Bank is not liable for nor is it
required to pay the assessment while the Petition for Reassessment is pending.
The Department has also issued proposed adjustments to Peoples Bank's 2003 Ohio
Corporation Franchise Tax Report (the "2003 Ohio Report") related to the fiscal
year ended December 31, 2002 (the "2003 tax year") on the basis of the 2002
assessment that would materially increase the amount of franchise tax due.
Management has objected to these proposed adjustments in their entirety and is
working with the Department to resolve and eliminate the proposed adjustments.
As part of this process, management has agreed to a one-year extension of the
statute of limitations for the 2003 tax year. The Department has not issued a
Notice of Assessment with respect to the 2003 Ohio Report.
Although the administrative process is not yet complete, management does not
anticipate that the ultimate resolution of the proposed adjustments for the 2002
tax year or 2003 tax year will result in a material impact on Peoples'
consolidated financial position. 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 amount of
loss can be reasonably estimated. No assurance can be given that the final
resolution of the proposed adjustments by the Department to Peoples Bank's
corporate franchise tax liability for the 2002 tax year or 2003 tax year will
not be different than what is reflected in Peoples' current and historical
consolidated financial statements.
Financial Overview
------------------
For the third quarter of 2006, net income totaled $5.3 million, or $0.50 per
diluted share, matching the amounts reported for the third quarter of 2005. For
the nine months ended September 30, 2006, Peoples' net income totaled $16.8
million, up 13% from $14.8 million through nine months of 2005, due to higher
net interest income and non-interest revenues, coupled with lower non-interest
expenses. Diluted earnings per share for the first nine months of 2006 improved
12% to $1.57, from $1.40 a year ago.
In the third quarter of 2006, net interest income of $12.9 million was down 2%
compared to the $13.2 million generated in the third quarter of 2005. Peoples'
funding costs continue to rise faster than its yield on earning assets,
offsetting the additional interest income generated by a higher volume of
earning assets. Peoples' net interest margin was 3.20% for the third quarter of
2006, compared to 3.32% a year ago and 3.29% for the second quarter of 2006.
Both net interest income and net interest margin for the third quarter of 2006
were also negatively impacted by Peoples placing $4.5 million of loans in a
single commercial relationship on nonaccrual status, resulting in the reversal
of $97,000 of interest income in the third quarter of 2006. On a year-to-date
basis, net interest income totaled $39.8 million versus $38.8 million a year
ago, while Peoples' net interest margin dropped one basis point to 3.29%.
Other income totaled $7.6 million for the third quarter of 2006 versus $7.1
million for 2005's third quarter. Other income was positively impacted by the
$0.2 million gain on the South Shore Office Sale. On a year-to-date basis, other
income was $23.3 million, up 7% from $21.8 million a year ago. Insurance and
investment revenues grew $0.8 million and deposit account service charges
increased $0.5 million, accounting for much of the increase in other income. In
the third quarter of 2006, other expense totaled $12.8 million compared to $12.5
million in the third quarter of 2005. Additional maintenance and utility costs,
along with marketing costs associated with Peoples' deposit direct mail and gift
program, comprised the majority of this increase. On a year-to-date basis, other
expense decreased 1% to $38.4 million, from $38.7 million, due primarily to
declines in salaries and benefit costs and intangible amortization.
At September 30, 2006, total assets were $1.89 billion, up $31.3 million over
year-end 2005. Gross portfolio loans increased by $68.0 million since December
31, 2005, totaling $1.14 billion at quarter-end. The largest portion of this
loan growth was from originations of commercial real estate mortgages.
Investment securities totaled $557.1 million at September 30, 2006, down 5% from
year-end 2005, as the majority of cash flows from the portfolio are being used
to fund loan growth.
Total liabilities were $1.69 billion at September 30, 2006, compared to $1.67
billion at year-end 2005. Deposit balances increased 13% through nine months, to
$1.23 billion at September 30, 2006, reflecting a $134.5 million increase in
interest-bearing balances, primarily from $84.8 million additional brokered
deposits, and a $3.8 million increase in non-interest-bearing balances.
At September 30, 2006, total stockholders' equity was $196.9 million versus
$183.1 million at December 31, 2005. This 8% increase was due mainly to Peoples'
earnings, net of dividends declared.
RESULTS OF OPERATIONS
Interest Income and Expense
---------------------------
Peoples earns interest income from loans, investment securities and short-term
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, totaling $12.9
million in the third quarter of 2006, down 2% when compared to the third quarter
of 2005. Interest income for the third quarter grew $3.3 million to $27.6
million, due to higher average earning assets, while interest expense increased
$3.5 million to $14.7 million, primarily due to the 90 basis point increase in
the average cost of funds, from the third quarter of 2005. Third quarter 2006
net interest income was also reduced by $97,000 due to the reversal of interest
income on $4.5 million of loans in a single commercial relationship being placed
on nonaccrual status during the quarter.
For the nine months ended September 30, 2006, net interest income increased 3%
to $39.8 million versus $38.8 million. Interest income grew $10.0 million to
$80.4 million, while interest expense was $40.7 million, up $9.0 million from a
year ago. Interest income benefited from an improvement in average asset yields,
coupled with a $46.3 million increase in average earning assets for the first
nine months of 2006. Through nine months of 2006, Peoples' average cost of
interest-bearing liabilities has increased 75 basis points, the primary driver
of interest expense growth.
Peoples derives a portion of its interest income from loans to and investment
securities issued by states and political subdivisions. Since these revenues
generally are not subject to income taxes, management believes it is more
meaningful to analyze net interest income on a fully-tax equivalent ("FTE")
basis, which adjusts interest income by converting tax-exempt income to the
pre-tax equivalent of taxable income using a 35% tax rate. The following table
details the calculation of FTE net interest income:
Three Months Ended Nine Months Ended
---------------------------------------------- September 30,
September 30, June 30, September 30, --------------------------
(Dollars in thousands) 2006 2006 2005 2006 2005
--------------- ------------ --------------- ------------ ------------
Net interest income, as reported $ 12,943 $ 13,305 $ 13,150 $ 39,751 $ 38,778
Taxable equivalent adjustments 413 426 422 1,269 1,217
---------------------------------------------------------------------------------------------------------------------
Fully-tax equivalent net interest income $ 13,356 $ 13,731 $ 13,572 $ 41,020 $ 39,995
---------------------------------------------------------------------------------------------------------------------
Net interest margin, calculated by dividing FTE net interest income by average
interest-earning assets, serves as an important measurement of the net revenue
stream generated by the volume, mix and pricing of Peoples' earning assets and
interest-bearing liabilities. The following table details Peoples' average
balance sheet and analysis of net interest income for the periods presented:
For the Three Months Ended September 30,
----------------------------------------------------------------------------
2006 2005
------------------------------------- -----------------------------------
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------- ------------ -------- -------------- ------------ ---------
ASSETS
Short-term investments:
Interest-bearing deposits with banks $ 2,346 $ 28 4.70% $ 2,201 $ 16 2.81%
Federal funds sold 1,945 25 5.08% 540 5 3.31%
--------------------------------------------------------------------------------------------------------------------
Total short-term investments 4,291 53 4.96% 2,741 21 2.91%
Investment securities:
Taxable 494,968 6,047 4.89% 536,790 5,997 4.43%
Tax-exempt (1) 67,414 1,104 6.55% 69,707 1,124 6.45%
--------------------------------------------------------------------------------------------------------------------
Total investment securities 562,382 7,151 5.09% 606,497 7,121 4.70%
Loans (2):
Commercial (1) 742,270 13,989 7.48% 648,586 10,915 6.68%
Real estate (3) 309,269 5,378 6.96% 334,463 5,389 6.39%
Consumer 71,751 1,491 8.24% 61,619 1,331 8.57%
--------------------------------------------------------------------------------------------------------------------
Total loans 1,123,290 20,858 7.38% 1,044,668 17,635 6.75%
Less: Allowance for loan losses (15,507) (14,717)
--------------------------------------------------------------------------------------------------------------------
Net loans 1,107,783 20,858 7.49% 1,029,951 17,635 6.81%
--------------------------------------------------------------------------------------------------------------------
Total earning assets 1,674,456 $ 28,062 6.67% 1,639,189 $ 24,777 6.02%
Intangible assets 69,332 70,215
Other assets 129,434 131,792
--------------------------------------------------------------------------------------------------------------------
Total assets $ 1,873,222 $ 1,841,196
====================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 120,595 $ 201 0.66% $ 140,133 $ 235 0.67%
Interest-bearing demand deposits 311,405 2,150 2.74% 308,782 1,472 1.89%
Time 596,006 6,444 4.29% 490,213 4,063 3.29%
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,028,006 8,795 3.39% 939,128 5,770 2.44%
Borrowed funds:
Short-term 236,967 3,120 5.27% 148,142 1,301 3.48%
Long-term 234,078 2,791 4.77% 398,622 4,134 4.15%
--------------------------------------------------------------------------------------------------------------------
Total borrowed funds 471,045 5,911 4.92% 546,764 5,435 3.91%
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,499,051 $ 14,706 3.88% 1,485,892 $ 11,205 2.98%
Non-interest-bearing deposits 167,103 158,028
Other liabilities 16,071 17,317
--------------------------------------------------------------------------------------------------------------------
Total liabilities 1,682,225 1,661,237
Stockholders' equity 190,997 179,959
--------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,873,222 $ 1,841,196
====================================================================================================================
Interest spread (1) $ 13,356 2.79% $ 13,572 3.04%
Interest income to earning assets (1) 6.67% 6.02%
Interest expense to earning assets 3.47% 2.70%
--------------------------------------------------------------------------------------------------------------------
Net interest margin (1) 3.20% 3.32%
--------------------------------------------------------------------------------------------------------------------
(1) Interest income and yields are presented on a fully tax-equivalent basis
using a 35% tax rate.
(2) Nonaccrual and impaired loans are included in the average loan balances.
Related interest income earned on nonaccrual loans prior to the loan being
placed on nonaccrual is included in loan interest income. Loan fees
included in interest income totaled $110 and $124 for the periods presented
in 2006 and 2005, respectively.
(3) Loans held for sale are included in the average loan balance listed.
Related interest income on loans originated for sale prior to the loan
being sold is included in loan interest income.
For the Nine Months Ended September 30,
----------------------------------------------------------------------------
2006 2005
------------------------------------- -----------------------------------
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------- ------------ -------- -------------- ------------ ---------
ASSETS
Short-term investments:
Interest-bearing deposits with banks $ 2,466 $ 75 4.08% $ 2,335 $ 40 2.29%
Federal funds sold 1,539 57 4.95% 450 11 3.27%
--------------------------------------------------------------------------------------------------------------------
Total short-term investments 4,005 132 4.38% 2,785 51 2.42%
Investment securities:
Taxable 509,159 18,331 4.80% 535,602 17,667 4.41%
Tax-exempt (1) 68,039 3,341 6.55% 65,620 3,226 6.57%
--------------------------------------------------------------------------------------------------------------------
Total investment securities 577,198 21,672 5.01% 601,222 20,893 4.63%
Loans (2):
Commercial (1) 718,095 39,498 7.35% 629,342 30,572 6.49%
Real estate (3) 313,746 16,092 6.84% 342,208 16,174 6.32%
Consumer 68,575 4,278 8.34% 59,622 3,922 8.79%
--------------------------------------------------------------------------------------------------------------------
Total loans 1,100,416 59,868 7.27% 1,031,172 50,668 6.55%
Less: Allowance for loan losses (15,119) (15,004)
--------------------------------------------------------------------------------------------------------------------
Net loans 1,085,297 59,868 7.37% 1,016,168 50,668 6.66%
--------------------------------------------------------------------------------------------------------------------
Total earning assets 1,666,500 $ 81,672 6.54% 1,620,175 $ 71,612 5.90%
Intangible assets 68,957 70,298
Other assets 130,292 129,933
--------------------------------------------------------------------------------------------------------------------
Total assets $ 1,865,749 $ 1,820,406
====================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 124,571 $ 602 0.65% $ 147,535 $ 790 0.72%
Interest-bearing demand deposits 297,060 5,502 2.48% 296,942 3,844 1.73%
Time 563,962 16,768 3.98% 494,010 11,830 3.20%
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 985,593 22,872 3.10% 938,487 16,464 2.35%
Borrowed funds:
Short-term 210,357 7,643 4.84% 114,030 2,573 3.02%
Long-term 299,926 10,137 4.51% 416,416 12,580 4.04%
--------------------------------------------------------------------------------------------------------------------
Total borrowed funds 510,283 17,780 4.61% 530,446 15,153 3.79%
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,495,876 $ 40,652 3.62% 1,468,933 $ 31,617 2.87%
Non-interest-bearing deposits 166,590 157,473
Other liabilities 15,731 16,667
--------------------------------------------------------------------------------------------------------------------
Total liabilities 1,678,197 1,643,072
Stockholders' equity 187,552 177,334
--------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,865,749 $ 1,820,406
====================================================================================================================
Interest spread (1) $ 41,020 2.92% $ 39,995 3.03%
Interest income to earning assets (1) 6.54% 5.90%
Interest expense to earning assets 3.25% 2.60%
--------------------------------------------------------------------------------------------------------------------
Net interest margin (1) 3.29% 3.30%
====================================================================================================================
(1) Interest income and yields are presented on a fully tax-equivalent basis
using a 35% tax rate.
(2) Nonaccrual and impaired loans are included in the average loan balances.
Related interest income earned on nonaccrual loans prior to the loan being
placed on nonaccrual is included in loan interest income. Loan fees
included in interest income totaled $368 and $365 for the periods presented
in 2006 and 2005, respectively.
(3) Loans held for sale are included in the average loan balance listed.
Related interest income on loans originated for sale prior to the loan
being sold is included in loan interest income.
Between June 2004 and September 2006, the Federal Reserve's Open Market
Committee has increased the target Federal Funds rate 425 basis points, causing
a similar increase in short-term market interest rates. However, market driven
longer-term interest rates have risen very little during this same period,
resulting in the compression of the spread between short-term and long-term
interest rates. This current slope of the yield curve, coupled with intense
competition for loans and deposits, has made it difficult for many financial
institutions, including Peoples, to grow or even maintain net interest income
and margin.
In the third quarter and first nine months of 2006, average earning asset growth
resulted from higher average net loan balances due to continued demand for
commercial mortgage loans in certain markets. During these same periods, Peoples
has experienced modest improvements in asset yields from loan originations and
the upward repricing of variable rate loans, although competitive pricing of new
business loans and the repayment of some higher yielding loans have tempered
these improvements. In 2006, a major part of management's interest rate risk
strategy includes changing the mix of earning assets by funding loan growth with
investment portfolio cash flows. As a result, average investment securities have
decreased throughout 2006.
Another key component of Peoples' current interest rate risk strategy involves
growing deposit balances in order to reduce the amount of, and reliance on,
wholesale funding sources that generally carry higher market rates of interest.
In the third quarter of 2006, average interest-bearing deposits grew $88.9
million from the third quarter of 2005 and $55.8 million from the second quarter
of 2006, due primarily to an increase in brokered deposits and money market
balances. Average brokered deposits were up $52.4 million and $37.6 million in
the third quarter of 2006, compared to the third quarter of 2005 and second
quarter of 2006, respectively, while average money market balances increased
$16.5 million and $23.4 million for the same periods, respectively. For the nine
months ended September 30, 2006, average interest-bearing deposits increased 5%,
the result of a $43.6 million increase in average retail certificates of deposit
("CD") balances and a $26.3 million increase in brokered deposits. For both the
three and nine months ended September 30, 2006, average saving balances have
decreased, as some customers have sought out higher returns in the current
interest rate environment. The increase in the average cost of interest-bearing
deposits for both the quarter and year-to-date was caused by the general
increase in short-term interest rates and competitive pricing reflective of
Peoples' markets.
Peoples also utilizes a variety of borrowings to supplement its deposit base.
The following details the average balances and rates of Peoples' borrowed funds:
For the Three Months Ended
------------------------------------------------------------------------
September 30, 2006 June 30, 2006 September 30, 2005
---------------------- ----------------------- ------------------------
(Dollars in thousands) Average Average Average
Balance Rate Balance Rate Balance Rate
------------ --------- ------------ --------- ------------- ----------
Short-term borrowings:
FHLB advances $ 210,084 5.25% $ 193,934 4.93% $ 124,671 3.55%
Retail repurchase agreements 26,883 4.38% 34,049 3.96% 23,471 2.81%
-----------------------------------------------------------------------------------------------------------------
Total short-term borrowings $ 236,967 5.27% $ 227,983 4.84% $ 148,142 3.48%
-----------------------------------------------------------------------------------------------------------------
Long-term borrowings:
FHLB advances $ 93,678 4.49% $ 158,473 4.37% $ 197,854 4.12%
Wholesale repurchase agreements 100,163 3.48% 104,602 3.46% 157,850 3.17%
Other long-term borrowings 40,237 8.37% 42,642 8.07% 42,918 7.29%
-----------------------------------------------------------------------------------------------------------------
Total long-term borrowings $ 234,078 4.77% $ 305,717 4.59% $ 398,622 4.15%
-----------------------------------------------------------------------------------------------------------------
Total borrowings $ 471,045 4.92% $ 533,700 4.66% $ 546,764 3.91%
=================================================================================================================
For the Nine Months Ended
September 30,
--------------------------------------------------
2006 2005
---------------------- ----------------------
Average Average
Balance Rate Balance Rate
------------ --------- ------------ ---------
Short-term borrowings:
FHLB advances $ 178,475 4.94% $ 95,595 3.09%
Retail repurchase agreements 31,882 3.95% 18,435 2.36%
-------------------------------------------------------------------------------------------
Total short-term borrowings $ 210,357 4.84% $ 114,030 3.02%
-------------------------------------------------------------------------------------------
Long-term borrowings:
FHLB advances $ 145,517 4.32% $ 203,682 4.11%
Wholesale repurchase agreements 112,473 3.39% 168,823 3.11%
Other long-term borrowings 41,936 8.04% 43,911 7.04%
-------------------------------------------------------------------------------------------
Total long-term borrowings $ 299,926 4.51% $ 416,416 4.04%
-------------------------------------------------------------------------------------------
Total borrowings $ 510,283 4.61% $ 530,446 3.79%
===========================================================================================
The change in both short- and long-term borrowings reflects management's
decision to repay maturing long-term debt with short-term overnight Federal Home
Loan Bank ("FHLB") advances rather than extend the term at current market rates,
along with using the increase in average deposit balances, especially brokered
deposits, to reduce the amount of short-term overnight FHLB advances and
diversify funding sources. Additional information regarding Peoples' borrowed
funds can be found later in this discussion under the caption "FINANCIAL
CONDITION-Funding Sources".
The combination of higher current interest rates and intense competition for
loans and deposits continues to pressure net interest income and margin. One of
Peoples' major strategic initiatives for 2006 is to adjust its balance sheet mix
by increasing loans and decreasing investment securities in proportion to total
earning assets while reducing the amount of wholesale funding, when possible.
This strategy should produce long-term benefits to Peoples' net interest income
and margin. However, management expects the repricing of existing funding
sources, pricing competition and the current slope of the yield curve to
continue to pressure net interest margin in the short-term, which may mitigate
any positive margin impact from these balance sheet changes. Peoples will
continue to monitor net interest income performance and manage its balance sheet
mix through regular Asset-Liability Committee ("ALCO") meetings. 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 initiated by management.
Provision for Loan Losses
-------------------------
In the third quarter of 2006, Peoples' provision for loan losses was $929,000
compared to $573,000 the second quarter and $485,000 in the third quarter of
2005. The provision related to deposit account overdrafts was $254,000, $250,000
and $175,000, respectively. For the nine months ended September 30, 2006, the
provision for loan losses was $1.8 million, up from $1.5 million provided for
the first nine months of 2005. The provision expressed as a percentage of
average loans was 0.08% for the third quarter of 2006, compared to 0.05% for
both the second quarter of 2006 and third quarter of 2005. On a year-to-date
basis, the provision was 0.16% of average loans versus 0.14% a year ago.
The provision is based on management's in-depth quarterly analysis of the loan
portfolio and historical loss experience and is directionally consistent with
changes in Peoples' loan credit quality. Future provisions for loan losses will
continue to be based on management's quarterly procedural methodology that
estimates the amount of credit losses probable within the loan portfolio.
Additional information regarding changes in Peoples' allowance for loan losses
and loan credit quality can be found later in this discussion under the caption
"Allowance for Loan Losses".
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 the third quarter of 2006, non-interest income, excluding
gains and losses on securities and asset disposal transactions, totaled $7.3
million, up 3% from $7.1 million in the third quarter of 2005. This increase is
attributable to higher deposit account service charges and e-banking income,
which are both based on customer activity. Non-interest income was $23.0 million
through nine months of 2006 versus $21.5 million for the same period in 2005,
due to higher insurance revenues, deposit account service charges and e-banking
income. Compared to the second quarter of 2006, non-interest income was down 3%,
due mostly to lower insurance and investment commissions.
Service charges and other fees on deposit accounts, which are based on the
recovery of costs associated with services provided, comprised the largest
portion of non-interest revenue. In the third quarter of 2006, deposit account
service charges grew 6% from a year ago and up 3% from the prior quarter, while
on a year-to-date basis, deposit account service charges increased 6%. The
following table details Peoples' deposit account service charges:
For the Three Months Ended For the Nine Months
---------------------------------------------- Ended September 30,
September 30, June 30, September 30, -------------------------
(Dollars in thousands) 2006 2006 2005 2006 2005
---------------- ------------ --------------- ----------- ------------
Overdraft fees $ 1,850 $ 1,789 $ 1,738 $ 5,166 $ 4,890
Non-sufficient funds fees 578 543 506 1,582 1,364
Other fees and charges 254 272 289 999 1,025
------------------------------------------------------------------------------------------------------------
Total $ 2,682 $ 2,604 $ 2,533 $ 7,747 $ 7,279
============================================================================================================
The amount of deposit account service charges recognized by Peoples each
quarter, particularly overdraft and non-sufficient funds fees, is largely
dependent on the timing and volume of customer activity. In January 2006,
Peoples adjusted certain account charges, including a $2 per item increase in
overdraft and non-sufficient funds fees, in response to higher operational
costs. In addition, Peoples continues to add new customer relationships in 2006
due to its direct marketing and gift programs and focus on growing core
deposits, which has led to an increase in deposit account service charges.
In the third quarter of 2006, insurance and investment commissions were $2.2
million versus $2.3 million for the same period in 2005. For the nine months
ended September 30, 2006, insurance and investment commissions were up 12%,
largely attributable to the higher performance based commission income received
in the first quarter of 2006. The following table details Peoples' insurance and
investment commissions:
For the Three Months Ended For the Nine Months
---------------------------------------------- Ended September 30,
September 30, June 30, September 30, -------------------------
(Dollars in thousands) 2006 2006 2005 2006 2005
---------------- ------------ --------------- ----------- ------------
Property and casualty insurance $ 1,840 $ 2,048 $ 1,904 $ 5,856 $ 5,615
Brokerage 154 189 143 509 341
Life and health insurance 135 140 154 423 422
Credit life and A&H insurance 47 49 38 128 108
Fixed annuities 1 13 27 71 189
Contingent performance based commissions - 37 - 1,041 511
--------------------------------------------------------------------------------------------------------------------------
Total $ 2,177 $ 2,476 $ 2,266 $ 8,028 $ 7,186
=========================================================================================================================
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. During 2006, e-banking revenues
have remained strong, largely attributable to the combination of an increase in
the number of deposit relationships with debit cards and higher volumes of debit
card activity. At September 30, 2006, Peoples had 36,665 deposit relationships
with debit cards, or 53% of all eligible deposit accounts, compared to 31,866
relationships and a 50% penetration rate a year ago. Peoples' customers used
their debit cards to complete $143 million of transactions through nine months
of 2006, up 22% from $116 million for the first nine months of 2005.
Peoples' mortgage banking income is comprised mostly of net gains from the
origination and sale of long-term, fixed-rate real estate loans to the secondary
market, which are largely dependent on customer demand. In the third quarter of
2006, mortgage banking income was down $110,000 from 2005's third quarter and
$78,000 compared to the second quarter of 2006. On a year-to-date basis,
mortgage banking income was down 12%, totaling $578,000. The lower income levels
in 2006 reflect a decrease in both the number and amount of loans sold.
Non-Interest Expense
--------------------
In the third quarter of 2006, non-interest expense was up 2% compared to both
the prior quarter and the third quarter of 2005. Additional maintenance and
utility costs were the primary reason for these increases, while marketing costs
associated with Peoples' deposit direct mail and gift program also contributed
to the increase from a year ago. Through nine months of 2006, non-interest
expense was down slightly compared to the same period in 2005, due primarily to
declines in salaries and benefit costs and intangible amortization.
Salaries and benefit costs, Peoples' largest non-interest expense, were lower
for both the three and nine months ended September 30, 2006, when compared to
the same periods in 2005. Much of the year-to-date decline was the result of the
$578,000 pension settlement charge incurred in the second quarter of 2005, while
no such charges were incurred through nine months of 2006. The following table
details Peoples' salaries and benefit costs:
For the Three Months Ended For the Nine Months
---------------------------------------------- Ended September 30,
September 30, June 30, September 30, -------------------------
(Dollars in thousands) 2006 2006 2005 2006 2005
---------------- ------------ --------------- ----------- ------------
Salaries and other compensation $ 4,905 $ 4,894 $ 5,246 $ 15,121 $ 15,484
Employee benefits 927 905 817 2,846 3,302
Payroll taxes and other
employment-related costs 613 633 545 1,822 1,744
-------------------------------------------------------------------------------------------------------------------
Total salaries and benefit costs $ 6,445 $ 6,432 $ 6,608 $ 19,789 $ 20,530
====================================================================================================================
Through nine months of 2006, salaries considered direct loan origination costs
have increased as a result of the higher volume of loan production. Peoples'
employee benefit costs through nine months of 2006 have benefited from the
non-recurrence of pension settlement charges incurred in 2005 and a limited
increase in medical costs. Additionally, Peoples' adoption of new stock-based
compensation accounting rules on January 1, 2006, has tempered the improvement
since Peoples is required to record compensation expense for stock options
granted in 2006. Information regarding the new stock-based compensation
accounting rules and the impact on Peoples' results of operations can be found
in Note 3 of the Notes to the Consolidated Unaudited Financial Statements.
Net occupancy and equipment costs for the third quarter of 2006 were up 13% from
2005's third quarter and 14% from the prior quarter, due to additional
maintenance and utility costs. On a year-to-date basis, net occupancy and
equipment costs were flat, as lower depreciation expense from aged assets offset
the impact of higher maintenance costs.
Professional fees, which include accounting, legal and other professional
expenses, increased $93,000 and $153,000 for the three and nine months ended
September 30, 2006, respectively, compared to the same periods in 2005. The
primary factor driving the increased professional fees in 2006 was ongoing
regulatory compliance costs, while the review and administration of various
employee benefit plans contributed to the third quarter increase.
Marketing expense, which includes the cost of advertising, public relations and
charitable contributions, was up $99,000 for the third quarter of 2006 when
compared to the third quarter of 2005, while on a year-to-date basis, was up 18%
from a year ago. These increases were due mostly to costs associated with
Peoples' deposit direct mail marketing and gift program.
Income Tax Expense
------------------
For the nine months ended September 30, 2006, Peoples' effective tax rate was
26.6% compared to 27.2% for the same period a year ago. The reduction in the
effective tax rate produced an effective tax rate of 21.7% for the third quarter
of 2006. The change in the estimated effective tax rate was attributable to
additional alternative minimum tax credits expected to be realized in 2006. The
effective tax rate of 26.6% for the first nine months of 2006 is management's
current estimate of Peoples' effective rate for full year 2006.
Peoples has made tax-advantaged investments in order to manage its effective tax
rate and overall tax burden. At September 30, 2006, the amount of tax-advantaged
investments totaled $153.8 million compared to $155.9 million at year-end 2005
and $156.2 million at September 30, 2005. Depending on economic and regulatory
conditions, Peoples may make additional investments in various tax credit pools
and other tax-advantaged assets.
FINANCIAL CONDITION
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents decreased $2.8 million from the second quarter of
2006, to $34.8 million at September 30, 2006, and were down $4.8 million from
the $39.6 million at December 31, 2005. These decreases were attributable to a
lower amount of items in process of collection at September 30, 2006. The amount
of cash and cash equivalents fluctuates on a daily basis due to customer
activity and Peoples' liquidity needs. Management believes the current balance
of cash and cash equivalents, along with the availability of other funding
sources, provides Peoples with sufficient liquidity to meet its cash
requirements. Further information regarding Peoples' liquidity can be found
later in this discussion under "Interest Rate Sensitivity and Liquidity."
Investment Securities
---------------------
Total investment securities had a fair market value of $557.1 million at
September 30, 2006 down 2% from June 30, 2006, and down 5% from year-end 2005.
Through nine months of 2006, proceeds from calls, maturities and prepayments
totaled $57.3 million, which exceeded purchases totaling $25.3 million. Peoples'
net unrealized loss on investment securities was $1.7 million at both September
30, 2006, and December 31, 2005, primarily due to a decline in market value
attributable to changes in market interest rates. During the third quarter, the
fair market value of Peoples' investment portfolio improved as reflected by the
$8.7 million reduction in the net unrealized loss. Management does not believe
any individual unrealized loss at September 30, 2006, 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 details Peoples' investment portfolio, at estimated fair
value:
(Dollars in thousands) September 30, June 30, December 31, September 30,
2006 2006 2005 2005
----------------- ------------------ ------------------ -----------------
US Treasury securities and obligations of
US government agencies and corporations $ 117,876 $ 121,576 $ 110,373 $ 104,908
Obligations of states and political subdivisions 67,315 67,406 69,482 70,896
Mortgage-backed securities 311,523 324,843 353,084 370,537
Other securities 60,423 54,981 56,374 58,139
----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 557,137 $ 568,806 $ 589,313 $ 604,480
============================================================================================================================
Overall, the composition of Peoples' investment portfolio at September 30, 2006
was comparable to recent periods. Peoples' investment in mortgage-backed
securities continues to decline due to management using the majority of the
principal runoff to fund loan growth and for other corporate liquidity purposes.
Management also reinvested some of the cash flows from mortgage-backed
securities into U.S. agency and municipal securities during the first quarter of
2006 to improve the diversification and overall performance of the investment
portfolio in a changing rate environment.
Management regularly evaluates the performance and liquidity of the investment
portfolio. Management may continue to utilize some or all of the cash flows from
the investment portfolio to fund loan growth or reduce borrowed funds, as deemed
appropriate from an earnings and liquidity perspective. While Peoples'
investment portfolio is used to prudently leverage excess capital when
appropriate, it serves, first and foremost, as a means of maintaining liquidity
to satisfy cash flow requirements and an interest rate risk management tool to
balance the timing of cash flows and repricing of Peoples' earning assets and
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, throughout its market areas in central and southeastern Ohio,
northwestern West Virginia, and northeastern Kentucky markets. In the third
quarter of 2006, gross loans increased $25.6 million, or 9% on an annualized
basis, due mostly to strong commercial real estate loan originations. The
following table details total outstanding loans:
(Dollars in thousands) September 30, June 30, December 31, September 30,
2006 2006 2005 2005
---------------- ---------------- ---------------- ---------------
Commercial, mortgage $ 488,278 $ 484,486 $ 504,923 $ 493,954
Commercial, other 194,227 187,296 136,331 135,568
Real estate, construction 81,572 66,627 50,745 45,299
Real estate, mortgage 299,444 305,199 316,081 322,975
Consumer 76,331 70,605 63,796 62,760
---------------------------------------------------------------------------------------------------
Total loans $ 1,139,852 $ 1,114,213 $ 1,071,876 $ 1,060,556
===================================================================================================
Commercial loan balances, including loans secured by commercial real estate,
continue to represent the largest portion of Peoples' total loan portfolio,
comprising 60% of total loans at both September 30, 2006 and December 31, 2005.
Much of the commercial loan growth in 2006 resulted from continued demand for
commercial mortgage loans in certain markets and lower than expected payoffs. A
significant portion of the changes in both commercial mortgage balances and
other commercial loans was attributable to a reclassification of certain loans
in the first quarter of 2006 as a result of Peoples' ongoing regulatory
reporting compliance and loan review process. While management believes lending
opportunities exist in Peoples' markets, 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 considerations. Additionally, Peoples experienced $13 million of
commercial loan payoffs from a single loan relationship in early October 2006
that will limit loan growth during the fourth quarter of 2006.
In the third quarter of 2006, real estate construction loans increased 22%, to
$81.5 million. Nearly all of this increase was the result of higher balances in
commercial construction loans. Upon the completion of the construction period,
these loans will be converted to commercial mortgage loans.
While commercial loans comprise the largest portion of Peoples' loan portfolio,
generating residential real estate loans remains a major focus of Peoples'
lending efforts. Included in real estate mortgage loans are home equity credit
line balances of $43.9 million at September 30, 2006 versus $46.6 million at
December 31, 2005. Much of this decline was due to customers refinancing credit
lines into first mortgages in order to take advantage of the lower long-term,
fixed rates. Real estate loan balances continue to be impacted by customer
demand for long-term, fixed-rate mortgages, which Peoples generally sells to the
secondary market with servicing rights retained. At September 30, 2006, Peoples
was servicing $157.9 million of real estate loans previously sold to the
secondary market compared to $144.3 million at year-end 2005 and $140.6 million
at September 30, 2005.
Consumer loan balances, which include overdrafts, have risen modestly for the
past six consecutive quarters. Peoples' indirect lending area remains the major
source of this growth, with balances of $36.0 million at September 30, 2006,
versus $33.9 million at June 30, 2006 and $28.2 million at December 31, 2005.
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 is to assisted living
facilities and nursing homes, which comprised approximately 9.3% of Peoples'
outstanding commercial loans at quarter-end, compared to 8.9% at December 31,
2005. Loans to lodging and lodging-related companies also represented a
significant portion of Peoples' commercial loans, comprising 7.9% of Peoples'
outstanding commercial loans at September 30, 2006, versus 8.8% at year-end
2005. In early October 2006, the amount of loans to assisted living facilities
and nursing homes decreased due to the previously mentioned $13 million of
commercial loan payoffs. As a result, loans to assisted living facilities and
nursing homes currently comprise approximately 7.5% of total commercial loans.
These lending opportunities 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 assisted living facilities and nursing homes, as well as loans
to lodging and lodging-related companies, 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, although not considered the primary source of
repayment, many of these loans are guaranteed by principals with substantial net
worth.
Allowance for Loan Losses
-------------------------
Peoples' allowance for loan losses totaled $16.1 million, or 1.42% of total
loans, at September 30, 2006, compared to $14.7 million, or 1.39% of total
loans, at September 30, 2005, and $14.7 million, or 1.37% of total loans, at
year-end 2005. The following table presents changes in Peoples' allowance for
loan losses:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
(Dollars in thousands) 2006 2005 2006 2005
-------------- ------------- ------------- -------------
Balance, beginning of period $ 15,331 $ 14,728 $ 14,720 $ 14,760
Charge-offs (628) (918) (1,802) (3,090)
Recoveries 502 413 1,446 1,572
-----------------------------------------------------------------------------------------------------
Net charge-offs (126) (505) (356) (1,518)
Provision for loan losses 929 485 1,770 1,466
-----------------------------------------------------------------------------------------------------
Balance, end of period $ 16,134 $ 14,708 $ 16,134 $ 14,708
=====================================================================================================
The allowance is allocated among the loan categories based upon management's
consistent, quarterly procedural discipline. However, the entire allowance for
loan losses is available to absorb loan losses in any loan category. The
following details the allocation of the allowance for loan losses:
(Dollars in thousands) September 30, June 30, December 31, September 30,
2006 2006 2005 2005
--------------- ---------------- --------------- ---------------
Commercial $ 13,984 $ 13,154 $ 11,883 $ 11,884
Real estate 1,081 1,051 1,400 1,400
Consumer 733 809 1,149 1,149
Overdrafts 336 317 288 275
------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 16,134 $ 15,331 $ 14,720 $ 14,708
============================================================================================================
The significant allocation of the allowance to commercial loans is based upon
Peoples' quarterly review process and reflects 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.
Asset quality remains a key focus, as management continues to stress loan
underwriting quality more than loan growth. The following table details Peoples'
nonperforming assets:
(Dollars in thousands) September 30, June 30, December 31, September 30,
2006 2006 2005 2005
---------------- -------------- ---------------- -----------------
Loans 90+ days past due and accruing $ 177 $ 808 $ 251 $ 137
Renegotiated loans 810 - - -
Nonaccrual loans 13,227 9,548 6,284 5,791
----------------------------------------------------------------------------------------------------------------
Total nonperforming loans 14,214 10,356 6,535 5,928
Other real estate owned 34 130 308 2,259
----------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 14,248 $ 10,486 $ 6,843 $ 8,187
================================================================================================================
Nonperforming loans as a percent of total 1.25% 0.93% 0.61% 0.56%
loans
================================================================================================================
Nonperforming assets as a percent of 0.76% 0.56% 0.37% 0.44%
total assets
================================================================================================================
During the third quarter of 2006, nonperforming loans increased as the result of
Peoples placing $4.5 million of commercial loans in a single commercial
relationship on nonaccrual status. This credit has been appropriately considered
by management in determining the adequacy of the allowance for loan losses at
September 30, 2006. The increase in nonaccrual loans was partially offset by
reductions in other nonaccrual loans due to payments and charge-offs.
Net charge-offs were $126,000 in the third quarter of 2006 compared to $505,000
for last year's third quarter and net recoveries of $86,000 in the second
quarter of 2006. The following table details Peoples' net charge-offs
(recoveries):
For the Three Months Ended For the Nine Months Ended
------------------------------------------------ September 30,
September 30, June 30, September 30, -------------------------------
(Dollars in thousands) 2006 2006 2005 2006 2005
---------------- -------------- ---------------- --------------- --------------
Overdrafts $ 234 $ 173 $ 195 $ 511 $ 439
Consumer 77 42 60 106 166
Real estate (29) (202) 49 (141) 490
Commercial (155) (98) 203 (116) 447
Credit card (1) (1) (2) (4) (24)
------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) $ 126 $ (86) $ 505 $ 356 $ 1,518
========================================================================================================================
As a percent of average loans (a) 0.04% (0.03%) 0.19% 0.04% 0.20%
========================================================================================================================
(a) Presented on an annualized basis.
Through nine months of 2006, Peoples has experienced a lower level of net
charge-offs due to increased recoveries of previously charged-off loans.
Management continues to evaluate the two commercial loan relationships that have
caused the majority of the increase in nonperforming loans in 2006. Although
dependent on the final evaluation, management expects net charge-offs will be
higher in the fourth quarter of 2006, due to the expected charge-off of a
significant portion of the $4.5 million of loans placed on nonaccrual status in
the third quarter. The loans in the other commercial relationship of
approximately $3.6 million are well collateralized and management does not
expect to incur any losses on that relationship. Both loan relationships were
considered in the determining the adequacy of the allowance of loan losses at
quarter-end.
At September 30, 2006, the recorded investment in loans that were considered to
be impaired was $23.2 million, of which $11.8 million were accruing interest and
$11.4 million were nonaccrual loans. Included in total impaired loans were $13.7
million of impaired loans for which the related allowance for loan losses was
$3.6 million. The remaining impaired loan balances did not have a related
allocation of the allowance for loan losses because the loans have previously
been written-down, are well collateralized or possess characteristics indicative
of the borrowers' ability to repay the loan. For the nine months ended September
30, 2006, Peoples' average recorded investment in impaired loans was
approximately $18.1 million and interest income of $740,000 was recognized on
impaired loans during the period, representing 0.9% of Peoples' total interest
income. This compares to average impaired loans of $10.5 million and interest
income of $508,000, or 0.8% of Peoples' total interest income, for the same
nine-month period in 2005.
Funding Sources
---------------
Deposits, both interest-bearing and non-interest-bearing, continue to be the
most significant source of funds for Peoples, totaling $1.23 billion at
September 30, 2006, versus $1.09 billion at year-end 2005. Much of this increase
is attributable to higher interest-bearing balances, primarily money market
deposit accounts, retail certificates of deposit and brokered deposits.
Interest-bearing deposits, excluding brokered deposits, grew $10.3 million with
most of the growth occurring in money market deposits. Non-interest-bearing
deposits, which serve as a core funding source, have also increased $3.8 million
since year-end 2005, reflecting Peoples' efforts to grow these balances and
reduce its reliance on higher cost funding sources. The following table details
Peoples' deposit balances:
September 30, June 30, December 31, September 30,
(Dollars in thousands) 2006 2006 2005 2005
------------------ ----------------- ----------------- -----------------
Retail certificates of deposit $ 498,564 $ 499,448 $ 465,148 $ 446,308
Interest-bearing transaction accounts 180,124 177,905 178,030 195,503
Money market deposit accounts 136,344 123,513 110,372 114,366
Brokered certificates of deposit 126,605 57,969 41,786 44,854
Savings accounts 119,462 123,293 131,221 136,979
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 1,061,099 $ 982,128 926,557 $ 938,010
--------------------------------------------------------------------------------------------------------------------
Non-interest-bearing deposits 166,505 169,903 162,729 158,892
--------------------------------------------------------------------------------------------------------------------
Total deposit balances $ 1,227,604 $ 1,152,031 $ 1,089,286 $ 1,096,902
====================================================================================================================
During the third quarter, Peoples increased brokered deposits by $68.6 million
to reduce its reliance on FHLB borrowings and diversify wholesale funding
sources, with $25 million of the new deposits being callable at Peoples' option
every six months and after giving required notice to the certificate holders.
The increase in money market deposit balances in the third quarter of 2006 was
generated by Peoples offering a money market product with a very competitive
rate. However, Peoples continues to experience strong competition for deposits
in its markets, which makes it difficult to maintain, let alone grow, deposit
balances. Management may continue to use brokered deposits to supplement retail
deposits for funding asset growth.
Peoples also accesses other funding sources, including short- and long-term
borrowings, to fund asset growth and satisfy liquidity needs. At September 30,
2006, borrowed funds totaled $443.8 million, down from $565.5 million at
year-end 2005, and $520.9 million at June 30, 2006. The following details
Peoples' short- and long-term borrowings:
(Dollars in thousands) September 30, June 30, December 31, September 30,
2006 2006 2005 2005
--------------- --------------- ---------------- ---------------
Short-term borrowings:
FHLB advances $ 193,200 $ 191,800 $ 137,800 $ 142,000
Retail repurchase agreements 28,081 36,768 35,896 23,844
National market repurchase agreements 5,000 - - -
-------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 226,281 $ 228,568 $ 173,696 165,844
Long-term borrowings:
FHLB advances $ 82,207 $ 151,071 $ 191,016 $ 194,859
National market repurchase agreements 100,000 100,000 157,850 157,850
Term note payable 5,900 11,900 13,600 13,600
-------------------------------------------------------------------------------------------------------------------
Total long-term borrowings 188,107 $ 262,971 $ 362,466 366,309
Subordinated notes held by subsidiary trusts 29,391 $ 29,369 $ 29,350 29,328
-------------------------------------------------------------------------------------------------------------------
Total borrowed funds $ 443,779 $ 520,908 $ 565,512 $ 561,481
-------------------------------------------------------------------------------------------------------------------
The short-term FHLB advances consist of overnight advances used to manage
Peoples' daily liquidity needs, which has caused some of the increase in these
overnight balances. The remaining increase in short-term FHLB advances was due
to management repaying maturing long-term borrowings using short-term FHLB
advances rather than extending the borrowings at current market rates. These
increases have been tempered by management's use of brokered deposits to
diversify funding and reduce Peoples' reliance on FHLB borrowings. Management
expects to continue to utilize various wholesale borrowings, both amortizing and
non-amortizing, to help manage its interest rate sensitivity and liquidity.
Further information regarding Peoples' management of interest rate sensitivity
can be found later in this discussion under "Interest Rate Sensitivity and
Liquidity."
Capital/Stockholders' Equity
----------------------------
At September 30, 2006, stockholders' equity was $196.9 million versus $183.1
million at December 31, 2005, an 8% increase attributable to Peoples' earnings,
net of dividends declared, of $10.2 million. The remaining increase reflects a
$3.4 million decrease in treasury shares, primarily the result of issuing common
shares in connection with stock option exercises.
In the third quarter of 2006, Peoples Bancorp declared dividends of $0.21 per
share, up 5% from $0.20 per share declared for the third quarter of 2005.
Through nine months of 2006, Peoples Bancorp declared dividends totaling $6.6
million, up 9% from the $6.1 million declared in the first nine months of 2005,
representing dividend payout ratios of 39.4% and 41.0% of earnings,
respectively. While management anticipates Peoples Bancorp 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 Bancorp from paying dividends even when
sufficient cash is available. Further, Peoples Bancorp or Peoples Bank may
decide to limit the payment of dividends, even when the legal ability to pay
them exists, in order to retain earnings for other strategic purposes. At
September 30, 2006, Peoples Bank had approximately $5.7 million of net retained
profits available for dividends to Peoples Bancorp without regulatory approval.
At September 30, 2006, Peoples had treasury stock totaling $5.4 million compared
to $8.8 million at year-end 2005, reflecting the reissuance of 129,623 common
shares for stock option exercises and 18,726 common shares related to the
insurance agency acquisitions completed in 2004. Through nine months of 2006,
Peoples Bancorp has repurchased 14,000 common shares under the 2006 Stock
Repurchase Program. Peoples Bancorp may repurchase additional common shares in
2006 as authorized under the 2006 Stock Repurchase Program when deemed
appropriate by management.
Management uses the tangible equity ratio as one measure of the adequacy of
Peoples' capital. The ratio, defined as tangible equity as a percentage of
tangible assets, excludes the balance sheet impact of intangible assets acquired
through acquisitions accounted for using the purchase method of accounting. At
September 30, 2006, Peoples' tangible equity ratio was 7.03% compared to 6.37%
at December 31, 2005 and 6.17% at September 30, 2005. This higher ratio compared
to prior periods reflects a greater proportional increase in tangible equity
than 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 industry. At September 30,
2006, all three risk-based capital ratios for both Peoples and Peoples Bank were
well above the minimum standards for a well-capitalized institution.
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 minimizing interest rate
and liquidity risk exposure 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 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 from 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 streams as
well as market values of financial assets and liabilities. Peoples' exposure to
IRR is due primarily to differences in the timing of 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. Peoples' ALCO
has established an IRR management policy that sets minimum requirements and
guidelines for monitoring and managing the level and amount of IRR. There have
been no material changes to these policies or methods used by the ALCO to assess
IRR from those disclosed in Peoples' 2005 Form 10-K.
The difference between rate sensitive assets and rate sensitive liabilities for
specified time periods is known as the sensitivity gap. The ALCO reviews gap
measures for specific periods focusing on a one-year cumulative gap. At
September 30, 2006, Peoples' one-year cumulative gap amount was negative 19.0%
of earning assets, which represented $322.8 million more in liabilities than
assets that may contractually reprice or mature during that period. This
compares to a one-year cumulative gap amount of negative 18.5% of earning
assets, or $311.4 million more in liabilities than assets, at June 30, 2006. The
recent trend of Peoples' gap position reflects customer preference for loans
with initial fixed rate periods in excess of one year and deposits with terms of
one year or less and indicates a greater risk of a decline in Peoples' net
interest income in a rising interest rate environment. Since the gap position
has moved outside the ALCO's desired range of +/- 15% of earning assets, the
ALCO has discussed the current gap position and has taken steps to manage
Peoples' gap position. Currently, the ALCO feels Peoples' gap position is
acceptable due to the improvement in Peoples' interest risk profile, as measured
by the level of earnings and economic value at risk. Still, the ALCO will
continue to monitor the trend in gap position closely, as well as earnings and
economic value exposure to changing interest rates, and take appropriate actions
to minimize the impact of changes in interest rates on Peoples' earnings.
The following table is provided to illustrate the estimated earnings at risk and
economic value at risk positions of Peoples, on a pre-tax basis, at September
30, 2006 (dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) (Decrease) Increase (Decrease) Increase in
in Basis Points In Net Interest Income Economic Value of Equity
------------------------- ---------------------------- ------------------------------
200 $ (5,835) (11.5) % $ (30,243) (12.3) %
100 (2,627) (5.2) (14,194) (5.7)
(100) 2,249 4.4 8,062 3.3
(200) $ 2,928 5.8 % $ 9,635 3.9 %
Peoples is within the established IRR policy limits for all scenarios shown in
the above table. The interest rate risk analysis at September 30, 2006, shows
that Peoples is liability sensitive. Based on current assumptions, an immediate
and sustained increase in interest rates would negatively impact net interest
income primarily due to a higher volume of liabilities repricing than assets.
Further, in a rising rate environment, improvement in asset yields may be
limited by variable rate loans that may reach their annual interest rate cap or
potentially their lifetime interest rate cap and a slow down in the prepayment
amounts on loans and mortgage-backed securities, producing less cash flow to
reinvest at current interest rates. Peoples' interest-bearing liabilities do not
possess the same level of optionality or repricing characteristics as the
earning assets. Specifically, management administers the rates paid on deposits,
and thus, can lag increases in a rising rate environment and mitigate some of
the IRR exposure.
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 interest income from loans and investment
securities. For the nine months ended September 30, 2006, cash and cash
equivalents declined $4.8 million, as the $45.1 million of cash used in
investing activities exceeded the $17.3 million of net cash provided by
financing activities and $23.0 million of net cash from operations. Compared to
the same period in 2005, net cash increased $3.5 million, as net cash from
operations and financing activities of $35.4 million and $37.4 million,
respectively, was offset by $69.3 million used in investing activities,
primarily to fund loan originations. In the financing activities during the
first nine months of 2006, a net increase in deposits of $143.0 million allowed
Peoples to reduce borrowings by $121.8 million. Investing activities during the
same period included a net increase in loans of $68.6 million and net decrease
of $32.0 million in investment securities, as principal runoff was used to fund
loan growth and for other corporate liquidity purposes.
As part of the process of the management of liquidity, the ALCO reviews trends
of deposits and loans, as well as other maturing liabilities, in relation to the
need for cash or additional funding. A liquidity forecast is prepared based on
that information and the ALCO may discuss appropriate actions, if any, that
should be taken. However, actual future cash flows may be materially different
from the forecast due to the level of uncertainty regarding the timing and
magnitude of anticipated cash flows, such as demands for funding related to
unfunded loan commitments and other contractual obligations and prepayments on
loans and investment securities.
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 Peoples with the ability to
obtain large quantities of funds in a relatively short time period and
supplement funding from customer deposits. At September 30, 2006, Peoples had
available borrowing capacity of approximately $284 million through these
external sources, along with unpledged investment securities of approximately
$41 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 September 30, 2006, Peoples' net
liquidity position was $38.0 million, or 2.0% of total assets, compared to
$104.3 million, or 5.6% of total assets, at December 31, 2005. The liquidity
position as of both dates 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
could require Peoples to make cash payments to third parties in the event that
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 be only partially used, the total amount of
commitments does not necessarily represent future cash requirements. These
activities are necessary to meet the financing needs of customers. The following
table details the total contractual amount of loan commitments and standby
letters of credit:
September 30, December 31, September 30,
(Dollars in thousands) 2006 2005 2005
--------------- -------------- --------------
Loan commitments $ 195,105 $ 162,065 $ 154,893
Standby letters of credit 44,299 29,803 31,697
Peoples also has commitments to make additional capital contributions to
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. At
September 30, 2006, these commitments approximated $1.6 million, with
approximately $0.3 million expected to be paid over the next twelve months.
Management may make additional investments in various tax credit funds.
Management does not anticipate Peoples' current off-balance sheet activities
will have a material impact on future results of operations and financial
condition.
Peoples continues to lease certain banking 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 banking
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.
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, typically monetary assets
exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation
has had little impact on Peoples' net assets.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
The information called for by this item is provided under the caption "Interest
Rate Sensitivity and Liquidity" under Item 2 - Management's Discussion and
Analysis of Results of Operation and Financial Condition in this Form 10-Q, and
is incorporated herein by reference.
ITEM 4: CONTROLS AND PROCEDURES
-------------------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Peoples Bancorp's management, with the participation of Peoples Bancorp's
President and Chief Executive Officer and Peoples Bancorp's Chief Financial
Officer and Treasurer, has evaluated the effectiveness of Peoples Bancorp's
disclosure controls and procedures (as defined in Rules 13a-15(e) under the
Securities Exchange Act of 1934, as amended) (the "Exchange Act") as of
September 30, 2006. Based upon that evaluation, Peoples Bancorp's President and
Chief Executive Officer and Peoples Bancorp's Chief Financial Officer and
Treasurer have concluded that:
(a) information required to be disclosed by Peoples Bancorp in this
Quarterly Report on Form 10-Q and other reports Peoples files or
submits under the Exchange Act would be accumulated and communicated to
Peoples Bancorp's 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 Bancorp in this
Quarterly Report on Form 10-Q and other reports Peoples Bancorp files
or submits under the Exchange Act would be recorded, processed,
summarized and reported within the time periods specified in the SEC's
rules and forms; and
(c) Peoples Bancorp's disclosure controls and procedures are effective as
of the end of the fiscal quarter covered by this Quarterly Report on
Form 10-Q to ensure that material information relating to Peoples
Bancorp and its consolidated subsidiaries is made known to them,
particularly during the period in which Peoples Bancorp's periodic
reports, including this Quarterly Report on Form 10-Q, are being
prepared.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There were no changes in Peoples Bancorp's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred
during Peoples Bancorp's fiscal quarter ended September 30, 2006, that have
materially affected, or are reasonably likely to materially affect, Peoples
Bancorp's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
--------------------------
In the ordinary course of business or operations, Peoples Bancorp and its
subsidiaries may be named as plaintiff, defendant, or a party or any of their
respective properties may be subject to various pending and threatened legal
proceedings. In view of the inherent difficulty of predicting the outcome of
such matters, Peoples Bancorp 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.
Examination by Ohio Department of Taxation
------------------------------------------
Peoples Bank has been undergoing examination by the Ohio Department of Taxation
of Peoples Bank's 2002 Ohio Corporation Franchise Tax Report related to the
fiscal year ended December 31, 2001. These proceedings are described under the
heading "Summary of Recent Transactions and Events" in "ITEM 2: MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" of
Part I of this Quarterly Report on Form 10-Q. The discussion of the proceedings
with the Ohio Department of Taxation is incorporated herein by reference.
ITEM 1A: RISK FACTORS
----------------------
In addition to the other information set forth in this Quarterly Report on Form
10-Q, the risk factors discussed in "ITEM 1A. RISK FACTORS" of Part I of
Peoples' 2005 Form 10-K, one of which is updated below, should be considered.
These risk factors could materially affect Peoples' business, financial
condition or future results. The risk factors described in Peoples Bancorp's
2005 Form 10-K and in this Quarterly Report on Form 10-Q are not the only risks
Peoples faces. Additional risks and uncertainties not currently known to
management or that management currently deems to be immaterial also may
materially adversely affect Peoples' business, financial condition and/or
operating results.
PEOPLES BANCORP AND ITS SUBSIDIARIES ARE SUBJECT TO EXAMINATIONS AND
CHALLENGES BY TAX AUTHORITIES
In the normal course of business, Peoples Bancorp and its subsidiaries are
routinely subject to examinations and challenges from federal and state tax
authorities regarding positions taken in their respective tax returns. State tax
authorities have become increasingly aggressive in challenging tax positions
taken by financial institutions, especially those positions relating to tax
compliance and calculation of taxes subject to apportionment. Any challenge or
examination by a tax authority may result in adjustments to the timing or amount
of taxable 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
Peoples' favor could have a material adverse effect on Peoples' financial
condition and results of operation.
As previously disclosed in "ITEM 1A. RISK FACTORS" and "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -
Critical Accounting Policies - Income Taxes" of Peoples' 2005 Form 10-K, Peoples
Bank has been undergoing an examination by the Ohio Department of Taxation (the
"Department") of its 2002 Ohio Corporation Franchise Tax Report related to the
fiscal year ended December 31, 2001 (the "2002 tax year"). On August 23, 2006,
the Department issued a Notice of Assessment in the amount of approximately $1.4
million in regards to Peoples Bank's corporate franchise tax liability for the
2002 tax year. Management disagrees with this assessment in its entirety, and on
September 22, 2006, Peoples Bank filed a Petition for Reassessment with the
Department objecting to the assessment. Peoples Bank is not liable for nor is it
required to pay the assessment while the Petition for Reassessment is pending.
The Department has also issued proposed adjustments to Peoples Bank's 2003 Ohio
Corporation Franchise Tax Report (the "2003 Ohio Report") related to the fiscal
year ended December 31, 2002 (the "2003 tax year") on the basis of the 2002
assessment that would materially increase the amount of franchise tax due.
Management has objected to these proposed adjustments in their entirety and is
working with the Department to resolve and eliminate the proposed adjustments.
As part of this process, management has agreed to a one-year extension of the
statute of limitations for the 2003 tax year. The Department has not issued a
Notice of Assessment with respect to the 2003 Ohio Report.
Although the administrative process is not yet complete, management does not
anticipate that the ultimate resolution of the proposed adjustments for the 2002
tax year or 2003 tax year will result in a material impact on Peoples'
consolidated financial position. 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 amount of
loss can be reasonably estimated. No assurance can be given that the final
resolution of the proposed adjustments by the Department to Peoples Bank's
corporate franchise tax liability for the 2002 tax year or 2003 tax year will
not be different than what is reflected in Peoples' current and historical
consolidated financial statements.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
--------------------------------------------------------------------
The following table details repurchases by Peoples Bancorp and purchases by
"affiliated purchasers" as defined in Rule 10b-18(a)(3) of Peoples Bancorp's
common shares during the three months ended September 30, 2006;
(d)
(c) Maximum Number
Total Number of of Common Shares
(a) Common Shares that May Yet Be
Total Number of (b) Purchased as Part of Purchased Under
Common Shares Average Price Paid Publicly Announced the Plans or
Period Purchased per Share Plans or Programs (1) Programs (1)(2)
----------------------------------------------------------------------------------------------------------------
July 1 - 31, 2006 907 (3) $29.99 (3) - 411,000
August 1 - 31, 2006 640 (4) $29.46 (4) - 411,000
September 1 - 30, 2006 - - - 411,000
----------------------------------------------------------------------------------------------------------------
Total 1,547 $29.77 - 411,000
================================================================================================================
(1) Information reflects solely the 2006 Stock Repurchase Program
originally announced on January 17, 2006, which authorizes the
repurchase of up to 425,000 common shares, with an aggregate purchase
price of not more than $11.5 million. The 2006 Stock Repurchase
Program expires on December 31, 2006.
(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 388 common shares purchased in open market
transactions at an average price of $28.94 by Peoples Bank under the
Rabbi Trust and 252 common shares acquired at an average price of
$30.25 in connection with the exercise of stock options under Peoples
Bancorp's stock option plans.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
----------------------------------------
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
None.
ITEM 5: OTHER INFORMATION
--------------------------
None.
ITEM 6: EXHIBITS
-----------------
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
Exhibit
Number Description Exhibit Location
------------ ------------------------------------------------------ ---------------------------------
3.1(a) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by
Inc. (as filed with the Ohio Secretary of State on reference to Exhibit 3(a) to
May 3, 1993) the Registration Statement on
Form 8-B of Peoples Bancorp
Inc. ("Peoples") filed July 20,
1993 (File No. 0-16772)
3.1(b) Certificate of Amendment to the Amended Articles of Incorporated herein by
Incorporation of Peoples Bancorp Inc. (as filed with reference to Exhibit 3(a)(2) to
the Ohio Secretary of State on April 22, 1994) Peoples' Annual Report on Form
10-K for the fiscal year ended
December 31, 1997 (File No.
0-16772) ("Peoples") 1997 Form
10-K')
Certificate of Amendment to the Amended Articles of Incorporated herein by
3.1(c) Incorporation of Peoples Bancorp Inc. (as filed with reference to Exhibit 3(a)(3) to
the Ohio Secretary of State on April 9, 1996) Peoples' 1997 Form 10-K
Certificate of Amendment to the Amended Articles of Incorporated herein by
3.1(d) Incorporation of Peoples Bancorp Inc. (as filed with reference to Exhibit 3(a) to
the Ohio Secretary of State on April 23, 2003) Peoples' Quarterly Report on
Form 10-Q for the quarterly
period ended March 31, 2003
(File No. 0-16772) ("People'
March 31, 2003 Form 10-Q")
3.1(e) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by
Inc. (reflecting amendments through April 23, 2003) reference to Exhibit 3(b) to
[For SEC reporting compliance purposes only -- not Peoples' March 31, 2003 Form
filed with Ohio Secretary of State] 10-Q
3.2(a) 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)
3.2(b) Certificate of Amendment to the Code of Regulations Incorporated herein by
of Peoples Bancorp Inc. regarding adoption of reference to Exhibit 3(c) to
amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, Peoples' March 31, 2003 Form
1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code 10-Q
of Regulations of Peoples Bancorp Inc. by
shareholders on April 10, 2003
3.2(c) Certificate of Amendment to the Code of Regulations Incorporated herein by
of Peoples Bancorp Inc. regarding adoption of reference to Exhibit 3(a) to
amendments to Article Three of the Code of Peoples' Quarterly Report on
Regulations of Peoples Bancorp Inc. by shareholders Form 10-Q for the quarterly
on April 8, 2004 period ended March 31, 2004
(File No. 0-16772)
Certificate regarding adoption of amendments to Incorporated herein by
3.2(d) Sections 2.06, 2.07, 3.01 and 3.04 of Peoples reference to Exhibit 3.1 to
Bancorp Inc.'s Code of Regulations by the Peoples' Current Report on Form
shareholders on April 13, 2006 8-K dated and filed on April
14, 2006 (File No. 0-16772)
("Peoples' April 14, 2006 Form
8-K")
Code of Regulations of Peoples Bancorp Inc. Incorporated herein by
3.2(e) (reflecting amendments through April 13, 2006) reference to Exhibit 3(b) to
[For SEC reporting compliance purposes only] Peoples" Quarterly Report on
Form 10-Q for the quarterly
period ended March 31, 2006
(File No. 0-16772)
10(a) Form of Change in Control Agreement, adopted Incorporated herein by
August 1, 2006, applicable to Donald J. Landers, Jr. reference to Exhibit 10(g) to
Peoples" Quarterly Report on
Form 10-Q for the quarterly
period ended June 30, 2006
(File No. 0-16772)
11 Computation of Earnings Per Share Filed herewith
12 Computation of Ratios Filed herewith
Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
31(a) [President and Chief Executive Officer]
Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
31(b) [Chief Financial Officer and Treasurer]
32 Section 1350 Certifications Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORP INC.
Date: November 1, 2006 By:/s/ MARK F. BRADLEY
--------------------------------------
Mark F. Bradley
President and Chief Executive Officer
Date: November 1, 2006 By:/s/ DONALD J. LANDERS, JR.
--------------------------------------
Donald J. Landers, Jr.
Chief Financial Officer and Treasurer
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
Exhibit
Number Description Exhibit Location
------------ ------------------------------------------------------ ---------------------------------
3.1(a) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by
Inc. (as filed with the Ohio Secretary of State on reference to Exhibit 3(a) to
May 3, 1993) the Registration Statement on
Form 8-B of Peoples Bancorp
Inc. ("Peoples") filed July 20,
1993 (File No. 0-16772)
3.1(b) Certificate of Amendment to the Amended Articles of Incorporated herein by
Incorporation of Peoples Bancorp Inc. (as filed with reference to Exhibit 3(a)(2) to
the Ohio Secretary of State on April 22, 1994) Peoples' Annual Report on Form
10-K for the fiscal year ended
December 31, 1997 (File No.
0-16772) ("Peoples") 1997 Form
10-K')
Certificate of Amendment to the Amended Articles of Incorporated herein by
3.1(c) Incorporation of Peoples Bancorp Inc. (as filed with reference to Exhibit 3(a)(3) to
the Ohio Secretary of State on April 9, 1996) Peoples' 1997 Form 10-K
Certificate of Amendment to the Amended Articles of Incorporated herein by
3.1(d) Incorporation of Peoples Bancorp Inc. (as filed with reference to Exhibit 3(a) to
the Ohio Secretary of State on April 23, 2003) Peoples' Quarterly Report on
Form 10-Q for the quarterly
period ended March 31, 2003
(File No. 0-16772) ("People'
March 31, 2003 Form 10-Q")
3.1(e) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by
Inc. (reflecting amendments through April 23, 2003) reference to Exhibit 3(b) to
[For SEC reporting compliance purposes only -- not Peoples' March 31, 2003 Form
filed with Ohio Secretary of State] 10-Q
3.2(a) 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)
3.2(b) Certificate of Amendment to the Code of Regulations Incorporated herein by
of Peoples Bancorp Inc. regarding adoption of reference to Exhibit 3(c) to
amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, Peoples' March 31, 2003 Form
1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code 10-Q
of Regulations of Peoples Bancorp Inc. by
shareholders on April 10, 2003
3.2(c) Certificate of Amendment to the Code of Regulations Incorporated herein by
of Peoples Bancorp Inc. regarding adoption of reference to Exhibit 3(a) to
amendments to Article Three of the Code of Peoples' Quarterly Report on
Regulations of Peoples Bancorp Inc. by shareholders Form 10-Q for the quarterly
on April 8, 2004 period ended March 31, 2004
(File No. 0-16772)
Certificate regarding adoption of amendments to Incorporated herein by
3.2(d) Sections 2.06, 2.07, 3.01 and 3.04 of Peoples reference to Exhibit 3.1 to
Bancorp Inc.'s Code of Regulations by the Peoples' Current Report on Form
shareholders on April 13, 2006 8-K dated and filed on April
14, 2006 (File No. 0-16772)
("Peoples' April 14, 2006 Form
8-K")
Code of Regulations of Peoples Bancorp Inc. Incorporated herein by
3.2(e) (reflecting amendments through April 13, 2006) reference to Exhibit 3(b) to
[For SEC reporting compliance purposes only] Peoples" Quarterly Report on
Form 10-Q for the quarterly
period ended March 31, 2006
(File No. 0-16772)
10(a) Form of Change in Control Agreement, adopted Incorporated herein by
August 1, 2006, applicable to Donald J. Landers, Jr. reference to Exhibit 10(g) to
Peoples" Quarterly Report on
Form 10-Q for the quarterly
period ended June 30, 2006
(File No. 0-16772)
11 Computation of Earnings Per Share Filed herewith
12 Computation of Ratios Filed herewith
Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
31(a) [President and Chief Executive Officer]
Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
31(b) [Chief Financial Officer and Treasurer]
32 Section 1350 Certifications Filed herewith