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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio
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(Address of principal executive offices)
45750
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(Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Shares, No
No Par Value (9,589,534 outstanding at February 21, 2003)
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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Based upon the closing price of the Common Shares of the Registrant on The
NASDAQ National Market as of June 28, 2002, the aggregate market value of the
Common Shares of the Registrant held by nonaffiliates on that date was
$218,127,000. 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 10, 2003, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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PART I Page
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Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Executive Officers of the Registrant 14
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 35
PART III
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Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 60
Item 13. Certain Relationships and Related Transactions 61
Item 14. Controls and Procedures 61
PART IV
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Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 62
Signatures 63
Exhibit Index 66
PART I
ITEM 1. BUSINESS.
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INTRODUCTION
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Peoples Bancorp Inc. ("Peoples") is a financial holding company organized in
1980, with origins in the Mid-Ohio Valley dating back to 1902. At December 31,
2002, Peoples' wholly-owned subsidiaries included Peoples Bank, National
Association ("Peoples Bank"), Peoples Investment Company, PEBO Capital Trust I
and PEBO Capital Trust II. Peoples Bank also owns an insurance agency subsidiary
and an asset management subsidiary. Peoples Investment Company also owns a
capital management subsidiary.
Peoples' principal executive office is located at 138 Putnam Street, Marietta,
Ohio 45750, and its telephone number is (740) 373-3155. Peoples' common shares
are traded through the NASDAQ National Market System under the symbol PEBO and
its web site is www.peoplesbancorp.com (this uniform resource located (URL) is
an inactive textual reference only and is not intended to incorporate Peoples'
website into this Form 10-K).
Since November 15, 2002, Peoples has made available free of charge on or through
its website, its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") as soon as reasonably practicable after Peoples electronically
filed each such report or amendment, or furnished it to, the Securities and
Exchange Commission ("SEC").
Peoples' principal operating subsidiary, Peoples Bank, is a full service
community bank that provides an array of financial products and services to its
customers, including a variety of interest-bearing and non-interest bearing
demand deposit accounts; savings and money market accounts; certificates of
deposit; commercial, installment, and real estate mortgage loans (commercial and
residential); credit and debit cards; 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 Peoples' 45 financial
service locations and 30 automated teller machines ("ATMs") in Ohio, West
Virginia and Kentucky, as well as banking by phone, and internet-based banking.
Peoples Bank offers a full range of life, property and casualty insurance
products through Peoples Insurance Agency, Inc. and provides custom-tailored
solutions for asset management needs through its Peoples Financial Advisors
division, including investment products through an unaffiliated registered
broker-dealer.
At December 31, 2002, Peoples and its subsidiaries had 462 full-time equivalent
employees, total assets of $1.4 billion, total loans of $850.9 million, total
deposits of $955.9 million, and total stockholders' equity of $147.2 million.
Peoples Bank held trust assets with an approximate market value of $500 million
at December 31, 2002. For the year ended December 31, 2002, Peoples' return on
average assets was 1.46% and return on average stockholders' equity was 17.69%.
For the five-year period ended December 31, 2002, Peoples' assets grew at a
13.0% compound annual growth rate, while stockholders' equity grew at a compound
annual growth rate of 13.3%. Peoples has also had a history of consistent
earnings growth, as earnings per share grew at a compound rate of 16.1% for the
five-year period ended December 31, 2002. Over that same period, Peoples' annual
return on average assets and annual return on stockholders' equity averaged
1.17% and 14.34%, respectively.
Peoples has experienced significant growth in assets and increased its capital
position through a combination of internal and external growth. In December 2002
and January 2003, Peoples enhanced its capital position through the sale of 1.7
million common shares, which generated capital of nearly $37 million. In
addition to core organic growth, Peoples has undertaken a controlled and steady
expansion and acquisition strategy. In the past five years, Peoples has opened
six de novo banking branches in its market area and has completed three branch
acquisitions, two bank acquisitions and one insurance agency acquisition. In the
aggregate, Peoples has acquired $159 million of assets, including $94 million of
loans, $248 million of deposits, and 11 sales offices since year-end 1997. These
acquisitions produced benefits, including the expansion of Peoples' customer
base, and provided opportunities to integrate non-traditional products and
services, such as insurance and investments, with the traditional banking
products currently offered to clients in Peoples' markets. These acquisitions
also enabled Peoples to expand into new markets.
Peoples routinely explores opportunities for additional growth and expansion of
its core financial service businesses, including the acquisition of companies
engaged in similar activities. Management also focuses on internal growth as a
method for reaching performance goals and reviews key performance indicators on
a regular basis to measure Peoples' success. There can be no assurance, however,
that Peoples will be able to grow, or if it does, that any such growth or
expansion will result in an increase in Peoples' earnings, dividends, book value
or the market value of its common shares.
RECENT ACQUISITIONS AND ADDITIONS
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On December 2, 2002, Peoples announced it had signed a definitive agreement and
plan of merger with Kentucky Bancshares Incorporated ("Kentucky Bancshares")
providing for the acquisition of Kentucky Bancshares by Peoples. In the
agreement, Peoples proposes to use a combination of cash and Peoples' common
shares as consideration for all of the issued and outstanding shares of Kentucky
Bancshares common stock. The aggregate value of the transaction is not expected
to exceed $31.4 million, of which approximately half would be paid in cash and
half in Peoples' common shares, dependent upon the market price of Peoples'
common shares.
Kentucky Bancshares' banking subsidiary, Kentucky Bank & Trust, operates five
offices in Kentucky's Boyd and Greenup Counties in the communities of Ashland,
Russell, Flatwoods, Greenup and South Shore. These locations will become Peoples
Bank financial service locations upon completion of the merger. At December 31,
2002, Kentucky Bancshares had total assets of $127 million, total loans of $78
million, total deposits of $99 million, and trust assets under management of
$197 million. This acquisition is contingent upon regulatory approval, approval
by the shareholders of Kentucky Bancshares and customary closing conditions.
Management anticipates completing this transaction during the second quarter of
2003. Concurrent with this acquisition, Peoples will also close the Peoples Bank
financial services location in Russell, Kentucky. Further information regarding
this acquisition can be found in the "Future Outlook" section of Management's
Discussion and Analysis included in Item 7 of this Form 10-K.
On October 4, 2002, Peoples completed the acquisition of a banking center in
Malta, Ohio, from Century National Bank of Zanesville, Ohio, a subsidiary of
Park National Corporation of Newark, Ohio. As part of the transaction, Peoples
acquired deposits of $6.3 million and loans of $1.6 million. Effective October
4, 2002, Peoples discontinued banking operations at the Malta office located at
50 West Third Street, with the Malta office customers being served by the
Peoples Bank financial service location in neighboring McConnelsville, Ohio.
On June 14, 2002, Peoples completed the acquisition of First Colony Bancshares,
Inc. ("First Colony"), the holding company of The Guernsey Bank, f.s.b, a
federal savings bank based in Cambridge, Ohio. As part of the transaction,
Peoples acquired full-service offices in Cambridge (two offices), Byesville, and
Quaker City in Ohio's Guernsey County and Flushing in Ohio's Belmont County,
involving total loans of $65 million, total deposits of $98 million and total
retail overnight repurchase agreements of $6 million. Peoples did not acquire
Guernsey Bank's full-service banking office or loan production office in
Worthington, Ohio, which continue to serve its customers and has retained "The
Guernsey Bank" name under a new banking charter.
CUSTOMERS AND MARKETS
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Peoples has expanded from its roots in Washington County, Ohio, where it
maintains nine financial service locations, to a market area that encompasses
counties in 17 southeastern Ohio and neighboring areas of Kentucky and West
Virginia, focusing on non-major urban areas. The primary market area possesses a
diverse economic base, with no single dominant industry or employer. Principal
industries in the market area include health care, education and other social
services; plastics and petrochemical manufacturing; oil, gas and coal
production; and tourism, education and other service-related industries.
Consequently, Peoples is not dependent upon any single industry segment for its
business opportunities and management believes Peoples' market area is largely
insulated from some of the fluctuations of national economic cycles as a result
of the diverse economic base.
Peoples Bank originates various types of loans, including commercial and
commercial real estate loans, residential real estate loans, home equity lines
of credit, real estate construction loans, and consumer loans (including loans
to individuals, credit card loans, and indirect loans). In general, Peoples Bank
retains the majority of loans it originates; however, Peoples Bank has
originated and sold a limited number of fixed rate mortgage loans into the
secondary market.
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 northeastern
Kentucky and northwestern West Virginia. In addition, loan production offices
and a full-serve banking office in Licking and Fairfield Counties in central
Ohio provide opportunities to serve customers in that economic region.
LEGAL LENDING LIMIT
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At December 31, 2002, Peoples Bank's legal lending limit was approximately $18.6
million. In 2002, Peoples Bank had not extended credit to any one borrower in
excess of its legal lending limit.
COMMERCIAL LOANS
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At December 31, 2002, Peoples Bank had approximately $392.5 million in
commercial loans (including commercial, financial and agricultural loans)
outstanding, representing approximately 46.1% 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
Bank, including the principal amount of the proposed loan, exceeds $4.0 million.
Peoples Bank periodically evaluates all new commercial loan relationships
greater than $250,000 and, on an annual basis, all loan relationships greater
than $500,000. If deterioration 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
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At December 31, 2002, Peoples Bank had outstanding consumer loans (including
indirect loans and credit cards) in an aggregate amount of approximately $110.2
million, or approximately 13.0% 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
adverse personal circumstances. In addition, application of various state and
federal laws, including bankruptcy and insolvency laws, could limit the amount
that may be recovered under these loans. Credit approval for consumer loans
typically requires demonstration of sufficiency of income to repay principal and
interest due, stability of employment, a positive credit record and sufficient
collateral for secured loans. It is the policy of Peoples Bank to review its
consumer loan portfolio monthly and to charge off loans that do not meet its
standards, and to adhere strictly to all laws and regulations governing consumer
lending. A qualified compliance officer is responsible for monitoring regulatory
compliance performance and for advising and updating loan personnel.
Peoples Bank makes credit life insurance and health and accident insurance
available to all qualified buyers, thus reducing risk of loss when a borrower's
income is terminated or interrupted due to accident, health or death. Peoples
Bank also offers its customers credit card access through its consumer lending
department.
REAL ESTATE LOANS
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At December 31, 2002, Peoples Bank had approximately $348.2 million of real
estate loans outstanding (including home equity and construction loans),
representing 40.9% of total loans outstanding. Home equity lines of credit and
construction mortgages totaled $28.5 million and $16.2 million, respectively.
LENDING PRACTICES. Peoples Bank requires residential real estate loan amounts to
be no more than 90% of the purchase price or the appraised value of the real
estate securing the loan, unless private mortgage insurance is obtained by the
borrower for the percentage exceeding 90%. On occasion, Peoples Bank may lend up
to 100% of the appraised value of the real estate. The risk conditions of these
loans are considered during underwriting for the purposes of establishing an
interest rate compatible with the risks inherent in mortgage lending and based
on the equity of the home. Loans made in this lending category are generally one
to five year adjustable rate, fully amortizing mortgages. Peoples Bank also
generates fixed rate real estate loans; however, these loans are typically sold
on the secondary market. In select cases, Peoples Bank may retain certain fixed
rate real estate 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 for loans in excess of $250,000.
HOME EQUITY LOANS. Home equity lines of credit, or Equilines, are generally made
as second mortgages by Peoples Bank. The maximum amount of a home equity line of
credit is generally limited to 80% of the appraised value of the property less
the balance of the first mortgage. Peoples Bank will lend up to 100% of the
appraised value of the property at higher interest rates that are considered
compatible with the additional risk assumed in these types of equilines. The
home equity lines of credit are written with ten-year terms, but are subject to
review upon request for renewal. For several years, Peoples Bank has generally
charged a fixed rate on home equity loans for the first five years, with the
loan converting to a variable interest rate for the remaining five years.
Peoples Bank also offers a home equity line of credit with a variable rate for
the entire term of the loan.
CONSTRUCTION LOANS. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, Peoples Bank may be
required to advance funds beyond the amount originally committed to permit
completion of the project.
COMPETITION
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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 and mutual funds, credit unions, insurance companies
and brokerage firms. The primary factors in competing for deposits are interest
rates paid on deposits, account liquidity, convenience of office location and
overall financial condition. Peoples believes that its size provides
flexibility, which enables Peoples Bank to offer an array of banking products
and services. Peoples' financial condition also contributes to a favorable
competitive position in the markets Peoples serves.
Peoples primarily focuses on 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.
SUPERVISION AND REGULATION
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The following is a summary of certain statutes and regulations affecting Peoples
and its subsidiaries and is qualified in its entirety by reference to such
statutes and regulations:
GENERAL
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BANK HOLDING COMPANY ACT. Peoples is subject to regulation under the Bank
Holding Company Act of 1956, as amended, (the "BHC Act"). The BHC Act requires
the prior approval of the Federal Reserve Board for Peoples to acquire or hold
more than a 5% voting interest in any bank. In addition, the BHC Act restricts
interstate banking activities; although, interstate bank acquisitions and
interstate branching by acquisition and consolidation are permitted under the
BHC Act with some state law limitation mostly regarding deposit concentrations.
FINANCIAL HOLDING COMPANY. The Gramm-Leach-Bliley Act (also known as the
Financial Services Modernization Act of 1999) established a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers through the creation of
a "financial holding company" entity. Bank holding companies that elect to
become financial holding companies have the ability to expand their activities
from those historically permissible for bank holding companies and engage in
activities that are financial in nature or complementary to financial
activities, including securities and insurance activities, sponsoring mutual
funds and investment companies, and merchant banking. Financial holding
companies are also permitted to acquire, without regulatory approval, a company,
other than a bank or savings association, engaged in activities that are
financial in nature or incidental to activities that are deemed financial in
nature by the Federal Reserve Board.
In order to become a financial holding company, a bank holding company must file
a declaration with the Federal Reserve Bank indicating its desire to become a
financial holding company. In addition, all subsidiary banks of the bank holding
company must be well capitalized, well managed and have at least a satisfactory
rating under the Community Reinvestment Act. Failure to maintain the
"well-capitalized" standard or the other criteria for a financial holding
company may result in requirements to correct the deficiency or limit activities
to those allowed bank holding companies.
In 2002, Peoples elected to become a financial holding company and received
notification from the Federal Reserve Board on August 5, 2002, that the election
had been approved.
BANKING SUBSIDIARY. 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 and capital requirements, in activities that are
financial in nature, other than insurance underwriting, real estate development
and real estate investment, through a financial subsidiary of Peoples Bank, as
along as Peoples Bank remains well capitalized, well managed and continues to
have at least a satisfactory Community Reinvestment Act rating.
Peoples Bank is also subject to restrictions imposed by the Federal Reserve Act
on transactions with affiliates, including any loans or extensions of credit to
Peoples or its subsidiaries, investments in the stock or other securities
thereof, and the taking of such stock or securities as collateral for loans to
any borrower; the issuance of guarantees, acceptances or letters of credit on
behalf of Peoples 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.
FEDERAL RESERVE BOARD
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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.
FEDERAL DEPOSIT INSURANCE CORPORATION
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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
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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
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FEDERAL RESERVE BOARD. The Federal Reserve Board has adopted risk-based capital
guidelines for financial holding companies. The risk-based capital guidelines
include both a definition of capital and a framework for calculating
risk-weighted assets by assigning assets and off-balance sheet items to broad
risk categories. 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
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Peoples' ability to pay dividends depends largely on the amount of dividends
declared by Peoples Bank and Peoples' other subsidiaries. However, the Federal
Reserve Board expects Peoples to serve as a source of strength to Peoples Bank
and may require Peoples to retain capital for further investment in Peoples
Bank, rather than pay dividends to its shareholders. Since Peoples is a
financial holding company, Peoples Bank is required to maintain capital
sufficient to meet the "well capitalized" standard set by the regulators and
will be able to pay dividends only so long as its capital continues to exceed
these levels. Peoples Bank is also limited in the total amount of dividends it
may pay in any year without prior approval from the Office of the Comptroller of
Currency. For further discussion regarding regulatory restrictions on dividends,
see Note 13 of the Notes to the Consolidated Financial Statements included in
Item 8 of this Form 10-K.
Peoples or Peoples Bank may decide to limit the payment of dividends, even when
the legal ability to pay them exists, in order to retain earnings for use in
Peoples Bank's business. Additionally, Peoples has established two trust
subsidiaries to issue preferred securities. If Peoples suspends interest
payments relating to the trust preferred securities issued by either of the two
trust subsidiaries, Peoples will be prohibited from paying dividends on its
common shares. For further discussion regarding Peoples' trust subsidiaries, see
Note 12 of the Notes to the Consolidated Financial Statements included in Item 8
of this Form 10-K.
FEDERAL AND STATE LAWS
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Peoples Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of Peoples Bank to open
a new branch or engage in a merger transaction. Community reinvestment
regulations evaluate how well and to what extent Peoples Bank lends and invests
in its designated service area, with particular emphasis on low-to-moderate
income communities and borrowers in such areas.
RECENT LEGISLATION
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On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws. The proposed changes are
intended to allow shareholders to monitor the performance of companies and
directors more easily and efficiently.
The Sarbanes-Oxley Act generally applies to all companies, both U.S. and
non-U.S., that file or are required to file periodic reports with the SEC under
the Exchange Act. Further, the Sarbanes-Oxley Act includes very specific
additional disclosure requirements and new corporate governance rules, requires
the SEC, securities exchanges and the NASDAQ Stock Market to adopt extensive
additional disclosure, corporate governance and other related rules and mandates
further studies of certain issues by the SEC and the Comptroller General. Given
the extensive SEC role in implementing rules relating to many of the
Sarbanes-Oxley Act's new requirements, the final scope of these requirements
remains to be determined.
This Sarbanes-Oxley Act addresses, among other matters: audit committees;
certification of financial statements by the chief executive officer and the
chief financial officer; the forfeiture of bonuses and profits made by directors
and senior officers in the twelve month period covered by restated financial
statements; a prohibition on insider trading during pension plan black out
periods; disclosure of off-balance sheet transactions; a prohibition on personal
loans to directors and officers (excluding Federally insured financial
institutions); expedited filing requirements for stock transaction reports by
officers and directors; the formation of a public accounting oversight board;
auditor independence; and various increased criminal penalties for violations of
securities laws.
Management has instituted a series of actions to strengthen and improve Peoples
already strong corporate governance practices. Included in those actions was the
formation a new Disclosure Committee for Financial Reporting (the "DCFR"), to
evaluate and monitor the continued effectiveness of the design and operation of
disclosure controls for financial reporting. The DCFR consists of key members of
executive management as well as senior professional supporting staff from the
Legal Department, Audit Department and Controller. The DCFR complements Peoples'
longstanding committee structure and process, which has consistently provided an
invaluable tool for communication of disclosure information. Each key element of
operation is subject to oversight by a committee to insure proper
administration, risk management and an up-streaming of critical management
information and disclosures to finance and control, executive management and the
board of directors. The DCFR agenda is designed to capture information from all
segments of the business. It is believed that the addition of these new
processes has brought with it a broader and more in depth analysis to Peoples'
already effective and detailed disclosure process. These more recent additions
to the process are expected to enhance Peoples' overall disclosure control
environment.
MONETARY POLICY AND ECONOMIC CONDITIONS
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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 36 through 59 of this Form 10-K. Loan Portfolio
Analysis:
(Dollars in Thousands) 2002 2001 2000 1999 1998
Year-end balances:
Commercial, financial and agricultural $ 392,528 $ 343,800 $ 310,558 $ 272,219 $ 212,530
Real estate, mortgage 331,948 295,944 283,323 252,427 233,550
Real estate, construction 16,231 14,530 20,267 14,067 10,307
Consumer 103,635 111,912 115,913 114,412 104,718
Credit card 6,549 6,670 6,904 6,708 6,812
- ----------------------------------------------------------------------------------------------------------------------
Total $ 850,891 $ 772,856 $ 736,965 $ 659,833 $ 567,917
======================================================================================================================
Average total loans 824,733 753,777 698,144 603,922 532,711
Average allowance for loan losses (12,779) (12,164) (10,979) (10,121) (9,134)
======================================================================================================================
Average loans, net of allowance $ 811,954 $ 741,613 $ 687,165 $ 593,801 $ 523,577
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Allowance for loan losses, January 1 $ 12,357 $ 10,930 $ 10,264 $ 9,509 $ 8,356
Allowance for loan losses acquired 304 967 - - -
Loans charged off:
Commercial, financial and agricultural 1,935 1,048 780 306 101
Real estate 268 154 74 77 46
Consumer 1,054 1,188 1,018 932 1,220
Overdrafts 880 - - - -
Credit card 191 248 189 203 278
- ----------------------------------------------------------------------------------------------------------------------
Total 4,328 2,638 2,061 1,518 1,645
- ----------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 41 124 78 44 55
Real estate 58 5 2 23 13
Consumer 387 286 303 304 378
Overdrafts 175 - - - -
Credit card 25 24 22 24 27
- ----------------------------------------------------------------------------------------------------------------------
Total 686 439 405 395 473
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs:
Commercial, financial and agricultural 1,894 924 702 262 46
Real estate 210 149 72 54 33
Consumer 667 902 715 628 842
Overdrafts 705 - - - -
Credit card 166 224 167 179 251
- ----------------------------------------------------------------------------------------------------------------------
Total 3,642 2,199 1,656 1,123 1,172
- ----------------------------------------------------------------------------------------------------------------------
Provision for loan losses, December 31 4,067 2,659 2,322 1,878 2,325
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 13,086 $ 12,357 $ 10,930 $ 10,264 $ 9,509
======================================================================================================================
Ratio of net charge-offs to average total loans:
Commercial 0.23% 0.12% 0.10% 0.04% 0.01%
Real estate 0.03 0.02 0.01 0.01 0.01
Consumer 0.07 0.12 0.10 0.11 0.16
Overdrafts 0.09 - - - -
Credit card 0.02 0.03 0.02 0.03 0.04
- ----------------------------------------------------------------------------------------------------------------------
Total 0.44% 0.29% 0.23% 0.19% 0.22%
======================================================================================================================
Percent of loans to total loans at December 31:
Commercial 46.1% 44.5% 42.1% 41.3% 37.4%
Real estate, mortgage 39.0 38.3 38.4 38.3 41.1
Real estate, construction 1.9 1.9 2.8 2.1 1.9
Consumer 12.2 14.5 15.8 17.3 18.4
Credit card 0.8 0.8 0.9 1.0 1.2
---------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
======================================================================================================================
Allocation of allowance for loan losses at December 31:
Commercial $ 8,846 $ 7,950 $ 5,992 $ 5,164 $ 3,757
Real estate 1,617 1,602 1,112 1,557 1,453
Consumer 2,075 2,447 2,701 2,161 2,556
Overdrafts 206 - - - -
Credit card 342 358 432 434 628
General risk - - 693 948 1,115
- ----------------------------------------------------------------------------------------------------------------------
Total $ 13,086 $ 12,357 $ 10,930 $ 10,264 $ 9,509
======================================================================================================================
Nonperforming assets:
Loans 90+ days past due $ 407 $ 686 $ 344 $ 249 $ 495
Renegotiated loans 2,439 425 518 747 392
Nonaccrual loans 4,617 4,380 4,280 1,109 687
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 7,463 5,491 5,142 2,105 1,574
Other real estate owned 148 181 86 207 396
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,611 $ 5,672 $ 5,228 $ 2,312 $ 1,970
======================================================================================================================
Nonperforming loans as a percent of total loans 0.88% 0.71% 0.70% 0.32% 0.28%
======================================================================================================================
Nonperforming assets as a percent of total assets 0.55% 0.48% 0.46% 0.21% 0.22%
======================================================================================================================
Allowance for loan losses as a percent of total loans 1.54% 1.60% 1.48% 1.56% 1.67%
======================================================================================================================
Allowance for loan losses as a percent of nonperforming
loans 175.3% 225.0% 212.6% 487.6% 604.1%
======================================================================================================================
Interest income on nonaccrual and renegotiated loans that would have been
recorded under the original terms of the loans for 2002, 2001 and 2000 was $632
($23 was actually recorded), $328 ($9 was actually recorded) and $204 ($32 was
actually recorded), respectively.
Loan Maturities at December 31, 2002:
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 $ 15,226 $ 54,866 $ 10,819 $ 80,911
Variable 68,908 80,923 161,786 311,617
- ----------------------------------------------------------------------------------------------------------------------
84,134 135,789 172,605 392,528
======================================================================================================================
Real estate loans:
Fixed 33,444 72,294 33,232 138,970
Variable 80,557 67,023 61,629 209,209
- ----------------------------------------------------------------------------------------------------------------------
114,001 139,317 94,861 348,179
======================================================================================================================
Consumer loans:
Fixed 35,105 63,225 3,431 101,761
Variable 7,667 617 139 8,423
- ----------------------------------------------------------------------------------------------------------------------
42,772 63,842 3,570 110,184
======================================================================================================================
Total $ 240,907 $ 338,948 $ 271,036 $ 850,891
======================================================================================================================
Maturities of Certificates of Deposit $100,000 or More:
(Dollars in Thousands) 2002 2001 2000 1999 1998
Under 3 months $ 11,559 $ 15,478 $ 17,430 $ 12,261 $ 19,121
3 to 6 months 23,793 25,279 6,871 8,275 14,335
6 to 12 months 9,277 7,515 16,639 23,174 9,189
Over 12 months 50,181 28,270 24,209 11,872 9,262
- --------------------------------------------------------------------------------
Total $ 94,810 $ 76,542 $ 65,149 $ 55,582 51,907
================================================================================
Average Balances and Analysis of Net Interest Income:
(Dollars in Thousands) 2002 2001 2000
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------------------
Securities (1):
Taxable $ 298,850 $ 17,615 5.89% $ 279,546 $ 18,526 6.63% $ 290,728 $ 20,031 6.89%
Nontaxable (2) 62,561 4,349 6.95% 39,461 2,800 7.09% 34,927 2,641 7.56%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Total 361,411 21,964 6.08% 319,007 21,326 6.68% 325,655 22,672 6.96%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Loans (3) (4):
Commercial 386,812 26,620 6.88% 334,043 27,527 8.24% 299,313 27,591 9.22%
Real estate 322,627 24,365 7.55% 296,908 24,713 8.32% 274,668 22,828 8.31%
Consumer 115,292 11,527 10.00% 122,826 12,994 10.58% 124,163 13,044 10.51%
Valuation reserve (12,779) (12,164) (10,979)
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Total 811,952 62,512 7.70% 741,613 65,234 8.80% 687,165 63,463 9.09%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Short-term Investments:
Interest-bearing 2,041 28 1.35% 2,472 91 3.69% 479 22 4.59%
deposits
Federal funds sold 5,294 75 1.43% 13,499 544 4.03% 142 8 5.63%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Total 7,335 103 1.42% 15,971 635 3.98% 621 30 4.83%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Total earning 1,180,698 84,579 7.16% 1,076,591 87,195 8.10% 1,013,441 86,165 8.50%
assets
Other assets 107,623 86,283 77,103
------------- ------------ ------------
Total assets $ 1,288,321 $ 1,162,874 $ 1,090,544
============= ============ ============
Deposits:
Savings $ 116,512 $ 1,731 1.49% $ 77,543 $ 1,432 1.85% $ 83,246 $ 1,964 2.36%
Interest-bearing demand 279,407 4,481 1.60% 275,331 8,768 3.18% 234,311 10,193 4.35%
Time 393,676 15,945 4.05% 370,704 21,881 5.90% 341,020 19,102 5.60%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Total 789,595 22,157 2.81% 723,578 32,081 4.43% 658,577 31,259 4.75%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Borrowed Funds:
Short-term 44,866 864 1.93% 71,504 3,241 4.53% 99,324 6,162 6.20%
Long-term 209,295 9,948 4.75% 151,804 7,652 5.04% 144,018 7,418 5.15%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Total 254,161 10,812 4.25% 223,308 10,893 4.88% 243,342 13,580 5.58%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Total interest-bearing
liabilities 1,043,756 32,969 3.16% 946,886 42,974 4.54% 901,919 44,839 4.97%
------------- ---------- -------- ------------ ----------- ------- ------------ ------------------
Non-interest bearing
demand deposits 100,740 87,503 81,205
Other liabilities 37,800 37,796 32,829
------------- ------------ ------------
Total liabilities 1,182,296 1,072,185 1,015,953
Stockholders'
equity 106,025 90,689 74,591
------------- ------------ ------------
Total liabilities
and stockholders'
equity $ 1,288,321 $ 1,162,874 $ 1,090,544
============ =========== ===========
Interest rate spread $ 51,610 4.00% $ 44,221 3.56% $ 41,326 3.53%
========== -------- ========== -------- ========== --------
Interest income/earning assets 7.16% 8.10% 8.50%
Interest expense/earning assets 2.79% 3.99% 4.42%
-------- -------- --------
Net yield on earning assets (net interest 4.37% 4.11% 4.08%
margin) ======== ======== ========
(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 $1,612; $1,087 and $1,036 for 2002; 2001 and 2000,
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 2002, 2001 and 2000 were $711,
$706 and $708, respectively.
Rate Volume Analysis:
(Dollars in Thousands)
Change from 2001 to 2002 (1) Change from 2000 to 2001 (1)
Increase (decrease) in: Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
Investment income: (2)
Taxable $ 1,225 $ (2,136) $ (911) $ (756) $ (749) $ (1,505)
Nontaxable 1,607 (58) 1,549 328 (169) 159
- ---------------------------------------------------------------------------------------------------------------------------
Total 2,832 (2,194) 638 (428) (918) (1,346)
===========================================================================================================================
Loan Income:
Commercial 3,997 (4,904) (907) 3,024 (3,088) (64)
Real estate 2,045 (2,393) (348) 1,851 34 1,885
Consumer (693) (774) (1,467) (141) 91 (50)
- ---------------------------------------------------------------------------------------------------------------------------
Total 5,349 (8,071) (2,722) 4,734 (2,963) 1,771
- ---------------------------------------------------------------------------------------------------------------------------
Short-term investments (241) (291) (532) 613 (8) 605
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 7,940 (10,556) (2,616) 4,919 (3,889) 1,030
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 618 (319) 299 (127) (405) (532)
Interest-bearing demand
deposits 128 (4,415) (4,287) 1,595 (3,020) (1,425)
Time deposits 1,286 (7,222) (5,936) 1,718 1,061 2,779
Short-term borrowings (935) (1,442) (2,377) (1,489) (1,432) (2,921)
Long-term borrowings 2,754 (458) 2,296 395 (161) 234
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,851 (13,856) (10,005) 2,092 (3,957) (1,865)
===========================================================================================================================
$ 4,089 $ 3,300 $ 7,389 $ 2,827 $ 68 $ 2,895
===========================================================================================================================
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the dollar
amounts of the change in each.
(2) Presented on a fully tax equivalent basis.
ITEM 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, Cambridge (2 offices), Byesville, Quaker City,
Flushing, 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.
Of the 45 banking offices, 11 are leased and the rest are owned. Rent expense on
the leased properties totaled $279,000 in 2002. The following are the only
properties that have a lease expiring on or before June 2004:
Location Address Lease Expiration Date
- --------------------------------- ------------------------------------ ---------------------
Lancaster Loan Production Office 117 West Main St, Suite 206 October 2003
Lancaster Ohio
Kroger Office Washington Square March 2004 (a)
Marietta, Ohio
New Martinsville Wal-Mart Office 1142 South Bridge Street March 2004 (a)
New Martinsville, West Virginia
Parkersburg Office 2107 Pike Street April 2004 (a)
Parkersburg West Virginia
(a) Date represents the ending date of the current lease period. However,
Peoples has the option to renew the lease for another five-year period
under the terms of the lease agreement.
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.
- --------------------------
Thereare 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.
EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------
Pursuant to General Instruction G of Form 10-K and Instruction 3 to Item 401(b)
of Regulation S-K, the following information regarding Peoples' executive
officers is included as an unnumbered item in Part I of this Form 10-K in lieu
of being included in the Peoples' definitive Proxy Statement relating to
Peoples' Annual Meeting of Shareholders to be held April 10, 2003 ("Peoples'
2003 Definitive Proxy Statement"). In addition to Robert E. Evans, Chief
Executive Officer, and Mark F. Bradley, Executive Vice President/Chief
Integration Officer, who are included in Peoples' 2003 Definitive Proxy
Statement under "Election of Directors", the Executive Officers of Peoples are
as follows:
Name Age Position
David B. Baker 56 Executive Vice President
John (Jack) W. Conlon 57 Chief Financial Officer and Treasurer
Larry E. Holdren 55 Executive Vice President
Carol A. Schneeberger 46 Executive Vice President/Operations
Joseph S. Yazombek 48 Executive Vice President/Chief Lending Officer
Mr. Baker became Executive Vice President of Peoples in February 1999. In
February 2000, Mr. Baker was appointed President of Peoples Bank's Investment
and Insurance Services (now known as Peoples Financial Advisors). Mr. Baker
previously served as President of Peoples Bank's Investment and Business
Division, beginning January 1998, and President of the Investment and Trust
Division of Peoples Bank, a position he held between 1991 and 1998. Mr. Baker
has held various positions in the Investment and Trust Division for Peoples Bank
since 1974.
Mr. Conlon has been Chief Financial Officer of Peoples since April 1991. He
became Treasurer of Peoples in April 1999. He has also served as Peoples Bank's
Chief Financial Officer since 1991 and Treasurer since 1985. Between 1982 and
1985, Mr. Conlon served as Controller of Peoples Bank.
Mr. Holdren became Executive Vice President of Peoples in February 1999. He has
also been President of the Retail and Banking Division for Peoples Bank since
January 1998. Between 1987 and 1998, Mr. Holdren served as Executive Vice
President/Director of Human Resources for Peoples Bank.
Ms. Schneeberger became Executive Vice President/Operations of Peoples in April
1999. Since February 2000, Ms. Schneeberger has also been Executive Vice
President/Operations of Peoples Bank. Prior thereto, she was Vice
President/Operations of Peoples since October 1988. Prior thereto, she was
Auditor of Peoples from August 1987 to October 1988 and Auditor of Peoples Bank
from January 1986 to October 1988.
Mr. Yazombek was appointed Executive Vice President/Chief Lending Officer of
Peoples in January 2000. Mr. Yazombek has also held the position of Executive
Vice President and Chief Lending Officer of Peoples Bank since October 1998. He
was an Executive Vice President of Peoples Bank's Consumer and Mortgage Lending
areas from May 1996 to October 1998 where he also directly managed Peoples
Bank's collections efforts. Mr. Yazombek joined Peoples Bank in 1983 and served
as a real estate lender until May 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
- ------------------------------------------------------------------------
Peoples' common shares are traded on The NASDAQ National Market under the symbol
PEBO and at December 31, 2002, Peoples had 1,277 stockholders of record. The
table presented below provides the high and low bids for the indicated periods
and the cash dividends declared, with respect to Peoples' common shares. Bid
information has been obtained directly from The NASDAQ National Market. All per
share information has been retroactively adjusted for a 10% stock dividend
issued June 28, 2002.
Quarterly Market and Dividend Information
PER SHARE
Dividends
High Bid Low Bid Declared
2002
Fourth Quarter $ 30.00 $ 22.86 $ 0.150
Third Quarter 31.63 23.00 0.150
Second Quarter 30.00 21.91 0.150
First Quarter 22.41 16.59 0.136
- ----------------------------------------------------------------------------
2001
Fourth Quarter $ 18.41 $ 13.82 $ 0.136
Third Quarter 21.09 15.74 0.136
Second Quarter 16.41 14.05 0.124
First Quarter 16.79 12.60 0.116
- ----------------------------------------------------------------------------
2000
Fourth Quarter $ 12.60 $ 9.92 $ 0.116
Third Quarter 12.60 10.74 0.116
Second Quarter 14.88 10.74 0.116
First Quarter 16.34 13.02 0.116
- ----------------------------------------------------------------------------
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, as well as the "Limits on
Dividends" section under Item 1 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The information below has been derived from Peoples' Consolidated Financial
Statements.
(Dollars in Thousands, except Per Share Data) 2002 2001 2000 1999 1998
Operating Data For the year ended:
Total interest income $ 82,968 $ 86,107 $ 85,129 $ 72,346 $ 63,645
Total interest expense 32,970 42,974 44,839 34,258 30,497
Net interest income 49,998 43,133 40,290 38,088 33,148
Provision for loan losses 4,067 2,659 2,322 1,878 2,325
Gains (losses) on securities transactions 216 29 10 (104) 418
Other income exclusive of securities transactions 15,020 10,621 8,900 7,478 6,806
Goodwill and other intangible asset amortization 646 2,347 2,284 2,639 2,093
Other expense 35,321 31,065 28,760 25,403 21,169
Net income 18,752 $ 12,335 $ 11,126 $ 10,718 $ 10,045
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
At year end:
Total assets $ 1,394,361 $ 1,193,966 $ 1,135,834 $ 1,075,450 $ 880,284
Total intangible assets 30,738 17,010 17,848 20,154 22,117
Investment securities 412,100 330,364 330,521 328,306 235,569
Net loans 837,805 760,499 726,035 649,569 558,408
Total deposits 955,877 814,368 757,621 728,207 714,168
Long-term borrowings 203,829 192,448 138,511 150,338 40,664
Guaranteed preferred beneficial interest in
junior subordinated debentures 29,090 29,056 29,021 28,986 -
Stockholders' equity 147,183 93,854 83,194 72,874 86,014
Tangible assets (1) $ 1,363,623 1,176,956 1,117,986 1,055,296 858,167
Tangible equity (2) 116,445 $ 76,844 $ 65,346 $ 52,720 $ 63,897
- ------------------------------------------------------------------------------------------------------------------------------
Significant Ratios
Return on average assets 1.46 % 1.06 % 1.02 % 1.09 % 1.20 %
Return on average stockholders' equity 17.69 13.60 14.92 13.27 12.21
Net interest margin (3) 4.37 4.11 4.08 4.35 4.47
Non-interest income leverage ratio (4) 42.73 34.53 31.32 29.92 32.20
Efficiency ratio (5) 52.95 56.53 57.14 54.11 50.38
Average stockholders' equity to average assets 8.23 7.80 6.84 8.20 9.90
Average loans to average deposits 92.63 92.93 94.37 85.12 80.88
Allowance for loan losses to total loans 1.54 1.60 1.48 1.56 1.67
Risk-based capital ratio 16.79 14.21 14.21 14.30 11.95
Dividend payout ratio 24.91 % 33.08 % 33.06 % 31.78 % 30.38 %
- ------------------------------------------------------------------------------------------------------------------------------
Per Share Data(6)
Net income per share - Basic $ 2.36 $ 1.56 $ 1.41 $ 1.29 $ 1.19
Net income per share - Diluted 2.30 1.54 1.39 1.26 1.16
Cash dividends paid 0.59 0.51 0.46 0.41 0.36
Book value at end of period 15.72 12.00 10.59 9.14 10.24
Tangible book value at end of period (7) $ 12.44 $ 9.82 $ 8.32 $ 6.61 $ 7.61
Weighted average shares outstanding:
Basic 7,932,485 7,882,890 7,893,808 8,283,746 8,440,947
Diluted 8,150,087 8,003,593 7,986,194 8,498,944 8,695,806
Common shares outstanding at end of period: 9,361,871 7,822,014 7,852,502 7,971,156 8,401,177
==============================================================================================================================
(1) Total assets less goodwill and other intangible assets.
(2) Total stockholders' equity less goodwill and other intangible assets.
(3) Fully-tax equivalent net interest income divided by average earning assets.
(4) Non-interest income (less securities and asset disposal gains) as a
percentage of non-interest expense (less intangible amortization).
(5) Non-interest expense (less intangible amortization) as a percentage of
fully-tax equivalent net interest income plus non-interest income.
(6) Adjusted for all stock dividends and splits.
(7) Tangible book value per share reflects capital calculated for banking
regulatory requirements and excludes balance sheet impact of intangible
assets acquired through purchase accounting for acquisitions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
- ------------------------------------------------------------------------
INTRODUCTION
The following discussion and analysis of the Consolidated Financial Statements
of Peoples 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, PEBO Capital Trust I and PEBO
Capital Trust II. 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., 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
45 financial service locations and 30 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 (this uniform resource locator (URL) is an
inactive, textual reference only). 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
Financial Advisors, 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, as well as the ratios and
statistics, contained elsewhere in this Form 10-K.
References will be found in this Form 10-K to the following transactions that
have impacted or will impact Peoples' results of operations:
o As discussed in Note 15 of the Notes to the Consolidated Financial
Statements, Peoples has signed a definitive agreement and plan of
merger with Kentucky Bancshares Incorporated ("Kentucky Bancshares"),
the holding company of Kentucky Bank & Trust, providing for the
acquisition of Kentucky Bancshares by Peoples. In addition, Peoples
completed the acquisition of a banking center in Malta, Ohio, on
October 4, 2002, and First Colony Bancshares, Inc. ("First Colony"),
the holding company of The Guernsey Bank, f.s.b., a federal savings
bank based in Cambridge, Ohio, on June 14, 2002.
o On December 19, 2002, Peoples completed the sale of 1,440,000 common
shares through a firm commitment underwritten offering (the "Common
Stock Offering"). On January 3, 2003, Peoples sold an additional
216,000 common shares in conjunction with the option granted to the
underwriters to cover over-allotments. The Common Stock Offering and
the additional common shares sold to cover over-allotments generated
new capital totaling $36.9 million after offering expenses. In early
2003, Peoples used $16 million of the net proceeds to increase Peoples
Bank's capital position. Peoples intends to use the remaining net
proceeds for general corporate purposes, which may include the
repayment of outstanding indebtedness, mergers, acquisitions and other
strategic investments.
o On April 10, 2002, Peoples issued $7.0 million of LIBOR based floating
rate trust preferred securities through PEBO Capital Trust II (a
newly-formed subsidiary), which participated in a pooled offering.
PEBO Capital Trust II used the proceeds from the issuance to purchase
floating rate junior subordinated debit securities due April 22, 2032
(the "Debentures"). Peoples has used the net proceeds from the sale of
the Debentures for general corporate purposes and management of
corporate liquidity.
The impact of these transactions, where significant, is discussed in the
applicable sections of this Management's Discussion and Analysis.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of Peoples conform to accounting
principles generally accepted in the United States ("US GAAP") and to general
practices within the banking industry. The preparation of the financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. A summary
of Peoples' significant accounting policies can be found in Note 1 of the Notes
to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Management has identified the accounting policies described below as those that,
due to the judgments, estimates and assumptions inherent in those policies, are
critical to an understanding of Peoples' consolidated financial statements and
management's discussion and analysis.
INCOME RECOGNITION
Peoples recognizes interest income by methods that conform to general accounting
practices within the banking industry. In the event management believes
collection of all or a portion of contractual interest on a loan has become
doubtful, which generally occurs after the loan is 90 days past due, Peoples
discontinues the accrual of interest and any previously accrued interest
recognized in income deemed uncollectible is reversed if accrued in the current
year or charged against the allowance for loan losses if accrued in the prior
year. Interest received on nonaccrual loans is included in income only if
principal recovery is reasonably assured. A nonaccrual loan is restored to
accrual status when it is brought current, has performed in accordance with
contractual terms for a reasonable period of time, and the collectibility of the
total contractual principal and interest is no longer in doubt.
ALLOWANCE FOR LOAN LOSSES
In general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples maintains
an allowance for loan losses to absorb probable losses in the loan portfolio
based on a quarterly analysis of the portfolio and expected future losses. This
formal analysis determines an appropriate level and allocation of the allowance
for loan losses among loan types by considering factors affecting loan losses,
including specific losses, levels and trends in impaired and nonperforming
loans, historical loan loss experience, current national and local economic
conditions, volume, growth and composition of the portfolio, regulatory guidance
and other relevant factors. Management continually monitors the loan portfolio
through its Loan Review Department and Loan Loss Committee to evaluate the
adequacy of the allowance. Ultimately, Peoples records a provision for loan
losses to maintain the allowance at an adequate level. The provision expense
could increase or decrease each quarter based upon the results of management's
formal analysis.
The amount of the allowance for the various loan types represents management's
estimate of expected losses from existing loans based upon specific allocations
for individual lending relationships and historical loss experience for each
category of homogeneous loans. The allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. This evaluation requires management to make estimates of the
amounts and timing of future cash flows on impaired loans, which consists
primarily of non-accrual and restructured loans.
Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, loan quality ratings, value of
collateral, repayment ability of borrowers, and historical experience factors.
The historical experience factors utilized are based upon past 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, growth of loans
in particular markets, and known changes in economic conditions in each
particular lending market. Consistent with the evaluation of allowances for
homogenous loans, allowances relating to the Overdraft Privilege program are
based upon management's monthly analysis of accounts in the program. This
analysis considers factors that could affect future losses on existing accounts,
including historical loss experience and length of overdraft.
There can be no assurance that the allowance for loan losses will be adequate to
cover all losses, but management believes the allowance for loan losses was
adequate at December 31, 2002. While management uses available information to
provide for loan losses, the ultimate collectibility of a substantial portion of
the loan portfolio and the need for future additions to the allowance will be
based on changes in economic conditions and other relevant factors. A slowdown
in economic activity could adversely affect cash flows for both commercial and
individual borrowers, as a result of which Peoples could experience increases in
problem assets, delinquencies and losses on loans.
INVESTMENT SECURITIES
Investment securities are recorded at cost, which includes premiums and
discounts if purchased at other than par or face value. Peoples amortizes
premiums and discounts as an adjustment to interest income using the effective
interest method over the estimated life of the security. The cost of investment
securities sold, and any resulting gain or loss, is based on the specific
identification method.
Management determines the appropriate classification of investment securities at
the time of purchase. Held-to-maturity securities are those securities that
Peoples has the positive intent and ability to hold to maturity and are recorded
at amortized cost. Available-for-sale securities are those securities that would
be available to be sold in the future in response to Peoples' liquidity needs,
changes in market interest rates, and asset-liability management strategies,
among others. Available-for-sale securities are reported at fair value, with
unrealized holding gains and losses reported in stockholders' equity as a
separate component of other comprehensive income, net of applicable deferred
income taxes.
Peoples classifies its entire investment portfolio as available-for-sale. As a
result, both the investment and equity sections of Peoples' balance sheet are
more sensitive to changes in the overall market value of the investment
portfolio, in response to changes in market interest rates, investor confidence
and other factors affecting marketing values, than if the investment portfolio
was classified as held-to-maturity.
Management systematically evaluates investment securities for other than
temporary declines in fair value on a quarterly basis. Declines in fair value of
individual investment securities below their amortized cost that are deemed to
be other than temporary will be written down to current market value and
included in earnings as realized losses. There were no investment securities
which management identified to be other-than-temporarily impaired for the year
ended December 31, 2002. If the financial markets experience deterioration and
investments decline in fair value, charges to income could occur in future
periods.
GOODWILL AND OTHER INTANGIBLE ASSETS
Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill
and Other Intangible Assets" ("SFAS 142"), establishes standards for the
amortization of acquired intangible assets and the non-amortization and
impairment assessment of goodwill. In addition, Statement of Financial
Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions"
("SFAS 147"), establishes standards for unidentifiable intangible assets
acquired specifically in branch purchases that qualify as business combinations.
At December 31, 2002, Peoples had $5.2 million of core deposit intangible
assets, which is subject to amortization, and $25.5 million in goodwill, which
is not subject to periodic amortization.
Goodwill arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Peoples' goodwill
relates to value inherent in the banking business and the value is dependent
upon Peoples' ability to provide quality, cost effective services in a
competitive market place. As such, goodwill value is supported ultimately by
revenue that is driven by the volume of business transacted. A decline in
earnings as a result of a lack of growth or the inability to deliver cost
effective services over sustained periods can lead to impairment of goodwill
that could adversely impact earnings in future periods.
Under US GAAP in effect through December 31, 2001, Peoples amortized goodwill on
a straight-line basis over periods ranging from ten to fifteen years. Effective
January 1, 2002, Peoples was no longer required to amortize previously recorded
goodwill as a result of adopting SFAS 142 and SFAS 147.
Peoples has performed the transitional impairment tests on its goodwill assets
and has concluded the recorded value of goodwill was not impaired as of December
31, 2002. There are many assumptions and estimates underlying the determination
of impairment. Another estimate using different, but still reasonable,
assumptions could produce a significantly different result. Additionally, future
events could cause management to conclude impairment indicators exist and
Peoples' goodwill is impaired, which would result in Peoples' recording an
impairment loss. Any resulting impairment loss could have a material adverse
impact on Peoples' financial condition and results of operations.
OVERVIEW OF THE INCOME STATEMENT
Peoples' net income totaled $18,752,000 in 2002, up $6,417,000 (or 52%) compared
to $12,335,000 last year. Diluted earnings per share improved to $2.30 in 2002
from $1.54 for the prior year, an increase of $0.76 (or 49%). In 2002, Peoples'
earnings increased as a result of strong net interest income and enhanced
non-interest income, which increased $6,865,000 and $4,586,000, respectively.
Return on average equity was 17.69% in 2002 versus 13.60% in 2001 while return
on average assets was 1.46% and 1.06% for the same periods, respectively.
Reported net income for the year ended December 31, 2002, reflects the adoption
of SFAS 142, on January 1, 2002, and SFAS 147, which is effective retroactive to
January 1, 2002, whereby goodwill is no longer amortized but will be subject to
annual impairment tests. Earnings per diluted share would have been $1.72 in
2001 excluding goodwill amortization of $1,846,000 that would not have been
recorded had SFAS 142 and 147 been in effect. On a comparative basis without
goodwill amortization, net income per diluted share increased 34% in 2002
compared to 2001.
Net income was also positively impacted by Peoples' purchase of $7.0 million of
trust preferred securities issued by PEBO Capital Trust I, at a discount in the
first quarter, which resulted in an extraordinary gain of $631,000 (or $410,000
after tax) and reduced trust preferred expense by $541,000 compared to 2001.
Excluding the extraordinary gain, income grew 49% from last year, to
$18,342,000, or $2.25 per diluted share in 2002.
Net interest income grew 16% in 2002, totaling $49,998,000 compared to
$43,133,000 in 2001, largely the result of very low market interest rates during
the year. Non-interest income was $15,236,000 in 2002 versus $10,650,000 a year
ago, a 43% increase. Enhanced non-interest income in 2002 is primarily the
result of higher levels of deposit service charge income, while non-interest
income in the fourth quarter of 2001 was enhanced by non-recurring income of
$877,000 relating to a demutualization. For the year-ended December 31, 2002,
non-interest expense totaled $35,967,000 compared to $33,412,000 in 2001, as
increased operating expenses were partially offset by reduced intangible
amortization expense due to new accounting rules that resulted in Peoples
ceasing amortization of all goodwill.
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 manage and improve
net interest income; however, factors that influence market interest rates, such
as interest rate changes by the Federal Reserve Open Market Committee 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 extremely difficult to manage net interest margin and income, let
alone predict future changes.
In 2002, net interest income totaled $49,998,000 compared to $43,133,000 in
2001, an increase of $6,865,000 (or 16%). Total interest income was down
$3,139,000 (or 4%) in 2002 to $82,968,000, from $86,107,000 a year ago. Interest
expense decreased $10,004,000 (or 23%), totaling $32,970,000 versus 2001's
$42,974,000. The low interest rate environment in 2002 afforded management
opportunities to lower Peoples' costs of funds more than the declines
experienced in asset yields, while a modest growth in earning assets, due in
part to First Colony acquisition, provided additional improvement in net
interest income.
Included in interest income is tax-exempt income derived from loans to and
investments issued by states and political subdivisions. Since these revenues
are not taxed, management believes it is more meaningful to analyze net interest
income on a fully-tax equivalent ("FTE") basis, which adjusts interest income by
converting tax-exempt income to the pre-tax equivalent of taxable income using a
tax rate of 35%. In 2002, interest income was increased by $1,612,000 for the
impact of the tax-equivalent adjustment, resulting in FTE net interest income of
$51,610,000, up $7,389,000 (or 17%) from $44,221,000 in 2001. The FTE yield on
Peoples' earning assets was 7.16% for the year ended December 31, 2002, versus
8.10% for the same period last year, while the cost of interest-bearing
liabilities was 3.16% and 4.54% for the same periods, respectively.
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. In 2002, net interest margin was 4.37% versus
4.11% a year ago. While market interest rates remained at very low levels
throughout 2002, management's focus on securing longer-term funding to lock in
low rates, coupled with continued demand for lower loan rates, compressed net
interest margin in the second half of 2002. In the fourth quarter of 2002, net
interest margin was 4.05% compared to 4.42% in the prior quarter and 4.30% in
the fourth quarter of 2001. Net interest margin in the fourth quarter of 2002
was also adversely impacted by additional net premium amortization of
approximately $120,000 on mortgage-backed securities due to increased prepayment
speeds; an interest reversal of approximately $105,000 due to an incorrect
accrual on a business loan; and net premium amortization of approximately
$80,000 on loans acquired in the First Colony acquisition.
Earning assets averaged $1.18 billion in 2002, up $104.1 million (or 10%)
compared to $1.08 billion last year. Loans accounted for the largest portion of
earning assets, averaging $812.0 million for the year ended December 31, 2002,
compared to average loans of $741.6 million in 2001. Loans acquired in the First
Colony acquisition accounted for a majority of the loan growth from a year ago.
Investment securities averaged $361.4 million in 2002 compared to $319.0 million
a year ago, as management grew the investment portfolio during 2002 as part of a
plan initiated in late 2001 to return the portfolio, as a percent of earning
assets, to pre-2000 levels in anticipation of modest loan growth in 2002. The
FTE yield on loans was 7.70% in 2002 compared to 8.80% the prior year, while the
FTE yield on investments was 6.08% and 6.68% for the same periods, respectively.
Declining yields on both loans and investment securities are a result of lower
market interest rates.
Peoples' average interest-bearing liabilities increased $96.9 million (or 10%)
to $1.04 billion for the year ended December 31, 2002, from $946.9 million a
year ago. Traditional deposits comprise the majority of Peoples'
interest-bearing liabilities, averaging $789.6 million in 2002 compared to
$723.6 million in 2001, an increase of $66.0 million (or 9%) due in large part
to deposits acquired as part of acquisitions. Cost of funds from
interest-bearing deposits was 2.81% in 2002, down from 4.43% in 2001. The lower
rates paid on interest-bearing deposit accounts were a result of market rates
remaining at low levels; however, management competitively priced Peoples'
longer-term certificates of deposit as part of a strategy to shift to
longer-term funding, which tempered the overall drop in average deposit costs.
While traditional deposits remain the primary source of funds, Peoples routinely
utilizes a variety of borrowings as complementary funding sources. Total
borrowed funds averaged $254.2 million for the year ended December 31, 2002, up
$30.9 million (or 14%) from $223.3 million a year ago. While additional advances
from the Federal Home Loan Bank ("FHLB") comprise the majority of this increase,
a portion of this increase is also attributable to Peoples obtaining a $17
million loan from an unrelated financial institution to initially fund the First
Colony acquisition. The interest cost of Peoples' borrowed funds was 4.25% in
2002, down from 4.88% last year.
Peoples' main sources of borrowed funds are short- and long-term advances from
the FHLB. Short-term FHLB advances are primarily variable rate, LIBOR based
advances that are used to balance Peoples' daily liquidity needs and may be
repaid at any time without a penalty. The long-term FHLB advances consist
largely of 10-year borrowings requiring monthly interest payments and principal
is due at maturity. The rate on these advances are fixed for initial periods
ranging from two to four years, depending on the specific advance. After the
initial fixed rate period, the FHLB has the option to convert each advance to a
LIBOR based, variable rate advance; however, Peoples may repay the advance,
without a penalty, if the FHLB exercises its option.
In 2002, Peoples' short-term FHLB borrowings averaged $12.6 million compared to
$33.2 million a year ago and the average cost was 1.82% and 5.00% for the same
periods, respectively. Average long-term FHLB borrowings were up $48.4 million
(or 32%) compared to 2001, totaling $198.3 million for the year ended December
31, 2002, while the average cost dropped to 4.83% from 5.04%. The increase in
long-term FHLB advances was due to management's efforts to secure longer-term
funding during this period of low rates. A portion of the new long-term FHLB
advances are fixed rate advances that require monthly principal and interest
payments and may not be repaid prior to maturity without a penalty. Management
intends to continue using a variety of FHLB borrowings to fund asset growth and
manage interest rate sensitivity, as deemed appropriate.
Peoples offers cash management services to its business customers, which also
provide short-term funding in the form of overnight repurchase agreements. In
2002, overnight repurchase agreements (excluding balances of wholesale market
term repurchase agreements) averaged $23.8 million, down from $25.6 million last
year. The average rate paid on overnight repurchase agreements was 1.32% in 2002
compared to 3.56% in the prior year, a result of reductions in the market index
tied to the pricing of these accounts.
Peoples also periodically accesses national market repurchase agreements to
diversify short-term funding sources. In 2002, wholesale market term repurchase
agreements averaged $8.4 million at a rate of 3.65%, down from $12.6 million and
average rate of 5.28% in 2001. Peoples reduced the amount of wholesale
repurchase agreements outstanding due to the availability and attractiveness of
other funding sources. Management may access such funding at other times in the
future, as deemed appropriate.
In late 2002, management initiated an asset growth strategy to offset the
dilutive impact of the Common Stock Offering, thereby leveraging Peoples'
increased capital levels ("Leverage Strategy"). This Leverage Strategy caused
earning assets, particularly mortgage-backed investment securities, to increase
by approximately $260 million in January 2003 compared to year-end 2002. Peoples
funded the investment purchases using $187 million of wholesale market
repurchase agreements, $58 million of FHLB advances and $15 million from the
Common Stock Offering. In addition to the positive impact to net interest
income, the Leverage Strategy has enhanced Peoples' asset sensitivity. As the
new securities pay down through monthly principal and interest payments,
management would expect to reinvest the runoff over time into higher-earning
assets, such as loans.
Net interest income and margin improved as a result of the low interest rate
environment and Peoples' proactive management of funding costs, as well as a
modest increase in earning assets. These factors allowed management to reduce
Peoples' funding costs more than the decline in earning asset yields. At
December 31, 2002, Peoples' asset-liability simulations indicated that a
sustained increase in interest rates could cause net interest income to increase
modestly based on Peoples' interest rate risk position at that time. In 2003,
management expects net interest margin to compress as a result of the Leverage
Strategy in addition to Peoples' ongoing shift to longer-term funding and the
demand for lower rates on loans. Even though management continues to focus on
minimizing the impact of future rate changes on Peoples' earnings, Peoples' net
interest margin and income remain difficult to predict, and to manage, since
changes in market interest rates can have a greater impact than adjustments by
management.
PROVISION FOR LOAN LOSSES
In 2002, Peoples' provision for loan losses was $4,067,000 compared to
$2,659,000 in 2001. The majority of this increase was due to provisions related
to the first full year's impact of the Overdraft Privilege program, which
totaled $877,000 in 2002 compared to $34,000 in 2001. The remaining increases in
the provision were based upon management's ongoing evaluation of the adequacy of
the allowance for loan losses and factors affecting probable loan losses. When
expressed as a percentage of average loans, the provision has been 0.49%, 0.35%
and 0.33% in 2002, 2001 and 2000, respectively. Management believes the
provisions were appropriate for the overall quality, inherent risk and volume
concentrations of Peoples' loan portfolio.
GAINS AND/OR LOSSES ON SECURITIES TRANSACTIONS
Peoples recognized net gains on securities transactions of $216,000 in 2002
compared to $29,000 in 2001. The net gains on securities transactions were
primarily the result of normal portfolio activity; however, management's plan to
balance the overall yield, maturity and duration of the investment portfolio
contributed to the net gains in 2002.
GAINS ON SALE OF LOANS
Peoples recognized a gain on sale of loans of $157,000 in 2002 as a result of
selling a limited number of fixed rate real estate loans into the secondary
market. In prior periods, Peoples either has acted as an agent with a national
firm for long-term, fixed rate real estate loans or retained the loans and thus
did not recognize any gains. Management anticipates originating and selling
additional fixed rate mortgage loans into the secondary market in the future.
NON-INTEREST INCOME
Peoples generates non-interest income from five primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking and business owned life insurance ("BOLI"). In 2002,
non-interest income was $15,236,000 versus $10,650,000 a year ago, an increase
of $4,586,000 (or 43%). Higher levels of deposit account service charge income
was the primary driver of Peoples' enhanced non-interest income in 2002, while
non-recurring income of $877,000 relating to a demutualization positively
impacted non-interest income in 2001.
In December 2001, Peoples introduced Overdraft Privilege, which has
significantly impacted non-interest revenues in 2002. Overdraft Privilege is a
service that provides qualified clients with virtually automatic protection by
establishing an Overdraft Privilege amount. After a 30-day waiting period to
verify deposit ability, each new checking account receives an Overdraft
Privilege amount of either $400 or $700, based on the type of account and other
parameters. Once established, clients are permitted to overdraw their accounts,
up to their Overdraft Privilege limit, with each item being charged Peoples'
regular overdraft fee. Clients then pay back the overdraft privilege with their
next deposit. While Overdraft Privilege has boosted revenues, Peoples records a
provision for losses from checking accounts with overdrafts deemed
uncollectible, partially reducing the overall benefit. The provision and any
chargeoffs are included in Peoples' allowance for loan losses. Management
believes this simple, efficient process allows Peoples to fill the void between
traditional overdraft protection, such as a line of credit, and "check cashing
stores".
Concurrent with the introduction of Overdraft Privilege, Peoples made several
changes to the assessment of cost recovery fees on its deposit accounts, which
further enhanced non-interest revenues. Peoples changed the number of overdrafts
for which a fee is charged from 5 per day to an unlimited number, while also
automating the overdraft decision process to minimize the opportunity to pay
overdraft items without charging the fee. Another significant change was the
modification of Peoples' core operating system to begin charging for point of
sale ("POS") and ATM transactions that cause an overdraft, which previously were
paid without the client incurring a fee. While this change would have affected
only a limited number of transactions, Overdraft Privilege now allows those
transactions that would have previously been denied due to insufficient funds to
be processed, resulting in a higher volume of overdrafts from POS and ATM
transactions.
Service charges and other fees on deposit accounts, which are based on the
recovery of costs associated with services provided, remain Peoples' largest
source of non-interest revenues. In 2002, deposit account service charges
totaled $6,976,000, up $3,368,000 (or 93%) from $3,608,000 a year ago. This
increase is the result of higher volumes of overdraft and non-sufficient funds
fees attributable to Peoples' introduction of the Overdraft Privilege program,
as well as other changes to the assessment of these fees in late 2001. Overdraft
fees grew 222% in 2002 when compared to last year, while non-sufficient funds
fees increased 38%. In the fourth quarter of 2002, deposit account services
charges were virtually flat compared to the prior quarter and management does
not anticipate substantial growth in the deposit account service charges in
2003.
Peoples' electronic banking services are alternative delivery channels to
traditional sales offices for providing services to clients. These services
include ATM and debit cards, direct deposit services and Internet banking.
Electronic banking revenues totaled $1,729,000 in 2002, up $307,000 (or 22%)
from $1,422,000 in 2001. Throughout 2002, clients used Peoples' debit cards to
complete more of their payment transactions, reaching a volume of nearly $5
million in December and exceeding $43 million for the year. In addition, Peoples
issued over 18,500 new cards to clients in 2002, with 15% of these cards issued
in conjunction with acquisitions. Management continues to explore new e-banking
capabilities that complement existing delivery channels, both traditional and
non-traditional, as sources of revenue and to expand product and service
opportunities for Peoples' customers.
In 2002, insurance and investment commissions grew $462,000 (or 31%) to
$1,966,000, from $1,504,000 the prior year. While strong annuity sales in 2002
accounted for most of the increase, additional property and casualty insurance
commissions also contributed to the growth. The following table details Peoples'
insurance and investment commissions:
(Dollars in thousands) 2002 2001 2000
Fixed annuities $ 1,023 $ 438 $ 468
Property and casualty insurance 376 282 211
Brokerage 208 315 364
Life and health insurance 180 221 241
Credit life and A&H insurance 179 160 57
Reinsurance revenues - 88 199
- ----------------------------------------------------------------------------
Total $ 1,966 $ 1,504 $ 1,540
============================================================================
Peoples' fiduciary fees, which are based in part on the market value of assets
managed, totaled $2,479,000 in 2002 compared to $2,508,000 in 2001. In 2003,
management combined Peoples' trust, brokerage and life insurance groups to
create Peoples Financial Advisors to improve its ability to provide asset and
risk management products to Peoples' clients and prospects in a more integrated
and client-focused manner through newly formed service teams. As a result of
this initiative and management's ongoing focus, insurance and investment
commissions, as well as fiduciary revenues, should continue to be significant
contributors to future non-interest income growth.
Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. In 2002, BOLI income totaled $1,471,000 versus $481,000
last year, an increase of $990,000 (or 206%). The timing of Peoples' BOLI
purchase in mid-2001 accounted for the majority of the increase, while an
adjustment in the mix of investment funds in early 2002 provided additional
enhancement.
NON-INTEREST EXPENSE
Non-interest expense totaled $35,967,000 in 2002, up $2,555,000 (or 8%) from
$33,412,000 a year ago. This increase was due largely to Peoples incurring
additional operating expenses in 2002, primarily higher salaries and benefit
expenses and professional fees. However, Peoples' adoption of new accounting
rules positively impacted non-interest expense through the discontinuance of all
goodwill amortization and tempering the increase in operating expenses.
Salaries and benefits remain Peoples' largest non-interest expense, which is
inherent in a service-based industry such as financial services. In 2002,
salaries and benefits totaled $18,100,000 compared to $15,590,000 last year, an
increase of $2,510,000 (or 16%). This increase is largely attributable to the
addition of new associates and salary increases necessary to retain and recruit
key personnel. At December 31, 2002, Peoples had 462 full-time equivalent
associates, up from 403 at year-end 2001, with the First Colony acquisition
accounting for nearly half of this increase. The remaining increase was
attributable to the addition of associates in both sales and support positions
in response to Peoples expanded customer base. Salaries and benefits were also
impacted by additional incentive plan expenses of $459,000 in 2002 that
correspond with Peoples' improved earnings. Management will continue to leverage
Peoples' resources, while retaining and recruiting key associates, to
effectively optimize customer service and produce additional future revenue
streams.
Professional fees, which include fees for accounting, legal and other
professional services, were up $917,000 (or 92%) in 2002 compared to last year,
totaling $1,913,000 versus $996,000. Costs associated with Peoples'
implementation of "Free Checking" and Overdraft Privilege, which totaled
$506,000, comprised the majority of the increase, while various other strategic
initiatives accounted for the remaining increase.
Marketing expense totaled $1,006,000 in 2002, up $398,000 (or 65%) from $608,000
in 2001 as a result of various promotional campaigns throughout the year. In the
first half of 2002, Peoples aggressively advertised its new Free Checking and
Overdraft Privilege products and implemented a new marketing campaign designed
to enhance brand name awareness in Peoples' markets. In the second half of 2002,
Peoples promoted its enhanced Internet billpay capabilities. These initiatives
have helped Peoples attract many new clients, which improved top-line revenues.
Peoples experienced a modest increase in net occupancy and equipment expenses
due to investments in technology and recent acquisitions. In 2002, net occupancy
and equipment expenses totaled $3,915,000 compared to $3,695,000 a year ago, an
increase of $220,000 (or 6%). This continued investment in technology has
enhanced Peoples' ability to serve clients and satisfy client needs, while
acquisitions have allowed Peoples to expand its customer base.
In 2002, intangible amortization expense was down substantially from last year
in response to the adoption of new accounting standards, which permitted Peoples
to discontinue the amortization of all goodwill effective January 1, 2002. As a
result, Peoples had no goodwill amortization in 2002 compared to $1,846,000 in
2001. However, Peoples continued to amortize other intangible assets, primarily
core deposit intangibles, which totaled $646,000 in 2002, up $145,000 (or 29%)
as a result of acquisitions.
Peoples' trust preferred costs dropped 8% in 2002 to $2,420,000, from $2,621,000
as a result of Peoples' $7 million trust preferred purchase in the first quarter
of 2002. While the issuance of trust preferred securities through PEBO Capital
Trust II tempered the overall reduction in trust preferred costs, these variable
rate, LIBOR based securities should allow Peoples' trust preferred costs to
remain below its previously fixed rate of 8.62%, at least in the short-term.
Data processing and software costs were $1,208,000 in 2002 compared to
$1,107,000 a year ago. This increase is primarily due to software licensing
renewal fees incurred in the first half of 2002. In 2003, management anticipates
making investments in new systems, such as Customer Relationship Management and
profitability systems, which will result in higher data processing and software
costs compared to 2002.
Management uses the non-interest income leverage ratio as a measurement of
non-interest expense leverage. The ratio, defined as non-interest income as a
percentage of operating expenses, excludes gains and losses on securities
transaction and asset disposals, as well as intangible asset amortization. Due
to strong non-interest revenues coupled with controlled expense growth, the
non-interest leverage ratio improved to 42.7% in 2002 compared to 34.5% a year
ago. Peoples' sales associates will strive to generate new revenues and leverage
operating expenses through a needs-based selling approach in order to achieve
the long-term target non-interest income leverage ratio of 50%.
RETURN ON EQUITY
Peoples' return on equity ("ROE") was 17.69% in 2002 versus 13.60% in 2001. This
enhancement is largely attributable to Peoples' higher net income, while the
increased gain in the mark-to-market adjustment on the available-for-sale
investment portfolio negatively impacted ROE. Since ROE will continue to be
impacted by changing market conditions, management focuses on earnings per share
("EPS") as a more meaningful measurement of short-term performance.
RETURN ON ASSETS
Return on assets ("ROA") was 1.46% in 2002, up from 1.06% in 2001, with the
improvement in 2002 a result of Peoples' strong earnings. In recent years, the
primary focus of both the investment community and management has shifted to EPS
enhancement and ROE while reducing the emphasis on ROA as a key performance
indicator. However, management continues to monitor ROA and considers it a
measurement of Peoples' asset utilization.
INCOME TAX EXPENSE
Peoples' effective tax rate was reduced to 27.4% in 2002 compared to 30.4% in
2001. Peoples' adoption of SFAS 142 and SFAS 147 accounted for 42% of this
decrease, while Peoples' investment in tax-advantaged investments accounted for
41% of the decline. Peoples has continued to make several tax-advantaged
investments, including investments in low-income housing tax credit funds and
the purchase of BOLI. As a result, the amount of tax-advantaged investments
included in Other Assets averaged $28.2 million in 2002, nearly double last
year's average. Depending on economic and regulatory conditions, Peoples may
make additional investments in various tax credit pools and other tax-advantaged
assets over the next several years which could impact Peoples' effective tax
rate and overall tax burden.
OVERVIEW OF BALANCE SHEET
At December 31, 2002, total assets were $1.39 billion compared to $1.19 billion
at year-end 2001, an increase of $200.4 million (or 17%). Gross loans grew $78.0
million (or 10%) during 2002, to $850.9 million at December 31, 2002, with
approximately $67 million attributable to acquisitions. Peoples' planned growth
of the investment portfolio in 2002 resulted in total investment securities of
$412.1 million at December 31, 2002, up $81.7 million (or 25%) from year-end
2001.
Total liabilities were $1.22 billion at December 31, 2002 compared to $1.07
billion at year-end 2002, an increase of $147.0 million (or 14%). At December
31, 2002, deposits totaled $955.9 million versus $814.4 million at year-end,
with the majority of the increase attributable to acquisitions. Interest-bearing
balances grew $122.1 million (or 17%) while non-interest bearing deposits were
up $19.4 million (or 20%) since December 31, 2001. Borrowed funds increased $3.5
million (or 1%) at December 31, 2002, totaling $252.0 million, versus $248.5
million at year-end 2001.
Stockholders' equity totaled $147.2 million at December 31, 2002, versus $93.9
million at December 31, 2001, an increase of $53.3 million (or 57%). The Common
Stock Offering generated capital of $32.1 million, after offering expenses,
accounting for the majority of this increase. Peoples increased earnings, net of
dividends paid, was also a significant contributor to the higher level of equity
at year-end 2002.
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 December 31, 2002, cash and cash equivalents
totaled $55.6 million, up $22.8 million (or 70%) compared to $32.8 million at
December 31, 2001. The majority of this increase is attributable to a higher
level of Federal funds sold due to the timing of the Common Stock Offering in
late 2002, while the remaining increase was the result of additional items in
process of collection. At December 31, 2002, Peoples had Federal funds sold of
$20.5 million compared to $0.9 million at year-end 2001.
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, specifically
undrawn lines of credit, construction loans and letters of credit, as they come
due. Peoples will actively manage the principal runoff from the investment and
loan portfolios and 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 and maintaining adequate
liquidity. Further information regarding Peoples' liquidity can be found later
in this discussion under "Interest Rate Sensitivity and Liquidity."
INVESTMENT SECURITIES
At December 31, 2002, the amortized cost of Peoples' investment securities
totaled $402.0 million compared to $329.1 million at year-end 2001, while the
market value of the investment portfolio was $412.1 million at December 31,
2002, up from $330.4 million at December 31, 2001. In the first half of 2002,
management continued the planned growth of the investment portfolio in
anticipation of modest loan growth in 2002. In addition, Peoples also acquired
investment securities of approximately $6 million, primarily mortgage-backed
securities, in conjunction with the First Colony acquisition.
The difference in amortized cost and market value at December 31, 2002, resulted
in unrealized appreciation in the investment portfolio of $10.1 million and a
corresponding increase in Peoples' equity of $6.4 million, net of deferred
taxes. In comparison, the difference in amortized cost and market value at
December 31, 2001, resulted in unrealized appreciation of $1.3 million and an
increase in equity of $0.8 million, net of deferred taxes.
At December 31, 2002, Peoples' investment in US treasury securities and
obligations of US government agencies and corporations was down $37.6 million
(or 57%) versus year-end 2001, due primarily to the sale of a $31.0 million
callable security late in the first quarter of 2002. Management reinvested the
proceeds from this sale along with the principal runoff in the investment
portfolio throughout 2002 in mortgage-backed securities and obligations of
states and political subdivisions, which accounts for the increase in those
security types. In 2003, Peoples will grow its investment in mortgage-backed
securities investment securities by approximately $260 million as part of the
Leverage Strategy discussed in the "Interest Income and Expense" section of this
Discussion. Further information regarding Peoples investment securities can be
found in Note 3 to the Consolidated Financial Statements included in Item 8 of
this Form 10-K.
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 deposit pricing and
maturity guidelines, and manages Peoples' interest rate risk. Through active
management of the balance sheet and investment portfolio, Peoples seeks to
maintain sufficient liquidity to satisfy depositor demand, other company
liquidity requirements and various credit needs of its customers.
LOANS
Peoples Bank originates various types of loans, including commercial, financial
and agricultural loans ("commercial loans"), real estate loans (both commercial
and residential) and consumer loans, focusing primarily on lending opportunities
in central and southeastern Ohio, northwestern West Virginia, and northeastern
Kentucky markets. At December 31, 2002, gross loans totaled $850.9 million, an
increase of $78.0 million (or 10%) since year-end 2001. Peoples acquired loans
of approximately $67 million as part of acquisitions. In addition, Peoples has
experienced organic growth in commercial loans of $31 million. This commercial
loan growth was partially offset by declines in real estate and consumer loan
balances.
At December 31, 2002, commercial loan balances, including loans secured by
commercial real estate, were $392.5 million, up $48.7 million (or 14%) from
year-end 2001's balance of $343.8 million, with nearly $31 million of the
increase attributable to lending opportunities within Peoples' existing markets.
In addition to organic growth, Peoples acquired loans of approximately $11
million as part of acquisitions and approximately $7 million through the
purchase of multi-family real estate loans from an unrelated financial
institution in the first quarter of 2002. Commercial loans continue to represent
the largest portion of Peoples' total loan portfolio, comprising 46.1% of total
loans at December 31, 2002 and 44.5% at December 31, 2001. The portion of
commercial loan balances secured by commercial real estate, excluding
construction loans, was $289.6 million and $251.2 million at December 31, 2002
and 2001, respectively. Future commercial lending activities will be dependent
on economic and related conditions, such as general demand for loans in Peoples'
primary markets, interest rates offered by Peoples and normal underwriting
requirements. In addition to in-market opportunities, Peoples will continue to
selectively lend to creditworthy customers outside its primary markets.
Real estate loans, which include construction loans but exclude loans secured by
commercial real estate, totaled $348.2 million at December 31, 2002 compared to
$310.5 million at year-end 2001, an increase of $37.7 million (or 12%). In 2002,
Peoples acquired approximately $50 million of real estate loans through
acquisitions, which was partially offset by declines experienced in the
portfolio throughout the year. Real estate loans comprised 40.9% of Peoples'
total loan portfolio at December 31, 2002, versus 40.2% at the prior year-end.
Included in real estate loans are home equity credit line ("Equiline") balances
of $28.5 million at December 31, 2002, up 4% from $27.3 million at December 31,
2001. This increase was attributable to Peoples acquiring home equity loans of
approximately $4 million in the First Colony acquisition; however, Peoples
continues to experience intense competition for home equity loans, which has
affected Peoples' ability to maintain existing Equiline balances. 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.
Excluding credit card balances, consumer loans have decreased $8.3 million (or
7%) since year-end 2001, totaling $103.6 million at December 31, 2002. Consumer
loan balances have declined throughout 2002 as a result of both a decline in
demand and Peoples focusing on loan quality more than loan growth due to
economic conditions. This decline was partially offset by Peoples acquiring
consumer loans of approximately $5 million through the First Colony and Malta
acquisitions. The indirect lending area represents the majority of Peoples'
consumer loans, with balances of $56.2 million and $66.2 million at December 31,
2002 and 2001 respectively. The decline in indirect loan balances since year-end
2001 is due to automobile manufacturers offering attractive financing options to
car buyers through their captive credit affiliates, declining indirect sales
opportunities, and normal runoff of indirect loans.
Management is satisfied 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 delinquencies have increased in
the financial services industry, management's actions to reinforce Peoples'
pricing system and underwriting criteria in addition to proactive collection
efforts 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.
Peoples' credit card balances totaled $6.5 million at December 31, 2002, down
$0.2 million (or 2%) since December 31, 2001. While, management routinely
evaluates new opportunities to serve credit card customers and grow the credit
card balance, Peoples' credit cards are marketed as a complementary product
offering for client relationships.
LOAN CONCENTRATION
Peoples' largest concentration of commercial loans are credits to assisted
living facilities and nursing homes, which comprised 13.4% of Peoples'
outstanding commercial loans at December 31, 2002, versus 11.9% at year-end
2001. Loans to lodging and lodging related companies also represented a
significant portion of Peoples' commercial loans accounting for approximately
11.2% of Peoples' outstanding commercial loans at quarter-end, compared to 12.8%
at December 31, 2001.
These lending opportunities have arisen due to the growth of these industries in
markets served by Peoples or contiguous areas, as well as sales associates'
efforts to develop these relationships. Management believes Peoples' loans to
assisted living facilities and nursing homes, as well as loans to lodging and
lodging related companies, do not pose abnormal risk when compared to risk
assumed in other types of lending since these credits have been subjected to
Peoples' normal underwriting standards. In addition, a sizeable portion of the
loans to lodging and lodging related companies are spread over various
geographic areas, guaranteed by individuals with substantial net worth and/or
possess lower loan-to-collateral value ratios than other commercial loans.
ALLOWANCE FOR LOAN LOSSES
Peoples' allowance for loan losses totaled $13.1 million at December 31, 2002,
compared to $12.4 million at the prior year-end, with $0.3 million of the
increase attributable to the First Colony acquisition. As a percentage of total
loans, the allowance was 1.54% at December 31, 2002 compared to 1.60% at
December 31, 2001. The decrease in the allowance for loan losses as a percent of
total loans is a result of internal loan growth and acquiring $67 million of
loans through acquisitions. The acquired portfolio was primarily residential and
consumer loans with a lower credit risk profile and allowance coverage of 0.46%.
The remaining increase is due to the provision for loan losses, net of
chargeoffs and recoveries.
The allowance is allocated among the loan categories based upon the consistent,
quarterly procedural discipline described in the "Critical Accounting Policies"
section of this discussion. However, the entire allowance for loan losses is
available to absorb future loan losses in any loan category. The following
schedule details the allocation of the allowance for loan losses at December 31:
2002 2001 2000
------------------------------ ------------------------------ ------------------------------
(Dollars in thousands) Percent Percent Percent
Allocation of Loans Allocation of Loans Allocation of Loans
of in Each of in Each of in Each
Allowance Category Allowance Category Allowance Category
for Loan to Total for Loan to Total for Loan to Total
Losses Loans Losses Loans Losses Loans
Commercial $ 8,846 46.1 % $ 7,950 44.5 % $ 5,992 42.1 %
Real estate 1,617 40.9 1,602 40.2 1,112 41.2
Consumer 2,075 12.1 2,447 14.4 2,701 15.8
Overdrafts 206 0.1 - 0.1 - -
Credit card 342 0.8 358 0.8 432 0.9
General risk - - - - 693 -
- -----------------------------------------------------------------------------------------------------------------------
Total $ 13,086 100.0 % $ 12,357 100.0 % $ 10,930 100.0 %
=======================================================================================================================
The allowance allocated to commercial loans has increased in recent periods,
reflecting the higher credit risk associated with this type of lending and the
continued growth in this portfolio. In 2002 and 2001, the commercial loan
balance grew by 14.2% and 10.7%, respectively, over the prior year balance. The
allowance allocated to the real estate and consumer loan portfolios is based
upon Peoples' allowance methodology for homogeneous loans, and increases or
decreases in loan balances of those portfolios. In 2001, Peoples refined its
systematic methodology in the determination of the adequacy of the allowance for
loan losses to allocations of general credit risk to specific loans or
homogenous 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 2002, net loan chargeoffs were $3,642,000 compared to $2,199,000 in 2001.
While commercial and consumer loans continue to comprise the majority of net
chargeoffs, Overdraft Privilege accounted for nearly half of the total increase
from the prior year, totaling $705,000, or 19% of net chargeoffs, in 2002.
Commercial loans accounted for 52% of net chargeoffs in 2002 versus 42% a year
ago, while consumer loans (excluding Overdraft Privilege) comprised 18% and 41%,
for the same periods, respectively. In addition to Overdraft Privilege, net
chargeoffs in 2002 were also impacted by Peoples charging down a group of
troubled commercial loans, to amounts deemed collectible, in the first half of
2002. These loans were part of a single relationship with a client in the
business of leasing equipment primarily to health care professionals and
accounted for $1.0 million of commercial chargeoffs in 2002. Management does not
anticipate any future loss from this relationship.
Asset quality remains a key focus, as management continues to stress quality
rather than growth in response to the current economic conditions. At December
31, 2002, Peoples' nonperforming assets (which include loans 90 days or more
past due, nonaccrual loans, renegotiated loans, and other real estate owned)
totaled $7,611,000, or 0.55% of total assets, up from $5.7 million, or 0.48% of
total assets, at December 31, 2001. Peoples' allowance for loan losses totaled
175% of nonperforming loans at December 31, 2002, versus 225% at December 31,
2001. Management continues to review the entire loan portfolio as part of the
risk management process and will deal aggressively with problem loans as they
are identified to minimize the amount of any future loss. Although nonperforming
assets have increased, total loan delinquencies have declined 6% since year-end
2001, largely attributable to fewer loans that were 30-59 days past due.
A loan is considered impaired when, based on current information and events, it
is probable that Peoples will be unable to collect the scheduled payments of
principal or interest according to the contractual terms of the loan agreement.
The measurement of potential impaired loan losses is generally based on the
present value of expected future cash flows discounted at the loan's 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.
At December 31, 2002, the recorded investment in loans that were considered to
be impaired was $9.6 million, of which $6.8 million were accruing interest, and
$2.8 million were nonaccrual loans. Included in this amount were $1.7 million of
impaired loans for which the related allowance for loan losses was $493,000. The
remaining impaired loan balances do not have a related allocation of the
allowance for loan losses because the loans have been previously written-down,
are well secured, or possess characteristics indicative of the ability to repay
the loan. In 2002, Peoples' average recorded investment in impaired loans was
approximately $8.7 million and interest income of $490,000 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 funding needs, including
but not limited to deposits, short-term borrowings, and long-term borrowings.
Deposits, both interest-bearing and non-interest bearing, continue to be the
most significant source of funds for Peoples, totaling $955.9 million, or 79.1%
of total funding sources, at December 31, 2002.
Non-interest bearing deposits serve as a core funding source. At December 31,
2002, non-interest bearing deposit balances totaled $115.9 million, up $19.4
million (or 20%) compared to the prior year-end. Peoples acquired non-interest
bearing deposit balances of approximately $11 million through acquisitions in
2002. In addition, Peoples implemented two programs in the first quarter of 2002
aimed at attracting new clients and core deposits, as well as producing
additional revenue opportunities: Overdraft Privilege and Free Checking. These
programs have had a positive impact by generating many new non-interest bearing
accounts. 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 $840.0 million at December 31, 2002, an
increase of $122.2 million (or 17%) compared to $717.8 million at December 31,
2001, with acquisitions accounting for about $93 million of the growth. Savings
balances increased $64.0 million (or 80%) since year-end 2001. Peoples
introduced a new savings product for its public funds customers (states and
political subdivisions), which comprised $40.0 million of savings balances at
year-end 2002 and 63% of the growth during the year. Certificates of deposit
remain Peoples' largest group of interest-bearing deposits, totaling $422.7
million at December 31, 2002, up $62.0 million (or 17%) since the prior
year-end, with acquisitions accounting for nearly 90% of the increase.
Interest-bearing transaction accounts (primarily Peoples' money market deposit
accounts), are also a significant portion of Peoples' interest-bearing deposits,
totaling $273.7 million at December 31, 2002, compared to $277.5 million at
year-end 2001.
Peoples also accesses other funding sources, including short-term and long-term
borrowings, to fund asset growth and satisfy liquidity needs. Peoples'
short-term borrowings include repurchase agreements, a short-term loan from an
unrelated financial institution and FHLB advances, 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
10-year 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 rate product. In addition to these convertible rate advances,
recent long-term FHLB advances have included fixed rate, amortizing advances,
which helps Peoples manage its interest rate sensitivity.
At December 31, 2002, long-term borrowings totaled $203.8 million, up $11.4
million (or 6%) from $192.4 million at December 31, 2001. This increase is the
result of Peoples' emphasis on securing longer-term funding to "lock in" costs
during this period of low interest rates. Peoples' short-term borrowings totaled
$48.2 million, down $7.9 million (or 14%) compared to year-end 2001. Peoples
obtained a $17 million short-term loan from an unrelated financial institution
to provide initial funding for the First Colony acquisition, which partially
offset the reduction in short-term FHLB borrowings. Management is evaluating
various long-term funding alternatives in anticipation of converting this
short-term loan to longer term financing during the first half of 2003.
CAPITAL/STOCKHOLDERS' EQUITY
At December 31, 2002, stockholders' equity was $147.2 million, an increase of
$53.3 million (or 57%) since December 31, 2001, primarily the result of Peoples'
common stock issuance. In late December 2002, Peoples issued 1,440,000 common
shares generating capital of $32.1 million after offering expenses. In addition
to this new capital, Peoples earnings in 2002, net of dividends paid, accounted
for $14.1 million of the increase.
In 2002, Peoples paid dividends of $4.7 million, representing a dividend payout
ratio of 24.9% of earnings, compared to a ratio of 33.1% a year ago. While
management anticipates Peoples continuing its 37-year history of consistent
dividend growth in future periods, Peoples Bancorp's ability to pay dividends on
its common shares largely depends on receipt of dividends from Peoples Bank. In
addition, other restrictions and limitations may prohibit Peoples from paying
dividends even when sufficient cash is available. Further discussion regarding
restrictions on Peoples' ability to pay future dividends can be found in Note 13
of the Notes to the Consolidated Financial Statements included in Item 8 of this
Form 10-K, as well as the "Limits on Dividends" section under Item 1 of this
Form 10-K.
The adjustment for the net unrealized holding gains on available-for-sale
securities, net of deferred income taxes, also increased equity. At December 31,
2002, net unrealized holding gains totaled $6.4 million versus $0.8 million at
December 31, 2001, a change of $5.6 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 than if the investment portfolio was classified as
held-to-maturity.
At December 31, 2002, Peoples had treasury stock totaling $1.1 million compared
to $3.4 million at year-end 2001, a decrease of $2.3 million (or 68%). In 2002,
Peoples reissued approximately 86,250 treasury shares through various stock
option plans and Peoples' deferred compensation plan. Peoples also repurchased
10,532 common shares at an average price of $23.17 per share. At this time,
management does not anticipate any treasury stock purchases in 2003 other than
purchases relating to Peoples' deferred compensation plan, which accounted for
54% of the common shares repurchased in 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, 2002. Further information regarding 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.
INTEREST RATE SENSITIVITY AND LIQUIDITY
The objective of the asset/liability management function is to guide management
in the acquisition of earning assets, while securing the most appropriate
funding, with the goal being to optimize net interest income within the
constraints of prudent capital adequacy, liquidity, and safety. This objective
requires Peoples to manage the balance sheet mix of assets and liabilities with
a focus on interest rate risk exposure and adequate liquidity. External factors,
such as changes in economic conditions, current and future interest rate levels
and customer preferences must also be considered.
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 has charged the ALCO with the overall management
of Peoples' balance sheet and off-balance sheet hedging transactions related to
the management of IRR. It is the ALCO's responsibility to keep Peoples focused
on the future by evaluating trends and potential future events, researching
alternatives, then recommending and authorizing an appropriate course of action.
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
simulations to project future net interest income, to monitor the sensitivity of
the net present market value of equity and difference, or "gap", between
maturing or rate-sensitive assets and liabilities over various time periods.
Peoples also uses these methods to monitor IRR for both the short- and
long-term. 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 to net income and net market value, the ALCO is better able to evaluate
interest rate risks and their potential impact to earnings and market value of
equity.
The modeling process starts with a base case simulation using 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
produced from the simulation data, showing the earnings variance from the flat
rate forecast, illustrate the risks associated with the current balance sheet
structure. Additional simulations, when deemed appropriate, are prepared using
different interest rate scenarios than those used with the base case simulation
and/or possible changes in balance sheet structure. The additional simulations
are used to better evaluate risks and highlight opportunities inherent in the
modeled balance sheet. Comparisons showing the earnings and equity value
variance from the base case are provided to the ALCO for review and discussion.
The results from these model simulations are evaluated for indications of
effectiveness of current IRR management strategies.
As part of the evaluation of IRR, the ALCO has established limits on changes in
net interest income and the net value of the balance sheet have been
established. The ALCO limits the decrease in net interest income of Peoples Bank
to 10% or less from base case for each 100 basis point shift in interest rates
measured over a twelve-month period assuming a static balance sheet. The ALCO
limits the negative impact on net equity value to 40% or less given an immediate
and sustained 200 basis points shift in interest rates also assuming a static
balance sheet. The ALCO also reviews static gap measures for specific time
periods focusing on one-year cumulative gap. At December 31, 2002, Peoples'
one-year cumulative gap amount was positive 4.8% of earning assets, which
represented $60.8 million more in assets than liabilities that may reprice
during that period. 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. Results that are greater than any of these limits will prompt a
discussion by ALCO of appropriate actions, if any, that should be taken.
The following table is provided to illustrate the estimated earnings at risk and
value at risk positions of Peoples, on a pre-tax basis, at December 31, 2002
(dollars in thousands):
Immediate Estimated Estimated
Interest Rate
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- --------------------------- ----------------------------- --------------------------------
300 $ (101) (0.2) % $ (62,630) (30.0)%
200 292 0.6 (37,944) (18.2)
100 593 1.2 (14,115) (6.8)
(100) $ (154) (0.3) % $ 6,582 3.1 %
The interest rate risk analysis shows that Peoples is asset sensitive, which
means that increasing interest rates should favorably impact Peoples' net
interest income while downward moving interest rates should negatively impact
net interest income. Peoples' became asset sensitive during the fourth quar` ter
of 2002 due to an increase in rate sensitive assets attributable to investment
portfolio activity as well as continued efforts to secure longer-term funding in
the current low interest rate environment. As part of this process, management
has priced Peoples' 3 and 5-year certificates of deposit to make them more
attractive to clients than shorter-term certificates. Many clients have shifted,
and continue to shift, funds to the longer-term certificates as their existing
deposits mature. The interest rate analysis also shows Peoples is within the
established IRR policy limits for all simulations and all scenarios for the
current period.
The ALCO implemented a hedge position to help protect Peoples' net interest
income streams in the event of rising rates which will complement the current
slightly asset sensitive position. In early October, the ALCO hedged a $17
million long-term, fixed-rate borrowing from the FHLB that may convert to a
variable rate, at the FHLB's discretion. In addition, the ALCO may consider
additional hedging options for Peoples' variable rate liabilities, including,
but not limited to, the purchase of other interest rate hedge positions, as
available and appropriate, that would provide net interest income protection in
a rising rate environment.
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,
both total wholesale funding and reliance on brokered deposits.
Typically, 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 2002, cash provided by financing activities totaled $63.6 million, due
largely to increases in deposit balances of $37.7 million and proceeds from
issuance of common shares of $33.2 million. Cash used in investing activity
totaled $66.1 million, due to investment securities purchases, net of maturities
and sales, of $66.8 million and a net increase in loan balances totaling $15.1
million, which was partially offset by net cash of $18.6 million received from
acquisitions.
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 better enable Peoples to match funding dates and
pricing characteristics with contractual maturity dates and pricing parameters
of earning assets. At December 31, 2002, Peoples had available borrowing
capacity of approximately $137 million through these external sources and
unpledged securities in the investment portfolio of approximately $269 million
that can be utilized as an additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting volatile
funds from liquid assets. Peoples' volatile funds consist primarily of
short-term growth in deposits, while liquid assets includes short-term
investments and unpledged available-for-sale securities. At December 31, 2002,
Peoples' net liquidity position was $189.7 million, or 13.6% of total assets,
compared to $177.2 million, or 14.9% of total assets, at December 31, 2001. This
decrease in liquidity position as a percent of total assets was attributed to an
$82.6 million increase in volatile funds and Peoples' $17 million loan to
provide the initial financing for the First Colony acquisition. This increase in
volatile funds partially offset an increase in liquid assets from investment
security purchases. The liquidity position as of December 31, 2002, was within
Peoples' policy limit of negative 10% of total assets. At December 31, 2002,
total wholesale funding comprised 15.8% of total assets and brokered funds were
0.7% of total assets, which was within Peoples' policy limits of 30% and 10%,
respectively.
OFF-BALANCE SHEET ACTIVITIES AND CONTRACTUAL OBLIGATIONS
Peoples routinely engages in activities that involve, to varying degrees,
elements of risk that are not reflected in whole or in part in the consolidated
financial statements. These activities are part of Peoples normal course of
business and include traditional off-balance sheet credit-related financial
instruments, interest rate contracts, operating leases, long-term debt and
commitments to make additional capital contributions in low-income housing
project investments.
Traditional off-balance sheet credit-related financial instruments are primarily
commitments to extend credit, and standby letters of credit. These activities
could require Peoples' to make cash payments to third parties in the event
certain specified future events occur. The contractual amounts represent the
extent of Peoples' exposure in these off-balance sheet activities. However,
since certain off-balance sheet commitments, particularly standby letters of
credit, are expected to expire or be only partially used, the total amount of
commitments does not necessarily represent future cash requirements. Management
believes these activities are necessary to meet the financing needs of customers
and/or manage Peoples' exposure to fluctuations in interest rates.
Peoples also enters into interest rate contracts under which Peoples is required
to either receive cash from or pay cash to counter parties depending on changes
in interest rates. Interest rate contracts are carried at fair value on the
consolidated balance sheet, with the fair value representing the net present
value of expected future cash receipts or payments based on market interest
rates as of the balance sheet date. As a result, the amounts recorded on the
balance sheet at December 31, 2002, do not represent the amounts that may
ultimately be paid or received under these contracts. For further discussion
regarding financial instruments with off-balance sheet risk, see Note 11 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Management does not anticipate Peoples' current off-balance sheet activities
will have a material impact on future results of operation and financial
condition.
Peoples continues to lease certain banking facilities and equipment under
noncancelable operating leases with terms providing for fixed monthly payments
over periods ranging from two to fifteen years. The majority of Peoples' leased
banking facilities are inside retail shopping centers and, as a result, are not
available for purchase. Management believes these leased facilities increase
Peoples' visibility within its markets and affords sales associates additional
access to current and potential clients. For further information regarding
Peoples' future obligations under existing operating leases, see Note 5 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
EFFECTS OF INFLATION ON FINANCIAL STATEMENTS
Substantially all of Peoples' assets relate to banking and are monetary in
nature. As a result, inflation does not impact Peoples to the same degree as
companies in capital-intensive industries in a replacement cost environment.
During a period of rising prices, a net monetary asset position results in a
loss in purchasing power and conversely a net monetary liability position
results in an increase in purchasing power. The opposite would be true during a
period of decreasing prices. In the banking industry, typically monetary assets
exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation
has had little impact on Peoples' net assets.
FUTURE OUTLOOK
In 2002, Peoples' results reflect success in several key performance areas, as
earnings per share and return on equity reached record levels. Ultimately,
future success in the financial service industry revolves around three issues:
growth and quality of earnings, asset quality, and a strong capital base. Top
line revenues are strong and Peoples' sales management teams are focused on
integrated financial service offerings to clients through a needs-based sales
approach. Asset quality remains a key focus for management, as Peoples works to
improve performance ratios to the levels of high performing financial services
companies. Peoples' capital ratios, particularly tangible capital, reached new
highs, due in part to the Common Stock Offering, and remain strongly positioned
above well-capitalized minimums, providing a solid foundation to withstand the
impact of adverse economic conditions, as well as providing opportunities for
strategic growth.
Peoples has made sizeable investments in technology and personnel in recent
periods. These investments are part of Peoples' strategy to provide clients with
speedy, technologically superior services that make it easier for them to
complete their transaction and conduct business with Peoples. In 2003,
management expects Peoples to invest additional resources in new technologies,
such as Customer Relationship Management and profitability systems, as well as
explore possible new e-service capabilities. While these investments could
increase operating expenses, management believes they will help strengthen
client relationships, increase Peoples' long-term stakeholder value and enhance
future revenue growth opportunities.
Peoples' business strategy also incorporates a focus on retail products and
services, including increasing core deposits and real estate lending. As a
result, one of management's strategic goals in 2003 is to improve Peoples'
retail loan efforts. In the first quarter of 2003, management plans to
reorganize Peoples' real estate loan delivery methods by creating new "Loan
Originator" positions. These Loan Originators will be specifically responsible
for originating real estate loans and home equity loans and will be located
throughout Peoples' primary market area. Management intends to fill these
positions either with existing associates or new hires. This shift to
"specialists" will help Peoples' associates become more focused on the nuances
of real estate loans and allow Peoples to better penetrate its markets. Personal
Bankers will continue to serve the deposit and personal loan needs of customers
and make loan referrals to the Loan Originators.
Another strategic goal is to increase core deposits, specifically non-interest
bearing demand deposits, to a larger percentage of total funding sources. In
2003, management will strive to grow demand deposits to 13% of total customer
funding sources (from year-end 2002's 11%) and ultimately to 15% of total
customer funding sources by year-end 2004. Management believes the combination
of a growing branch network and extended hours in some offices will allow
Peoples to successfully compete for core deposits, plus technology, such as
Internet banking and free online billpay. In the end, if Peoples is successful
in penetrating its customer base through a deposit account and a real estate
loan, sales associates can work to extend the relationship to Peoples' other
products and services, such as investments and insurance.
In 2002, Peoples was successful in growing non-interest revenues, primarily
deposit account service charges, due in part to the development and
implementation of the Overdraft Privilege program. However, Peoples is obligated
to pay professional fees to the consultant who developed the process based on
revenue parameters, with that amount totaling just over $500,000 in 2002.
Additional net revenues from Overdraft Privilege (i.e. after provision for bad
debt) have more than offset the professional expenses associated with the new
product. Beginning in March 2003, the percentage of revenues paid to the
consultant will decrease. Therefore, management does not expect these
professional fees to increase significantly in 2003. In addition, the contract
expires in February 2004, which should further enhance revenue streams going
forward assuming Peoples maintains and/or grows total retail core deposits and
volumes remain stable.
As part of the Kentucky Bancshares acquisition and the transition of the five
full-service offices of Kentucky Bank & Trust to Peoples Bank offices, Peoples
has decided to close the current Russell, Kentucky office of Peoples Bank
concurrently with the targeted completion date for the Kentucky Bancshares
acquisition of May 9, 2003. Management believes Kentucky Bank & Trust's Russell
office gives Peoples' current and future customers the best location in Russell
to do their banking. The cost savings are part of the overall integration plan
for the Kentucky Bancshares acquisition. After the acquisition, Peoples will
have 8 offices in the three county area of Greenup, Boyd and Carter Counties in
northeastern Kentucky. Peoples will rank second in the three county market with
8 full-service locations, and third in the market with over $140 million of
total deposits.
Mergers and acquisitions, such as the Kentucky Bancshares acquisition, have been
an integral part of Peoples' efforts to expand its operations and scope of
client services even while management continues to build client relationships
and implements new products and services to enhance Peoples' earnings potential.
Peoples' enhanced regulatory capital ratios as a result of the Common Stock
Offering afford management additional growth opportunities through mergers and
acquisitions. As a result of increased tangible equity to total assets,
management believes Peoples is positioned to continue its disciplined
acquisition strategy of the past decade. As a result, management plans to
dedicate more resources to develop and realize acquisition opportunities in and
around Peoples' markets. However, the evaluation of future acquisitions will
focus more on opportunities that complement Peoples' core competencies and
strategic intent rather than geographic location or proximity to current
markets.
Peoples remains a service-oriented company with a sales focus that aims to
satisfy clients through a relationship sales process. Through this process,
sales associates work to anticipate, uncover, and solve their clients' every
financial need, from insurance to banking to investments. Management will
continue to be stakeholder-focused with four key long-term objectives:
double-digit EPS growth, ROE improvement, consistent dividend growth, and
revenue diversification.
FORWARD-LOOKING STATEMENTS
The statements in this Form 10-K which are not historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. Although
management believes Peoples' plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, Peoples cannot
give any assurance that those plans, intentions or expectations will be
achieved. The forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, the effect of changes in interest
rates, the effect of federal and state banking and tax regulations, the effect
of technological changes, the effect of economic conditions, the effect of
competitive products and pricing, and other risks detailed in Peoples'
Securities and Exchange Commission filings. All forward-looking statements are
expressly qualified in their entirety by the cautionary statements. Although
management believes the expectations in these forward-looking statements are
based on reasonable assumptions within the bounds of management's knowledge of
Peoples' business and operations, it is possible that actual results may differ
materially from these projections.
COMPARISON OF 2001 TO 2000
Peoples reported net income of $12.3 million in 2001, up 11% from $11.1 million
in 2000. Diluted earnings per share were $1.54 for the year ended December 31,
2001, compared to $1.39 in 2000. In 2001, Peoples' improved earnings resulted
from net interest income growth of $2.8 million, as well as increased
non-interest revenues of $1.7 million. Return on average assets was 1.06% in
2001, compared to 1.02% in 2000, while return on stockholders' equity was 13.60%
and 14.92%, for the same periods respectively. Peoples' return on equity was
negatively impacted by the mark-to-market adjustment on available-for-sale
securities, which resulted in an increase in equity.
Net interest income totaled $43.1 million in 2001, up 7% compared to the prior
year, as total interest income grew 1% to $86.1 million and interest expense
declined 4% to $43.0 million. Net interest margin was 4.11% in 2001 versus 4.08%
in 2000. Peoples' improved net interest margin in 2001 resulted from lower costs
of funds in response to rate reductions by the Federal Reserve Open Market
Committee. The yield on earning assets dropped to 8.10% for the year ended
December 31, 2001, compared to 8.50% for the prior year, while the cost of
interest-bearing liabilities decreased 43 basis points to 4.54% during the same
period.
Peoples' provision for loan losses totaled $2.7 million in 2001, up 17% from
2000's expense of $2.3 million. The combination of increased loan volume, less
favorable loss experience, and a general economic slowdown resulted in the
increased provision in 2001. At December 31, 2001, Peoples' allowance for loan
losses as a percentage of total loans was 1.60%, compared to a year-end 2000
ratio of 1.48%.
Non-interest income totaled $10,650,000 in 2001, an increase of 20% compared to
2000. In 2001, deposit account service charge income increased $365,000 to
$3,608,000, from $3,243,000 in 2000, due to higher volumes of overdraft and
non-sufficient fund fees. Income from fiduciary activities totaled $2,508,000,
down 4% compared to the prior year. Electronic banking income grew 17% in 2001,
from $1,220,000 in 2000. Electronic banking income increased primarily due to
growth in the number of debit card users and the associated volume increases in
debit card usage. Insurance and investment commissions were $1,504,000 in 2001
versus $1.540,000 in 2000. BOLI income totaled $0.5 million in 2001 compared to
no income in 2000 due to the timing of the purchase in mid-2001.
For the year ended December 31, 2001, non-interest expense totaled $33.4
million, up $2.4 million compared to 2000. Increased salaries and benefits
accounted for the majority of the expense growth in 2001, totaling $15.6 million
versus $13.5 million the prior year. Peoples also experienced slight increases
in amortization of intangible assets, as well as data processing and software
costs. Peoples' other non-interest expenses were near prior period levels.
Total assets reached $1.19 billion at December 31, 2001, versus $1.14 billion at
year-end 2000. Gross loans remain the largest component of Peoples' earning
assets, totaling $772.9 million at year-end 2001, up $35.9 million from December
31, 2000, with growth occurring in the commercial and real estate loan
portfolios. Average loans totaled 92.9% of average deposits in 2001, compared to
94.4% in 2000. Peoples' other significant earning asset component is the
investment securities portfolio, which totaled $330.4 million at year-end 2001,
virtually unchanged from the prior year-end.
Liabilities totaled $1.07 billion at year-end 2001 compared to $1.02 billion a
year ago, an increase of $47.4 million. Deposits remain Peoples' largest source
of funds and the largest component of total liabilities. During 2001, deposits
grew $56.7 million from $757.6 million at December 31, 2000, as interest-bearing
balances were up $45.2 million to $717.8 million and non-interest bearing
deposits increased $11.6 million to $96.5 million. 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. The higher level of
equity in 2001 is due in part to increased earnings, net of dividends paid. The
remaining increase in equity was a result of a positive change in market value
of Peoples' available-for-sale investment securities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ------------------------------------------------------------------------
Please refer to the section captioned "Interest Rate Sensitivity and Liquidity"
on pages 30 through 32 under 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 Form
10-K.
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 2002 2001
Cash and cash equivalents:
Cash and due from banks $ 34,034 $ 31,642
Interest-bearing deposits in other banks 1,016 346
$
Federal funds sold 20,500 850
- ------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 55,550 32,838
- ------------------------------------------------------------------------------------------------------------------------------
Available-for-sale investment securities, at estimated fair value (amortized
cost of $402,048 in 2002 and $329,081 in 2001) 412,100 330,364
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees and costs 850,891 772,856
Allowance for loan losses (13,086) (12,357)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans 837,805 760,499
- ------------------------------------------------------------------------------------------------------------------------------
Bank premises and equipment, net 18,058 16,369
Goodwill 25,504 15,388
Other intangible assets 5,234 1,622
Other assets 40,110 36,886
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,394,361 $ 1,193,966
==============================================================================================================================
Liabilities
Deposits:
Non-interest bearing $ 115,907 $ 96,533
Interest bearing 839,970 717,835
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 955,877 814,368
- ------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 31,183 23,752
Federal Home Loan Bank advances - 32,300
Other short-term borrowings 17,000 -
- ------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 48,183 56,052
- ------------------------------------------------------------------------------------------------------------------------------
Long-term borrowings 203,829 192,448
Accrued expenses and other liabilities 10,199 8,188
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,218,088 1,071,056
- ------------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in junior subordinated
debentures ("Trust Preferred Securities") 29,090 29,056
Stockholders' Equity
Common stock, no par value, 12,000,000 shares authorized, 9,421,222 shares
issued in 2002 and 7,289,266 shares issued in 2001,
including shares in treasury 129,173 78,664
Accumulated comprehensive income, net of deferred income taxes 6,446 834
Retained earnings 12,650 17,735
- ------------------------------------------------------------------------------------------------------------------------------
148,269 97,233
Treasury stock, at cost, 59,351 shares in 2002 and 178,344 shares in 2001 (1,086) (3,379)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 147,183 93,854
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities, beneficial interests and stockholders' equity $ 1,394,361 $ 1,193,966
==============================================================================================================================
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,
2002 2001 2000
Interest Income:
Interest and fees on loans $ 62,423 $ 65,126 $ 63,352
Interest on obligations of U.S. government and its agencies 14,044 14,973 16,405
Interest on obligations of state and political subdivisions 2,908 1,901 1,798
Other interest income 3,593 4,107 3,574
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 82,968 86,107 85,129
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 22,157 32,081 31,259
Interest on short-term borrowings 1,181 3,242 6,162
Interest on long-term borrowings 9,632 7,651 7,418
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 32,970 42,974 44,839
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 49,998 43,133 40,290
Provision for loan losses 4,067 2,659 2,322
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 45,931 40,474 37,968
- ------------------------------------------------------------------------------------------------------------------------------
Other Income:
Service charges on deposit accounts 6,976 3,608 3,243
Income from fiduciary activities 2,479 2,508 2,608
Investment and insurance commissions 1,966 1,504 1,540
Electronic banking income 1,729 1,422 1,220
Business owned life insurance 1,471 481 -
Gain on securities transactions 216 29 10
Other 399 1,098 289
- ------------------------------------------------------------------------------------------------------------------------------
Total other income 15,236 10,650 8,910
- ------------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Salaries and employee benefits 18,100 15,590 13,503
Net occupancy and equipment 3,915 3,695 3,900
Trust Preferred Securities expense 2,420 2,621 2,623
Professional fees 1,913 996 1,108
Data processing and software 1,208 1,107 1,033
Marketing 1,006 608 732
Amortization of other intangible assets 646 501 558
Amortization of goodwill - 1,846 1,726
Other 6,759 6,448 5,861
- ------------------------------------------------------------------------------------------------------------------------------
Total other expenses 35,967 33,412 31,044
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 25,200 17,712 15,834
- ------------------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 5,969 5,246 4,886
Deferred 889 131 (178)
- ------------------------------------------------------------------------------------------------------------------------------
Total income taxes 6,858 5,377 4,708
- ------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary gain 18,342 12,335 11,126
Extraordinary gain on early debt extinguishment, net of
tax expense of $221 410 - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 18,752 $ 12,335 $ 11,126
==============================================================================================================================
Basic earnings per share:
Income before extraordinary gain $ 2.31 $ 1.56 $ 1.41
- ------------------------------------------------------------------------------------------------------------------------------
Extraordinary gain 0.05 - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.36 $ 1.56 $ 1.41
- ------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income before extraordinary gain $ 2.25 $ 1.54 $ 1.39
- ------------------------------------------------------------------------------------------------------------------------------
Extraordinary gain 0.05 - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 2.30 $ 1.54 $ 1.39
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding:
Basic 7,932,485 7,882,890 7,893,808
- ------------------------------------------------------------------------------------------------------------------------------
Diluted 8,150,087 8,003,593 7,986,194
- ------------------------------------------------------------------------------------------------------------------------------
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 (Loss) Treasury
Shares Amount Earnings Income (1) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
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 $0.46 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 $0.51 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
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 18,752 18,752
Other Comprehensive income, net of tax:
Unrealized gains on available-for-sale
securities,
Net of reclassification adjustment 5,612 5,612
----------
Total comprehensive income 24,364
Purchase of treasury stock, 9,806 shares (244) (244)
Distribution of treasury stock for deferred
compensation plan (reissued 267 treasury 5 5
shares)
10% stock dividend 668,228 18,053 (19,166) 1,113
Exercise of common stock options
(reissued 80,956 treasury shares) 7,972 (257) 1.419 1,162
Tax benefit from exercise of stock options 274 274
Issuance of common stock under dividend
reinvestment plan 15,756 371 371
Issuance of common stock 1,440,000 32,068 32,068
Cash dividends declared of $0.59 per share (4,671) (4,671)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 9,421,222 $ 129,173 $ 12,650 $ 6,446 $ (1,086) $ 147,183
====================================================================================================================================
(1) Disclosure of reclassification amount for the years ended: 2002 2001 2000
Net unrealized appreciation (depreciation) arising during period, net of tax $ 5,752 $ 3,836 $ 4,678
Less: reclassification adjustment for net securities gains (losses) included in net
income, net of tax 140 19 7
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment $ 5,612 $ 3,817 $ 4,671
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year ended December 31,
2002 2001 2000
Cash flows from operating activities:
Net income $ 18,752 $ 12,335 $ 11,126
$ $ $
Adjustments to reconcile net income to net cash provided:
Depreciation, amortization, and accretion 3,468 4,551 4,613
Provision for loan losses 4,067 2,659 2,322
Business owned life insurance income (1,471) (481) -
Gain on securities transactions (216) (29) (10)
Extraordinary gain on early debt extinguishment (631) - -
(Increase) decrease in interest receivable (261) 1,103 (1,029)
Increase (decrease) in interest payable 117 (925) 256
Deferred income tax expense (benefit) 889 131 (178)
Deferral of loan origination fees and costs 199 150 (116)
Other, net 351 3,102 (1,054)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,264 22,596 15,930
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities (220,156) (76,904) (23,391)
Proceeds from sales of available-for-sale securities 42,258 136 3,242
Proceeds from maturities of available-for-sale securities 111,115 85,696 25,337
Net increase in loans (15,086) (20,936) (78,375)
Expenditures for premises and equipment (1,813) (2,750) (2,427)
Proceeds from sales of other real estate owned 223 153 296
Acquisitions, net of cash received 18,648 (162) -
Investment in business owned life insurance - (20,000) -
Investment in limited partnership and tax credit funds (1,315) (4,400) (400)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (66,126) (39,167) (75,718)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in non-interest bearing deposits 8,346 10,187 1,707
Net increase in interest bearing deposits 29,333 29,142 27,720
Net (decrease) increase in short-term borrowings (13,359) (62,863) 32,476
Proceeds from long-term borrowings 17,000 54,282 -
Payments on long-term borrowings (7,405) (2,868) (11,827)
Cash dividends paid (4,177) (3,593) (3,262)
Purchase of treasury stock (244) (3,804) (2,717)
Proceeds from issuance of common stock 33,230 477 389
Repurchase of Trust Preferred Securities (6,150) - -
Proceeds from issuance of Trust Preferred Securities 7,000 - -
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 63,574 20,960 44,486
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash 22,712 4,389 (15,302)
equivalents
Cash and cash equivalents at beginning of year 32,838 28,449 43,751
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 55,550 $ 32,838 $ 28,449
===============================================================================================================================
Supplemental cash flow information:
Interest paid $ 32,791 $ 38,249 $ 39,415
- -------------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 5,779 $ 2,985 $ 3,960
- -------------------------------------------------------------------------------------------------------------------------------
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 2002 presentation. Such
reclassifications had no impact on net income. All share and per share
information has been adjusted for a 10% stock dividend issued June 28,
2002.
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.
Goodwill and other Intangible Assets:
-------------------------------------
Goodwill represents the excess of the cost of an acquisition over the fair
value of the net assets acquired in business combinations. On January 1,
2002, Peoples adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", ("SFAS 142") and, on October 1,
2002, adopted Statement of Financial Accounting Standards No. 147,
"Acquisitions of Certain Financial Institutions" ("SFAS 147"), which
applies specifically to branch purchases that qualify as business
combinations. Under SFAS 142 and 147, goodwill is no longer amortized, but
is subject to an annual impairment test. Prior to January 1, 2002, Peoples
amortized goodwill on a straight-line basis over periods ranging from 10 to
15 years.
Since SFAS 147 was not effective until October 1, 2002, but is to be
applied retroactive to the adoption of SFAS 142 on January 1, 2002, Peoples
is required to restate goodwill amortized on branch purchases for each of
the quarters ended September 30, 2002 as follows:
(Dollars in Thousands, except Per Share Data) First Second Third
Quarter Quarter Quarter
Reported intangible asset amortization $ 385 $ 386 $ 481
Add back goodwill amortization 274 274 273
- -----------------------------------------------------------------------------
Adjusted intangible asset amortization 111 112 208
Reported net income 4,515 4,585 4,619
Add back goodwill amortization, net of tax 178 178 177
- -----------------------------------------------------------------------------
Adjusted net income 4,693 4,763 4,796
Basic earnings per share:
- Reported 0.58 0.58 0.58
- Adjusted 0.60 0.60 0.61
Diluted earnings per share:
- Reported 0.57 0.57 0.57
- Adjusted $ 0.59 $ 0.59 $ 0.59
The following pro forma information assumes SFAS 142 and SFAS 147 had been in
effect for all periods presented:
(Dollars in Thousands, except Per Share Data) 2002 2001 2000
Reported net income $ 18,752 $ 12,335 $ 11,126
Add back goodwill amortization, net of tax - 1,451 1,332
- -------------------------------------------------------------------------------
Adjusted net income 18,752 13,786 12,458
Basic earnings per share:
- Reported 2.36 1.56 1.41
- Adjusted 2.36 1.75 1.58
Diluted earnings per share:
- Reported 2.30 1.54 1.39
- Adjusted $ 2.30 $ 1.72 $ 1.56
Under SFAS 142, the goodwill impairment assessment is performed at least
annually. Based upon this assessment of the fair value of the reporting
unit, Peoples concluded the recorded value of goodwill was not impaired as
of December 31, 2002.
Core deposit intangible assets represent the present value of future net
income to be earned from deposits and are amortized over their estimated
life of 10 years. Core deposit intangibles, net of accumulated
amortization, totaled $5.1 million and $1.6 million at December 31, 2002
and 2001, respectively. The estimated aggregate amortization expense
related to core deposit intangible assets for the each of the next five
years is as follows: $804,000 in 2003; $747,000 in 2004; $659,000 in 2005;
$541,000 in 2006 and $457,000 in 2007.
Mortgage Servicing Assets:
----------------------------
Mortgage servicing assets are recognized for loan originations, when there
is a definitive plan to sell the underlying loan and retain the servicing.
Mortgage servicing assets are reported in other intangible assets and are
amortized into non-interest income in proportion to, and over the period
of, the estimated future net servicing income of the underlying mortgage
loans. Mortgage servicing assets are evaluated for impairment based on the
fair value of those rights and recorded at the lower of cost or fair value,
with write-downs reflected in a valuation reserve. At December 31, 2002,
mortgage-servicing assets were $132,000. There were no mortgage servicing
assets at December 31, 2001.
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 nonaccrual
loans is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status when it is brought
current, has performed in accordance with contractual terms for a
reasonable period of time, and the collectibility of the total contractual
principal and interest is no longer in doubt.
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 are determined by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per
share is determined by dividing net income by the weighted-average number
of common shares outstanding increased by the number of common shares that
would be issued assuming the exercise of stock options.
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.
Derivative Financial Instruments:
---------------------------------
Peoples enters into derivative transactions principally to protect against
the risk of adverse interest rate movements. As required by Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended, Peoples
carries all derivative financial instruments at fair value on the balance
sheet. SFAS 133 provides special hedge accounting provisions, which permit
the change in the fair value of the hedged item related to the risk being
hedged to be recognized in earnings in the same period and in the same
income statement line as the change in fair value of the derivative.
Derivative financial instruments designated in a hedge relationship to
mitigate exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow hedges. Cash
flow hedges are accounted for by recording the fair value of the derivative
financial instrument on the balance sheet as either a freestanding asset or
liability, with a corresponding offset recorded in other comprehensive
income within stockholders' equity, net of deferred tax. Amounts are
reclassified from other comprehensive income to the income statement in the
period or periods the hedged forecasted transaction affects earnings.
Derivative gains and losses not effective in hedging the expected cash
flows of the hedged item are recognized immediately in the income
statement. At the hedge's inception and at least quarterly thereafter, a
formal assessment is performed to determine whether changes in cash flows
of the derivative financial instruments have been highly effective in
offsetting changes in cash flows of the hedged items and whether they are
expected to be highly effective in the future. If it is determined a
derivative financial instrument has not been or will not continue to be
highly effective as a hedge, hedge accounting is discontinued
prospectively. SFAS 133 basis adjustments recorded on hedged assets and
liabilities are amortized over the remaining life of the hedged item no
later than when hedge accounting ceases.
Stock-Based Compensation:
-------------------------
Peoples accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees" and has adopted the disclosure
provisions of Financial Accounting Standards Statement No. 148, "Accounting
for Stock Based Compensation". The following pro forma information
regarding net income and earnings per share assumes the adoption of
Statement No. 123 for stock options granted subsequent to December 31,
1994. The estimated fair value of the options is amortized to expense over
the vesting period.
(Dollars in Thousands, except Per Share Data) 2002 2001 2000
Net Income:
As Reported $ 18.752 $ 12,335 $ 11,126
Pro forma 18,395 12,095 10,806
Basic Earnings Per Share:
As Reported $ 2.36 $ 1.56 $ 1.41
Pro forma 2.32 1.53 1.37
Diluted Earnings Per Share:
As Reported $ 2.30 $ 1.54 $ 1.39
Pro forma 2.26 1.51 1.35
The fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for
2002, 2001 and 2000, respectively: risk-free interest rate of 5.50%, 3.50%,
and 5.75%; dividend yield of 2.51%, 3.16%, and 3.29%; volatility factor of
the expected market price of Peoples' stock of 31%, 27%, and 25%, and a
weighted average expected life of the options of 7 years, 6 years, and 5
years. Compensation expense, net of related tax, amounted to $357,000,
$240,000 and $320,000 in 2002, 2001 and 2000, respectively and are included
in the pro forma net income as reported above.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Peoples' employee stock options
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
New Accounting Pronouncements:
------------------------------
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets and long-lived assets to be disposed. This statement is effective
for 2002. Management has evaluated the impact of this statement and has
determined that there is no material effect on Peoples' financial position
or results of operations.
Statement of Financial Accounting Standards No. 145, "Rescission of
Statements No. 4, 44 and 64, Amendment of Statement No. 13, and Technical
Corrections" rescinds Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." Peoples will adopt the provisions of this
Statement in the first quarter of 2003, by reclassifying a $631,000 gain on
extinguishment of debt that was classified as an extraordinary item in the
first quarter of 2002 to Other Income.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") addresses the
accounting and reporting for one-time employee termination benefits,
certain contract termination costs, and other costs associated with exit or
disposal activities such as facility closings or consolidations and
employee relocations. The standard is effective for exit or disposal
activities initiated after December 31, 2002. Peoples will adopt the
provisions of SFAS146 for any future transaction that prospectively
applies.
Financial Accounting Standards Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" is applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements in FIN 45 are first effective for Peoples' 2002
year-end. FIN 45 requires the guarantor to recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 clarifies the
requirements of Financial Accounting Standards No. 5, "Accounting for
Contingencies," relating to guarantees. In general, FIN 45 applies to
contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying (a specified interest rate, security price, commodity price,
foreign exchange rate, index of prices or rates, or other variable) that is
related to an asset, liability, or equity security of the guaranteed party.
Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this interpretation, including, among others,
guarantees relating to employee compensation, residual value guarantees
under capital lease arrangements, commercial letters of credit, loan
commitments, subordinated interests in an SPE and guarantees of a company's
own future performance. Other guarantees are subject to the disclosure
requirements of FIN 45 but not to the recognition provisions and include,
among others, a guarantee accounted for as a derivative instrument under
SFAS 133, a parent's guarantee of debt owed to a third party by its
subsidiary or vice versa, and a guarantee which is based on performance not
price. Significant guarantees that have been entered into by Peoples are
disclosed in the Notes to the Consolidated Financial Statements. Peoples
does not expect the requirements of FIN 45 to have a material impact on
results of operations, financial position or liquidity.
2. Fair Values of Financial Instruments:
-------------------------------------
Peoples used the following methods and assumptions in estimating its fair
value disclosures for financial instruments:
Cash and Cash Equivalents:
--------------------------
The carrying amounts reported in the balance sheet for these captions
approximate their fair values.
Investment Securities:
----------------------
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
estimated using quoted market prices of comparable securities.
Loans:
------
The fair value of performing variable rate loans that reprice frequently
and performing demand loans, with no significant change in credit risk, is
based on carrying value. The fair value of performing loans is estimated
using discounted cash flow analyses and interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
The fair value of significant nonperforming loans is based on either the
estimated fair value of underlying collateral or estimated cash flows,
discounted at a rate commensurate with the risk. Assumptions regarding
credit risk, cash flows, and discount rates are determined using available
market information and specific borrower information.
Deposits:
---------
The carrying amounts of demand deposits, savings accounts and certain money
market deposits approximate their fair values. The fair value of fixed
maturity certificates of deposit is estimated using a discounted cash flow
calculation 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 overnight under repurchase agreements
approximate their fair values. The fair value of term national market
repurchase agreements is estimated using a discounted cash flow calculation
that applies current rates currently available to Peoples for repurchase
agreements with similar terms.
Long-term Borrowings:
--------------------
The fair value of long-term borrowings is estimated using discounted cash
flow analysis based on rates currently available to Peoples for borrowings
with similar terms.
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 Contracts:
------------------------
Fair values for interest rate contracts are based on quoted market prices.
Financial Instruments:
----------------------
The fair value of loan commitments and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements
considering the remaining terms of the agreements and the counter parties'
credit standing. The estimated fair value of these commitments approximates
their carrying value.
The estimated fair values of Peoples' financial instruments at December 31
are as follows:
2002 2001
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 55,550 $ 55,550 $ 32,838 $ 32,838
Investment securities 412,100 412,100 330,364 330,364
Loans 837,805 867,463 760,499 782,334
Financial liabilities:
Deposits $ 955,877 $ 970,833 $ 814,368 $ 823,172
Short-term borrowings 48,183 48,397 56,052 56,054
Long-term borrowings 203.829 209,326 192,448 230,872
Other financial instruments:
Trust Preferred Securities 29,090 28,678 29,056 26,913
Interest rate contracts $ 485 $ 485 $ 39 $ 39
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
2002 Cost Gains Losses Fair Value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 28,005 731 $ (89) $ 28,647
Obligations of states and political subdivisions 64,707 3,100 (1) 67,806
Mortgage-backed securities 254,854 5,098 (141) 259,811
Other securities 54,482 2,615 (1,261) 55,836
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 402,048 11,544 $ (1,492) $ 412,100
=============================================================================================================
2001
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
=============================================================================================================
In 2002, 2001 and 2000, gross gains of $328,000, $30,000 and $204,000 and gross
losses of $112,000, $1,000 and $194,000 were realized, respectively. At December
31, 2002 and 2001, investment securities having a carrying value of $171,118,000
and $176,715,000, 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, 2002. 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.
U.S. Treasury Obligations
securities and of states Total
obligations of and Mortgage- available-
U.S. government political backed Other for-sale
(Dollars in Thousands) agencies subdivisions securities securities securities
Within one year
Amortized cost $ 7,834 $ 1,770 $ 12,509 $ 2,506 $ 24,169
Fair value 7,942 1,800 12,386 2,243 24,371
Average yield 6.79 % 6.77 % 6.51 % 5.49 % 6.51 %
1 to 5 years
Amortized cost $ 4,300 $ 9,492 $ 82,506 $ 9,864 $ 106,162
Fair value 4,629 9,984 84,247 9,830 108,690
Average yield 9.21 % 6.80 % 4.94 % 7.35 % 5.50 %
5 to 10 years
Amortized cost $ 2,821 $ 34,113 $ 16,731 $ 3,452 $ 57,117
Fair value 2,910 35,791 17,306 3,335 59,342
Average yield 6.19 % 6.85 % 6.26 % 5.10 % 6.54 %
Over 10 years
Amortized cost $ 13,050 $ 19,332 $ 143,558 $ 38,660 $ 214,600
Fair value 13,166 20,231 145,872 40,428 219,697
Average yield 5.63 % 6.86 % 5.77 % 7.37 % 6.15 %
-----------------------------------------------------------------------------------------------------------------
Total amortized cost $ 28,005 $ 64,707 $ 254,854 $ 54,482 $ 402,048
Total fair value $ 28,647 $ 67,806 $ 259,811 $ 55,836 $ 412,100
Total average yield 6.56 % 6.85 % 5.57 % 7.13 % 6.05 %
=================================================================================================================
4. Loans:
------
Peoples primarily focuses on lending opportunities in central and
southeastern Ohio, northern West Virginia, and northeastern Kentucky
markets. Loans are comprised of the following at December 31:
(Dollars in Thousands) 2002 2001
Commercial, financial, and agricultural $ 392,528 $ 343,800
Real estate, construction 16,231 14,530
Real estate, mortgage 331,948 295,944
Consumer 103,635 111,912
Credit card 6,549 6,670
==========================================================================
Total loans $ 850,891 $ 772,856
==========================================================================
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 assisted living
facilities/nursing homes, as well as lodging and lodging related companies.
Assisted living facilities/nursing homes loans totaled $52,660,000 and
$41,015,000 at December 31, 2002 and 2001, respectively. Loans to lodging
and lodging related companies totaled $43,889,000 and $43,967,000 at
December 31, 2002 and 2001, respectively. These credits were subjected to
Peoples' normal commercial underwriting standards and did not present more
than the normal amount of risk assumed in other lending areas. Peoples does
not extend credit to any single borrower or group of related borrowers in
excess of the legal lending limit of its subsidiary bank.
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, 2002:
(Dollars in Thousands)
Balance, January 1, 2002 $ 22,192
New loans and disbursements 13,277
Repayments (11,651)
Other changes 529
-----------------------------------------------------
Balance, December 31, 2002 $ 24,347
=====================================================
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) 2002 2001 2000
Balance, beginning of year $ 12,357 $ 10,930 $ 10,264
Charge-offs (4,328) (2,638) (2,061)
Recoveries 686 439 405
- -------------------------------------------------------------------------------
Net charge-offs (3,642) (2,199) (1,656)
Provision for loan losses 4,067 2,659 2,322
Allowance for loan losses acquired 304 967 -
- -------------------------------------------------------------------------------
Balance, end of year $ 13,086 $ 12,357 $ 10,930
===============================================================================
Impaired loans totaled $9,642,000 at December 31, 2002, including
$1,719,000 of impaired loans for which the related allowance for loan
losses was $493,000. At December 31, 2001, impaired loans totaled
$7,955,000, including $2,708,000 of impaired loans for which the related
allowance for loan losses was $1,015,000. Peoples' average investment in
impaired loans was $8,732,000 in 2002 and $7,795,000 in 2001.
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) 2002 2001
Land $ 3,643 $ 3,130
Building and premises 20,922 19,159
Furniture, fixtures and equipment 12,415 11,981
-----------------------------------------------------------------------
36,980 34,270
Accumulated depreciation (18,922) (17,901)
-----------------------------------------------------------------------
Net book value $ 18,058 $ 16,369
=======================================================================
Peoples depreciates its building and premises and furniture, fixtures and
equipment over estimated useful lives ranging from 5 to 40 years and 2 to
10 years, respectively. Depreciation expense was $2,025,000, $1,943,000 and
$1,957,000, for the years ended December 31, 2002, 2001 and 2000,
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 under
noncancelable operating leases with initial terms of one year or more
consisted of the following at December 31, 2002:
(Dollars in Thousands)
2003 $ 277
2004 275
2005 282
2006 253
2007 214
Thereafter 2,075
------------------------------------------------------
Total minimum lease payments $ 3,376
======================================================
Rent expense was $286,000, $288,000 and $341,000 in 2002, 2001 and 2000,
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: $197,366,000 in 2003; $71,027,000 in 2004;
$67,321,000 in 2005; $5,426,000 in 2006; $67,576,000 in 2007; and $293,000
thereafter.
Deposits from related parties approximated $14.8 million and $22.3 million
at December 31, 2002 and 2001, respectively.
7. Short-term Borrowings:
----------------------
Peoples utilizes various short-term borrowings as sources of funds,
including Federal Home Loan Bank ("FHLB") advances and repurchase
agreements. Short-term borrowings are summarized as follows:
National
Retail Market Other
Federal Funds Repurchase Repurchase FHLB Short-Term
(Dollars in Thousands) Purchased Agreements Agreements Advances Borrowings
2002
Ending balance $ - $ 22,083 $ 9,100 $ - $ 17,000
Average balance 28 23,351 8,427 12,626 9,408
Highest month end balance - 26,693 9,100 49,000 17,000
Interest expense - YTD 1 318 312 234 316
Weighted average interest rate:
End of year - % 0.93 % 3.70 % - % 2.91 %
During the year 3.57 1.36 3.70 1.85 3.36
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 -
The FHLB advances are collateralized by mortgage-backed securities and
loans. Peoples' national market repurchase agreements are with high
quality, financially secure financial service companies. Other short-term
borrowings include a short-term loan from an unrelated financial
institution to fund an acquisition.
8. Long-term Borrowings:
---------------------
Long-term borrowings consisted of the following at December 31:
(Dollars in Thousands) 2002 2001
Term note payable, at LIBOR (parent company) $ 1,500 $ 1,800
Federal Home Loan Bank advances, bearing interest at rates
ranging from 3.75% to 5.63% 202,329 190,648
------------------------------------------------------------------------------------------------
Total long-term borrowings $ 203,829 $ 192,448
================================================================================================
The 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)
2003 $ 7,520
2004 6,128
2005 6,275
2006 6,454
2007 5,978
Thereafter 171,476
--------------------------------------------------
Total long-term borrowings $ 203,829
==================================================
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, 2002, and a statement of the funded status as of
December 31, 2002 and 2001:
Pension Postretirement
Benefits Benefits
(Dollars in Thousands) 2002 2001 2002 2001
Change in benefit obligation:
Obligation at January 1 $ 8,262 $ 6,976 $ 696 $ 869
Service cost 551 464 - -
Interest cost 606 553 48 57
Plan participants' contributions - - 114 97
Actuarial loss (gain) 1,010 687 1 (66)
Benefit payments (377) (418) (174) (261)
Increase due to plan changes 54 - - -
- ------------------------------------------------------------------------------------------------
Obligation at December 31 10,106 8,262 685 696
- ------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 7,614 7,253 - -
Claims payable adjustment - - - -
Actual return on plan assets (472) (121) - -
Employer contributions 1,000 900 60 164
Plan participants' contributions - - 114 97
Benefit payments (377) (418) (174) (261)
- ------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 7,765 7,614 - -
- ------------------------------------------------------------------------------------------------
Funded status:
Funded status at December 31 (2,341) (649) (685) (696)
Unrecognized transition obligation - (8) - -
Unrecognized prior-service cost 38 (25) 33 44
Unrecognized net gain 3,767 1,516 156 162
- ------------------------------------------------------------------------------------------------
Accrued benefit cost $ 1,464 $ 834 $ (496) $ (490)
================================================================================================
The following table provides the components of net periodic benefit cost
for the plans:
Pension Benefits Postretirement Benefits
(Dollars in Thousands) 2002 2001 2000 2002 2001 2000
Service cost $ 550 $ 464 $ 410
Interest cost 606 553 525 $ 48 $ 57 $ 62
Expected return on plan assets (769) (689) (648) - - -
Amortization of transition asset (8) (8) (8) - - -
Amortization of prior service cost (9) (9) (9) - - -
Amortization of net loss - - - 17 16 15
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 370 $ 311 $ 270 $ 65 $ 73 $ 77
===========================================================================================================
The assumptions used in the measurement of Peoples' benefit obligation at
December 31 are shown in the following table:
Pension Postretirement
Benefits Benefits
2002 2001 2002 2001
Discount rate 6.75 % 7.25 % 6.75 % 7.25 %
Expected return on plan assets 8.50 9.00 n/a n/a
Rate of compensation increase 4.00 4.00 n/a n/a
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed
for 2002, grading down 1% per year to an ultimate rate of 5%. The health
care trend rate assumption does not have a significant effect on the
contributory defined benefit postretirement plan; therefore, a one
percentage point change in the trend rate is not material in the
determination of the accumulated postretirement benefit obligation or the
ongoing expense.
Peoples also maintains a retirement savings plan, or 401(k) plan, which
covers substantially all employees. The plan provides participants the
opportunity to save for retirement on a tax-deferred basis. In addition,
Peoples makes matching contributions equal to 100% of participants'
contributions that do not exceed 3% of the participants' compensation plus
50% of participants' contributions between 3% and 5% of he participants'
compensation. Matching contributions made by Peoples totaled $413,000,
$356,000 and $324,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
10. Federal Income Taxes:
---------------------
The effective federal income tax rate in the consolidated statement of
income is less than the statutory corporate tax rate due to the following:
Year ended December 31
2002 2001 2000
Statutory corporate tax rate 35.0 % 35.0 % 35.0 %
Differences in rate resulting from:
Interest on obligations of state and political (3.6) (3.4) (3.6)
subdivisions
Investments in low-income housing tax credit funds (2.2) (3.0) (2.1)
Business owned life insurance (2.0) (1.0) -
Other, net 0.2 2.8 0.4
- -------------------------------------------------------------------------------------------------------
Effective federal income tax rate 27.4 % 30.4 % 29.7 %
=======================================================================================================
The significant components of Peoples' deferred tax assets and liabilities
consisted of the following at December 31:
(Dollars in Thousands) 2002 2001
Deferred tax assets:
Allowance for loan losses $ 4,987 $ 4,288
Accrued employee benefits 318 459
Deferred loan fees and costs 222 129
Other 216 294
--------------------------------------------------------------------
Total deferred tax assets 5,743 5,170
--------------------------------------------------------------------
Deferred tax liabilities:
Bank premises and equipment (24) 735
Deferred Income 1,502 700
Investments 1,910 1,685
Available-for-sale securities 3,470 450
Other 88 59
--------------------------------------------------------------------
Total deferred tax liabilities 6,946 3,629
--------------------------------------------------------------------
Net deferred tax (liability) $ (1,203) $ 1,541
asset
====================================================================
The related federal income tax expense on securities transactions
approximated $77,000 in 2002, $10,000 in 2001 and $4,000 in 2000.
11. Financial Instruments with Off-Balance Sheet Risk:
--------------------------------------------------
In the normal course of business, Peoples is party to financial instruments
with off-balance sheet risk necessary to meet the financing needs of
customers and to manage its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, and interest rate caps. The instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheets. The contract or notional amounts
of these instruments express the extent of involvement Peoples has in these
financial instruments.
Loan Commitments and Standby Letters of Credit:
-----------------------------------------------
Loan commitments are made to accommodate the financial needs of Peoples'
customers. Standby letters of credit commit Peoples to make payments on
behalf of customers when certain specified future events occur.
Historically, most loan commitments and standby letters of credit expire
unused. Peoples' exposure to credit loss in the event of nonperformance by
the counter-party to the financial instrument for loan commitments and
standby letters of credit is represented by the contractual amount of those
instruments. Peoples uses the same underwriting standards in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained is based on management's
credit evaluation of the customer. Collateral held varies, but may include
accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
The total amounts of loan commitments and standby letters of credit are
summarized as follows at December 31:
Contractual Amount
(Dollars in Thousands) 2002 2001
Loan commitments $ 103,462 $ 78,275
Standby letters of credit 7,632 7,135
Unused credit card limits 21,216 21,066
Interest Rate Contracts:
------------------------
Peoples has entered into interest rate contracts with unaffiliated
financial institutions as a means of managing the risk of changing interest
rates. These interest rate contracts subject Peoples to the risk that the
counter-parties may fail to perform. In order to minimize such risk,
Peoples deals only with high-quality, financially secure financial
institutions.
At December 31, 2002, Peoples held an option to initiate an interest rate
swap beginning on October 19, 2002, and continuing on a quarterly basis
until its expiration in July 2009. Under the terms of the interest rate
swap, Peoples would receive LIBOR based variable rate payments and pay
fixed rate payments to a counter-party, computed on a notional amount of
$17 million. Peoples entered into this interest rate contract to hedge a
$17 million long-term, fixed rate FHLB advance, which could convert to a
variable rate at the FHLB's discretion. At December 31, 2002, Peoples had
not exercised its option under this interest rate contract since the
advance remained a fixed rate advance.
At December 31, 2002, Peoples also had in place interest rate cap contracts
with notional amounts of $20 million. Under these interest rate cap
contracts, Peoples is entitled to receive cash from counter-parties for
interest rate differentials between an index rate and a specified rate,
computed on notional amounts. These contracts expire as follows: $10
million in September 2003 and $10 million in September 2004.
Other:
------
Peoples also has commitments to make additional capital contributions in
low income housing projects. Such commitments approximated $5.7 million at
December 31, 2002, and $7.0 million at December 31, 2001.
12. Corporation-Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Debentures of the Corporation:
------------------------------------------------------------------
The corporation-obligated mandatorily redeemable capital securities (the
"Capital Securities" or "Trust Preferred Securities") of subsidiary trusts
holding solely junior subordinated debt securities of the Corporation (the
"debentures") were issued by statutory business trusts, of which 100% of
the common equity in the trust is owned by Peoples Bancorp. The trusts were
formed for the purpose of issuing the capital securities and investing the
proceeds from the sale of such capital securities in the debentures. The
debentures held by the trusts are the sole assets of those trusts.
Distributions on the capital securities issued by the trusts are payable
semiannually at a rate per annum equal to the interest rate being earned by
the trusts on the debentures held by that trusts and are recorded as
non-interest expense by Peoples. Peoples has entered into agreements which,
taken collectively, fully and unconditionally guarantee the capital
securities subject to the terms of each of the guarantees. The capital
securities issued by a statutory business trusts are summarized as follows
at December 31:
(Dollars in thousands) 2002 2001
Capital securities of PEBO Capital Trust I, 8.62%, due May 1, 2029,
net of unamortized issuance costs $ 22,310 $ 29,056
Capital securities of PEBO Capital Trust II, 3-month LIBOR + 3.70%,
due April 22, 2032, 6,780 -
----------------------------------------------------------------------------------------------------
Total capital securities 29,090 29,056
====================================================================================================
Total capital securities qualifying for Tier 1 capital 29,090 29,056
====================================================================================================
The capital securities are subject to mandatory redemption, in whole or in
part, upon repayment of the debentures. The debentures held by PEBO Capital
Trust I are first redeemable, in whole or in part, by the Corporation on
May 1, 2009. The debentures held by PEBO Capital Trust II are first
redeemable, in whole or in part, by the Corporation on April 22, 2007.
13. Regulatory Matters:
-------------------
The following is a summary of certain regulatory matters affecting Peoples
Bancorp and its subsidiaries:
Limits on dividends:
--------------------
The primary source of funds for the dividends paid by Peoples Bancorp is
dividends received from its banking subsidiary. The payment of dividends by
banking subsidiaries is subject to various banking regulations. The most
restrictive provision requires regulatory approval if dividends declared in
any calendar year exceed the total net profits of that year plus the
retained net profits of the preceding two years. At December 31, 2002,
approximately $3.9 million of retained net profits of the banking
subsidiary plus its retained net profits through the dividend date of the
banking subsidiary were available for the payment of dividends to Peoples
Bancorp without regulatory approval.
Capital Requirements:
---------------------
Peoples Bancorp and its banking subsidiary are subject to various
regulatory capital requirements administered by the banking regulatory
agencies. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Peoples and its banking subsidiary must meet
specific capital guidelines that involve quantitative measures of each
entity's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Peoples' and its banking
subsidiary's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Peoples and its banking subsidiary to maintain minimum amounts and
ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Peoples and its banking subsidiary met all
capital adequacy requirements at December 31, 2002.
As of December 31, 2002, the most recent notifications from the banking
regulatory agencies categorized Peoples and its banking subsidiary as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, Peoples Bancorp and its banking
subsidiary must maintain minimum total risk-based, Tier I risk-based and
Tier I leverage ratios as set forth in the table below. There are no
conditions or events since these notifications that management believes
have changed Peoples' or its banking subsidiary's category.
Peoples Bancorp's and its banking subsidiary's, Peoples Bank, actual
capital amounts and ratios as of December 31 are also presented in the
following table:
(Dollars in Thousands) Well Capitalized Under
Prompt Corrective
Actual For Capital Adequacy Action Provision
2002 Amount Ratio Amount Ratio Amount Ratio
Total Capital (1)
Peoples $ 151,454 16.8 % $ 72,165 8.0 % $ 90,206 10.0 %
Peoples Bank 122,380 13.7 71,561 8.0 89,451 10.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 (2)
Peoples 139,208 15.4 36,082 4.0 54,124 6.0
Peoples Bank 111,135 12.4 35,780 4.0 53,671 6.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 Leverage (3)
Peoples 139,208 10.6 52,710 4.0 65,887 5.0
Peoples Bank 111,135 8.3 53,420 4.0 66,775 5.0
------------------------------------------------------------------------------------------------------------------------
Total Capital (1)
Peoples $ 116,114 14.2 % $ 65,353 8.0 % $ 81,691 10.0 %
Peoples Bank 105,292 13.0 64,881 8.0 81,101 10.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 (2)
Peoples 105,065 12.9 32,676 4.0 49,014 6.0
Peoples Bank 95,127 11.7 32,440 4.0 48,661 6.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 Leverage (3)
Peoples 105,065 9.2 45,756 4.0 57,195 5.0
Peoples Bank 95,127 8.3 45,694 4.0 57,118 5.0
------------------------------------------------------------------------------------------------------------------------
(1) Ratio represents total capital to net risk-weighted assets.
(2) Ratio represents Tier 1 capital to net risk-weighted assets.
(3) Ratio represents Tier 1 capital to average assets.
14. Federal Reserve Requirements:
-----------------------------
Peoples Bank is required to maintain a certain level of reserves consisting
of non-interest bearing balances with the Federal Reserve Bank and cash on
hand. The reserve requirement is calculated on a percentage of total
deposit liabilities and averaged $6,743,000 for the year ended December 31,
2002.
15. Acquisitions:
-------------
On December 2, 2002, Peoples announced it had signed a definitive agreement
and plan of merger with Kentucky Bancshares Incorporated ("Kentucky
Bancshares") providing for the acquisition of Kentucky Bancshares by
Peoples. In the agreement, Peoples proposes to use a combination of cash
and Peoples' common shares as consideration for all of the issued and
outstanding shares of Kentucky Bancshares common stock. The aggregate value
of the transaction is not expected to exceed $31.4 million, of which
approximately half would be paid in cash and half in Peoples' common
shares, dependent upon the market price of Peoples' common shares.
Kentucky Bancshares' banking subsidiary, Kentucky Bank & Trust, operates
five offices in Kentucky's Boyd and Greenup Counties in the communities of
Ashland, Russell, Flatwoods, Greenup and South Shore. Peoples plans to
operate these offices as full-service banking offices of Peoples Bank upon
completion of the merger. At December 31, 2002, Kentucky Bancshares had
total assets of $127 million, total loans of $78 million, total deposits of
$99 million, and trust assets under management of $197 million. This
acquisition is contingent upon regulatory approval, as well as approval of
the shareholders of Kentucky Bancshares. Management anticipates completing
this transaction during the second quarter of 2003. Concurrent with this
acquisition, Peoples will close the existing Russell, Kentucky Office.
On October 4, 2002, Peoples completed the acquisition of a banking center
in Malta, Ohio, from Century National Bank of Zanesville, Ohio, a
subsidiary of Park National Corporation of Newark, Ohio. As part of the
transaction, Peoples acquired deposits of $6.3 million and loans of $1.6
million. Effective October 4, Peoples discontinued banking operations at
the Malta office located at 50 West Third Street, with the Malta office
customers being served by Peoples' full-service office in neighboring
McConnelsville.
On June 14, 2002, Peoples completed the acquisition of First Colony
Bancshares, Inc. ("First Colony"), the holding company of The Guernsey
Bank, f.s.b, a federal savings bank based in Cambridge, Ohio. As part of
the transaction, Peoples acquired full-service offices in Cambridge (two
offices), Byesville, and Quaker City in Ohio's Guernsey County and Flushing
in Ohio's Belmont County, involving total loans of $65 million, total
deposits of $98 million and total retail overnight repurchase agreements of
$6 million. Peoples did not acquire Guernsey Bank's full-service banking
office or loan production office in Worthington, Ohio, which continue to
serve its customers and retained "The Guernsey Bank" name under a new
banking charter.
The acquisitions in 2002 were accounted for under the purchase method of
accounting. The balances and operations of acquired businesses are included
in Peoples' financial statements from the date of acquisition and do not
materially impact Peoples' financial position, results of operations or
cash flows for any period presented.
In addition, Peoples made several other acquisitions in prior years
accounted for under the purchase method of accounting. The purchase prices
of these acquisitions were allocated to the identifiable tangible and
intangible assets acquired based upon their fair value at the acquisition
date.
16. Stock Options:
--------------
Peoples' stock option plans provide for the granting of both incentive
stock options and non-qualified stock options covering up to 1,537,465
common shares. Under the provisions of the plans, the option price per
share shall not be less than the fair market value of the common shares on
the date of grant of such option; therefore, no compensation expense is
recognized. Recent options granted to employees vest over periods ranging
from three to six years. Options granted to directors of Peoples Bancorp
and Peoples Bank vest in one year. All granted options to both employees
and directors expire ten years from the date of grant.
The following summarizes Peoples' stock options as of December 31, 2002,
2001 and 2000, and the changes for the years then ended:
2002 2001 2000
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price Of Shares Price of Shares Price
--------------------------- --------------------------- ---------------------------
Outstanding at January 1 609,662 $ 14.15 714,379 $ 13.57 695,195 $ 13.29
Granted 82,275 24.70 7,040 15.89 94,558 14.22
Exercised 97,646 12.76 82,072 8.07 51,850 8.72
Canceled 978 14.55 29,685 16.97 23,525 18.43
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 593,313 15.84 609,662 14.15 714,379 13.57
======================================================================================================================
Exercisable at December 31 336,669 13.86 373,746 12.92 430,096 11.64
=====================================================================================================================
Weighted average estimated fair value of
options granted during the year $ 7.95 $ 3.48 $ 3.38
======================================================================================================================
The following summarizes information concerning Peoples' stock options
outstanding at December 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Option Remaining Average Average
Range of Shares Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------------------------------------------- -------------------------------
$6.59 to $8.80 145,161 1.8 years $ 8.69 145,161 $ 8.69
$8.84 to $14.26 123,708 6.4 years 13.88 47,477 13.28
$14.27 to $17.27 108,954 6.4 years 15.79 25,929 15.89
$17.32 to $19.93 124,083 5.1 years 19.69 105,900 19.75
$20.57 to $30.00 91,407 8.8 years 24.67 12,202 22.27
17. Parent Company Only Financial Information:
------------------------------------------
Condensed Balance Sheets December 31,
(Dollars in Thousands) 2002 2001
Assets:
Cash $ 50 $ 50
Interest bearing deposits in subsidiary bank 40,618 5,057
Receivable from subsidiary bank 209 1,779
Investment securities: Available-for-sale (amortized cost of $1,981 and
$4,909 at December 31, 2002 and 2001, respectively) 4,034 6,755
Investments in subsidiaries:
Bank 132,729 97,658
Non-bank 19,784 13,998
Other assets 1,535 2,575
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 198,959 $ 127,872
===============================================================================================================
Liabilities:
Accrued expenses and other liabilities $ 2,990 $ 2,089
Dividends payable 1,196 1,073
Short-term borrowings 17,000 -
Long-term borrowings 1,500 1,800
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 22,686 4,962
- ---------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in junior subordinated debentures 29,090 29,056
Stockholders' equity 147,183 93,854
- ---------------------------------------------------------------------------------------------------------------
Total liabilities, beneficial interests and stockholders' equity $ 198,959 $ 127,872
===============================================================================================================
Consolidated Statements of Income Year ended December 31,
(Dollars in Thousands) 2002 2001 2000
Income:
Dividends from subsidiary bank $ 10,200 $ 29,125 $ 4,900
Interest 389 182 299
Dividends from other subsidiaries - 80 80
Rental income from subsidiaries 55 55 -
Management fees from subsidiaries - - 989
Other 831 911 28
- --------------------------------------------------------------------------------------------------------------------------
Total income 11,475 30,353 6,296
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Trust Preferred Securities expense 2,420 2,621 2,623
Interest 361 101 162
Salaries and benefits - 2 1,285
Other 978 1,167 1,042
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 3,759 3,891 5,112
- --------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and equity in undistributed earnings of
(excess dividends from) subsidiaries 7,716 26,462 1,184
Applicable income tax benefit (700) (509) (1,267)
Equity in undistributed earnings of (excess dividends from) subsidiaries 10,336 (14,636) 8,675
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 18,752 $ 12,335 $ 11,126
==========================================================================================================================
Statements of Cash Flows Year ended December 31,
(Dollars in Thousands) 2002 2001 2000
Cash flows from operating activities:
Net income $ 18,752 $ 12,335 $ 11,126
Adjustment to reconcile net income to cash provided by operations:
Amortization and depreciation 48 206 205
(Equity in undistributed earnings of) excess dividends from subsidiaries (10,336) 14,636 (8,675)
Other, net 920 478 (961)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,384 27,655 1,695
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of (purchases of) investment securities 1,102 (2,000) 310
Net (expenditures for) proceeds from sale of premises and equipment (18) 13 (39)
Investment in subsidiaries (21,521) (14,634) -
Investment in tax credit funds (1,315) (400) (400)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,752) (17,021) (129)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of Trust Preferred Securities 7,000 - -
Repurchase of Trust Preferred Securities (6,150) - -
Proceeds from short-term borrowings 17,000 - -
Payments on long-term borrowings (300) (300) (300)
Purchase of treasury stock (244) (3,804) (2,717)
Change in receivable from subsidiary 1,570 (468) 249
Proceeds from issuance of common stock 33,230 477 389
Cash dividends paid (4,177) (3,593) (3,262)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 47,929 (7,688) (5,641)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 35,561 2,946 (4,075)
Cash and cash equivalents at the beginning of the year 5,107 2,161 6,236
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 40,668 $ 5,107 $ 2,161
==========================================================================================================================
Supplemental cash flow information:
Interest paid $ 361 $ 101 $ 162
- --------------------------------------------------------------------------------------------------------------------------
18. Subsequent Events:
------------------
On December 19, 2002, Peoples completed the sale of 1,440,000 common shares
through a firm commitment underwritten offering, generating capital of
$32.1 million after offering expense. On January 3, 2003, Peoples sold
216,000 common shares in conjunction with the option granted to the
underwriters to cover over-allotments, generating capital of $4.8 million.
In January 2003, Peoples used $16 million of the net proceeds to increase
Peoples Bank's capital position. Peoples intends to use the remaining net
proceeds for general corporate purposes, which may include the repayment of
outstanding indebtedness, mergers, acquisitions and other strategic
investments.
In December 2002, Peoples initiated an asset growth strategy to offset the
dilutive impact of the Common Stock Offering, thereby leveraging Peoples'
increased capital levels ("Leverage Strategy"). As a result of this
Leverage Strategy, total earning assets, particularly mortgage-backed
investment securities, increased by $260 million in January 2003 compared
to the year-end 2002 balance. Peoples funded the investment purchases using
$187 million of wholesale market repurchase agreements at an average cost
of 2.92%, $58 million of FHLB advances at an average cost of 2.15% and $15
million from the Common Stock Offering.
19. Summarized Quarterly Information (Unaudited):
---------------------------------------------
A summary of selected quarterly financial information for 2002 and 2001
follows:
(Dollars in Thousands, except Per Share 2002
Data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $ 20,315 $ 20,312 $ 21,683 $ 20,658
Interest expense 8,156 7,801 8,545 8,468
Net interest income 12,159 12,511 13,138 12,190
Provision for possible loan losses 861 980 1,182 1,044
Gains (losses) on securities transactions 51 - 51 114
Asset disposals (losses) gains (7) (7) - (58)
Gain on sale of loans - - 22 135
Other income 3,283 3,633 4,044 3,975
Intangible asset amortization 111 112 208 215
Other expenses 8,566 8,437 9,271 9,046
Income taxes 1,665 1,845 1,798 1,551
Income before extraordinary gain 4,283 4,763 4,796 4,500
Extraordinary gain on early debt
extinguishment, net of tax expense 410 - - -
Net income 4,693 4,763 4,796 4,500
Earnings per share:
Basic 0.60 0.60 0.61 0.55
Diluted $ 0.59 $ 0.59 $ 0.59 $ 0.54
Weighted average shares outstanding:
Basic 7,841,605 7,873,795 7,896,633 8,116,691
Diluted 7,979,461 8,102,047 8,150,003 8,344,996
2001
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $ 22,120 $ 21,992 $ 21,456 $ 20,539
Interest expense 11,809 11,196 10,674 9,295
Net interest income 10,311 10,796 10,782 11,244
Provision for possible loan losses 675 675 675 634
Gains (losses) on securities transactions 2 (1) 26 2
Asset disposal gains (losses) 20 5 (12) 11
Net mark-to-market adjustment on
interest rate caps (173) 42 - -
Other income 2,201 2,270 2,514 3,743
Intangible asset amortization 566 582 582 617
Other expenses 7,385 7,586 7,535 8,559
Income taxes 1,139 1,264 1,321 1,653
Net income 2,596 3,005 3,197 3,537
Earnings per share:
Basic 0.33 0.38 0.41 0.45
Diluted $ 0.32 $ 0.37 $ 0.40 $ 0.45
Weighted average shares outstanding:
Basic 7,903,704 7,951,379 7,889,519 7,824,590
Diluted 8,009,473 8,068,643 8,033,685 7,944,450
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors:
-------------------------------------------
We have audited the accompanying consolidated balance sheets of Peoples
Bancorp Inc. and Subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002.
These financial statements are the responsibility of Peoples' management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Peoples Bancorp Inc. and Subsidiaries at December 31, 2002 and
2001, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United
States.
As discussed in Note 1 to the consolidated financial statements, in 2002
Peoples changed its method of accounting for goodwill.
/s/ ERNST & YOUNG LLP
Charleston, West Virginia
January 24, 2003
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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Directors of Peoples include those persons identified under "Election of
Directors" on pages 5 and 8 of Peoples' definitive Proxy Statement relating to
Peoples' Annual Meeting of Shareholders to be held April 10, 2003 ("Peoples'
definitive Proxy Statement"), which section is incorporated by reference.
The information regarding Peoples' executives officers required under this item
is included under Part I of this Form 10-K.
The information required to be disclosed under Item 405 of Regulation S-K is
included under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 4 of Peoples' definitive Proxy Statement, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
See "Compensation of Executive Officers and Directors" on pages 11 through 14 of
Peoples' definitive Proxy Statement relating to Peoples' Annual Meeting of
Shareholders to be held on April 10, 2003, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
- ----------------------------------------------------------------------------
See "Security Ownership of Certain Beneficial Owners and Management" on pages 2
through 4 of Peoples' definitive Proxy Statement relating to Peoples' Annual
Meeting of Shareholders to be held on April 10, 2003, which section is
incorporated by reference.
EQUITY COMPENSATION PLAN INFORMATION
The table provides information as of December 31, 2002, with respect to
compensation plans under which common shares of Peoples are authorized for
issuance to directors, officers or employees in exchange for consider in the
form of goods or services. These compensation plans include: (i) the Peoples
Bancorp Inc. 1993 Stock Option Plan (the "1993 Plan"); (ii) the Peoples Bancorp
Inc. 1995 Stock Option Plan (the "1995 Plan"); (iii) the Peoples Bancorp Inc.
1998 Stock Option Plan (the "1998 Plan"); (iv) the Peoples Bancorp Inc. 2002
Stock Option Plan (the "2002 Plan"); and (v) the Peoples Bancorp Inc. Deferred
Compensation Plan for Directors of Peoples Bancorp Inc and subsidiaries (the
"Deferred Compensation Plan"). All of these compensation plans were approved
by Peoples' shareholders.
(c)
(a) Number of common
Number of shares available for
common shares (b) future issuance under
to be issued upon Weighted equity compensation
exercise of average exercise plans (excluding
outstanding price ofissuance common shares
optpions, warrants outstanding reflected in column
Plan Category and rights options (a))
- -------------
Equity compensation plans approved by
shareholders 652,944(1) $15.84(2) 496,465(3)
Equity compensations plans not approved
by shareholders - - -
- ---------------------------------------------------------------------------------------------------------
Total 652,944 $15.84 496,465
=========================================================================================================
(1) Includes an aggregate of 593,313 common shares issuable upon exercise
of options granted under the 1993 Plan, the 1995 Plan, the 1998 Plan
and the 2002 Plan and 59,631 common shares credited to participants'
accounts under the deferred compensation plan.
(2) Represents weighted-average exercise price of outstanding options
under the 1993 Plan, the 1995 Plan, the 1998 Plan and the 2002 Plan.
(3) Includes 39,924 common shares, 17,714 common shares, 397,125 common
shares and 41,702 common shares remaining available for issuance under
the 1995 Plan, the 1998 Plan, the 2002 Plan and the Deferred
Compensation Plan, respectively, at December 31, 2002. No shares were
available for issuance under the 1993 Plan at December 31, 2002.
Additional information regarding Peoples' stock option plans can be found in
Note 16 to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
See "Transactions Involving Management" on page 5 of Peoples' definitive Proxy
Statement relating to Peoples' Annual Meeting of Shareholders to be held on
April 10, 2003, which section is incorporated by reference.
ITEM 14: CONTROLS AND PROCEDURES
- --------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within ninety days prior to the filing date of this Annual Report on Form 10-K,
Peoples under the supervision and with the participation of its management,
including its Chief Executive Officer and Chief Financial Officer, performed an
evaluation of Peoples' disclosure controls and procedures, in accordance with
Rules 13a-14 and 13a-15 of the Securities Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that such disclosure controls and procedures are effective to ensure that
material information relating to Peoples, including its consolidated
subsidiaries, is made known to them, particularly during the period for which
the periodic reports are being prepared.
CHANGES IN INTERNAL CONTROLS
No significant changes were made in Peoples' internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation performed pursuant to Rule 13a-15 of the Securities Act of 1934,
referred to above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
a)(1) Financial Statements:
---------------------
The following consolidated financial statements of Peoples Bancorp
Inc. and subsidiaries are included in Item 8: