UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio
---------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
31-0987416
------------------------------------
(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio
------------------------------------------------
(Address of principal executive offices)
45750
-----------
(Zip Code)
Registrant's telephone number, including area code:(740) 373-3155
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, No Par Value (7,135,880 outstanding at February 25, 2002)
------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based upon the closing price of the Common Shares of the Registrant on The
NASDAQ National Market as of February 25, 2002, the aggregate market value of
the Common Shares of the Registrant held by nonaffiliates on that date was
$134,226,000. For this purpose, certain executive officers and directors are
considered affiliates.
Documents Incorporated by Reference:
Portions of Registrant's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 11, 2002, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
-----------------
PART I Page
- ------ -----
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
- -------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 29
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant 51
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners and Management 52
Item 13. Certain Relationships and Related Transactions 52
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 53
Signatures 54
Exhibit Index 55
PART I
ITEM 1. BUSINESS.
- --------------------
Introduction
- ------------
Peoples Bancorp Inc. ("Peoples") was organized as a bank holding company in
1980, with origins in the Mid-Ohio Valley back to 1902. At December 31, 2001,
Peoples' wholly-owned subsidiaries included Peoples Bank, National Association
("Peoples Bank"), Peoples Investment Company, and PEBO Capital Trust I. Peoples
Bank also owns an insurance agency subsidiary and an asset management
subsidiary. Peoples Investment Company also owns a capital management
subsidiary.
Peoples operates 40 sales offices in the states of Ohio, West Virginia and
Kentucky. At December 31, 2001, Peoples had total assets of $1.2 billion, total
loans of $772.9 million, total deposits of $814.4 million, and total
stockholders' equity of $93.9 million. At December 31, 2001, Peoples Bank held
trust assets with an approximate market value of $539 million. For the year
ended December 31, 2001, Peoples' return on average assets was 1.06% and return
on average stockholders' equity was 13.60%.
Peoples provides an array of financial products and services to its customers
through Peoples Bank, including checking accounts; NOW accounts; money market
deposit accounts; savings accounts; time certificates of deposit; commercial,
installment, and real estate mortgage loans (commercial and residential); credit
and debit cards; lease financing; corporate and personal trust services; and
safe deposit rental facilities. Peoples also sells travelers checks, money
orders and cashier's checks. Services are provided through ordinary walk-in
offices, automated teller machines ("ATMs"), automobile drive-in facilities
("Motor Banks"), banking by phone, and Internet-based banking. Peoples Insurance
Agency, Inc. ("Peoples Insurance") offers a complete line of life and health and
property and casualty products. In addition, Peoples offers a full line of
investment products through an unaffiliated registered broker-dealer.
At December 31, 2001, Peoples had 403 full-time equivalent employees. Peoples'
principal executive office is located at 138 Putnam Street, Marietta, Ohio
45750, and its telephone number is (740) 373-3155. Peoples' common stock is
traded through the NASDAQ National Market System under the symbol PEBO and its
web site is www.peoplesbancorp.com.
In the past five years, Peoples has experienced significant growth in assets and
increased its capital position, primarily through bank acquisitions as well as
purchases of full-service banking centers and associated assets and liabilities.
For the five-year period ended December 31, 2001, Peoples' assets grew at a
12.0% compound annual growth rate, while stockholders' equity grew at a compound
annual growth rate of 4.5%. Peoples has also had a history of consistent
earnings growth, as earnings per share grew at a compound rate of 9.1% for the
five-year period ended December 31, 2001. Over that same period, Peoples' annual
return on average assets and stockholders' equity averaged 1.16% and 13.79%,
respectively.
Peoples routinely explores opportunities for additional growth and expansion of
its core financial service businesses, including the acquisition of companies
engaged in similar activities. Management also focuses on internal growth as a
method for reaching performance goals and reviews key performance indicators on
a regular basis to measure Peoples' success. There can be no assurance, however,
that Peoples will be able to grow, or if it does, that any such growth or
expansions will result in an increase in Peoples' earnings, dividends, book
value or the market value of its common shares.
Recent Acquisitions and Additions
- ---------------------------------
On January 2, 2001, Peoples Bank opened a full-service office at 3411 Emerson
Avenue in Parkersburg, West Virginia. The office offers ATM access as well as an
Internet Cafe, an "Investment Resource Center" complete with a large screen
television, financial magazines and newspapers, and a "Home Resource Center"
that provides opportunities for clients to retrieve information from the
Internet and other reference materials regarding buying or renting homes. These
areas contain sales areas where associates can assist clients with all their
financial needs.
Effective at the close of business on February 23, 2001, Peoples acquired The
Lower Salem Commercial Bank in Washington County, Ohio, for a total
consideration of $2.4 million ($0.9 million in cash and $1.5 million in common
stock). The Lower Salem Commercial Bank is now a full-service sales office of
Peoples Bank.
On January 4, 2002, Peoples announced it had signed a stock purchase agreement
with the shareholders of First Colony Bancshares, Inc. ("First Colony") to
acquire all of the outstanding common stock of First Colony, the holding company
of The Guernsey Bank, Federal Savings Bank based in Cambridge, Ohio. Under the
terms of the agreement, Peoples has agreed to pay approximately $18 million
total cash consideration and assume approximately $2 million of First Colony
debt to acquire full-service office locations in Cambridge (two offices),
Byesville, Quaker City in Ohio's Guernsey County and Flushing in Ohio's Belmont
County, involving assets of approximately $110 million and deposits of
approximately $100 million. Peoples will not acquire the Worthington, Ohio,
operations, or its related loans and deposits, and will operate the Guernsey and
Belmont County offices as full-service sales office of Peoples Bank. This
transaction is subject to regulatory approval and is expected to be completed in
the second quarter of 2002.
Customers and Markets
- ---------------------
Peoples' service area has a diverse economic structure. Principal industries in
the area include metals, plastics and petrochemical manufacturing; oil, gas and
coal production; and related support industries. In addition, tourism, education
and other service-related industries are important and growing industries.
Consequently, Peoples is not dependent upon any one industry segment for its
business opportunities.
Peoples Bank originates various types of loans, including commercial and
commercial real estate loans, residential real estate loans, home equity lines
of credit, real estate construction loans, and consumer loans (including loans
to individuals, credit card loans, and indirect loans). In general, Peoples Bank
retains most of its originated loans and, therefore, secondary market activity
has been minimal. Loans are spread over a broad range of industrial
classifications. Management believes it has no significant concentrations of
loans to borrowers engaged in the same or similar industries and no loans to
foreign entities. The lending market areas served are primarily concentrated in
southeastern Ohio and neighboring areas of Kentucky and West Virginia. In
addition, loan production offices in central Ohio provide opportunities to serve
customers in that economic region.
Legal Lending Limit
- -------------------
At December 31, 2001, Peoples Bank had not extended credit to any one borrower
in excess of its legal lending limit of approximately $16.1 million at the time
the loan was closed.
Commercial Loans
- ----------------
At December 31, 2001, Peoples Bank had approximately $343.8 million in
commercial loans (including commercial, financial and agricultural loans)
outstanding, representing approximately 44.5% of the total aggregate loan
portfolio.
LENDING PRACTICES. Commercial lending entails significant additional risks as
compared with consumer lending (i.e., single-family residential mortgage
lending, installment lending, credit card loans and indirect lending). In
addition, the payment experience on commercial loans typically depends on
adequate cash flow of a business and thus may be subject, to a greater extent,
to adverse conditions in the general economy or in a specific industry. Loan
terms include amortization schedules commensurate with the purpose of each loan,
the source of repayment and the risk involved. The primary analysis technique
used in determining whether to grant a commercial loan is the review of a
schedule of cash flows to evaluate whether anticipated future cash flows will be
adequate to service both interest and principal due. Additionally, collateral is
reviewed to determine its value in relation to the loan.
The Peoples Bank Board of Directors is required to approve loans in excess of
$3.0 million secured by real estate and loans in excess of $1.5 million secured
by all other assets; however, approval of the Board of Directors is required for
all loans, regardless of amount, to borrowers whose aggregate debt to Peoples,
including the principal amount of the proposed loan, exceeds $4.0 million.
Peoples Bank periodically evaluates all new commercial loans greater than
$250,000 and, on an annual basis, all loans greater than $500,000. If
deterioration has occurred, Peoples takes effective and prompt action designed
to assure repayment of the loan. Upon detection of the reduced ability of a
borrower to meet cash flow obligations, the loan is considered an impaired loan
and reviewed for possible downgrading or placement on non-accrual status.
Consumer Loans
- --------------
At December 31, 2001, Peoples Bank had outstanding consumer loans (including
indirect loans and credit cards) in an aggregate amount of approximately $118.6
million, or approximately 15.3% of the aggregate total loan portfolio.
LENDING PRACTICES. Consumer loans generally involve more risk as to
collectibility than mortgage loans because of the type and nature of the
collateral and, in certain instances, the absence of collateral. As a result,
consumer lending collections are dependent upon the borrower's continued
financial stability, and thus are more likely to be adversely affected by
employment loss, personal bankruptcy, or adverse economic conditions. Credit
approval for consumer loans requires demonstration of sufficiency of income to
repay principal and interest due, stability of employment, a positive credit
record and sufficient collateral for secured loans. It is the policy of Peoples
Bank to review its consumer loan portfolio monthly and to charge off loans that
do not meet its standards, and to adhere strictly to all laws and regulations
governing consumer lending. A qualified compliance officer is responsible for
monitoring performance in this area and for advising and updating loan
personnel.
Peoples Bank makes credit life insurance and health and accident insurance
available to all qualified buyers, thus reducing risk of loss when a borrower's
income is terminated or interrupted. Peoples Bank also offers its customers
credit card access through its consumer lending department.
Real Estate Loans
- -----------------
At December 31, 2001, Peoples Bank had approximately $310.5 million of real
estate loans outstanding (including home equity and construction loans),
representing 40.2% of total loans outstanding. Home equity lines of credit and
construction mortgages totaled $27.3 million and $14.5 million, respectively.
LENDING PRACTICES. Peoples Bank requires residential real estate loan amounts to
be no more than 90% of the purchase price or the appraisal value of the real
estate securing the loan, unless private mortgage insurance is obtained by the
borrower for the percentage exceeding 90%. On occasion, Peoples Bank may lend up
to 100% of the appraised value of the real estate. The risk conditions of these
loans are considered during underwriting for the purposes of establishing an
interest rate compatible with the risks inherent in mortgage lending and based
on the equity of the home. Loans made in this lending category are generally one
to five year adjustable rate, fully amortized mortgages. Peoples Bank also
generates fixed rate real estate loans and generally retains these loans. All
real estate loans are secured by first mortgages with evidence of title in favor
of Peoples Bank in the form of an attorney's opinion of the title or a title
insurance policy. Peoples also requires proof of hazard insurance, with Peoples
Bank named as the mortgagee and as the loss payee. Licensed appraisals are
required in the case of loans in excess of $250,000.
HOME EQUITY LOANS. Home equity lines of credit are generally made as second
mortgages by Peoples Bank. The maximum amount of a home equity line of credit is
generally limited to 80% of the appraised value of the property less the balance
of the first mortgage. Peoples Bank will lend up to 100% of the appraised value
of the property at higher interest rates that are considered compatible with the
additional risk assumed in these types of equilines. The home equity lines of
credit are written with ten-year terms, but are subject to review upon request
for renewal. For the past two years, Peoples Bank has generally charged a fixed
rate on home equity loans for the first five years. At the end of the five-year
period, the equiline reverts to a variable interest rate product.
CONSTRUCTION LOANS. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, Peoples Bank may be
required to advance funds beyond the amount originally committed to permit
completion of the project.
Competition
- -----------
Peoples Bank experiences significant competition in attracting depositors and
borrowers. Competition in lending activities comes principally from other
commercial banks, savings associations, insurance companies, governmental
agencies, credit unions, brokerage firms and pension funds. The primary factors
in competing for loans are interest rate and overall lending services.
Competition for deposits comes from other commercial banks, savings
associations, money market funds and credit unions as well as from insurance
companies and brokerage firms. The primary factors in competing for deposits are
interest rates paid on deposits, account liquidity, convenience of office
location and overall financial condition. Peoples believes that its size
provides flexibility, which enables the company to offer an array of banking
products and services. Peoples' financial condition also contributes to a
favorable competitive position in the markets it serves.
Peoples primarily focuses on non-major metropolitan markets in which to provide
products and services. Management believes Peoples has developed a niche and a
certain level of expertise in serving these communities. Peoples historically
has operated under a "needs-based" selling approach that management believes has
proven successful in serving the financial needs of many customers. Management
anticipates in future periods, Peoples will continue to increase its investment
in sales training and education to assist in the development of Peoples'
associates and their identification of customer service opportunities.
It is not Peoples' strategy to compete solely on the basis of price. Management
believes a focus on customer relationships and incentives that promote customers
continued use of Peoples' financial products and services will lead to enhanced
revenue opportunities. Management believes the integration of traditional
financial products with non-traditional financial products, such as insurance
and investment products, will lead to enhanced revenues through complementary
product offerings that satisfy customer demands for high quality, "one-stop
shopping."
Supervision and Regulation
- --------------------------
The following is a summary of certain statutes and regulations affecting Peoples
and its subsidiaries and is qualified in its entirety by reference to such
statutes and regulations:
General
- -------
BANK HOLDING COMPANY. Peoples is a bank holding company under the Bank Holding
Company Act of 1956, which restricts the activities of Peoples and the
acquisition by Peoples of voting stock or assets of any bank, savings
association or other company. Peoples is also subject to the reporting
requirements of, and examination and regulation by, the Federal Reserve Board.
Peoples' subsidiary bank, Peoples Bank, is subject to restrictions imposed by
the Federal Reserve Act on transactions with affiliates, including any loans or
extensions of credit to Peoples or its subsidiaries, investments in the stock or
other securities thereof, and the taking of such stock or securities as
collateral for loans to any borrower; the issuance of guarantees, acceptances or
letters of credit on behalf of Peoples and its subsidiaries; purchases or sales
of securities or other assets; and the payment of money or furnishing of
services to Peoples and other subsidiaries. Peoples is prohibited from acquiring
direct or indirect control of more than 5% of any class of voting stock or
substantially all of the assets of any bank holding company without the prior
approval of the Federal Reserve Board. Peoples and Peoples Bank are prohibited
from engaging in certain tying arrangements in connection with extensions of
credit and/or the provision of other property or services to a customer by
Peoples or its subsidiaries.
Under the Gramm-Leach-Bliley Act (better known as "GLB", or the Financial
Services Modernization Act of 1999), which became effective March 11, 2000, bank
holding companies are permitted to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. A bank holding company may become
a financial holding company if each of its subsidiary banks is well capitalized,
is well managed and has at least a satisfactory rating under the Community
Reinvestment Act, by filing a declaration that the bank holding company wishes
to become a financial holding company. Also effective March 11, 2000, no
regulatory approval is required for a financial holding company to acquire a
company, other than a bank or savings association, engaged in activities that
are financial in nature or incidental to activities that are financial in
nature, as determined by the Federal Reserve Board. While qualified to become a
financial holding company, Peoples remains a bank holding company.
BANKING SUBSIDIARIES. Peoples Bank is a national banking association chartered
under the National Bank Act and is regulated by the Office of the Comptroller of
the Currency. Peoples Bank provides Federal Deposit Insurance Corporation
("FDIC") insurance on its deposits and is a member of the Federal Home Loan Bank
of Cincinnati. As a national bank, Peoples Bank may engage, subject to
limitations on investment, in activities that are financial in nature, other
than insurance underwriting, insurance company portfolio investment, real estate
development and real estate investment, through a financial subsidiary of the
bank, if the bank is well capitalized, well managed and has at least a
satisfactory Community Reinvestment Act rating, which it does.
Federal Deposit Insurance Corporation
- -------------------------------------
The FDIC insures the deposits of Peoples Bank, which is subject to the
applicable provisions of the Federal Deposit Insurance Act. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule, order
or condition enacted or imposed by the bank's regulatory agency.
Federal Home Loan Bank
- ----------------------
The Federal Home Loan Banks ("FHLBs") provide credit to their members in the
form of advances. As a member of the FHLB of Cincinnati, Peoples Bank must
maintain an investment in the capital stock of that FHLB in an amount equal to
the greater of 1% of the aggregate outstanding principal amount of its
respective residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB.
Capital Requirements
- --------------------
FEDERAL RESERVE BOARD. The Federal Reserve Board has adopted risk-based capital
guidelines for bank holding companies. The risk-based capital guidelines include
both a definition of capital and a framework for calculating weighted-risk
assets by assigning assets and off-balance sheet items to broad risk categories.
For further discussion regarding Peoples' risk-based capital requirements, see
Note 13 of the Notes to the Consolidated Financial Statements included in Item 8
of this Form 10-K.
OFFICE OF THE COMPTROLLER OF CURRENCY. National bank subsidiaries, such as
Peoples Bank, are subject to similar capital requirements adopted by the
Comptroller of the Currency.
Limits On Dividends
- -------------------
Peoples' ability to obtain funds for the payment of dividends and for other cash
requirements largely depends on the amount of dividends declared by Peoples Bank
and Peoples' other subsidiaries. However, the Federal Reserve Board expects
Peoples to serve as a source of strength to Peoples Bank. The Federal Reserve
Board may require Peoples to retain capital for further investment in Peoples
Bank, rather than pay dividends to its shareholders. Peoples Bank may not pay
dividends to Peoples if, after paying those dividends, Peoples Bank would fail
to meet the required minimum levels under the risk-based capital guidelines and
the minimum leverage ratio requirements. Peoples Bank must have the approval
from the Office of the Comptroller of Currency if a dividend in any year would
cause the total dividends for that year to exceed the sum of the current year's
net earnings and the retained earnings for the preceding two years, less
required transfers to surplus. These provisions could limit Peoples' ability to
pay dividends on its outstanding common shares. For further discussion regarding
the payment of dividends by Peoples, see Note 13 of the Notes to the
Consolidated Financial Statements included in Item 8 of this Form 10-K.
Federal and State Laws
- ----------------------
Peoples Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of a bank to open a new
branch or engage in a merger transaction. Community reinvestment regulations
evaluate how well and to what extent a bank lends and invests in its designated
service area, with particular emphasis on low-to-moderate income communities and
borrowers in such areas.
Monetary Policy and Economic Conditions
- ---------------------------------------
The business of financial institutions is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
agencies, including the Federal Reserve Board. The Federal Reserve Board
regulates money and credit conditions and interest rates in order to influence
general economic conditions primarily through open market operations in U.S.
government securities, changes in the discount rate on bank borrowings, and
changes in the reserve requirements against depository institutions' deposits.
These policies and regulations significantly affect the overall growth and
distribution of loans, investments and deposits, as well as interest rates
charged on loans and paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of financial institutions in the past and are expected
to continue to have significant effects in the future. In view of the changing
conditions in the economy and the money markets and the activities of monetary
and fiscal authorities, Peoples can make no definitive predictions as to future
changes in interest rates, credit availability or deposit levels.
Effect of Environmental Regulation
- ----------------------------------
Peoples' primary exposure to environmental risk is through Peoples Bank's
lending activities. When management believes environmental risk potentially
exists, Peoples mitigates its environmental risk exposures by requiring
environmental site assessments at the time of loan origination to confirm
collateral quality as to commercial real estate parcels posing higher than
normal potential for environmental impact, as determined by reference to present
and past uses of the subject property and adjacent sites. Environmental
assessments are typically required prior to any foreclosure activity involving
non-residential real estate collateral.
In regards to residential real estate lending, management reviews those loans
with inherent environmental risk on an individual basis and makes decisions
based on the dollar amount of the loan and the materiality of the specific
credit.
Peoples anticipates no material effect on capital expenditures, earnings or the
competitive position of itself or any subsidiary as a result of compliance with
federal, state or local environmental protection laws or regulations.
Statistical Financial Information Regarding Peoples
- ---------------------------------------------------
The following listing of statistical financial information provides comparative
data for Peoples over the past three and five years, as appropriate. These
tables should be read in conjunction with Item 7 of this Form 10-K
("Management's Discussion and Analysis of Financial Condition and Results of
Operation") and the Consolidated Financial Statements of Peoples and its
subsidiaries found at pages 30 through 50 of this Form 10-K.
Loan Portfolio Analysis:
(Dollars in Thousands)
Year-end balances: 2001 2000 1999 1998 1997
Commercial, financial and agricultural $ 343,800 $ 310,558 $ 272,219 $ 212,530 $ 159,035
Real estate, mortgage 295,944 283,323 252,427 233,550 228,689
Real estate, construction 14,530 20,267 14,067 10,307 19,513
Consumer 111,912 115,913 114,412 104,718 107,158
Credit card 6,670 6,904 6,708 6,812 7,175
- -----------------------------------------------------------------------------------------------------------------
Total $ 772,856 $ 736,965 $ 659,833 $ 567,917 $ 521,570
=================================================================================================================
Average total loans 753,777 698,144 603,922 532,711 468,229
Average allowance for loan losses (12,164) (10,979) (10,121) (9,134) (7,521)
- -----------------------------------------------------------------------------------------------------------------
Average loans, net of allowance $ 741,613 $ 687,165 $ 593,801 $ 523,577 $ 460,708
=================================================================================================================
Allowance for loan losses, January 1 $ 10,930 $ 10,264 $ 9,509 $ 8,356 $ 6,873
Allowance for loan losses acquired 967 - - - 290
Loans charged off:
Commercial, financial and agricultural 1,048 780 306 101 354
Real estate 154 74 77 46 42
Consumer 1,188 1,018 932 1,220 1,258
Credit card 248 189 203 278 263
- -----------------------------------------------------------------------------------------------------------------
Total 2,638 2,061 1,518 1,645 1,917
- -----------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 124 78 44 55 124
Real estate 5 2 23 13 6
Consumer 286 303 304 378 374
Credit card 24 22 24 27 17
- -----------------------------------------------------------------------------------------------------------------
Total 439 405 395 473 521
- -----------------------------------------------------------------------------------------------------------------
Net chargeoffs:
Commercial, financial and agricultural 924 702 262 46 230
Real estate 149 72 54 33 36
Consumer 902 715 628 842 884
Credit card 224 167 179 251 246
- -----------------------------------------------------------------------------------------------------------------
Total 2,199 1,656 1,123 1,172 1,396
- -----------------------------------------------------------------------------------------------------------------
Provision for loan losses, December 31 2,659 2,322 1,878 2,325 2,589
- -----------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 12,357 $ 10,930 $ 10,264 $ 9,509 $ 8,356
=================================================================================================================
Allocation of allowance for loan losses at December 31: 2001 2000 1999 1998 1997
Commercial $ 7,950 $ 5,992 $ 5,164 $ 3,757 $ 3,147
Real estate 1,602 1,112 1,557 1,453 1,478
Consumer 2,447 2,701 2,161 2,556 2,255
Credit card 358 432 434 628 395
General risk - 693 948 1,115 1,081
- -----------------------------------------------------------------------------------------------------------------
Total $ 12,357 $ 10,930 $ 10,264 $ 9,509 $ 8,356
=================================================================================================================
Percent of loans to total loans at December 31:
Commercial 44.5% 42.1% 41.3% 37.4% 30.5%
Real estate, mortgage 38.3 38.4 38.3 41.1 43.8
Real estate, construction 1.9 2.8 2.1 1.9 3.8
Consumer 14.5 15.8 17.3 18.4 20.5
Credit card 0.8 0.9 1.0 1.2 1.4
- -----------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=================================================================================================================
Ratio of net chargeoffs to average total loans:
Commercial 0.12% 0.10% 0.04% 0.01% 0.05%
Real estate 0.02 0.01 0.01 0.01 0.01
Consumer 0.12 0.10 0.11 0.16 0.19
Credit card 0.03 0.02 0.03 0.04 0.05
- -----------------------------------------------------------------------------------------------------------------
Total 0.29% 0.23% 0.19% 0.22% 0.30%
=================================================================================================================
Nonperforming assets:
Loans 90+ days past due 686 344 249 495 462
Renegotiated loans 425 518 747 392 --
Nonaccrual loans 4,380 4,280 1,109 687 1,220
- -----------------------------------------------------------------------------------------------------------------
Total nonperforming loans 5,491 5,142 2,105 1,574 1,682
Other real estate owned 181 86 207 396 19
- -----------------------------------------------------------------------------------------------------------------
Total nonperforming assets 5,672 5,228 2,312 1,970 1,701
=================================================================================================================
Nonperforming loans as a percent of total loans 0.71% 0.70% 0.32% 0.28% 0.32%
=================================================================================================================
Nonperforming assets as a percent of total assets 0.48% 0.46% 0.21% 0.22% 0.22%
=================================================================================================================
Nonperforming loans are comprised of loans 90 days or more past due,
renegotiated loans and nonaccrual loans.
Nonperforming assets are comprised of nonperforming loans and other real
estate owned.
Interest income on nonaccrual and renegotiated loans that would have been
recorded under the original terms of the loans for 2001, 2000 and 1999 was
$328 ($9 was actually recorded), $204 ($32 was actually recorded) and $102
($66 was actually recorded), respectively.
Loan Maturities at December 31, 2001:
Due in
(Dollars in Thousands) Due in One Year Due
One Year Through After
Loan Type Or Less Five Years Five Years Total
Commercial loans:
Fixed $ 28,265 $ 47,110 $ 14,329 $ 89,704
Variable 74,671 62,297 117,128 254,096
- --------------------------------------------------------------------------------
102,936 109,407 131,457 343,800
================================================================================
Real estate loans:
Fixed 13,659 44,744 59,716 118,119
Variable 59,245 68,538 64,572 192,355
- --------------------------------------------------------------------------------
72,904 113,282 124,288 310,474
================================================================================
Consumer loans:
Fixed 46,263 62,167 1,424 109,854
Variable 7,832 663 233 8,728
- --------------------------------------------------------------------------------
54,095 62,830 1,657 118,582
- --------------------------------------------------------------------------------
Total $ 229,935 $ 285,519 $ 257,402 $ 772,856
================================================================================
Average Balances and Analysis of Net Interest Income:
(Dollars in Thousands) 2001 2000 1999
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------------------------------
Securities (1):
Taxable $ 279,546 $ 18,526 6.63% $ 290,728 $ 20,031 6.89% $ 258,924 $ 16,600 6.41%
Nontaxable (2) 39,461 2,800 7.09% 34,927 2,641 7.56% 43,805 3,287 7.50%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Total 319,007 21,326 6.68% 325,655 22,672 6.96% 302,729 19,887 6.57%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Loans (3) (4):
Commercial 334,043 27,527 8.24% 299,313 27,591 9.22% 247,141 21,515 8.71%
Real estate 296,908 24,713 8.32% 274,668 22,828 8.31% 242,899 20,052 8.26%
Consumer 122,826 12,994 10.58% 124,163 13,044 10.51% 113,635 11,766 10.35%
Valuation reserve (12,164) (10,979) (10,121)
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Total 741,613 65,234 8.80% 687,165 63,463 9.09% 593,554 53,333 8.83%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Short-term Investments:
Interest-bearing deposits 2,472 91 3.69% 479 22 4.59% 3,390 143 4.22%
Federal funds sold 13,499 544 4.03% 142 8 5.63% 5,074 244 4.81%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Total 15,971 635 3.98% 621 30 4.83% 8,464 387 4.57%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Total earning
assets 1,076,591 87,195 8.10% 1,013,441 86,165 8.50% 904,747 73,607 8.14%
Other assets 86,283 77,103 80,496
------------- ------------ -----------
Total assets $ 1,162,874 $ 1,090,544 $ 985,243
============= ============ ===========
Deposits:
Savings $ 77,543 $ 1,432 1.85% $ 83,246 $ 1,964 2.36% $ 95,606 $ 2,290 2.40%
Interest-bearing
demand 275,331 8,768 3.18% 234,311 10,193 4.35% 213,342 7,560 3.54%
Time 370,704 21,881 5.90% 341,020 19,102 5.60% 321,460 16,106 5.01%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Total 723,578 32,081 4.43% 658,577 31,259 4.75% 630,408 25,956 4.12%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Borrowed Funds:
Short-term 71,504 3,241 4.53% 99,324 6,162 6.20% 54,394 2,655 4.88%
Long-term 151,804 7,652 5.04% 144,018 7,418 5.15% 114,388 5,647 4.94%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Total 223,308 10,893 4.88% 243,342 13,580 5.58% 168,782 8,302 4.92%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Total interest-bearing
liabilities 946,886 42,974 4.54% 901,919 44,839 4.97% 799,190 34,258 4.29%
------------- ----------- ------- ------------ ----------- ------- ----------- ---------- --------
Non-interest bearing
demand deposits 87,503 81,205 78,799
Other liabilities 37,796 32,829 26,474
------------- ------------ -----------
Total liabilities
Stockholders' 1,072,185 1,015,953 904,463
equity 90,689 74,591 80,780
------------- ------------ -----------
Total liabilities
and stockholders'
equity $ 1,162,874 $ 1,090,544 $ 985,243
============= ============ ===========
Interest rate spread $ 44,221 3.56% $ 41,326 3.53% $ 39,349 3.85%
=========== ------- =========== ------- =========== --------
Interest income/earning assets 8.10% 8.50% 8.14%
Interest expense/earning assets 3.99% 4.42% 3.79%
-------- -------- --------
Net yield on earning assets
(net interest margin) 4.11% 4.08% 4.35%
======== ======== ========
(1) Average balances of investment securities based on carrying value.
(2) Computed on a fully tax equivalent basis using a tax rate of 35%. Interest
income was increased by $1,087; $1,036 and $1,261 for 2001; 2000 and 1999,
respectively, for the impact of the tax equivalent adjustment.
(3) Nonaccrual and impaired loans are included in the average balances listed.
Related interest income on nonaccrual loans prior to the loan being put on
nonaccrual is included in loan interest income.
(4) Loan fees included in interest income for 2001, 2000 and 1999 were $706,
$708 and $650, respectively.
Rate Volume Analysis:
(Dollars in Thousands)
Change from 2000 to 2001 (1) Change from 1999 to 2000 (1)
Increase (decrease) in: Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
Investment income: (2)
Taxable $ (756) $ (749) $ (1,505) $ 2,134 $ 1,297 $ 3,431
Nontaxable 328 (169) 159 (671) 25 (646)
- ---------------------------------------------------------------------------------------------------------------------------
Total (428) (918) (1,346) 1,463 1,322 2,785
- ---------------------------------------------------------------------------------------------------------------------------
Loan Income:
Commercial 3,024 (3,088) (64) 4,751 1,325 6,076
Real estate 1,851 34 1,885 2,640 136 2,776
Consumer (141) 91 (50) 1,104 174 1,278
- ---------------------------------------------------------------------------------------------------------------------------
Total 4,734 (2,963) 1,771 8,495 1,635 10,130
- ---------------------------------------------------------------------------------------------------------------------------
Short-term investments 613 (8) 605 (408) 51 (357)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 4,919 (3,889) 1,030 9,550 3,008 12,558
===========================================================================================================================
Interest expense:
Savings deposits (127) (405) (532) (292) (34) (326)
Interest-bearing demand
deposits 1,595 (3,020) (1,425) 794 1,839 2,633
Time deposits 1,718 1,061 2,779 1,019 1,977 2,996
Short-term borrowings (1,489) (1,432) (2,921) 2,641 866 3,507
Long-term borrowings 395 (161) 234 1,517 254 1,771
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,092 (3,957) (1,865) 5,679 4,902 10,581
===========================================================================================================================
$ 2,827 $ 68 $ 2,895 $ 3,871 $ (1,894) $ 1,977
===========================================================================================================================
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the dollar
amounts of the change in each.
(2) Presented on a fully tax equivalent basis.
Maturities of Certificates of Deposit $100,000 or More:
(Dollars in Thousands) 2001 2000 1999 1998
Under 3 months $ 15,478 $ 17,430 $ 12,261 $ 19,121
3 to 6 months 25,279 6,871 8,275 14,335
6 to 12 months 7,515 16,639 23,174 9,189
Over 12 months 28,270 24,209 11,872 9,262
- ----------------------------------------------------------------------------
Total $ 76,542 $ 65,149 $ 55,582 $ 51,907
============================================================================
ITEM 2. PROPERTIES
- -------------------
Peoples' sole banking subsidiary, Peoples Bank, generally owns its offices,
related facilities and unimproved real property. Peoples Bank operates offices
in Marietta (4 offices), Belpre (2 offices), Lowell, Lower Salem, Reno,
Nelsonville (2 offices), Athens (3 offices), The Plains, Middleport, Rutland,
Pomeroy (2 offices), Gallipolis, Caldwell, Chesterhill, McConnelsville,
Baltimore, Lancaster and Granville, Ohio. In West Virginia, Peoples operates
offices in Huntington, Parkersburg (3 offices), Vienna, Point Pleasant (2
offices), New Martinsville (2 offices) and Steelton. Office locations in
Kentucky include Catlettsburg, Grayson, Ashland and Russell.
Peoples Bank operates through 40 banking offices of which 11 are leased and the
rest are owned. Rent expense on the leased properties totaled $277,000 in 2001.
The following is the only property that has a lease expiring on or before June
2003:
Location Address Lease Expiration Date
- ------------------ --------------------- ---------------------
Athens Mall Office 801 East State Street June 2002
Athens OH 45701
Additional information concerning the property and equipment owned or leased by
Peoples and its subsidiaries is incorporated herein by reference from Note 5 of
the Notes to the Consolidated Financial Statements included in Item 8 of this
Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
There are no pending legal proceedings to which Peoples or any of its
subsidiaries is a party or to which any of their property is subject other than
ordinary routine litigation to which Peoples' subsidiaries are parties
incidental to their respective businesses. Peoples considers none of such
proceedings to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
- ------------------------------------------------------------------------
The table presented below sets forth the high and low bids for the indicated
periods, and the cash dividends declared, with respect to Peoples' common
shares.
Quarterly Market and Dividend Information
PER SHARE
High Bid Low Bid Dividend
2001
Fourth Quarter $ 20.25 $ 15.20 $ 0.150
Third Quarter 23.20 17.32 0.150
Second Quarter 18.05 15.45 0.136
First Quarter 18.46 13.86 0.127
- ---------------------------------------------------------------------------
2000
Fourth Quarter $ 13.86 $ 10.91 $ 0.127
Third Quarter 13.86 11.82 0.127
Second Quarter 16.36 11.82 0.127
First Quarter 17.98 14.32 0.127
- ---------------------------------------------------------------------------
1999
Fourth Quarter $ 22.62 $ 16.32 $ 0.116
Third Quarter 24.79 22.11 0.116
Second Quarter 23.14 16.62 0.116
First Quarter 19.35 16.62 0.105
- ---------------------------------------------------------------------------
Peoples' common shares are traded on The NASDAQ National Market under the symbol
PEBO. Bid information has been obtained directly from The NASDAQ National
Market.
Peoples plans to continue to pay quarterly cash dividends, subject to certain
regulatory restrictions described in Note 13 to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
The bid information and per share dividends have been retroactively adjusted for
a 10% stock dividend issued on September 12, 2001.
Peoples had 1,320 stockholders of record at December 31, 2001.
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The information below has been derived from Peoples' Consolidated Financial
Statements.
(Dollars in Thousands, except Ratios, Share and Per Share Data)
2001 2000 1999 1998 1997
Operating Data For the year ended:
Total interest income $ 86,107 $ 85,129 $ 72,346 $ 63,645 $ 53,836
Total interest expense 42,974 44,839 34,258 30,497 25,216
Net interest income 43,133 40,290 38,088 33,148 28,620
Provision for loan losses 2,659 2,322 1,878 2,325 2,589
Gains (losses) on securities transactions 29 10 (104) 418 (28)
Other income exclusive of securities transactions 10,621 8,900 7,478 6,806 5,955
Intangible asset amortization 2,347 2,284 2,639 2,093 1,138
Other expense 31,065 28,760 25,403 21,169 18,116
Net income $ 12,335 $ 11,126 $ 10,718 $ 10,045 $ 8,605
- --------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
At year end:
Total assets 1,193,966 $ 1,135,834 $ 1,075,450 $ 880,284 $ 758,158
Total intangible assets 17,010 17,848 20,154 22,117 12,796
Investment securities 330,364 330,521 328,306 235,569 174,291
Net loans 760,499 726,035 649,569 558,408 513,214
Total deposits 814,368 757,621 728,207 714,168 611,107
Long-term borrowings 192,448 138,511 150,338 40,664 28,577
Stockholders' equity 93,854 83,194 72,874 86,014 78,818
Tangible assets (1) 1,176,956 1,117,986 1,055,296 858,167 745,362
Tangible equity (2) 76,844 $ 65,346 $ 52,720 $ 63,897 $ 66,022
- --------------------------------------------------------------------------------------------------------------------------------
Significant Ratios
Cash earnings to: (3)(4)
Average tangible assets 1.22 % 1.19 % 1.30 % 1.41 % 1.42 %
Average tangible equity 19.21 22.90 20.96 17.82 18.00
Net income to:
Average total assets 1.06 1.02 1.09 1.20 1.29
Average stockholders' equity 13.60 14.92 13.27 12.21 14.33
Average stockholders' equity
to average total assets 7.8 6.8 8.2 9.9 9.0
Average loans to average deposits 92.9 94.4 85.1 80.9 85.5
Risk-based capital ratio 14.21 14.21 14.30 11.95 14.34
Dividend payout ratio 33.1 % 33.1 % 31.8 % 30.4 % 30.5 %
- --------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Cash earnings: (3)
Basic 1.95 $ 1.77 $ 1.66 $ 1.50 $ 1.35
Diluted 1.92 1.75 1.63 1.45 1.31
Net income:
Basic 1.72 1.55 1.42 1.31 1.24
Diluted 1.70 1.53 1.39 1.27 1.20
Cash dividends paid 0.56 0.51 0.45 0.40 0.37
Book value at end of period 13.20 $ 11.65 $ 10.05 $ 11.26 $ 10.30
Weighted average shares outstanding:
Basic 7,166,264 7,176,189 7,530,678 7,673,588 6,934,160
Diluted 7,275,994 7,260,176 7,726,313 7,905,278 7,152,625
- --------------------------------------------------------------------------------------------------------------------------------
(1) Total assets less goodwill and other intangible assets.
(2) Total stockholders' equity less goodwill and other intangible assets.
(3) Excludes after-tax impact of amortization of goodwill and other intangible
assets.
(4) Defined as cash earnings as a percentage of average total assets or average
stockholders' equity minus average goodwill and other intangible assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
- ------------------------------------------------------------------------
Introduction
- ------------
The following discussion and analysis of the Consolidated Financial Statements
of Peoples is presented to provide insight into management's assessment of the
financial results. Peoples' subsidiaries are Peoples Bank, National Association
("Peoples Bank"), Peoples Investment Company and PEBO Capital Trust I. Peoples
Bank also operates Peoples Insurance Agency, Inc. ("Peoples Insurance"), which
offers a full range of life, property, and casualty insurance products to
customers in Peoples' markets, and Peoples Loan Services, Inc. ("PLS"), which
invests in certain loans originated in Peoples' markets. 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 complete financial products and services through
40 financial service locations and 26 ATMs in Ohio, West Virginia, and Kentucky.
Peoples Bank's e-banking service, Peoples OnLine Connection, can be found on the
Internet at www.peoplesbancorp.com. Peoples Bank provides 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
Insurance offers investment and insurance products. Peoples provides services
through ordinary 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
Investment Services, which provides customer-tailored solutions for fiduciary
needs, investment alternatives, financial planning, retirement plans, and other
asset management needs. Brokerage services are offered exclusively through
Raymond James Financial Services, member NASD/SIPC and an independent
broker/dealer, located at Peoples Bank offices.
Peoples Investment Company and Peoples Capital Corporation were formed in late
2001 to allow management to better deploy investable funds and provide new
opportunities to make investments, including, but not limited to, low-income
housing tax credit funds, that are either limited or restricted at the bank
level.
This discussion and analysis should be read in conjunction with the audited
Consolidated Financial Statements and footnotes and the ratios and statistics
contained elsewhere in the Form 10-K.
References will be found in this Form 10-K to the following transactions that
have impacted or will impact Peoples' results of operations:
On November 9, 2001, Peoples announced approval to repurchase 175,000 (or
approximately 2.5% of Peoples' outstanding common shares) from time to
time in open market or privately negotiated transactions (the "2002 Stock
Repurchase Program"). Management may chose to purchase shares, based on
timing and prices it deems appropriate through the expiration of the 2002
Stock Repurchase Program on December 31, 2002.
On January 4, 2002, Peoples announced it had signed a stock purchase
agreement with the shareholders of First Colony Bancshares, Inc. ("First
Colony") to acquire all of the outstanding common stock of First Colony,
the holding company of The Guernsey Bank, Federal Savings Bank based in
Cambridge, Ohio. Under the terms of the agreement, Peoples has agreed to
pay approximately $18 million total cash consideration and assume
approximately $2 million of First Colony debt to acquire full-service
office locations in Cambridge (two offices), Byesville, Quaker City in
Ohio's Guernsey County and Flushing in Ohio's Belmont County, involving
assets of approximately $110 million and deposits of approximately $100
million. Peoples will not acquire the Worthington, Ohio, operations, or
its related loans and deposits, and will operate the Guernsey and Belmont
County offices as full-service sales offices of Peoples Bank. This
transaction is subject to regulatory approval and is expected to be
completed in the second quarter of 2002.
The impact of these transactions, where significant, is discussed in the
applicable sections of this Management's Discussion and Analysis.
Overview of the Income Statement
- --------------------------------
In 2001, Peoples net income totaled $12,335,000, up $1,209,000 (or 10.9%)
compared to $11,126,000 last year. Diluted earnings per share improved to $1.70
in 2001 from $1.53 for the prior year, an increase of $0.17 (or 11.1%). Peoples'
enhanced earnings were the result of net interest income growth and higher
non-interest income. Return on average equity was 13.60% in 2001 versus 14.92%
in 2000 while return on average assets was 1.06% and 1.02% for the same periods,
respectively. The decline in return on equity can be attributed to the increase
in the market value of available-for-sale securities.
On a cash basis, earnings per diluted share were $1.92 in 2001, up $0.17 (or
9.7%) compared to the same period in 2000. Cash basis earnings exclude the
after-tax impact of intangible amortization expense. Cash basis return on
tangible equity and return on tangible assets was 19.21% and 1.22%,
respectively, in 2001 versus 22.90% and 1.19% last year. Return on tangible
equity is defined as cash earnings as a percentage of average total
stockholders' equity minus goodwill and core deposit intangibles. Return on
tangible assets is defined as cash earnings as a percentage of average total
assets minus goodwill and core deposit intangibles. In 2001, Peoples had
amortization expense of $2,347,000 relating to intangible assets acquired under
purchase accounting rules for acquisitions in comparison to $2,284,000 in the
prior year.
Net interest income increased $2,843,000 (or 7.1%) to $43,133,000 in 2001, due
primarily to a reduction in funding costs. Peoples' provision for loan losses
totaled $2,659,000 for the year ended December 31, 2001, compared to $2,322,000
for the same period last year, up $337,000 (or 14.5%). Non-interest income
(excluding all non-operating gains and losses) grew by $1,719,000 (or 19.1%) to
$10,728,000 in 2001 compared to 2000's total of $9,009,000. Key contributors to
Peoples' non-interest revenue growth were enhanced electronic banking income and
deposit account service charges, as well as revenues from Peoples' mid-2001
investment in business owned life insurance ("BOLI"). Non-interest income was
also positively impacted by non-recurring income related to stock received in a
demutualization recorded in the fourth quarter of 2001. Peoples' non-interest
expense totaled $33,412,000 in 2001, up $2,368,000 (or 7.6%) compared to the
prior year, primarily the result of increased salaries and benefits expense.
Interest Income and Expense
- ---------------------------
Peoples derives a majority of its interest income from loans and investment
securities 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. Management periodically
adjusts the mix of assets and liabilities in an attempt to control and improve
net interest income; however, factors that influence market interest rates, such
as interest rate changes by the Federal Reserve and Peoples' competitors, may
have a greater impact on net interest income than those adjustments made by
management. Consequently, a volatile rate environment can make it difficult to
manage net interest margin and income, let alone predict future changes.
Peoples' net interest income totaled $43,133,000 in 2001 compared to $40,290,000
in the prior year, an increase of $2,843,000 (or 7.1%). In 2001, total interest
income grew $978,000 (or 1.1%) to $86,107,000 while interest expense of
$42,974,000, was down $1,865,000 (or 4.2%). The improvement in net interest
income is due to both a better mix of funding sources and the aggregate decrease
in costs of funds resulting from the Federal Reserve's aggressive lowering of
key interest rates throughout 2001.
Peoples derives a portion of its interest income from states and political
subdivisions, which is exempt from taxation. As a result, management believes it
is more meaningful to analyze net interest income on a fully-tax equivalent
("FTE") basis. In 2001, FTE net interest income was $44,221,000, up $2,895,000
(or 7.0%) from $41,326,000 in 2000. The FTE yield on Peoples' earning assets was
8.10% for the year ended December 31, 2001, versus 8.50% for the same period
last year, while the cost of interest-bearing liabilities was 4.54% and 4.97%
for the same periods, respectively. Earning assets averaged $1.08 billion in
2001, up $63.2 million (or 6.2%) compared to the prior year, with the majority
of the increase attributable to loan growth. Peoples' average interest-bearing
liabilities increased $45.0 million (or 5.0%) in 2001 to $946.9 million, as
volume increases in deposits were partially offset by a reduction in the volume
of borrowed funds.
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 mix and pricing of Peoples' earning assets and
interest-bearing liabilities. Throughout 2001, Peoples' net interest margin
improved, reaching 4.30% in the fourth quarter and 4.11% for the year compared
to 3.91% and 4.08%, respectively, for the same periods in 2000. The Federal
Reserve's 475 basis point reductions of key interest rates in 2001 were the
significant drivers of improvement in net interest margin, which facilitated a
lowering of Peoples' costs of funds; however, the magnitude of these reductions
has intensified the pressure for lower loan rates in Peoples' markets, as many
clients seek to refinance existing loans. Management believes the recent rate
cuts will modestly enhance net interest income streams in early 2002, although,
anticipated improvements could be offset in part by decreases in income from
prime based commercial loan repricings and other loan refinancings.
Loans account for the largest portion of earning assets, averaging $753.8
million in 2001, with a FTE yield of 8.80%, compared to average loans of $698.1
million, with a FTE yield of 9.09%, in 2000. Investment securities decreased
$6.7 million (or 2.1%) from 2000's average of $325.7 million to $319.0 in 2001.
The FTE yield on investments decreased 28 basis points in 2001 to 6.68% from
6.96% a year ago. The yields on both loans and investment securities have been
impacted by lower market interest rates.
Peoples' interest-bearing liabilities consist primarily of traditional deposits.
Deposit costs declined 32 basis points to 4.43% from 4.75% last year. In 2001,
Peoples lowered rates paid on interest bearing deposit accounts in response to
the Federal Reserve's rate cuts, but changes in deposit mix due to volume
increases in certificates of deposit during the first half of this year, as well
as very competitive rates paid on those deposits throughout the entire year,
tempered the overall drop in average deposit costs. In the first half of 2002,
management anticipates deposit costs to remain near current levels as
competitors' pricing of deposits and customer's alternative investment
opportunities may limit Peoples' ability to further reduce funding costs from
deposit products.
In addition to traditional deposits, Peoples utilizes a variety of borrowings,
both short-term and long-term, as complementary funding sources. Total borrowed
funds averaged $223.3 million in 2001, down $20.0 million (or 8.2%) from the
prior year's average and the cost of Peoples' borrowed funds fell 70 basis
points during the same period, due to the repayment of higher cost borrowings.
Peoples' primary source of borrowed funds is short and long-term advances from
the FHLB. The short-term FHLB advances are primarily LIBOR based advances while
the long-term FHLB advances consist largely of 10-year borrowings with initial
fixed rate periods. After the initial fixed rate period, the FHLB has the option
to convert each advance to a LIBOR based, variable rate advance, but Peoples may
repay the advance, without a penalty, if the FHLB exercises its option.
In 2001, Peoples' short-term FHLB borrowings averaged $33.2 million, at a cost
of 4.94%, compared to $40.5 million and an average cost of 6.66% in 2000.
Average long-term FHLB borrowings were up $8.1 million (or 5.7%) to $149.9
million in 2001 while the average cost dropped 8 basis points to 5.04%. In 2001,
Peoples converted a portion of its short-term FHLB advances to long-term
advances to secure lower rate, longer-term funding. Management will continue to
use a variety of FHLB borrowings to fund asset growth, when deemed appropriate.
Peoples' cash management services (offered to a variety of business customers)
also provide short-term funding, primarily in the form of overnight repurchase
agreements. Overnight repurchase agreements (excluding balances of wholesale
market term repurchase agreements) averaged $25.6 million, a decrease of $5.8
million (or 18.5%), from last year's average of $31.4 million. The average rate
paid on overnight repurchase agreements was 3.51% in 2001, down 187 basis points
from the prior year, due to decreases in the market index tied to these
accounts. The decreased volume of repurchase agreements in 2001 is due largely
to a withdrawal of a significant balance by a client who opted for an
alternative investment product.
Peoples also periodically accesses national market repurchase agreements to
diversify short-term funding sources. In 2001, wholesale market term repurchase
agreements averaged $12.6 million at a rate of 5.21%, down from $27.5 million
and an average rate of 6.47% in 2000. Peoples reduced the balance of these
agreements throughout the year due to the availability and attractiveness of
other funding sources and at December 31, 2001, had no wholesale market
repurchase agreements outstanding. However, management has again accessed this
funding source in the first quarter of 2002 to fund asset growth and may
continue to access such funding in the future, as deemed appropriate.
While Peoples has benefited from the Federal Reserve's rate cuts in 2001,
management has shifted its focus to securing longer-term funding as a means of
reducing its liability sensitivity and anticipates the current demand to
refinance loans to remain strong. The combination of these factors could apply
downward pressure on net interest income and net interest margin in the first
half of 2002. Although management continually works to mitigate the impact of
these factors, Peoples' net interest margin and income remains difficult to
predict, and to manage, in volatile interest rate environments.
Provision for Loan Losses
- -------------------------
Peoples' provision for loan losses totaled $2,659,000 in 2001, compared to
$2,322,000 a year ago. The increased provision is based upon management's
ongoing evaluation of the adequacy for loan losses and factors affecting loan
losses. Management believes the current provision is appropriate for the
quality, inherent risk, and volume concentrations of Peoples' loan portfolio.
While the overall quality of Peoples' loan portfolio remains strong, management
anticipates that the provision for the first quarter of 2002 will increase
marginally compared to recent quarters due in part to the Overdraft Privilege
Program. Ultimately, the provision will increase or decrease each quarter based
upon the results of Peoples' formal analysis of the allowance for loan losses.
Further information can be found later in this discussion under "Allowance for
Loan Losses."
Gains and/or Losses on Securities Transactions
- ----------------------------------------------
Gains on securities transactions, net of losses, totaled $29,000 compared to
$10,000 in 2000. The net gains on securities transactions in both 2001 and 2000
resulted from normal portfolio activity.
Gains and/or Losses on Asset Disposals
- --------------------------------------
Net gains on asset disposals totaled $24,000 for the year ended December 31,
2001, compared to net losses of $109,000 in the same period last year. The gains
in 2001 were the result of asset disposals in conjunction with normal asset
replacement, while net losses in 2000 resulted from Peoples' investment in a
larger central processing unit in the second quarter of 2000. This investment
has enhanced Peoples' processing capabilities and improved client service
through more timely delivery of products and services.
Mark-to-Market Adjustment on Interest Rate Caps
- -----------------------------------------------
On January 1, 2001, Peoples adopted Statement of Financial Accounting Standards
Number 133 "Accounting for Derivative Instruments and Hedging Instruments"
("SFAS No. 133"), as required. As a result of this adoption, Peoples recognized
the change in market value of certain interest rate contracts as an increase or
decrease to income. In 2001, the net mark-to-market adjustment was $131,000,
reducing net income by $85,000, or $0.01 per share. Management does not
anticipate any additional adjustments related to Peoples' existing interest rate
cap contracts.
Non-Interest Income
- -------------------
Peoples generates non-interest income from four primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions, and
electronic banking. For the year ended December 31, 2001, non-interest income
(excluding non-operating gains and losses) increased $1,719,000 (or 19.1%) to
$10,728,000 compared to the same period last year. Increased electronic banking
income and deposit account service charges, as well as Peoples' mid-2001 BOLI
investment, were significant factors in improved non-interest revenue.
Non-interest income was also positively impacted by non-recurring revenue of
$877,000 recorded in the fourth quarter of 2001 related to stock Peoples
received from the demutualization of Anthem Insurance Companies, Inc.
Fee income generated from deposits represents the largest component of Peoples'
non-interest income. Deposit account service charge income totaled $3,608,000 in
2001 versus $3,243,000 a year ago, an increase of $365,000 (or 11.3%)
attributable to higher volumes of overdraft and non-sufficient fund fees. In
late 2001, Peoples began offering Overdraft Privilege to qualified non-business
clients, which increased deposit account services charges. Due in part to this
program, overdraft fees were up 60% in the fourth quarter of 2001 compared to
the same period in 2000. Management anticipates that the Overdraft Privilege
program will produce significant revenue growth in 2002.
Electronic banking is one of Peoples' many delivery channels for providing
products and services to its clients and includes ATM and debit card services,
direct deposit services and Internet banking. Electronic banking revenues grew
$202,000 (or 16.6%) in 2001 from 2000's total of $1,220,000, due to volume
increases in debit card usage by clients and additional clients utilizing
Peoples' e-banking services. Management will continue to explore and develop new
e-banking capabilities that complement existing delivery channels, both
traditional and non-traditional, and produce additional sources of revenue.
Peoples' other significant non-interest income sources, insurance and investment
commissions and fiduciary revenues, totaled $1,504,000 and $2,508,000,
respectively, in 2001 compared to $1,540,000 and $2,608,000, respectively, in
2000. In 2000, Peoples experienced significant brokerage and annuity sales that
were not at the time expected to continue in 2001; however, Peoples' ability to
maintain these revenue levels in 2001 was challenged more than expected as a
result of the weak US stock market and general economic conditions. Management
continues to pursue new ways to provide asset and risk management products to
Peoples' clients and prospects and believes the associated revenues will be a
significant source of future non-interest income growth.
Non-Interest Expense
- --------------------
One of Peoples' goals in 2001 was to manage the growth of non-interest expense
without sacrificing client service or slowing expansion into non-traditional
products and services. In 2001, non-interest expense totaled $33,412,000, up
$2,368,000 (or 7.6%) compared to the prior year. Increased salaries expense
and benefit costs accounted for most of the expense growth in 2001.
Salaries and benefits continue to be Peoples' largest component of non-interest
expense, which is inherent in a service-based industry such as financial
services. Compared to 2000, salaries and benefits grew $2,087,000 (or 15.5%) to
$15,590,000 for the year ended December 31, 2001. Rising medical costs and
benefit expenses, as well as routine salary increases, wage adjustments
necessary to retain and recruit key personnel, and the addition of associates,
accounted for this increase. At year-end 2001, Peoples had 403 full-time
equivalent associates compared to 388 at year-end 2000. Management will continue
to leverage Peoples' resources, while retaining and recruiting key associates,
to effectively optimize customer service.
Peoples also experienced modest increases in amortization of intangible assets,
data processing and software costs, as well as higher levels of non-income based
taxes. In 2001, Peoples had amortization expense related to intangible assets of
$2,347,000, up $63,000 (or 2.8%) due primarily to an acquisition in the first
quarter of 2001. Data processing and software costs totaled $1,107,000 compared
to $1,033,000 last year, an increase of $74,000 (or 7.2%), as a result of a
one-time software licensing fee paid in late 2001. Due to higher equity levels,
non-income based taxes grew $140,000 (or 18.7%) to $888,000 in 2001. Peoples'
other major areas of non-interest expense were at or below their levels of
recent periods.
Management uses the non-interest income leverage ratio to measure efficiency and
Peoples' performance. The ratio is defined as non-interest income as a
percentage of operating expenses, excludes securities and asset disposal gains
and losses and intangible asset amortization. In 2001, Peoples' non-interest
income leverage ratio was 34.5% compared to 31.3% in 2000. Enhanced deposit
account service charges, as well as the new revenue streams generated from
Peoples' BOLI investment and income relating to the Anthem demutualization
accounted for a majority of the improvement. Management continues to implement
strategies aimed at producing additional non-interest income and improving
Peoples' non-interest income leverage ratio.
Return on Equity
- ----------------
Peoples' return on equity ("ROE") was 13.60% in 2001 versus 14.92% in 2000. On a
cash basis, tangible ROE was 19.21% for the year ended December 31, 2001,
compared to 22.90% for the same period in 2000. Peoples' ROE has been negatively
impacted in 2001 by the mark-to-market adjustment on Peoples' available-for-sale
investment portfolio that resulted in an increase in equity. As market interest
rates change, both the investment and equity sections of Peoples' balance sheet
are sensitive to the corresponding change in the overall market value of the
investment portfolio. Since ROE enhancement during the first half of 2002 will
be limited due to current market conditions, management continues to focus on
earnings per share ("EPS") as the most meaningful measurement of short-term
performance.
Return on Assets
- ----------------
Return on assets ("ROA") in 2001 was 1.06%, up from 1.02% a year ago. Removing
the impact of intangibles and related amortization expense, tangible ROA was
1.22% versus 1.19% in 2000.
In recent years, the primary focus of both the investment community and
management has shifted to EPS enhancement and ROE while diminishing the emphasis
on ROA as a key performance indicator. Despite the reduced emphasis, management
continues to monitor ROA and considers it a measurement of Peoples' asset
leverage. Management expects any enhancement to ROA in 2002 to be minimal.
Income Tax Expense
- ------------------
In 2001, Peoples continued to make tax advantaged investments, including
investments in low-income housing tax credit funds and the purchase of BOLI.
Peoples' effective tax rate was 30.4% in 2001 versus 29.7% last year. At
December 31, 2001, Peoples' investment in tax credit funds and low-income
housing approximated $6.5 million compared to $3.1 million at year-end 2000.
These additional investments are expected to reduce Peoples' income tax expense
in the future. Depending on economic and regulatory conditions, Peoples may make
additional investments in various tax credit pools over the next several years
that could impact Peoples' effective tax rate and overall tax burden.
Overview of Balance Sheet
- -------------------------
Total assets were $1.19 billion at December 31, 2001, an increase of $58.1
million (or 5.1%) compared to year-end 2000. Gross loans increased $35.9 million
(or 4.9%) to $772.9 million, with growth occurring in commercial and real estate
loans. Peoples also purchased $20.0 million of BOLI in mid-2001 using
accumulated funds from investment runoff and other sources, which accounts for
most of the increase in other assets. The BOLI investment produces a
tax-advantaged revenue stream that enhances Peoples' operating efficiency by
offsetting rising employee benefit costs.
Liabilities totaled $1.07 billion at year-end 2001 compared to $1.02 billion a
year ago, an increase of $47.4 million (or 4.6%). Peoples' total deposits grew
$56.7 million (or 7.5%) from $757.6 million at December 31, 2000.
Interest-bearing balances were up $45.2 million (or 6.7%) to $717.8 million at
December 31, 2001 while non-interest bearing deposits increased $11.6 million
(or 13.6%) to $96.5 million. During 2001, the amount of borrowed funds declined
from $258.4 million at December 31, 2000, to $248.5 million at year-end 2001.
Stockholders' equity totaled $93.9 million at December 31, 2001, versus $83.2
million at December 31, 2000, an increase of $10.7 million (or 12.8%). The
higher level of equity in 2001 is due in part to a positive change in market
value of Peoples' available-for-sale investment securities. The remaining
increase in equity was a result of increased earnings, net of dividends paid.
Cash and Cash Equivalents
- -------------------------
Peoples' cash and cash equivalents are Federal funds sold, cash and balances due
from banks, and interest bearing balances in other institutions. The amount of
cash and cash equivalents fluctuates on a daily basis due to client activity and
Peoples' liquidity needs. At year-end 2001, cash and cash equivalents totaled
$32.8 million, up $4.4 million (or 15.4%) compared to December 31, 2000. This
change is due largely to additional items in process of collection, which
resulted in higher balances due from banks at year-end. At December 31, 2001,
Peoples had Federal funds sold of $850,000 compared to no Federal funds sold at
December 31, 2000, also contributing to the overall increase in cash and cash
equivalents.
Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, should allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments as they come due.
Management will actively manage the principal runoff from the investment and
loan portfolios and reinvest those funds based on loan demand and investment
opportunities, as appropriate, while monitoring the level of cash and cash
equivalents to ensure funds are appropriately deployed while maintaining
adequate liquidity.
Investment Securities
- ---------------------
At December 31, 2001, the amortized cost of Peoples' investment securities
totaled $329.1 million, down from $335.1 million at year-end 2000, while the
market value of the investment portfolio was virtually unchanged. In the first
half of 2001, management redeployed a portion of principal runoff resulting in a
decrease in amortized cost; however, this decline was partially offset by market
value increases attributable to interest rate fluctuations. Management initiated
a plan in late 2001 to return the investment portfolio to previous levels in
anticipation of flat to modest loan growth in 2002.
The difference in amortized cost and market value at December 31, 2001, resulted
in unrealized appreciation in the investment portfolio of $1.3 million and a
corresponding increase in Peoples' equity of $0.8 million, net of deferred
taxes. In comparison, the difference in amortized cost and market value at
December 31, 2000, resulted in unrealized depreciation of $4.6 million and a
decrease in equity of $3.0 million, net of deferred taxes.
Peoples' investment in mortgage-backed securities comprised a significant
portion of Peoples' investment portfolio, with a total market value of $166.3
million, up $22.8 million (or 15.9%) from year-end 2000. Investments in US
Treasury securities and obligations of US government agencies totaled $66.3
million at year-end compared to $106.0 million at December 31, 2000. Peoples'
investment in obligations of state and political subdivisions and all other
securities totaled $49.6 million and $48.2 million, respectively, increases of
$11.1 million (or 28.7%) and $5.7 million (or 13.5%), respectively.
Management monitors the earnings performance and liquidity of the investment
portfolio on a regular basis through Asset/Liability Committee ("ALCO")
meetings. The ALCO also monitors net interest income, sets pricing guidelines,
and manages Peoples' interest rate risk. Through active management of the
balance sheet and investment portfolio, Peoples maintains sufficient liquidity
to satisfy depositor demand, other company liquidity requirements and various
credit needs of its customers. Management believes the risk characteristics
inherent in the investment portfolio are acceptable.
Loans
- -----
Peoples Bank primarily focuses on lending opportunities in central and
southeastern Ohio, northern West Virginia, and northeastern Kentucky markets,
especially retail lending, which includes single-family residential mortgages
and other consumer lending. At December 31, 2001, gross loans totaled $772.9
million, an increase of $35.9 million (or 4.9%) since year-end 2000. Most of the
growth in 2001 occurred in commercial, financial and agricultural loans
("commercial loans"); however, loans acquired as part of an acquisition in the
first quarter of 2001, which were primarily retail loans, also contributed to
loan growth. Commercial loan growth occurred primarily in Peoples' existing
markets and through loan participation relationships, while some lending
activity involved selected customers outside Peoples' primary markets.
At December 31, 2001, commercial loans increased $33.2 million (or 10.7%) from
year-end 2000's balance of $310.6 million, with a majority of the increase
occurring in the fourth quarter of 2001. Commercial loans represent the largest
portion of Peoples' total loan portfolio, comprising 44.5% of total loans at
December 31, 2001, versus 42.1% at December 31, 2000. Future commercial lending
activities will depend on economic and related conditions, such as general
demand for loans in Peoples' primary markets and interest rates offered by
Peoples. In addition to in-market opportunities, Peoples will continue to
selectively lend to creditworthy customers outside its primary markets.
Real estate loans (including construction loans) grew $6.9 million (or 2.3%)
compared to year-end 2000, with total balances of $310.5 million at December 31,
2001. Real estate loans comprise 40.2% of Peoples' total loan portfolio at
year-end 2001 versus 41.2% a year ago. Included in real estate loans are home
equity credit lines ("Equilines"), which totaled $27.3 million at the end of
2001 compared to $26.1 million at December 31, 2000. Management believes
Equiline loans are a relationship product with an acceptable return on
investment after risk considerations. Residential real estate loans continue to
represent a major focus of Peoples' lending due to the lower risk factors
associated with this type of loan, and the opportunity to provide additional
products and services to these consumers, at reasonable risk-return ratios to
Peoples.
Consumer lending continues to be a vital part of Peoples' core lending.
Excluding credit card balances, consumer loans decreased $4.0 million (or 3.5%)
to $111.9 million since year-end 2000. The indirect lending area represents the
majority of Peoples' consumer loans, with balances of $66.2 million. Indirect
loan balances have declined $5.0 million (or 7.0%) from $71.2 million at
year-end 2000, a result of declining creditworthy indirect sales opportunities,
normal runoff of indirect loans, and especially automobile manufacturers
offering attractive financing options to car buyers in late 2001.
Management is pleased with the performance of Peoples' consumer loan portfolio,
which can be attributed to a commitment to sound lending practices and a strong
customer service orientation. Lenders use a tiered pricing system that enables
Peoples to apply interest rates based on the corresponding risk associated with
the loan. Although consumer debt delinquency has increased in the financial
services industry, management's actions to reinforce Peoples' pricing system and
underwriting criteria have had a positive impact on consumer loan delinquencies.
Management plans to continue its commitment to the use of this tiered pricing
system to improve the performance of Peoples consumer loan portfolio and promote
controlled growth of quality consumer loans.
Peoples' credit card balances totaled $6.7 million at December 31, 2001, down
$0.2 million (or 3.4%) since December 31, 2000. Management routinely evaluates
new opportunities to serve credit card customers and grow the credit card
balance. Management does not intend to subject Peoples to additional and/or
unnecessary risk merely for such growth and considers Peoples' credit cards to
be a complementary product offering for client relationships.
Loan Concentration
- ------------------
Peoples' largest concentration of commercial loans are credits to lodging and
lodging related companies, which comprised approximately 12.8% of Peoples'
outstanding commercial loans at December 31, 2001, compared to 10.6% at December
31, 2000. Loans to assisted living facilities and nursing homes also represent a
significant portion of Peoples' commercial loans accounting for 11.9% of
Peoples' outstanding commercial loans at year-end 2001 versus 11.6% at year-end
2000. These lending opportunities have arisen due to the growth of these
industries in certain markets or contiguous areas, as well as sales associates'
efforts to develop these key relationships. Management believes Peoples' loans
to lodging and lodging related companies, as well as loans to assisted living
facilities and nursing homes, do not pose abnormal risk when compared to risk
assumed in other types of lending. Management is confident Peoples has
sufficient knowledge of these industries to make sound underwriting decisions.
Allowance for Loan Losses
- -------------------------
Management continually monitors the loan portfolio through its Loan Review
Department and Loan Loss Committee to determine the adequacy of the allowance
for loan losses. This formal analysis determines an appropriate level of the
allowance for loan losses, and allocation of the allowance among loan types. The
portion of the allowance allocated among the various loan types represents
management's estimate of expected losses based upon specific allocations for
individual lending relationships and historical loss experience for each
category of loans. The individual loan reviews are based upon specific
qualitative and quantitative criteria, including the size of the loan and loan
grades below a predetermined level. The historical experience factors are based
upon historical loss experience, trends in losses and delinquencies, the growth
of loans in particular markets and industries, and known changes in economic
conditions in the particular lending markets.
Allowances for homogeneous loans (such as residential mortgage loans, credit
cards, personal loans, etc.) are collectively evaluated based upon historical
loss experience, trends in losses and delinquencies, the growth of loans in
particular markets, and known changes in economic conditions in each particular
lending markets. A loan is considered impaired when, based on current
information and events, it is probable that Peoples will be unable to collect
the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of potential impaired
loan losses is generally based on the present value of expected future cash
flows discounted at the loan's historical effective interest rate, or the fair
value of the collateral if the loan is collateral dependent. If foreclosure is
probable, impairment loss is measured based on the fair value of the collateral.
Peoples recorded a provision for loan losses of $2,659,000 in 2001, $2,322,000
in 2000 and $1,878,000 in 1999 based upon management's ongoing evaluation of the
adequacy of the allowance for loan losses and factors affecting loan losses.
Factors contributing to the increased allowance for loan loss and related
provision in 2001 included higher loss experience, loan balances and continued
growth of higher risk commercial loans. When expressed as a percentage of
average loans, the provision has been 0.35%, 0.32% and 0.29%, and net chargeoffs
amounted to 0.29%, 0.23% and 0.19% in 2001, 2000 and 1999, respectively.
The following schedule sets forth the allocation of the allowance for loan
losses among the loan categories. This allocation is based upon the consistent,
quarterly procedural discipline described above. The entire allowance for loan
losses is available to absorb future loan losses in any loan category and is
allocated as follows at December 31:
2001 2000 1999
---------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
(Dollars in thousands) Amount Loans Amount Loans Amount Loans
Commercial $ 7,950 44.5 % $ 5,992 42.1 % $ 5,164 41.3 %
Real estate 1,602 40.2 1,112 41.2 1,557 40.4
Consumer 2,447 14.5 2,701 15.8 2,161 17.3
Credit card 358 0.8 432 0.9 434 1.0
General risk - - 693 - 948 -
- ---------------------------------------------------------------------------------------------------------------------
Total $ 12,357 100.0 % $ 10,930 100.0 % $ 10,264 100.0 %
=====================================================================================================================
The higher allocations for commercial loans reflect the increased credit risk
associated with this type of lending and are also driven by the continued growth
in this portfolio. In 2001 and 2000, the commercial loan balance grew by 10.7%
and 14.1%, respectively, over the prior year balance. Other factors considered
by Peoples in determining the allocations to the commercial portfolios were the
concentration of credit risk in single borrowers and the specific allocation for
individual lending relationships. The allowance allocation for the real estate
and consumer loan portfolio is based upon Peoples' allowance methodology for
homogeneous loans, and increases or decreases in loan balances for real estate
and consumer loans. As a result of changes in economic conditions and the
recessionary environment in late 2001, Peoples refined its systematic
methodology in the determination of the allowance for loan losses to specific
loans or groups. As a result, the allocation for general credit risk has been
assigned to loss factors developed from historical data to make them more
representative of those which may be expected in the current economic
environment.
In 2001, net chargeoffs totaled $2,199,000 compared to $1,656,000 in 2000.
Commercial and consumer loans comprised a majority of net chargeoffs, totaling
$924,000 and $902,000, respectively, in 2001 versus $702,000 and $715,000,
respectively, in 2000. Real estate chargeoffs represented a small percentage of
total net chargeoffs for the year ended December 31, 2001 and 2000, reflecting
the quality of the real estate loan portfolio.
Peoples' nonperforming assets (which include loans 90 days or more past due,
nonaccrual loans, renegotiated loans, and other real estate owned) were up
marginally from year-end 2000. At December 31, 2001, nonperforming assets
totaled $5.7 million, or 0.48% of total assets, versus $5.2 million, or 0.46%, a
year ago. Management continues to review the entire loan portfolio as part of
the risk management process and has confidence in Peoples' loan review programs
and the level of Peoples' allowance for loan losses, which stands at 225% of
nonperforming loans, and 1.60% of total loans, at year-end 2001.
At December 31, 2001, the recorded investment in loans that were considered to
be impaired was $8.0 million of which $4.9 million was accruing interest, and
$3.1 million were nonaccrual loans. Included in this amount are $2.7 million of
impaired loans for which the related allowance for loan losses is $1.0 million.
The remaining impaired loan balances do not have a related allocation of the
allowance for loan losses as a result of previous write-downs, being
well-secured, or possessing characteristics indicative of ability to repay the
loan. For the year ended December 31, 2001, the average recorded investment in
impaired loans was approximately $7.8 million and interest income of $503,000
was recognized on impaired loans during the period, representing 0.6% of
Peoples' total interest income.
Funding Sources
- ---------------
Peoples considers a number of sources when evaluating its funding needs,
including but not limited to deposits, short-term borrowings, and long-term
borrowings. Traditional deposits continue to be the most significant source of
funds for Peoples, totaling $814.4 million, or 76.6% of total funding sources at
December 31, 2001.
Non-interest bearing deposits serve as a core funding source. At year-end 2001,
non-interest bearing balances totaled $96.5 million, an $11.6 million (or 13.6%)
increase compared to the prior year-end. In the fourth quarter of 2001, Peoples
implemented two programs aimed at attracting new clients and core deposits, as
well as producing additional non-interest income opportunities: Overdraft
Privilege and Free Checking. These programs have already had a positive impact
through the addition of new deposits. Management expects these programs to
produce additional benefits in 2002. In addition, management will continue to
focus on expanding its base of lower-cost funding sources and enhancing client
relationships by providing incentives for clients to utilize more of Peoples'
products and services.
Interest-bearing deposits totaled $717.8 million at December 31, 2001, an
increase of $45.2 million (or 6.7%) compared to $672.6 million at December 31,
2000. Certificates of deposits account for the majority of Peoples'
interest-bearing deposits, increasing $19.7 million (or 5.8%) since year-end
2000 to $360.7 million at December 31, 2001. Interest-bearing transaction
accounts, comprised primarily of Peoples' money market deposit accounts, also
contributed to the overall increased level of interest-bearing deposits totaling
$277.5 million at December 31, 2001, up $21.0 million (or 8.2%) compared to
$256.5 million at year-end 2000. Peoples' money market accounts offer variable,
competitive rates that allow clients flexibility and opportunity to enhance
their investment yields.
Peoples also accesses other funding sources, including short-term and long-term
advances, to fund asset growth and satisfy liquidity needs. Advances from FHLB
and repurchase agreements comprise Peoples' short-term borrowings, while
long-term borrowings are primarily 10-year FHLB advances, with initial fixed
rate features for periods of two, three, or four years, depending on the
specific advance. Each advance has the opportunity, at the discretion of the
FHLB, to reprice after its initial fixed rate period, and Peoples has the option
to prepay any repriced advance without penalty, or allow the borrowing to
reprice to a LIBOR based, variable product.
At December 31, 2001, long-term borrowings were up $53.9 million (or 38.9%)
compared to year-end 2000, totaling $192.4 million at December 31, 2001. Since
year-end 2000, Peoples' short-term borrowings declined $63.9 million (or 53%) to
$56.1 million at December 31, 2001. These changes are the result of Peoples'
shift to longer-term funding to "lock in" costs during this period of low
interest rates. This shift includes the conversion of a significant portion of
Peoples' short-term FHLB borrowings to long-term borrowings. Management plans to
access FHLB borrowings (both long and short-term) as an appropriate funding
source.
Capital/Stockholders' Equity
- ----------------------------
At December 31, 2001, stockholders' equity was $93.9 million, an increase of
$10.7 million (or 12.8%) since December 31, 2000, as changes in the market value
of Peoples' investment portfolio and increased earnings directly impacted
Peoples' stockholders' equity. In 2001, Peoples had net income of $12,335,000
and paid dividends of $4,081,000, a dividend payout ratio of 33.08% of earnings,
compared to a ratio of 33.06% a year ago. Management believes recent dividends
represent an acceptable payout ratio for Peoples and anticipates similar payout
ratios in future periods through quarterly dividends.
The adjustment for the net unrealized holding gains on available-for-sale
securities, net of deferred income taxes, totaled $0.8 million at year-end 2001
versus holding losses of $3.0 million at December 31, 2000, a change of $3.8
million. Since all the investment securities in Peoples' portfolio are
classified as available-for-sale, both the investment and equity sections of
Peoples' balance sheet are more sensitive to the changing market values of
investments. Management believes Peoples' capital continues to provide a strong
base for profitable growth.
Peoples had treasury stock totaling $3.4 million compared to $3.6 million at
year-end 2000. During 2001, Peoples repurchased 209,076 common shares authorized
under formal treasury share purchase plans at an average price of $18.05 per
share. Peoples issued approximately 93,600 shares through various stock option
plans, deferred compensation plans and the dividend reinvestment program. In
2002, Peoples may repurchase additional shares under the 2002 Stock Repurchase
Program based on timing and prices management deems appropriate until its
expiration on December 31, 2002.
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. Peoples and Peoples
Bank have complied with these requirements and were considered well-capitalized
institutions at December 31, 2001. Detailed information concerning Peoples'
risk-based capital ratios can be found in Note 13 of the Notes to Consolidated
Financial Statements included in Item 8 of this Form 10-K.
Liquidity and Interest Rate Sensitivity
- ---------------------------------------
The objective of Peoples' asset/liability management function is to optimize and
protect net interest income within Peoples' policy guidelines. This objective is
accomplished through management of Peoples' balance sheet mix, liquidity and
interest rate risk exposure based on changes in economic conditions, interest
rate levels and customer preferences.
Interest Rate Risk
- ------------------
One of the most significant risks resulting from Peoples' normal business of
extending loans and accepting deposits is interest rate risk. Interest rate risk
("IRR") is the potential for economic loss due to future interest rate changes
that can impact both the earnings stream as well as market values of financial
assets and liabilities. Peoples' management has charged the ALCO with the
overall management of Peoples' balance sheet and off-balance sheet transactions
related to the management of IRR. The ALCO strives to keep Peoples focused on
the future, anticipating and exploring alternatives, rather than simply reacting
to change.
To this end, the ALCO has established an IRR management policy that sets the
minimum requirements and guidelines for monitoring and managing the level and
amount of IRR. The objective of the IRR policy is to encourage management to
adhere to sound fundamentals of banking while allowing sufficient flexibility to
exercise the creativity and innovations necessary to meet the challenges and
opportunities of changing markets. The ultimate goal of these policies is to
optimize net interest income within the constraints of prudent capital adequacy,
liquidity, and safety.
Peoples' ALCO relies on different methods of assessing IRR including simulating
net interest income, monitoring the sensitivity of the net present market value
of equity, and monitoring the difference or gap between maturing or
rate-sensitive assets and liabilities over various time periods. The ALCO places
emphasis on simulation modeling as the most beneficial measurement of IRR
because it is a dynamic measure. By employing a simulation process that
estimates the impact of potential changes in interest rates and balance sheet
structures and by establishing limits on these estimated changes in net income
and net market value, the ALCO is better able to evaluate the risks expected,
based on the simulation data, associated with alternative strategies.
The modeling process starts with a base case simulation that represents the
current balance sheet. Base case simulation results are prepared under an
assumed flat interest rate scenario and at least two alternative interest rate
scenarios, one rising and one declining, assuming parallel yield curve
parameters. Comparisons showing the earnings variance from the flat rate
forecast illustrate the risks associated with the current balance sheet
strategy. When deemed appropriate, additional balance sheet strategies are
developed and simulations prepared. These additional simulations are run with
the same interest rate scenarios used with the base case simulation and/or using
different yield curves. The additional strategies are used to measure yield
curve risk, prepayment risk, basis risk, and index lag risk inherent in the
balance sheet. Comparisons showing the earnings and equity value variance from
the base case provide the ALCO with information concerning the risks associated
with implementing the alternative strategies produced from the simulation data.
The results from model simulations are reviewed for indications of effectiveness
of current IRR strategies.
Peoples monitors IRR for both the short and long-term. Therefore, to effectively
evaluate results from model simulations, limits on changes in net interest
income and the value of the balance sheet have been established. To monitor the
short-term exposure to IRR, the ALCO limited the earnings at risk of Peoples
Bank to 10% or less from base case for each 100 basis point shift in interest
rates measured on an annual basis. To monitor long-term exposure, management has
limited the negative impact on net equity value to 40% or less when interest
rates shift 200 basis points. For an assessment of the current interest rate
risk position, the ALCO reviews static gap measures for specific time periods
focusing on one-year cumulative gap. Based on historical trends and performance,
the ALCO has determined the ratio of the one-year cumulative gap should be
within 15% of earning assets.
The following table is provided to illustrate the estimated earnings at risk and
value at risk positions of Peoples at December 31, 2001 (dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- ------------------------ ----------------------- ------------------------
300 $ (3,596) (7.5) % $ (35,209) (33.2) %
200 (2,274) (4.7) (22,523) (21.2)
100 (886) (1.8) (9,845) (9.3)
(100) $ 115 0.2 % $ 5,525 5.2 %
The interest risk analysis shows that Peoples is moderately liability sensitive,
which means that downward moving interest rates should favorably impact Peoples'
net interest income while upward moving interest rates should negatively impact
net interest income. As a result, the ALCO may consider the purchase of interest
rate hedge instruments, as available and appropriate, that would provide net
interest income protection in a rising rate environment. Peoples' liability
sensitivity reflects a moderate decrease from year-end 2000 due in part to the
ALCO's continuing efforts to secure long-term funding in the current low
interest rate environment. The interest rate analysis also shows Peoples is
within the established IRR policy limits for all simulations and all scenarios
for the current period as well as at all measured points during the preceding
year.
Liquidity
- ---------
In addition to IRR management, a primary objective of the ALCO is the
maintenance of 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.
The main source of liquidity for Peoples is deposit growth. Liquidity is also
provided from cash generated from earning assets such as maturities, principal
payments and income from loans and investment securities. In 2001, cash provided
by financing activities totaled $21.0 million as increases in deposits and
long-term borrowings were partially offset by a decrease in short-term
borrowings. Cash flows used in investing activity totaled $39.2 million, due to
a net increase in loan balances and other investing activities such as the BOLI
purchase. When appropriate, Peoples takes advantage of external sources of
funds, such as advances from the FHLB, national market repurchase agreements,
and brokered funds. These external sources often provide attractive interest
rates and flexible maturity dates that enable Peoples to match funding dates and
pricing characteristics with contractual maturity dates and pricing parameters
of earning assets. Securities in the investment portfolio that are
available-for-sale can be utilized as an additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting volatile
liabilities, short-term growth in deposits and brokered funds, from liquid
assets, short-term investments and unpledged available-for-sale securities. At
December 31, 2001, Peoples' net liquidity position was $177.2 million, or 14.85%
of total assets, in comparison to a net liquidity position of $99.2 million, or
8.74% of total assets, at December 31, 2000. The increase in liquidity is
attributed to an increase in liquid assets, which include Federal funds sold and
investment securities, and an increase in what Peoples considers stable deposits
during 2001. The liquidity position as of year-end 2001 was within Peoples'
policy limit of negative 10% of total assets.
Effects of Inflation on Financial Statements
- --------------------------------------------
Substantially all of the 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.
Future Outlook
- --------------
Peoples achieved several key goals in 2001 including double-digit earnings
growth and top-line revenue generation despite a slower than expected first half
of the year and challenging economic conditions throughout the year. Future
success in the financial service industry will revolve around three issues:
earnings growth and quality, asset quality, capital quality. Management believes
that Peoples is sound in all of these areas, as reflected by the strong results
in 2001, due largely to solid asset/liability management and underwriting, as
well as diversified revenue streams. In 2002, management will work to build upon
existing client relationship and continue to explore new opportunities, which
will position Peoples for the future of financial services.
The introduction of the Overdraft Privilege program and Free Checking in late
2001 have already produced positive benefits because of the aggressive marketing
of these products in each market Peoples serves. In 2002, management expects
these initiatives to boost non-interest revenues, particularly deposit account
service charges and overdraft fees, by as much as 30% and modestly increase the
level of Peoples' core deposits. Management's focus will be to expand on these
new relationships and revenue opportunities created by these programs, through
an integrated, needs-based sales process.
E-banking remains a key focal point for management as more and more clients
enjoy the benefits of Peoples' award winning e-banking services that include
Internet banking through Peoples OnLine Connection, ATMs and TeleBank
capabilities. Peoples' investment in technology in recent periods is aligned
with the strategy to provide the core of its business, those clients who
complete thousands of transactions each week in their deposit and loan accounts,
with speedy, technologically superior services that make it easier to do
business with Peoples.
In 2002, Peoples will strive to continue to improve its e-banking services by
exploring the possibility of offering "account aggregation capabilities" (also
known as "screen scraping" technology) as part of Peoples' e-services. This
service would give Peoples' clients the ability to manage a real-time
consolidated view of all their financial accounts at all financial institutions
on one active web page (as long as the financial institutions are web-enabled).
The cost of this capability has dropped in recent months, and management will
determine if this technology and its capabilities makes strategic sense for
Peoples' client base.
Even while management grows Peoples' operations and client base through new
products and services, the strong capital levels that exist afford Peoples the
opportunity to grow and expand through strategic mergers and acquisitions, such
as the First Colony acquisition. Management believes the First Colony
acquisition will produce immediate benefits to Peoples' operating results, as
well as provide new opportunities as Peoples integrates its non-traditional
products and services (such as insurance and investments) with the traditional
banking products currently offered to clients in the new markets. Management
continues to explore merger and acquisition prospects in and around Peoples'
current footprint. However, the evaluation of future acquisitions will focus
more on enhancing Peoples' earnings potential rather than geographic location or
proximity to current markets and ultimately, will depend upon opportunities that
complement Peoples' core competencies and strategic intent.
In the last several years, Peoples has completed several acquisitions using the
purchase method of accounting, which added goodwill balances to Peoples' balance
sheet and amortization expense to results of operations. On January 1, 2002, new
accounting rules took effect that eliminated the amortization expense on a
portion of Peoples' intangible assets. If the new rules had been in effect in
2001, Peoples goodwill amortization expense would have been reduced by $750,000
and diluted EPS would have been approximately $1.80 versus the $1.70 reported.
In 2002, management anticipates that the new accounting rules will have a
similar impact.
Late in the fourth quarter of 2001, Peoples completed the formation of new
capital management subsidiaries: Peoples Investment Company and Peoples Capital
Corporation. These new subsidiaries will allow management to better manage
Peoples' investments and provide new opportunities to make investments,
including, but not limited to, low-income housing tax credit funds, that are
either limited or restricted at the bank level. The goal is to invest Peoples'
capital across business units, based on projected risk and return on
investments, which have potential for both strong growth and enhancement to
Peoples' overall long-term value. Management expects that these subsidiaries
will also provide opportunities to reduce Peoples' overall tax burden (both
income based and non-income based) while helping to optimize Peoples'
operational effectiveness.
In 1999, Peoples issued $30.0 million of trust preferred securities through PEBO
Capital Trust I, which boosted capital ratios to even stronger levels. In the
first quarter of 2002, Peoples took advantage of an opportunity to repurchase
$7.0 million of its trust preferred, at a discount, in open market transactions
and as a result, will recognize a pre-tax gain of approximately $600,000, or
approximately $0.05 per share after tax, in its results of operations for the
first quarter of 2002. Management is evaluating opportunities to participate in
a pooled trusted preferred offering in late first quarter or early second
quarter of 2002. This source of funds will likely be a variable rate, LIBOR
based product and will help maintain capital ratios, fuel growth plans, and
initially lower Peoples' funding costs from its current fixed rate of 8.62%.
It is Peoples' goal to be a complete financial services provider to clients. To
that end, management will continue to evaluate possible Customer Relationship
Management ("CRM") information systems and processes in 2002 that will enhance
client contact management, data mining, profitability information, and
marketing. In addition, management expects to gain a better understanding of
client dynamics and the value proposition Peoples can offer to each client
through CRM. Management believes an investment in a CRM system is a necessary
step to continue the development and growth of Peoples' sales culture and
measurement systems. Management plans to have due diligence completed in the
first quarter of 2002, with the goal of making decisions in the second quarter
of 2002 regarding investments and other resources necessary to create a
corporate-wide process that promotes profitable sales growth. Management is
excited by the possibilities that a complete CRM process will provide, and looks
forward to implementation and enhancements that will follow.
Peoples' earnings momentum strengthened throughout 2001 and management believes
it will continue into the first half of 2002. Peoples' focus remains long-term
and strategies linked to filling the financial needs of every client through an
integrated, seamless service process, regardless of economic conditions. In
2002, management's goals remain unchanged and centered around producing
long-term financial benefits for every stakeholder: integrating traditional and
non-traditional products and services; enhancing non-interest revenues; and
controlling operating expenses.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
- ---------------------------------------------------------------
The statements in this Form 10-K which are not historical fact are forward
looking statements that involve risks and uncertainties, including, but not
limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of technological changes, the effect of
economic conditions, the impact of competitive products and pricing, and other
risks detailed in Peoples' Securities and Exchange Commission filings. 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.
Comparison of 2000 to 1999
- --------------------------
Peoples reported an increase in net income of 3.7%, to $11.1 million in 2000
from $10.7 million in 1999. Diluted earnings per share totaled $1.53 for the
year ended December 31, 2000, compared to $1.39 in 1999. Cash basis earnings,
which removes the after-tax impact of intangible amortization expense, increased
$0.12, to $1.75 per diluted share for the year ended December 31, 2000, compared
to $1.63 in 1999. Peoples increased profits in 2000 were the result of net
interest income growth and non-interest revenue enhancements.
For the year ended December 31, 2000, return on average assets was 1.02%,
compared to 1.09% in 1999. A leverage strategy implemented during second quarter
of 1999 significantly increased Peoples' asset base thus causing this decrease
in ROA in 2000. In 2000, return on stockholders' equity increased to 14.92%
compared to 13.27% in 1999. Using a portion of the proceeds from the Trust
Preferred Securities issuance in 1999, Peoples implemented stock repurchase
programs that favorably impacted ROE through a reduction in the number of
outstanding common shares and corresponding reduction in equity.
Net interest income totaled $40.3 million, up 5.8% compared to 1999, as total
interest income reached $85.1 million and interest expense totaled $44.8
million. Net interest margin decreased in 2000 to 4.08% from 4.35% in 1999. Net
interest margin decreased in 2000 due to interest rate compression between loan
pricing and funding source costs. Peoples' yield on earning assets improved 36
basis points in 2000 to 8.50%, but the cost of interest-bearing liabilities
increased 68 basis points to 4.97% during the same period.
Peoples' provision for loan losses totaled $2,322,000 in 2000, up 23.6% compared
to 1999's expense of $1,878,000. The combination of increased loan volume, less
favorable loss experience, and a general economic slowdown resulted in the
increased provision in 2000. At December 31, 2000, Peoples' allowance for loan
losses as a percentage of total loans was 1.48%, compared to a year-end 1999
ratio of 1.56%.
Non-interest income from operations (excluding securities and asset disposal
transactions) totaled $9,009,000 in 2000, an increase of 18.5% compared to 1999.
In 2000, deposit account service charge income increased $513,000 (or 18.8%)
compared to $2,730,000 in 1999, due to higher volumes of overdraft and
non-sufficient fund fees. Income from fiduciary activities totaled $2,608,000,
down 1.0% compared to 1999. Electronic banking income grew 18.1% in 2000 from
$1,033,000 the prior year. Electronic banking income increased primarily due to
growth in the number of debit card users and the associated volume increases in
debit card usage. As a result of increased life insurance and annuity sales,
insurance and investment commissions were up 99.5% in 2000 from $772,000 in
1999.
For the year ended December 31, 2000, non-interest expense totaled $31.0
million, up $3.0 million (or 10.7%) compared to 1999. In 2000, Peoples
implemented several strategic initiatives that resulted in higher levels of
non-interest expense. Salaries and benefits totaled $13.5 million in 2000, an
increase of 14.4% compared to $11.8 million the prior year. Furniture and
equipment expenses were up $0.1 million to $1.9 million in 2000, while net
occupancy expense grew $0.2 million to $2.0 million compared to the previous
year. These increases can be attributed primarily to the depreciation of the
assets acquired through investments and business acquisitions aimed at making
financial services more convenient and flexible. Peoples' other non-interest
expenses were near prior period levels.
Total assets reached $1.14 billion at December 31, 2000, up $60.4 million
compared to year-end 1999. Asset growth can be attributed primarily to strong
loan growth throughout 2000. Loans continued to be Peoples' largest earning
asset component and increased $77.1 million compared to year-end 1999, totaling
$737.0 million at year-end 2000. While each of Peoples' loan categories
experienced strong growth, a majority of the increase occurred in the commercial
and real estate loan portfolios. Average loans totaled 94.4% of average deposits
in 2000, up from 85.1% at year-end 1999. Peoples' other significant earning
asset component is the investment securities portfolio, which totaled $330.5
million at year-end 2000, up $2.2 million from year-end 1999.
Although Peoples utilized a variety of funding sources, traditional deposits
continued to be the most significant source of funds totaling $757.6 million, or
74.6% of Peoples' funding sources at December 31, 2000. In additional to
traditional deposits, Peoples accessed both short-term and long-term borrowings
to fund operations and investments. Short-term borrowings totaled $119.9 million
at year-end 2000, up $32.5 million since year-end 1999. Short-term FHLB advances
and national market repurchase agreements were accessed heavily at year-end 1999
to fund Peoples' Y2K cash reserves. Peoples repaid those borrowings in early
2000 and continued to access those funding sources at various times to balance
liquidity needs and fund loan growth. At December 31, 2000, long-term borrowings
totaled $138.5 million compared to $150.3 million a year earlier, a result of
Peoples repaying $11.5 million of FHLB borrowings in mid-2000.
Total stockholders' equity increased $10.3 million to $83.2 million at December
31, 2000. This increase was the result of market value increases in Peoples'
investment portfolio and the reissuance of treasury shares in conjunction with
the 10% stock dividend in the first quarter of 2000. At December 31, 2000, the
adjustment for the net unrealized holding loss on available-for-sale securities
totaled $3.0 million, a change of $4.7 million from the previous year. Peoples
had a treasury share balance of $3.6 million at December 31, 2000, compared to
$10.8 million at year-end 1999. In 2000, Peoples' dividend payout ratio was
33.1% of earnings compared to 31.8% in 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ------------------------------------------------------------------------
Please refer to pages 24 through 26 in Item 7 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The Consolidated Financial Statements and accompanying notes, and the report of
independent auditors, are set forth immediately following Item 9 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- --------------------------------------------------------------------------
No response required.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share Data)
December 31,
Assets 2001 2000
Cash and cash equivalents:
Cash and due from banks $ 31,642 $ 28,242
Interest-bearing deposits in other banks 346 207
Federal funds sold 850 -
- ------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 32,838 28,449
- ------------------------------------------------------------------------------------------------------------------------------
Available-for-sale investment securities, at estimated fair value (amortized
cost of $329,081 in 2001 and $335,111 in 2000) 330,364 330,521
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees and costs 772,856 736,965
Allowance for loan losses (12,357) (10,930)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans 760,499 726,035
- ------------------------------------------------------------------------------------------------------------------------------
Bank premises and equipment, net 16,369 15,565
Other assets 53,896 35,264
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,193,966 $ 1,135,834
==============================================================================================================================
Liabilities
Deposits:
Non-interest bearing $ 96,533 $ 84,974
Interest bearing 717,835 672,647
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 814,368 757,621
- ------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 23,752 54,729
Federal Home Loan Bank advances 32,300 65,186
- ------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 56,052 119,915
- ------------------------------------------------------------------------------------------------------------------------------
Long-term borrowings 192,448 138,511
Accrued expenses and other liabilities 8,188 7,572
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,071,056 1,023,619
- ------------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in junior subordinated
debentures ("Trust Preferred Securities") 29,056 29,021
Stockholders' Equity
Common stock, no par value, 12,000,000 shares authorized, 7,289,266 shares
issued in 2001 and 6,679,028 issued in 2000,
including shares in treasury 78,664 66,364
Accumulated comprehensive income (loss), net of deferred income taxes 834 (2,983)
Retained earnings 17,735 23,381
- ------------------------------------------------------------------------------------------------------------------------------
97,233 86,762
Treasury stock, at cost, 178,344 shares in 2001 and 189,357 shares in 2000 (3,379) (3,568)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 93,854 83,194
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities, beneficial interests and stockholders' equity $ 1,193,966 $ 1,135,834
==============================================================================================================================
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Share and Per Share Data) Year ended December 31,
2001 2000 1999
Interest Income:
Interest and fees on loans $ 65,126 $ 63,352 $ 53,223
Interest and dividends on:
Obligations of U.S. government and its agencies 14,973 16,405 13,450
Obligations of states and political subdivisions 1,901 1,798 2,261
Other interest income 4,107 3,574 3,412
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 86,107 85,129 72,346
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 32,081 31,259 25,956
Interest on short-term borrowings 3,242 6,162 2,655
Interest on long-term borrowings 7,651 7,418 5,647
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 42,974 44,839 34,258
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 43,133 40,290 38,088
Provision for loan losses 2,659 2,322 1,878
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 40,474 37,968 36,210
- ------------------------------------------------------------------------------------------------------------------------------
Other Income:
Service charges on deposit accounts 3,608 3,243 2,730
Income from fiduciary activities 2,508 2,608 2,634
Investment and insurance commissions 1,504 1,540 772
Electronic banking income 1,422 1,220 1,033
Business owned life insurance 481 - -
Gain (loss) on securities transactions 29 10 (104)
Gain (loss) on asset disposals 24 (109) (122)
Net mark-to-market adjustment on interest rate caps (131) - -
Other 1,205 398 431
- ------------------------------------------------------------------------------------------------------------------------------
Total other income 10,650 8,910 7,374
- ------------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Salaries and employee benefits 15,590 13,503 11,824
Trust Preferred Securities expense 2,621 2,623 1,840
Amortization of intangibles 2,347 2,284 2,639
Net occupancy 2,155 2,043 1,839
Equipment 1,540 1,857 1,787
Data processing and software 1,107 1,033 966
Other 8,052 7,701 7,147
- ------------------------------------------------------------------------------------------------------------------------------
Total other expenses 33,412 31,044 28,042
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 17,712 15,834 15,542
- ------------------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 5,246 4,886 4,556
Deferred 131 (178) 268
- ------------------------------------------------------------------------------------------------------------------------------
Total income taxes 5,377 4,708 4,824
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 12,335 $ 11,126 $ 10,718
==============================================================================================================================
Earnings per share:
Basic $ 1.72 $ 1.55 $ 1.42
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.70 $ 1.53 $ 1.39
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding:
Basic 7,166,264 7,176,189 7,530,678
- ------------------------------------------------------------------------------------------------------------------------------
Diluted 7,275,994 7,260,176 7,726,313
- ------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, except Share and Per
Share Data)
Accumulated
Other
Comprehensive
Common Stock Retained Income Treasury
Shares Amount Earnings (Loss) (1) Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,790,148 $ 50,807 $ 33,441 3,588 $ (1,822) $ 86,014
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 10,718 10,718
Other Comprehensive income, net of tax:
Unrealized loss on available-for-sale
securities,
Net of reclassification adjustment (11,242) (11,242)
------------
Total comprehensive income (524)
Purchase of treasury stock, 379,636 shares (10,256) (10,256)
Distribution of treasury stock for deferred
compensation plan (reissued 191 treasury 5 5
shares)
10% stock dividend 579,505 14,512 (14,512)
Exercise of common stock options
(reissued 43,368 treasury shares) (838) 1,317 479
Tax benefit from exercise of stock options 121 121
Issuance of common stock under dividend
reinvestment plan 17,856 441 441
Cash dividends declared of $0.46 per share (3,406) (3,406)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 6,387,509 $ 65,043 $ 26,241 (7,654) $ (10,756) $ 72,874
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 11,126 11,126
Other Comprehensive income, net of tax:
Unrealized gains on available-for-sale
securities,
Net of reclassification adjustment 4,671 4,671
------------
Total comprehensive income 15,797
Purchase of treasury stock, 148,321 shares (2,717) (2,717)
Distribution of treasury stock for deferred
compensation plan (reissued 5,481 treasury 125 125
shares)
10% stock dividend 269,597 1,469 (10,308) 8,839
Exercise of common stock options
(reissued 39,517 treasury shares) (552) 941 389
Tax benefit from exercise of stock options 58 58
Issuance of common stock under dividend
reinvestment plan 21,922 346 346
Cash dividends declared of $0.51 per share (3,678) (3,678)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 6,679,028 $ 66,364 $ 23,381 (2,983) $ (3,568) $ 83,194
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 12,335 12,335
Other Comprehensive income, net of tax:
Unrealized gains on available-for-sale
securities,
Net of reclassification adjustment 3,817 3,817
---------
Total comprehensive income 16,152
Purchase of treasury stock, 71,057 shares (3,804) (3,804)
Distribution of treasury stock for deferred
compensation plan (reissued 237 treasury 5 5
shares)
10% stock dividend 583,686 12,358 (13,900) 1,542
Exercise of common stock options
(reissued 19,026 treasury shares) (689) 1,166 477
Tax benefit from exercise of stock options 82 82
Issuance of common stock under dividend
reinvestment plan 18,769 329 329
Cash dividends declared of $0.56 per share (4,081) (4,081)
Issuance of common stock to purchase Lower
Salem Commercial Bank 7,783 220 1,280 1,500
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 7,289,266 $ 78,664 $ 17,735 834 $ (3,379) $ 93,854
==============================================================================================================================
(1) Disclosure of reclassification amount for the years ended: 2001 2000 1999
Net unrealized appreciation (depreciation) arising during period, net of tax $ 3,836 $ 4,678 $ (11,310)
Less: reclassification adjustment for net securities gains (losses) included in net
income, net of tax 19 7 (68)
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment $ 3,817 $ 4,671 $ (11,242)
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year ended December 31,
2001 2000 1999
Cash flows from operating activities:
Net income $ 12,335 $ 11,126 $ 10,718
Adjustments to reconcile net income to net cash provided:
Provision for loan losses 2,659 2,322 1,878
(Gain) loss on securities transactions (29) (10) 104
Depreciation, amortization, and accretion 4,551 4,613 4,997
Decrease (increase) in interest receivable 1,103 (1,029) (1,572)
(Decrease) increase in interest payable (925) 256 712
Deferred income tax expense (benefit) 131 (178) 268
Deferral of loan origination fees and costs 150 (116) (1)
Other, net 2,621 (1,054) (3,225)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,596 15,930 13,879
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities (76,904) (23,391) (174,750)
Proceeds from sales of available-for-sale securities 136 3,242 21,565
Proceeds from maturities of available-for-sale securities 85,696 25,337 43,507
Net increase in loans (20,936) (78,375) (92,169)
Expenditures for premises and equipment (2,750) (2,427) (2,156)
Proceeds from sales of other real estate owned 153 296 277
Acquisitions, net of cash received (162) - 4,010
Investment in business owned life insurance (20,000) - -
Investment in limited partnership and tax credit funds (4,400) (400) (1,336)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (39,167) (75,718) (201,052)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in non-interest bearing deposits 10,187 1,707 576
Net increase in interest bearing deposits 29,142 27,720 8,331
Net (decrease) increase in short-term borrowings (62,863) 32,476 54,925
Proceeds from long-term borrowings 54,282 - 127,000
Payments on long-term borrowings (2,868) (11,827) (17,326)
Cash dividends paid (3,593) (3,262) (2,926)
Purchase of treasury stock (3,804) (2,717) (10,255)
Proceeds from issuance of common stock for stock options 477 389 478
Proceeds from issuance of Trust Preferred Securities - - 30,000
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 20,960 44,486 190,803
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,389 (15,302) 3,630
Cash and cash equivalents at beginning of year 28,449 43,751 40,121
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 32,838 $ 28,449 $ 43,751
===============================================================================================================================
Supplemental cash flow information:
Interest paid $ 38,249 $ 39,415 $ 29,760
- -------------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 2,985 $ 3,960 $ 4,035
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
The accounting and reporting policies of Peoples Bancorp Inc. and
Subsidiaries ("Peoples") conform to accounting principles generally
accepted in the United States and to general practices within the banking
industry. Peoples considers all of its principal activities to be banking
related. The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates. Certain reclassifications have
been made to prior period amounts to conform to the 2001 presentation.
Such reclassifications had no impact on net income. All share and per
share information has been adjusted for a 10% stock dividend issued
September 12, 2001.
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Peoples
Bancorp Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash and due from banks, interest
bearing deposits in other banks, and federal funds sold, all with
original maturities of ninety days or less.
INVESTMENT SECURITIES:
Management determines the appropriate classification of investment
securities at the time of purchase. Held-to-maturity securities are
those securities that Peoples has the positive intent and ability to
hold to maturity and are recorded at amortized cost. Available-for-sale
securities are those securities that would be available to be sold in
the future in response to Peoples' liquidity needs, changes in market
interest rates, and asset-liability management strategies, among
others. Available-for-sale securities are reported at fair value, with
unrealized holding gains and losses reported in a separate component of
other comprehensive income, net of applicable deferred income taxes.
The cost of securities sold is based on the specific identification
method.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is maintained at a level believed
adequate by management to absorb probable losses in the loan portfolio.
Management's determination of the adequacy of the allowance for loan
losses is based on a quarterly evaluation of the portfolio, including
levels and trends in impaired and nonperforming loans, historical loan
loss experience, current national and local economic conditions,
volume, growth and composition of the portfolio, other relevant factors
and also regulatory guidance. This evaluation is inherently subjective
and requires management to make estimates of the amounts and timing of
future cash flows on impaired loans, consisting primarily of
non-accrual and restructured loans. The allowance for loan losses
related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans.
BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated useful lives of the related assets.
OTHER REAL ESTATE:
Other real estate owned, included in other assets on the consolidated
balance sheet, represents properties acquired by Peoples' subsidiary
bank, Peoples Bank, National Association ("Peoples Bank"), in
satisfaction of a loan. Real estate is recorded at the lower of cost or
fair value based on appraised value at the date actually or
constructively received, less estimated costs to sell the property.
INTANGIBLE ASSETS:
Intangible assets representing the present value of future net income
to be earned from deposits are being amortized on an accelerated basis
over a ten-year period. The excess of cost over the fair value of net
assets acquired (goodwill) is being amortized on a straight-line basis
over periods ranging from 10 to 15 years.
INCOME RECOGNITION:
Interest income is recognized by methods that result in level rates of
return on principal amounts outstanding. Amortization of premiums has
been deducted from and accretion of discounts has been added to the
related interest income. Nonrefundable loan fees and direct loan costs
are deferred and recognized over the life of the loan as an adjustment
of the yield. Peoples' discontinues the accrual of interest when
management believes collection of all or a portion of contractual
interest has become doubtful, which generally occurs when a loan is 90
days past due. When deemed uncollectible, previously accrued interest
recognized in income in the current year is reversed and interest
accrued in prior years is charged against the allowance for loan
losses. Interest received on non-accrual loans is included in income
only if principal recovery is reasonably assured. A non-accrual loan is
restored to accrual status when it is brought current, has performed in
accordance with contractual terms for a reasonable period of time, and
the collectibility of the total contractual principal and interest is
no longer in doubt.
INCOME TAXES:
Deferred income taxes (included in other assets) are provided for
temporary differences between the tax basis of an asset or liability
and its reported amount in the financial statements at the statutory
tax rate. The components of other comprehensive income included in the
Consolidated Statements of Stockholders' Equity have been computed
based upon a 35% effective tax rate.
EARNINGS PER SHARE:
Basic earnings per share is determined by dividing net income by the
weighted-average number of shares outstanding. Diluted earnings per
share is determined by dividing net income by the weighted-average
number of shares outstanding increased by the number of shares that
would be issued assuming the exercise of stock options.
OPERATING SEGMENTS:
Peoples' business activities are currently confined to one segment
which is community banking. As a community banking entity, Peoples
offers its customers a full range of products through various delivery
channels.
NEW ACCOUNTING PRONOUNCEMENTS:
On January 1, 2001, Peoples adopted Statement of Financial Accounting
Standards Statement Number 133, "Accounting for Derivative Instruments
and Hedging Instruments", as required. As a result of this adoption,
Peoples recognized the change in market value of certain interest rate
contracts as an increase or decrease to income. In 2001, the net
mark-to-market adjustment was $131,000, reducing net income by $85,000,
or $0.01 per share.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141"). SFAS 141 requires all business combinations
initiated after June 30, 2001, to be accounted for using the purchase
method of accounting and further clarifies the criteria to recognize
intangible assets separately from goodwill. Although SFAS 141 will
impact the accounting for future business combinations, it had no
impact on Peoples' financial position or results of operations in 2001.
Also in June 2001, FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
Under SFAS 142, goodwill and indefinite lived intangible assets, except
the portion of goodwill recorded in accordance with Statement of
Financial Accounting Standards Number 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions", are no longer subject
to amortization. Rather an assessment for impairment applying a
fair-value based test must be performed at least annually. Separable
intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, Peoples adopted Statement 142 on
January 1, 2002, as required. If SFAS 142 had been in effect for the
year 2001, Peoples' diluted earnings per share would have been
approximately $1.80 versus the $1.70 reported.
2. Fair Values of Financial Instruments:
Peoples used the following methods and assumptions in estimating its fair
value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS:
The carrying amounts reported in the balance sheet for these captions
approximate their fair values.
INVESTMENT SECURITIES:
Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not available,
fair values are estimated using quoted market prices of comparable
securities.
LOANS:
The fair value of performing variable rate loans that reprice
frequently and performing demand loans, with no significant change in
credit risk, is based on carrying value. The fair value of certain
mortgage loans is based on quoted market prices of similar loans
adjusted for differences in loan characteristics. The fair value of
other performing loans (e.g., commercial real estate, commercial and
consumer loans) is estimated using discounted cash flow analyses and
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
The fair value of significant nonperforming loans is based on either
the estimated fair value of underlying collateral or estimated cash
flows, discounted at a rate commensurate with the risk. Assumptions
regarding credit risk, cash flows, and discount rates are determined
using available market information and specific borrower information.
DEPOSITS:
The carrying amounts of demand deposits, savings accounts and certain
money market deposits approximate their fair values. The fair value of
fixed maturity certificates of deposit is estimated using a discounted
cash flow calculation that applies current rates offered for deposits
of similar remaining maturities.
SHORT-TERM BORROWINGS:
The carrying amounts of federal funds purchased, Federal Home Loan Bank
advances, and securities sold under repurchase agreements approximate
their fair values.
LONG-TERM BORROWINGS:
The fair value of long-term borrowings is estimated using discounted
cash flow analysis based on rates currently available to Peoples for
borrowings with similar terms.
TRUST PREFERRED SECURITIES:
The fair value of the Trust Preferred Securities is estimated using
discounted cash flow analysis based on current market rates of
securities with similar risk and remaining maturity.
INTEREST RATE CAPS:
Fair values for interest rate caps are based on quoted market prices.
FINANCIAL INSTRUMENTS:
The fair value of loan commitments and standby letters of credit is
estimated using the fees currently charged to enter into similar
agreements considering the remaining terms of the agreements and the
counterparties' credit standing. The estimated fair value of these
commitments approximates their carrying value.
The estimated fair values of Peoples' financial instruments at December
31 are as follows:
2001 2000
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 32,838 $ 32,838 $ 28,449 $ 28,449
Investment securities 330,364 330,364 330,521 330,521
Loans 760,499 782,334 726,035 726,874
Financial liabilities:
Deposits $ 814,368 $ 823,172 $ 757,621 $ 759,801
Short-term borrowings 56,052 56,054 119,915 119,908
Long-term borrowings 192,448 230,872 138,511 136,278
Other financial instruments:
Trust Preferred Securities 29,056 26,913 29,021 25,041
Off-balance sheet instruments:
Interest rate caps $ 39 $ 39 $ 238 $ 92
Bank premises and equipment, customer relationships, deposit base,
banking center networks, and other information required to compute
Peoples' aggregate fair value are not included in the above
information. Accordingly, the above fair values are not intended to
represent the aggregate fair value of Peoples.
3. Investment Securities:
The following tables present the amortized costs, gross unrealized gains
and losses and estimated fair value of securities available-for-sale at
December 31. The portfolio contains no single issue (excluding U.S.
government and U.S. agency securities) that exceeds 10% of stockholders'
equity.
Gross Gross
(Dollars in Thousands) Amortized Unrealized Unrealized Estimated
2001 Cost Gains Losses Fair Value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 65,023 1,299 $ (28) $ 66,294
Obligations of states and political subdivisions 49,547 483 (468) 49,562
Mortgage-backed securities 164,557 2,171 (459) 166,269
Other securities 49,954 1,953 (3,668) 48,239
- ------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 329,081 5,906 $ (4,623) $ 330,364
================================================================================================
2000
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 107,434 436 $ (1,851) $ 106,019
Obligations of states and political subdivisions 38,117 544 (154) 38,507
Mortgage-backed securities 143,572 789 (856) 143,505
Other securities 45,988 1,511 (5,009) 42,490
- ------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 335,111 3,280 $ (7,870) $ 330,521
================================================================================================
1999
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 105,169 200 $ (4,680) $ 100,689
Obligations of states and political subdivisions 36,805 125 (1,774) 35,156
Mortgage-backed securities 152,788 203 (5,560) 147,431
Other securities 45,320 2,711 (3,001) 45,030
- ------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 340,082 3,239 $ (15,015) $ 328,306
================================================================================================
In 2001, 2000 and 1999, gross gains of $30,000, $204,000 and $229,000 and
gross losses of $1,000, $194,000 and $333,000 were realized, respectively.
At December 31, 2001 and 2000, investment securities having a carrying
value of $176,715,000 and $237,550,000, respectively, were pledged to
secure public and trust department deposits and repurchase agreements in
accordance with federal and state requirements.
The following table presents the amortized costs, fair value, and weighted
average yield of securities by maturity at December 31, 2001. The
estimated maturities presented in the tables below may differ from the
contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties. Rates are
calculated on a taxable equivalent basis using a 35% federal income tax
rate.
(Dollars in Thousands)
U.S. Treasury Obligations
securities and of states Total
obligations of and Mortgage- available-
U.S. government political backed Other for-sale
agencies subdivisions securities securities securities
Within one year
Amortized cost $ 6,420 $ 1,245 $ 5,464 $ 250 $ 13,379
Fair value $ 6,541 $ 1,251 $ 5,549 $ 245 $ 13,586
Average yield 6.39 % 6.88 % 6.40 % 6.50 % 6.44 %
1 to 5 years
Amortized cost 11,594 7,450 86,241 6,378 111,663
Fair value 12,056 7,584 87,318 6,176 113,134
Average yield 6.33 % 7.02 % 6.53 % 7.01 % 6.57 %
5 to 10 years
Amortized cost 40,655 19,903 15,073 8,882 84,513
Fair value 41,313 19,992 15,223 8,158 84,686
Average yield 7.74 % 7.01 % 6.45 % 7.90 % 7.36 %
Over 10 years
Amortized cost 6,354 20,949 57,779 34,444 119,526
Fair value 6,384 20,735 58,179 33,660 118,958
Average yield 7.93 % 7.03 % 6.29 % 7.11 % 6.74 %
- -----------------------------------------------------------------------------------------------------------------
Total amortized cost $ 65,023 $ 49,547 $ 164,557 $ 49,954 $ 329,081
Total fair value $ 66,294 $ 49,562 $ 166,269 $ 48,239 $ 330,364
Total average yield 7.37 % 7.02 % 6.43 % 7.23 % 6.83 %
=================================================================================================================
4. Loans:
Loans are comprised of the following at December 31:
(Dollars in Thousands) 2001 2000
Commercial, financial, and agricultural $ 343,800 $ 310,558
Real estate, construction 14,530 20,267
Real estate, mortgage 295,944 283,323
Consumer 118,582 122,817
- ------------------------------------------------------------------------------
Total loans $ 772,856 $ 736,965
==============================================================================
Changes in the allowance for loan losses for each of the three years in the
period ended December 31, 2001, were as follows:
(Dollars in Thousands) 2001 2000 1999
Balance, beginning of year $ 10,930 $ 10,264 $ 9,509
Charge-offs (2,638) (2,061) (1,518)
Recoveries 439 405 395
- ----------------------------------------------------------------------------
Net charge-offs (2,199) (1,656) (1,123)
Provision for loan losses 2,659 2,322 1,878
Allowance for loan losses acquired 967 - -
- ----------------------------------------------------------------------------
Balance, end of year $ 12,357 $ 10,930 $ 10,264
============================================================================
Peoples primarily focuses on lending opportunities in central and
southeastern Ohio, northern West Virginia, and northeastern Kentucky
markets. A majority of the portfolio consists of retail lending, which
includes single-family residential mortgages and other consumer lending.
Peoples' largest groups of business loans consist of credits to lodging and
lodging related companies, as well as assisted living facilities/nursing
homes. Loans to lodging and lodging related companies totaled $43,967,000
and $32,991,000 at December 31, 2001 and 2000, respectively. Assisted
living facilities/nursing homes loans totaled $41,015,000 and $35,877,000
at December 31, 2001 and 2000, respectively. These credits were subjected
to Peoples' normal commercial underwriting standards and did not present
more than the normal amount of risk assumed in other lending areas.
Peoples does not extend credit to any single borrower or group of related
borrowers in excess of the combined legal lending limits of its subsidiary
bank. Impaired loans totaled $7,955,000 at December 31, 2001, including
$2,708,000 of impaired loans for which the related allowance for loan
losses was $1,015,000. At December 31, 2000, impaired loans totaled
$9,057,000, including $5,930,000 of impaired loans for which the related
allowance for loan losses was $2,047,000. Peoples' average investment in
impaired loans was $7,795,000 in 2001 and $8,814,000 in 2000.
In the normal course of its business, Peoples Bank has granted loans to
executive officers and directors of Peoples and to their associates.
Related party loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable loans with unrelated persons and did not involve more than
normal risk of collectibility. The following is an analysis of activity of
related party loans for the year ended December 31, 2001:
(Dollars in Thousands)
Balance, January 1, 2001 $ 23,471
New loans 7,208
Repayments (5,794)
Other changes (2,693)
-----------------------------------------------------
Balance, December 31, 2001 $ 22,192
=====================================================
5. Bank Premises and Equipment:
The major categories of bank premises and equipment and accumulated
depreciation are summarized as follows at December 31:
(Dollars in Thousands) 2001 2000
Land $ 3,130 $ 2,926
Building and premises 19,159 17,768
Furniture, fixtures and equipment 11,981 11,009
-----------------------------------------------------------------------
34,270 31,703
Accumulated depreciation (17,901) (16,138)
-----------------------------------------------------------------------
Net book value $ 16,369 $ 15,565
=======================================================================
Peoples depreciates its building and premises and furniture, fixtures and
equipment over estimated useful lives ranging from 5 to 20 years and 2 to
10 years, respectively. Depreciation expense was $1,943,000, $1,957,000
and $1,972,000, for the years ended December 31, 2001, 2000 and 1999,
respectively.
Peoples leases certain banking facilities and equipment under various
agreements with original terms providing for fixed monthly payments over
periods ranging from two to ten years. The future minimum payments, by
year and in the aggregate, under noncancelable operating leases with
initial or remaining terms of one year or more consisted of the following
at December 31, 2001:
(Dollars in Thousands)
2002 $ 265
2003 258
2004 224
2005 201
2006 153
Thereafter 1,151
------------------------------------------------------
Total minimum lease payments $ 2,252
======================================================
Rent expense was $288,000, $341,000 and $306,000 in 2001, 2000 and 1999,
respectively.
6. Deposits:
Included in interest-bearing deposits are various time deposit products.
The maturities of time deposits for each of the next five years and
thereafter are as follows: $213,284,000 in 2002; $117,909,000 in 2003;
$13,845,000 in 2004; $3,137,000 in 2005; $4,480,000 in 2006; and $494,000
thereafter.
Deposits from related parties approximated $22.3 million and $15.2 million
at December 31, 2001 and 2000, respectively.
7. Short-term Borrowings:
Short-term borrowings are summarized as follows:
National Short-
Federal Retail Market term
Funds Repurchase Repurchase FHLB
(Dollars in Thousands) Purchased Agreements Agreements Advances
--------- ---------- ---------- --------
2001
Ending balance $ - $ 23,752 $ - $ 32,300
Average balance 16 25,630 12,612 33,247
Highest month end balance 10 28,950 25,800 56,586
Interest expense - YTD 1 911 666 1,665
Weighted average interest rate:
- -------------------------------
End of year - % 1.95 % - % 2.05 %
During the year 6.25 3.55 5.28 5.01
2000
Ending balance $ 162 $ 28,767 $ 25,800 $ 65,186
Average balance 209 31,162 27,497 40,454
Highest month end balance 587 35,572 34,010 69,586
Interest expense - YTD 12 1,675 1,779 2,696
Weighted average interest rate:
- -------------------------------
End of year 5.21 % 4.24 % 6.68 % 6.75 %
During the year 5.74 5.38 6.37 6.55
1999
Ending balance $ 501 $ 30,478 $ 34,010 $ 22,450
Average balance 137 30,171 18,606 5,477
Highest month end balance 501 31,502 35,000 22,450
Interest expense - YTD 7 1,294 1,058 296
Weighted average interest rate:
- -------------------------------
End of year 2.66 % 5.07 % 6.05 % 4.75 %
During the year 4.89 4.29 5.69 5.40
Peoples utilizes FHLB advances and repurchase agreements as sources of
funds. The advances are collateralized by mortgage-backed securities and
loans. Peoples' institutional, national market repurchase agreements are
with high quality, financially secure financial service companies.
8. Long-term Borrowings:
Long-term borrowings consisted of the following at December 31:
(Dollars in Thousands) 2001 2000
Term note payable, at LIBOR (parent company) $ 1,800 $ 2,100
Federal Home Loan Bank advances, bearing interest at rates
ranging from 3.87% to 5.63% 190,648 136,411
- --------------------------------------------------------------------------------
Total long-term borrowings $ 192,448 $138,511
================================================================================
The Federal Home Loan Bank ("FHLB") advances consist of various borrowings
with maturities ranging from 10 to 20 years with initial fixed rate
periods of one, two or three years. After the initial fixed rate period
the FHLB has the option to convert each advance to a LIBOR based, variable
rate advance, but Peoples may repay the advance in whole or in part,
without a penalty, if the FHLB exercises its option. At all other times,
Peoples' early repayment of any advance would be subject to a prepayment
penalty. The advances are collateralized by Peoples' real estate mortgage
portfolio, FHLB common stock owned by Peoples Bank, and other bank assets.
The most restrictive requirement of the debt agreement requires Peoples to
provide real estate mortgage loans as collateral in an amount not less
than 150% of advances outstanding.
The aggregate minimum annual retirements of long-term borrowings in the
next five years and thereafter are as follows:
(Dollars in Thousands)
2002 $ 4,659
2003 6,193
2004 4,745
2005 4,833
2006 4,951
Thereafter 167,067
--------------------------------------------------
Total long-term borrowings $ 192,448
==================================================
9. Employee Benefit Plans:
Peoples sponsors a noncontributory defined benefit pension plan which
covers substantially all employees. The plan provides benefits based on an
employee's years of service and compensation. Peoples' funding policy is
to contribute annually an amount that can be deducted for federal income
tax purposes. Plan assets consist primarily of U.S. Government obligations
and collective stock and bond funds.
Peoples also has a contributory benefit postretirement plan for former
employees who were retired as of December 31, 1992. The plan provides
health and life insurance benefits. Peoples' policy is to fund the cost of
the benefits as they are incurred.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period
ending December 31, 2001, and a statement of the funded status as of
December 31, 2001 and 2000:
Pension Postretirement
Benefits Benefits
(Dollars in Thousands) 2001 2000 2001 2000
Change in benefit obligation:
Obligation at January 1 $ 6,976 $ 6,669 $ 869 $ 820
Service cost 464 410 - -
Interest cost 553 525 57 63
Plan participants' contributions - - 97 87
Actuarial loss (gain) 687 177 (66) (2)
Benefit payments (418) (805) (261) (154)
Increase due to plan changes - - - 55
- --------------------------------------------------------------------------------
Obligation at December 31 6,976 8,262 696 869
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 7,253 7,298 - -
Claims payable adjustment - - - -
Actual return on plan assets (121) (109) - -
Employer contributions 900 870 164 67
Plan participants' contributions - - 97 87
Benefit payments (418) (806) (261) (154)
- --------------------------------------------------------------------------------
Fair value of plan assets at December 31 7,614 7,253 0 0
- --------------------------------------------------------------------------------
Pension Postretirement
Benefits Benefits
(Dollars in Thousands) 2001 2000 2001 2000
Funded status:
Funded status at December 31 (649) 277 (696) (869)
Unrecognized transition obligation (8) (16) - -
Unrecognized prior-service cost (25) (34) 44 55
Unrecognized net gain 1,516 18 162 232
- --------------------------------------------------------------------------------
Accrued benefit cost $ 834 $ 245 $ (490) $ (582)
================================================================================
The following table provides the components of net periodic benefit cost
for the plans: