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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750-0738
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to
Section 12 (g) of the Act: Common Shares, No Par Value (10,396,659
outstanding at February 28, 2005)
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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 (the only
common equity of the Registrant) on The NASDAQ National Market as of June 30,
2004, the aggregate market value of the Common Shares of the Registrant held by
non-affiliates on that date was $259,933,000. For this purpose, executive
officers and directors of the Registrant are considered affiliates.
Document Incorporated by Reference:
Portions of Registrant's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 14, 2005, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Executive Officers of the Registrant 15
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 40
Item 9A. Controls and Procedures 40
Item 9B. Other Information 40
PART III
Item 10. Directors and Executive Officers of the Registrant 70
Item 11. Executive Compensation 70
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 71
Item 13. Certain Relationships and Related Transactions 71
Item 14. Principal Accountant Fees and Services 72
PART IV
Item 15. Exhibits and Financial Statement Schedules 73
Signatures 74
Exhibit Index 75
PART I
ITEM 1. BUSINESS.
General
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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,
2004, 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 on The NASDAQ National Market under the symbol PEBO and its web site
is www.peoplesbancorp.com (this uniform resource located, or URL, is an inactive
textual reference only and is not intended to incorporate Peoples' website into
this Form 10-K).
Peoples' primary business activities currently are confined to the financial
services industry, which are conducted through Peoples Bank, its principal
operating subsidiary. Peoples Bank is a full service community bank that makes
available an array of financial products and services to its customers, which
include the following:
o various interest-bearing and non-interest-bearing demand deposit accounts
o savings and money market accounts
o certificates of deposit
o commercial, installment, and real estate mortgage loans (both commercial
and residential)
o credit and debit cards
o corporate and personal trust services o safe deposit rental facilities
Peoples also sells travelers checks, money orders and cashier's checks. Services
are provided through Peoples Bank's 48 financial service locations and 33
automated teller machines ("ATMs") in Ohio, West Virginia and Kentucky, as well
as banking by telephone, and internet-based banking. Peoples Bank offers a full
range of life, health, property and casualty insurance products through its
subsidiary Peoples Insurance Agency, Inc. ("Peoples Insurance Agency") and makes
available custom-tailored solutions for asset management needs through its
Peoples Financial Advisors division, including investment products through an
unaffiliated registered broker-dealer.
At December 31, 2004, Peoples and its subsidiaries had 537 full-time equivalent
employees, total assets of $1.8 billion, total loans of $1.0 billion, total
deposits of $1.1 billion, and total stockholders' equity of $175.4 million.
Peoples Bank held trust assets with an approximate market value of $646 million
at December 31, 2004. For the year ended December 31, 2004, Peoples' return on
average assets was 1.04% and return on average stockholders' equity was 10.60%.
For the five-year period ended December 31, 2004, Peoples' assets grew at a
11.0% compound annual growth rate, while stockholders' equity grew at a compound
annual growth rate of 19.2%. Peoples also has a history of earnings and dividend
growth, as earnings and dividends per share grew at compound rates of 7.3% and
13.0%, respectively, for the five-year period ended December 31, 2004. Over that
same period, Peoples' annual return on average assets and annual return on
average stockholders' equity averaged 1.11% and 13.31%, respectively.
Peoples has experienced significant growth in assets and increased its capital
position through a combination of internal and external growth. In December 2002
and January 2003, Peoples increased its capital position through the sale of 1.7
million common shares, which generated capital of nearly $37 million. In
addition to core organic growth, Peoples has undertaken a controlled and steady
expansion and acquisition strategy. In the past five years, Peoples has opened
two de novo banking branches and two loan production offices in its market area
and has completed two branch acquisitions, three bank acquisitions and two
insurance agency acquisitions. Since year-end 1999, Peoples has acquired $388
million of assets, which included $202 million of loans, $301 million of
deposits, and 14 financial service offices. These acquisitions produced
benefits, including the expansion of Peoples' customer base, and provided
opportunities to integrate non-traditional products and services, such as
insurance and investments, with the traditional banking products currently
offered to clients in Peoples' markets. These acquisitions also enabled Peoples
to expand into new markets.
Peoples routinely explores opportunities for additional growth and expansion of
its core financial service businesses, including the acquisition of companies
engaged in similar activities. Management also focuses on internal growth as a
method for reaching performance goals and reviews key performance indicators on
a regular basis to measure Peoples' success. There can be no assurance, however,
that Peoples will be able to grow, or if it does, that any such growth or
expansion will result in an increase in Peoples' earnings, dividends, book value
or the market value of its common shares.
Recent Acquisitions and Additions
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At the close of business on December 3, 2004, Peoples Bank completed the
acquisition of two full-service offices in the Ashland, Kentucky area from an
unaffiliated institution. In the acquisition, Peoples acquired approximately $65
million in deposits and $43 million of loans. Concurrent with the acquisition,
Peoples Bank consolidated some of its Ashland, Kentucky area banking offices.
The Flatwoods, Kentucky, office and the acquired office in downtown Ashland were
consolidated into nearby Peoples Bank offices at the close of business on
December 3, 2004. Also, the Peoples Bank Cedar Knoll office ceased operations at
the close of business on December 27, 2004, with clients redirected to Peoples
Bank's newly acquired office in Summit, Kentucky.
At the close of business on May 28, 2004, Peoples completed the acquisition of
Barengo Insurance Agency, Inc., ("Barengo"), based in Marietta, Ohio, for
initial consideration of $6.2 million ($3.0 million in cash and $3.2 million in
Peoples' common shares). The agreement also provides for additional
consideration of up to $2.7 million ($1.3 million in cash and $1.4 million in
Peoples Bancorp's common shares) to be paid by Peoples over the next three
years, contingent on Barengo achieving certain revenue growth goals.
At the close of business on April 30, 2004, Peoples completed the acquisition of
substantially all of the assets of Putnam Agency, Inc. ("Putnam Agency"), with
offices in Ashland, Kentucky and Huntington, West Virginia, for initial
consideration of $8.6 million ($7.0 million in cash and $1.6 million in Peoples'
common shares). The agreement also provides for additional consideration of up
to $4.4 million in cash to be paid by Peoples over the next three years,
contingent on the Putnam Agency achieving certain revenue growth goals.
Both Barengo and the Putnam Agency were full-service insurance agencies that
offered a wide range of insurance products to both commercial and individual
clients. Peoples operates the former agencies as divisions of Peoples Insurance
Agency, using the "Barengo Insurance Agency" and "Putnam Agency" trade names.
Peoples has retained all key producers and managers, with the exception of one
producer with the Putnam Agency who has retired.
Customers and Markets
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Peoples has expanded from its roots in Washington County, Ohio, where it
maintains nine financial service locations, to a market area that encompasses 18
counties in southeastern Ohio and neighboring areas of Kentucky and West
Virginia, focusing on 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 somewhat
insulated from some of the fluctuations of national economic cycles as a result
of the diverse economic base.
Peoples Bank originates various types of loans, including commercial and
commercial real estate loans, residential real estate loans, home equity lines
of credit, real estate construction loans, and consumer loans (including loans
to individuals and indirect loans). In general, Peoples Bank retains the
majority of loans it originates; however, certain fixed-rate mortgage loan
originations, primarily one-to-four family residential mortgages, are sold into
the secondary market. In prior years, Peoples Bank also originated various
credit card loans. In late 2003, Peoples Bank sold its existing credit card
portfolio and entered into a joint marketing alliance to serve the credit card
needs of its customers and prospects, which reduces Peoples Bank's risks since
it does not own the loans.
Loans are spread over a broad range of industrial classifications. Management
believes 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 concentrated primarily in southeastern Ohio,
northeastern Kentucky and northwestern West Virginia. In addition, loan
production offices and full-service banking offices in central Ohio provide
opportunities to serve customers in that economic region.
Legal Lending Limit
At December 31, 2004, Peoples Bank's legal lending limit was approximately $21.4
million. In 2004, Peoples Bank did not extend credit to any one borrower in
excess of its legal lending limit.
Commercial Loans
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At December 31, 2004, Peoples Bank had $576.7 million in commercial, financial
and agricultural loans, including loans secured by commercial real estate
("commercial loans") outstanding, representing approximately 56.3% of the total
aggregate loan portfolio. Loans secured by commercial real estate, excluding
construction loans, totaled $450.3 million at December 31, 2004.
LENDING PRACTICES. Commercial lending entails significant additional risks
compared to consumer lending (i.e., single-family residential mortgage lending,
installment lending, credit card loans and indirect lending). In addition, the
payment experience on commercial loans typically depends on adequate cash flow
of a business and thus may be subject, to a greater extent, to adverse
conditions in the general economy or in a specific industry. Loan terms include
amortization schedules commensurate with the purpose of each loan, the source of
repayment and the risk involved. The primary analytical technique used in
determining whether to grant a commercial loan is the review of a schedule of
cash flows to evaluate whether anticipated future cash flows will be adequate to
service both interest and principal due. Additionally, collateral is reviewed to
determine its value in relation to the loan.
The Peoples Bank Board of Directors is required to approve loans 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 of the loan has occurred, Peoples Bank takes
effective and prompt action designed to assure repayment of the loan. Upon
detection of the reduced ability of a borrower to meet cash flow obligations,
the loan is considered an impaired loan and reviewed for possible downgrading or
placement on non-accrual status.
Consumer Loans
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At December 31, 2004, Peoples Bank had outstanding consumer loans (including
indirect loans but excluding real estate loans) in an aggregate amount of $60.9
million, or 6.0% 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 at more risk from adverse personal
circumstances. In addition, application of various state and federal laws,
including bankruptcy and insolvency laws, could limit the amount that may be
recovered under these loans. Credit approval for consumer loans typically
requires demonstration of sufficiency of income to repay principal and interest
due, stability of employment, a positive credit record and sufficient collateral
for secured loans. It is the policy of Peoples Bank to review its consumer loan
portfolio monthly and to chargeoff 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 borrowers, thus reducing risk of loss when a
borrower's income is terminated or interrupted due to accident, disability or
death.
Real Estate Loans
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At December 31, 2004, Peoples Bank had $385.4 million of real estate loans
outstanding (including home equity and construction loans), representing 37.7%
of total loans outstanding. Home equity lines of credit and construction
mortgages totaled $43.7 million and $35.4 million, respectively. Peoples also
had approximately $0.6 million of real estate loans (primary one-to-four family
residential mortgages) held for sale into the secondary market at December 31,
2004. Peoples was servicing $106.4 million of real estate loans (primary
one-to-four family residential mortgages) previously sold into the secondary
market at December 31, 2004.
LENDING PRACTICES. Peoples Bank requires residential real estate loan amounts to
be no more than 90% of the purchase price or the appraised value of the real
estate securing the loan, unless private mortgage insurance is obtained by the
borrower for the percentage exceeding 90%. On occasion, Peoples Bank may lend up
to 100% of the appraised value of the real estate. The risk conditions of these
loans are considered during underwriting for the purposes of establishing an
interest rate compatible with the risks inherent in mortgage lending and
remaining equity of the home, if any. Peoples Bank originates both fixed rate
and one-to-five year adjustable rate, fully amortizing real estate loans.
Typically, the fixed rate real estate loans are sold in the secondary market,
with Peoples Bank retaining servicing rights on those loans. In select cases,
Peoples Bank may retain certain fixed rate real estate loans. Real estate loans
are typically secured by first mortgages with evidence of title in favor of
Peoples Bank in the form of an attorney's opinion of the title or a title
insurance policy. Peoples Bank also requires proof of hazard insurance, with
Peoples Bank named as the mortgagee and as the loss payee. Licensed appraisals
are required for loans in excess of $250,000.
HOME EQUITY LOANS. Home equity lines of credit, or Equilines, are generally made
as second mortgages by Peoples Bank. The maximum amount of a home equity line of
credit is generally limited to 80% of the appraised value of the property less
the balance of the first mortgage. Peoples Bank will lend up to 100% of the
appraised value of the property at higher interest rates that are considered
compatible with the additional risk assumed in these types of equilines. The
home equity lines of credit are written with ten-year terms, but are subject to
review upon request for renewal. Peoples Bank offers home equity loans with a
fixed rate for the first five years and converting to a variable interest rate
for the remaining five years. Peoples Bank also offers a home equity line of
credit with a variable rate for the entire term of the loan.
CONSTRUCTION LOANS. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, Peoples Bank may be
required to advance funds beyond the amount originally committed to permit
completion of the project.
Overdraft Privilege
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Since 2001, Peoples Bank has granted Overdraft Privilege to qualified customers.
Overdraft Privilege is a service that provides virtually automatic overdraft
protection to retail customers by establishing an Overdraft Privilege amount.
After a 30-day waiting period to verify deposit ability, each new checking
account usually receives an Overdraft Privilege amount of either $400 or $700,
based on the type of account and other parameters. Once established, customers
are permitted to overdraw their checking account, up to their Overdraft
Privilege limit, with each item being charged Peoples' regular overdraft fee.
Customers repay the overdraft with their next deposit. Overdraft Privilege is
designed to allow Peoples to fill the void between traditional overdraft
protection, such as a line of credit, and "check cashing stores". While
Overdraft Privilege generates fee income, Peoples maintains an allowance for
losses from checking accounts with overdrafts deemed uncollectible. This
allowance, along with the related provision and net chargeoffs, is included in
Peoples' allowance for loan losses.
Website Access to Peoples' Securities and Exchange Commission Filings
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Peoples makes available free of charge on or through its website, its annual
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 files each such report or
amendment with, or furnishes it to, the Securities and Exchange Commission
("SEC").
Corporate Governance
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Peoples' Board of Directors and management has instituted a series of actions to
enhance Peoples' already strong corporate governance practices. Included in
those actions was adoption of a Code of Ethics, a revision of the charter of the
Audit Committee and the formation two new committees: the Disclosure Committee
for Financial Reporting and the Governance and Nominating Committee. The current
charters of these committees and the Compensation Committee can be found on
Peoples' website under the "Corporate Governance and Code of Ethics and Ethics
Hotline" section.
Code of Ethics
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In 2003, Peoples' Board of Directors adopted a formal Code of Ethics applicable
to all directors, officers and associates of Peoples and its affiliates. The
Board of Directors adopted Peoples' Code of Ethics to demonstrate to the public
and Peoples' shareholders the importance the Board and management place on
ethical conduct, and to continue to set forth Peoples' expectations for the
conduct of ethical business practices. Peoples' Code of Ethics is available,
free of charge, to the public on Peoples' website on the "Corporate Governance
and Code of Ethics and Ethics Hotline" page. Please also see Item 10 of Part III
of this Form 10-K.
Disclosure Committee for Financial Reporting
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In 2003, Peoples established the Disclosure Committee for Financial Reporting
(the "Disclosure Committee") to formalize Peoples' process of establishing and
monitoring Peoples' disclosure controls and procedures and communicating the
results of such controls and procedures. The Disclosure Committee consists of
key members of executive management as well as senior professional support staff
from the Legal Department, Risk Management group and Controller. The Disclosure
Committee complements Peoples' longstanding committee structure and process,
which has consistently provided an invaluable tool for communication of
disclosure information.
The Disclosure Committee has the responsibility to:
o ensure that Peoples' Chief Executive Officer and Chief Financial
Officer can evaluate the effectiveness of Peoples' disclosure controls
and procedures, for the purpose of improving these controls and
procedures as necessary and disclosing the results of the evaluation
in the reports Peoples files with the SEC.
o ensure management has timely access to all information which is
necessary or desirable to disclose in Peoples' reports for the purpose
of discharging Peoples' responsibilities in providing accurate and
complete information to shareholders, including, but not limited to, a
fair presentation of Peoples' financial condition, results of
operations and cash flows.
o facilitate determinations regarding the appropriate disclosure of the
results of Peoples' disclosure controls and procedures in Peoples'
reports, including the determination of the materiality of risks or
events for the purposes of disclosure in reports.
o provide a process on which Peoples' Chief Executive Officer and Chief
Financial Officer can rely in providing the certifications required
under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 to be
filed, or furnished, with each report.
Each key element of operation is subject to oversight by a committee to ensure
proper administration, risk management and an up-streaming of critical
management information and disclosures to finance and control areas, executive
management and the Board of Directors. The Disclosure Committee agenda is
designed to capture information from all components of Peoples' business. It is
believed that the addition of these new processes has brought with it a broader
and more in-depth analysis to Peoples' already effective and detailed disclosure
process, as well as enhanced Peoples' overall disclosure control environment.
Governance and Nominating Committee
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In 2003, the Board of Directors formally developed a Governance and Nominating
Committee consisting of at least three independent members of the Board. The
purpose of the Governance and Nominating Committee is to identify qualified
candidates for election, nomination or appointment to Peoples' Board of
Directors and recommend to the Board a slate of director nominees for each
annual meeting of the shareholders of Peoples' or as vacancies occur. In
addition, the Governance and Nominating Committee oversees matters of corporate
governance, including the evaluation of Board performance and processes, and
makes recommendations to the Board and the Chairman of the Board regarding
assignment and rotation of members and chairs of committees of the Board. The
goal of the Governance and Nominating Committee is to assure that the
composition, practices and operation of the Board contribute to value creation
and to the effective representation of Peoples' shareholders.
Competition
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The financial services industry is highly competitive, especially in Peoples'
primary markets. Continued deregulation and other dynamic changes in the
financial services industry subjects Peoples to intense competition by providing
customers the opportunity to select from a growing variety of traditional and
nontraditional alternatives. Competition in Peoples Bank's lending activities
comes principally from other commercial banks, savings associations, insurance
companies, governmental agencies, credit unions, brokerage firms and pension
funds. The primary factors in competing for loans are interest 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, quality of service provided and overall financial condition. Peoples
also faces competition for wealth management and insurance products from other
commercial banks, brokerage firms and insurance agencies. Peoples believes that
its size provides flexibility, which enables Peoples Bank to offer an array of
banking products and services. Peoples' financial condition also contributes to
a favorable competitive position in the markets Peoples serves.
Peoples primarily focuses on non-major metropolitan markets in which to provide
a full range of products and services. Management believes Peoples has developed
a niche and a certain level of expertise in serving these communities, although
Peoples has recently expanded in the more metropolitan area of central Ohio with
loan production offices. Peoples historically has operated under a "needs-based"
selling approach that management believes has proven successful in serving the
financial needs of many customers. Management anticipates Peoples will continue
to increase its investment in sales training and education in future periods to
assist in the development of Peoples' associates and their identification of
customer service opportunities.
It is not Peoples' strategy to compete solely on the basis of price. Management
believes a focus on customer relationships, speed in the delivery of service and
incentives to promote customers' continued use of multiple financial products
and services will lead to enhanced revenue opportunities. Management believes
the integration of traditional financial products with non-traditional financial
products, such as insurance and investment products, will lead to enhanced
revenues through complementary product offerings.
Supervision and Regulation
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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, and received approval from the Federal Reserve Board,
to become a financial holding company.
BANKING SUBSIDIARY. Peoples Bank is a national banking association chartered
under the National Banking Act and is regulated by the Office of the Comptroller
of the Currency. Peoples Bank provides Federal Deposit Insurance Corporation
("FDIC") insurance on its deposits, up to prescribed statutory limits, and is a
member of the Federal Home Loan Bank ("FHLB") of Cincinnati. As a national bank,
Peoples Bank may engage, subject to limitations on investment and capital
requirements, in activities that are financial in nature, other than insurance
underwriting, 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 subject to the reporting requirements of, and examination and
regulation by, the Federal Reserve Board. In addition, the Federal Reserve Board
has adopted risk-based capital guidelines for financial holding companies. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning assets and
off-balance sheet items to broad risk categories.
Federal Deposit Insurance Corporation
The FDIC insures the deposits of Peoples Bank up to the applicable legal limit,
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 FHLB provides credit to their members in the form of collateralized
advances. As a member of the FHLB of Cincinnati, Peoples Bank must maintain an
investment in the capital stock of that FHLB in an amount equal to the greater
of 1% of the aggregate outstanding principal amount of its respective
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB.
Capital Requirements
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Peoples and its banking subsidiary are subject to various regulatory capital
requirements administered by the banking regulatory agencies. The Federal
Reserve Board, the Office of the Comptroller of Currency and the FDIC have
substantially similar risk-based capital ratio and leverage ratio guidelines for
banking organizations. The guidelines are intended to ensure that banking
organizations have adequate capital given the risk levels of assets and
off-balance sheet financial instruments. For further discussion regarding
Peoples and Peoples Bank's risk-based capital requirements, see Note 13 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Limits on Dividends
- -------------------
Peoples' ability to pay dividends depends largely on the amount of dividends
declared by Peoples Bank and Peoples' other subsidiaries. However, the Federal
Reserve Board expects Peoples to serve as a source of strength to Peoples Bank
and may require Peoples to retain capital for further investment in Peoples
Bank, rather than pay dividends to 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.
Even when the legal ability exists, Peoples or Peoples Bank may decide to limit
the payment of dividends in order to retain earnings for corporate use.
Additionally, Peoples has established two trust subsidiaries, which issued
preferred securities. If Peoples suspends interest payments relating to the
trust preferred securities issued by either of the two trust subsidiaries,
Peoples will be prohibited from paying dividends on its common shares. For
further discussion regarding Peoples' trust subsidiaries, see Note 9 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Federal and State Laws
- ----------------------
Peoples Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of Peoples Bank to open
a new branch or engage in a merger transaction. Community reinvestment
regulations evaluate how well and to what extent Peoples Bank lends and invests
in its designated service area, with particular emphasis on low-to-moderate
income communities and borrowers in such areas.
Sarbanes-Oxley Act of 2002
- --------------------------
In 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 addresses, among other matters: increased
responsibilities of audit committees; certification of financial statements by
the chief executive officer and the chief financial officer; a requirement that
chief executive and chief financial officers forfeit certain bonuses and profits
if their companies issue restated financial statements due to miscounduct; 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 loans by federally insured financial institutions);
expedited filing requirements for stock transaction reports by officers and
directors; the formation of the Public Company Accounting Oversight Board;
auditor independence; and various increased criminal penalties for violations of
securities laws.
Monetary Policy and Economic Conditions
- ---------------------------------------
The business of financial institutions is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
agencies, including the Federal Reserve Board. The Federal Reserve Board
regulates money and credit conditions and interest rates in order to influence
general economic conditions primarily through open market operations in U.S.
government securities, changes in the discount rate on bank borrowings, and
changes in the reserve requirements against depository institutions' deposits.
These policies and regulations significantly affect the overall growth and
distribution of loans, investments and deposits, as well as interest rates
charged on loans and paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of financial institutions in the past and are expected
to continue to have significant effects in the future. In view of the changing
conditions in the economy, the money markets and the activities of monetary and
fiscal authorities, Peoples can make no definitive predictions as to future
changes in interest rates, credit availability or deposit levels.
Effect of Environmental Regulation
- ----------------------------------
Peoples' primary exposure to environmental risk is through Peoples Bank's
lending activities. When management believes environmental risk potentially
exists, Peoples mitigates its environmental risk exposures by requiring
environmental site assessments at the time of loan origination to confirm
collateral quality as to commercial real estate parcels posing higher than
normal potential for environmental impact, as determined by reference to present
and past uses of the subject property and adjacent sites. Environmental
assessments are typically required prior to any foreclosure activity involving
non-residential real estate collateral. Management reviews residential real
estate loans with inherent environmental risk on an individual basis and makes
decisions based on the dollar amount of the loan and the materiality of the
specific credit.
Peoples anticipates no material effect on capital expenditures, earnings or the
competitive position of itself or any subsidiary as a result of compliance with
federal, state or local environmental protection laws or regulations.
Statistical Financial Information Regarding Peoples
- ---------------------------------------------------
The following listing of statistical financial information provides comparative
data for Peoples over the past three and five years, as appropriate. These
tables should be read in conjunction with Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operation, of this Form 10-K and
the Consolidated Financial Statements of Peoples and its subsidiaries found at
pages 19 through 39 of this Form 10-K. Loan Portfolio Analysis:
(Dollars in Thousands) 2004 2003 2002 2001 2000
Year-end loan balances:
Commercial, financial and agricultural $ 576,743 $ 512,069 $ 392,528 $ 343,800 $ 310,558
Real estate, mortgage 349,965 301,726 330,840 295,944 283,323
Real estate, construction 35,423 21,056 16,231 14,530 20,267
Consumer 60,927 79,926 103,635 111,912 115,913
Credit card - 221 6,549 6,670 6,904
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 1,023,058 $ 914,998 $ 849,783 $ 772,856 $ 736,965
===========================================================================================================================
Percent of loans to total loans at December 31:
Commercial, financial and agricultural 56.3% 56.0% 46.1% 44.5% 42.1%
Real estate, mortgage 34.2 33.0 39.0 38.3 38.4
Real estate, construction 3.5 2.3 1.9 1.9 2.8
Consumer 6.0 8.7 12.2 14.5 15.8
Credit card - 0.0 0.8 0.8 0.9
- ---------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===========================================================================================================================
Average total loans 942,761 894,419 824,731 753,777 698,144
Average allowance for loan losses (14,974) (14,093) (12,779) (12,164) (10,979)
- ---------------------------------------------------------------------------------------------------------------------------
Average loans, net of allowance $ 927,787 $ 880,326 $ 811,952 $ 741,613 $ 687,165
===========================================================================================================================
Allowance for loan losses:
Allowance for loan losses, January 1 $ 14,575 $ 13,086 $ 12,357 $ 10,930 $ 10,264
Allowance for loan losses acquired - 573 304 967 -
Loans charged off:
Commercial, financial and agricultural 961 1,036 1,935 1,048 780
Real estate 677 449 268 154 74
Consumer 886 1,113 1,054 1,188 1,018
Overdrafts 1,130 967 880 - -
Credit card 133 221 191 248 189
- ---------------------------------------------------------------------------------------------------------------------------
Total 3,787 3,786 4,328 2,638 2,061
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 487 352 41 124 78
Real estate 186 66 58 5 2
Consumer 431 399 387 286 303
Overdrafts 308 263 175 - -
Credit card 14 21 25 24 22
- ---------------------------------------------------------------------------------------------------------------------------
Total 1,426 1,101 686 439 405
- ---------------------------------------------------------------------------------------------------------------------------
Net chargeoffs:
Commercial, financial and agricultural 474 684 1,894 924 702
Real estate 491 383 210 149 72
Consumer 455 714 667 902 715
Overdrafts 822 704 705 - -
Credit card 119 200 166 224 167
- ---------------------------------------------------------------------------------------------------------------------------
Total 2,361 2,685 3,642 2,199 1,656
- ---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses, December 31 2,546 3,601 4,067 2,659 2,322
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 14,760 $ 14,575 $ 13,086 $ 12,357 $ 10,930
===========================================================================================================================
Allocation of allowance for loan losses at December 31:
Commercial, financial and agricultural $ 11,751 $ 11,232 $ 8,846 $ 7,950 $ 5,992
Real estate 1,175 1,234 1,617 1,602 1,112
Consumer 1,394 1,594 2,075 2,447 2,701
Overdrafts 327 283 206 - -
Credit card 113 232 342 358 432
General risk - - - - 693
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 14,760 $ 14,575 $ 13,086 $ 12,357 $ 10,930
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net chargeoffs to average loans:
Commercial, financial and agricultural 0.05% 0.08% 0.23% 0.12% 0.10%
Real estate 0.05 0.04 0.03 0.02 0.01
Consumer 0.05 0.08 0.08 0.12 0.10
Overdrafts 0.09 0.08 0.09 - -
Credit card 0.01 0.02 0.02 0.03 0.02
- ---------------------------------------------------------------------------------------------------------------------------
Total 0.25% 0.30% 0.45% 0.29% 0.23%
===========================================================================================================================
Nonperforming assets:
Loans 90+ days past due $ 285 $ 188 $ 407 $ 686 $ 344
Renegotiated loans 1,128 - 2,439 425 518
Nonaccrual loans 5,130 6,556 4,617 4,380 4,280
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 6,543 6,744 7,463 5,491 5,142
Other real estate owned 1,163 392 148 181 86
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,706 $ 7,136 $ 7,611 $ 5,672 $ 5,228
===========================================================================================================================
Nonperforming loans as a percent of total loans 0.64% 0.73% 0.88% 0.71% 0.70%
===========================================================================================================================
Nonperforming assets as a percent of total assets 0.43% 0.41% 0.55% 0.48% 0.46%
===========================================================================================================================
Allowance for loan losses as a percent of total loans 1.44% 1.59% 1.54% 1.60% 1.48%
===========================================================================================================================
Allowance for loan losses as a percent of nonperforming 225.6% 216.1% 175.3% 225.0% 212.6%
loans
===========================================================================================================================
Interest income on nonaccrual and renegotiated loans that would have been
recorded under the original terms of the loans for 2004, 2003 and 2002 was
$338,000 ($68,000 was actually recorded), $387,000 ($59,000 was actually
recorded) and $632,000 ($23,000 was actually recorded), respectively.
Peoples discontinues the accrual of interest on loans when management believes
collection of all or a portion of contractual interest has become doubtful,
which generally occurs when a loan is 90 days past due. A nonaccrual loan is
restored to accrual status when it is brought current, has performed in
accordance with contractual terms for a reasonable period of time, and the
collectibility of the total contractual principal and interest is no longer in
doubt. Interest on a nonaccrual loan is recorded on a cash basis and if
principal recovery is reasonably assured.
Loan Maturities at December 31, 2004:
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 $ 18,465 $ 87,839 $ 82,432 $ 188,736
Variable 88,770 62,759 236,478 388,007
----------------------------------------------------------------------------------------------------------------------
Total commercial loans 107,235 150,598 318,910 576,743
----------------------------------------------------------------------------------------------------------------------
Construction loans:
Fixed 331 3,024 2,204 5,559
Variable 3,985 10,311 15,568 29,864
----------------------------------------------------------------------------------------------------------------------
Total real estate loans 4,316 13,335 17,772 35,423
----------------------------------------------------------------------------------------------------------------------
Mortgage real estate loans:
Fixed 438 8,289 99,695 108,422
Variable 252 9,609 231,682 241,543
----------------------------------------------------------------------------------------------------------------------
Total real estate loans 690 17,898 331,377 349,965
----------------------------------------------------------------------------------------------------------------------
Consumer loans:
Fixed 5,823 47,647 6,246 59,716
Variable 470 298 443 1,211
----------------------------------------------------------------------------------------------------------------------
Total consumer loans 6,293 47,945 6,689 60,927
----------------------------------------------------------------------------------------------------------------------
Total loans $ 118,534 $ 229,776 $ 674,748 $ 1,023,058
======================================================================================================================
Average Balances and Analysis of Net Interest Income:
(Dollars in Thousands) 2004 2003 2002
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------------------
Securities (1):
Taxable $ 576,502 $ 24,237 4.20% $ 609,453 $ 26,429 4.34% $ 298,850 $ 17,615 5.89%
Nontaxable (2) 63,589 4,274 6.72% 66,232 4,433 6.69% 62,561 4,349 6.95%
------------ ----------- ------- ------------ ---------- ------- ------------ --------- --------
Total 640,091 28,511 4.45% 675,685 30,862 4.57% 361,411 21,964 6.08%
Loans (3) (4):
Commercial 559,762 33,388 5.96% 471,145 29,786 6.32% 386,812 26,620 6.88%
Real estate (5) 313,234 20,303 6.48% 324,778 22,970 7.07% 322,627 24,365 7.55%
Consumer 69,765 6,323 9.06% 98,496 9,514 9.66% 115,292 11,527 10.00%
Valuation reserve (14,974) (14,093) (12,779)
------------ ----------- ------- ------------ ---------- ------- ------------ --------- --------
Total 927,787 60,014 6.47% 880,326 62,270 7.07% 811,952 62,512 7.70%
Short-term Investments:
Interest-bearing
deposits
in other banks 2,610 21 0.80% 2,917 21 0.72% 2,041 28 1.35%
Federal funds sold 9,204 114 1.24% 15,453 164 1.06% 5,294 75 1.43%
------------ ----------- ------- ------------ ---------- ------- ------------ --------- --------
Total 11,814 135 1.14% 18,370 185 1.01% 7,335 103 1.42%
------------ ----------- ------- ------------ ---------- ------- ------------ --------- --------
Total 1,579,692 88,660 5.61% 1,574,381 93,317 5.93% 1,180,698 84,579 7.16%
earning assets
Other assets 180,843 135,661 107,623
------------ ------------ ------------
Total assets $ 1,760,535 $ 1,710,042 $ 1,288,321
============ =========== ============
Deposits:
Savings $ 171,705 $ 1,140 0.66% $ 172,240 $ 1,733 1.01% $ 116,512 $ 1,731 1.49%
Interest-bearing demand 262,206 2,359 0.90% 272,800 2,667 0.98% 279,407 4,481 1.60%
Time 454,793 13,498 2.97% 453,488 14,171 3.12% 393,676 15,945 4.05%
------------ ----------- ------- ------------ ---------- ------- ------------ --------- --------
Total 888,704 16,997 1.91% 898,528 18,571 2.07% 789,595 22,157 2.81%
------------ ----------- ------- ------------ ---------- ------- ------------ --------- --------
Borrowed Funds:
Short-term 87,051 1,130 1.30% 54,219 793 1.46% 45,847 869 1.89%
Long-term 454,898 17,033 3.74% 457,858 18,686 4.08% 236,251 12,290 5.20%
------------ ----------- ------- ------------ ---------- ------- ------------ --------- --------
Total 541,949 18,163 3.32% 512,077 19,479 3.78% 282,098 13,159 4.65%
------------ ----------- ------- ------------ ---------- ------- ------------ --------- --------
Total interest-bearing
liabilities 1,430,653 35,160 2.45% 1,410,605 38,050 2.69% 1,071,693 35,316 3.29%
------------ ----------- ------- ------------ ---------- ------- ------------ --------- --------
Non-interest-bearing
demand deposits 144,564 124,574 100,740
Other liabilities 12,919 8,223 9,863
------------ ------------ ------------
Total liabilities 1,588,136 1,543,402 1,182,296
Stockholders'
equity 172,399 166,640 106,025
------------ ------------ ------------
Total liabilities
and
stockholders'
equity $ 1,760,535 $ 1,710,042 $ 1,288,321
============ ============ ============
Interest rate spread $ 53,500 3.16% $ 55,267 3.24% $ 49,263 3.87%
Interest income/earning assets 5.61% 5.93% 7.16%
Interest expense/earning assets 2.22% 2.41% 2.99%
-------- -------- --------
Net yield on earning assets (net interest 3.39% 3.52% 4.17%
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 $1,630; $1,662 and $1,611 for 2004; 2003 and 2002,
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 2004; 2003 and 2002 were $482;
$698 and $711, respectively. (5) Loans held for sale are included in the
average balances listed. Related interest income on loans originated
for sale prior to the loan being sold is included in real estate loan
interest income.
Rate Volume Analysis:
(Dollars in Thousands)
Change from 2003 to 2004 (1) Change from 2002 to 2003 (1)
Increase (decrease) in: Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
Investment income: (2)
Taxable $ (1,401) $ (791) $ (2,192) $ 14,450 $ (5,636) $ 8,814
Nontaxable (178) 19 (159) 249 (165) 84
- ---------------------------------------------------------------------------------------------------------------------------
Total (1,579) (772) (2,351) 14,699 (5,801) 8,898
- ---------------------------------------------------------------------------------------------------------------------------
Loan Income:
Commercial 5,359 (1,757) 3,602 5,460 (2,294) 3,166
Real estate (796) (1,871) (2,667) 161 (1,556) (1,395)
Consumer (2,634) (557) (3,191) (1,633) (380) (2,013)
- ---------------------------------------------------------------------------------------------------------------------------
Total 1,929 (4,185) (2,256) 3,988 (4,230) (242)
- ---------------------------------------------------------------------------------------------------------------------------
Short-term investments (72) 22 (50) 118 (36) 82
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 278 (4,935) (4,657) 18,805 (10,067) 8,738
===========================================================================================================================
Interest expense:
Savings deposits (5) (588) (593) 668 (666 2
Interest-bearing demand
deposits (101) (207) (308) (104) (1,710) (1,814)
Time deposits 41 (714) (673) 2,201 (3,975) (1,774)
Short-term borrowings 435 (98) 337 143 (219) (76)
Long-term borrowings (120) (1,533) (1,653) 9,508 (3,112) 6,396
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 250 (3,140) (2,890) 12,416 (9,682) 2,734
===========================================================================================================================
Net interest income $ 28 $ (1,795) $ (1,767) $ 6,389 $ (385) $ 6,004
===========================================================================================================================
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the dollar
amounts of the change in each.
(2) Presented on a fully-tax equivalent basis.
Maturities of Certificates of Deposit $100,000 or More at December 31:
(Dollars in Thousands) 2004 2003 2002 2001 2000
3 months or less $ 17,772 $ 10,316 $ 11,559 $ 15,478 $ 17,430
Over 3 to 6 months 17,923 18,964 23,793 25,279 6,871
Over 6 to 12 months 14,163 40,701 9,277 7,515 16,639
Over 12 months 76,267 49,765 50,181 28,270 24,209
- ------------------------ ---------- ---------- ---------- ----------- ----------
Total $ 126,125 $ 119,746 $ 94,810 $ 76,542 $ 65,149
- ------------------------ ---------- ---------- ---------- ----------- ----------
ITEM 2. PROPERTIES
Peoples' sole banking subsidiary, Peoples Bank, generally owns its offices,
related facilities and unimproved real property. In Ohio, Peoples Bank operates
offices in Marietta (4 offices), Belpre (2 offices), Lowell, Lower Salem, Reno,
Nelsonville (2 offices), Athens (3 offices), The Plains, Middleport, Rutland,
Pomeroy (2 offices), Gallipolis, Cambridge (2 offices), Byesville, Quaker City,
Flushing, Caldwell, Chesterhill, McConnelsville, Baltimore, Lancaster, Delaware
and Granville. In West Virginia, Peoples Bank operates offices in Huntington,
Parkersburg (3 offices), Vienna, Point Pleasant (2 offices), New Martinsville (2
offices) and Steelton. In Kentucky, Peoples Bank's office locations include
Greenup, Summit, South Shore, Grayson, Ashland and Russell.
Peoples Insurance Agency rents office space in various Peoples Bank's offices.
In addition, Peoples Insurance Agency leases office buildings in Marietta, Ohio,
Huntington; West Virginia; and Ashland, Kentucky.
Of the 48 banking offices, 12 are leased and the rest are owned. Rent expense on
the leased properties totaled $534,000 in 2004. The following are the only
properties that have a lease expiring on or before June 2006:
Lease
Expiration
Location Address Date
- -------------------------------- --------------------------- --------------
Granville Loan Production Office 1915 Newark-Granville Road September 2005
Granville, Ohio
Delaware Loan Production Office 351 West Central Avenue March 2006
Delaware, Ohio
Additional information concerning the property and equipment owned or leased by
Peoples and its subsidiaries is incorporated herein by reference from Note 5 of
the Notes to the Consolidated Financial Statements included in Item 8 of this
Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings to which Peoples or any of its
subsidiaries is a party or to which any of their property is subject other than
ordinary routine litigation to which Peoples' subsidiaries are parties
incidental to their respective businesses. Peoples considers none of such
proceedings to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------
Pursuant to General Instruction G of Form 10-K and Instruction 3 to Item 401(b)
of Regulation S-K, the following information regarding Peoples' executive
officers is included as an unnumbered item in Part I of this Form 10-K in lieu
of being included in the Peoples' definitive Proxy Statement relating to
Peoples' Annual Meeting of Shareholders to be held April 14, 2005 ("Peoples'
2005 Definitive Proxy Statement").
In addition to Robert E. Evans, Chairman of the Board and Chief Executive
Officer, and Mark F. Bradley, President and Chief Operating Officer, whose Item
401(b) information is included in Peoples' 2005 Definitive Proxy Statement under
"Election of Directors," the executive officers of Peoples as of February 14,
2005, are as follows:
Name Age Position
David B. Baker 58 Executive Vice President
John (Jack) W. Conlon 59 Chief Financial Officer and Treasurer
Larry E. Holdren 57 Executive Vice President
Carol A. Schneeberger 48 Executive Vice President/Operations
Joseph S. Yazombek 51 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.
Each executive officer of Peoples is appointed by the Board of Directors and
serves at the pleasure of the Board.
In August 2004, Peoples offered Change in Control Agreements to the executive
officers of Peoples and entered into agreements ("Agreement" or "Agreements")
with Robert E. Evans, Mark F. Bradley, David B. Baker, John W. Conlon, Larry E.
Holdren and Carol A. Schneeberger. Each Agreement provides that, if the
executive officer is terminated by Peoples or its successors for any reason
other than cause or by the executive officer for good reason, within six (6)
months prior to or within twenty-four (24) months after a defined change in
control, Peoples will pay a specified change in control benefit to the executive
officer. If the executive officer receives a change in control benefit as
previously described, he or she is subject to a non-compete agreement covering
the same period of time as the benefit is paid. Additional information required
by Item 401(b) of Regulation S-K regarding the Agreements are incorporated
herein by reference to the sections captioned "Change in Control Arrangements"
on pages 18, 22 and 23 of Peoples' 2005 Definitive Proxy Statement and Exhibits
10(u) and 10(v) of this Annual Report on Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Peoples' common shares are traded on The NASDAQ National Market under the symbol
PEBO. At December 31, 2004, Peoples had 1,307 stockholders of record. The table
presented below provides the high and low bids for Peoples' common shares and
the cash dividends per share declared for the indicated periods. Bid information
has been obtained directly from The NASDAQ National Market.
Dividends
High Bid Low Bid Declared
2004
Fourth Quarter $ 32.44 $ 26.21 $ 0.180
Third Quarter 26.67 23.27 0.180
Second Quarter 28.10 27.52 0.180
First Quarter 32.05 26.92 0.180
- ----------------------------------------------------------------------------
2003
Fourth Quarter $ 30.17 $ 26.92 $ 0.180
Third Quarter 28.45 23.53 0.170
Second Quarter 24.99 21.10 0.152
First Quarter 25.24 19.45 0.143
- ----------------------------------------------------------------------------
Peoples plans to continue to pay quarterly cash dividends, subject to certain
regulatory restrictions described in Note 13 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Form 10-K, as well as the
"Limits on Dividends" section under Item 1 of this Form 10-K.
The following table details Peoples' repurchases and purchases by "affiliated
purchasers" as defined in Rule 10b-18(a)(3) of Peoples' common shares during the
three months ended December 31, 2004:
(d) Maximum Number
(c)Total Number Number of
of Common Shares Commons Shares
(a) Total Purchased as Part that May Yet Be
Number of (b) Average of Publicly Purchased Under
Common Share Price Paid Per Announced Plans the Plans or
Period Purchased Share or Programs (1) Programs (1)(2)
October 1 - 31, 2004 1,515(3) $27.42(3) 613 123,852
November 1 - 30, 2004 10,818(4) $27.74(4) 10,200 113,652
December 1 - 31, 2004 224(5) $28.18(5) - -(6)
- ------------------------------------------------------------------------------------------------
Total 12,557 $27.71 10,813 -
================================================================================================
(1) Information reflects solely the 2004 Stock Repurchase Program originally
announced on December 17, 2003, which authorized the repurchase of 425,000
common shares, with an aggregate purchase price of not more than $13.0
million. On August 13, 2004, Peoples' Board of Directors authorized the
repurchase of an additional 200,000 common shares, with an aggregate
purchase price of not more than $6.5 million, under the 2004 Stock
Repurchase Program. The 2004 Stock Repurchase Program expired on December
31, 2004.
(2) Information reflects maximum number of common shares that may be purchased
at the end of the period indicated.
(3) Includes an aggregate of 902 common shares purchased in open market
transactions at an average price of $27.41 by Peoples Bank under the Rabbi
Trust Agreement establishing a rabbi trust holding assets to provide
payment of the benefits under the Peoples Bancorp Inc. Deferred
Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries
(the "Rabbi Trust").
(4) Includes an aggregate of 618 common shares acquired at an average price of
$27.96 in connection with the exercise of stock options under Peoples'
stock option plans.
(5) Information reflects solely common shares purchased by Peoples Bank for the
Rabbi Trust.
(6) The 2004 Stock Repurchase Program expired on December 31, 2004, and as
such, no additional common shares could be purchased under that Program at
the end of the period. However, Peoples is authorized to repurchase up to
525,000 of its common shares, with an aggregate purchase price of not more
than $17.0 million, in 2005 under the 2005 Stock Repurchase Program
announced December 10, 2004, which expires December 31, 2005.
ITEM 6. SELECTED FINANCIAL DATA.
The information below has been derived from Peoples' Consolidated Financial
Statements.
(Dollars in Thousands, except Per Share Data) 2004 2003 2002 2001 2000
Operating Data For the year ended:
Total interest income $ 87,030 $ 91,655 $ 82,968 $ 86,107 $ 85,129
Total interest expense 35,160 38,050 35,316 45,560 47,427
Net interest income 51,870 53,605 47,652 40,547 37,702
Provision for loan losses 2,546 3,601 4,067 2,659 2,322
Net (loss) gains on securities transactions (3,040) (1,905) 216 29 10
Other income exclusive of securities transactions 25,248 19,443 15,020 10,621 8,900
Goodwill and other intangible asset amortization 2,219 1,493 646 2,347 2,284
Other expense 44,979 44,410 32,975 28,479 26,172
Net income $ 18,275 $ 16,254 $ 18,752 $ 12,335 $ 11,126
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Balance Sheet Data
At year end:
Total assets $ 1,809,086 $ 1,736,104 $ 1,394,361 $ 1,193,966 $ 1,135,834
Total intangible assets 71,118 48,705 30,738 17,010 17,848
Investment securities 602,364 641,464 412,100 330,364 330,521
Net loans 1,008,298 900,423 836,697 760,499 726,035
Total deposits 1,069,421 1,028,530 955,877 814,368 757,621
Short-term borrowings 51,895 108,768 39,083 56,052 119,915
Long-term borrowings 464,864 388,647 212,929 192,448 138,511
Junior subordinated notes 29,263 29,177 29,090 29,056 29,021
Stockholders' equity 175,418 170,880 147,183 93,854 83,194
Tangible assets (1) 1,737,968 1,687,399 1,363,623 1,176,956 1,117,986
Tangible equity (2) $ 104,300 $ 122,175 $ 116,445 $ 76,844 $ 65,346
- ---------------------------------------------------------------------------------------------------------------------------------
Significant Ratios
Return on average assets 1.04 % 0.95 % 1.46 % 1.06 % 1.02 %
Return on average stockholders' equity 10.60 9.75 17.69 13.60 14.92
Net interest margin 3.39 3.52 4.17 3.87 3.82
Non-interest income leverage ratio (3) 55.93 48.68 45.77 37.29 34.01
Efficiency ratio (4) 57.18 51.06 51.24 54.50 54.94
Average stockholders' equity to average assets 9.79 9.74 8.23 7.80 6.84
Average loans to average deposits 91.24 87.42 92.63 92.93 94.37
Allowance for loan losses to total loans 1.44 1.59 1.54 1.60 1.48
Risk-based capital ratio 12.30 15.43 16.79 14.21 14.21
Dividend payout ratio 41.66 % 42.06 % 24.91 % 33.08 % 33.06 %
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Per Share Data(5)
Net income per share - Basic $ 1.74 $ 1.56 $ 2.25 $ 1.49 $ 1.34
Net income per share - Diluted 1.71 1.52 2.19 1.47 1.33
Cash dividends paid 0.72 0.65 0.56 0.49 0.44
Book value at end of period 16.81 16.11 14.97 11.43 10.09
Tangible book value at end of period (6) $ 10.00 $ 11.76 $ 11.85 $ 9.36 $ 7.93
Weighted-average shares outstanding:
Basic 10,529,332 10,433,708 8,329,109 8,277,035 8,288,498
Diluted 10,710,114 10,660,083 8,557,591 8,403,773 8,385,504
Common shares outstanding at end of period: 10,435,102 10,603,792 9,829,965 8,213,115 8,245,127
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(1) Total assets less goodwill and other intangible assets.
(2) Total stockholders' equity less goodwill and other intangible assets.
(3) Non-interest income (less securities and asset disposal gains) as a
percentage of non-interest expense (less intangible amortization).
(4) Non-interest expense (less intangible amortization) as a percentage of
fully-tax equivalent net interest income plus non-interest income.
(5) Adjusted for all stock dividends and splits.
(6) 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. This discussion and analysis should be read in conjunction
with the audited Consolidated Financial Statements and Notes thereto, as well as
the ratios and statistics, contained elsewhere in this Form 10-K.
References will be found in this Form 10-K to the following transactions that
have impacted or will impact Peoples' results of operations:
o As discussed in Note 15 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K, Peoples completed the
acquisition of Putnam Agency, Inc. ("Putnam") on April 30, 2004 and
Barengo Insurance Agency, Inc. ("Barengo") on May 28, 2004,
(collectively, the "Insurance Agency Acquisitions"). In addition,
Peoples Bank acquired two full-service banking offices in the Ashland,
Kentucky area at the close of business on December 3, 2004 (the
"Ashland Banking Acquisition"). In conjunction with the Ashland
Banking Acquisition, Peoples Bank consolidated two of its existing
offices in the Ashland area market into other Peoples Bank offices and
closed one of the acquired offices. In 2003, Peoples acquired Kentucky
Bancshares Incorporated ("Kentucky Bancshares"), the holding company
of Kentucky Bank & Trust, and closed two of Peoples Bank's existing
offices, due to the proximity of the acquired offices.
o In December 2004, Peoples sold approximately $85 million of fixed-rate
securities, consisting primarily of mortgage-backed securities
purchased in a historically low interest rate environment, and
reinvested the net proceeds in other investment securities, primarily
variable rate mortgage-backed securities (the "2004 Investment
Portfolio Repositioning"). The securities sold were selected because
management wanted to shorten the estimated life of the portfolio and
expected those securities selected to underperform in a rising rate
environment. While the 2004 Investment Portfolio repositioning is
expected to have a minimal impact on short-term yields, the new
securities have shorter estimated lives and duration and better cash
flow characteristics in a rising rate environment than the securities
sold, which should improve the overall long-term performance of the
investment portfolio as interest rates return to more historic levels.
o In December 2003, Peoples Bank sold its existing credit card portfolio
to InfiCorp Holdings, Inc. ("InfiCorp"). In addition to the sale,
Peoples Bank and InfiCorp entered into a joint marketing agreement to
serve the credit card needs of Peoples' customers and prospective
customers.
o In December 2003, Peoples sold $55 million of mortgage-backed
investment securities due to the high rate of prepayments on those
securities and the corresponding downward pressure on yields from
accelerated amortization of bond premiums. Peoples reinvested the
proceeds from the sales into other mortgage-backed securities that
were anticipated to produce a higher yield with estimated lives
similar to those of the securities that were sold (collectively, the
"2003 Investment Portfolio Restructuring"). Approximately $27 million
of the reinvestment settled in late December 2003 and the remaining
reinvestment of approximately $26 million settled in late January
2004.
o On December 16, 2003, Peoples prepaid $63 million of long-term,
convertible rate borrowings from the Federal Home Loan Bank ("FHLB")
and reborrowed the funds using a short-term, repurchase agreement
advance (collectively, the "Long-Term Debt Restructuring"). Peoples
incurred prepayment penalties totaling $6.8 million as part of this
transaction. The prepaid borrowings had a weighted-average rate of
5.14% and weighted-average remaining maturity of 5.4 years. The new
short-term advance had a significantly lower initial interest rate,
yet has somewhat similar interest rate sensitivity characteristics in
a rising interest rate environment.
o On December 17, 2003, Peoples Bancorp announced the authorization to
repurchase up to 425,000, or approximately 4%, of Peoples Bancorp's
outstanding common shares in 2004 from time to time in open market or
privately negotiated transactions. On August 13, 2004, Peoples Bancorp
announced the authorization to repurchase an additional 200,000
shares, or approximately 2%, of Peoples Bancorp's outstanding common
shares in 2004 from time to time in open market or privately
negotiated transactions (collectively, the "2004 Stock Repurchase
Program"). The repurchased common shares are held as treasury shares
and are anticipated to be used for future exercises of stock options
granted under Peoples' stock option plans, issuances of common shares
for Peoples Bancorp's deferred compensation plans, and other general
corporate purposes. Peoples Bancorp repurchased 511,348 common shares
(or 82% of the total authorized) under the 2004 Stock Repurchase
Program, at an average price of $26.53. The 2004 Stock Repurchase
Program expired on December 31, 2004.
o On December 10, 2004, Peoples Bancorp announced the authorization to
repurchase up to 525,000, or approximately 5%, of Peoples Bancorp's
outstanding common shares in 2005 from time to time in open market or
privately negotiated transactions (the "2005 Stock Repurchase
Program"). Any repurchased common shares will be held as treasury
shares and are anticipated to be used for future exercises of stock
options granted under Peoples' stock option plans, future issuances of
common shares in connection with Peoples' deferred compensation plans,
and other general corporate purposes. Through February 28, 2005,
Peoples Bancorp had repurchased a total of 53,800 common shares (or
10% of the total authorized) under the 2005 Stock Repurchase Program,
at an average price of $26.85 per share.
The impact of these transactions, where significant, is discussed in the
applicable sections of this Management's Discussion and Analysis.
Critical Accounting Policies
- ----------------------------
The accounting and reporting policies of Peoples conform to accounting
principles generally accepted in the United States ("US GAAP") and to general
practices within the financial services industry. The preparation of the
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could materially differ from
those estimates. Management has identified the accounting policies described
below as those that, due to the judgments, estimates and assumptions inherent in
those policies, are critical to an understanding of Peoples' consolidated
financial statements and management's discussion and analysis.
Income Recognition
- ------------------
Interest income on loans and investment securities is recognized by methods that
result in level rates of return on principal amounts outstanding, including
yield adjustments resulting from the amortization of loan costs and premiums on
investment securities and accretion of loan fees and discounts on investment
securities. Since mortgage-backed securities comprise a sizable portion of
Peoples' investment portfolio, a significant increase in principal payments on
those securities negatively impacts interest income due to the corresponding
acceleration of premium amortization.
In the event management believes collection of all or a portion of contractual
interest on a loan has become doubtful, which generally occurs after the loan is
90 days past due, Peoples discontinues the accrual of interest. In addition,
previously accrued interest deemed uncollectible that was recognized in income
in the current year is reversed, while amounts recognized in income in the prior
year are charged against the allowance for loan losses. Interest received on
nonaccrual loans is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status when it is brought
current or 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 considered doubtful.
Allowance for Loan Losses
- -------------------------
In general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples maintains
an allowance for loan losses to absorb probable losses based on a quarterly
analysis of the portfolio. This formal analysis determines an appropriate level
and allocation of the allowance for loan losses among loan types and resulting
provision for loan losses by considering factors affecting losses, including
specific losses, levels and trends in impaired and nonperforming loans,
historical loan loss experience, current national and local economic conditions,
volume, growth and composition of the portfolio, regulatory guidance and other
relevant factors. Management continually monitors the loan portfolio through its
Loan Review Department and Loan Loss Committee to evaluate the adequacy of the
allowance. The provision could increase or decrease each quarter based upon the
results of management's formal analysis.
The amount of the allowance for loan losses for the various loan types
represents management's estimate of expected losses from existing loans based
upon specific allocations for individual lending relationships and historical
loss experience for each category of homogeneous loans. The allowance for loan
losses related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans. This evaluation requires management to make
estimates of the amounts and timing of future cash flows on impaired loans,
which consists primarily of nonaccrual and restructured loans. While allocations
are made to specific loans and pools of loans, the allowance is available for
all loan losses.
Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, loan quality ratings, value of
collateral, repayment ability of borrowers, and historical experience factors.
The historical experience factors utilized for individual loan reviews are based
upon past loss experience, known trends in losses and delinquencies, the growth
of loans in particular markets and industries, and known changes in economic
conditions in the particular lending markets. Allowances for homogeneous loans
(such as residential mortgage loans, personal loans, etc.) are evaluated based
upon historical loss experience, trends in losses and delinquencies, growth of
loans in particular markets, and known changes in economic conditions in each
lending market. Consistent with the evaluation of allowances for homogenous
loans, 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 losses on existing accounts, including
historical loss experience and length of overdraft.
There can be no assurance the allowance for loan losses will be adequate to
cover all losses, but management believes the allowance for loan losses of $14.8
million at December 31, 2004, is adequate to provide for probable losses from
existing loans based on information currently available. While management uses
available information to provide for loan losses, the ultimate collectibility of
a substantial portion of the loan portfolio, and the need for future additions
to the allowance, will be based on changes in economic conditions and other
relevant factors. As such, adverse changes in economic activity could reduce
cash flows for both commercial and individual borrowers, which would likely
cause Peoples to experience increases in problem assets, delinquencies and
losses on loans.
Investment Securities
- ---------------------
Investment securities are initially recorded at cost, which includes premiums
and discounts if purchased at other than par or face value. Peoples amortizes
premiums and accretes discounts as an adjustment to interest income over the
estimated life of the security. The cost of investment securities sold, and any
resulting gain or loss, is based on the specific identification method.
Management determines the appropriate classification of investment securities at
the time of purchase. Held-to-maturity securities are those securities that
Peoples has the positive intent and ability to hold to maturity and are reported
at amortized cost. Available-for-sale securities are those securities that would
be available to be sold in the future in response to Peoples' liquidity needs,
changes in market interest rates, and asset-liability management strategies,
among other considerations. Available-for-sale securities are reported at
estimated fair value, with unrealized holding gains and losses reported in
stockholders' equity as a separate component of other comprehensive income, net
of applicable deferred income taxes. Trading securities are those securities
bought and held principally for the purpose of selling in the near term. Trading
securities are reported at fair value, with holding gains and losses recognized
in earnings.
Presently, Peoples classifies its entire investment portfolio as
available-for-sale. As a result, both the investment and equity sections of
Peoples' balance sheet are more sensitive to changes in the overall market value
of the investment portfolio, due to changes in market interest rates, investor
confidence and other factors affecting market values, than if the investment
portfolio was classified as held-to-maturity.
While temporary changes in the market value of available-for-sale securities are
not recognized in earnings, a decline in fair value below amortized cost deemed
to be "other-than-temporary" results in an adjustment to the cost basis of the
investment, with a corresponding loss charged against earnings. Management
systematically evaluates Peoples' investment securities for other-than-temporary
declines in estimated fair value on a quarterly basis. This analysis requires
management to consider various factors in order to determine if a decline in
estimated fair value is temporary or other-than-temporary. These factors include
duration and magnitude of the decline in value, the financial condition of the
issuer, and Peoples' ability and intent to continue holding the investment for a
period of time sufficient to allow for any anticipated recovery in market value.
At December 31, 2004, management determined an investment in Fannie Mae
preferred stock was other-than-temporarily impaired, resulting in an impairment
charge of $490,000, or $319,000 after-tax. There were no other investment
securities identified by management to be other-than-temporarily impaired. If
investments decline in fair value due to adverse changes in the financial
markets, additional charges to income could occur in future periods.
Goodwill and Other Intangible Assets
- ------------------------------------
Over the past several years, Peoples has grown through mergers and acquisitions
accounted for under the purchase method of accounting. Under the purchase
method, Peoples is required to allocate the cost of an acquired company to the
assets acquired, including identified intangible assets, and liabilities assumed
based on their estimated fair values at the date of acquisition. At December 31,
2004, Peoples had $11.4 million of identifiable intangible assets acquired in
acquisitions, subject to amortization, and $59.1 million of goodwill, not
subject to periodic amortization.
The determination of fair value and subsequent allocation of the cost of an
acquired company generally involves management making estimates based on third
party valuations, such as appraisals, or internal valuations based on discounted
cash flow analyses or other valuation techniques. In addition, the valuation and
amortization of intangible assets representing the present value of future net
income to be earned from customers (commonly referred to as "customer
relationship intangibles" or "core deposit intangibles") requires significant
judgment and the use of estimates by management. While management feels the
assumptions and variables used to value recent acquisitions were reasonable, the
use of different, but still reasonable, assumptions could produce materially
different results.
Customer relationship intangibles are required to be amortized over their
estimated useful lives. The method of amortization should reflect the pattern in
which the economic benefits of the intangible assets are consumed or otherwise
used up. Since Peoples' acquired customer relationships are subject to routine
customer attrition, the relationships are more likely to produce greater
benefits in the near-term than in the long-term, which typically supports the
use of an accelerated method of amortization for the related intangible assets.
Management is required to evaluate the useful life of customer relationship
intangibles to determine if events or circumstances warrant a change in the
estimated life. Should management determine in future periods the estimated life
of any intangible asset is shorter than originally estimated, Peoples would
adjust the amortization of that asset, which could increase future amortization
expense.
Goodwill arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Goodwill recorded
by Peoples in connection with its acquisitions relates to the inherent value in
the businesses acquired and this value is dependent upon Peoples' ability to
provide quality, cost effective services in a competitive market place. As such,
goodwill value is supported ultimately by revenue that is driven by the volume
of business transacted. A decline in earnings as a result of a lack of growth or
the inability to deliver cost effective services over sustained periods can lead
to impairment of goodwill that could adversely impact earnings in future
periods.
Peoples has reviewed its recorded goodwill and concluded that the recorded value
of goodwill was not impaired as of December 31, 2004. However, future events
could cause management to conclude that impairment indicators exist and
re-evaluate goodwill. If such re-evaluation indicated impairment, Peoples would
recognize the loss, if any. Any resulting impairment loss could have a material,
adverse impact on Peoples' financial condition and results of operations.
RESULTS OF OPERATION
Overview of the Income Statement
- --------------------------------
In 2004, Peoples' net income was $18,275,000, or $1.71 per diluted share, up
from $16,254,000, or $1.52 per diluted share, a year ago. Enhanced non-interest
revenues of $4,670,000, more than offset the increase in non-interest expense of
$1,295,000 and the $1,735,000 decline in net interest income. Return on average
equity improved to 10.60% in 2004, from 9.75% a year ago, while return on
average assets was 1.04% and 0.95% in 2004 and 2003, respectively.
Balance sheet restructuring and other charges negatively impacted reported
earnings in both 2004 and 2003. In December 2004, Peoples recorded a loss on
sale of securities totaling $2,596,000 (or $1,688,000 after-tax) as part of the
2004 Investment Portfolio Repositioning; a write down of $128,000 ($83,000
after-tax) on real estate values of banking offices consolidated in conjunction
with the Ashland Banking Acquisition and an other-than-temporary impairment
charge of $490,000 (or $319,000 after-tax) on an investment in Fannie Mae
("FNMA") preferred stock. The aggregate impact of these transactions resulted in
a charge to expense of $3,214,000 (or $2,090,000 after-tax) in 2004.
Comparatively, the Long-Term Debt Restructuring, Investment Portfolio
Restructuring and sale of the credit card portfolio in December 2003 resulted in
a net charge of $7,462,000 (or $5,372,000, after tax) for the year 2003.
For the year ended December 31, 2004, net interest income totaled $51.9 million
and net interest margin was 3.39% compared to $53.6 million and 3.52% for the
same period in 2003. Both net interest income and margin were negatively
impacted by extremely competitive pricing for loans and deposits, as well as
Peoples' management of its interest rate risk position, which included extending
the maturities of funding liabilities resulting in increased interest expense.
Other income totaled $22.2 million, up 27% from $17.5 million a year ago due
primarily to increased insurance commissions of $4.7 million attributable to the
Insurance Agency Acquisitions and deposit account services charges of $1.4
million. Other income was also impacted by securities transactions and asset
disposals, which resulted in a net loss of $3.2 million in 2004 versus $2.2
million in 2004, as well as the gain of $1.4 million on the sale of the credit
card portfolio in 2003.
Non-interest expense was $47.2 million in 2004 versus $45.9 million for the year
ended December 31, 2003, an increase of $1.3 million. This increase was largely
attributable to additional salaries and benefit costs and other operating
expenses incurred as a result of recent acquisitions. Excluding the loss from
the Long-Term Debt Restructuring in 2003, non-interest expense was up $8.2
million.
Interest Income and Expense
- ---------------------------
Peoples earns interest income from loans, investment securities and short-term
investments and incurs interest expense on interest-bearing deposits and
borrowed funds. Net interest income, the amount by which interest income exceeds
interest expense, remains Peoples' largest source of revenue. Management
periodically adjusts the mix of assets and liabilities, as well as the rates
earned or paid on those 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 adjustments made by management. Consequently, a volatile rate
environment or extended periods of unusually low or high interest rates can make
it extremely difficult to manage net interest margin and income in the
short-term, much less anticipate and position the balance sheet for future
changes.
Net interest income totaled $51,870,000 in 2004 compared to $53,605,000 a year
ago. Interest income totaled $87,030,000 for the year ended December 31, 2004,
down 5% compared to last year. This decrease was due mainly to lower yields
attributable to assets repricing downward and competition for quality loans.
Interest expense totaled $35,160,000 in 2004 versus $38,050,000 in 2003, an 8%
decline reflecting Peoples' lower cost of funds resulting from the prolonged low
rate environment and the Long-Term Debt Restructuring in December 2003.
Peoples earns a portion of its interest income from loans to, and investments
issued by, states and political subdivisions. Since these revenues generally are
not subject to income taxes, management believes it is more meaningful to
analyze net interest income on a fully-tax equivalent ("FTE") basis, which
adjusts interest income by converting tax-exempt income to the pre-tax
equivalent of taxable income using an effective tax rate of 35%. 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. The following table details the calculation of FTE
net interest income and margin for the years ended December 31:
(Dollars in thousands) 2004 2003 2002
Net interest income, as reported $ 51,870 $ 53,605 $ 47,652
Taxable equivalent adjustments 1,630 1,662 1,611
- --------------------------------------------------------------------------------------------
Fully-tax equivalent net interest income $ 53,500 $ 55,267 $ 49,263
============================================================================================
Average earning assets $ 1,579,692 $ 1,574,381 $ 1,180,698
============================================================================================
Net interest margin 3.39% 3.52% 4.17%
============================================================================================
The sustained low interest rate environment has challenged Peoples' generation
of net interest income due to declining asset yields with limited opportunities
for similar reduction in Peoples' cost of funds. The FTE yield on earning assets
was 5.61% in 2004, down from 5.93% the prior year, while the cost of funds was
2.45% versus 2.69%. While the Federal Reserve's action to increase rates in the
second half of 2004 has produced some benefits, intense competition for quality
loans and management's efforts to secure longer-term funding, which generally
have higher rates than short-term funds, have offset any improvement in current
asset yields. In the fourth quarter of 2004, net interest margin was 3.29%
compared to 3.34% for the prior quarter and 3.32% for the fourth quarter of
2003. Management remains committed to minimizing the impact of future rate
increases on earnings by working to maintain a slightly asset sensitive risk
position.
Net loans comprise the largest portion of Peoples' earning assets, averaging
$927.8 million in 2004, versus $880.3 million in 2003 with the increase due
primarily to internal growth. Since a significant portion of the loan growth
involved prime based commercial loan originations, the FTE yield on net loans
dropped 60 basis points to 6.47% for the year ended December 31, 2004, from
7.07% a year ago. Other factors contributing to the lower yield were loans
repricing downward in the low rate environment and the impact from the sale of
the credit card portfolio in late 2003. Compared to the third quarter of 2004,
average net loans grew $47.9 million to $977.8 million in the fourth quarter of
2004, and the FTE yield improved to 6.42%, from 6.39%
In 2004, investment securities averaged $640.1 million compared to $675.7
million in 2003, with FTE yields of 4.45% and 4.57%, respectively. The decrease
in the average balance from a year ago is largely attributable to management
using a portion of the principal runoff to manage liquidity, fund loan growth
and other corporate purposes. The reduced yield was due to the low rate
environment and related reinvestment of funds at significantly lower rates. For
the quarter ended December 31, 2004, investment securities averaged $619.0
million versus $651.1 million for the prior quarter, while the FTE yield was
4.56% and 4.47% for the same periods, respectively. Management anticipates
maintaining, or slightly growing, the investment portfolio in 2005 depending on
loan growth and other corporate liquidity needs.
Peoples' interest-bearing liabilities averaged $1.43 billion in 2004 compared to
$1.41 billion last year, while the overall cost of funds dropped 24 basis
points. Traditional deposits comprise the majority of Peoples' interest-bearing
liabilities, averaging $888.7 million for the year ended December 31, 2004,
compared to $898.5 million in 2003. The lower level of deposits was due
primarily to intense competition, particularly for certificates of deposit. The
cost of funds from interest-bearing deposits was 1.91%, down from 2.07% a year
ago.
Peoples also utilizes a variety of borrowings as other funding sources to
complement traditional deposits. For the year ended December 31, 2004, total
borrowed funds averaged $541.9 million compared to $512.1 million in 2003. This
increase was the result of management using various borrowings to fund asset
growth and offset declines in interest-bearing deposits. Even with this
increase, Peoples' overall cost of borrowed funds dropped to 3.32% from 3.78%
last year, due in part to the Long-Term Debt Restructuring.
Peoples' main source of borrowed funds is short-term and long-term advances from
the FHLB. Short-term FHLB borrowings averaged $70.2 million in 2004 compared to
$26.9 million a year ago, with an average cost of 1.35% and 1.47% for the same
periods, respectively. Long-term FHLB borrowings averaged $178.5 million, with
an average cost of 4.21%, in 2004, versus $219.2 million a year ago, with an
average cost of 4.64%. These changes reflect the impact of the Long-Term Debt
Restructuring and management's continued use of FHLB borrowings to fund asset
growth and manage interest rate sensitivity, as deemed appropriate.
In the second half of 2004, management has match-funded selected three- and
five-year adjustable rate commercial loans using long-term FHLB advances with
similar amortization and repricing characteristics and continued to extend other
debt to lock-in rates. As a result, average long-term FHLB advances were $206.0
million in the fourth quarter of 2004, up from $183.1 million in the prior
quarter, while short-term advances averaged $48.5 million and $82.7 million for
the same periods, respectively. The average cost of long-term FHLB borrowing
increased 62 basis points to 4.39% in the fourth quarter, compared to 3.76% the
prior quarter. The average cost of short-term borrowings was 1.93% in the fourth
quarter, up 43 basis points from the third quarter, reflecting the FHLB rate
increases in response to the Federal Reserve's action. Management expects to
continue shifting to longer-term borrowings, as appropriate, to lock-in rates in
anticipation of rising interest rates. Additional information regarding Peoples'
advances from the FHLB can be found later in this discussion under the caption
"Funding Sources" and Notes 7 and 8 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
In 2004, management continued to take steps to position the balance sheet for
the expected eventual increase in rates, which has produced some benefits.
However, like most other financial institutions, Peoples' net interest margin
has been negatively affected by intense competition for loans and deposits.
While the 150 basis point increase in rates by the Federal Reserve has eased
some of the net interest income pressures, Peoples' proactive interest rate risk
management, coupled with the lag in repricing of a sizeable portion of Peoples'
variable rate loans and flattening yield curve, limits any short-term
improvement. Management believes additional interest rate increases could cause
net interest income to increase modestly based on Peoples' interest rate risk
position and asset-liability simulations at December 31, 2004. Even though
management continues to focus on minimizing the impact of future rate changes on
earnings, Peoples' net interest margin and income remain difficult to predict,
and to manage, since changes in market interest rates and the timing of these
changes remain uncertain.
Provision for Loan Losses
- -------------------------
Peoples' provision for loan losses was $2,546,000 in 2004, down 29% from
$3,601,000 in the prior year. The lower overall provision was the result of
Peoples' quarterly analysis of the adequacy of the allowance for loan losses and
is directionally consistent with Peoples' continued strong asset quality and
lower level of loan delinquencies. A portion of the provision relates to the
Overdraft Privilege program, which totaled $866,000 in 2004, compared to
$781,000 in 2003.
When expressed as a percentage of average loans, the provision was 0.27% in 2004
compared to 0.40% in 2003. Management believes the provisions were appropriate
for the overall quality, inherent risk and volume concentrations of Peoples'
loan portfolio. Future provisions will continue to be based on management's
quarterly procedural discipline described in the "Critical Accounting Policies"
section of this discussion.
Gains and/or Losses on Securities Transactions
- ----------------------------------------------
In 2004, Peoples recognized a net loss of $3,040,000 on investment securities
transactions compared to $1,905,000 a year ago. The net loss in 2004 is largely
the result of the 2004 Investment Portfolio Repositioning during the fourth
quarter, coupled with the $490,000 other-than-temporary impairment charge on
FNMA preferred stock. The net loss in 2003 was attributable to the 2003
Investment Portfolio Restructuring implemented during the fourth quarter.
Non-Interest Income
- -------------------
Peoples generates non-interest income from six primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking ("e-banking"), mortgage banking and business owned life
insurance ("BOLI"). In 2004, non-interest income was $22,208,000, up $4,670,000
(or 27%) from $17,538,000 a year ago. Excluding losses on securities
transactions, non-interest income was $25,248,000 in 2004 compared to
$19,443,000, an increase of $5,805,000 (or 30%). The Insurance Agency
Acquisitions generated gross revenue of $4.7 million in 2004, accounting for
most of the increase. These revenues, coupled with enhanced deposit account
service charges and BOLI income, were the primary reasons for the increased
non-interest income.
Peoples' largest source of non-interest revenue remains service charges and
other fees on deposit accounts, which are based on the recovery of costs
associated with services provided. For the year ended December 31, 2004, deposit
account service charges totaled $9,636,000, up 18% from $8,192,000 in 2003. This
increase was the result of higher volumes of overdraft and non-sufficient funds
("NSF") fees, combined with an overall increase in the number of checking
accounts, primarily due to acquisitions. Additionally, Peoples increased certain
cost recovery fees, including overdraft and NSF fees, effective January 1, 2004.
Management periodically evaluates its cost recovery fees to ensure the fees are
reasonable based on operational costs, as well as similar to fees charged in
Peoples' markets. The following table details Peoples' deposit account service
charges:
(Dollars in Thousands) 2004 2003 2002
Overdraft fees $ 6,366 $ 5,292 $ 4,435
Non-sufficient funds fees 1,844 1,481 1,104
Other fees and charges 1,426 1,419 1,437
- ----------------------------------------------------------------------------
Total $ 9,636 $ 8,192 $ 6,976
============================================================================
Insurance and investment commissions were $6,152,000 in 2004, up $4,687,000,
versus $1,465,000 in 2003. This increase was largely the result of higher
insurance commissions, primarily from sales of property and casualty insurance,
due to the Insurance Agency Acquisitions completed in mid-2004, which generated
revenues of $4,690,000. The following table details Peoples' insurance and
investment commissions:
(Dollars in Thousands) 2004 2003 2002
Property and casualty insurance $ 4,929 $ 452 $ 376
Life and health insurance 404 152 180
Brokerage 402 286 208
Fixed annuities 277 444 1,023
Credit life and A&H insurance 140 131 179
- -----------------------------------------------------------------------------
Total $ 6,152 $ 1,465 $ 1,966
=============================================================================
Compared to the third quarter, insurance and investment commissions were down 5%
to $2,153,000 in the fourth quarter of 2004, from $2,272,000. This decrease is
mostly attributable to seasonality of revenues generated by the acquired
insurance agencies. Management expects insurance commissions to remain near
fourth quarter levels throughout 2005, although Peoples' ability to retain
customer relationship acquired in the Insurance Agency Acquisitions could impact
future revenues.
Peoples offers various e-banking services, including ATM and debit cards, direct
deposit services and Internet banking, as alternative delivery channels to
traditional sales offices, for providing services to clients. For the year ended
December 31, 2004, Peoples' electronic banking services generated revenues of
$2,390,000 compared to $2,055,000 a year ago, an increase of $335,000 (or 16%).
Peoples' e-banking revenues have remained strong due in large part to an
increase in the number of debit cards issued to customers and higher volumes of
debit card activity. At December 31, 2004, Peoples had 69,733 cards issued, with
45% of all eligible deposit accounts having a debit card, compared to 52,375
cards and a 39% penetration rate a year ago. Peoples' customers used their debit
cards to complete $126 million of transactions in 2004, up 34% from $94 million
a year ago.
Peoples' mortgage banking involves the origination and selling of long-term,
fixed-rate real estate loans into the secondary market. In 2004, mortgage
banking produced revenues of $931,000 compared to $1,352,000 in the prior year.
The reduction in mortgage banking income from last year reflects the expected
decline in real estate loan refinancing activity in response to higher long-term
rates and the retention of more real estate loan productions. While it appears
future real estate loan refinancing activity will remain light compared to 2003
activity, mortgage banking is a key part of Peoples' long-term business
strategy.
Peoples' fiduciary revenues totaled $3,471,000 in 2004, compared to $3,363,000 a
year ago. The Kentucky Bancshares acquisition added trust assets of about $182
million, and the first full-year's impact of associated fiduciary revenues
accounted for the increase. Peoples' future fiduciary revenues will be
influenced by the relative performance of equity markets since a significant
portion of fiduciary fees is based on the market value of assets managed.
Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. For the year ended December 31, 2004, BOLI income
totaled $1,899,000 compared to $1,403,000 in 2003, a 35% increase as a result of
Peoples investing an additional $20 million in BOLI in early 2004. Management
believes BOLI continues to provide a better vehicle for funding future benefit
costs than alternative investment opportunities with similar risk
characteristics.
Non-Interest Expense
- --------------------
For the year ended December 31, 2004, non-interest expense totaled $47,198,000,
up 3% from $45,903,000 a year ago. Recent acquisitions caused Peoples to incur
$4.9 million of additional expense in 2004, primarily salaries and benefits
expense, occupancy and equipment costs and intangible amortization, while
Peoples compliance with new Sarbanes-Oxley regulatory requirements resulted in
higher professional fee expense. Non-interest expense in 2003 was impacted by
FHLB advance prepayment fees of $6.8 million incurred as part of the Long-Term
Debt Restructuring. Excluding the impact of the FHLB fees and intangible
amortization, non-interest expense was up $7.4 million in 2004 compared to the
prior year.
Salaries and benefits remain Peoples' largest operating expense, which is
inherent in a service-based industry such as financial services. In 2004,
salaries and benefits totaled $24,574,000, up $4,938,000 compared to $19,636,000
in 2003, with $2.8 million, or over half of the increase, attributable to the
Insurance Agency Acquisitions and full-year's impact of the Kentucky Bancshares
acquisition. In addition, rising medical costs and higher sales-related
compensation accounted for $0.8 million and $0.6 million of the increase,
respectively, while annual salary adjustments necessary to retain key associates
and additional personnel in strategic sales and support positions, were also
significant factors for the overall increase. In the fourth quarter of 2004,
salaries and benefits were $6,678,000, virtually unchanged from the third
quarter of 2004. Management continues to explore ways, such as the BOLI
investment, to offset the rising salaries and benefit costs in order to provide
a reasonable level of benefits to associates and remain competitive in order to
attract and hire talented professionals.
In 2004, net occupancy and equipment expenses were $5,134,000, up $573,000 (or
13%) from $4,561,000 the prior year. The Insurance Agency Acquisitions caused
Peoples to incur additional occupancy and equipment expenses of $240,000,
particularly depreciation expense, representing 42% of the increase, while a
full-year's impact of the Kentucky Bancshares acquisition and investments in
technology also contributed to the increase. Management believes the continued
investment in technology enhances Peoples' ability to serve clients and satisfy
their financial needs, while acquisitions have allowed Peoples to expand its
customer base for economies of scale. Management continues to monitor capital
expenditures to ensure the resources deployed either improve efficiencies or
generate additional revenues.
Acquisitions also caused an increase in amortization expense of customer
relationship intangible assets. In 2004, intangible amortization was $2,219,000
compared to $1,493,000 in 2003. Management expects total intangible amortization
to be modestly higher in 2005 due to a full-year's amortization of the customer
relationship intangibles acquired in acquisitions during 2004. Since Peoples
uses an accelerated method of amortization for these intangibles, amortization
expense will be lower in subsequent years based on the intangible assets at
December 31, 2004.
For the year ended December 31, 2004, data processing and software costs totaled
$1,849,000, up 16% from $1,596,000 a year ago. The higher level of data
processing and software costs was attributable to an increase in software
licensing fees for the additional office locations and users of key software
packages, as well as amortization of Peoples' $1.8 million investment in
Customer Relationship Management ("CRM") and profitability systems implemented
in late 2003, the majority of which was software related costs. While the
CRM/profitability investment has increased operating expenses, these new systems
and processes will be a strategic part of Peoples' sales and marketing efforts
for many years and are part of management's long-term focus to build the best
process to grow revenues and develop profitable customer relationships.
Professional fees, which include fees for accounting, legal and other
professional services, totaled $2,030,000 in 2004, compared to $1,938,000 in
2003. Professional fees were impacted by costs associated with Peoples'
compliance with new reporting requirements mandated by the Sarbanes-Oxley Act,
which apply to all public companies. These increased costs were partially offset
by the expiration of a consulting contract relating to the Overdraft Privilege
program at the end of the first quarter of 2004. From April 2002 through March
2004, Peoples paid consulting fees, which were based on a percentage of the net
improvement in overdraft fee income, to the firm that assisted with the
implementation of the Overdraft Privilege program. In 2004, these fees totaled
$84,000 compared to $523,000 in 2003.
Peoples' bankcard costs, which consist primarily of debit card and ATM
processing fees, were $1,461,000 in 2004 versus $1,160,000 in 2003. This
increase was largely the result of Peoples' increased customer base and
additional cards issued during 2004,coupled with customers using the ATM and
debit cards to complete more of their transactions.
Peoples is subject to various state franchise taxes, which are based largely on
Peoples Bank's equity at year-end. For the year ended December 31, 2004,
franchise taxes totaled $1,458,000, up 29% from $1,126,000 for the same period
in 2003. This increase was primarily attributable to additional equity at
Peoples Bank resulting from the Kentucky Bancshares acquisition and a $16
million capital contribution from Peoples Bancorp in early 2003. Despite the
increased franchise taxes, management believes Peoples Bank's stronger capital
level positions Peoples for strategic growth. In addition, management regularly
evaluates the capital position of Peoples' other direct and indirect
subsidiaries and seeks to maximize Peoples' consolidated capital position
through allocation of capital, which is intended to enhance profitability and
shareholder value.
The non-interest leverage ratio serves as a measurement of Peoples' efficiency
for management and is one of the key performance indicators for Peoples'
incentive compensation plan for senior management and certain other associates.
The non-interest leverage ratio is defined as non-interest income as a
percentage of operating expenses, excluding gains and losses on securities
transactions, asset disposals, early debt extinguishment and sale of the credit
card portfolio, as well as intangible asset amortization. The followings details
the components of the non-interest leverage ratio calculation:
(Dollars in Thousands) 2004 2003 2002
Total other income, as reported $ 22,208 $ 17,538 $ 15,236
Add: Loss on asset disposals 119 261 72
Loss on securities transactions 3,040 1,905 -
Deduct: Recovery of loss on sale of other real estate owned 210 - -
Gain on securities transactions - - 216
Gain on sale of credit card portfolio - 1,423 -
- ---------------------------------------------------------------------------------------------------------------------
Adjusted total other income $ 25,157 $ 18,281 $ 15,092
=====================================================================================================================
Total other expense, as reported $ 47,198 $ 45,903 $ 32,990
Add: Gain on early debt extinguishment - - 631
Deduct: Amortization of other intangible assets 2,219 1,493 646
Loss on early debt extinguishment - 6,858 -
- ---------------------------------------------------------------------------------------------------------------------
Adjusted total other expense $ 44,979 $ 37,552 $ 32,975
=====================================================================================================================
Non-interest leverage ratio 55.9 % 48.7 % 45.8 %
=====================================================================================================================
Return on Equity
- ----------------
In 2004, Peoples' return on average equity ("ROE") was 10.60% versus 9.75% for
the same period last year. Management uses ROE to evaluate Peoples' long-term
performance. However, management believes earnings per share ("EPS") serves as a
more meaningful measurement of short-term performance due to the volatility that
can occur in equity from changes in the estimated fair values of Peoples'
investment portfolio.
Return on Assets
- ----------------
Return on average assets ("ROA") was 1.04% in 2004 compared to 0.95% a year ago.
In recent years, Peoples' primary focus has shifted to EPS enhancement and ROE
while reducing the emphasis on ROA as a key performance indicator. However,
management continues to monitor ROA and considers it a measurement of Peoples'
asset utilization.
Income Tax Expense
- ------------------
In 2004, Peoples' effective income tax rate was 24.9%, unchanged from a year
ago, due largely to tax-advantaged income comprising a similar portion of
Peoples' income before taxes. Peoples continues to make tax-advantaged
investments in order to manage its effective tax rate and overall tax burden. At
December 31, 2004, the amount of tax-advantaged investments totaled $53.4
million compared to $30.5 million at December 31, 2003. Depending on economic
and regulatory conditions, Peoples may make additional investments in various
tax credit pools and other tax-advantaged assets.
FINANCIAL CONDITION
Overview of Balance Sheet
- -------------------------
At December 31, 2004, total assets were $1.81 billion compared to $1.74 billion
at year-end 2003, an increase of $73.0 million which is attributable to loan
growth, as well as recent acquisitions. Gross loans grew $108.1 million (or 12%)
to $1.02 billion at December 31, 2004, from $915.0 million at December 31, 2003,
a result of Peoples Bank acquiring $43 million of loans in the Ashland Banking
Acquisition and internal loan generations of $65 million. Investment securities
totaled $602.4 million at December 31, 2004 versus $641.5 million at year-end
2003.
Total liabilities were $1.63 billion at December 31, 2004, compared to $1.57
billion at year-end 2003, an increase of $68.4 million. At December 31, 2004,
deposits totaled $1.07 billion, up $40.9 million from the prior year-end, while
borrowed funds used to fund asset growth totaled $546.0 million, up $19.4
million from $526.6 million at December 31, 2003.
Stockholders' equity totaled $175.4 million at December 31, 2004, versus $170.9
million at December 31, 2003, an increase of $4.5 million. This increase is
largely due to the equity issued in conjunction with the Insurance Agency
Acquisitions.
Cash and Cash Equivalents
- -------------------------
Peoples considers cash and cash equivalents to consist of Federal funds sold,
cash and balances due from banks, interest-bearing balances in other
institutions and other short-term investments that are readily liquid. The
amount of cash and cash equivalents fluctuates on a daily basis due to customer
activity and Peoples' liquidity needs. At December 31, 2004, cash and cash
equivalents totaled $31.4 million, down $42.0 million (or 57%) from $73.4
million at December 31, 2003. This decrease is attributable to a $44.0 million
reduction in Federal funds sold since year-end 2003, of which $20 million was
consumed by the BOLI investment in early 2004. Since September 30, 2004, cash
and cash equivalents decreased $10.0 million, with the $7.7 million reduction in
Federal funds sold accounting for most of the decline.
Cash and balances due from banks comprised the largest portion of Peoples' cash
and cash equivalents at December 31, 2004, totaling $30.7 million. Since
year-end 2003, the amount of cash and balances due from banks grew $2.3 million
(or 8%). These changes are due to normal daily fluctuations in the amount of
items in process of collection and cash on hand caused by customer activity.
Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, will allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments, such as unfunded
loan commitments, undrawn lines of credit, construction loans and letters of
credit, as they come due. Peoples will actively manage the principal runoff from
the investment and loan portfolios and seek to reinvest those funds
appropriately, based on loan demand and investment opportunities, while
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, 2004, the amortized cost of Peoples' investment securities
totaled $594.5 million compared to $634.8 million at year-end 2003, while the
fair market value of the investment portfolio was $602.4 million at December 31,
2004, down from $641.5 million at December 31, 2003. The difference in amortized
cost and market value at December 31, 2004, resulted in unrealized appreciation
in the investment portfolio of $7.9 million and a corresponding increase in
Peoples' equity of $5.1 million, net of deferred taxes. In comparison, the
difference in amortized cost and market value at December 31, 2003, resulted in
unrealized appreciation of $6.7 million and an increase in equity of $4.3
million, net of deferred taxes.
Overall, the composition of Peoples' investment portfolio at December 31, 2004,
was comparable to recent periods. Peoples' investment in mortgage-backed
securities decreased compared to year-end 2003 due primarily to management using
the principal runoff from the investment portfolio to fund loan growth, the $20
million BOLI investment and other corporate purposes during 2004. Additional
information regarding the composition of the investment portfolio can be found
in Note 3 of the Notes to the Consolidated Financial Statements included in Item
8 of this Form 10-K.
Management 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 and consumer
loans, focusing primarily on lending opportunities in central and southeastern
Ohio, northwestern West Virginia, and northeastern Kentucky markets. At December
31, 2004, gross loans totaled $1.02 billion, up $108.1 million (or 12%) compared
to year-end 2003. The majority of this growth is attributable to internal loan
originations of $65 million, with growth primarily occurring in commercial real
estate loans. Peoples Bank also acquired $43 million of loans, primarily
residential real estate loans, in the Ashland Banking Acquisition.
Commercial loans, including loans secured by commercial real estate, represent
the largest portion of Peoples' total loan portfolio. At December 31, 2004,
commercial loan balances were $576.7 million, or 56.3% of total loans, up $64.7
million (or 13%) from $512.1 million, or 56.0% of total loans, at year-end 2003.
Nearly all of this increase is attributable to internally generated growth from
lending opportunities within Peoples' existing markets. In addition, Peoples
Bank acquired commercial loans of $1.3 million in the Ashland Banking
Acquisition. The portion of commercial loan balances secured by commercial real
estate, excluding construction loans, totaled $450.3 million, or 44.0% of total
loans, at December 31, 2004, versus $380.4 million, or 41.6% of total loans, at
December 31, 2003. Future commercial lending activities will be dependent on
economic and related conditions, such as general demand for loans in Peoples'
primary markets, interest rates offered by Peoples and normal underwriting
requirements. In addition to in-market opportunities, Peoples will continue to
lend selectively to creditworthy customers outside its primary markets.
While commercial loans comprise the largest portion of Peoples' loan portfolio,
generating residential real estate loans remains a major focus of Peoples'
lending efforts, whether the loans are ultimately sold into the secondary market
or retained on Peoples' balance sheet. At December 31, 2004, real estate loans,
which include construction loans but exclude loans secured by commercial real
estate, totaled $385.4 million compared to $322.8 million at December 31, 2003,
an increase of $62.6 million (or 19%). Excluding loans acquired in the Ashland
Banking Acquisition, total real estate loans were up $20.9 million (or 6%)
primarily attributable to increased construction loans. Real estate loans
comprised 37.7% of Peoples' total loan portfolio at December 31, 2004, versus
35.3% at year-end 2003. Included in real estate loans are home equity credit
line balances of $43.7 million at December 31, 2004, versus $28.3 million at
December 31, 2003, with the Ashland Banking Acquisition accounting for $6.6
million of the increase. The remaining increase in home equity credit line
balances is attributable to a shift in client preference for home equity loans
over more traditional consumer loans, due in part to Peoples' marketing and
sales efforts.
Growth of real estate loan balances in recent periods has been impacted by
customer demand for long-term, fixed-rate mortgages, which Peoples generally
sells to the secondary market with servicing rights retained. In 2004, Peoples
originated 467 long-term, fixed-rate mortgage loans, with total loan amounts of
$37 million, versus 783 loans, with total loan amounts of $68 million, in 2003.
This decrease reflects the slowdown in refinancing activity for traditional home
lending. At December 31, 2004, Peoples was servicing $106 million of real estate
loans previously sold to the secondary market compared to $76 million at
year-end 2003. In addition, Peoples had $0.6 million of fixed-rate real estate
loans held for sale to the secondary market at December 31, 2004. Management
anticipates selling these loans during the first quarter of 2005.
Consumer loans decreased $19.0 million (or 24%) since year-end 2003, totaling
$60.9 million at December 31, 2004. The indirect lending area represented a
significant portion of Peoples' consumer loans, with balances of $23.6 million
and $38.4 million at December 31, 2004 and 2003, respectively. Strong
competition for loans, particularly automobile loans, as well as availability of
alternative credit products, such as home equity credit lines, have challenged
the performance and growth of Peoples' consumer loan portfolio. Regardless of
management's desire to maintain, or even grow, consumer loan balances, Peoples'
commitment to quality loan origination based on sound underwriting practices and
appropriate loan pricing discipline remains the paramount objective.
Loan Concentration
- ------------------
Peoples' largest concentration of commercial loans are credits to lodging and
lodging-related companies, which comprised approximately 11.4% of Peoples'
outstanding commercial loans at year-end 2004, compared to 12.7% at December 31,
2003. Loans to assisted living facilities and nursing homes also represented a
significant portion of Peoples' commercial loans, comprising 10.2% of Peoples'
outstanding commercial loans at December 31, 2004, versus 11.3% at year-end
2003.
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 other lending relationships. Management believes Peoples'
loans to lodging and lodging-related companies, as well as loans to assisted
living facilities and nursing homes, do not pose abnormal risk when compared to
risk assumed in other types of lending since these credits have been subjected
to Peoples' normal underwriting standards, which includes an evaluation of the
financial strength, market expertise and experience of the borrowers and
principals in these business relationships. In addition, a sizeable portion of
the loans to lodging and lodging-related companies is spread over various
geographic areas and is guaranteed by principals with substantial net worth.
Allowance for Loan Losses
- -------------------------
Peoples' allowance for loan losses totaled $14.8 million at December 31, 2004,
up slightly compared to $14.6 million at year-end 2003. When expressed as a
percentage of total loans, the allowance was 1.44% at year-end 2004, down from
1.59% at December 31, 2003, a result of internal loan growth and the acquisition
of $43 million of loan balances. The majority of the loans acquired in the
Ashland Banking Acquisition were secured by residential real estate with a lower
credit risk profile.
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:
2004 2003 2002
------------------------------ ------------------------------ ------------------------------
(Dollars in thousands) Percent Percent Percent
Allocation of Loans Allocation of Loans Allocation of Loans
of in Each of in Each of in Each
Allowance Category Allowance Category Allowance Category
for Loan to Total for Loan to Total for Loan to Total
Losses Loans Losses Loans Losses Loans
Commercial $ 11,751 56.3 % $ 11,232 56.0 % $ 8,846 46.1 %
Consumer 1,394 5.9 1,594 8.5 2,075 12.1
Real estate 1,175 37.7 1,234 35.3 1,617 40.9
Overdrafts 327 0.1 283 0.2 206 0.1
Credit card 113 - 232 - 342 0.8
- --------------------------------------------------------------------------------------------------------------------------
Total $ 14,760 100.0 % $ 14,575 100.0 % $ 13,086 100.0 %
==========================================================================================================================
The allowance allocated to commercial loans has increased in recent periods,
reflecting the higher credit risk associated with this type of lending and
continued growth in this portfolio. The allowance allocated to the real estate
and consumer loan portfolios is based upon Peoples' allowance methodology for
homogeneous pools of loans, which includes a consideration of changes in total
balances in those portfolios. The allowance for credit cards reflects an
estimate of the loss from the retained recourse on the business cards included
in the credit card portfolio sale. This credit card recourse expires in the
second quarter of 2005. Additional information regarding Peoples' credit card
recourse can be found in Note 12 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
In 2004, net chargeoffs were down 12% compared to 2003, totaling $2,361,000
versus $2,685,000. This decline was attributable to increased recoveries, while
gross chargeoffs were virtually unchanged from the prior year. Net chargeoffs
relating to the Overdraft Privilege Program comprised the largest portion of
Peoples' net chargeoffs in 2004, totaling $822,000 versus $704,000 in 2003.
Consumer loans also comprised a significant portion of net chargeoffs, totaling
$455,000 and $714,000 in 2004 and 2003, respectively.
Asset quality remains a key focus, as management continues to stress quality
rather than growth. At December 31, 2004, nonperforming assets totaled
$7,706,000, or 0.43% of total assets, versus $7,136,000, or 0.41% of total
assets, at year-end 2003. This increase was largely the result of a single
restructured loan of $1.1 million in the fourth quarter and Peoples
reclassifying the net value, totaling $752,000, of the banking offices closed as
part of the Ashland Banking Acquisition, previously recorded as bank premises,
to other real estate owned ("OREO") in anticipation of their eventual sale.
However, management does not expect Peoples to incur any losses from these two
items in the near term. In January 2005, Peoples sold one of the closed banking
properties at a slight gain, reducing the balance of OREO by $202,000.
A loan is considered impaired when, based on current information and events, it
is probable that Peoples will be unable to collect the scheduled payments of
principal or interest according to the contractual terms of the loan agreement.
The measurement of potential impaired loan losses is generally based on the
present value of expected future cash flows discounted at the loan's contractual
effective interest rate, or the fair value of the collateral if the loan is
collateral dependent. If foreclosure is probable, impairment loss is measured
based on the fair value of the collateral.
At December 31, 2004, the recorded investment in loans that were considered to
be impaired was $10.5 million, of which $7.9 million were accruing interest, and
$2.6 million were nonaccrual loans. Included in this amount were $4.9 million of
impaired loans for which the related allowance for loan losses was $2.0 million.
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. For the year ended December 31, 2004, Peoples' average recorded
investment in impaired loans was approximately $17.7 million and interest income
of $513,000 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 $1.07 billion at December
31, 2004 versus $1.03 billion at year-end 2003. At December 31, 2004, borrowed
funds totaled $546.0 million, up $19.4 million (or 4%) from $526.6 million at
year-end 2003, as a result of an increase in long-term borrowings.
Non-interest-bearing deposits serve as a core funding source. At December 31,
2004, non-interest-bearing deposit balances totaled $153.0 million, up $19.3
million (or 14%) compared to the prior year-end. The majority of this increase
is attributable to Peoples' efforts to grow non-interest-bearing deposits and
reduce its reliance on high cost funding. In addition, Peoples Bank acquired $2
million of non-interest-bearing deposits in the Ashland Banking Acquisition.
Since customer activity can result in significant temporary changes in deposit
balances at end of periods, management believes a comparison of average balances
to be a more meaningful reflection of the trend in non-interest-bearing
deposits. In 2004, non-interest-bearing deposits averaged $144.6 million versus
$124.6 in 2003, reflecting Peoples' efforts to increase non-interest-bearing
deposits. Peoples' strategies include continued emphasis on core deposit growth
in products such as non-interest-bearing checking accounts.
Interest-bearing deposits totaled $916.4 million at December 31, 2004, compared
to $894.8 million at December 31, 2003, a 2% increase. Excluding the $62 million
of acquired deposits, total interest-bearing deposits declined $41 million,
reflecting the intense competition for deposits, particularly certificates of
deposits and other high-cost funds, during this period of rising interest rates.
The following details Peoples' interest-bearing deposits at December 31:
(Dollars in thousands) 2004 2003 2002
Certificates of deposit $ 486,759 $ 461,904 $ 422,715
Interest-bearing transaction accounts 165,144 157,410 139,609
Savings accounts 157,145 171,488 143,594
Money market deposit accounts 107,394 104,019 134,052
- ----------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 916,442 $ 894,821 $ 839,970
==============================================================================================
Peoples' short-term borrowings include overnight repurchase agreements and FHLB
advances, while long-term borrowings include FHLB advances, a loan from an
unrelated financial institution and term repurchase agreements. Advances from
the FHLB comprise a significant portion of Peoples' borrowed funds. Short-term
FHLB advances are typically variable rate cash management advances used to
manage Peoples' daily liquidity needs and may be repaid, in whole or part, at
anytime without a penalty. Peoples also utilizes short-term, repo advances
ranging in terms from overnight to one-year to manage its cost of funds and
temporary cash needs. Approximately half of Peoples' long-term FHLB advances are
convertible rate advances, with the initial rate fixed for periods ranging from
two to four years, depending on the specific advance. After the initial
fixed-rate period, these advances are subject to conversion, at the discretion
of the FHLB, to a LIBOR based, variable-rate product. Peoples has the option to
prepay, without penalty, any advance that has been converted or allow the
borrowing to reprice. The balance of the long-term FHLB advances are fixed-rate
advances, both amortizing and non-amortizing, designed to help manage its
interest rate sensitivity and liquidity. Further information regarding Peoples'
management of interest rate sensitivity can be found later in this discussion
under "Interest Rate Sensitivity and Liquidity."
In addition to FHLB advances, Peoples accesses national market repurchase
agreements to diversify its funding sources. At December 31, 2004, wholesale
repurchase agreements totaled $238.7 million versus $216.3 million at year-end
2003. This increase is due to Peoples using wholesale repurchase agreements to
fund asset growth during the year and to mitigate the interest rate risk of some
investment security purchases. Peoples' current wholesale repurchase agreements
range in original terms of two to five years. The repurchase agreements may not
be repaid prior to maturity and must remain sufficiently collateralized during
the entire term. As a result, a decline in the market value of the investment
securities associated with these agreements would require Peoples to pledge
additional investment securities.
Capital/Stockholders' Equity
- ----------------------------
At December 31, 2004, stockholders' equity was $175.4 million, versus $170.9
million at December 31, 2003, an increase of $4.5 million (or 3%), attributable
to the common shares issued as part of the Insurance Agency Acquisitions, which
increased equity $4.8 million. Peoples' earnings, net of dividends paid, of
$10.7 million was almost entirely offset by treasury stock purchases, net of
shares reissued, of $10.0 million.
For the year ended December 31, 2004, Peoples paid dividends of $7.6 million,
representing a dividend payout ratio of 41.7% of earnings, compared to $6.8
million, and a payout ratio of 42.1%, a year ago. While management anticipates
Peoples continuing its 39-year history of consistent dividend growth in future
periods, Peoples Bancorp's ability to pay dividends on its common shares is
largely dependent upon dividends from Peoples Bank. In addition, other
restrictions and limitations may prohibit Peoples from paying dividends even
when sufficient cash is available. Further discussion regarding restrictions on
Peoples' ability to pay future dividends can be found in Note 13 of the Notes to
the Consolidated Financial Statements included in Item 8 of this Form 10-K, as
well as the "Limits on Dividends" section under Item 1 of this Form 10-K.
Included in Peoples' equity is accumulated comprehensive income, net of deferred
taxes, which consists primarily of the adjustment for the net unrealized holding
gains on available-for-sale securities. At December 31, 2004, accumulated
comprehensive income totaled $5.0 million versus $4.3 million at December 31,
2003, a change of $0.7 million. Since all the investment securities in Peoples'
portfolio are classified as available-for-sale, both the investment and equity
sections of Peoples' consolidated balance sheet are more sensitive to the
changing market values of investments than if the investment portfolio was
classified as held-to-maturity.
At December 31, 2004, Peoples had treasury stock totaling $10.3 million compared
to $2.2 million at year-end 2003. During 2004, Peoples repurchased 511,348
common shares (or 82% of the total authorized), at an average price of $26.53
per share, under the 2004 Stock Repurchase Program, and 5,387 common shares, at
an average price of $26.72, in conjunction with the deferred compensation plan
for directors of Peoples and subsidiaries. During the same period, Peoples
reissued 193,892 of the shares purchased under the 2004 Stock Repurchase Program
as part of the acquisition of Putnam and stock option exercises. Peoples may
repurchase additional common shares as authorized under the 2005 Stock
Repurchase Program.
Management uses the tangible capital ratio as one measure of the adequacy of
Peoples' equity. The ratio, defined as tangible equity as a percentage of
tangible assets, excludes the balance sheet impact of intangible assets acquired
through acquisitions. At December 31, 2004, Peoples' tangible capital ratio was
6.00% compared to 7.24% at December 31, 2003. The lower ratio compared to the
prior year end is the result of an increase in assets and a decline in tangible
equity due to intangible assets acquired during 2004 through acquisitions.
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 were categorized as well-capitalized institutions at December 31, 2004,
based on the most recent regulatory notification. Further information regarding
Peoples and Peoples Bank's risk-based capital ratios can be found in Note 13 of
the Notes to Consolidated Financial Statements included in Item 8 of this Form
10-K.
Interest Rate Sensitivity and Liquidity
- ---------------------------------------
While Peoples is exposed to various business risks, the risks relating to
interest rate sensitivity and liquidity are typically the most complex and
dynamic and could materially impact future results of operation and financial
condition. The objective of Peoples' asset/liability management ("ALM") function
is to measure and manage these risks in order to optimize net interest income
within the constraints of prudent capital adequacy, liquidity and safety. This
objective requires Peoples to focus on interest rate risk exposure and adequate
liquidity through management of the mix and characteristics of assets and
liabilities. Ultimately, the ALM function is intended to guide management in the
acquisition and disposition of earning assets and selection of appropriate
funding sources.
Interest Rate Risk
- ------------------
Interest rate risk ("IRR") is one of the most significant risks for Peoples, and
the entire financial services industry, primarily arising in the normal course
of business of offering a wide array of financial products to its customers,
including loans and deposits, and from the complexity and characteristics of its
own investment portfolio and borrowed funds. IRR is the potential for economic
loss due to future interest rate changes that can impact both the earnings
stream as well as market values of financial assets and liabilities. Peoples'
exposure to IRR is due primarily to differences in the maturity, or repricing,
of earning assets and interest-bearing liabilities. In addition, other factors,
such as prepayments of loans and investment securities or early withdrawal of
deposits, can expose Peoples to IRR and increase interest costs or reduce
revenue streams.
Peoples has charged the ALCO with the overall management of Peoples' balance
sheet mix and off-balance sheet commitments and hedging transactions related to
the management of IRR. The ALCO consists of Peoples' Chief Financial Officer,
Chief Executive Officer, President and Chief Lending Officer, as well as other
members of senior management. The ALCO regularly reports to the Board of
Directors. It is the ALCO's responsibility to focus on the future by evaluating
trends and potential future events, researching alternatives, then recommending
and authorizing appropriate courses 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 adherence to sound fundamentals of
banking while allowing sufficient flexibility to exercise the creativity and
innovation 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 simulation
modeling, to project future net interest income under various interest rate
scenarios and to monitor the sensitivity of the net present market value of
equity. The model is based on cash flows and repricing characteristics for
balance sheet instruments and incorporates market-based assumptions regarding
the impact of changing interest rates on the prepayment rate of certain assets
and liabilities. The model also includes management projections for activity
levels in product lines offered by Peoples. 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 on the balance sheet structure and by
establishing limits on these estimated changes to net interest income and net
market value, the ALCO is better able to evaluate interest rate risks and their
potential impact to earnings and the market value of equity.
The modeling process starts with a base case simulation using the current
balance sheet and current interest rates held constant for the next twelve
months. At least two alternative interest rate scenarios, one with higher
interest rates and one with lower interest rates, assuming parallel, immediate
and sustained changes are also prepared using the same balance sheet structure
as the base scenario. Comparisons produced from the simulation data, showing the
earnings variance from the base interest rate scenario, 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. The ALCO limits the
decrease in net interest income of Peoples to 15% or less from base case for a
200 basis point shift in interest rates measured over a twelve- and
twenty-four-month period. The ALCO limits the negative impact on net equity to
30% or less given an immediate and sustained 200 basis points shift in interest
rates. The difference between rate sensitive assets and rate sensitive
liabilities for specified periods of time is known as the gap. The ALCO also
reviews the gap for specific periods focusing on a one-year cumulative gap.
Based on historical trends and performance, the ALCO has determined the ratio of
the one-year cumulative gap should be within +/-15% of earning assets at the
date of measurement. Results that are outside of any of these limits will prompt
a discussion by the ALCO of appropriate actions, if any, that should be taken.
At December 31, 2004, Peoples' one-year cumulative gap amount was positive 6.2%
of earning assets.
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, 2004
(dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in Increase (Decrease) Decrease in Economic Value of
Basis Points In Net Interest Income Equity
- --------------------------- ----------------------------- --------------------------------
200 $ 1,969 3.8 % $ (14,160) (6.6) %
100 1,030 2.0 (4,815) (2.2)
(100) $ (2,932) (5.7)% $ (7,582) (3.5) %
The interest rate risk analysis shows 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, based on the assumptions used. However, the variability of cash
flows from the investment and loan portfolios continue to have a significant
influence on future net interest income and earnings, especially during periods
of changing interest rates. In general, the amount of principal runoff from
these portfolios tends to decrease as interest rates increase due to fewer
prepayments, limiting the amount of funds which can be reinvested at higher
rates, while declining interest rates tend to result in a higher level of funds
that must be reinvested at lower rates, due to an increase in prepayments. The
interest rate table also shows Peoples is within the established IRR policy
limits for all simulations and all scenarios for the current period.
Peoples has implemented hedge positions to help protect net interest income
streams in the event of rising rates, which complements the current IRR
position. Peoples has an interest rate swap on a $17 million long-term,
fixed-rate borrowing from the Federal Home Loan Bank that may convert to a
variable rate, at the option of the Federal Home Loan Bank. In addition, the
ALCO may consider additional hedging options, 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 wholesale funding and brokered deposits.
Typically, the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided by cash generated from earning assets such as maturities,
calls, principal payments and net income from loans and investment securities.
In 2004, cash used in financing activities totaled $23.4 million, primarily
treasury stock purchases. In comparison, in 2003, cash provided by financing
activities was $190.7 million as a result of increased long-term borrowings used
to fund an investment growth strategy. Cash used in investing activities totaled
$51.4 million in 2004 versus $201.1 million last year, primarily due to lower
level of investment securities purchases in 2004.
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, 2004, Peoples had available borrowing
capacity of approximately $170 million through these external sources and
unpledged securities in the investment portfolio of approximately $163 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 include short-term
investments and unpledged available-for-sale securities. At December 31, 2004,
Peoples' net liquidity position was $141.4 million, or 7.8% of total assets,
compared to $260.1 million, or 15.0% of total assets, at December 31, 2003. The
decrease in liquidity position was primarily the result of a lower level of
liquid assets, due in large part to the reduction in Federal funds sold and
investment securities. The liquidity position as of December 31, 2004, was
within Peoples' policy limit of negative 10% of total assets.
Off-Balance Sheet Activities and Contractual Obligations
- --------------------------------------------------------
Peoples routinely engages in activities that involve, to varying degrees,
elements of risk that are not reflected in whole or in part in the consolidated
financial statements. These activities are part of Peoples' normal course of
business and include traditional off-balance sheet credit-related financial
instruments, interest rate contracts, operating leases, long-term debt and
commitments to make additional capital contributions in low-income housing tax
credit investments.
Traditional off-balance sheet credit-related financial instruments are primarily
commitments to extend credit, and standby letters of credit. These activities
are necessary to meet the financing needs of customers and could require Peoples
to make cash payments to third parties in the event certain specified future
events occur. The contractual amounts represent the extent of Peoples' exposure
in these off-balance sheet activities. However, since certain off-balance sheet
commitments, particularly standby letters of credit, are expected to expire or
be only partially used, the total amount of commitments does not necessarily
represent future cash requirements.
Peoples also enters into interest rate contracts where Peoples is required to
either receive cash from or pay cash to counter parties depending on changes in
interest rates. Peoples utilizes interest rate contracts to help manage the risk
of changing interest rates. Interest rate contracts are carried at fair value on
the consolidated balance sheet, with the fair value representing the net present
value of expected future cash receipts or payments based on market interest
rates as of the balance sheet date. As a result, the amounts recorded on the
balance sheet at December 31, 2004, do not represent the amounts that may
ultimately be paid or received under these contracts.
Peoples also has commitments to make additional capital contributions in
low-income housing tax credit funds, consisting of a pool of low-income housing
projects. As a limited partner in these funds, Peoples receives federal income
tax benefits, which assist Peoples in managing its overall tax burden. Since the
future contributions are conditioned on certain future events occurring, the
total amount of delayed equity contributions is not reflected on the
consolidated balance sheet at December 31, 2004. Further information regarding
Peoples' delayed equity contributions can be found in Note 12 of the Notes to
the Consolidated Financial Statements included in Item 8 of this Form 10-K.
In connection with the sale of the credit card portfolio, Peoples provided
credit recourse on the approximately $0.9 million of business credit card loans
sold to an unrelated third party during the fourth quarter of 2003. As a result,
Peoples is required to reimburse the third party in the event of any customer
default, pursuant to the recourse provided on the business credit cards. At
December 31, 2004, the maximum amount of Peoples' exposure in the event of
nonperformance by the underlying borrowers was approximately $5.9 million. No
loss was incurred by Peoples in 2004 as a result of this credit card recourse,
which expires in the second quarter of 2005.
Management does not anticipate Peoples' current off-balance sheet activities
will have a material impact on future results of operations and financial
condition based on past experience. Further information regarding Peoples'
financial instruments with off-balance sheet risk can be found in Note 12 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Peoples continues to lease certain facilities and equipment under noncancelable
operating leases with terms providing for fixed monthly payments over periods
ranging from two to fifteen years. Many of Peoples' leased facilities are inside
retail shopping centers and, as a result, are not available for purchase.
Management believes these leased facilities increase Peoples' visibility within
its markets and afford sales associates additional access to current and
potential clients.
The following table details Peoples' future contractual obligations under
certain contractual obligations:
Payments due by period
----------------------------------------------------------
Less More
than 1 1-3 3-5 than
Total year years years 5 years
Long-term debt (1) $ 464,864 $ 117,242 $ 166,429 $ 144,738 $ 36,455
Operating leases 4,642 605 1,131 969 1,937
Time deposits 448,676 185,957 205,977 56,740 2
- --------------------------------------------------------------------------------------------------
Total $ 918,182 $ 303,804 $ 373,537 $ 202,447 $ 38,394
==================================================================================================
(1) Amounts reflect the minimum principal payments required under Peoples'
long-term debt agreements.
Effects of Inflation on Financial Statements
- --------------------------------------------
Substantially all of Peoples' assets relate to banking and are monetary in
nature. As a result, inflation does not impact Peoples to the same degree as
companies in capital-intensive industries in a replacement cost environment.
During a period of rising prices, a net monetary asset position results in a
loss in purchasing power and conversely a net monetary liability position
results in an increase in purchasing power. The opposite would be true during a
period of decreasing prices. In the banking industry, 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 2004, Peoples' results reflect a period of growth, expansion and revenue
diversification, as well as continued positioning of the balance sheet for the
expected increases in interest rates. Management maintains a positive outlook on
Peoples' ability to grow earnings, as prospects for loan growth and continued
strong asset quality, coupled with a full-year's impact of acquisitions, should
produce better operating results in 2005. However, the flattening yield curve
causes some concern and emphasizes the need to enhance non-interest income
through increased cross-sales. Peoples' capital position, coupled with
management's commitment to sound underwriting discipline and Peoples' solid
asset quality, serves as a foundation of strength in the current business
environment. Management continues its efforts to position Peoples for long-term
earnings growth in anticipation of a rising interest rate environment, which
will pose additional challenges as competition for loans and deposits
intensifies.
Cost control remains a key focus of management, especially during tougher times
of net interest revenue growth. While Peoples' implementation of new
Sarbanes-Oxley requirements caused an increase in professional fee expense,
management does not expect some of these costs to be repeated in 2005, which
could result in slightly lower professional fees. However, the new accounting
rules requiring companies to expense stock options will have an impact on
expenses in the second half of 2005. Management estimates the expense will be
$400,000 to $500,000, or approximately $0.03 per diluted share after-tax. In
2005, management will continue to monitor expenses and explore opportunities to
enhance Peoples' operating efficiency.
One of Peoples' successes in 2004 was strong internal loan growth. With economic
conditions improving in many of Peoples' markets, management looks to continue
growing loans in a disciplined manner that preserves Peoples' already solid
asset quality. As Peoples works to generate new loans, management is evaluating
the possibility of selling between $10 and $15 million of long-term, fixed-rate
residential real estate loans acquired in the Ashland Banking Acquisition. The
proceeds from this sale, which is not expected to generate any significant gain
or loss, would be used to fund new loans at rates and terms more consistent with
Peoples' mortgage portfolio and interest rate risk parameters.
Peoples' ability to retain, and even grow, deposits has been challenged by
fierce competition for interest-bearing deposits, especially certificates of
deposits. In 2005, management will continue to focus on attracting core deposits
and adjusting the mix of funding sources as a means of managing Peoples' overall
cost of funds. As part of this strategy, Peoples has introduced a new
interest-bearing checking product - Ultimate Freedom Checking - in early 2005.
This new product offers customers with higher balances attractive rates that are
comparable to money market products offered by Peoples' competitors.
In March 2005, Peoples will expand its operations in central Ohio with the
opening of a loan production office in Westerville. Loan production offices have
served as an effective means for Peoples to enter new markets or expand its
presence in existing markets. Central Ohio and its vibrant economic conditions
have been good for Peoples, and the Westerville office is expected to provide
opportunities for additional growth and complements existing offices in the
region. Management's long-term goal is to expand to more full-service offerings
of Peoples' financial services and develop client relationships in the
Westerville market.
Acquisitions continue to serve as a means of growing and diversifying Peoples
revenues and decreasing its reliance on margin based revenues. As expected, the
Insurance Agency Acquisitions are having a positive impact on revenues and
earnings, while the Ashland Banking Acquisition added many new customers and
allowed Peoples to streamline its operations in the Ashland market. In 2005,
non-interest revenues are expected to be slightly higher, due largely to a
full-year's impact of recent acquisitions.
With strong regulatory capital ratios and an acceptable level of tangible equity
to total assets, management believes mergers and acquisitions remain a viable
means of expanding Peoples' operations and customer base. While Peoples has
completed several traditional banking and branch acquisitions in recent years,
management's evaluation of future acquisitions will also include insurance
agency and professional investment services firms. Ultimately, the assessment of
potential acquisitions will emphasize opportunities to complement Peoples' core
competencies and strategic intent more than geographic location, size or nature
of business.
Peoples remains a service-oriented company with a sales focus that strives to
satisfy clients through a relationship sales process. Through this process,
sales associates work to anticipate, uncover, and solve their clients' every
financial need, from insurance to banking to investment services. In 2005,
management expects earnings catalysts to include loan growth, a full-year's
impact of recent acquisitions, controlled operating expenses and possible
improvement in net interest revenue due to interest rate increases.
Forward-Looking Statements
- --------------------------
Certain statements in this Form 10-K which are not historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. Words such as
"expects," "believes", "plans", "will", "would", "should", "could" and similar
expressions are intended to identify these forward-looking statements but are
not the exclusive means of identifying such statements. Forward-looking
statements are subject to risks and uncertainties that may cause actual results
to differ materially. Factors that might cause such a difference include, but
are not limited to:
(1) competitive pressures among depository institutions increase
significantly;
(2) changes in the interest rate environmentreduce interest margins;
(3) prepayment speeds, loan originations and sale volumes, chargeoffs and
loan loss provisions are less favorable than expected;
(4) the businesses of Putnam and Barengo may not be successfully
integrated with Peoples Insurance or the integration may take longer
to accomplish than expected;
(5) the expected synergies from the Insurance Agency Acquisitions and
Ashland Banking Acquisition may make it difficult to maintain
relationships with clients, associates or suppliers;
(6) general economic conditions may be less favorable than expected;
(7) political developments, wars or other hostilities may disrupt or
increase volatility in securities markets or other economic
conditions;
(8) legislative or regulatory changes or actions may adversely affect
Peoples' business;
(9) changes and trends in the securities markets;
(10) a delayed or incomplete resolution of regulatory issues that could
arise;
(11) the impact of reputational risk created by these developments on such
matters as business generation and retention, funding and liquidity;
(12) the costs and effects of regulatory and legal developments, including
the outcome of regulatory or other governmental inquiries and legal
proceedings and results of regulatory examinations; and
(13) other risk factors relating to the banking industry or Peoples as
detailed from time to time in Peoples' reports filed with the
Securities and Exchange Commission ("SEC").
All forward-looking statements speak only as of the execution date of this Form
10-K and are expressly qualified in their entirety by the cautionary statements.
Although management believes the expectations in these forward-looking
statements are based on reasonable assumptions within the bounds of management's
knowledge of Peoples' business and operations, it is possible that actual
results may differ materially from these projections. Additionally, Peoples
undertakes no obligation to release revisions to these forward-looking
statements to reflect events or circumstances after the date of this Form 10-K.
Copies of documents filed with the SEC are available free of charge at the SEC
website at http://www.sec.gov and/or from Peoples' website.
Comparison of 2003 to 2002
- --------------------------
Peoples reported net income of $16.3 million in 2003, or $1.52 per diluted
share, compared to $18.8 million, or $2.19 in 2002. Earnings in 2003 were
reduced by $5.6 million, or $0.53 per diluted share, of after-tax net charges
resulting from a balance sheet restructuring in December 2003. In addition, net
interest compression resulting from assets repricing downward, coupled with
additional shares outstanding, contributed to the lower earnings per share.
Alternatively, earnings in 2002 were positively impacted by an after-tax gain of
$410,000, or $0.04 per diluted share, on Peoples' repurchase of $7.0 million of
trust preferred securities issued by PEBO Capital Trust I.
In 2003, ROE was 9.75% versus 17.69% in 2002, due to decreased earnings from
balance sheet restructuring charges in the fourth quarter of 2003, coupled with
higher average equity generated by the sale of common shares through a firm
underwritten offering and the Kentucky Bancshares acquisition. ROA was 0.95% in
2003 compared to 1.46% in 2002, with the decline due primarily to Peoples' lower
earnings and an increase in total average assets from an investment growth
strategy and Kentucky Bancshares acquisition.
Peoples' provision for loan losses was $3.6 million in 2003, down 11% from $4.1
million in 2002. This decrease was due largely to Peoples' good asset quality
and lower loan delinquencies. When expressed as a percentage of average loans,
the provision was 0.40% in 2003 compared to 0.49% in 2002. At December 31, 2003,
Peoples' allowance for loan losses as a percentage of total loans was 1.59%,
compared to a year-end 2002 ratio of 1.54%.
For the year ended December 31, 2003, net interest income totaled $53.6 million
and net interest margin was 3.52% compared to $47.7 million and 4.17% for the
same period in 2002. Recent acquisitions, coupled with an investment growth
strategy in the first quarter of 2003, increased earning assets and produced
higher levels of net interest income in 2003. Net interest margin compression
was the result of declining yields on earning assets and limited opportunities
for Peoples to lower its costs of funds in the low interest rate environment.
Other income grew 15% in 2003 compared to 2002, totaling $17.5 million. This
increase was attributable to higher deposit service charge income and mortgage
banking revenues, while revenues from Peoples' e-banking services and fiduciary
activities were also significant contributors. Other income was impacted by
securities transactions and asset disposals, which resulted in a net loss of
$2.2 million in 2003 versus a net gain of $144,000 in 2002, as well as the gain
of $1.4 million on the sale of the credit card portfolio in 2003.
Non-interest expense was $45.9 million in 2003, up from $33.0 million for the
year ended December 31, 2002. A significant portion of this increase was the
result of prepayment penalties of $6.9 million in conjunction with the Long-Term
Debt Restructuring and increased intangible asset amortization of $0.8 million.
The remaining increase from the prior year was largely attributable to
additional salaries and benefit costs and other operating expenses incurred as a
result of the Kentucky Bancshares acquisition and a full-year impact of the
acquisition of First Colony Bancshares, Inc. completed in mid-2002.
At December 31, 2003, total assets were $1.74 billion compared to $1.39 billion
at year-end 2002, due to an increase in investments and loans. Investment
securities totaled $641.5 million at December 31, 2003, up $229.4 million (or
56%) since December 31, 2002. Gross loans were $915.0 million at year-end 2003,
up $65.2 million (or 8%) since December 31, 2002, largely attributable to the
Kentucky Bancshares acquisition. Goodwill and unamortized other intangible
assets were $18.0 million higher at year-end 2003 compared to December 31, 2002,
as a result of the Kentucky Bancshares acquisition.
Total liabilities were $1.57 billion at December 31, 2003, compared to $1.25
billion at year-end 2002, an increase of $318.0 million (or 26%). At December
31, 2003, deposits totaled $1.03 billion versus $955.9 million at year-end 2002,
an increase of $72.7 million (or 8%). This increase was primarily the result of
deposits acquired in the Kentucky Bancshares acquisition. Borrowed funds totaled
$526.6 million at December 31, 2003, up from $281.1 million at December 31,
2002, due to borrowings used, for the most part, to fund the Investment Growth
Strategy.
Stockholders' equity totaled $170.9 million at December 31, 2003, versus $147.2
million at December 31, 2002, an increase of $23.7 million (or 16%). The
majority of this increase is due to common shares issued in conjunction with the
Kentucky Bancshares acquisition and a common stock offering, which increased
equity by $19.1 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Please refer to the section captioned "Interest Rate Sensitivity and Liquidity"
on pages 33 through 35 under Item 7 of this Form 10-K, which section is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements and accompanying notes, and the report of
independent registered public accounting firm, are set forth immediately
following Item 9B of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
- ----------------------------------
Peoples' management, with the participation of its Chief Executive Officer,
President and Chief Financial Officer has evaluated its disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended. Based upon this evaluation, Peoples' Chief
Executive Officer, President and Chief Financial Officer have concluded that:
(a) information required to be disclosed by Peoples in this Annual Report
on Form 10-K and other reports it files or submits under the Exchange
Act would be accumulated and communicated to Peoples' management,
including its Chief Executive Officer, President, and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure;
(b) information required to be disclosed by Peoples in this Annual Report
on Form 10-K would be recorded, processed, summarized and reported
within the timeframe specified in the SEC's rules and forms; and
(c) Peoples' disclosure controls and procedures are effective as of the
end of the period covered by this Annual Report on Form 10-K to ensure
material information relating to Peoples and its consolidated
subsidiaries is made known to them, particularly during the period in
which Peoples' periodic reports, including this Annual Report on Form
10-K, are being prepared.
Changes in Internal Control over Financial Reporting
- ----------------------------------------------------
During the fourth quarter of Peoples' fiscal year ended December 31, 2004, no
significant changes were made in Peoples' internal control over financial
reporting in connection with the above evaluation that has materially effected,
or is reasonably likely to materially effect, Peoples' internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION.
No response required.
Report of Management's Assessment of Internal Controls Over Financial Reporting
- -------------------------------------------------------------------------------
Peoples' management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934, as amended. Peoples' internal
control over financial reporting has been designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation,
integrity, and fair presentation of Peoples' consolidated financial statements
for external reporting purposes in accordance with United States generally
accepted accounting principles.
With the participation of its Chief Executive Officer, President, and Chief
Financial Officer, management evaluated the effectiveness of its internal
control over financial reporting as of December 31, 2004, using the framework
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission.
No matter how well designed, internal control over financial reporting may not
prevent or detect all misstatements. Projection of the evaluation of
effectiveness to future periods is subject to risks, including but not limited
to (a) controls may become inadequate due to changes in conditions; (b) a
deterioration in the degree of compliance with policies or procedures; and (c)
the possibility of control circumvention or override, any of which may lead to
misstatements due to undetected error or fraud. Effective internal control over
financial reporting can provide only a reasonable assurance with respect to
financial statement preparation and reporting.
Management assessed the effectiveness of Peoples' internal control over
financial reporting as of December 31, 2004, and, based on this assessment, has
concluded Peoples' internal control over financial reporting is effective as of
that date.
Peoples' independent registered public accounting firm, Ernst & Young LLP has
audited the financial statements included in this Annual Report and has issued
an audit report on management's assessment of Peoples' internal control over
financial reporting.
/s/ ROBERT E. EVANS /s/ JOHN W. CONLON
- --------------------------------------- -------------------------------------
Robert E. Evans John W. Conlon
Chief Executive Officer Chief Financial Officer and Treasurer
Chairman of the Board
/s/ MARK F. BRADLEY
- ---------------------------------------
Mark F. Bradley
President and Chief Operating Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders of Peoples Bancorp Inc.
We have audited management's assessment, included in the accompanying Report of
Management's Assessment of Internal Control Over Financial Reporting, that
Peoples Bancorp, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Peoples Bancorp
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Peoples Bancorp, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Peoples Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Peoples Bancorp Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2004 of Peoples Bancorp
Inc., and our report dated March 11, 2005 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 11, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON CONSOLIDATED FINANCIAL STATEMENTS
To the Audit Committee of the Board of Directors
Peoples Bancorp Inc.
We have audited the accompanying consolidated balance sheets of Peoples Bancorp
Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of Peoples Bancorp Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Peoples Bancorp
Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of three years in the
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Peoples Bancorp
Inc.'s internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 11, 2005, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 11, 2005
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
Assets 2004 2003
Cash and cash equivalents:
Cash and due from banks $ 30,670 $ 28,349
Interest-bearing deposits in other banks 779 1,077
Federal funds sold - 44,000
- ------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 31,449 73,426
- ------------------------------------------------------------------------------------------------------------------------------
Available-for-sale investment securities, at estimated fair value (amortized
cost of $594,457 and $634,801 at December 31, 2004 and 2003, respectively) 602,364 641,464
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees and costs 1,023,058 914,998
Allowance for loan losses (14,760) (14,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans 1,008,298 900,423
- ------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 612 2,847
Bank premises and equipment, net 22,640 22,155
Business owned life insurance 45,253 23,355
Goodwill 59,096 41,407
Other intangible assets 12,022 7,298
Other assets 27,352 23,729
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,809,086 $ 1,736,104
==============================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 152,979 $ 133,709
Interest-bearing 916,442 894,821
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,069,421 1,028,530
- ------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 14,495 16,468
Federal Home Loan Bank advances 37,400 92,300
- ------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 51,895 108,768
- ------------------------------------------------------------------------------------------------------------------------------
Long-term borrowings 464,864 388,647
Junior subordinated notes held by subsidiary trusts 29,263 29,177
Accrued expenses and other liabilities 18,225 10,102
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,633,668 1,565,224
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, no par value, 24,000,000 shares authorized,
10,850,641 shares issued and 10,704,938 shares issued at December 31, 2004
and 2003, respectively, including shares in treasury 162,284 161,005
Retained earnings 18,442 7,781
Accumulated comprehensive income, net of deferred income taxes 4,958 4,255
- ------------------------------------------------------------------------------------------------------------------------------
185,684 173,041
Treasury stock, at cost, 415,539 shares and 101,146 shares at December 31, 2004
and 2003, respectively (10,266) (2,161)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 175,418 170,880
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,809,086 $ 1,736,104
==============================================================================================================================
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data) Year ended December 31,
2004 2003 2002
Interest Income:
Interest and fees on loans $ 59,880 $ 62,159 $ 62,423
Interest on taxable investment securities 24,237 26,429 17,615
Interest on tax-exempt investment securities 2,778 2,882 2,827
Other interest income 135 185 103
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 87,030 91,655 82,968
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 16,997 18,571 22,157
Interest on short-term borrowings 1,130 793 869
Interest on long-term borrowings 14,678 16,344 9,944
Interest on junior subordinated notes held by subsidiary trusts 2,355 2,342 2,346
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 35,160 38,050 35,316
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 51,870 53,605 47,652
Provision for loan losses 2,546 3,601 4,067
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 49,324 50,004 43,585
- ------------------------------------------------------------------------------------------------------------------------------
Other Income:
Service charges on deposit accounts 9,636 8,192 6,976
Investment and insurance commissions 6,152 1,465 1,966
Income from fiduciary activities 3,471 3,363 2,479
Electronic banking income 2,390 2,055 1,729
Business owned life insurance 1,899 1,403 1,471
Mortgage banking income 931 1,352 157
Gain on sale of credit card portfolio - 1,423 -
(Loss) gain on securities transactions (3,040) (1,905) 216
Other 769 190 242
- ------------------------------------------------------------------------------------------------------------------------------
Total other income 22,208 17,538 15,236
- ------------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Salaries and employee benefits 24,574 19,636 18,100
Net occupancy and equipment 5,134 4,561 3,915
Amortization of other intangible assets 2,219 1,493 646
Professional fees 2,030 1,938 1,987
Data processing and software 1,849 1,596 1,208
Bankcard costs 1,461 1,160 974
Franchise tax 1,458 1,126 745
Marketing 1,128 1,053 1,006
Communications 1,116 993 866
Loss (gain) on early debt extinguishment - 6,858 (631)
Other 6,229 5,489 4,174
- ------------------------------------------------------------------------------------------------------------------------------
Total other expenses 47,198 45,903 32,990
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 24,334 21,639 25,831
- ------------------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 4,483 4,055 6,190
Deferred 1,576 1,330 889
- ------------------------------------------------------------------------------------------------------------------------------
Total income taxes 6,059 5,385 7,079
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 18,275 $ 16,254 $ 18,752
==============================================================================================================================
Earnings per share:
Basic $ 1.74 $ 1.56 $ 2.25
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.71 $ 1.52 $ 2.19
- ------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares outstanding:
Basic 10,529,332 10,433,708 8,329,109
- ------------------------------------------------------------------------------------------------------------------------------
Diluted 10,710,114 10,660,083 8,557,591
- ------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, except Per Share Data) Accumulated
Common Stock Retained Comprehensive Treasury
Shares Amount Earnings Income Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 7,289,266 $ 78,664 $ 17,735 834 $ (3,379) $ 93,854
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 18,752 18,752
Other comprehensive income, net of tax 5,612 5,612
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 (issued
88,928 shares - 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 $0.56 per share (4,671) (4,671)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 9,421,222 $ 129,173 $ 12,650 6,446 $ (1,086) $ 147,183
====================================================================================================================================
Net income 16,254 16,254
Other comprehensive loss, net of tax (2,191) (2,191)
Purchase of treasury stock, 157,222 shares (4,092) (4,092)
Distribution of treasury stock for deferred
compensation plan (reissued 304 treasury 6 6
shares)
5% stock dividend 466,127 13,128 (14,286) 1,158
Exercise of common stock options (issued
68,505 shares - reissued 46,274 treasury
shares) 22,231 (406) 1,194 788
Tax benefit from exercise of stock options 257 257
Issuance of common stock under dividend
reinvestment plan 16,403 411 411
Issuance of common stock 216,000 4,794 4,794
Issuance of common stock to purchase Kentucky
Bancshares Incorporated (issued 592,648
shares - reissued 29,693 treasury shares) 562,955 13,648 659 14,307
Cash dividends declared of $0.65 per share (6,837) (6,837)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 10,704,938 $ 161,005 $ 7,781 4,255 $ (2,161) $ 170,880
====================================================================================================================================
Net income 18,275 18,275
Other comprehensive income, net of tax 703 703
Purchase of treasury stock, 516,735 shares (13,709) (13,709)
Distribution of treasury stock for deferred
compensation plan (reissued 8,450 treasury 153 153
shares)
Exercise of common stock options
(reissued 127,310 treasury shares) (2,421) 3,539 1,118
Tax benefit from exercise of stock options 300 300
Issuance of common stock under dividend
reinvestment plan 18,257 498 498
Cash dividends declared of $0.72 per share (7,614) (7,614)
Issuance of common stock to purchase Putnam
Agency, Inc. (reissued 66,582 treasury (327) 1,912 1,585
shares)
Issuance of common stock to purchase Barengo
Insurance Agency, Inc. 127,446 3,229 3,229
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 10,850,641 $ 162,284 $ 18,442 4,958 $ (10,266) $ 175,418
====================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands) 2004 2003 2002
Net income $ 18,275 $ 16,254 $ 18,752
Other comprehensive income:
Unrealized (loss) gain on available-for-sale securities arising in the period (1,852) (5,300) 8,937
Less: reclassification adjustment for net securities (losses) gains included in net
income (3,040) (1,905) 216
Unrealized (loss) gain on cash flow hedge derivatives arising in the period (106) 24 (87)
- ----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income 1,082 (3,371) 8,634
Income tax expense (benefit) 379 (1,180) 3,022
- ----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income, net of tax 703 (2,191) 5,612
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 18,978 $ 14,063 $ 24,364
==================================================================================================================================
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year ended December 31,
2004 2003 2002
Cash flows from operating activities:
Net income $ 18,275 $ 16,254 $ 18,752
Adjustments to reconcile net income to net cash provided:
Depreciation, amortization, and accretion, net 7,735 6,610 3,468
Provision for loan losses 2,546 3,601 4,067
Business owned life insurance income (1,899) (1,403) (1,471)
Loss (gain) on securities transactions 3,040 1,905 (216)
Loss (gain) on early debt extinguishment - 6,858 (631)
Loans originated for sale (39,415) (69,182) (8,309)
Proceeds from sales of loans 42,245 68,274 7,288
Gain on sale of loans (882) (1,349) (157)
Deferred income tax expense 1,576 1,330 889
Increase (decrease) in accrued expenses 630 (2,102) 1,350
Other, net (996) (2,568) (874)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,855 28,228 24,156
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities (200,507) (622,808) (220,156)
Proceeds from sales of available-for-sale securities 83,026 153,333 42,258
Proceeds from maturities of available-for-sale securities 152,366 254,650 111,115
Net (increase) decrease in loans (67,528) 6,997 (13,978)
Net expenditures for premises and equipment (2,110) (2,996) (1,813)
Net (expenditures) proceeds from sales of other real estate owned (38) (502) 223
Acquisitions, net of cash received 6,074 12,015 18,648
Investment in business owned life insurance (20,000) - -
Investment in limited partnership and tax credit funds (2,672) (1,752) (1,315)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (51,389) (201,063) (65,018)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in non-interest-bearing deposits 17,259 (757) 8,346
Net (decrease) increase in interest-bearing deposits (40,308) (39,805) 29,333
Net (decrease) increase in short-term borrowings (56,873) 69,685 (22,459)
Proceeds from long-term borrowings 89,275 249,958 26,100
Payments on long-term borrowings (13,059) (84,156) (7,405)
Cash dividends paid (7,146) (5,704) (4,177)
Purchase of treasury stock (13,709) (4,092) (244)
Proceeds from issuance of common stock 1,118 5,582 33,230
Repurchase of Trust Preferred Securities - - (6,150)
Proceeds from issuance of Trust Preferred Securities - - 7,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used by) provided by financing activities (23,443) 190,711 63,574
- -----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (41,977) 17,876 22,712
Cash and cash equivalents at beginning of year 73,426 55,550 32,838
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 31,449 $ 73,426 $ 55,550
===================================================================================================================================
Supplemental cash flow information:
Interest paid $ 34,561 $ 36,054 $ 32,791
- -----------------------------------------------------------------------------------------------------------------------------------
Income taxes paid 2,108 6,492 5,779
- -----------------------------------------------------------------------------------------------------------------------------------
Value of shares issued for acquisitions $ 4,814 $ 14,307 $ -
- -----------------------------------------------------------------------------------------------------------------------------------
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. ("Peoples
Bancorp") and Subsidiaries (collectively, "Peoples") conform to accounting
principles generally accepted in the United States ("US GAAP") 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 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.
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
CONSOLIDATION: Accounting Research Bulletin 51 ("ARB 51") requires a
company's consolidated financial statements to include subsidiaries in
which the company has a controlling financial interest, principally
defined as owning a voting interest greater than 50%. This requirement
usually has been applied to subsidiaries in which a company has a
majority voting interest.
The voting interest approach of ARB 51 is not applicable to entities
not controlled by voting interests or in which the equity investors do
not bear the residual economic risks. For such entities, the Financial
Accounting Standards Board ("FASB") Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") provides
guidance on how to identify a variable interest entity and determine
when assets, liabilities, non-controlling interests and results of
operations of a variable interest entity need to be included in a
company's consolidated financial statements..
The consolidated financial statements include the accounts of Peoples
Bancorp and its consolidated subsidiaries, Peoples Bank, National
Association ("Peoples Bank") and Peoples Investment Company, along with
their wholly-owned subsidiaries. Peoples Bancorp has two statutory
business trusts disclosed in Note 9 that are variable interest entities
under FIN 46 for which Peoples Bancorp is not the primary beneficiary.
As a result, the accounts of these trusts are not included in Peoples'
consolidated financial statements. All significant intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash and
due from banks, interest-bearing deposits in other banks, federal funds
sold and other short-term investments, all with original maturities of
ninety days or less.
INVESTMENT SECURITIES: Investment securities are recorded initially at
cost, which includes premiums and discounts if purchased at other than
par or face value. Peoples amortizes premiums and accretes discounts as
an adjustment to interest income over the estimated life of the
security. The cost of investment securities sold, and any resulting
gain or loss, is based on the specific identification method.
Management determines the appropriate classification of investment
securities at the time of purchase. Held-to-maturity securities are
those securities that Peoples has the positive intent and ability to
hold to maturity and are recorded at amortized cost. Available-for-sale
securities are those securities that would be available to be sold in
the future in response to Peoples' liquidity needs, changes in market
interest rates, and asset-liability management strategies, among other
considerations. Available-for-sale securities are reported at fair
value, with unrealized holding gains and losses reported in
stockholders' equity as a separate component of other comprehensive
income, net of applicable deferred income taxes. Trading securities are
those securities bought and held principally for the purpose of selling
in the near term. Trading securities are reported at fair value, with
holding gains and losses recognized in earnings. Presently, Peoples
classifies its entire investment portfolio as available-for-sale.
Certain restricted equity securities, such as stock of the Federal Home
Loan Bank ("FHLB") of Cincinnati, are included in investment securities
and carried at cost.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: Peoples enters into
sales of securities under agreements to repurchase ("Repurchase
Agreements") with customers and other financial service companies,
which are treated as financings. The obligations to repurchase
securities sold are recorded as a liability on the Consolidated Balance
Sheets and disclosed in Notes 7 and 8. Securities pledged as collateral
under Repurchase Agreements are included in investment securities on
the Consolidated Balance Sheets. The fair value of the collateral
pledged to a third party is continually monitored and additional is
collateral is pledged or returned, as deemed appropriate.
LOANS: Loans originated that Peoples has the positive intent and
ability to hold to maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an
allowance for loan losses. Net unearned loan fees were $1,368,000 and
$850,000 at December 31, 2004 and 2003, respectively.
LOANS HELD FOR SALE: Loans originated and intended to be sold in the
secondary market, generally one-to-four family residential loans, are
carried at the lower of cost or fair value determined on an aggregate
basis. Gains and losses on sales of loans held for sale are included in
mortgage banking income.
Peoples enters into interest rate lock commitments with borrowers and
best efforts commitments with investors on loans originated for sale
into the secondary markets. Peoples uses these commitments to manage
the inherent interest rate and pricing risk associated with selling
loans in the secondary market. The interest rate lock commitments
generally terminate once the loan is funded, the lock period expires or
the borrower decides not to contract for the loan. The best efforts
commitments generally terminate once the loan is sold, the commitment
period expires or the borrower decides not to contract for the loan.
These commitments are considered derivatives which are generally
accounted for by recognizing their estimated fair value on the balance
sheet as either a freestanding asset or liability. The valuation of
such commitments does not consider expected cash flows related to the
servicing of the future loan. Management has determined these
derivatives do not have a material effect on Peoples' financial
position, results of operations or cash flows.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for management's estimate of the probable credit losses
inherent in the loan portfolio. Management's evaluation of the adequacy
of the allowance for loan loss and the appropriate provision for loan
losses is based upon a quarterly evaluation of the portfolio. This
formal analysis is inherently subjective and requires management to
make significant estimates of factors affecting loan losses, including
specific losses, levels and trends in impaired and nonperforming loans,
historical loan loss experience, current national and local economic
conditions, volume, growth and composition of the portfolio, regulatory
guidance and other relevant factors. Loans deemed to be uncollectible
are charged against the allowance for loan losses, while recoveries of
previously charged-off amounts are credited to the allowance for loan
losses.
The amount of the allowance for the various loan types represents
management's estimate of expected losses from existing loans based upon
specific allocations for individual lending relationships and
historical loss experience for each category of homogeneous loans. The
allowance for loan losses related to impaired loans is based on
discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent
loans. This evaluation requires management to make estimates of the
amounts and timing of future cash flows on impaired loans, which
consists primarily of nonaccrual and restructured loans. While
allocations are made to specific loans and pools of loans, the
allowance is available for all loan losses.
BANK PREMISES AND EQUIPMENT: Bank premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed on the
straight-line method over the estimated useful lives of the related
assets owned. Major improvements to leased facilities are capitalized
and included in bank premises at cost less accumulated depreciation,
which is calculated on the straight-line method over the lesser of the
remaining term of the leased facility or the estimated economic life of
the improvement
BUSINESS OWNED LIFE INSURANCE: Business owned life insurance ("BOLI")
represents life insurance on the lives of certain employees who have
provided positive consent allowing Peoples Bank to be the beneficiary
of such policies. These policies are recorded at their cash surrender
value, or the amount that can be realized. Income from these policies
and changes in the cash surrender value are recorded in other income
OTHER REAL ESTATE OWNED: Other real estate owned ("OREO"), included in
other assets on the Consolidated Balance Sheet, is comprised primarily
of commercial and residential real estate properties acquired by
Peoples Bank in satisfaction of a loan. OREO also includes bank
premises qualifying as held for sale under Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." OREO obtained in satisfaction of a loan
is recorded at the lower of cost or fair value based on appraised value
at the date actually or constructively received, less estimated costs
to sell the property. Bank premises are transferred at the lower of
carrying value or estimated fair value, less estimated costs to sell
the property.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of
the cost of an acquisition over the fair value of the net assets
acquired in business combinations. Goodwill is not amortized but is
tested for impairment at least annually. Peoples' performed the
required goodwill impairment tests and concluded the recorded value of
goodwill was not impaired as of December 31, 2004, based upon the fair
value of the reporting unit.
Other Intangible Assets consist of customer relationship intangible
assets, primarily core deposit intangibles, representing the present
value of future net income to be earned from acquired customer
relationships and are amortized over their estimated lives ranging from
7 to 10 years. Customer relationship intangible assets totaled $19.3
million and $12.4 million, net of accumulated amortization of $7.9
million and $5.7 million, at December 31, 2004 and 2003, respectively.
The estimated aggregate amortization expense related to customer
relationship intangible assets for the each of the next five years is
estimated as follows: $2.7 million in 2005; $2.3 million in 2006; $1.9
million in 2007; $1.5 million in 2008; and $1.2 million in 2009.
MORTGAGE SERVICING ASSETS: Mortgage servicing assets are recognized for
loan originations when there is a definitive plan to sell the
underlying loan and retain the servicing. Mortgage servicing assets are
reported in other intangible assets and are amortized into mortgage
banking income in proportion to, and over the period of, the estimated
future net servicing income of the underlying mortgage loans. Mortgage
servicing assets are evaluated for impairment based on the fair value
of those rights and recorded at the lower of cost or fair value, with
write-downs reflected in a valuation reserve and recognized through
mortgage banking income. The fair value of the mortgage servicing
rights is determined by using a discounted cash flow model, which
estimates the present value of the future net cash flows of the
servicing portfolio based on various factors, such as servicing costs,
expected prepayment speeds and discount rates. Mortgage servicing
assets totaled $653,000 and $549,000 at December 31, 2004 and 2003,
respectively.
TRUST ASSETS UNDER MANAGEMENT: Peoples Bank manages certain assets held
by the bank in a fiduciary or agency capacity for customers. These
assets under management, other than cash on deposit at Peoples Bank,
are not included in the Consolidated Balance Sheets since they are not
assets of Peoples Bank.
INTEREST INCOME RECOGNITION: Interest income on loans and investment
securities is recognized by methods that result in level rates of
return on principal amounts outstanding. Amortization of premiums has
been deducted from, and accretion of discounts has been added to, the
related interest income. Nonrefundable loan fees and direct loan costs
are deferred and recognized over the life of the loan as an adjustment
of the yield.
Peoples discontinues the accrual of interest on loans when management
believes collection of all or a portion of contractual interest has
become doubtful, which generally occurs when a contractual payment on a
loan is 90 days past due. When interest is deemed uncollectible,
amounts accrued in the current year are reversed and amounts accrued in
prior years are charged against the allowance for loan losses. Interest
received on nonaccrual loans is included in income only if principal
recovery is reasonably assured. A nonaccrual loan is restored to
accrual status when it is brought current, has performed in accordance
with contractual terms for a reasonable period of time, and the
collectibility of the total contractual principal and interest is no
longer in doubt. Nonaccrual loans totaled $5.1 million and $6.6 million
at December 31, 2004 and 2003, respectively.
OTHER INCOME RECOGNITION: Service charges on deposits include cost
recovery fees associated with services provided, such as overdraft and
non-sufficient funds. Income is recognized at the time the related
services are performed.
Income from fiduciary activities includes fees for services such as
asset management, record keeping, retirement services and estate
management. Income is recognized on an accrual basis at the time the
related services are performed.
Insurance and investment income includes commissions and fees relating
to the sales of policies and investments as well as fees for related
insurance services. Insurance commission income is recognized as of the
effective date of the insurance policy, net of adjustments, including
policy cancellations. Such adjustments are recorded when the amount can
be reasonably estimated, which is generally in the period in which they
occur. Contingent performance-based commissions from insurance
companies are recognized when earned and no contingencies remain.
INCOME TAXES: Deferred income tax assets and liabilities are provided
for temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements at the
statutory tax rate. The components of other comprehensive income
included in the Consolidated Statements of Stockholders' Equity have
been computed based upon a 35% effective tax rate.
EARNINGS PER SHARE: Basic earnings per share are determined by dividing
net income by the weighted-average number of common shares outstanding.
Diluted earnings per share is determined by dividing net income by the
weighted-average number of common shares outstanding increased by the
number of common shares that would be issued assuming the exercise of
stock options. The dilutive effect of stock options approximated
180,782; 226,375 and 228,482 in 2004, 2003 and 2002, respectively.
OPERATING SEGMENTS: Peoples' business activities are currently confined
to one reportable segment which is community banking. As a community
banking entity, Peoples offers its customers a full range of products
through various delivery channels. Peoples aggregated its operating
segments given similar economic characteristics, products and services,
production processes, type of customer, distribution channels and
regulatory environment.
DERIVATIVE FINANCIAL INSTRUMENTS: Peoples enters into derivative
transactions principally to protect against the risk of adverse
interest rate movements. Peoples carries all derivative financial
instruments at fair value on the Consolidated Balance Sheets as a
component of other assets. Peoples' derivative financial instruments
did not have a material effect on Peoples' financial position at
December 31, 2004 or 2003, and results of operations or cash flows in
2004, 2003 and 2002. US GAAP provides special hedge accounting
provisions, which permit the change in the fair value of the hedged
item related to the risk being hedged to be recognized in earnings in
the same period and in the same income statement line as the change in
fair value of the derivative.
Derivative financial instruments designated in a hedge relationship to
mitigate exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow
hedges. Cash flow hedges are accounted for by recording the fair value
of the derivative financial instrument on the balance sheet as either a
freestanding asset or liability, with a corresponding offset recorded
in other comprehensive income within stockholders' equity, net of
deferred tax. Amounts are reclassified from other comprehensive income
to the income statement in the period or periods the hedged forecasted
transaction affects earnings.
Derivative gains and losses not effective in hedging the expected cash
flows of the hedged item are recognized immediately in the income
statement. At the hedge's inception and at least quarterly thereafter,
a formal assessment is performed to determine whether changes in cash
flows of the derivative financial instruments have been highly
effective in offsetting changes in cash flows of the hedged items and
whether they are expected to be highly effective in the future. If it
is determined a derivative financial instrument has not been or will
not continue to be highly effective as a hedge, hedge accounting is
discontinued prospectively. Basis adjustments recorded on hedged assets
and liabilities are amortized over the remaining life of the hedged
item no later than when hedge accounting ceases.
STOCK-BASED COMPENSATION: Peoples has various stock option plans, which
are detailed in Note 16. Peoples accounts for stock-based compensation
using the intrinsic value method in accordance.
Under the provisions of the stock option plans, the option price per
share cannot be less than the fair market value of the underlying
common shares on the date of grant. As a result, Peoples does not
recognize any stock-based employee compensation expense in net income.
The following table illustrates the effect on net income and earnings
per share had Peoples applied fair value recognition to stock-based
employee compensation, assuming the estimated fair value of the options
is amortized to expense over the vesting period:
(Dollars in Thousands, except Per Share Data) 2004 2003 2002
Net Income, as reported $ 18,275 $ 16,254 $ 18,752
Deduct: stock-based compensation expense determined
under fair value based method, net of tax 527 474 357
- --------------------------------------------------------------------------------------------------
Pro forma net income 17,748 15,780 18,395
==================================================================================================
Basic Earnings Per Share:
- As Reported $ 1.74 $ 1.56 $ 2.25
- --------------------------------------------------------------------------------------------------
- Pro forma 1.69 1.51 2.21
- --------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
- As Reported $ 1.71 $ 1.52 $ 2.19
- --------------------------------------------------------------------------------------------------
- Pro forma 1.66 1.48 2.15
- --------------------------------------------------------------------------------------------------
The fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
2004 2003 2002
Risk-free interest rate 4.14% 3.65% 5.50%
Dividend yield 2.62% 2.47% 2.51%
Volatility factor of the market price of parent stock 27.8% 29.8% 30.8%
Weighted average expected life of options 7 years 7 years 7 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Peoples' employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NEW ACCOUNTING PRONOUNCEMENTS: In January 2003, the FASB issued FIN 46
to provide guidance on how to identify a variable interest entity and
determine when assets, liabilities, non-controlling interests and
results of operations of a variable interest entity need to be included
in a company's consolidated financial statements. FIN 46 applied
immediately to variable interest entities created or acquired after
January 31, 2003; otherwise, the requirements of FIN 46 are effective
at the end of the periods ending after December 15, 2003. Peoples
adopted the provisions of FIN 46 on December 31, 2003, as required,
resulting in the deconsolidation of its subsidiary grantor trusts.
In December 2003, the FASB cleared for issuance Accounting Standards
Executive Committee Statement of Position 03-3, "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3
is effective for loans acquired in fiscal years beginning after
December 15, 2004, with early adoption encouraged. SOP 03-3 addresses
accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in
loans or debt securities ("loans") acquired in a transfer if those
differences are attributable, at least in part, to credit quality.
In March 2004, the FASB Emerging Issues Task Force ("EITF") released
Issue 03-01, "Meaning of Other Than Temporary Impairment" ("Issue
03-01"), which addressed other-than-temporary impairment for certain
debt and equity investments. The recognition and measurement
requirements of Issue 03-01, and other disclosure requirements not
already implemented, were effective for periods beginning after June
15, 2004. In September 2004, the FASB staff issued FASB Staff Position
("FSP") EITF 03-1-1, which delayed the effective date for certain
measurement and recognition guidance contained in Issue 03-1. The FSP
requires the application of pre-existing other-than-temporary guidance
during the period of delay until a final consensus is reached.
Management does not anticipate the issuance of the final consensus will
have a material impact on financial condition, the results of
operations or liquidity.
On December 16, 2004, the FASB issued a revision of Statement No. 123,
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires the
compensation cost relating to share-based payment transactions to be
recognized in financial statements based on the fair value of the
equity or liability instruments issued. SFAS 123(R) replaces SFAS 123
and supercedes APB 25. SFAS 123 (R) is effective for public companies
that do not file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after June 15,
2005.
In December 2004, the FASB issued Statement No. 153 "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions." This statement amends the principle that
exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged and more broadly provides for exceptions
regarding exchanges of nonmonetary assets that do not have commercial
substance. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption
of this standard is not expected to have a material impact on financial
condition, results of operations or liquidity.
2. Fair Values of Financial Instruments:
------------------------------------
Peoples used the following methods and assumptions in estimating its fair
value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance
sheet for these captions approximate their fair values.
INVESTMENT SECURITIES: Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices of
comparable securities.
LOANS: The fair value of performing variable rate loans that reprice
frequently and performing demand loans, with no significant change in
credit risk, is based on carrying value. The fair value of performing
loans is estimated using discounted cash flow analyses and interest
rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
The fair value of significant nonperforming loans is based on either
the estimated fair value of underlying collateral or estimated cash
flows, discounted at a rate commensurate with the risk. Assumptions
regarding credit risk, cash flows, and discount rates are determined
using available market information and specific borrower information.
Deposits: The carrying amounts of demand deposits, savings accounts and
certain money market deposits approximate their fair values. The fair
value of fixed maturity certificates of deposit is estimated using a
discounted cash flow calculation based on current rates offered for
deposits of similar remaining maturities.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
FHLB advances, and securities sold overnight under repurchase
agreements approximate their fair values. The fair value of term
national market repurchase agreements is estimated using a discounted
cash flow calculation based on rates currently available to Peoples for
repurchase agreements with similar terms.
LONG-TERM BORROWINGS: The fair value of long-term borrowings is
estimated using discounted cash flow analysis based on rates currently
available to Peoples for borrowings with similar terms.
Junior Subordinated Notes: The fair value of the junior subordinated
notes is estimated using discounted cash flow analysis based on current
market rates of securities with similar risk and remaining maturity.
INTEREST RATE CONTRACTS: Fair values for interest rate contracts are
based on quoted market prices.
FINANCIAL INSTRUMENTS: The fair value of loan commitments and standby
letters of credit is estimated using the fees currently charged to
enter into similar agreements considering the remaining terms of the
agreements and the counter parties' credit standing. The estimated fair
value of these commitments approximates their carrying value.
The estimated fair values of Peoples' financial instruments at December
31 are as follows:
2004 2003
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 31,449 $ 31,449 $ 73,426 $ 73,426
Investment securities 602,364 602,364 641,464 641,464
Loans 1,008,298 1,010,378 900,423 917,113
Financial liabilities:
Deposits $ 1,069,421 $ 1,072,906 $ 1,028,530 $ 1,023,612
Short-term borrowings 51,895 51,895 108,768 108,764
Long-term borrowings 464,864 469,000 388,647 400,125
Junior subordinated notes 29,263 31,945 29,177 33,813
Other financial instruments:
Interest rate contracts $ 133 $ 133 $ 403 $ 403
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
2004 Cost Gains Losses Fair Value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 63,817 $ 163 $ (1,210) $ 62,770
Obligations of states and political subdivisions 59,134 3,103 (3) 62,234
Mortgage-backed securities 417,040 2,391 (1,337) 418,094
Other securities 54,466 5,087 (287) 59,266
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 594,457 $ 10,744 $ (2,837) $ 602,364
=============================================================================================================
2003
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 65,968 $ 519 $ (1,046) $ 65,441
Obligations of states and political subdivisions 62,625 3,663 - 66,288
Mortgage-backed securities 447,897 2,796 (3,352) 447,341
Other securities 58,311 4,994 (911) 62,394
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 634,801 $ 11,972 $ (5,309) $ 641,464
=============================================================================================================
2002
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
=============================================================================================================
In 2004, 2003 and 2002, gross gains of $62,000, $580,000 and $328,000 and
gross losses of $3,102,000, $2,485,000 and $112,000 were realized,
respectively. At December 31, 2004 and 2003, investment securities having
a carrying value of $449,162,000 and $437,080,000, respectively, were
pledged to secure public and trust department deposits and repurchase
agreements in accordance with federal and state requirements.
The following table presents a summary of available-for-sale investment
securities that had an unrealized loss at December 31, 2004:
(Dollars in Thousands) Obligations of Obligations
U.S. Treasury and of states and Mortgage-
government political backed Other
agencies subdivisions securities securities Total
Less than 12 months
Estimated fair value $ 26,556 $ 685 $ 134,498 $ - $ 161,739
Unrealized loss 1,178 3 1,007 - 2,188
12 months or more
Estimated fair value $ 4,128 $ - $ 30,855 $ 7,700 $ 42,683
Unrealized loss 32 - 330 287 649
Total
Estimated fair value $ 30,684 $ 685 $ 165,353 $ 7,700 $ 204,422
Unrealized loss 1,210 3 1,337 287 2,837
The unrealized losses reported for mortgage-backed securities relate to
securities issued by U.S. government sponsored entities and private
institutions, while the unrealized losses reported for other securities
relate primarily to trust preferred securities issued by commercial banks.
In both cases, the unrealized losses were largely attributable to the
sustained low interest rate environment. Management systematically
evaluates investment securities for other-than-temporary declines in fair
value on a quarterly basis. This analysis requires management to consider
various factors, which include duration and magnitude of the decline in
value, the financial condition of the issuer, and Peoples' ability and
intent to continue holding the investment for a period of time sufficient
to allow for any anticipated recovery in market value. At December 31,
2004, management determined an investment in Fannie Mae preferred stock
was other-than-temporarily impaired, resulting in an impairment charge of
$490,000. Management does not believe any of the remaining individual
unrealized loss at December 31, 2004, represents an other-than-temporary
impairment since Peoples has the ability and intent to hold those
securities for a period of time sufficient to recover the amortized cost.
The following table presents the amortized costs, fair value and weighted
average yield of securities by maturity at December 31, 2004. 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 fully-tax equivalent basis using a 35% federal income tax
rate.
Obligations of Obligations Total
U.S. Treasury of states Mortgage- available-
and government and political backed Other for-sale
(Dollars in Thousands) agencies subdivisions securities securities securities
Within one year
Amortized cost $ 20,787 $ 2,813 $ - $ 1,305 $ 24,905
Fair value 20,847 2,838 - 1,334 25,019
Average yield 3.46 % 5.02 % - % 6.08 % 3.77 %
1 to 5 years
Amortized cost $ 15,622 $ 33,476 $ 1,007 $ 19,112 $ 69,217
Fair value 15,637 35,043 1,056 19,944 71,680
Average yield 4.00 % 6.96 % 6.95 % 7.96 % 6.57 %
5 to 10 years
Amortized cost $ 1,118 $ 21,457 $ 29,951 $ - $ 52,526
Fair value 1,101 22,885 30,341 - 54,327
Average yield 3.52 % 6.95 % 4.17 % - % 5.29 %
Over 10 years
Amortized cost $ 26,290 $ 1,388 $ 386,082 $ 34,049 $ 447,809
Fair value 25,185 1,468 386,697 37,988 451,338
Average yield 5.45 % 7.01 % 4.20 % 5.44 % 4.38 %
-----------------------------------------------------------------------------------------------------------------
Total amortized cost $ 63,817 $ 59,134 $ 417,040 $ 54,466 $ 594,457
Total fair value $ 62,770 $ 62,234 $ 418,094 $ 59,266 $ 602,364
Total average yield 4.41 % 6.86 % 4.20 % 6.34 % 4.69 %
=================================================================================================================
4. Loans:
-----
Peoples Bank originates various types of loans, including commercial,
financial and agricultural loans ("commercial loans"), real estate loans
and consumer loans, focusing primarily on lending opportunities in central
and southeastern Ohio, northwestern West Virginia, and northeastern
Kentucky markets. Loans are comprised of the following at December 31:
(Dollars in Thousands) 2004 2003
Commercial, mortgage $ 450,270 $ 380,372
Commercial, other 126,473 131,697
Real estate, construction 35,423 21,056
Real estate, mortgage 349,965 301,726
Consumer 60,927 79,926
Credit card - 221
---------------------------------------------------------------
Total loans $ 1,023,058 $ 914,998
===============================================================
Excluded from the loan balances above are $0.6 million and $2.8 million of
real estate loans originated and held for sale in the secondary market at
December 31, 2004 and 2003, respectively. Peoples Bank has pledged certain
loans secured by 1-4 family and multifamily residential mortgages and
commercial mortgages under a blanket collateral agreement to secure
borrowings from the FHLB as discussed in Note 8. At December 31, 2004, the
amount of such pledged loans totaled $465.6 million. Peoples Bank has also
pledged certain commercial loans totaling $11.9 million at December 31,
2004, to the Federal Reserve Bank of Cleveland to secure advances from the
discount window.
At December 31, 2004, impaired loans totaled $10,467,000, including
$4,901,000 of impaired loans for which the related allowance for loan
losses was $1,965,000. Impaired loans totaled $20,025,000 at December 31,
2003, including $8,427,000 of impaired loans for which the related
allowance for loan losses was $3,787,000. Peoples' average investment in
impaired loans was $17,681,000, $13,686,000 and $8,732,000 and interest
income recognized on impaired loans was $513,000, $1,097,000 and $490,000
in 2004, 2003 and 2002, respectively. Interest received on impaired loans
is included in income if principal recovery is reasonably assured.
In December 2003, Peoples sold its existing credit card portfolio, which
resulted in Peoples recognizing a pre-tax gain of $1.2 million, net of
expenses. The credit card loan balances at December 31, 2003, represent
nonqualifying balances excluded from the preliminary settlement of the sale
and were subject to final settlement, which was completed in the January
2004.
Peoples' loans consist of credits to borrowers spread over broad range of
industrial classifications, with no loans to foreign entities. Peoples'
largest concentration of commercial loans consist of credits to lodging and
lodging related companies, which totaled $65,752,000 and $65,268,000 at
December 31, 2004 and 2003, respectively. Loans to assisted living
facilities and nursing homes also represent a significant portion of
Peoples' commercial loans, totaling $58,793,000 and $57,692,000 at December
31, 2004 and 2003, 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 affliliates.
Related party loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable loans with unrelated persons and did not involve more than
normal risk of collectibility. The following is an analysis of activity of
related party loans for the year ended December 31, 2004:
(Dollars in Thousands)
Balance, January 1, 2004 $ 19,490
New loans and disbursements 3,888
Repayments (2,600)
No longer executive officer or director (1,418)
Other changes 1,307
----------------------------------------------------------------
Balance, December 31, 2004 $ 20,667
================================================================
Changes in the allowance for loan losses for each of the three years in
the period ended December 31, 2004, were as follows:
(Dollars in Thousands) 2004 2003 2002
Balance, beginning of year $ 14,575 $ 13,086 $ 12,357
Charge-offs (3,787) (3,786) (4,328)
Recoveries 1,426 1,101 686
- -------------------------------------------------------------------------------
Net charge-offs (2,361) (2,685) (3,642)
Provision for loan losses 2,546 3,601 4,067
Allowance for loan losses acquired - 573 304
- -------------------------------------------------------------------------------
Balance, end of year $ 14,760 $ 14,575 $ 13,086
===============================================================================
Included in the allowance for loan losses was an allocation for credit
cards of $113,000 and $232,000 at December 31, 2004 and 2003, respectively,
relating to the credit card recourse disclosed in Note 12.
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) 2004 2003
Land $ 4,610 $ 4,930
Building and premises 24,778 23,609
Furniture, fixtures and equipment 15,448 13,846
-----------------------------------------------------------------
44,836 42,385
Accumulated depreciation (22,196) (20,230)
-----------------------------------------------------------------
Net book value $ 22,640 $ 22,155
=================================================================
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 $2,451,000, $2,240,000
and $2,025,000, in 2004, 2003 and 2002, 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. Rent expense was $550,000, $349,000
and $286,000 in 2004, 2003 and 2002, respectively. The future minimum
payments under noncancelable operating leases with initial terms of one
year or more consisted of the following at December 31, 2004:
(Dollars in Thousands)
2005 $ 605
2006 567
2007 564
2008 558
2009 411
Thereafter 1,937
-----------------------------------------------
Total $ 4,642
===============================================
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: $185,957,000 in 2005; $93,307,000 in 2006;
$112,670,000 in 2007; $38,477,000 in 2008; $18,263,000 in 2009 and $2,000
thereafter.
Deposits from related parties approximated $9.0 million and $11.4 million
at December 31, 2004 and 2003, respectively.
7. Short-term Borrowings:
---------------------
Peoples utilizes various short-term borrowings as sources of funds,
including FHLB advances and retail Repurchase Agreements with customers.
The FHLB advances are collateralized by residential mortgage loans and
investment securities. Other short-term borrowings represented a
short-term loan from an unrelated financial institution to fund an
acquisition. Short-term borrowings are summarized as follows:
(Dollars in Thousands) Federal Funds Retail FHLB Other
Repurchase Short-Term
Purchased Agreements Advances Borrowings
2004
Ending balance $ - $ 14,495 $ 37,400 $ -
Average balance 420 16,385 70,246 -
Highest month end balance 6,500 18,788 99,700 -
Interest expense 8 155 967 -
Weighted-average interest rate:
- ------------------------------
End of year - % 1.52 % 2.23 % - %
During the year 1.82 0.95 1.38 -
2003
Ending balance $ - $ 16,468 $ 92,300 $ -
Average balance 1 20,151 26,900 7,545
Highest month end balance - 24,342 92,300 17,000
Interest expense - 175 400 218
Weighted-average interest rate:
- ------------------------------
End of year - % 0.53 % 1.23 % - %
During the year 1.20 0.87 1.49 2.89
2002
Ending balance $ - $ 22,083 $ - $ 17,000
Average balance 28 23,351 12,626 9,408
Highest month end balance - 26,693 49,000 17,000
Interest expense 1 318 234 316
Weighted-average interest rate:
- ------------------------------
End of year - % 0.93 % - % 2.91 %
During the year 3.57 1.36 1.85 3.36
8. Long-term Borrowings:
--------------------
Long-term borrowings consisted of the following at December 31:
(Dollars in Thousands) 2004 2003
Term note payable, at LIBOR (parent company) $ 15,300 $ 17,000
National market repurchase agreements, bearing interest
at rates ranging from 2.09% to 4.08% 238,750 216,250
FHLB convertible rate advances, bearing interest at rates
ranging from 3.20% to 5.63% 107,000 107,000
FHLB non-amortizing, fixed rate advances, bearing interest at
rates ranging from 1.94% to 4.48% 43,500 5,000
FHLB amortizing, fixed rate advances, bearing interest at rates
ranging from 2.01% to 5.00% 60,314 43,397
- -----------------------------------------------------------------------------------------------------
Total long-term borrowings $ 464,864 $ 388,647
=====================================================================================================
Peoples' national market Repurchase Agreements consist of agreements with
high quality, financially secure financial service companies and
maturities ranging from 2 to 5 years.
The FHLB advances consist of various borrowings with maturities ranging
from 10 to 20 years and generally may not be repaid prior to maturity
without a penalty. The rate on the convertible rate advances are fixed
from initial periods ranging from one to four years, depending on the
specific advance. After the initial fixed rate period, the FHLB has the
option to convert each advance to a LIBOR based, variable rate advance. If
the FHLB exercises its option, Peoples may repay the advance in whole or
in part on the conversion date or any subsequent repricing date without a
prepayment fee. At all other times, early repayment of any convertible
rate advance would result in Peoples incurring a prepayment penalty.
All FHLB advances, including short-term advances, are collateralized by
Peoples Bank's real estate mortgage portfolio and other bank assets.
Peoples' borrowing capacity with the FHLB is based on the amount of FHLB
common stock owned by Peoples Bank and the amount of collateral pledged.
The most restrictive requirement of the debt agreement requires Peoples to
provide commercial real estate mortgage loans as collateral in an amount
not less than 300% of advances outstanding.
The aggregate minimum annual retirements of long-term borrowings in the
next five years and thereafter are as follows:
(Dollars in Thousands)
2005 $ 117,242
2006 89,597
2007 76,832
2008 65,396
2009 79,342
Thereafter 36,455
--------------------------------------------
Total $ 464,864
============================================
9. Junior Subordinated Notes Held By Subsidiary Trusts:
---------------------------------------------------
Peoples Bancorp has two statutory business trusts (the "Trusts") that were
formed for the purpose of issuing or participating in pools of
corporation-obligated mandatorily redeemable capital securities (the
"Capital Securities" or "Trust Preferred Securities"), with 100% of the
common equity in the Trusts owned by Peoples Bancorp. The proceeds from
the Capital Securities and common equity were invested in junior
subordinated debt securities of Peoples Bancorp (the "Debentures").
The Debentures held by the trusts are the sole assets of those trusts.
Distributions on the Capital Securities are payable semiannually at a rate
per annum equal to the interest rate being earned by the Trusts on the
Debentures and are recorded as interest expense by Peoples. Since the
Trusts are variable interest entities and Peoples Bancorp is not deemed to
be the primary beneficiary, the Trusts are not included in Peoples'
consolidated financial statements. As a result, Peoples includes the
Debentures as a separate category of long-term debt on the Consolidated
Balance Sheets entitled "Junior Subordinated Notes Held by Subsidiary
Trusts" and the related expense as interest expense on the Consolidated
Statements of Income.
Under the provisions of the subordinated debt, Peoples Bancorp has the
right to defer payment of interest on the subordinated debt at any time,
or from time to time, for periods not exceeding five years. If interest
payments on the subordinated debt are deferred, the dividends on the
Capital Securities are also deferred. Interest on the subordinated debt is
cumulative. Peoples Bancorp has entered into agreements which, taken
collectively, fully and unconditionally guarantee the Capital Securities
subject to the terms of each of the guarantees.
The Capital Securities are subject to mandatory redemption, in whole or in
part, upon repayment of the debentures. The Debentures held by PEBO
Capital Trust I are first redeemable, in whole or in part, by Peoples
Bancorp on May 1, 2009. The Debentures held by PEBO Capital Trust II are
first redeemable, in whole or in part, by Peoples Bancorp on April 22,
2007. The Capital Securities issued by the Trusts are summarized as
follows at December 31:
(Dollars in thousands) 2004 2003
Capital securities of PEBO Capital Trust I, 8.62%, due May 1, 2029,
net of unamortized issuance costs $ 22,380 $ 22,345
Capital securities of PEBO Capital Trust II, 3-month LIBOR + 3.70%,
due April 22, 2032, 6,883 6,832
- ----------------------------------------------------------------------------------------------------
Total capital securities 29,263 29,177
====================================================================================================
Total capital securities qualifying for Tier 1 capital 29,263 29,177
====================================================================================================
The Trust Preferred Securities currently qualify as Tier 1 capital for
regulatory capital purposes, subject to certain quantitative limits and
qualitative standards. On March 1, 2005, the Board of Governors of the
Federal Reserve System (the "Federal Reserve") adopted final rules
amending its risk-based capital standards for bank holding companies
regarding the continued inclusion of trust preferred securities in the
Tier 1 capital of bank holding companies. The new rules, which include a
five-year transition period, limit the aggregate amount of trust preferred
securities and certain other capital elements to 25% of core capital
elements, net of goodwill. The excess amount of trust preferred securities
not qualifying for Tier 1 capital may be included in Tier 2 capital.
Additionally, trust preferred securities no longer qualify for Tier 1
capital within five years of their maturity.
10. 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 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, 2004, and a statement of the funded status as of
December 31, 2004 and 2003:
Pension Postretirement
Benefits Benefits
(Dollars in Thousands) 2004 2003 2004 2003
Change in benefit obligation:
Obligation at January 1 $ 12,010 $ 10,106 $ 616 $ 685
Service cost 903 708 - -
Interest cost 772 688 35 40
Plan participants' contributions - - 119 117
Actuarial loss (gain) 544 1,206 8 (80)
Benefit payments (732) (711) (194) (146)
Acquisition 29 13 - -
Increase due to plan changes - - - -
- ---------------------------------------------------------------------------------------------------------------
Obligation at December 31 13,526 12,010 584 616
- ---------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation at December 31 10,495 9,062 - -
- ---------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 10,307 7,765 - -
Actual return on plan assets 1,183 1,753 -
Employer contributions 2,600 1,500 75 29
Plan participants' contributions - - 119 117
Benefit payments (732) (711) (194) (146)
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 13,358 10,307 - -
- ---------------------------------------------------------------------------------------------------------------
Funded status:
Funded status at December 31 (168) (1,702) (584) (616)
Unrecognized transition obligation - - - -
Unrecognized prior-service cost 41 44 11 22
Unrecognized net gain 4,159 4,004 80 73
- ---------------------------------------------------------------------------------------------------------------
Net amount recognized 4,032 2,346 (493) (521)
- ---------------------------------------------------------------------------------------------------------------
Amounts recognized in Consolidated Balance Sheets:
Prepaid benefit costs 4,032 2,346 - -
Accrued benefit liability - - (493) (521)
- ---------------------------------------------------------------------------------------------------------------
Net amount recognized $ 4,032 $ 2,346 $ (493) $ (521)
===============================================================================================================
The assumptions used in the measurement of Peoples' benefit obligation at
December 31 are shown in the following table:
Pension Postretirement
Benefits Benefits
2004 2003 2004 2003
Discount rate 6.00 % 6.25 % 6.00 % 6.25 %
Expected return on plan assets 8.50 8.50 n/a n/a
Rate of compensation increase 3.50 4.00 n/a n/a
DETERMINATION OF EXPECTED LONG-TERM RATE OF RETURN: The expected long-term
rate of return on the plans' total assets is based on the expected return
of each of each category of the plan's assets. Management considers the
long-term historical returns of the assets within the portfolio and adjusts
the rate, as necessary, for expected future returns on the assets in the
plans in determining the rate.
NET PERIODIC BENEFIT COST: The following table provides the components of
net periodic benefit cost for the plans:
Pension Benefits Postretirement Benefits
(Dollars in Thousands) 2004 2003 2002 2004 2003 2002
Service cost $ 903 $ 708 $ 550 $ - $ - $ -
Interest cost 772 688 606 35 40 48
Expected return on plan assets (972) (861) (769) - - -
Amortization of transition asset - - (8) - - -
Amortization of prior service cost 2 (6) (9) 11 11 -
Amortization of net loss 208 89 - - 4 17
- -----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 913 $ 618 $ 370 $ 46 $ 55 $ 65
=================================================================================================================
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 2004, grading down 1% per year to an ultimate rate of 5%. The health
care trend rate assumption does not have a significant effect on the
contributory defined benefit postretirement plan; therefore, a one
percentage point increase or decrease in the trend rate is not material in
the determination of the accumulated postretirement benefit obligation or
the ongoing expense.
PLAN ASSETS: Peoples' investment strategy, as established by the Retirement
Plan Committee, is to invest assets per the following target allocations:
Equity securities of 60-75%; Debt securities of 24-39%; and Other of 1%.
The assets are reallocated periodically to meet the above target
allocations. The investment policy is reviewed periodically, under the
advisement of a certified investment advisor, to determine if the policy
should be changed.
Peoples' pension plan actual weighted-average asset allocations by asset
category at December 31 are as follows:
2004 2003
Equity securities 69 % 70 %
Debt securities 26 25
Other 5 5
- -------------------------------------------------------
Total 100 % 100 %
=======================================================
Equity securities of Peoples' pension plan did not include any securities
of Peoples Bancorp or related parties in 2004 or 2003.
CASH FLOWS: Peoples anticipates contributing $1.5 million to its pension
plan in 2005; however, actual contributions are made at the discretion of
the Retirement Plan Committee and Peoples' Board of Directors. Estimated
future benefit payments, which reflect expected future service, for the
years ending December 31 are as follows:
(Dollars in Thousands)
2005 $ 327
2006 340
2007 366
2008 406
2009 459
2010 to 2014 4,672
RETIREMENT SAVINGS PLAN: Peoples also maintains a retirement savings plan,
or 401(k) plan, which covers substantially all employees. The plan provides
participants the opportunity to save for retirement on a tax-deferred
basis. In addition, Peoples makes matching contributions equal to 100% of
participants' contributions that do not exceed 3% of the participants'
compensation, plus 50% of participants' contributions between 3% and 5% of
the participants' compensation. Matching contributions made by Peoples
totaled $601,000, $480,000 and $413,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
11. Federal Income Taxes:
--------------------
The effective federal income tax rate in the Consolidated Statement of
Income is less than the statutory corporate tax rate due to the following:
Year ended December 31
2004 2003 2002
Statutory corporate tax rate 35.0 % 35.0 % 35.0 %
Differences in rate resulting from:
Interest on obligations of state and political (4.0) (4.5) (3.6)
subdivisions
Investments in low-income housing tax credit funds (3.6) (3.4) (2.2)
Business owned life insurance (2.7) (2.3) (2.0)
Other, net 0.2 0.1 0.2
- -------------------------------------------------------------------------------------
Effective federal income tax rate 24.9 % 24.9 % 27.4 %
=====================================================================================
The significant components of Peoples' deferred tax assets and liabilities
consisted of the following at December 31:
(Dollars in Thousands) 2004 2003
Deferred tax assets:
Allowance for loan losses $ 5,741 $ 5,667
Accrued employee benefits (490) 101
Deferred loan fees and costs 487 308
Other 357 330
- ---------------------------------------------------------------------
Total deferred tax assets 6,095 6,406
- ---------------------------------------------------------------------
Deferred tax liabilities:
Bank premises and equipment 975 770
Deferred Income 4,057 2,886
Investments 2,367 2,129
Available-for-sale securities 2,670 2,260
Other 516 154
- ---------------------------------------------------------------------
Total deferred tax liabilities 10,585 8,199
- ---------------------------------------------------------------------
Net deferred tax liability $ (4,490) $ (1,793)
=====================================================================
The related federal income tax (benefit) expense on securities
transactions approximated $(1,064,000) in 2004, $(667,000) in 2003 and
$77,000 in 2002.
12. Financial Instruments with Off-Balance Sheet Risk:
-------------------------------------------------
In the normal course of business, Peoples is party to financial
instruments with off-balance sheet risk necessary to meet the financing
needs of customers and to manage its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, standby letters of credit, and interest rate caps. The instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the Consolidated Balance Sheets. The
contract or notional amounts of these instruments express the extent of
involvement Peoples has in these financial instruments.
LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT: Loan commitments are made
to accommodate the financial needs of Peoples' customers. Standby letters
of credit are instruments issued by Peoples Bank guaranteeing the
beneficiary payment by the bank in the event of default by Peoples Bank's
customer in the non-performance of an obligation or service. Historically,
most loan commitments and standby letters of credit expire unused. Peoples'
exposure to credit loss in the event of nonperformance by the counter-party
to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amount of those instruments.
Peoples uses the same underwriting standards in making commitments and
conditional obligations as it does for on-balance sheet instruments. The
amount of collateral obtained is based on management's credit evaluation of
the customer. Collateral held varies, but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing commercial
properties.
The total amounts of loan commitments and standby letters of credit are
summarized as follows at December 31:
Contractual Amount
(Dollars in Thousands) 2004 2003
Loan commitments $ 139,731 $ 115,685
Standby letters of credit 31,612 20,928
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, 2004, 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, 2004, Peoples had
not exercised its option under this interest rate contract since the
advance remained a fixed rate advance. This cash flow hedge is considered
highly effective. Accordingly, any change in its fair value is recorded in
other comprehensive income, net of deferred taxes. No ineffectiveness was
recorded in income in 2004, 2003 or 2002.
OTHER: Peoples also has commitments to make additional capital
contributions in low income housing projects. Such commitments approximated
$6.3 million at December 31, 2004, and $8.9 million at December 31, 2003.
The maximum aggregate amounts Peoples could be required to make for each of
the next five years are as follows: $2.5 million in 2005; $0.8 million in
2006; $0.7 million in 2007 and 2008; $0.4 million in 2009.
In connection with the sale of the credit card portfolio, Peoples provided
credit recourse on the approximately $0.9 million of business credit card
loans sold to an unrelated third party during the fourth quarter of 2003.
As a result, Peoples is required to reimburse the third party in the event
of customer default, pursuant to the recourse provided on the business
credit cards. At December 31, 2004, the maximum amount of Peoples' exposure
in the event of nonperformance by the underlying borrowers was
approximately $5.9 million. Peoples has approximately $113,000 recorded for
this obligation at December 31, 2004. No loss was incurred by Peoples in
2004 as a result of this credit card recourse, which expires in the second
quarter of 2005.
13. Regulatory Matters:
------------------
The following is a summary of certain regulatory matters affecting Peoples
Bancorp and its subsidiaries:
LIMITS ON DIVIDENDS: The primary source of funds for the dividends paid by
Peoples Bancorp is dividends received from Peoples Bank. The payment of
dividends by Peoples Bank is subject to various banking regulations. The
most restrictive provision requires regulatory approval if dividends
declared in any calendar year exceed the total net profits of that year
plus the retained net profits of the preceding two years. At December 31,
2004, Peoples Bank's retained net profits available for distribution to
Peoples Bancorp as dividends without regulatory approval were approximately
$5.4 million. During 2005, only Peoples Bank's retained net profits of 2005
through the dividend date will be available for distribution to Peoples
Bancorp as dividends without regulatory approval.
CAPITAL REQUIREMENTS: Peoples and Peoples Bank are subject to various
regulatory capital requirements administered by the banking regulatory
agencies. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Peoples and its banking subsidiary must meet
specific capital guidelines that involve quantitative measures of each
entity's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Peoples' and Peoples
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Peoples and Peoples Bank to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets
(as defined). Peoples and Peoples Bank met all capital adequacy
requirements at December 31, 2004.
As of December 31, 2004, the most recent notifications from the banking
regulatory agencies categorized Peoples and Peoples Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, Peoples and Peoples Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table below. There are no conditions or events
since these notifications that management believes have changed Peoples'
or its banking subsidiary's category.
Peoples' and Peoples Bank's, actual capital amounts and ratios as of
December 31 are also presented in the following table:
(Dollars in Thousands) Actual For Capital Adequacy To Be Well Capitalized
2004 Amount Ratio Amount Ratio Amount Ratio
Total Capital (1)
Peoples $ 145,135 12.3 % $ 94,386 8.0 % $ 117,983 10.0 %
Peoples Bank 142,222 12.2 93,287 8.0 116,609 10.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 (2)
Peoples 129,194 11.0 47,193 4.0 70,790 6.0
Peoples Bank 127,643 11.0 46,643 4.0 69,965 6.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 Leverage (3)
Peoples 129,194 7.6 68,468 4.0 85,585 5.0
Peoples Bank 127,643 7.5 68,034 4.0 85,042 5.0
------------------------------------------------------------------------------------------------------------------------
2003
Total Capital (1)
Peoples $ 161,780 15.4 % $ 83,864 8.0 % $ 104,830 10.0 %
Peoples Bank 151,782 14.6 83,023 8.0 103,779 10.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 (2)
Peoples 147,591 14.1 41,932 4.0 62,898 6.0
Peoples Bank 138,790 13.4 41,512 4.0 62,267 6.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 Leverage (3)
Peoples 147,591 8.7 68,021 4.0 85,027 5.0
Peoples Bank 138,790 8.2 67,548 4.0 84,435 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 $13.0 million for the year ended
December 31, 2004.
15. Acquisitions:
------------
At the close of business on December 3, 2004, Peoples Bank completed the
acquisition of two full-service offices in the Ashland, Kentucky area from
an unaffiliated institution. In the acquisition, Peoples acquired $65
million in deposits and $43 million of loans. As part of the initial
purchase price allocation, Peoples recorded goodwill of $6.6 million and
core deposit intangible of $1.7 million. Concurrent with the acquisition,
Peoples Bank consolidated some of its Ashland, Kentucky area banking
offices. The Flatwoods office and the acquired office in downtown Ashland
were consolidated into nearby Peoples Bank offices at the close of
business on December 3, 2004. Also, the Peoples Bank Cedar Knoll office
ceased operations at the close of business on December 27, 2004, with
clients redirected to Peoples Bank's newly acquired office in Summit,
Kentucky.
At the close of business on May 28, 2004, Peoples completed the
acquisition of Barengo Insurance Agency, Inc., ("Barengo"), based in
Marietta, Ohio, for initial consideration of $6.2 million ($3.0 million in
cash and $3.2 million in Peoples Bancorp's common shares). The agreement
also provides for additional consideration of up to $2.7 million ($1.3
million in cash and $1.4 million in Peoples Bancorp's common shares) to be
paid by Peoples over the next three years, contingent on Barengo achieving
certain revenue growth goals. As part of the initial purchase price
allocation, Peoples recorded goodwill of $4.8 million and customer
relationship intangible of $2.0 million.
At the close of business on April 30, 2004, Peoples completed the
acquisition of substantially all of the assets of Putnam Agency, Inc.
("Putnam Agency"), with offices in Ashland, Kentucky and Huntington, West
Virginia, for initial consideration of $8.6 million ($7.0 million in cash
and $1.6 million in Peoples Bancorp's common shares). The agreement also
provides for additional consideration of up to $4.4 million in cash to be
paid by Peoples over the next three years, contingent on the Putnam Agency
achieving certain revenue growth goals. Peoples accounted for this
transaction under the purchase method of accounting. As part of the
initial purchase price allocation, Peoples recorded goodwill of $5.5
million and customer relationship intangible of $3.2 million.
Both Barengo and the Putnam Agency were full-service insurance agencies
that offered a wide range of insurance products to both commercial and
individual clients. Peoples operates the former agencies as divisions of
Peoples Insurance Agency, Inc., using the "Barengo Insurance Agency" and
"Putnam Agency" trade names. Peoples has retained all key producers and
managers, with the exception of one producer with the Putnam Agency who
has retired.
On May 9, 2003, Peoples Bancorp completed the acquisition of Kentucky
Bancshares Incorporated ("Kentucky Bancshares"), the holding company of
Kentucky Bank & Trust, for total consideration of $29.1 million ($14.8
million in cash and $14.3 million in Peoples Bancorp's common shares).
This acquisition was accounted for under the purchase method of
accounting. As part of the purchase price allocation, Peoples recorded
goodwill of $14.0 million, core deposit intangible of $3.5 million and
trust relationship intangible of $1.0 million.
The acquisition of Kentucky Bancshares included the merger of Kentucky
Bank & Trust into Peoples Bank. As a result, the five former Kentucky Bank
& Trust offices in the northeastern Kentucky communities of Ashland,
Russell, Flatwoods, Greenup and South Shore now operate as full-service
financial service offices of Peoples Bank. In this transaction, Peoples
acquired loans of $75 million, deposits of $113 million, and trust assets
under management of $182 million, as well as three ATMs.
The balances and operations of the acquired businesses are included in
Peoples' financial statements from the date of acquisition and do not
materially impact Peoples' financial position, results of operations or
cash flows for any period presented. In addition, Peoples made several
other acquisitions in prior years accounted for under the purchase method
of accounting. The purchase prices of these acquisitions were allocated to
the identifiable tangible and intangible assets acquired based upon their
fair value at the acquisition date.
The changes in the carrying amount of goodwill for the years ended December
31, were as follows:
(Dollars in Thousands) 2004 2003
Balance at January 1 $ 41,407 $ 25,504
Goodwill acquired 16,759 13,589
Additions resulting from valuation adjustments
in final purchase price allocations 930 2,314
- -----------------------------------------------------------------------------
Balance at December 31 $ 59,096 $ 41,407
=============================================================================
16. Stock Options:
-------------
Peoples' stock option plans provide for the granting of both incentive
stock options and non-qualified stock options covering up to 1,614,339
common shares. Under the provisions of the plans, the option price per
share shall not be less than the fair market value of the common shares on
the date of grant of an option; therefore, no compensation expense is
recognized. Recent options granted to employees vest over periods ranging
from one 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, 2004,
2003 and 2002, and the changes for the years then ended:
2004 2003 2002
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price Of Shares Price of Shares Price
--------------------------- --------------------------- ---------------------------
Outstanding at January 1 661,228 $ 16.78 622,978 $ 15.09 640,144 $ 13.48
Granted 40,275 27.85 120,103 22.57 86,389 23.52
Exercised 139,776 10.36 72,957 11.82 102,528 12.15
Canceled 15,845 21.24 8,896 17.20 1,027 13.86
----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 545,882 19.11 661,228 16.78 622,978 15.09
======================================================================================================================
Exercisable at December 31 269,145 16.67 346,426 14.20 356,757 13.20
======================================================================================================================
Weighted average estimated fair value of
options granted during the year $ 8.15 $ 7.01 $ 7.57
======================================================================================================================
The following summarizes information concerning Peoples' stock options
outstanding at December 31, 2004:
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
--------------------------------------------------- -------------------------------
$ 8.07 to $13.58 109,416 4.1 years $ 12.99 73,866 $ 12.70
$13.59 to $18.70 114,387 4.3 years 15.55 80,583 15.73
$18.98 to $21.71 111,527 3.4 years 19.44 104,877 19.47
$22.06 to $22.32 93,304 8.2 years 22.32 - -
$23.59 to $28.98 117,248 7.9 years 25.42 9,819 24.36
17. Parent Company Only Financial Information:
Condensed Balance Sheets
December 31,
(Dollars in Thousands) 2004 2003
Assets:
Cash $ 50 $ 50
Interest-bearing deposits in subsidiary bank 5,021 13,898
Receivable from subsidiary bank 630 421
Investment securities: Available-for-sale (amortized cost of $1,768 and
$1,858 at December 31, 2004 and 2003, respectively) 5,543 5,086
Investments in subsidiaries:
Bank 187,733 176,150
Non-bank 27,370 23,662
Other assets 1,085 4,840
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 227,432 $ 224,107
===============================================================================================================
Liabilities:
Accrued expenses and other liabilities $ 5,562 $ 5,131
Dividends payable 1,889 1,919
Long-term borrowings 15,300 17,000
Junior subordinated debentures held by subsidiary trusts 29,263 29,177
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 52,014 53,227
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity 175,418 170,880
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 227,432 $ 224,107
===============================================================================================================
Consolidated Statements of Income
Year ended December 31,
(Dollars in Thousands) 2004 2003 2002
Income:
Dividends from subsidiary bank $ 24,500 $ 17,750 $ 10,200
Interest 166 221 389
Rental income from subsidiaries 55 55 55
Other 34 41 831
- --------------------------------------------------------------------------------------------------------------------------
Total income 24,755 18,067 11,475
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Interest expense on junior subordinated notes held by subsidiary trusts 2,441 2,429 2,420
Intercompany management fees 685 576 520
Interest 483 474 361
Other 836 677 458
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 4,445 4,156 3,759
- --------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and equity in undistributed earnings of
(excess dividends from) subsidiaries 20,310 13,911 7,716
Applicable income tax benefit (1,322) (1,285) (700)
(Excess dividends from) equity in undistributed earnings of subsidiaries (3,357) 1,058 10,336
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 18,275 $ 16,254 $ 18,752
==========================================================================================================================
Statements of Cash Flows
Year ended December 31,
(Dollars in Thousands) 2004 2003 2002
Cash flows from operating activities:
Net income $ 18,275 $ 16,254 $ 18,752
Adjustment to reconcile net income to cash provided by operations:
Amortization and depreciation 32 35 48
Excess dividends from (equity in undistributed earnings of) subsidiaries 3,357 (1,058) (10,336)
Other, net 2,058 (1,264) 920
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 23,722 13,967 9,384
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from sales and maturity (purchases) investment securities 90 (1,603) 1,102
Net expenditures for premises and equipment - - (18)
Investment in subsidiaries (4,095) (17,475) (21,521)
Acquisitions, net of cash received (6,948) (15,683) -
Investment in tax credit funds - - (1,315)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,953) (34,761) (21,752)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of Trust Preferred Securities - - 7,000
Repurchase of Trust Preferred Securities - - (6,150)
(Payments on) proceeds from short-term borrowings - (17,000) 17,000
Net (payments on) proceeds from long-term borrowings (1,700) 15,500 (300)
Purchase of treasury stock (13,709) (4,092) (244)
Change in receivable from subsidiary (209) (212) 1,570
Proceeds from issuance of common stock 1,118 5,582 33,230
Cash dividends paid (7,146) (5,704) (4,177)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (21,646) (5,926) 47,929
- --------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (8,877) (26,720) 35,561
Cash and cash equivalents at the beginning of the year 13,948 40,668 5,107
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 5,071 $ 13,948 $ 40,668
==========================================================================================================================
Supplemental cash flow information:
Interest paid $ 478 $ 486 $ 331
- --------------------------------------------------------------------------------------------------------------------------
18. Summarized Quarterly Information (Unaudited):
A summary of selected quarterly financial information for 2004 and 2003
follows:
(Dollars in Thousands, except Per Share Data) 2004
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $ 21,586 $ 21,145 $ 21,850 $ 22,449
Interest expense 8,038 8,448 8,959 9,715
Net interest income 13,548 12,697 12,891 12,734
Provision for loan losses 794 616 605 531
Net gain (loss) on securities transactions 32 5 (7) (3,070)
Net gain (loss) on asset disposals 30 17 (25) (141)
Other income 4,825 6,245 7,248 7,049
Intangible asset amortization 401 526 635 657
Other expenses 9,889 11,005 11,909 12,176
Income tax expense 1,985 1,764 1,820 490
Net income 5,366 5,053 5,138 2,718
Earnings per share:
Basic 0.51 0.48 0.49 0.26
Diluted $ 0.50 $ 0.47 $ 0.48 $ 0.26
Weighted-average shares outstanding:
Basic 10,560,241 10,603,510 10,524,304 10,430,408
Diluted 10,808,007 10,766,289 10,669,798 10,595,211
2003
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $ 22,777 $ 23,492 $ 23,550 $ 21,836
Interest expense 9,719 9,915 9,465 8,951
Net interest income 13,058 13,577 14,085 12,885
Provision for loan losses 831 935 920 915
Net gain (loss) on securities transactions 2 (29) 2 (1,880)
Net (loss) gain on asset disposals (2) (236) 9 (32)
Gain on sale of credit card portfolio - - - 1,423
Mortgage banking income 230 337 400 385
Other income 3,705 4,210 4,641 4,373
Intangible asset amortization 201 271 551 470
Long-term debt prepayment penalties - 41 - 6,817
Other expenses 8,918 9,146 9,448 10,040
Income tax expense (benefit) 2,029 2,027 2,278 (949)
Net income 5,014 5,439 5,940 (139)
Earnings per share:
Basic 0.50 0.52 0.56 (0.01)
Diluted $ 0.49 $ 0.51 $ 0.55 $ (0.01)
Weighted-average shares outstanding:
Basic 10,056,615 10,400,673 10,653,999 10,614,989
Diluted 10,255,705 10,598,820 10,896,461 10,874,876
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning (a) directors of Peoples Bancorp Inc. ("Peoples"),
(b) the Board of Directors' determination that Peoples has an "audit committee
financial expert" serving on its Audit Committee, (c) the Audit Committee of
Peoples' Board of Directors and (d) the procedures by which shareholders of
Peoples may recommend nominees to Peoples' Board of Directors required by Item
401 of Regulation S-K is included in the section captioned "ELECTION OF
DIRECTORS" on pages 7 through 10 of the definitive Proxy Statement of Peoples
Bancorp Inc. relating to the Annual Meeting of Shareholders to be held April 14,
2005 ("Peoples' Definitive Proxy Statement"), which section is incorporated
herein by reference.
The information regarding Peoples' executive officers required by Item 401 is
included under Part I of this Form 10-K in the section captioned "Executive
Officers Of The Registrant".
The information required by Item 405 of Regulation S-K is included under the
caption "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 6 of
Peoples' Definitive Proxy Statement, which section is incorporated herein by
reference.
The Board of Directors of Peoples has adopted charters for each of the Audit
Committee, the Compensation Committee and the Governance and Nominating
Committee.
In accordance with the requirements of Rule 4350(n) of The NASDAQ Stock Market,
Inc. Corporate Governance Rules, the Board of Directors of Peoples has adopted a
Code of Ethics covering the directors, officers and employees of Peoples and its
affiliates, including, without limitation, the principal executive officer, the
principal financial officer and the controller (principal accounting officer) of
Peoples. Peoples intends to disclose the following on the "Corporate Governance
and Code of Ethics and Ethics Hotline" page of its Internet website within four
business days following their occurrence:
(A) the date and nature of any amendment to a provision of its Code of
Ethics that
(i) applies to the principal executive officer, principal
financial officer, principal accounting officer or controller
of Peoples, or persons performing similar functions,
(ii) relates to any element of the code of ethics definition set
forth in Item 406(b) of SEC Regulation S-K, and (iii) is not a
technical, administrative or other non-substantive amendment;
and
(B) a description (including the nature of the waiver, the name of the
person to whom the waiver was granted and the date of the waiver) of
any waiver, including an implicit waiver, from a provision of the
Code of Ethics to the principal executive officer, principal
financial officer, principal accounting officer or controller of
Peoples, or persons performing similar functions, that relates to
one or more of the elements of the code of ethics definition set
forth in Item 406(b) of SEC Regulation S-K.
Each of the Code of Ethics, the Audit Committee Charter, the Governance and
Nominating Committee Charter and the Compensation Committee Charter is posted on
the "Corporate Governance and Code of Ethics and Ethics Hotline" page of
Peoples' Internet website at www.peoplesbancorp.com. Interested persons may also
obtain copies of the Code of Ethics without charge by writing to Peoples Bancorp
Inc., Attention: Corporate Secretary, 138 Putnam Street, P.O. Box 738, Marietta,
Ohio 45750-0738.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 is included in the section captioned
"Compensation Committee Interlocks and Insider Participation" on page 18 of
Peoples' Definitive Proxy Statement and the section captioned "COMPENSATION OF
EXECUTIVE OFFICERS AND DIRECTORS" on pages 19 through 24 of Peoples' Definitive
Proxy Statement, which sections are incorporated herein by reference. Such
incorporation by reference shall not be deemed to specifically incorporate by
reference the information referred to in Item 402(a)(8) of SEC Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this Item 12 regarding the security ownership of
certain beneficial owners and management is included in the section captioned
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 3
through 6 of Peoples' Definitive Proxy Statement, which section is incorporated
herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
The table below provides information as of December 31, 2004, with respect to
compensation plans under which common shares of Peoples are authorized for
issuance to directors, officers or employees in exchange for consideration in
the form of goods or services. These compensation plans include:
(i) the Peoples Bancorp Inc. Amended and Restated 1993 Stock Option Plan
(the "1993 Plan");
(ii) the Peoples Bancorp Inc. 1995 Stock Option Plan (the "1995 Plan");
(iii) the Peoples Bancorp Inc. 1998 Stock Option Plan (the "1998 Plan");
(iv) the Peoples Bancorp Inc. 2002 Stock Option Plan (the "2002 Plan");
and
(v) the Peoples Bancorp Inc. Deferred Compensation Plan for Directors of
Peoples Bancorp Inc. and Subsidiaries (the "Deferred Compensation
Plan").
All of these compensation plans were approved by the shareholders of Peoples.
(c)
Number of common shares
(a) remaining available for
Number of common (b) future issuance under
shares to be issued Weighted-average equity compensation
upon exercise of exercise price of plans (excluding common
outstanding options, outstanding options, shares reflected in
Plan Category warrants and rights warrants and rights column (a))
Equity compensation plans approved by
shareholders 610,655(1) $19.11(2) 373,266(3)
Equity compensations plans not approved
by shareholders - - -
- ---------------------------------------------------------------------------------------------------------------
Total 610,655 $19.11 373,266
===============================================================================================================
(1) Includes an aggregate of 545,882 common shares issuable upon
exercise of options granted under the 1993 Plan, the 1995 Plan, the
1998 Plan and the 2002 Plan and 64,773 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 25,016 common shares, 24,747 common shares, 290,647 common
shares and 32,856 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, 2004. No common
shares were available for issuance under the 1993 Plan at December
31, 2004.
Additional information regarding Peoples' stock option plans can be found in
Note 16 of the Notes to the Consolidated Financial Statements included in Item 8
of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 is included in the section captioned
"TRANSACTIONS INVOLVING MANAGEMENT" on pages 6 and 7 of Peoples' Definitive
Proxy Statement, the section captioned "ELECTION OF DIRECTORS" on pages 7
through 10 of Peoples' Definitive Proxy Statement and the section captioned
"Compensation Committee Interlocks and Insider Participation" on page 18 of
Peoples' Definitive Proxy Statement, which sections are incorporated by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item 14 is included in the section captioned
"AUDIT COMMITTEE MATTERS-Pre-Approval Policy" and "AUDIT COMMITTEE
MATTERS-Services of the Independent Registered Public Accounting Firm" on pages
27 and 28 of Peoples' Definitive Proxy Statement, which sections are
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements:
--------------------
The following consolidated financial statements of Peoples Bancorp
Inc. and subsidiaries are included in Item 8:
Page
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) on Consolidated
Financials Statements 43
Consolidated Balance Sheets as of December 31, 2004 and 2003 44
Consolidated Statements of Income for each of the three years ended December 31, 2004 45
Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 2004 46
Consolidated Statements of Comprehensive Income for each of the three years ended
December 31, 2004 46
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2004 47
Notes to the Consolidated Financial Statements 48
Peoples Bancorp Inc. (Parent Company Only Financial Information is included in Note 17 of the
Notes to the Consolidated Financial Statements) 67
(a)(2) Financial Statement Schedules
-----------------------------
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(a)(3) Exhibits
--------
Exhibits filed with this Annual Report on Form 10-K are attached
hereto or incorporated herein by reference. For a list of such
exhibits, see "Exhibit Index" beginning at page 75. The Exhibit
Index specifically identifies each management contract or
compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-K.
(b) Exhibits
--------
Exhibits filed with this Annual Report on Form 10-K are attached
hereto or incorporated herein by reference. For a list of such
exhibits, see "Exhibit Index" beginning at page 75.
(c) Financial Statement Schedules
-----------------------------
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEOPLES BANCORP INC.
Date: March 10, 2005 By: /s/ ROBERT E. EVANS
--------------------------------------
Robert E. Evans, Chairman of the Board
and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ ROBERT E. EVANS Chairman of the Board, Chief Executive March 10, 2005
- ------------------------------------------- Officer and Director --------------------
Robert E. Evans (Principal Executive Officer)
/s/ MARK F. BRADLEY President, Chief Operating Officer March 10, 2005
- ------------------------------------------- and Director --------------------
Mark F. Bradley
/s/ JOHN W. CONLON Chief Financial Officer and Treasurer March 10, 2005
- ------------------------------------------- (Principal Financial Officer) --------------------
John W. Conlon
/s/ DONALD J. LANDERS, JR. Controller and Chief Accounting Officer March 10, 2005
- ------------------------------------------- (Principal Accounting Officer) --------------------
Donald J. Landers, Jr.
/s/ CARL L. BAKER, JR. Director March 10, 2005
- ------------------------------------------- --------------------
Carl L. Baker, Jr.
/s/ GEORGE W. BROUGHTON Director March 10, 2005
- ------------------------------------------- --------------------
George W. Broughton
/s/ FRANK L. CHRISTY Director March 10, 2005
- ------------------------------------------- --------------------
Frank L. Christy
/s/ WILFORD D. DIMIT Director March 10, 2005
- ------------------------------------------- --------------------
Wilford D. Dimit
/s/ RICHARD FERGUSON Director March 10, 2005
- ------------------------------------------- --------------------
Richard Ferguson
/s/ ROBERT W. PRICE Director March 10, 2005
- ------------------------------------------- --------------------
Robert W. Price
/s/ THEODORE P. SAUBER Director March 10, 2005
- ------------------------------------------- --------------------
Theodore P. Sauber
/s/ PAUL T. THEISEN Director March 10, 2005
- ------------------------------------------- --------------------
Paul T. Theisen
/s/ JOSEPH H. WESEL Vice Chairman of the Board and March 10, 2005
- ------------------------------------------- Leadership Director --------------------
Joseph H. Wesel
/s/ THOMAS J. WOLF Director March 10, 2005
- ------------------------------------------- --------------------
Thomas J. Wolf
EXHIBIT INDEX
PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2004
Exhibit
Number Description Exhibit Location
- ----------- ------------------------------------------------------- -------------------------------------------------------
2(a) Agreement and Plan of Merger, dated as of November Incorporated herein by reference to Exhibit 2.1 to
29, 2002, by and between Peoples Bancorp Inc. Pre-Effective Amendment No. 1 to Peoples'
("Peoples") and Kentucky Bancshares Incorporated, as Registration Statement on Form S-4 (Registration No.
amended March 6, 2003 (excluding schedules). 333-103670) filed March 27, 2003.
2(b) Plan of Merger, dated as of March 24, 2003, by and Incorporated herein by reference to Exhibit 2.2 to
between Peoples and Kentucky Bancshares Incorporated. Pre-Effective Amendment No. 1 to Peoples'
Registration Statement on Form S-4 (Registration No.
333-103670) filed March 27, 2003.
3(a)(1) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit 3(a) to
Inc. (as filed with the Ohio Secretary of State on Peoples' Registration Statement on Form 8-B filed
May 3, 1993). July 20, 1993 (File No. 0-16772).
3(a)(2) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a)(2)
Incorporation of Peoples Bancorp Inc. (as filed with to Peoples' Annual Report on Form 10-K for the
the Ohio Secretary of State on April 22, 1994). fiscal year ended December 31, 1997 (File No.
0-16772) ( "Peoples' 1997 Form 10-K").
3(a)(3) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a)(3)
Incorporation of Peoples Bancorp Inc. (as filed with to Peoples' 1997 Form 10-K.
the Ohio Secretary of State on April 9, 1996).
3(a)(4) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a) to
Incorporation of Peoples Bancorp Inc. (as filed with Peoples' Quarterly Report on Form 10-Q for the
the Ohio Secretary of State on April 23, 2003). quarterly period ended March 31, 2003 (File No.
0-16772)("Peoples' March 31, 2003 Form 10-Q").
3(a)(5) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit 3(b) to
Inc. (reflecting amendments through April 23, 2005) Peoples' March 31, 2003 Form 10-Q.
[For SEC reporting compliance purposes only - not
filed with Ohio Secretary of State].
3(b)(1) Code of Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b) to
Peoples' Registration Statement on Form 8-B filed
July 20, 1993 (File No. 0-16772).
3(b)(2) Certified Resolutions Regarding Adoption of Incorporated herein by reference to Exhibit 3(c) to
Amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, Peoples' March 31, 2003 Form 10-Q.
1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code
of Regulations of Peoples Bancorp Inc. by
shareholders on April 10, 2003
3(b)(3) Certified Resolutions Regarding Adoption of Incorporated herein by reference to Exhibit 3(a) to
Amendments to Article THREE of the Code of Peoples' Quarterly Report on Form 10-Q for the
Regulations of Peoples Bancorp Inc. by Shareholders quarterly period ended March 31, 2004, filed on May
on April 8, 2004. 10, 2004 (File No. 0-16772)("Peoples' March 31, 2004
Form 10-Q").
3(b)(4) Code of Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b) to
(reflecting amendments through April 8, 2004) [For Peoples' March 31, 2004 Form 10-Q.
SEC reporting compliance purposes only].
4(a) Agreement to furnish instruments and agreements Filed herewith.
defining rights of holders of long-term debt.
4(b) Indenture, dated as of April 20, 1999, between Incorporated herein by reference to Exhibit 4.1 to
Peoples Bancorp Inc. and Wilmington Trust Company, the Registration Statement on Form S-4 (Registration
as Debenture Trustee, relating to Junior No. 333-81251) filed on June 22, 1999 by Peoples
Subordinated Deferrable Interest Debentures. Bancorp Inc. and PEBO Capital Trust I ("Peoples'
1999 Form S-4").
4(c) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.5 to
Capital Trust I, dated as of April 20, 1999. Peoples' 1999 Form S-4.
4(d) Series B Capital Securities Guarantee Agreement, Incorporated herein by reference to Exhibit 4 (i) of
dated as of September 23, 1999, between Peoples Peoples' Annual Report on Form 10-K for the fiscal
Bancorp Inc. and Wilmington Trust Company, as year ended December 31, 1999. (File No. 0-16772)
Guarantee Trustee, relating to SeriesB 8.62%
Capital Securities.
4(e) Indenture, dated as of April 10, 2002, between Incorporated herein by reference to Exhibit 4.1 to
Peoples Bancorp Inc. and Wilmington Trust Company, Peoples' Quarterly Report on Form 10-Q for the
as Trustee, relating to Floating Rate Junior quarterly period ended September 30, 2002(File No.
Subordinated Debt Securities due 2032. 0-16772) ("Peoples' September 30, 2002 Form 10-Q").
4(f) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.2 to
Capital Trust II, dated as of April 10, 2002. Peoples' September 30, 2002 Form 10-Q.
4(g) Guarantee Agreement, dated as of April 10, 2002, by Incorporated herein by reference to Exhibit 4.3 to
and between Peoples Bancorp Inc. and Wilmington Peoples' September 30, 2002 Form 10-Q.
Trust Company, as Guarantee Trustee, relating to
Floating Rate MMCaps(SM) Capital Securities.
4(h) Loan Agreement dated as of June 12, 2003, by and Incorporated herein by reference to Exhibit 10(a) to
between Peoples Bancorp Inc. and First Tennessee Peoples' Quarterly Report on Form 10-Q for the
Bank National Association. quarterly period ended June 30, 2003 (File No.
0-16772) (the "June 30, 2003 Form 10-Q").
4(i) Promissory note executed by Peoples Bancorp Inc., as Incorporated herein by reference to Exhibit 10(b) to
Maker in the principal amount of $17,000,000 dated Peoples' June 30, 2003 Form 10-Q.
June 12, 2003.
4(j) Commercial Pledge Agreement dated as of June 12, Incorporated herein by reference to Exhibit 10(c) to
2003, by and between Peoples Bancorp Inc. and First Peoples' June 30, 2003 Form 10-Q.
Tennessee Bank National Association.
4(k) Registration Rights Agreement, dated as of April 30, Incorporated herein by reference to Exhibit 4.1 to
2004, among Putnam Agency, Inc.; Thomas G. Chaffin, Peoples' Registration Statement on Form S-3
Dana N. Conley, Charles R. Lowe, Clarence C. Massey, (Registration No. 333-116683) filed on June 21, 2004
Laura A. Morris, Thomas E. Phipps, Donald H. Putnam, ("Peoples' 2004 Form S-3").
Jr. and Donald H. Putnam, Jr. Trustee U/A DTD May 7,
1993, FBO Donald H. Putnam, Jr. Revocable Trust and
Erland P. Stevens, Jr., the shareholders of Putnam
Agency, Inc.; and Peoples Bancorp Inc.
4(l) Registration Rights Agreement, dated as of May 28, Incorporated herein by reference to Exhibit 4.2 to
2004, among James Barengo, Randall T. Barengo and Peoples 2004 Form S-3.
Peoples Bancorp Inc.
10(a) Deferred Compensation Agreement, dated November 18, Incorporated herein by reference to Exhibit 6(g) to
1976, between Robert E. Evans and The Peoples Registration Statement No. 2-68524 on Form S-14 of
Banking and Trust Company (now known as Peoples Peoples Bancorp Inc., a Delaware corporation,
Bank, National Association), as amended December 26, Peoples' predecessor.
1978 and March 22, 1979.*
10(b)(1) Peoples Bancorp Inc. Deferred Compensation Plan for Incorporated herein by reference to Exhibit 10(a) of
Directors of Peoples Bancorp Inc. and Subsidiaries Peoples Registration Statement on Form S-8 filed
(Amended and Restated Effective January 2, 1998.)* December 31, 1997 (Registration No. 333-43629).
10(b)(2) Amendment No. 1 to Peoples Bancorp Inc. Deferred Incorporated herein by reference to Exhibit 10(b) of
Compensation Plan for Directors of Peoples Bancorp Peoples' Post-Effective Amendment No. 1 to Form S-8
Inc. and Subsidiaries effective January 2, 1998.* filed September 4, 1998 (Registration No. 333-43629).
10(c) Summary of the Performance Compensation Program for Incorporated herein by reference to Exhibit 10(c) of
Peoples Bancorp Inc. effective for calendar years Peoples' Annual Report on Form 10-K for the fiscal
beginning on or after January 1, 2002.* year ended December 31, 2003 (File No. 0-16772).
10(d) Amended and Restated Peoples Bancorp Inc. 1993 Stock Incorporated herein by reference to Exhibit 4 of
Option Plan.* Peoples' Registration Statement on Form S-8 filed
August 25, 1993 (Registration Statement No.
33-67878).
10(e) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(g) of
with grant of non-qualified stock options under Peoples' Annual Report on Form 10-K for the fiscal
Amended and Restated Peoples Bancorp Inc. 1993 Stock year ended December 31, 1995 (File No. 0-16772)
Option Plan.* ("Peoples' 1995 Form 10-K").
10(f) Form of Stock Option Agreement, dated May 20, 1993, Incorporated herein by reference to Exhibit 10(h) of
used in connection with grant of incentive stock Peoples' 1995 Form 10-K.
options under Amended and Restated Peoples Bancorp
Inc. 1993 Stock Option Plan.*
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*Management Compensation Plan
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10(g) Form of Stock Option Agreement dated November 10, Incorporated herein by reference to Exhibit 10(i) of
1994, used in connection with grant of incentive Peoples' 1995 Form 10-K.
stock options under Peoples Bancorp Inc. Amended and
Restated 1993 Stock Option Plan.*
10(h) Peoples Bancorp Inc. 1995 Stock Option Plan.* Incorporated herein by reference to Exhibit 4 of
Peoples' Form S-8 filed May 24, 1995 (Registration
Statement No. 33-59569).
10(i) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(k) of
with grant of non-qualified stock options to Peoples' 1995 Form 10-K.
non-employee directors of Peoples under Peoples
Bancorp Inc. 1995 Stock Option Plan.*
10(j) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(l) of
with grant of non-qualified stock options to Peoples' 1995 Form 10-K.
non-employee directors of Peoples' subsidiaries
under Peoples Bancorp Inc. 1995 Stock Option Plan.*
10(k) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(m) of
with grant of incentive stock options under Peoples Peoples' Annual Report on Form 10-K for the fiscal
Bancorp Inc. 1995 Stock Option Plan.* year ended December 31, 1998 (File No. 0-16772)
("Peoples' 1998 Form 10-K").
10(l) Peoples Bancorp Inc. 1998 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of
Peoples' Form S-8 filed September 4, 1998
(Registration Statement No. 333-62935).
10(m) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o) of
with grant of non-qualified stock options to Peoples' 1998 Form 10-K.
non-employee directors of Peoples under Peoples
Bancorp Inc. 1998 Stock Option Plan.*
10(n) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(p) of
with grant of non-qualified stock options to Peoples' 1998 Form 10-K.
consultants/advisors of Peoples under Peoples
Bancorp Inc. 1998 Stock Option Plan.*
10(o) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o) of
with grant of incentive stock options under Peoples People' Annual Report on Form 10-K for the fiscal
Bancorp Inc. 1998 Stock Option Plan.* year ended December 31, 1999(File No. 0-16772).
10(p) Peoples Bancorp Inc. 2002 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of
Peoples' Form S-8 filed April 15, 2002 (Registration
Statement No. 333-86246).
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*Management Compensation Plan
10(q) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(r) to
with grant of non-qualified stock options to Annual Report on Form 10-K for the fiscal year ended
directors of Peoples under Peoples Bancorp Inc. 2002 December 31, 2003 (File No. 0-16772)("Peoples' 2002
Stock Option Plan.* Form 10-K").
10(r) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(s) to
with grant of non-qualified stock options to Peoples' 2002 Form 10-K.
subsidiary directors of Peoples under Peoples
Bancorp Inc. 2002 Stock Option Plan.*
10(s) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(t) to
with grant of non-qualified stock options to Peoples' 2002 Form 10-K.
employees of Peoples under Peoples Bancorp Inc. 2002
Stock Option Plan.*
10(t) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(u) to
with grant of incentive stock options under Peoples Peoples' 2002 Form 10-K.
Bancorp Inc. 2002 Stock Option Plan.*
10(u) Form of Change in Control Agreement applicable to Incorporated herein by reference to Exhibit 10(a) to
Robert E. Evans and Mark F. Bradley* Peoples' Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004, filed
November 8, 2004 (File No. 0-16772) (the "September
30, 2004 Form 10-Q").
10(v) Form of Change in Control Agreement applicable to Incorporated herein by reference to Exhibit 10(b) to
David B. Baker, Larry E. Holdren, Carol A. Peoples' September 30, 2004 Form 10-Q.
Schneeberger and John W. Conlon*
10(w) Summary of Perquisites for Executive Officers of Filed herewith.
Peoples Bancorp Inc.
10(x) Summary of Base Salaries for Executive Officers of Filed herewith.
Peoples Bancorp Inc.
10(y) Summary of Cash Compensation for Directors of Filed herewith.
Peoples Bancorp Inc.
12 Statements of Computation of Ratios. Filed herewith.
21 Subsidiaries of Peoples Bancorp Inc. Filed herewith.
23 Consent of Independent Registered Public Accounting Filed herewith.
Firm - Ernst & Young LLP.
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*Management Compensation Plan
31(a) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith.
[Chairman of the Board and Chief Executive Officer]
31(b) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith.
[Chief Financial Officer and Treasurer]
31(c) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith.
[President and Chief Operating Officer]
32 Section 1350 Certifications Filed herewith.