form10-k.htm
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, 2009
OR
o 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
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PEOPLES
BANCORP INC.
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(Exact
name of registrant as specified in its charter)
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Ohio
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31-0987416
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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138
Putnam Street, PO Box 738, Marietta, Ohio
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45750-0738
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
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(740)
373-3155
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
shares, without par value
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
oNo x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
oNo x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such
files). Yes o No
o
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated
filer
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Accelerated
filer x
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Non-accelerated
filer o
(Do
not check if a smaller reporting company)
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Smaller
reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the
Act). Yes
oNo x
As of
June 30, 2009, the aggregate market value of the registrant’s Common Shares (the
only common equity of the registrant) held by non-affiliates was $165,459,000
based upon the closing price as reported on The NASDAQ Global Select
Market. For this purpose, executive officers and directors of the
registrant are considered affiliates.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock as of the latest practical date: 10,492,076 common shares, without par
value, at February 26, 2010.
Document Incorporated by
Reference:
Portions
of registrant’s definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 22, 2010, are incorporated by reference into Part
III of this Annual Report on Form 10-K.
TABLE OF
CONTENTS
PART I
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Page
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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14
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Item
1B.
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Unresolved
Staff Comments
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20
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Item
2.
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Properties
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20
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Item
3.
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Legal
Proceedings
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20
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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20
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PART II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases
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of
Equity Securities
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21
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Item
6.
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Selected
Financial Data
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23
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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25
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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53
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Item
8.
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Financial
Statements and Supplementary Data
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53
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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53
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Item
9A.
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Controls
and Procedures
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53
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Item
9B.
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Other
Information
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54
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PART III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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93
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Item
11.
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Executive
Compensation
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93
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related
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Stockholder
Matters
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94
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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95
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Item
14.
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Principal
Accountant Fees and Services
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95
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PART IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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96
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Signatures
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97
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Exhibit
Index
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98
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As used
in this Annual Report on Form 10-K (“Form 10-K”), “Peoples” refers to Peoples
Bancorp Inc. and its consolidated subsidiaries collectively, except where the
context indicates the reference relates solely to the registrant, Peoples
Bancorp Inc. Unless otherwise indicated, all note references
contained in this Form 10-K refer to the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
PART
I
Corporate
Overview
Peoples
Bancorp Inc. is a financial holding company organized in
1980. Peoples operates principally through its wholly-owned
subsidiary, Peoples Bank, National Association (“Peoples Bank”). At
December 31, 2009, Peoples’ other wholly-owned subsidiaries included Peoples
Investment Company and PEBO Capital Trust I. Peoples Bank also owned
Peoples Insurance Agency, LLC (“Peoples Insurance”) and PBNA, L.L.C., an asset
management company. Peoples Investment Company also owned Peoples
Capital Corporation.
Peoples
Bank was first chartered in 1902 as an Ohio banking corporation under the name
“The Peoples Banking and Trust Company” in Marietta, Ohio, and was later
reorganized as a national banking association under its current name in
2000. Peoples Insurance was first chartered in 1994 as an Ohio
corporation under the name “Northwest Territory Property and Casualty Insurance
Agency, Inc.” In late 1995, Peoples Insurance was awarded insurance
agency powers in the State of Ohio, becoming the first insurance agency in Ohio
to be affiliated with a financial institution. Peoples Insurance was
converted from an Ohio corporation to an Ohio limited liability company under
its current name in December 2009.
Peoples
Investment Company, its subsidiary, Peoples Capital Corporation, and PBNA,
L.L.C. were formed in 2001 to optimize Peoples’ consolidated capital position
and provide new investment opportunities as a means of enhancing
profitability. These opportunities include, but are not limited to,
investments in low-income housing tax credit funds or projects, venture capital
and other higher risk investments, which are either limited or restricted at
Peoples Bank. Presently, the operations of these companies do not
represent a material part of Peoples’ overall business activities.
Business
Overview
Peoples
makes available a complete line of banking, investment, insurance and trust
solutions through its financial units – Peoples Bank, Peoples Insurance and
Peoples Financial Advisors (a division of Peoples Bank). These
products and services include the following:
o various
demand deposit accounts, savings accounts, money market accounts and
certificates of deposit
o commercial,
consumer and real estate mortgage loans (both commercial and residential) and
lines of credit
o debit and
automated teller machine (“ATM”) cards
o corporate
and personal trust services
o safe
deposit rental facilities
o travelers
checks, money orders and cashier’s checks
o full
range of life, health and property and casualty insurance products
o custom-tailored
fiduciary and wealth management services
Peoples’
financial products and services are offered through its financial service
locations and ATMs in Ohio, West Virginia and Kentucky, as well as telephone and
internet-based banking. Brokerage services are offered exclusively
through an unaffiliated registered broker-dealer located at Peoples Bank’s
offices. Peoples also makes available credit cards to consumers and
businesses, as well as merchant credit card processing services, through joint
marketing arrangements with third parties.
Since
1996, Peoples has undertaken a controlled and steady expansion strategy
involving a combination of internal and external growth. This
strategy has included the opening of de novo banking and loan
production offices, acquisitions of existing banking offices, both individually
and as part of entire institutions, and acquisitions of two insurance
agencies. As a result, Peoples has experienced growth in total assets
and its capital position, as well as expansion of its customer base and primary
market area. This strategy has also provided opportunities for
Peoples to integrate non-traditional products and services, such as insurance
and investments, with the traditional banking products offered to its
clients.
Since
2003, Peoples has taken steps to improve operating efficiency by redirecting
resources to offices and markets with greater growth potential. These
actions have included the consolidation of existing banking offices with
acquired offices in close proximity to each other and sale of certain banking
offices.
Recent
Corporate Developments
In
October 2008, the United States Department of the Treasury (the “U.S.
Treasury”) established the TARP Capital Purchase Program under the authority
granted by the Emergency Economic Stabilization Act of 2008 (the “EESA”), which
appropriated $700 billion for the purpose of restoring liquidity and stability
in the U.S. financial system. Under the TARP Capital Purchase
Program, the U.S. Treasury made $250 billion of capital available to U.S.
financial institutions in the form of senior preferred stock investments and a
warrant entitling the U.S. Treasury to buy the participating institution’s
common stock with a market price equal to 15% of the senior preferred
stock.
In late
2008, Peoples received preliminary approval from the U.S. Treasury for a capital
investment of $39 million through the voluntary TARP Capital Purchase
Program. At the time of this preliminary approval, Peoples was not
authorized to issue preferred shares under its Amended Articles of
Incorporation. The approved amount of capital, which represented 3%
of Peoples’ total risk-weighted assets, was the maximum that Peoples was allowed
to receive under the TARP Capital Purchase Program.
On
January 22, 2009, Peoples’ shareholders adopted an amendment to Article FOURTH
of Peoples’ Amended Articles of Incorporation to authorize the issuance of up to
50,000 preferred shares. The preferred shares may be issued from time
to time by Peoples’ Board of Directors in one or more series, with each series
to consist of such number of shares and to have such voting powers,
designations, preferences, rights, qualifications, limitations and restrictions
as determined by the Board of Directors. On January 28, 2009,
Peoples’ Board of Directors adopted an amendment to Peoples’ Amended Articles of
Incorporation to create a series of preferred shares designated as Peoples’
Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par
value and having a liquidation preference of $1,000 per share (the “Series A
Preferred Shares”). These actions enabled Peoples to obtain final
approval for the $39 million capital investment through the TARP Capital
Purchase Program.
On
January 30, 2009, Peoples issued and sold to the U.S. Treasury (i) 39,000 of
Peoples’ Series A Preferred Shares, and (ii) a ten-year warrant (the “Warrant”)
to purchase 313,505 Peoples common shares, each without par value (“Common
Shares”), at an exercise price of $18.66 per share (subject to certain
anti-dilution and other adjustments), for an aggregate purchase price of $39
million in cash. This issuance and sale was a private placement
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof. Additional
information regarding the Series A Preferred Shares and the Warrant can be found
in Note 11 of the Notes to the Consolidated Financial Statements.
To
finalize Peoples’ participation in the TARP Capital Purchase Program, Peoples
entered into certain agreements with the U.S. Treasury. Additional
information regarding the TARP Capital Purchase Program and the restrictions
imposed on Peoples can be found under the “TARP Capital Purchase Program”
heading in the “Supervision and Regulation” section included later in this
item.
Primary
Market Area and Customers
Peoples
considers its primary market area to consist of the counties where it has a
physical presence and neighboring counties. This market area
currently includes the counties of Athens, Belmont, Fairfield, Franklin, Gallia,
Guernsey, Meigs, Morgan, Muskingum, Noble and Washington in Ohio; Cabell, Mason,
Wetzel and Wood in West Virginia; and Boyd and Greenup in
Kentucky. This market area encompasses the Metropolitan Statistical
Areas (“MSA”) of Parkersburg-Marietta-Vienna, WV-OH and Huntington-Ashland,
WV-KY-OH, and portions of the Columbus OH and Wheeling, WV-OH
MSAs. This primary market area largely consists of rural or small
urban areas with a diverse group of industries and
employers. Principal industries in this area include health care,
education and other social services; plastics and petrochemical manufacturing;
oil, gas and coal production; and tourism and other service-related
industries. Because of this diversity, Peoples is not dependent upon
any single industry segment for its business opportunities.
Lending
Activities
Peoples
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. In prior years,
Peoples also originated and retained various credit card loans. In
2003, Peoples sold its existing credit card portfolio and entered into joint
marketing alliances to serve the credit card needs of its customers and
prospects, which reduces Peoples’ risks since it does not own the
loans.
Peoples’
lending activities are focused principally on lending opportunities within its
primary market areas, although Peoples occasionally originates loans outside its
primary markets related to existing customer relationships. In
general, Peoples retains the majority of loans it originates; however, certain
longer-term fixed-rate mortgage loan originations, primarily one-to-four family
residential mortgages, are sold into the secondary market.
Peoples’
loans consist of credits to borrowers spread over a broad range of industrial
classifications. At December 31, 2009, Peoples had no concentration
of loans to borrowers engaged in the same or similar industries that exceeded
10% of total loans nor had any loans outstanding to non-U.S.
entities.
Legal
Lending Limit
Federal
regulations impose a limit on the aggregate amount a financial institution may
lend to one borrower, including certain related or affiliated
borrowers. This legal lending limit is generally 15% of the
institution’s total capital, as defined by risk-based capital regulations, plus
any allowance for loan losses not already included in total
capital. At December 31, 2009, Peoples’ legal lending limit was
approximately $28.4 million. During 2009, Peoples did not extend
credit to any one borrower in excess of its legal lending limit.
Commercial
Lending
Commercial,
financial and agricultural loans (“commercial loans”), including loans secured
by commercial real estate, represent the largest portion of Peoples’ total loan
portfolio, comprising approximately 63.0% of total loans at December 31,
2009. Commercial lending inherently involves a significant degree of
risk of loss since commercial loan relationships generally involve larger loan
balances than other loan classes. Additionally, repayment of
commercial loans normally depends on adequate cash flows of a business, which
can be negatively impacted by adverse changes in the general economy or in a
specific industry.
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Commercial
Lending Practices. Loan terms include
amortization schedules and interest rates commensurate with the purpose of
each loan, the source of repayment and the
risk
involved. The majority of Peoples’ commercial loans carry
variable interest rates equal to an underlying index rate plus a
margin. Peoples occasionally originates
commercial loans with fixed
interest rates for periods generally ranging from 3 to 5
years. 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 the borrower’s 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.
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The Peoples
Bank Board of Directors Loan Committee is required to approve loans secured by
real estate of $4 million or more, loans secured by all other assets of
$2 million or more and unsecured loans of $1 million or
more. Approval of the Peoples Bank Board of Directors Loan
Committee is required for all new loans, regardless
of amount, to borrowers whose aggregate debt to Peoples Bank, including the
principal amount of the proposed loan, of $5 million or more.
The Peoples
Bank Board of Directors is required to approve all new loans of $10 million or
more and any loan, regardless of amount, to borrowers whose aggregate
debt to Peoples Bank, including the principal amount of the proposed loan, of
$15 million or more.
Peoples
evaluates all commercial loan relationships whenever a new loan causes the
aggregate debt to Peoples to exceed $250,000. On an annual basis,
Peoples
evaluates all loan relationships whose aggregate debt to Peoples is greater than
$500,000 for possible credit deterioration. This loan review process
provides Peoples
with opportunities to identify potential problem loans and take proactive
actions to assure repayment of the loan or minimize Peoples’ risk of loss, such
as reviewing the
relationship more frequently based upon the loan quality rating and aggregate
debt outstanding. Upon detection of the reduced ability of a borrower
to meet cash flow
obligations, the loan is reviewed for possible downgrading or placement on
nonaccrual status.
Real
Estate Loans
While
commercial loans comprise the largest portion of Peoples’ loan portfolio,
generating residential real estate loans remains a major focus of Peoples’
lending efforts, whether the loans are ultimately sold into the secondary market
or retained in Peoples’ loan portfolio. At December 31, 2009,
portfolio real estate loans comprised 20.5% of total loans. Peoples
also had $1.9 million of real estate loans held for sale and was servicing
$227.8 million of loans, consisting primarily of one-to-four family residential
mortgages, previously sold in the secondary market.
Peoples
originates both fixed-rate and adjustable-rate real estate
loans. Typically, the longer-term fixed-rate real estate loans are
sold in the secondary market, with Peoples retaining servicing rights on those
loans. In select cases, Peoples may retain certain fixed-rate real
estate loans or sell the loans without retaining the servicing
rights.
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Real
Estate Lending Practices. Peoples
typically requires residential real estate loan amounts to be no more than
80% of the purchase price or the appraised value of the real
estate
securing the loan, which ever is lower, unless private mortgage insurance
is obtained by the borrower for the percentage exceeding
80%. In limited circumstances,
Peoples
may lend up to 100% of the appraised value of the real estate, although
such lending currently is limited to loans that qualify under established
federally backed
rural
housing programs. The risk conditions of real estate loans are
considered during underwriting for the purposes of establishing an
interest rate commensurate with
the
risks inherent in mortgage lending and remaining equity of the home, if
any.
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Real estate
loans are typically secured by first mortgages with evidence of title in favor
of Peoples in the form of an attorney’s opinion of the title or a title
insurance
policy. Peoples also requires proof of hazard insurance, with Peoples
named as the mortgagee and loss payee. Licensed appraisals are
required for all real estate loans.
Home
Equity Lines of Credit
Peoples
originates home equity lines of credit that provide consumers with greater
flexibility in financing personal expenditures. At December 31, 2009,
home equity lines of credit comprised 4.7% of Peoples’ total
loans. Peoples currently offers home equity lines of credit with a
prime-based variable rate for the entire 10-year term of the loan. In
prior years, Peoples also offered a home equity line of credit whose terms
included a fixed rate for the first five years and converting to a variable
interest rate for the remaining five years. At December 31, 2009,
total outstanding principal balances and available credit amounts of these
convertible rate home equity lines of credit were $16.0 million and $23.2
million, respectively, and weighted-average remaining maturity of 2.8
years.
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Home
Equity Lending Practices. Home equity lines
of credit are generally made as second mortgages by
Peoples. 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 will lend up to 90% of the appraised value of
the property
at
higher interest rates that are commensurate with the additional risk being
assumed in these situations. The home equity lines of credit
are written with ten-year terms
and are
subject to review upon request for
renewal.
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Construction
Loans
Peoples
originates various construction loans to provide temporary financing during the
construction phase for commercial and residential properties. At
December 31, 2009, construction loans comprised 3.1% of Peoples’ loan
portfolio. Construction financing is generally considered to involve
the highest risk since Peoples 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 estimated
construction cost proves to be inaccurate, Peoples may be required to advance
funds beyond the amount originally committed to enable completion of the
project. In certain cases, such as real estate development projects,
repayment of construction loans occurs as a result of subsequent sales of the
developed real estate.
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Construction
Lending Practices. Peoples’
construction lending is focused primarily on commercial and residential
projects of select real estate developers and
homebuilders. These
projects include the construction of office, retail or industrial
complexes and real estate development for either residential or commercial
uses. The
underwriting criteria for
construction loans is generally the same as for non-construction
loans.
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To mitigate
the risk of construction lending, Peoples requires periodic site inspections by
a construction loan manager, appraiser or architect to ensure appropriate
completion of the project prior to any disbursements. Construction
loans are structured to provide sufficient time to complete construction,
including consideration for
weather or other variables that influence completion time, although Peoples
generally requires the term to be less than two years.
Consumer
Lending
Peoples’
consumer lending activities primarily involve loans secured by automobiles,
boats, recreational vehicles and other personal property. At December
31, 2009, consumer loans comprised 8.5% of Peoples’ loan portfolio.
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Consumer
Lending Practices. Consumer loans
generally involve more risk as to collectability than real estate 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 are at
more
risk from adverse changes in 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, credit history and sufficient collateral for
secured loans. It is the policy of Peoples to review its
consumer loan
portfolio monthly and to charge-off
loans that do not meet its standards, and to adhere strictly to all laws
and regulations governing consumer lending. A qualified
compliance officer is responsible
for monitoring regulatory compliance performance and for advising and
updating loan personnel.
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Peoples makes
credit life insurance and accident and health insurance available to all
qualified borrowers, thus reducing risk of loss when a borrower’s income is
terminated or interrupted due to accident, disability or death.
Overdraft
Privilege
Peoples
grants Overdraft Privilege to qualified customers. Overdraft
Privilege is a service that provides overdraft protection to retail deposit
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 at Peoples’ discretion, up to
their Overdraft Privilege limit, with each item being charged Peoples’ regular
overdraft fee. Customers repay the overdraft with their next
deposit. Overdraft Privilege is designed to allow Peoples to fill the
void between traditional overdraft protection, such as a line of credit, and
“check cashing stores”. While Overdraft Privilege generates fee
income, Peoples maintains an allowance for losses from checking accounts with
overdrafts deemed uncollectible. This allowance, along with the
related provision and net charge-offs, is included in Peoples’ allowance for
loan losses.
Investment
Activities
Investment
securities comprise a significant portion of Peoples’ total
assets. The majority of Peoples’ investment activities are conducted
through Peoples Bank, although Peoples and its non-banking subsidiaries engage
in investment activities from time-to-time. Investment activity by
Peoples Bank is subject to certain regulatory guidelines and limitations on the
types of securities eligible for purchase. As a result, the
investment securities owned by Peoples Bank include obligations of the U.S.
Treasury, agencies and corporations of the U.S. government, including
mortgage-backed securities, bank eligible obligations of any state or political
subdivision in the U.S. and bank eligible corporate obligations, including
private-label mortgage-backed securities. The investments owned by
Peoples are comprised of common stocks issued by various unrelated banking
holding companies and tax-exempt municipal obligations. The
investments owned by Peoples’ non-banking subsidiaries currently consist of tax
credit funds and corporate obligations.
Peoples’
investment activities are governed internally by a written, Board-approved
policy, which is administered by Peoples’ Asset-Liability Management Committee
(“ALCO”). The primary purpose of Peoples’ investment portfolio is to:
(1) employ excess funds not needed for loan demand; (2) provide a source of
liquid assets to accommodate unanticipated deposit and loan fluctuations and
overall liquidity needs; (3) provide eligible securities to secure public and
trust funds; and (4) earn the maximum overall return commensurate with the
investment’s risk and corporate needs. Investment strategies to
achieve these objectives are reviewed and approved by the ALCO. In
its evaluation of investment strategies, the ALCO considers various factors,
including the interest rate environment, balance sheet mix, actual and
anticipated loan demand, funding opportunities and Peoples’ overall interest
rate sensitivity. The ALCO also has much broader responsibilities,
which are discussed in the “Interest Rate Sensitivity and Liquidity” section of
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation” included in Item 7 of in this Form 10-K.
Funding
Sources
Peoples’
primary sources of funds for lending and investing activities are
interest-bearing and non-interest-bearing deposits. Cash flows from
both the loan and investment portfolios, which include scheduled payments, as
well as prepayments, calls and maturities, also provide a relatively stable
source of funds. Peoples also utilizes a variety of short-term and
long-term borrowings to fund asset growth and satisfy liquidity
needs. Peoples’ funding sources are monitored and managed through
Peoples’ asset-liability management process, which is discussed further in the
“Interest Rate Sensitivity and Liquidity” section of “Management’s Discussion
and Analysis of Financial Condition and Results of Operation” included in Item 7
of this Form 10-K.
The
following is a brief description of the various sources of funds utilized by
Peoples:
Deposits
Peoples
obtains deposits principally from individuals and businesses within its primary
market area by offering a broad selection of deposit products to
clients. Retail deposit account terms vary with respect to the
minimum balance required, the time the funds must remain on deposit and service
charge schedules. Interest rates paid on specific deposit types are
determined based on (1) the interest rates offered by competitors, (2) the
anticipated amount and timing of funding needs, (3) the availability and cost of
alternative sources of funding and (4) the anticipated future economic
conditions and interest rates. Retail deposits are attractive sources
of funding because of their stability and relative cost in addition to providing
opportunities for Peoples to build long-term client relationships through the
cross-selling of its other products and services.
Peoples
occasionally obtains deposits from clients outside Peoples’ primary market area,
generally in the form of certificates of deposit and often through deposit
brokers. These deposits are used to augment Peoples’ retail deposits
to fund loans originated to customers located outside Peoples’ primary market
area, as well as provide diversity in funding sources. While these
deposits may carry slightly higher interest costs than other wholesale funds,
they do not require Peoples to secure the funds with collateral, unlike most
other borrowed funds.
Additional
information regarding the amounts and composition of Peoples’ deposits can be
found in the “Deposits” section of “Management’s Discussion and Analysis of
Financial Condition and Results of Operation” included in Item 7 of this Form
10-K and in Note 7 of the Notes to the Consolidated Financial
Statements.
Borrowed
Funds
Peoples
obtains funds through a variety of short-term and long-term borrowings, which
typically include advances from the Federal Home Loan Bank of Cincinnati
(“FHLB”), Federal Funds purchased, advances from the Federal Reserve Discount
Window and repurchase agreements. Occasionally, Peoples obtains funds
from unrelated financial institutions in the form of loans or revolving lines of
credit. Short-term borrowings are used generally to manage Peoples’
daily liquidity needs since they typically may be repaid, in whole or part, at
any time without a penalty. Long-term borrowings provide
cost-effective options for funding asset growth and satisfying capital needs,
due to the variety of pricing and maturity options available.
Additional
information regarding the amounts and composition of Peoples’ borrowed funds can
be found in the “Borrowed Funds” section of “Management’s Discussion and
Analysis of Financial Condition and Results of Operation” included in Item 7 of
this Form 10-K and in Notes 8 and 9 of the Notes to the Consolidated Financial
Statements.
Peoples
has an established statutory business trust subsidiary (PEBO Capital Trust I)
that was formed for the sole purpose of issuing preferred securities and
investing the proceeds in junior subordinated debt securities of
Peoples. The trust preferred securities qualify as Tier 1 capital for
regulatory capital purposes, subject to certain quantitative limits and
qualitative standards. Additional information can be found in Note 10
of the Notes to the Consolidated Financial Statements.
Competition
Peoples
experiences intense competition within its primary market area due to the
presence of several national, regional and local financial institutions and
other service providers, including finance companies, insurance agencies and
mutual funds. Competition within the financial service industry
continues to increase as a result of mergers between, and expansion of,
financial service providers within and outside of Peoples’ primary market
areas. In addition, the deregulation of the financial services
industry (see the discussion of the Gramm-Leach-Bliley Act of 1999 in the
section of this item captioned “Supervision and Regulation-Bank Holding Company
Act”) has allowed securities firms and insurance companies that have elected to
become financial holding companies to acquire commercial banks and other
financial institutions, which can create additional competitive
pressure.
Peoples
primarily competes based on client service, convenience and responsiveness to
customer needs, available products, rates of interest on loans and deposits, and
the availability and pricing of trust, brokerage and insurance
services. However, some competitors may have greater resources and,
as such, higher lending limits than Peoples, which adversely affects Peoples’
ability to compete. Peoples’ business strategy includes the use of a
“needs-based” sales and service approach to serve customers and incentives
intended to promote customers’ continued use of multiple financial products and
services. In addition, Peoples continues to emphasize the integration
of traditional commercial banking products with non-traditional financial
products, such as insurance and investment products.
Peoples
historically has focused on providing its full range of products and services in
smaller metropolitan markets rather than major metropolitan
areas. While management believes Peoples has developed a level of
expertise in serving the financial service needs of smaller communities,
Peoples’ primary market area has expanded into larger metropolitan areas, like
central Ohio. These larger areas typically contain entrenched service
providers with an existing customer base much larger than Peoples’ initial entry
position. As a result, Peoples may be forced to compete more
aggressively in order to grow its market share in these areas, which could
reduce current and future profit potential from such markets.
Employees
At
December 31, 2009, Peoples had 537 full-time equivalent employees.
Intellectual
Property and Proprietary Rights
Peoples
has registered the service marks “Peoples Bank (with logo)”, “Peoples Bancorp
(with logo)”, “Peoples Financial Advisors (with logo)”, “Connect Card”, “Peoples
Bank” and “peoplesbancorp.com” with the U.S. Patent and Trademark
Office. These service marks currently have expiration dates ranging
from 2014 to 2017. Peoples may renew the registrations of service
marks with the U.S. Patent and Trademark Office generally for additional 10-year
periods indefinitely, provided it continues to use the service marks and files
appropriate maintenance and renewal documentation with the U.S. Patent and
Trademark Office at times required by the federal trademark laws and
regulations.
Peoples
has a proprietary interest in the Internet Domain name
“pebo.com”. Internet Domain names in the U.S. and in foreign
countries are regulated, but the laws and regulations governing the Internet are
continually evolving.
Supervision
and Regulation
Peoples
and its subsidiaries are subject to extensive supervision and regulation by
federal and state agencies. The regulation of financial holding
companies and their subsidiaries is intended primarily for the protection of
consumers, depositors, borrowers, the federal deposit insurance fund and the
banking system as a whole and not for the protection of
shareholders. The following is a summary of the regulatory agencies,
statutes and related regulations that have, or could have, a significant impact
on Peoples’ business. This discussion is qualified in its entirety by
reference to such regulations and statutes.
Financial
Holding Company
Peoples
is a legal entity separate and distinct from its subsidiaries and affiliated
companies. As a financial holding company, Peoples is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the “BHC
Act”), and to inspection, examination and supervision by the Board of Governors
of the Federal Reserve System (the “Federal Reserve Board”).
The
Federal Reserve Board also has extensive enforcement authority over financial
holding companies. In general, the Federal Reserve Board may initiate
enforcement actions for violations of laws and regulations and unsafe or unsound
practices. The Federal Reserve Board may assess civil money
penalties, issue cease and desist or removal orders and require that a financial
holding company divest subsidiaries, including subsidiary
banks. Peoples is also required to file reports and other information
with the Federal Reserve Board regarding its business operations and those of
its subsidiaries.
Subsidiary
Bank
Peoples
Bank is subject to regulation and examination primarily by the Office of the
Comptroller of the Currency (“OCC”) and secondarily by the Federal Reserve Board
and the Federal Deposit Insurance Corporation (“FDIC”). OCC regulations govern
permissible activities, capital requirements, dividend limitations, investments,
loans and other matters. The OCC has the authority to impose
sanctions on Peoples Bank and, under certain circumstances, may place Peoples
Bank into receivership.
Peoples
Bank is subject to certain restrictions imposed by the Federal Reserve Act and
Federal Reserve Board regulations regarding such matters as the maintenance of
reserves against deposits, extensions of credit to the financial holding company
or any of its subsidiaries, investments in the stock or other securities of the
financial holding company or its subsidiaries and the taking of such stock or
securities as collateral for loans to any borrower.
Non-Banking
Subsidiaries
Peoples’
non-banking subsidiaries are also subject to regulation by the Federal Reserve
Board and other applicable federal and state agencies. Peoples
Insurance, as a licensed insurance agency, is subject to regulation by the Ohio
Department of Insurance and the state insurance regulatory agencies of those
states where it may conduct business.
Other
Regulatory Agencies
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Securities
and Exchange Commission (“SEC”) and NASDAQ. Peoples is
also under the jurisdiction of the SEC and certain state securities
commissions for matters
relating to the offering and sale
of its securities. Peoples is subject to the disclosure and
regulatory requirements of the Securities Act of 1933, as amended (the
“Securities Act”), and the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the
regulations promulgated thereunder, as administered by the
SEC. Peoples’ Common
Shares are listed on The NASDAQ Stock Market LLC (“NASDAQ”) under the
symbol “PEBO” and Peoples is subject to the rules for
NASDAQ
listed companies.
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Federal
Home Loan Bank. Peoples Bank is a member of the FHLB, which
provides credit to its members in the form of advances. As a
member of the FHLB, Peoples Bank
must
maintain an investment in the capital stock of the FHLB in a specified
amount. Upon the origination or renewal of an advance, the FHLB
is required by law to
obtain
and maintain a security interest in certain types of
collateral. The FHLB is required to establish standards of
community investment or service that its
members
must maintain for continued access to long-term advances from the
FHLB. The standards take into account a member’s performance
under the Community
Reinvestment Act and its record of
lending to first-time homebuyers.
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The
Federal Deposit Insurance Corporation/Depository Insurance. The
FDIC is an independent federal agency which insures the deposits, up to
prescribed
statutory limits, of
federally-insured banks and savings associations and safeguards the safety
and soundness of the financial institution industry. Peoples
Bank’s
deposits are insured up to
applicable limits by Deposit Insurance Fund of the FDIC and subject to
deposit insurance assessments to maintain the Deposit Insurance
Fund.
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The FDIC
utilizes a risk-based assessment system that imposes insurance premiums based
upon a four-tier risk matrix based upon a bank’s capital level and
supervisory, or CAMELS, rating. The assessment rate determined by
considering such information is then applied to the amount of the bank’s
deposits to
determine the bank’s insurance premiums. An increase in the
assessment rate could have a material adverse effect on the earnings of the
affected insured
depository institutions. The FDIC may terminate insurance coverage
upon a finding that the insured depository institution has engaged in unsafe or
unsound
practices, is in an unsafe or unsound condition, or has violated any applicable
law, regulation, rule, order or condition enacted or imposed by the
institution’s
regulatory agency.
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U.S.
Treasury and Special Inspector General. As a result of Peoples’
participation in the TARP Capital Purchase Program, Peoples is also
subject to the regulatory
authority granted to the U.S.
Treasury and the Special Inspector General for the Troubled Assets Relief
Program under EESA and the American Recovery and
Reinvestment Act of 2009 (the
“ARRA”), as discussed below under the caption “TARP Capital Purchase
Program”.
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Bank
Holding Company Act
In
general, the BHC Act limits the business of bank holding companies to banking,
managing or controlling banks and other activities that the Federal Reserve
Board has determined to be so closely related to banking as to be a proper
incident thereto. As a result of the Gramm-Leach-Bliley Act of 1999 –
also known as the Financial Services Modernization Act of 1999 –, which amended
the BHC Act, bank holding companies that are financial holding companies may
engage in any activity, or acquire and retain the shares of a company engaged in
any activity that is either (1) financial in nature or incidental to such
financial activity (as determined by the Federal Reserve Board in consultation
with the OCC) or (2) complementary to a financial activity, and that does not
pose a substantial risk to the safety and soundness of depository institutions
or the financial system generally (as solely determined by the Federal Reserve
Board). Activities that are financial in nature include securities
underwriting and dealing, insurance underwriting and making merchant banking
investments. In 2002, Peoples elected, and received approval from the
Federal Reserve Board, to become a financial holding company.
In order
for a financial holding company to commence any new activity permitted by the
BHC Act, or to acquire a company engaged in any new activity permitted by the
BHC Act, each insured depository institution subsidiary of the financial holding
company must have received a rating of at least “satisfactory” in its most
recent examination under the Community Reinvestment Act, which is more fully
discussed in the section captioned “Community Reinvestment Act” included later
in this item. In addition, financial holding companies like Peoples
are permitted to acquire companies engaged in activities that are financial in
nature and in activities that are incidental and complementary to financial
activities without prior Federal Reserve Board approval.
The BHC
Act and other federal and state statutes regulate acquisitions of commercial
banks. The BHC Act requires the prior approval of the Federal Reserve
Board for the direct or indirect acquisition of more than 5% of the voting
shares of a commercial bank or its parent holding company. Under the
Federal Bank Merger Act, the prior approval of the OCC is required for a
national bank to merge with another bank or purchase the assets or assume the
deposits of another bank. In reviewing applications seeking approval
of merger and acquisition transactions, the bank regulatory authorities will
consider, among other things, the competitive effect and public benefits of the
transactions, the capital position of the combined organization, the applicant’s
performance record under the Community Reinvestment Act and fair housing laws
and the effectiveness of the subject organizations in combating money laundering
activities.
Under
Federal Reserve Board policy, a financial holding company is expected to act as
a source of financial strength to each subsidiary bank and to commit resources
to support each such subsidiary bank. Under this policy, the Federal
Reserve Board may require a financial holding company to contribute additional
capital to an undercapitalized subsidiary bank and may disapprove of the payment
of dividends to the shareholders if the Federal Reserve Board believes the
payment of such dividends would be an unsafe or unsound practice.
Capital Adequacy and Prompt
Corrective Action
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among
other things, identifies five capital categories for insured depository
institutions and requires the respective federal regulatory agencies to
implement systems for “prompt corrective action” for insured depository
institutions that do not meet minimum capital requirements within such
categories. The federal regulatory agencies, including the Federal
Reserve Board and the OCC, have adopted substantially similar regulatory capital
guidelines and regulations consistent with the requirements of FDICIA, as well
as established a system of prompt corrective action to resolve certain of the
problems of undercapitalized institutions. This system is based on
five capital level categories for insured depository
institutions: “well capitalized”, “adequately capitalized”,
“undercapitalized”, “significantly undercapitalized” and “critically
undercapitalized”.
The
federal banking agencies may (or in some cases must) take certain supervisory
actions depending upon a bank’s capital level. For example, the
banking agencies must appoint a receiver or conservator for a bank within 90
days after it becomes “critically undercapitalized” unless the bank’s primary
regulator determines, with the concurrence of the FDIC, that other action would
better achieve regulatory purposes. Banking operations otherwise may
be significantly affected depending on a bank’s capital category. For
example, a bank that is not “well capitalized” generally is prohibited from
accepting brokered deposits and offering interest rates on deposits higher than
the prevailing rate in its market, and the holding company of any
undercapitalized bank must guarantee, in part, specific aspects of the bank’s
capital plan for the plan to be acceptable.
Both
Peoples and Peoples Bank are subject to risk-based capital requirements and
guidelines imposed by their respective primary regulatory
agencies. These capital guidelines and regulations are based on the
1998 capital accord of the Basel Committee on Banking Supervision (the “Basel
Committee”) and divide the capital of Peoples and Peoples Bank into two
tiers:
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“Tier
1 capital” consists of (1) common shareholders’ equity; (2) qualifying
perpetual preferred stock and trust preferred securities (up to 25% of
total Tier 1 capital); and (3) minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other deductions
including intangible assets and net unrealized gains and losses on
available-for-sale securities.
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“Tier
2 capital” consists primarily of allowance for loan losses and net
unrealized gains on certain available-for-sale equity securities, subject
to limitations established by the guidelines, as well as any qualifying
perpetual preferred stock and trust preferred securities amounts excluded
from Tier 1 capital. Tier 2 capital may also include, among
other things, certain amounts of hybrid capital instruments, mandatory
convertible debt and subordinated
debt.
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In
addition, each asset on Peoples and Peoples Bank’s balance sheets, as well as
credit equivalent amounts of certain derivatives and off-balance sheet items,
are assigned to one of several broad risk weight categories: 0%, 20%, 50%, 100%
and in some cases 200%, resulting in a calculation of “total risk-weighted
assets”.
Peoples
and Peoples Bank are required to maintain sufficient capital to meet both a
risk-based asset ratio test and leverage ratio test. From time to
time, the regulatory agencies may require Peoples and Peoples Bank to maintain
capital above these minimum levels should certain conditions exist, such as
deterioration of their financial condition or growth in assets, either actual or
expected. Additional information regarding Peoples and Peoples Bank’s
risk-based capital requirements and ratios can be found in Note 17 of the Notes
to the Consolidated Financial Statements.
In 2004,
the Basel Committee published a new capital accord to replace its 1988 capital
accord (“Basel II”). Basel II provides two approaches for setting
capital standards for credit risk, sets capital requirements for operational
risk and refines the existing capital requirements for market risk
exposures. In November 2007, the U.S. federal regulatory agencies
adopted a definitive final rule for implementing Basel II in the United
States. The final rule applies only to internationally active banking
organizations and organizations with consolidated total assets of at least $250
billion or consolidated on-balance sheet foreign exposures of at least $10
billion. Currently, Peoples and Peoples Bank are not required to
comply with Basel II. In July 2008, the federal banking agencies
proposed rules that would allow banks other than those subject to Basel II to
elect to adopt the new risk weighting methodologies. Until such rules
are finalized, Peoples is unable to predict whether it will adopt the new
standards.
Community
Reinvestment Act
The
Community Reinvestment Act of 1977 (the “CRA”) requires depository institutions
to assist in meeting the credit needs of their market areas consistent with safe
and sound banking practice. Under the CRA, each depository
institution is required to help meet the credit needs of its market areas by,
among other things, providing credit to low and moderate-income individuals and
communities. Depository institutions are periodically examined for
compliance with the CRA and are assigned ratings. As of December 31,
2009, the OCC’s most recent performance evaluation of Peoples Bank resulted in
an overall rating of “Outstanding”.
TARP
Capital Purchase Program
As
discussed in more detail above under the caption “Recent Corporate
Developments,” Peoples elected to participate in the TARP Capital Purchase
Program and received $39 million of new equity capital from the U.S. Treasury on
January 30, 2009. As part of its participation in the TARP Capital
Purchase Program, Peoples agreed to various requirements and restrictions
imposed on all participants in the TARP Capital Purchase
Program. Among the terms of participation was a provision that the U.
S. Treasury could change the terms of participation at any time.
On
February 17, 2009, President Obama signed into law the ARRA enacted by the U.S.
Congress. The ARRA, among other things, imposed certain new executive
compensation and corporate expenditure limits on all current and future
recipients of funds under the TARP Capital Purchase Program, including Peoples,
as long as any obligation arising from the financial assistance provided to the
recipient under the TARP Capital Purchase Program remains outstanding, excluding
any period during which the U.S. Treasury holds only warrants to purchase common
stock of a TARP participation (the “Covered Period”). On June 10,
2009, the U.S. Treasury issued an interim final rule describing how
participating institutions are to comply with the executive compensation and
corporate governance standards imposed by the EESA, as amended by the
ARRA. On December 7, 2009, the U.S. Treasury published technical
amendments to the interim final rule (collectively, the interim final rule
published on June 15, 2009 and the amendments published on December 7, 2009 are
referred to as the "Interim Final Rule").
The
current terms of participation in the TARP Capital Purchase Program include the
following:
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Peoples
must file with the SEC a registration statement under the Securities Act
registering for resale the Series A Preferred Shares or, in the event the
Series A Preferred Shares are deposited with a depository at the request
of the U.S. Treasury, depository shares evidencing fractional interests in
the Series A Preferred Shares; the Warrant to purchase 313,505 Common
Shares; and any Common Shares issued from time to time upon exercise of
the Warrant. On March 6, 2009, Peoples filed a Registration
Statement on Form S-3 to register these securities, which Registration
Statement became effective on April 7,
2009.
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As
long as the Series A Preferred Shares remain outstanding, unless all
accrued and unpaid dividends for all past dividend periods on the Series A
Preferred Shares are fully paid, Peoples will not be permitted to declare
or pay dividends on any Common Shares, any junior preferred shares or,
generally, any preferred shares ranking pari passu with the
Series A Preferred Shares (other than in the case of pari passu preferred
shares, dividends on a pro rata basis with the Series A Preferred Shares),
nor will Peoples be permitted to repurchase or redeem any Common Shares or
preferred shares other than the Series A Preferred
Shares.
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Unless
the Series A Preferred Shares have been transferred to unaffiliated third
parties or redeemed in whole, until January 20, 2012, the U.S. Treasury's
approval is required for any increase in Common Share dividends or any
share repurchases other than repurchases of the Series A Preferred Shares,
repurchases of junior preferred shares, or repurchases of
Common Shares in connection with the administration of any employee
benefit plan in the ordinary course of business and consistent with past
practice and purchases under certain other limited circumstances specified
in the Securities Purchase Agreement with the U.S.
Treasury.
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Peoples
must comply with the U.S. Treasury’s standards for executive compensation
and corporate governance during the Covered Period. The current
standards include the following:
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compensation
plans and arrangements for Senior Executive Officers (as defined in the
Interim Final Rule) must not encourage unnecessary and excessive risks
that threaten the value of the financial
institution;
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any
bonus, retention award or incentive compensation paid (or under a legally
binding obligation to pay) to a Senior Executive Officer or any of
Peoples’ next 20 most highly-compensated employees based on materially
inaccurate financial statements or other materially inaccurate performance
metric criteria must be subject to recovery, or “clawback”, by
Peoples;
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Peoples
is prohibited from paying or accruing any bonus, retention award or
incentive compensation with respect to its five most highly-compensated
employees, except for grants of long-term restricted stock that do not
fully vest during the Covered Period and do not have a value which exceeds
one-third of an employee’s total annual
compensation;
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severance
payments to a Senior Executive Officer and the next five most
highly-compensated employees, generally referred to as “golden parachute”
payments, are prohibited , except for payments for services performed or
benefits accrued;
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compensation
plans that encourage manipulation of reported earnings to enhance the
compensation of any employees are
prohibited;
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Peoples
is prohibited from providing (formally or informally) “gross-ups” to a
Senior Executive Officer or any of Peoples’ next 20 most
highly-compensated employees;
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the
U.S. Treasury may retroactively review bonuses, retention awards and other
compensation previously paid to a Senior Executive Officer or any of
Peoples’ next 20 most highly-compensated employees to determine whether
such payments were inconsistent with the purposes of TARP or otherwise
contrary to the public interest;
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Peoples’
compensation committee consisting of independent directors must engage in
risk analysis of Senior Executive Officer and all other employee
compensation plans;
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Peoples’
Board of Directors must establish a company-wide policy regarding
excessive or luxury expenditures, which was adopted on August 27, 2009,
and post this policy on Peoples’
website;
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Peoples’
proxy statements for annual shareholder meetings must permit a non-binding
“say on pay” shareholder vote on the compensation of executives, as
disclosed pursuant to the compensation disclosure rules of the
SEC;
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executive
compensation in excess of $500,000 for each Senior Executive Officer must
not be deducted for federal income tax
purposes;
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Peoples
must disclose to the U.S. Treasury and Peoples’ primary regulator the
amount, nature and justification for offering to any of Peoples’ five most
highly-compensated employees any perquisites whose total value exceeds
$25,000;
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Peoples
must disclose to the U.S. Treasury and Peoples’ primary regulator whether
Peoples’ Board of Directors or the Compensation Committee engaged a
compensation consultant and the service performed by that compensation
consult and any of its affiliates;
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Peoples
must disclose to the U.S. Treasury the identity of Peoples’ Senior
Executive Officers and next 20 most highly-compensated employees,
identified by name and title and ranked in descending order of annual
compensation;
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Peoples
must limit any Employee Compensation Plan (as defined in the Interim Final
Rule) that unnecessarily exposes Peoples to risk;
and
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Peoples
must comply with the executive compensation reporting and recordkeeping
requirements established by the U.S.
Treasury.
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The ARRA
permits such TARP recipients, subject to consultation with the appropriate
federal banking agency, to repay to the U.S. Treasury any financial assistance
received under the TARP Capital Purchase Program without penalty, delay or the
need to raise additional replacement capital.
Detailed
information regarding the Series A Preferred Shares and the Warrant can be found
in Note 11 of the Notes to the Consolidated Financial Statements.
Dividend
Restrictions
Current
federal banking regulations impose restrictions on Peoples Bank’s ability to pay
dividends to Peoples. These restrictions include a limit on the
amount of dividends that may be paid in a given year without prior approval of
the OCC and a prohibition on paying dividends that would cause Peoples Bank’s
total capital to be less than the required minimum levels under the risk-based
capital requirements imposed by the OCC. Peoples Bank’s regulators
may prohibit the payment of dividends at any time if the regulators determine
the dividends represent unsafe and/or unsound banking practices or reduce
Peoples Bank’s total capital below adequate levels. For further
discussion regarding regulatory restrictions on dividends, see Note 17 of the
Notes to the Consolidated Financial Statements.
Peoples’
ability to pay dividends to its shareholders may also be
restricted. Current Federal Reserve Board policy requires a financial
holding company to act as a source of financial strength to each of its banking
subsidiaries. Under this policy, the Federal Reserve Board may
require Peoples to commit resources or contribute additional capital to Peoples
Bank, which could restrict the amount of cash available for
dividends. In 2009, the Federal Reserve Board issued guidance
and regulations on the declaration and payment of dividends by bank holding
companies, which included conditions under which a bank holding company must
provide advance notification of its intention to declare and pay
dividends.
Peoples
also has entered into certain agreements that place restrictions on
dividends. Specifically, Peoples will be prohibited from paying
dividends on its Common Shares if it suspends interest payments related to the
trust preferred securities issued by its trust subsidiary. Additional
information regarding Peoples’ trust subsidiary can be found in Note 10 of the
Notes to the Consolidated Financial Statements. The dividend rights
of holders of Peoples’ Common Shares are also qualified and subject to the
dividend rights of holders of Series A Preferred Shares described above under
the caption “Supervision and Regulation – TARP Capital Purchase
Program”.
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.
Customer
Privacy and Other Consumer Protections
Peoples
Bank is subject to regulations limiting the ability of financial institutions to
disclose non-public information about consumers to nonaffiliated third
parties. These limitations require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers to prevent disclosure of
certain personal information to a nonaffiliated party. Peoples Bank
is also subject to numerous federal and state laws aimed at protecting
consumers, including the Home Mortgage Disclosure Act, the Real Estate
Settlement Procedures Act, the Equal Credit Opportunity Act, the Truth in
Lending Act, the Bank Secrecy Act, the Community Reinvestment Act and the Fair
Credit Reporting Act.
USA
Patriot Act
The
Uniting and Strengthening of America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) and related
regulations, among other things, require financial institutions to establish
programs specifying procedures for obtaining identifying information from
customers and establishing enhanced due diligence policies, procedures and
controls designed to detect and report suspicious activity. Peoples
Bank has established policies and procedures that Peoples believes comply with
the requirements of the USA Patriot Act.
Monetary
Policy
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.
Regulatory
Reform
In June
2009, President Obama’s administration proposed a wide range of regulatory
reforms that, if enacted, may have significant effects on the financial services
industry in the United States. Key aspects of the proposed reforms
include, among other things, proposals to: (i) reassess and increase
capital requirements for banks and bank holding companies and examine the types
of instruments that qualify as regulatory capital; (ii) combine the OCC
and the Office of Thrift Supervision into a national bank supervisor with a
unified federal bank charter; (iii) expand the current eligibility
requirements for financial holding companies so that a financial holding company
must be “well capitalized” and “well managed” on a consolidated basis;
(iv) create a federal consumer financial protection agency to be the
primary federal consumer protection supervisor with broad examination,
supervision and enforcement authority with respect to consumer financial
products and services; (v) further limit the ability of banks to engage in
transactions with affiliates; and (vi) subject all “over-the-counter”
derivatives markets to comprehensive regulation.
The U.S.
Congress, state lawmaking bodies and federal and state regulatory agencies
continue to consider a number of wide-ranging and comprehensive proposals for
altering the structure, regulation and competitive relationships of the
financial institutions, including rules and regulations related to the Obama
administration’s proposals. Separate comprehensive financial reform
bills intended to address the proposals of the Obama administration were
introduced in both houses of Congress in the second half of 2009 and remain
under review by both the U.S. House of Representatives and the U.S.
Senate. Peoples cannot predict whether or in what form further
legislation or regulations may be adopted or the extent to which Peoples’
business activities could be affected.
Website
Access to Peoples’ SEC Filings
Peoples
maintains an Internet website at www.peoplesbancorp.com (this uniform resource
locator, or URL, is an inactive textual reference only and is not intended to
incorporate Peoples’ Internet website into this Form 10-K). Peoples
makes available free of charge on or through its website, its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act, as soon as reasonably practicable after Peoples
electronically files each such report or amendment with, or furnishes it to, the
SEC.
ITEM 1A. RISK
FACTORS
The
following are certain risks that management believes are specific to Peoples’
business. This should not be viewed as an all-inclusive list of risks or
presenting the risk factors listed in any particular order.
·
|
Current
conditions in the financial markets, the real estate markets and economic
conditions generally may adversely affect Peoples’
business.
|
Beginning
in the latter half of 2007 and continuing into 2010, negative developments in
the capital markets resulted in uncertainty in the financial markets and an
economic downturn. The housing market declined, resulting in
decreasing home prices and increasing delinquencies and
foreclosures. The credit performance of mortgage and construction
loans resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major commercial and
investment banks. The declines in the performance and value of
mortgage assets encompassed all mortgage and real estate asset types, leveraged
bank loans and nearly all other asset classes, including equity
securities. These write-downs have caused many financial institutions
to seek additional capital or to merge with larger and stronger
institutions. Some financial institutions have failed.
Concerns
over the stability of the financial markets and the economy have resulted in
decreased lending by some financial institutions to their customers and to each
other. This tightening of credit has led to increased loan
delinquencies, lack of customer confidence, increased market volatility and a
widespread reduction in general business activity. Competition among
depository institutions for deposits has increased significantly, and access to
deposits or borrowed funds has decreased for many institutions. It
has also become more difficult to assess the creditworthiness of customers and
to estimate the losses inherent in Peoples’ loan portfolio.
The
United States remains in a recession. Business activity across a wide
range of industries and regions is greatly reduced, and local governments and
many companies are in serious difficulty due to the lack of consumer spending
and the lack of liquidity in the credit markets. A worsening of
current conditions would likely adversely affect Peoples’ business and results
of operations, as well as those of its customers. As a result,
Peoples may experience increased foreclosures, delinquencies and customer
bankruptcies, as well as more restricted access to funds.
·
|
Enactment
of new legislation and increased regulatory oversight may significantly
affect Peoples’ financial condition and results of
operations.
|
The
Federal Reserve Board, U.S. Congress, the U.S. Treasury, the FDIC and others
have taken numerous actions to address the current liquidity and credit
situation in the financial markets. These measures include actions to
encourage loan restructuring and modification for homeowners; the establishment
of significant liquidity and credit facilities for financial institutions and
investment banks; the lowering of the federal funds rate; and coordinated
efforts to address liquidity and other weaknesses in the banking
sector. The long-term effect of actions already taken as well as new
legislation is unknown. Continued or renewed instability in the
financial markets could weaken public confidence in financial institutions and
adversely affect Peoples’ ability to attract and retain new
customers.
Further,
the U.S. Congress is considering several legislative proposals that, if enacted,
could cause Peoples to make adverse changes to its business practices related to
loans and deposits. Specifically, proposed legislation would alter
contractual rights and obligations of both Peoples and its customers under
existing loan contracts by reducing amounts customers are required to pay or
limiting Peoples’ ability to foreclose on collateral. Other
legislation would impact how Peoples assesses certain fees on deposit accounts,
such as overdraft fees. There can be no assurance that future
legislation will not significantly impact Peoples’ ability to collect on its
current loans and/or foreclose on collateral or require changes to business
practices that would reduce the amount of revenue recognized in future
periods.
·
|
Adverse
changes in national and/or local economic and political conditions could
impact Peoples’ earnings and financial
condition.
|
Peoples’
success depends, to a certain extent, upon economic and political conditions,
local and national, as well as governmental fiscal and monetary
policies. Inflation, recession, unemployment, changes in interest
rates, money supply and other factors beyond Peoples’ control may adversely
affect its asset quality, deposit levels and loan demand and, therefore,
Peoples’ financial condition and results of operations. Because a
significant amount of Peoples’ loans are secured by either commercial or
residential real estate, additional decreases in real estate values could
adversely affect the value of property used as collateral and Peoples’ ability
to sell the collateral upon foreclosure. Adverse changes in the
economy may also have a negative effect on the ability of Peoples’ borrowers to
make timely repayments of their loans, which would have an adverse impact on
Peoples’ earnings and cash flows.
The local
economies of the majority of Peoples’ market area historically have been less
robust than the economy of the nation as a whole and typically are not subject
to the same fluctuations as the national economy. Adverse economic
conditions in Peoples’ market area, including the loss of certain significant
employers, could reduce Peoples’ growth rate, affect borrowers’ ability to repay
their loans and generally affect Peoples’ financial condition and results of
operations. Furthermore, continued declines in real estate values
could cause additional loans to become under-collateralized and require further
increases to the allowance for loan losses.
·
|
Adverse
changes in the financial markets may adversely impact Peoples’ results of
operations.
|
The
global financial markets have experienced increased volatility and an overall
loss of investor confidence for the last two years. While Peoples
generally invests in securities with limited credit risk, certain investment
securities Peoples hold possess higher credit risk since they represent
beneficial interests in structured investments collateralized by residential
mortgages, debt obligations and other similar asset-backed
assets. Regardless of the level of credit risk, all investment
securities are subject to changes in market value due to changing interest rates
and implied credit spreads.
Over the
last few years, structured investments, like Peoples’ collateralized debt
obligations, have been subject to significant market volatility due to the
uncertainty of the credit ratings, deterioration in credit losses occurring
within certain types of residential mortgages, changes in prepayments of the
underlying collateral and the lack of transparency related to the investment
structures and the collateral underlying the structured investment
vehicles. These conditions have resulted in Peoples’ recognizing
impairment charges on certain investment securities during 2007, 2008 and
2009. Given recent market conditions and changing economic factors,
Peoples may be required to recognize additional impairment changes on securities
held in its investment portfolio in the future.
·
|
Recent
levels of market volatility are
unprecedented.
|
For more
than two years, the capital and credit markets have been experiencing
unprecedented levels of volatility. In some cases, share prices and credit
availability for certain issuers have declined without regard to those issuers’
underlying financial strength. If current levels of market disruption
and volatility continue or worsen, Peoples may experience a material adverse
effect on its ability to access capital and on its business, financial condition
and results of operations.
·
|
Defaults
by larger financial institutions could adversely affect Peoples’ business,
earnings and financial condition.
|
The
commercial soundness of many financial institutions may be closely interrelated
as a result of relationships between and among the institutions. As a
result, concerns about, or a default or threatened default by, one institution
could lead to significant market-wide liquidity and credit problems, losses or
defaults by other institutions. This “systemic risk” may adversely
affect Peoples’ business.
Additionally,
Peoples’ investment portfolio continues to include investments in individual
bank-issued trust preferred securities and collateralized debt obligations,
comprised mostly of bank-issued trust preferred
securities. Under current market conditions, the fair value of
these security types is based predominately on the present value of cash flows
expected to be received in future periods. Significant defaults by
other financial institutions could adversely affect conditions within the
financial services industry, thereby causing investors to require higher rates
of return for these investments. These factors could cause Peoples to
recognize additional impairment losses on its investment in bank-issued trust
preferred securities in future periods.
·
|
Increases
in FDIC insurance premiums may have a material adverse affect on Peoples’
earnings.
|
The
number of bank failures increased significantly in 2008 and 2009, which
dramatically increased resolution costs of the FDIC and depleted the Deposit
Insurance Fund. Also during this period, the FDIC and U.S. Congress
have instituted two temporary programs to further insure customer deposits at
FDIC-member banks: deposit accounts are now insured up to $250,000 per customer
(up from $100,000) and non-interest-bearing transactional accounts are fully
insured (unlimited coverage). These actions have placed additional
stress on the Deposit Insurance Funds. On January 1, 2014, the
standard insurance amount will return to $100,000 per depositor for all account
categories except Individual Retirement Accounts and certain other retirement
accounts, which will remain at $250,000 per depositor.
Since
late 2008, the FDIC has taken various actions intended to maintain a strong
funding position and restore reserve ratios of the Deposit Insurance
Fund. These actions included increasing assessment rates for all
insured institutions, requiring riskier institutions to pay a larger share of
premiums by factoring in rate adjustments based on secured liabilities and
unsecured debt levels, imposing a special assessment on all insured depository
institutions for the second quarter of 2009 and requiring insured depository
institutions to prepay their quarterly risk-based assessments for the fourth
quarter of 2009 and full years 2010 through 2012 on December 29,
2009. In January 2010, the FDIC issued an advance notice of proposed
rule-making asking for comments on how the FDIC’s risk-based deposit insurance
assessment system could be changed to include the risks of certain employee
compensation as criteria in the assessment system.
Peoples
has limited ability to control the amount of premiums it is required to pay for
FDIC insurance. If there are additional financial institution
failures, the FDIC may be required to increase assessment rates from the
recently increased levels or take actions similar to those taken during
2009. As a result, insured depository institutions, including
Peoples, may be required to pay even higher FDIC premiums in future
periods. Increases in FDIC insurance premiums may materially
adversely affect Peoples’ results of operations and ability to continue to pay
dividends on its common shares at the current rate or at all.
·
|
The
Series A Preferred Shares impact net income available to Peoples’
common shareholders, and the Warrant may be dilutive to Peoples’ common
shareholders.
|
The
additional capital Peoples raised through its participation in the TARP Capital
Purchase Program has provided further funding for its lending
activities. Management also believes this capital has improved
investor perceptions with regard to Peoples’ financial
position. However, such capital has increased Peoples’ equity and the
number of dilutive outstanding common shares. In addition, the
dividends declared and the accretion of discount on the Series A Preferred
Shares reduces the net income available to Peoples’ common shareholders and
earnings per common share. The Series A Preferred Shares will
also receive preferential treatment in the event of Peoples’ liquidation,
dissolution or winding up. Additionally, the ownership interest of
Peoples’ existing common shareholders will be diluted to the extent the Warrant
Peoples issued to the U.S. Treasury is exercised. Although the U.S.
Treasury has agreed not to vote any of the common shares it receives upon
exercise of the Warrant, a transferee of any portion of the Warrant or of any
common shares acquired upon exercise of the Warrant is not bound by this
agreement.
·
|
If
Peoples is unable to redeem the Series A Preferred Shares after five
years, the cost of this capital will increase
substantially.
|
If
Peoples is unable to redeem the Series A Preferred Shares prior to
February 15, 2014, the cost of this capital will increase substantially on
that date, from 5.0% per annum to 9.0% per annum. Depending on
Peoples’ financial condition at the time, this increase in the annual dividend
rate on the Series A Preferred Shares could have a material negative effect
on Peoples’ liquidity.
·
|
Changes
in interest rates may adversely affect Peoples’
profitability.
|
Peoples’
earnings are dependent to a significant degree on net interest income, which is
the amount by which interest income exceeds interest
expense. Interest rates are highly sensitive to many factors that are
beyond Peoples’ control, including general economic conditions and policies of
various governmental and regulatory agencies and, in particular, the Federal
Reserve Board. Changes in monetary policy, including changes in
interest rates, could influence not only the interest Peoples receives on loans
and securities and the amount of interest it pays on deposits and borrowings,
but such changes could also affect (i) Peoples’ ability to originate loans
and obtain deposits, (ii) the fair value of Peoples’ financial assets and
liabilities, and (iii) the average duration of Peoples’ mortgage-backed
securities portfolio. If the interest rates paid on deposits and
other borrowings increase at a faster rate than the interest rates received on
loans and other investments, Peoples’ net interest income and, therefore,
earnings could be adversely affected. Earnings could also be
adversely affected if the interest rates received on loans and other investments
fall more quickly than the interest rates paid on deposits and other
borrowings.
Management
uses various measures to monitor interest rate risk and believes it has
implemented effective asset and liability management strategies to reduce the
potential effects of changes in interest rates on Peoples’ results of
operations. Management also periodically adjusts the mix of assets
and liabilities to manage interest rate risk. However, any
substantial, unexpected, prolonged change in market interest rates could have a
material adverse effect on Peoples’ financial condition and results of
operations. See the sections captioned “Interest Income and Expense”
and “Interest Rate Sensitivity and Liquidity” in Item 7 of this Form 10-K for
further discussion related to Peoples’ interest rate risk.
·
|
Peoples’
exposure to credit risk could adversely affect Peoples’ earnings and
financial condition.
|
There are
certain risks inherent in making loans. These risks include interest
rate changes over the time period in which loans may be repaid, risks resulting
from changes in the economy, risks inherent in dealing with borrowers and, in
the case of loans secured by collateral, risks resulting from uncertainties
about the future value of the collateral.
Commercial
and commercial real estate loans comprise a significant portion of Peoples’ loan
portfolio. Commercial loans generally are viewed as having a higher
credit risk than residential real estate or consumer loans because they usually
involve larger loan balances to a single borrower and are more susceptible to a
risk of default during an economic downturn. Since Peoples’ loan
portfolio contains a significant number of commercial and commercial real estate
loans, the deterioration of one or a few of these loans could cause a
significant increase in nonperforming loans, and ultimately could have a
material adverse effect on Peoples’ earnings and financial
condition.
In
deciding whether to extend credit or enter into other transactions with
customers and counterparties, Peoples may rely on information provided to us by
customers and counterparties, including financial statements and other financial
information. Peoples may also rely on representations of customers
and counterparties as to the accuracy and completeness of that information and,
with respect to financial statements, on reports of independent
auditors. For example, in deciding whether to extend credit to a
business, Peoples may assume that the customer’s audited financial statements
conform with accounting principles generally accepted in the United States (“US
GAAP”) and present fairly, in all material respects, the financial condition,
results of operations and cash flows of the customer. Peoples may
also rely on the audit report covering those financial
statements. Peoples’ financial condition, results of operations and
cash flows could be negatively impacted to the extent that Peoples relies on
financial statements that do not comply with US GAAP or on financial statements
and other financial information that are materially misleading.
·
|
Peoples’
allowance for loan losses may be
insufficient.
|
Peoples
maintains an allowance for loan losses to provide for probable loan losses based
on management’s quarterly analysis of the loan portfolio. The
determination of the allowance for loan losses requires management to make
various assumptions and judgments about the collectibility of Peoples’ loan
portfolio, including the creditworthiness of its borrowers and the value of the
real estate and other assets serving as collateral for the repayment of
loans. Additional information regarding Peoples’ allowance for loan
losses methodology and the sensitivity of the estimates can be found the
discussion of Peoples’ “Critical Accounting Policies” included in Item 7 of this
Form 10-K.
Peoples’
estimation of future loan losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, which may
be beyond Peoples’ control, and these losses may exceed current
estimates. Peoples cannot fully predict the amount or timing of
losses or whether the loan loss allowance will be adequate in the
future.
If
Peoples’ assumptions prove to be incorrect, Peoples’ allowance for loan losses
may not be sufficient to cover losses inherent in its loan portfolio, resulting
in additions which could have a material adverse impact on Peoples’ financial
condition and results of operations. In addition, federal and state
regulators periodically review Peoples’ allowance for loan losses as part of
their examination process and may require management to increase the allowance
or recognize further loan charge-offs based on judgments different than those of
management. Any increase in the provision for loan losses would
decrease Peoples’ pretax and net income.
·
|
Changes in accounting
standards, policies, estimates or procedures may impact Peoples’ reported
financial condition or results of
operations.
|
The
accounting standard setters, including the Financial Accounting Standards Board,
the SEC and other regulatory bodies, periodically change the financial
accounting and reporting standards that govern the preparation of Peoples’
Consolidated Financial Statements. These changes can be difficult to predict and
can materially impact how Peoples records and reports its financial condition
and results of operations. In some cases, Peoples could be required to apply a
new or revised standard retroactively, resulting in the restatement of prior
period financial statements.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make significant estimates that affect the financial statements.
Due to the inherent nature of these estimates, no assurance can be given that
Peoples will not be required to recognize significant, unexpected losses due to
actual results varying materially from management’s
estimates. Additional information regarding Peoples’ critical
accounting policies and the sensitivity of estimates can be found in the section
captioned “Critical Accounting Policies” in Item 7 of this Form
10-K.
·
|
The
financial services industry is very
competitive.
|
Peoples
experiences significant competition in originating loans, principally from other
commercial banks, savings associations and credit unions. Several of
Peoples’ competitors have greater resources, larger branch systems and a wider
array of banking services. This competition could reduce Peoples’ net
income by decreasing the number and size of loans that Peoples originates and
the interest rates it may charge on these loans. Moreover, technology
and other changes are allowing businesses and individuals to utilize alternative
methods to complete financial transactions that historically have involved
banks. For example, consumers can now maintain funds in brokerage
accounts or mutual funds that in the past had been held as bank
deposits. Consumers can also complete transactions such as paying
bills and/or transferring funds directly without the assistance of
banks. The process of eliminating the use of banks to complete
financial transactions could result in the loss of fee income, as well as the
loss of customer deposits and the related income generated from those
deposits. The loss of these revenue streams and the lower cost
deposits as a source of funds could have a material adverse effect on Peoples’
financial condition and results of operations. For a more complete
discussion of Peoples’ competitive environment, see “Competition” in Item 1 of
this Form 10-K. If Peoples is unable to compete effectively, Peoples would
lose market share, which could reduce income generated from deposits, loans and
other products.
·
|
Peoples’
ability to pay dividends is
limited.
|
Peoples
is a separate and distinct legal entity from Peoples’
subsidiaries. Peoples receives nearly all of its revenue from
dividends from Peoples Bank, which are limited by federal banking laws and
regulations. These dividends also serve as the primary source of
funds to pay dividends on Peoples’ common shares. The inability of
Peoples Bank to pay sufficient dividends to Peoples could have a material,
adverse effect on its business. In addition, Peoples’ participation
in the U.S. Treasury’s TARP Capital Purchase Program currently restricts the
ability to increase the dividend payable to holders of common shares above $0.23
per share without prior approval of the U.S. Treasury. Further
discussion of Peoples’ ability to pay dividends can be found under the captions
“Supervision and Regulation – TARP Capital Purchase Program” and
“Supervision and Regulation – Dividend Restrictions” in Item 1 of this Form
10-K and Note 17 of the Notes to the Consolidated Financial
Statements.
·
|
Government
regulation significantly affects Peoples’
business.
|
The
banking industry is heavily regulated under both federal and state
law. Peoples is subject to regulation and supervision by the Federal
Reserve Board, and Peoples Bank is subject to regulation and supervision by the
OCC, and secondarily the FDIC. These regulations are primarily
intended to protect depositors and the federal deposit insurance funds, not
Peoples’ common shareholders. Peoples’ non-bank subsidiaries are also
subject to the supervision of the Federal Reserve Board, in addition to other
regulatory and self-regulatory agencies including the SEC and state securities
and insurance regulators. Regulations affecting banks and financial
services businesses are undergoing continuous change, and management cannot
predict the effect of those changes. Regulations and laws may be
modified at any time, and new legislation may be enacted that affects Peoples
and its subsidiaries. Any modifications or new laws could adversely
affect Peoples’ business. Further information about government
regulation of Peoples’ business can be found under the caption “Supervision and
Regulation” in Item 1 of this Form 10-K.
Legislation
has been proposed on both the federal and the state levels that could
substantially increase the regulation of the financial services
industry. A substantial overhaul of the regulatory system in the
United States is possible within the next few years. Peoples is
unable to predict the likelihood, timing or details of any of these
initiatives. Any such action could affect Peoples in unpredictable
ways and have a material adverse effect on its financial condition and results
of operations.
·
|
Peoples
is subject to several restrictions on compensation paid to Peoples’
executive officers because of its participation in the TARP Capital
Purchase Program.
|
As a
recipient of government funding under the TARP Capital Purchase Program, Peoples
must comply with the executive compensation and corporate governance standards
imposed by the ARRA and the standards established by the Secretary of the
Treasury under the ARRA. The restrictions on executive compensation
under these standards are more fully described in Item 1 of this Form 10-K under
the caption “Supervision and Regulation – TARP Capital Purchase
Program.” These standards could impact Peoples’ ability to hire or
retain key executives or cause Peoples to make material changes to its current
compensation plans and philosophy that could result in higher compensation costs
in future periods.
·
|
Peoples’
business could be adversely affected by material breaches in security of
its systems.
|
Peoples
collects, processes and stores sensitive consumer data by utilizing computer
systems and telecommunications networks operated by both us and third party
service providers. Peoples has security and backup and recovery
systems in place, as well as a business continuity plan, to ensure the computer
systems will not be inoperable, to the extent possible. Peoples also
has implemented security controls to prevent unauthorized access to the computer
systems and requires Peoples’ third party service providers to maintain similar
controls. However, management cannot be certain these measures will
be successful. A security breach of the computer systems and release
of confidential information, such as customer account numbers and related
information, could negatively affect customers’ confidence in Peoples, which may
cause a loss of business, and could result in Peoples’ incurring financial
losses for any fraudulent transactions completed by third parties due to the
security breach.
·
|
Anti-takeover
provisions may delay or prevent an acquisition or change in control by a
third party.
|
Provisions
in the Ohio General Corporation Law and Peoples’ amended articles of
incorporation and code of regulations, including a staggered board and a
supermajority vote requirement for significant corporate changes, could
discourage potential takeover attempts and make attempts by shareholders to
remove Peoples’ Board of Directors and management more
difficult. These provisions may also have the effect of delaying or
preventing a transaction or change in control that might be in the best
interests of Peoples’ shareholders
·
|
Peoples
and its subsidiaries are subject to examinations and challenges by tax
authorities.
|
In the
normal course of business, Peoples and its subsidiaries are routinely subject to
examinations and challenges from federal and state tax authorities regarding
positions taken regarding their respective tax returns. State tax
authorities have become increasingly aggressive in challenging tax positions
taken by financial institutions, especially those positions relating to tax
compliance and calculation of taxes subject to apportionment. Any
challenge or examination by a tax authority may result in adjustments to the
timing or amount of taxable net worth or taxable income or deductions or the
allocation of income among tax jurisdictions.
Management
believes it has taken appropriate positions on all tax returns filed, to be
filed or not filed and does not anticipate any examination would have a material
impact on Peoples’ Consolidated Financial Statements. However, the
outcome of such examinations and ultimate resolution of any resulting
assessments are inherently difficult to predict. Thus, no assurance
can be given that Peoples’ tax liability for any tax year open to examination
will not be different than what is reflected in Peoples’ current and historical
Consolidated Financial Statements. Further information can be found
in the “Critical Accounting Policies – Income Taxes” section of “Management’s
Discussion and Analysis of Results of Operation and Financial Condition”
included in this Form 10-K.
ITEM
1B. UNRESOLVED STAFF
COMMENTS
|
None.
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, Reno,
Nelsonville, Athens (3 offices), The Plains, Middleport, Pomeroy (2 offices),
Gallipolis, Cambridge (2 offices), Byesville, Quaker City, Flushing, Caldwell,
McConnelsville, Baltimore, Carroll, Lancaster (2 offices), Westerville and
Zanesville. In West Virginia, Peoples Bank operates offices in
Huntington (2 offices), Parkersburg (3 offices), Vienna, Point Pleasant (2
offices), New Martinsville (2 offices) and Steelton. In Kentucky,
Peoples Bank’s office locations include Greenup, Summit, Ashland and
Russell. Of these 45 offices, 15 are leased and the rest are owned by
Peoples Bank.
Peoples
Insurance Agency rents office space in various Peoples Bank
offices. In addition, Peoples Insurance Agency leases office
buildings in Marietta, Ohio, and Ashland, Kentucky.
Rent
expense on the leased properties totaled $894,000 in 2009, which excludes
intercompany rent expense. The following are the only properties that
have a lease term expiring on or before June 2011:
|
|
Lease
Expiration Date (a)
|
|
|
|
Westerville
Office
|
515
Executive Campus Drive
Westerville,
Ohio
|
April
2010
|
|
|
|
Lancaster
Wheeling Street Office
|
117
West Wheeling Street
Lancaster,
Ohio
|
June
2010
|
Athens
Union Street Office
|
152
West Union Street
Athens,
Ohio
|
January
2011
|
|
|
|
Lancaster
Fair Avenue Office
|
2211
West Fair Avenue
Lancaster,
Ohio
|
March
2011
|
|
|
|
Marietta
Kroger Office
|
40
Acme Street
Marietta,
Ohio
|
March
2011
|
|
|
|
(a)
Information represents the ending date of the current lease
period. Peoples may have the option to renew the lease beyond
this date under the terms of the lease agreement and intends to renew all
expiring leases unless otherwise disclosed in this Item
2.
|
Additional
information concerning the property and equipment owned or leased by Peoples and
its subsidiaries is incorporated herein by reference from Note 5 of the Notes to
the Consolidated Financial Statements.
ITEM
3. LEGAL
PROCEEDINGS
|
In the
ordinary course of their respective businesses or operations, Peoples or one of
its subsidiaries may be named as a plaintiff, a defendant, or a party to a legal
proceeding or any of their respective properties may be subject to various
pending and threatened legal proceedings and various actual and potential
claims. In view of the inherent difficulty of predicting the outcome of such
matters, Peoples cannot state what the eventual outcome of any such matters will
be; however, based on current knowledge and after consultation with legal
counsel, management believes that these proceedings will not have a material
adverse effect on the consolidated financial position, results of operations or
liquidity of Peoples.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
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 Global Select Market under the symbol
PEBO. At December 31, 2009, Peoples had 1,187 shareholders of
record. The table presented below provides the high and low sales
prices for Peoples’ common shares as reported on The NASDAQ Global Select Market
and the cash dividends per share declared for the indicated
periods.
|
High
Sales
|
|
Low
Sales
|
|
Dividends
Declared
|
2009
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
$
|
13.52
|
|
$
|
8.51
|
|
$
|
0.10
|
Third
Quarter
|
|
18.70
|
|
|
13.05
|
|
|
0.10
|
Second
Quarter
|
|
19.01
|
|
|
12.25
|
|
|
0.23
|
First
Quarter
|
|
19.92
|
|
|
7.25
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
$
|
22.92
|
|
$
|
13.59
|
|
$
|
0.23
|
Third
Quarter
|
|
29.25
|
|
|
17.33
|
|
|
0.23
|
Second
Quarter
|
|
25.75
|
|
|
18.33
|
|
|
0.23
|
First
Quarter
|
|
26.10
|
|
|
20.38
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
Peoples
plans to continue to pay quarterly cash dividends, subject to certain regulatory
restrictions described in Note 17 of the Notes to the Consolidated Financial
Statements, as well as in the sections captioned “Supervision and
Regulation-TARP Capital Purchase Program” and “Supervision and
Regulation-Dividend Restrictions” of Item 1 of this Form 10-K. On
January 28, 2010, Peoples’ Board of Directors determined that, effective
with the first calendar quarter of 2010, the decision as to whether a cash
dividend should be declared in respect of Peoples’ common shares would be made
in the third month of each calendar quarter. Any dividends so
declared would be paid to shareholders in the subsequent
month. Historically, Peoples’ Board of Directors had declared a cash
dividend in respect of Peoples' common shares, when appropriate, in the second
month of each calendar quarter.
Issuer
Purchases of Equity Securities
The
following table details Peoples’ repurchases and purchases by “affiliated
purchasers” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of
1934, as amended, of Peoples’ common shares during the three months ended
December 31, 2009:
|
(a)
Total
Number of Common Shares Purchased
|
|
(b)
Average
Price
Paid
per
Share
|
|
(c)
Total Number of Common Shares
Purchased as Part of Publicly Announced Plans or Programs (1)
|
|
(d)
Maximum
Number of Common Shares that
May Yet Be Purchased Under the Plans or Programs (1)
|
October
1 – 31, 2009
|
2,727
|
(2)
|
$
11.55
|
(2)
|
–
|
|
–
|
November
1 – 30, 2009
|
–
|
|
$
–
|
|
–
|
|
–
|
December
1 – 31, 2009
|
2,806
|
(2)
|
$
9.98
|
(2)
|
–
|
|
–
|
Total
|
5,533
|
|
$
10.75
|
|
–
|
|
–
|
|
(1)
Peoples’ Board of Directors has not authorized any stock repurchase plans
or programs for 2009, due in part to the restrictions
on
stock repurchases imposed by the terms of the TARP Capital
Investment.
|
|
(2) Information reflects solely common shares purchased in
open market transactions by Peoples Bank under the Rabbi Trust
Agreement
establishing a Rabbi trust holding assets to provide funds for the payment
of the benefits under the Peoples Bancorp
Inc. Second
Amended and Restated Deferred Compensation Plan for Directors of Peoples
Bancorp Inc. and Subsidiaries.
|
The following Performance Graph and related information shall not be
deemed “soliciting material” or to be “filed” with the Securities and Exchange
Commission, nor shall such information be deemed to be incorporated by reference
into any future filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, each as amended, except to the extent that Peoples
specifically incorporates it by reference into such filing.
The
following line graph compares the five-year cumulative total shareholder return
of Peoples’ common shares, based on an initial investment of $100 on December
31, 2004, and assuming reinvestment of dividends, against that of an index
comprised of all domestic common shares traded on The NASDAQ Stock Market
(“NASDAQ Stocks (U.S. Companies)”), and an index comprised of all depository
institutions (SIC Code #602) and depository institution holding companies (SIC
Code #671) that are traded on The NASDAQ Stock Market (“NASDAQ Bank
Stocks”).
|
COMPARISON
OF FIVE-YEAR TOTAL RETURN AMONG
|
|
PEOPLES
BANCORP INC., NASDAQ STOCKS (U.S.
COMPANIES),
|
|
At
December 31,
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
Peoples
Bancorp Inc.
|
$100.00
|
|
$107.00
|
|
$114.53
|
|
$ 99.26
|
|
$ 79.69
|
|
$ 42.31
|
NASDAQ
Stocks (U.S. Companies)
|
$100.00
|
|
$102.14
|
|
$112.19
|
|
$121.68
|
|
$ 58.64
|
|
$ 84.28
|
NASDAQ
Bank Stocks
|
$100.00
|
|
$ 97.69
|
|
$109.64
|
|
$ 86.90
|
|
$ 63.36
|
|
$ 53.09
|
ITEM 6. SELECTED
FINANCIAL DATA
The
information below has been derived from Peoples’ Consolidated Financial
Statements.
|
At
or For the Year Ended December 31,
|
(Dollars in thousands, except
per share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
Operating
Data
|
|
|
|
|
|
Total
interest income
|
$102,105
|
$106,227
|
$113,419
|
$108,794
|
$95,775
|
Total
interest expense
|
40,262
|
47,748
|
59,498
|
55,577
|
43,469
|
Net
interest income
|
61,843
|
58,479
|
53,921
|
53,217
|
52,306
|
Provision
for loan losses
|
25,721
|
27,640
|
3,959
|
3,622
|
2,028
|
Net
impairment loss on investment securities
|
(7,707)
|
(4,260)
|
(6,170)
|
–
|
–
|
Net
gain on securities and asset transactions
|
1,343
|
2,424
|
184
|
746
|
697
|
Total
non-interest income
|
32,050
|
32,097
|
31,350
|
30,379
|
28,470
|
FDIC
insurance expense
|
3,442
|
361
|
146
|
143
|
147
|
Other
non-interest expense
|
55,240
|
53,124
|
51,306
|
51,154
|
51,195
|
Preferred
dividends (1)
|
1,876
|
–
|
–
|
–
|
–
|
Net
income available to common shareholders
|
$2,314
|
$7,455
|
$18,314
|
$21,558
|
$20,499
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
Total
assets
|
$2,001,827
|
$2,002,338
|
$1,885,553
|
$1,875,255
|
$1,855,277
|
Investment
securities
|
751,866
|
708,753
|
565,463
|
548,733
|
589,313
|
Gross
loans
|
1,052,058
|
1,104,032
|
1,120,941
|
1,132,394
|
1,071,876
|
Allowance
for loan losses
|
27,257
|
22,931
|
15,718
|
14,509
|
14,720
|
Total
intangible assets
|
65,599
|
66,406
|
68,029
|
68,852
|
69,280
|
Non-interest-bearing
deposits
|
198,000
|
180,040
|
175,057
|
170,921
|
162,729
|
Retail
interest-bearing deposits
|
1,152,503
|
1,142,212
|
951,731
|
933,480
|
884,771
|
Brokered
deposits
|
45,383
|
44,116
|
59,589
|
129,128
|
41,786
|
Short-term
borrowings
|
76,921
|
98,852
|
222,541
|
194,883
|
173,696
|
Long-term
borrowings
|
246,113
|
308,297
|
231,979
|
200,793
|
362,466
|
Junior
subordinated notes held by subsidiary trusts
|
22,530
|
22,495
|
22,460
|
29,412
|
29,350
|
Preferred
stockholders' equity (1)
|
38,543
|
–
|
–
|
–
|
–
|
Common
stockholders' equity
|
205,425
|
186,626
|
202,836
|
197,169
|
183,077
|
Tangible
assets (2)
|
1,936,228
|
1,935,932
|
1,817,524
|
1,806,403
|
1,785,997
|
Tangible
common equity (2)
|
$139,826
|
$120,220
|
$134,807
|
$128,317
|
$113,797
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data
|
|
|
|
|
|
Earnings
per common share – Basic
|
$0.22
|
$0.72
|
$1.75
|
$2.03
|
$1.96
|
Earnings
per common share – Diluted
|
0.22
|
0.72
|
1.74
|
2.01
|
1.94
|
Cash
dividends paid on common shares
|
0.66
|
0.91
|
0.88
|
0.83
|
0.78
|
Book
value at end of period
|
19.80
|
18.06
|
19.70
|
18.51
|
17.40
|
Tangible
book value at end of period (2)
|
$13.48
|
$11.63
|
$13.09
|
$12.05
|
$10.82
|
Weighted-average
common shares outstanding - Basic
|
10,363,975
|
10,315,263
|
10,462,933
|
10,606,570
|
10,444,854
|
Weighted-average
common shares outstanding - Diluted
|
10,374,792
|
10,348,579
|
10,529,634
|
10,723,933
|
10,581,019
|
Common
shares outstanding at end of period
|
10,374,637
|
10,333,884
|
10,296,748
|
10,651,985
|
10,518,980
|
|
At
or For the Year Ended December 31,
|
|
2009
|
2008
|
2007
|
2006
|
2005
|
Significant
Ratios
|
|
|
|
|
|
Return
on average assets
|
0.21%
|
0.39%
|
0.98%
|
1.15%
|
1.12%
|
Return
on average common stockholders’ equity
|
1.17
|
3.67
|
9.21
|
11.33
|
11.52
|
Net
interest margin
|
3.48
|
3.51
|
3.32
|
3.29
|
3.32
|
Efficiency
ratio
|
60.14
|
56.30
|
57.07
|
57.51
|
59.05
|
Dividend
payout ratio
|
298.23
|
127.03
|
50.38
|
41.09
|
40.01
|
Average
stockholders’ equity to average assets
|
11.50
|
10.62
|
10.62
|
10.18
|
9.73
|
Average
loans to average deposits
|
77.97%
|
88.10%
|
93.52%
|
94.80%
|
94.92%
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality
|
|
|
|
|
|
Allowance
for loan losses to total loans
|
2.59%
|
2.08%
|
1.40%
|
1.28%
|
1.37%
|
Allowance
for loan losses to nonperforming loans
|
79.3
|
55.5
|
168.0
|
145.0
|
225.2
|
Nonperforming
loans to total loans
|
3.27
|
3.74
|
0.83
|
0.88
|
0.61
|
Nonperforming
assets to total assets
|
2.03
|
2.09
|
0.51
|
0.53
|
0.37
|
Nonperforming
assets to total
|
|
|
|
|
|
loans
and other real estate owned
|
3.85
|
3.79
|
0.87
|
0.88
|
0.64
|
Net
charge-offs to average loans
|
1.96
|
1.83
|
0.25
|
0.35
|
0.21
|
Provision
for loan losses to average loans
|
2.35%
|
2.48%
|
0.35%
|
0.33%
|
0.19%
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Information
|
|
|
|
|
|
Tier
1 capital ratio
|
15.49%
|
11.88%
|
11.91%
|
11.98%
|
11.60%
|
Tier
1 common ratio
|
10.58
|
10.17
|
10.18
|
9.80
|
9.26
|
Total
risk-based capital ratio
|
16.80
|
13.19
|
13.23
|
13.17
|
12.90
|
Leverage
ratio
|
10.06
|
8.18
|
8.48
|
8.90
|
8.10
|
Tangible
common equity to tangible assets (2)
|
7.22%
|
6.21%
|
7.42%
|
7.10%
|
6.37%
|
(1)
|
Amounts
relate to preferred shares issued and sold by Peoples in connection with
its participation in the TARP Capital Purchase
Program. Additional information regarding the preferred shares
can be found in Note 11 of the Notes to the Consolidated Financial
Statements.
|
(2)
|
These
amounts represent non-GAAP measures since they exclude the balance sheet
impact of intangible assets acquired through acquisitions on both total
stockholders’ equity and total assets. Additional information
regarding the calculation of these measures can be found later in the
Management’s Discussion and Analysis section under the caption
“Capital/Stockholders’ Equity”.
|
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
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
“anticipate”, “estimates”, “may”, “feels”, “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)
|
continued
deterioration in the credit quality of Peoples’ loan portfolio could occur
due to a number of factors, such as adverse changes in economic conditions
that impair the ability of borrowers to repay their loans, the underlying
value of the collateral could prove less valuable than otherwise assumed
and assumed cash flows may be worse than expected, which may adversely
impact the provision for loan
losses;
|
(2)
|
competitive
pressures among financial institutions or from non-financial institutions,
which may increase significantly;
|
(3)
|
changes
in the interest rate environment, which may adversely impact interest
margins;
|
(4)
|
changes
in prepayment speeds, loan originations, sale volumes and charge-offs,
which may be less favorable than expected and adversely impact the amount
of interest income generated;
|
(5)
|
general
economic conditions and weakening in the real estate market, either
nationally or in the states in which Peoples and its subsidiaries do
business, which may be less favorable than
expected;
|
(6)
|
political
developments, wars or other hostilities, which may disrupt or increase
volatility in securities markets or other economic
conditions;
|
(7)
|
legislative
or regulatory changes or actions, which may adversely affect the business
of Peoples and its subsidiaries;
|
(8)
|
changes
in accounting standards, policies, estimates or procedures may adversely
affect Peoples’ reported financial condition or results of
operations;
|
(9)
|
adverse
changes in the conditions and trends in the financial markets, which may
adversely affect the fair value of securities within Peoples’ investment
portfolio;
|
(10)
|
a
delayed or incomplete resolution of regulatory issues that could
arise;
|
(11)
|
Peoples’
ability to receive dividends from its
subsidiaries;
|
(12)
|
Peoples’
ability to maintain required capital levels and adequate sources of
funding and liquidity;
|
(13)
|
the
impact of larger or similar financial institutions encountering problems,
which may adversely affect the banking industry and/or
Peoples;
|
(14)
|
the
impact of reputational risk created by these developments on such matters
as business generation and retention, funding and
liquidity;
|
(15)
|
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
|
(16)
|
other
risk factors relating to the banking industry or Peoples as detailed from
time to time in Peoples’ reports filed with the Securities and Exchange
Commission (“SEC”), including those risk factors included in the
disclosure under the heading “ITEM 1A. RISK FACTORS” of Part I of this
Form 10-K.
|
All
forward-looking statements speak only as of the filing 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 update
these forward-looking statements to reflect events or circumstances after the
filing date of this Form 10-K or to reflect the occurrence of unanticipated
events except as may be required by applicable legal
requirements. Copies of documents filed with the SEC are available
free of charge at the SEC’s website at http://www.sec.gov and/or from Peoples
Bancorp’s website.
The
following discussion and analysis of Peoples’ Consolidated Financial Statements
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.
Summary
of Recent Transactions and Events
The
following is a summary of recent transactions or events that have impacted or
are expected to impact Peoples’ results of operations or financial
condition:
·
|
Peoples
recognized other-than-temporary impairment losses on certain investment
securities, totaling $7.7 million, $4.3 million and $6.2 million in 2009,
2008 and 2007, respectively. These impairment losses related to
Peoples’ investments in collateralized debt obligation (“CDO”) securities,
individual bank-issued trust preferred securities and preferred stocks
issued by the Federal National Mortgage Association (“Fannie Mae”) and the
Federal Home Loan Mortgage Corporation (“Freddie
Mac”).
|
·
|
During
2009, the Board of Directors of the Federal Deposit Insurance Corporation
(“FDIC”) took steps to rebuild the Deposit Insurance Fund, which has been
reduced substantially by the higher rate of bank failures in 2008 and 2009
compared to recent years. These actions affected all
FDIC-insured depository institutions and included increasing base
assessment rates beginning April 1, 2009, collecting a one-time special
assessment on September 30, 2009, and requiring the prepayment of
assessments for fourth quarter 2009 and full years 2010 through 2012 on
December 29, 2009. As a result of the FDIC’s actions, Peoples
recorded FDIC insurance expense of $3.4 million in 2009, of which $930,000
related to the special assessment, versus $361,000 and $146,000 in 2008
and 2007, respectively. Additionally, Peoples prepaid $9.0
million of FDIC assessments on December 29, 2009, which was recorded as a
prepaid expense included in “Other Assets” on the Consolidated Balance
Sheets. This prepayment did not have a material adverse effect
on Peoples’ liquidity, financial condition or results of
operations.
|
·
|
Peoples’
Board of Directors declared quarterly cash dividends of $0.10 per common
share for both the third and fourth quarters of 2009. These
dividends represented a reduction from the $0.23 per common share paid in
prior quarters in 2009. Management believes the lower dividend
rate balances the need for Peoples to provide a return on shareholder
investment and to maintain a dividend payout consistent with recent
earnings levels and long-term capital
needs.
|
·
|
During
the second quarter of 2009, Peoples Bank opened a new full-service office
in Zanesville, Ohio and combined operations in Nelsonville, Ohio into a
single facility. Peoples Bank also closed its Rutland, Ohio and
Lower Salem, Ohio banking offices and consolidated those offices into
existing nearby offices effective June 30, 2009. These actions
were consistent with management’s ongoing strategic focus of improving
operating efficiencies by directing resources to areas with greater
business development potential.
|
·
|
As
described in “ITEM 1. BUSINESS-Recent Corporate Developments”, on January
30, 2009, Peoples received $39 million of new equity capital from the U.S.
Treasury’s TARP Capital Purchase Program. The investment was in
the form of newly-issued non-voting cumulative perpetual preferred shares
and a related 10-year warrant sold by Peoples to the U.S. Treasury (the
“TARP Capital Investment”).
|
·
|
Between
August 2007 and December 2008, the Federal Reserve’s Open Market Committee
reduced the target Federal Funds rate 500 basis points and the Discount
Rate 575 basis points, which caused a corresponding downward shift in
short-term interest rates. During this period, longer-term
rates did not decrease to the same extent as short-term rates, resulting
in a steepening of the yield curve. In 2009, the Federal
Reserve’s Open Market Committee allowed the target Federal Funds Rate and
Discount Rate to remain at their historically low levels of 0% to 0.25%
and 0.50%, respectively, while the slope of the yield curve steepened
slightly. These interest rate conditions have provided Peoples
with opportunities to improve net interest income and margin by taking
advantage of lower-cost funding available in the market place and reducing
certain deposit costs.
|
·
|
Since
early 2008, Peoples’ loan quality has been negatively impacted by
worsening conditions within the commercial real estate market and economy
as a whole, which has caused declines in commercial real estate values and
deterioration in the financial condition of various commercial
borrowers. These conditions led to Peoples downgrading the loan
quality ratings on various commercial real estate loans through its normal
loan review process. In addition, several impaired loans have
become under-collateralized due to reductions in the estimated net
realizable fair value of the underlying collateral. As a
result, Peoples’ provision for loan losses, net charge-offs and
nonperforming loans in 2008 and 2009 were significantly higher than
historical levels.
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During
the fourth quarter of 2008, Peoples Bank sold its merchant credit card
payment processing services to First Data Merchant Services Corporation
(“First Data”). Peoples Bank will continue to serve the credit
card processing needs of its commercial customers through a referral
program with First Data. As a result of this transaction,
Peoples recognized a pre-tax gain of $500,000 in the fourth quarter of
2008, which was not material to Peoples’ Consolidated Financial
Statements.
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At
the close of business on October 17, 2008, Peoples Bank completed the sale
of its Grayson, Kentucky banking office to First National Bank of
Grayson. This sale was consistent with Peoples’ strategic plan
to optimize its branch network for better growth
opportunities. Under the terms of the agreement, Peoples
received $475,000 for the Grayson office’s $13.4 million of deposits and
$220,000 of fixed assets and sold $2.0 million of loans at book value,
resulting in a fourth quarter 2008 pre-tax gain of
$255,000. This sale was not material to Peoples’ Consolidated
Financial Statements.
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During
2008, Peoples systematically sold the preferred stocks issued by Fannie
Mae and Freddie Mac held in Peoples’ investment portfolio, due to the
uncertainty surrounding these entities. These securities had a
total recorded value of $12.1 million at December 31, 2007. In
July 2008, Peoples sold its remaining Fannie Mae preferred stocks, which
completely eliminated all equity holdings in Fannie Mae and Freddie
Mac. As a result of the sales, Peoples recognized cumulative
pre-tax losses of $1.2 million in
2008.
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Also
during 2008 and continuing in 2009, Peoples sold selected lower yielding,
longer-term investment securities, primarily obligations of U.S.
government-sponsored enterprises, U.S. agency mortgage-backed securities
and tax-exempt municipal bonds, as well as several small-lot
mortgage-backed securities. The proceeds from these sales were
reinvested into similar securities with less price volatility
risk. These actions were intended to reposition the investment
portfolio to reduce interest rate exposures and resulted in Peoples
recognizing net pre-tax gains of $1.4 million in 2009 and $1.7 million in
2008.
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As
described in “ITEM 3. LEGAL PROCEEDINGS” of Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2007, in December 2007,
Peoples resolved certain issues concerning its Ohio corporation franchise
tax liability and associated calculations for the fiscal years ended
December 31, 2001 through 2007 (the “Ohio Franchise Tax
Settlement”). As a result, Peoples’ franchise tax expense was
reduced by $782,000 during the fourth quarter of
2007.
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The
impact of these transactions or events, 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 generally accepted
accounting principles in the United States of America (“US GAAP”) and to general
practices within the financial services industry. A summary of
significant accounting policies is contained in Note 1 of the Notes to the
Consolidated Financial Statements. While all of these policies are
important to understanding the Consolidated Financial Statements, certain
accounting policies require management to exercise judgment and make estimates
or assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates and assumptions are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates or assumptions.
Management
views critical accounting policies to be those that are highly dependent on
subjective or complex judgments, estimates and assumptions, and where changes in
those estimates and assumptions could have a significant impact on the financial
statements. Management has identified the accounting policies
described below as those that, due to the judgments, estimates and assumptions
inherent in the policies, are critical to an understanding of Peoples’
Consolidated Financial Statements and management’s discussion and analysis of
financial condition and results of operation.
Income
Recognition
Interest
income on loans and investment securities is recognized by methods that result
in level rates of return on principal amounts outstanding, including yield
adjustments resulting from the amortization of loan costs and premiums on
investment securities and accretion of loan fees and discounts on investment
securities. Since mortgage-backed securities comprise a sizable
portion of Peoples’ investment portfolio, a significant increase in principal
payments on those securities could impact interest income due to the
corresponding acceleration of premium amortization or discount
accretion.
Peoples
discontinues the accrual of interest on a loan when conditions cause management
to believe collection of all or any portion of the loan’s contractual interest
is doubtful. Such conditions may include the borrower being 90 days
past due on any contractual payments or current information regarding the
borrower’s financial condition and repayment ability. Any accrued
interest deemed uncollectible that was recognized in income in the current year
is reversed, which would reduce Peoples’ net interest
income. Interest received on nonaccrual loans is included in income
only if principal recovery is reasonably assured.
Allowance
for Loan Losses
In
general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples
maintains an allowance for loan losses to absorb probable losses based on a
quarterly analysis of the loan portfolio and estimation of the losses that are
probable of occurrence within the loan portfolio. This formal
analysis determines an appropriate level and allocation of the allowance for
loan losses among loan types and resulting provision for loan losses by
considering factors affecting losses, including specific losses, levels and
trends in impaired and nonperforming loans, historical loan loss experience,
current national and local economic conditions, volume, growth and composition
of the portfolio, regulatory guidance and other relevant
factors. Management continually monitors the loan portfolio through
Peoples Bank’s 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 probable 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 consist primarily of loans placed on nonaccrual status, restructured or
internally classified as substandard or doubtful. While allocations
are made to specific loans and pools of loans, the allowance is available for
all loan losses.
Individual
loan reviews are based upon specific quantitative and qualitative criteria,
including the size of the loan, the loan cash flow characteristics, loan quality
ratings, value of collateral, repayment ability of borrowers, and historical
experience factors. The historical experience factors utilized for
individual loan reviews are based upon past loss experience, known trends in
losses and delinquencies, the growth of loans in particular markets and
industries, and known changes in economic conditions in particular lending
markets.
Allowances
for homogeneous loans (such as residential mortgage loans and consumer loans)
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. As part of the process of
identifying the pools of homogenous loans, management takes into account any
concentrations of risk within any portfolio segment, including any significant
industrial concentrations. Consistent with the evaluation of
allowances for homogenous loans, the allowance relating to the Overdraft
Privilege program is based upon management’s monthly analysis of accounts in the
program. This analysis considers factors that could affect losses on
existing accounts, including historical loss experience and length of
overdraft.
There can
be no assurance the allowance for loan losses will be adequate to cover all
losses, but management believes the allowance for loan losses at December 31,
2009, was 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
Presently,
Peoples classifies the majority of its investment portfolio, which accounted for
38% of total assets at December 31, 2009, as
available-for-sale. Correspondingly, Peoples carries these securities
at fair value on its Consolidated Balance Sheets, with any unrealized gain or
loss recorded in stockholders’ equity as a component of comprehensive
income. As a result, both the investment and equity sections of
Peoples’ Consolidated Balance Sheet are 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.
While
temporary changes in the fair value of available-for-sale securities are not
recognized in earnings, Peoples is required to evaluate all investment
securities with an unrealized loss on a quarterly basis to identify potential
other-than-temporary impairment (“OTTI”) losses. This analysis
requires management to consider various factors that can involve judgment and
estimation, including duration and magnitude of the decline in value, the
financial condition of the issuer or pool of issuers and structure of the
security.
In early
2009, the Financial Accounting Standards Board (“FASB”) issued an accounting
pronouncement that modified the general standards of accounting for OTTI
losses. Prior to this pronouncement, if Peoples determined a loss to
be “other-than-temporary”, then an impairment loss was recognized in earnings
equal to the entire difference between the investment’s amortized cost basis and
its fair value at the balance sheet date. Under the new standards
adopted by Peoples in the second quarter of 2009, an OTTI loss is recognized in
earnings only when (1) Peoples intends to sell the debt security; (2) it is more
likely than not that Peoples will be required to sell the security before
recovery of its amortized cost basis or (3) Peoples does not expect to recover
the entire amortized cost basis of the security. In situations where
Peoples intends to sell or when it is more likely than not that Peoples will be
required to sell the security, the entire OTTI loss must be recognized in
earnings. In all other situations, only the portion of the OTTI
losses representing the credit loss must be recognized in earnings, with the
remaining portion being recognized in stockholders’ equity as a component of
other comprehensive income, net of deferred taxes.
Additional
information regarding impairment losses recognized can be found later in this
discussion under the caption “Net Impairment Losses”.
Goodwill
and Other Intangible Assets
In prior
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. The excess cost
over the net assets acquired represents goodwill, which is not subject to
periodic amortization.
Customer
relationship intangibles are required to be amortized over their estimated
useful lives. The method of amortization reflects the pattern in
which the economic benefits of the intangible assets are estimated to be
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. Additionally,
management is required to evaluate customer relationship intangibles for
impairment when indicators of impairment exist, such as customer attrition
greater than originally estimated. Should management determine the
estimated life of any intangible asset is shorter than originally estimated or
that impairment exists, Peoples would adjust the amortization of the asset or
record an impairment charge in earnings.
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.
Goodwill
is not amortized but is tested for impairment when indicators of impairment
exist, or at least annually. Potential goodwill impairment exists
when the fair value of the reporting unit (as defined by US GAAP) is less than
its carrying value. An impairment loss is recognized in earnings only
when the carrying amount of goodwill is less than its implied fair
value. Peoples performs its required annual impairment test as of
June 30 each year. Management concluded no impairment existed at June
30, 2009, since the fair value of Peoples’ single reporting unit exceeded its
carrying value.
Peoples
is required to perform interim tests for goodwill impairment in subsequent
quarters should events occur or circumstances change that indicate potential
goodwill impairment exists, such as adverse changes to Peoples’ business or a
significant decline in Peoples’ market capitalization.
In the
second half of 2009, Peoples incurred OTTI losses and recorded higher provisions
for loan losses than the first half of 2009. Additionally, Peoples’
market capitalization at year-end was significantly lower than its book
value. Management believed these conditions were indicators of
potential goodwill impairment and performed an interim impairment test as of
December 31, 2009. Based on its analysis, management concluded that
the estimated fair value of Peoples' reporting unit was less than its carrying
amount. As a result, management calculated the implied fair value of
goodwill to determine the amount of any actual impairment and concluded no
goodwill impairment existed at December 31, 2009, since the implied fair value
of Peoples’ goodwill exceeded its recorded value by approximately $50.6 million,
or 81%.
The
significant assumptions made by management in estimating the reporting unit’s
fair value are (1) level of future cash flows over the next four years, (2)
long-term growth rate of cash flows after year four and (3) the discount
rate. Management’s analysis at year-end 2009 indicated a 25%
sustained decline in future cash flows, a 380 basis point decrease in long-term
growth rate or a 280 basis point increase in the discount rate would cause the
implied fair value of goodwill to equal its carrying value.
During
the first quarter of 2010, Peoples’ market capitalization has experienced a
steady increase, which corroborates management’s estimate of fair value and its
conclusion that goodwill is not impaired. However, conditions in future periods
could cause management to re-evaluate Peoples’ recorded goodwill and conclude
impairment exists. Given the current carrying amount of goodwill on
the Consolidated Balance Sheets of $62.5 million, any resulting impairment loss
recognized could have a material, adverse impact on Peoples’ financial condition
and results of operations.
Peoples
records mortgage servicing rights (“MSRs”) in connection with its mortgage
banking activities, which are intangible assets representing the right to
service loans sold to third party investors. These intangible assets
are recorded initially at fair value and subsequently amortized over the
estimated life of the loans sold. MSRs are stratified based on their
predominant risk characteristics and assessed for impairment at the strata level
at each reporting date based on their fair value. At December 31,
2009, management concluded no portion of the recorded MSRs was impaired since
the fair value exceeded the carrying value. However, future events,
such as a significant increase in prepayment speeds, could result in a fair
value that is less than the carrying amount, which would require the recognition
of an impairment loss in earnings.
Income
Taxes
Income
taxes are provided based on the liability method of accounting, which includes
the recognition of deferred tax assets and liabilities for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. In general, Peoples records
deferred tax assets when the event giving rise to the tax benefit has been
recognized in the Consolidated Financial Statements.
A
valuation allowance is recognized to reduce any deferred tax assets that, based
upon available information, it is more-likely-than-not all, or any portion, of
the deferred tax asset will not be realized. Assessing the need for,
and amount of, a valuation allowance for deferred tax assets requires
significant judgment and analysis of evidence regarding realization of the
deferred tax assets. In most cases, the realization of deferred tax
assets is dependent upon Peoples generating a sufficient level of taxable income
in future periods, which can be difficult to predict. Peoples’
largest deferred tax assets involve differences related to Peoples’ allowance
for loan losses and realization of income tax credits received from Peoples’
investments in low-income housing projects and funds. Given the
nature of Peoples’ deferred tax assets, management determined no valuation
allowances were needed at either December 31, 2009 or 2008.
The
calculation of tax liabilities is complex and requires the use of estimates and
judgment since it involves the application of complex tax laws that are subject
to different interpretations by Peoples and the various tax
authorities. These interpretations are subject to challenge by the
tax authorities upon audit or to reinterpretation based on management’s ongoing
assessment of facts and evolving case law.
From
time-to-time and in the ordinary course of business, Peoples is involved in
inquiries and reviews by tax authorities that normally require management to
provide supplemental information to support certain tax positions taken by
Peoples in its tax returns. Uncertain tax positions are initially
recognized in the financial statements when it is more likely than not the
position will be sustained upon examination by the tax
authorities. Such tax positions are initially and subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of
being realized upon ultimate settlement with the tax authority assuming full
knowledge of the position and all relevant facts. Management believes
it has taken appropriate positions on its tax returns, although the ultimate
outcome of any tax review cannot be predicted with certainty. Still,
no assurance can be given that the final outcome of these matters will not be
different than what is reflected in the current and historical financial
statements.
Fair
Value Measurements
As a
financial services company, the carrying value of certain financial assets and
liabilities is impacted by the application of fair value measurements, either
directly or indirectly. In certain cases, an asset or liability is
measured and reported at fair value on a recurring basis, such as
available-for-sale investment securities. In other cases, management
must rely on estimates or judgments to determine if an asset or liability not
measured at fair value warrants an impairment write-down or whether a valuation
reserve should be established. Given the inherent volatility, the use
of fair value measurements may have a significant impact on the carrying value
of assets or liabilities, or result in material changes to the financial
statements, from period to period.
Detailed
information regarding fair value measurements can be found in Note 2 of the
Notes to the Consolidated Financial Statements. The following is a
summary of those assets and liabilities that may be affected by fair value
measurements, as well as a brief description of the current accounting practices
and valuation methodologies employed by Peoples:
Available-for-Sale
Investment Securities
Investment
securities classified as available-for-sale are measured and reported at fair
value on a recurring basis. For most securities, the fair value is
based upon quoted market prices or determined by pricing models that consider
observable market data. However, the fair value of certain investment
securities, such as collateralized debt obligations, must be based upon
unobservable market data, such as non-binding broker quotes and discounted cash
flow analysis or similar models, due to the absence of an active market for
these securities. As a result, management’s determination of fair
value for these securities is highly dependent on subjective or complex
judgments, estimates and assumptions, which could change materially between
periods. Management occasionally uses information from independent
third-party consultants in its determination of the fair value of more complex
investment securities, such as the collateralized debt
obligations. At December 31, 2009, nearly all of Peoples’
available-for-sale investment securities were measured using observable market
data, with less than 1% measured using non-observable data.
Impaired
loans
For loans
considered impaired, the amount of impairment loss recognized is determined
based on a discounted cash flow analysis or the fair value of the underlying
collateral if repayment is expected solely from the sale of the
collateral. Management typically relies on the fair value of the
underlying collateral due to the significant uncertainty surrounding the
borrower’s ability to make future payments. The vast majority of the
collateral securing impaired loans is real estate, although it may also include
accounts receivable and equipment, inventory or similar personal
property. The fair value of the collateral used by management
represents the estimated proceeds to be received from the sale of the
collateral, less costs incurred during the sale, based upon observable market
data and market value data provided by independent, licensed or certified
appraisers.
Goodwill
The
process of evaluating goodwill for impairment involves highly subjective or
complex judgments, estimates and assumptions regarding the fair value of
Peoples’ reporting unit and, in some cases, goodwill itself. As a
result, changes to these judgments, estimates and assumptions in future periods
could result in materially different results.
Peoples
currently possesses a single reporting unit for goodwill impairment
testing. While quoted market prices exist for Peoples’ common shares
since they are publicly traded, these market prices do not necessarily reflect
the value associated with gaining control of an entity. Thus,
management takes into account all appropriate fair value measurements in
determining the estimated fair value of the reporting unit. These
measurements include valuations of recently acquired institutions based upon
multiples of book value or earnings and discounted cash flow
analysis.
For
Peoples’ December 31, 2009 goodwill impairment test, management estimated the
fair value of Peoples’ reporting unit using both an income approach and market
approach. The discount rate used represented the estimated cost of
Peoples’ common equity based upon observable market data. The income
approach consisted of a discounted cash flow analysis of projected future
earnings. The market approach was based upon multiples of book value
of recently acquired financial institutions, including distressed
institutions. The fair values derived under both approaches were
weighted to arrive at an overall estimated fair value. Management
placed greater weight on the income approach due to the limited number of
acquisitions occurring in 2009 involving healthy or non-distress entities
compared to prior years. Consequently, the estimated fair value of
Peoples’ reporting unit could be materially different in future periods due to
changes in either projected future earnings or the cost of common
equity.
Should
management determine the potential for goodwill impairment exists, the
measurement of any actual impairment loss requires management to calculate the
implied fair value of goodwill by deducting the fair value of all tangible and
separately identifiable intangible net assets (including unrecognized intangible
assets) from the fair value of the reporting unit. The fair value of
net tangible assets is calculated using the methodologies described in Note 2 of
the Notes to the Consolidated Financial Statements. Customer
relationship intangibles are the only separately identifiable intangible assets
included in the calculation of the implied fair value of
goodwill. The amount of these intangibles represents the present
value of future earnings stream attributable to the deposit
relationships.
Mortgage
Servicing Rights
MSRs are
carried at the lower of cost or market value, and, therefore, can be subject to
fair value measurements on a nonrecurring basis. MSRs do not trade in
an active market with readily observable prices. Thus, management
determines fair value based upon a valuation model that calculates the present
value of estimated future net servicing income provided by an independent third
party consultant. This valuation model is affected by various input
factors, such as servicing costs, expected prepayment speeds and discount rates,
which are subject to change between reporting periods. As a result,
significant changes to these factors could result in a material change to the
calculated fair value of MSRs.
Pension
and Other Postretirement Benefit Plans
Peoples
is required to recognize the funded status of defined benefit pension and other
postretirement benefit plans on its Consolidated Balance Sheets as an asset for
a plan’s overfunded status or a liability for a plan’s underfunded status, with
fluctuations in the funded status recognized through comprehensive income in the
year in which the change occurs. The funded status is based upon the
fair value of plan assets compared to the projected benefit
obligation. The determination of the projected benefit obligation and
periodic benefit costs involves significant judgment and estimation of
employees’ length of service and future compensation levels, discount rate and
expected rate of return on plan assets. While these variables are
equally important, changes to the discount rate can have a greater impact on the
projected benefit obligation, and thus the amount of the asset or liability
recognized, as well as the amount of pension plan expense recorded each
period.
EXECUTIVE
SUMMARY
In 2009,
net income available to common shareholders totaled $2.3 million, versus $7.5
million in 2008 and $18.3 million in 2007, representing diluted earnings per
common share of $0.22, $0.72 and $1.74, respectively. The lower
earnings in both 2009 and 2008 were largely the result of higher provisions for
loan losses. Earnings for 2009 also included the impact of preferred
dividends related to the TARP Capital Investment, which totaled $1.9
million. Peoples also recognized OTTI losses in all three years,
which negatively impacted net income available to common
shareholders. Despite these challenges, Peoples generated positive
results in several key areas, including growth and diversification of revenues,
expansion of retail deposits and expense control.
Provision
for loan losses totaled $25.7 million in 2009, compared to $27.6 million in 2008
and $4.0 million in 2007. These provisions reflect the amounts needed
to maintain the adequacy of the allowance for loan losses based on management’s
formal quarterly analysis. The higher provisions for loan losses in
both 2008 and 2009 were largely attributable to declines in commercial real
estate values securing existing impaired loans and the deteriorating financial
condition of borrowers commensurate with recessionary economic
conditions.
Net
interest income grew 6% in 2009 and 8% in 2008, due mostly to greater reductions
in Peoples’ funding costs in comparison to asset yields in response to lower
short-term market rates. Net interest margin compressed slightly in
2009 due to Peoples maintaining a higher volume of short-term assets, consisting
of excess cash reserves held at the Federal Reserve Bank of
Cleveland. In comparison, net interest margin expanded 19 basis
points in 2008, reflecting the impact of the lower short-term market
rates.
In 2009,
non-interest income totaled $32.1 million, unchanged from 2008, as significant
growth in mortgage banking income was offset by declines in other non-interest
revenue categories. Non-interest income increased 2% in 2008 compared
to $31.4 million for 2007, attributable to growth in several areas during
2008. The largest increase in 2008 occurred in electronic banking
income, which increased 10% due to sustained growth in debit card
activity.
Total
non-interest expense was $58.7 million, up $5.2 million
year-over-year. Most of this increase was due to $3.1 million in
additional FDIC insurance expense. Other significant factors included
higher employee medical benefit costs and workout costs for problem
loans. In 2008, non-interest expense increased $2.0 million, largely
the result of normal base salary adjustments, higher employee medical benefit
costs, and the impact of the Ohio Franchise Tax Settlement on 2007 franchise tax
expense.
Total
assets were $2.00 billion at both December 31, 2009 and 2008. Cash
and cash equivalents were $41.8 million at year-end 2009, versus $35.6 million
at December 31, 2008, as Peoples maintained excess cash reserves at the Federal
Reserve Bank due to limited opportunities for attractive long-term asset
investments. Gross portfolio loan balances decreased $52.0 million in
2009, due primarily to charge-offs and normal commercial loan payoffs, coupled
with lower demand for commercial loans due to economic
conditions. During 2009, the combination of elevated charge-off
levels and increases in specific reserves for impaired loans necessitated
building the allowance for loan losses by $4.3 million, to $27.3 million, or
2.59% of total loans, at December 31, 2009. Total investment
securities increased $43.1 million, to $751.9 million at December 31, 2009,
mostly attributable to improved market value of Peoples’ available-for-sale
investment portfolio. Other assets increased $5.4 million since
year-end 2008 as a result of Peoples’ reclassifying a $5.0 million commercial
real estate loan as other real estate owned upon the completion of the
foreclosure process.
Total
liabilities were $1.76 billion at December 31, 2009, down $57.9 million compared
to year-end 2008. Total deposit balances increased $29.5 million in
2009. Non-interest-bearing deposits increased $18.0 million, or 10%,
in 2009, while interest-bearing retail deposits grew $10.3
million. This growth, coupled with funds from the TARP Capital
Investment, enabled Peoples to reduce borrowed funds $84.1 million, or 20%,
during 2009, to $345.6 million at year-end.
Stockholders’
equity increased $57.3 million, or 31% in 2009, compared to $186.6 million at
December 31, 2008. The TARP Capital Investment accounted for most of
this growth, while the fair value of Peoples’ available-for-sale investment
portfolio increased $21.2 million, net of deferred income tax, further
contributing to higher stockholders’ equity. The TARP Capital
Investment also allowed Peoples to strengthen already healthy regulatory capital
ratios, with the Total Risk-Based capital ratio increasing to 16.80% at December
31, 2009, from 13.19% at the prior year-end. Tangible common equity
was 7.22% of tangible assets at year-end 2009, versus 6.21% at December 31,
2008, reflecting the impact of the higher fair value of Peoples’
available-for-sale investment portfolio.
RESULTS
OF OPERATION
Interest
Income and Expense
Peoples
earns interest income on loans and investments and incurs interest expense on
interest-bearing deposits and borrowed funds. Net interest income,
the amount by which interest income exceeds interest expense, remains Peoples’
largest source of revenue. The amount of net interest income earned
by Peoples is affected by various factors, including changes in market interest
rates due to the Federal Reserve Board’s monetary policy, the level and degree
of pricing competition for both loans and deposits in Peoples’ markets and the
amount and composition of Peoples’ earning assets and interest-bearing
liabilities.
Peoples
monitors net interest income performance and manages its balance sheet
composition through regular Asset-Liability Management Committee (“ALCO”)
meetings. The asset/liability management process employed by the ALCO
is intended to minimize the impact of future interest rate changes on Peoples’
net interest income and earnings. However, the frequency and/or
magnitude of changes in market interest rates are difficult to predict, and may
have a greater impact on net interest income than adjustments by
management.
As part
of the analysis of net interest income, management converts tax-exempt income to
the pre-tax equivalent of taxable income using an effective tax rate of
35%. Management believes the resulting fully tax-equivalent (“FTE”)
net interest income allows for a more meaningful comparison of tax-exempt income
and yields to their taxable equivalents. Net interest margin,
calculated by dividing FTE net interest income by average interest-earning
assets, serves as the primary measure used in evaluating the net revenue stream
generated by the mix and pricing of Peoples’ earning assets and interest-bearing
liabilities.
The
following table details Peoples’ average balance sheet for the years ended
December 31:
|
|
|
|
2009
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
2007
|
|
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
|
Average
|
|
Income/
|
|
Yield/
|
(Dollars in
thousands)
|
|
Balance
|
|
Expense
|
|
Rate
|
|
|
Balance
|
|
Expense
|
|
Rate
|
|
|
Balance
|
|
Expense
|
|
Rate
|
Short-Term
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
with other banks
|
|
$ 28,496
|
|
$ 70
|
|
0.25%
|
|
|
$ 2,363
|
|
$ 53
|
|
2.26%
|
|
|
$ 2,435
|
|
$ 115
|
|
4.72%
|
Federal
funds sold
|
|
–
|
|
–
|
|
–
%
|
|
|
508
|
|
12
|
|
2.36%
|
|
|
1,077
|
|
55
|
|
5.11%
|
Total
short-term investments
|
|
28,496
|
|
70
|
|
0.25%
|
|
|
2,871
|
|
65
|
|
2.28%
|
|
|
3,512
|
|
170
|
|
4.84%
|
Investment
Securities (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
660,828
|
|
34,522
|
|
5.22%
|
|
|
549,687
|
|
29,106
|
|
5.30%
|
|
|
503,094
|
|
25,646
|
|
5.10%
|
Nontaxable
(2)
|
|
67,471
|
|
4,325
|
|
6.41%
|
|
|
65,624
|
|
4,289
|
|
6.54%
|
|
|
60,368
|
|
3,949
|
|
6.54%
|
Total
investment securities
|
|
728,299
|
|
38,847
|
|
5.33%
|
|
|
615,311
|
|
33,395
|
|
5.43%
|
|
|
563,462
|
|
29,595
|
|
5.25%
|
Loans
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
725,021
|
|
40,299
|
|
5.56%
|
|
|
744,584
|
|
48,291
|
|
6.49%
|
|
|
750,906
|
|
57,613
|
|
7.67%
|
Real
estate (4)
|
|
273,625
|
|
17,163
|
|
6.27%
|
|
|
283,285
|
|
19,221
|
|
6.79%
|
|
|
292,867
|
|
20,985
|
|
7.17%
|
Consumer
|
|
94,411
|
|
7,331
|
|
7.76%
|
|
|
85,378
|
|
6,861
|
|
8.04%
|
|
|
79,035
|
|
6,552
|
|
8.29%
|
Total
loans
|
|
1,093,057
|
|
64,793
|
|
5.93%
|
|
|
1,113,247
|
|
74,373
|
|
6.69%
|
|
|
1,122,808
|
|
85,150
|
|
7.58%
|
Less:
Allowance for loan losses
|
|
(25,081)
|
|
|
|
|
|
|
(17,428)
|
|
|
|
|
|
|
(14,775)
|
|
|
|
|
Net
loans
|
|
1,067,976
|
|
64,793
|
|
6.07%
|
|
|
1,095,819
|
|
74,373
|
|
6.79%
|
|
|
1,108,033
|
|
85,150
|
|
7.68%
|
Total
earning assets
|
|
1,824,771
|
|
103,710
|
|
5.68%
|
|
|
1,714,001
|
|
107,833
|
|
6.29%
|
|
|
1,675,007
|
|
114,915
|
|
6.86%
|
Intangible
assets
|
|
66,010
|
|
|
|
|
|
|
67,203
|
|
|
|
|
|
|
68,440
|
|
|
|
|
Other
assets
|
|
133,530
|
|
|
|
|
|
|
128,798
|
|
|
|
|
|
|
128,670
|
|
|
|
|
Total
assets
|
|
$
2,024,311
|
|
|
|
|
|
|
$
1,910,002
|
|
|
|
|
|
|
$
1,872,117
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
2007
|
|
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
|
Average
|
|
Income/
|
|
Yield/
|
|
|
Average
|
|
Income/
|
|
Yield/
|
(Dollars in
thousands)
|
|
Balance
|
|
Expense
|
|
Rate
|
|
|
Balance
|
|
Expense
|
|
Rate
|
|
|
Balance
|
|
Expense
|
|
Rate
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$ 126,226
|
|
$ 645
|
|
0.51%
|
|
|
$ 114,651
|
|
$ 583
|
|
0.51%
|
|
|
$ 113,629
|
|
$ 725
|
|
0.64%
|
Interest-bearing
transaction
|
|
207,117
|
|
3,127
|
|
1.51%
|
|
|
199,639
|
|
3,578
|
|
1.79%
|
|
|
179,827
|
|
3,841
|
|
2.14%
|
Money
market
|
|
235,690
|
|
2,735
|
|
1.16%
|
|
|
168,075
|
|
3,482
|
|
2.07%
|
|
|
147,565
|
|
5,647
|
|
3.83%
|
Brokered
time
|
|
41,548
|
|
1,675
|
|
4.03%
|
|
|
39,151
|
|
1,843
|
|
4.71%
|
|
|
65,461
|
|
3,364
|
|
5.14%
|
Retail
time
|
|
595,655
|
|
17,941
|
|
3.01%
|
|
|
561,143
|
|
21,824
|
|
3.89%
|
|
|
521,506
|
|
23,398
|
|
4.49%
|
Total
interest-bearing deposits
|
|
1,206,236
|
|
26,123
|
|
2.17%
|
|
|
1,082,659
|
|
31,310
|
|
2.89%
|
|
|
1,027,988
|
|
36,975
|
|
3.60%
|
Borrowed
Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
6,867
|
|
15
|
|
0.19%
|
|
|
102,146
|
|
2,557
|
|
2.46%
|
|
|
197,915
|
|
10,065
|
|
5.09%
|
Retail
repurchase agreements
|
|
53,056
|
|
468
|
|
0.87%
|
|
|
40,524
|
|
826
|
|
2.00%
|
|
|
34,802
|
|
1,528
|
|
4.39%
|
Wholesale
repurchase agreements
|
|
–
|
|
–
|
|
–
%
|
|
|
–
|
|
–
|
|
–
%
|
|
|
4,425
|
|
242
|
|
5.47%
|
Total
short-term borrowings
|
|
59,923
|
|
483
|
|
0.81%
|
|
|
142,670
|
|
3,383
|
|
2.37%
|
|
|
237,142
|
|
11,835
|
|
4.93%
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
136,272
|
|
5,354
|
|
3.93%
|
|
|
116,176
|
|
4,856
|
|
4.18%
|
|
|
71,153
|
|
3,256
|
|
4.58%
|
Wholesale
repurchase agreements
|
|
153,795
|
|
6,323
|
|
4.05%
|
|
|
148,251
|
|
6,223
|
|
4.13%
|
|
|
124,191
|
|
5,257
|
|
4.23%
|
Other
borrowings
|
|
22,513
|
|
1,979
|
|
8.67%
|
|
|
22,478
|
|
1,976
|
|
8.65%
|
|
|
24,571
|
|
2,175
|
|
8.73%
|
Total
long-term borrowings
|
|
312,580
|
|
13,656
|
|
4.37%
|
|
|
286,905
|
|
13,055
|
|
4.55%
|
|
|
219,915
|
|
10,688
|
|
4.81%
|
Total
borrowed funds
|
|
372,503
|
|
14,139
|
|
3.76%
|
|
|
429,575
|
|
16,438
|
|
3.78%
|
|
|
457,057
|
|
22,523
|
|
4.87%
|
Total
interest-bearing liabilities
|
|
1,578,739
|
|
40,262
|
|
2.55%
|
|
|
1,512,234
|
|
47,748
|
|
3.15%
|
|
|
1,485,045
|
|
59,498
|
|
3.99%
|
Non-interest-bearing
deposits
|
|
195,688
|
|
|
|
|
|
|
180,973
|
|
|
|
|
|
|
172,571
|
|
|
|
|
Other
liabilities
|
|
17,036
|
|
|
|
|
|
|
13,892
|
|
|
|
|
|
|
15,707
|
|
|
|
|
Total
liabilities
|
|
1,791,463
|
|
|
|
|
|
|
1,707,099
|
|
|
|
|
|
|
1,673,323
|
|
|
|
|
Preferred
equity
|
|
35,438
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
–
|
|
|
|
|
Common
equity
|
|
197,410
|
|
|
|
|
|
|
202,903
|
|
|
|
|
|
|
198,794
|
|
|
|
|
Total
stockholders’ equity
|
|
232,848
|
|
|
|
|
|
|
202,903
|
|
|
|
|
|
|
198,794
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders’
equity
|
|
$
2,024,311
|
|
|
|
|
|
|
$
1,910,002
|
|
|
|
|
|
|
$
1,872,117
|
|
|
|
|
Interest
rate spread
|
|
|
|
$
63,448
|
|
3.13%
|
|
|
|
|
$
60,085
|
|
3.14%
|
|
|
|
|
$
55,417
|
|
2.87%
|
Interest
income/earning assets
|
|
|
|
|
|
5.68%
|
|
|
|
|
|
|
6.29%
|
|
|
|
|
|
|
6.86%
|
Interest
expense/earning assets
|
|
|
|
|
|
2.20%
|
|
|
|
|
|
|
2.78%
|
|
|
|
|
|
|
3.54%
|
Net
interest margin
|
|
|
|
|
|
3.48%
|
|
|
|
|
|
|
3.51%
|
|
|
|
|
|
|
3.32%
|
(1)
|
Average
balances are based on carrying
value.
|
(2)
|
Interest
income and yields are presented on a fully tax-equivalent basis using a
35% federal tax rate.
|
(3)
|
Nonaccrual
and impaired loans are included in the average loan
balances. Related interest income earned on nonaccrual loans
prior to the loan being placed on nonaccrual is included in loan interest
income. Loan fees included in interest income were immaterial
for all periods presented.
|
(4)
|
Loans
held for sale are included in the average loan balance
listed. Related interest income on loans originated for sale
prior to the loan being sold is included in loan interest
income.
|
The
following table details the calculation of FTE net interest income for the years
ended December 31:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Net
interest income, as reported
|
$61,843
|
|
$58,479
|
|
$53,921
|
Taxable
equivalent adjustments
|
1,605
|
|
1,606
|
|
1,496
|
Fully
tax-equivalent net interest income
|
$63,448
|
|
$60,085
|
|
$55,417
|
The
following table provides an analysis of the changes in net interest
income:
(Dollars
in thousands)
|
Change from 2008 to 2009
(1)
|
|
Change from 2007 to 2008
(1)
|
Increase
(decrease) in:
|
Rate
|
Volume
|
Total
|
|
Rate
|
Volume
|
Total
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
Short-term
investments
|
$(93)
|
$98
|
$5
|
|
$(81)
|
$(24)
|
$(105)
|
Investment
Securities: (2)
|
|
|
|
|
|
|
|
Taxable
|
(421)
|
5,837
|
5,416
|
|
1,037
|
2,423
|
3,460
|
Nontaxable
|
(86)
|
122
|
36
|
|
–
|
340
|
340
|
Total
investment income
|
(507)
|
5,959
|
5,452
|
|
1,037
|
2,763
|
3,800
|
Loans:
|
|
|
|
|
|
|
|
Commercial
|
(6,756)
|
(1,236)
|
(7,992)
|
|
(8,839)
|
(483)
|
(9,322)
|
Real
estate
|
(1,422)
|
(636)
|
(2,058)
|
|
(1,086)
|
(678)
|
(1,764)
|
Consumer
|
(240)
|
710
|
470
|
|
(203)
|
512
|
309
|
Total
loan income
|
(8,418)
|
(1,162)
|
(9,580)
|
|
(10,128)
|
(649)
|
(10,777)
|
Total
interest income
|
(9,018)
|
4,895
|
(4,123)
|
|
(9,172)
|
2,090
|
(7,082)
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Savings
deposits
|
1
|
61
|
62
|
|
(149)
|
7
|
(142)
|
Interest-bearing
transaction
|
(580)
|
129
|
(451)
|
|
(660)
|
397
|
(263)
|
Money
market
|
(1,851)
|
1,104
|
(747)
|
|
(2,867)
|
702
|
(2,165)
|
Brokered
time
|
(276)
|
108
|
(168)
|
|
(262)
|
(1,259)
|
(1,521)
|
Retail
time
|
(5,162)
|
1,279
|
(3,883)
|
|
(3,272)
|
1,698
|
(1,574)
|
Total
deposit cost
|
(7,868)
|
2,681
|
(5,187)
|
|
(7,210)
|
1,545
|
(5,665)
|
Borrowed
funds:
|
|
|
|
|
|
|
|
Short-term
borrowings
|
(1,818)
|
(1,082)
|
(2,900)
|
|
(4,924)
|
(3,528)
|
(8,452)
|
Long-term
borrowings
|
(420)
|
1,021
|
601
|
|
(441)
|
2,808
|
2,367
|
Total
borrowed funds cost
|
(2,238)
|
(61)
|
(2,299)
|
|
(5,365)
|
(720)
|
(6,085)
|
Total
interest expense
|
(10,106)
|
2,620
|
(7,486)
|
|
(12,575)
|
825
|
(11,750)
|
Net
interest income
|
$1,088
|
$2,275
|
$3,363
|
|
$3,403
|
$1,265
|
$4,668
|
(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.
|
In both
2008 and 2009, net interest income benefited from the Federal Reserve’s actions
to lower short-term interest rates, as Peoples experienced greater reductions in
funding costs than asset yields. Growth in low-cost retail deposits
allowed Peoples to repay maturing higher-cost wholesale funding, further
contributing to the decline in funding costs. Net interest margin
compressed slightly in 2009 as a result of Peoples maintaining excess cash
reserves at the Federal Reserve Bank of Cleveland. These cash
balances were maintained due to limited opportunities for attractive long-term
asset investments and Peoples’ planned paydowns of high-cost wholesale
funding. In comparison, net interest margin expanded 19 basis points
in 2008, reflecting the impact of the lower short-term market
rates.
During
the recent periods of changing interest rate conditions, Peoples has actively
managed its balance sheet and interest rate risk profile to minimize the impact
on earnings. These actions have included adjusting the mix of earning
assets and funding sources when opportunities were presented from loan demand
and retail deposit growth. However, average loan balances decreased
in both 2008 and 2009, reflecting significant commercial loan payoffs during the
second half of 2007 and elevated charge-off levels in 2008 and
2009. Total average loan balances in 2009 were also impacted by
residential real estate loans being refinanced and sold to the secondary
market. While these reductions in average loan balances negatively
impacted interest income, Peoples took advantage of attractive investment
opportunities that were available during 2008 and 2009, which accounted for the
increase in average investment securities during both years.
A key
component of management’s funding strategy over the last few years has been to
grow core retail deposit balances, primarily low-cost and non-interest-bearing
deposits, to reduce the amount of, and reliance on, wholesale funding sources
that typically carry higher market rates of interest. In addition,
management has been adjusting the mix of wholesale funding by repaying
higher-costing funds using other lower-cost borrowings and short-term
assets. In the second half of 2007, management initiated a strategy
of systematically borrowing funds in a given maturity range over a period of
time in order to create a stream of smaller future maturities and reduce the
concentration of funding maturity at one time. This strategy
accounted for much of the increase in average long-term borrowings in 2008 and
2009 compared to prior years.
Loan
yields declined in both 2008 and 2009 from downward repricing of variable rate
loans in response to lower short-term market interest rates, coupled with the
impact of additional loans being placed on nonaccrual status. The
average yield of Peoples’ investment portfolio was held relatively stable, due
to management’s proactive actions during 2008 and 2009. The impact of
lower loan yields was countered with an overall reduction in Peoples’ cost of
funds from the repayment of higher-costing funds using other lower-cost
borrowings and short-term assets, coupled with the impact of lower short-term
interest rates.
Detailed
information regarding changes in Peoples’ Consolidated Balance Sheets can be
found under appropriate captions of the “FINANCIAL CONDITION” section of this
discussion. Additional information regarding Peoples’ interest rate
risk and the potential impact of interest rate changes on Peoples’ results of
operations and financial condition can be found later in this discussion under
the caption “Interest Rate Sensitivity and Liquidity”.
Provision
for Loan Losses
The
provision for loan losses is based on management’s formal quarterly evaluation
of the loan portfolio and analysis of the adequacy of the allowance for loan
losses described in the “Critical Accounting Policies” section of this
discussion. This analysis considers various factors that affect
losses, such as changes in Peoples’ loan quality, historical loss experience and
current economic conditions. The following table details Peoples’
provision for loan losses:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Provision
for checking account overdrafts
|
$799
|
|
$1,125
|
|
$558
|
Provision
for other loan losses
|
24,922
|
|
26,515
|
|
3,401
|
Total
provision for loan losses
|
$25,721
|
|
$27,640
|
|
$3,959
|
|
|
|
|
|
|
As
a percentage of average gross loans
|
2.35%
|
|
2.48%
|
|
0.35%
|
The
provision for loan losses recorded in both 2008 and 2009 was significantly
higher than amounts recorded in 2007 and prior years. These elevated
levels reflect the increases to the allowance for loan losses that occurred
since mid-2008 and continued throughout 2009, due to changes in Peoples’ loan
quality, coupled with losses on impaired loans from declines in commercial real
estate values during the same period.
Additional
information regarding changes in the allowance for loan losses and loan credit
quality can be found later in this discussion under the caption “Allowance for
Loan Losses”.
Net
Impairment Losses
The
following table details the net impairment losses recognized on
available-for-sale securities:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Individual
bank-issued trust preferred securities
|
$ 4,000
|
|
$ 2,080
|
|
$
–
|
Collateralized
debt obligations
|
3,707
|
|
1,920
|
|
2,875
|
Preferred
stocks
|
–
|
|
260
|
|
3,195
|
Equity
securities
|
–
|
|
–
|
|
100
|
Total
net impairment losses
|
$
7,707
|
|
$
4,260
|
|
$
6,170
|
These
impairment losses were the result of management determining certain securities
were other-than-temporarily impaired. These determinations were made
in connection with management’s quarterly analysis of the investment portfolio
described in the “Critical Accounting Policies” section of this discussion,
which included evaluating the credit quality of underlying issuers and
estimating cash flows to be received from the securities.
The
losses attributable to individual bank-issued trust preferred securities
involved two unrelated issuers who had deferred interest
payments. Management deemed the securities a total loss since its
analysis indicated it was probable Peoples would not recover the entire
principal amounts. Subsequent to management’s determinations, federal
banking regulators closed the banking subsidiaries of both issuers, with the
FDIC being appointed as receiver of the failed institutions.
Since
2007, the fair value of CDO securities, including those held in Peoples’
investment portfolio, has been affected by the continued liquidity and credit
concerns within the financial markets, as well as the downgrading of these
securities by rating agencies. Additionally, several underlying
issuers have either deferred or defaulted on the payment obligations, which
reduced the overall cash flow stream in these structured
investments. In the second half of 2009, management’s analysis
indicated continued declines in the estimated cash flows to be received from two
of Peoples’ CDO securities, which led to both securities being deemed a total
loss at year-end 2009. Additional information regarding Peoples’
investments in CDO securities can be found later in this discussion under the
caption “Investment Securities”.
The
preferred stock losses related to preferred stocks issued by Fannie Mae and
Freddie Mac. The loss attributable to equity securities involved
common stock issued by an unrelated bank holding company.
Management
performed its quarterly analysis of the remaining investment securities with an
unrealized loss at December 31, 2009, and concluded no other individual
securities were other-than-temporarily impaired.
Non-Interest
Income
Peoples
generates non-interest income, which excludes gains and losses on investments
and assets, from six primary sources: deposit account service charges, trust and
investment activities, insurance sales revenues, electronic banking
(“e-banking”), mortgage banking and bank owned life insurance
(“BOLI”).
In recent
years, Peoples has placed increased emphasis on reducing its reliance on net
interest income by growing non-interest income, especially fee-based revenues
not affected by interest rate changes, and, thus, diversifying its revenue
stream. In 2009, non-interest income was driven primarily by stronger
mortgage banking income, as recessionary economic conditions and volatility in
the financial markets negatively impacted other non-interest
revenues. Total non-interest income accounted for 34.1% of Peoples’
total revenues in 2009, compared to 35.4% in 2008 and 36.8% in
2007.
Service
charges and other fees on deposit accounts, which are based on the recovery of
costs associated with services provided, comprised the largest portion of
Peoples’ non-interest income. Management periodically evaluates its
cost recovery fees to ensure they are reasonable based on operational costs and
similar to fees charged in Peoples’ markets by competitors. The
following table details Peoples’ deposit account service charges:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Overdraft
fees
|
$7,869
|
|
$7,356
|
|
$6,818
|
Non-sufficient
funds fees
|
1,467
|
|
1,682
|
|
1,965
|
Other
fees and charges
|
1,054
|
|
1,099
|
|
1,107
|
Total
deposit account service charges
|
$10,390
|
|
$10,137
|
|
$9,890
|
The
amount of deposit account service charges, particularly overdraft and
non-sufficient funds fees, is largely dependent on the timing and volume of
customer activity. As a result, the amount ultimately recognized by
Peoples can fluctuate from period to period. Peoples experiences some
seasonal changes in overdraft and non-sufficient funds fees, primarily in the
first and fourth quarters. Typically, the volume of overdraft and
non-sufficient funds fees are lower in the first quarter attributable to
customers receiving income tax refunds, while volumes generally increase in the
fourth quarter in connection with the holiday shopping season.
Insurance
income also comprises a significant portion of Peoples’ total non-interest
income. The following table details Peoples’ insurance
income:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Property
and casualty insurance commissions
|
$7,633
|
|
$7,982
|
|
$7,997
|
Life
and health insurance commissions
|
661
|
|
645
|
|
596
|
Credit
life and A&H insurance commissions
|
119
|
|
175
|
|
158
|
Performance
based commissions
|
828
|
|
864
|
|
817
|
Other
fees and charges
|
149
|
|
236
|
|
133
|
Total
insurance income
|
$9,390
|
|
$9,902
|
|
$9,701
|
Peoples’
insurance income consists predominantly of commission revenue from the sale of
property and casualty insurance to commercial customers. The lower
property and casualty insurance commissions in 2009 were due largely to the
effects of a contracting economy on commercial insurance needs and lower pricing
margins from competition within the insurance industry. In 2008,
these revenues remained stable as increased production more than offset the
impact of lower pricing margins within the insurance industry. The
bulk of the performance based commission income is received annually by Peoples
during the first quarter and is based on a combination of factors, including
loss experience of insurance policies sold, production volumes and overall
financial performance of the insurance industry during the preceding
year. As a result, the amount of contingent income recognized by
Peoples is difficult to predict and could fluctuate from year to
year.
Peoples’
trust and investment income is comprised of revenue generated from its fiduciary
activities and the sale of investment services. The following table
details Peoples’ trust and investment income for the years ended December 31 and
market value of managed assets at year-end:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Fiduciary
|
$3,760
|
|
$4,113
|
|
$4,099
|
Brokerage
|
962
|
|
1,026
|
|
884
|
Total
trust and investment income
|
$4,722
|
|
$5,139
|
|
$4,983
|
|
|
|
|
|
|
Trust
assets under management
|
$750,993
|
|
$685,705
|
|
$797,443
|
Brokerage
assets under management
|
216,479
|
|
184,301
|
|
223,950
|
Total
managed assets
|
$967,472
|
|
$870,006
|
|
$1,021,393
|
Both
fiduciary and brokerage revenues are based primarily on the value of assets
under management. The market value of Peoples’ managed assets was
impacted by the downturn in the financial markets that occurred in the second
half of 2008 and continued through most of 2009. The timing of these
market values fluctuation was the key cause of the lower trust and investment
income in 2009. During 2008, Peoples attracted over $50 million in
new assets, which generated additional revenue and offset the impact of lower
market values in the second half of 2008.
Peoples’
e-banking services include ATM and debit cards, direct deposit services and
internet banking, and serve as alternative delivery channels to traditional
sales offices for providing services to clients. In 2009, Peoples’
customers used their debit cards to complete $290 million of transactions,
versus $272 million in 2008 and $231 million in 2007, representing increases of
7% and 17%, respectively. At December 31, 2009, Peoples had 40,663
deposit relationships with debit cards, or 57% of all eligible deposit accounts,
compared to 39,279 relationships, or 57% of eligible accounts, at year-end 2008
and 37,427 relationships, or 53% of eligible accounts at December 31,
2007.
Peoples’
mortgage banking income is comprised mostly of net gains from the origination
and sale of long-term, fixed-rate real estate loans to the secondary market and
is largely dependent on customer demand and interest rates in
general. In 2009, Peoples’ secondary market loan production was
stronger than recent years, due mostly to customers taking advantage of
opportunities offered by the secondary market to refinance existing
loans. Long-term mortgage rates rose modestly during the second half
of 2009, resulting in reduced refinancing activity. During 2009,
Peoples sold $95 million of residential real estate loans to the secondary
market, versus $32 million in 2008 and $40 million in 2007.
Income
generated by Peoples’ BOLI investment serves to enhance operating efficiency by
partially offsetting rising employee benefit costs. Changes in the
interest rate environment can have an impact on the associated investment funds
and thus the amount of BOLI income recognized by Peoples. Management
monitors the performance of Peoples’ BOLI and may make adjustments to improve
the income streams and overall performance. Still, management
believes BOLI provides a better long-term vehicle for funding future employee
benefit costs, and offsetting the related expense, than alternative investment
opportunities with similar risk characteristics.
Non-Interest
Expense
Salaries
and employee benefit costs represent Peoples’ largest non-interest expense,
accounting for over 50% of total non-interest expense, which is inherent in a
service-based industry such as financial services.
The
following table details Peoples’ salaries and employee benefit
costs:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Base
salaries and wages
|
$20,455
|
|
$20,370
|
|
$19,270
|
Employee
benefits
|
5,037
|
|
3,983
|
|
3,574
|
Sales-based
and incentive compensation
|
3,130
|
|
3,672
|
|
3,985
|
Stock-based
compensation
|
149
|
|
498
|
|
391
|
Deferred
personnel costs
|
(1,477)
|
|
(1,984)
|
|
(1,867)
|
Payroll
taxes and other employment-related costs
|
2,100
|
|
1,982
|
|
2,199
|
Total
salaries and employee benefit costs
|
$29,394
|
|
$28,521
|
|
$27,552
|
|
|
|
|
|
|
Full-time
equivalent employees:
|
|
|
|
|
|
Actual
at December 31
|
537
|
|
546
|
|
559
|
Average
during the year
|
543
|
|
552
|
|
554
|
In 2009,
Peoples limited salary increases for management, which has resulted in base
salaries and wages remaining comparable to 2008. The majority of the
sales-based and incentive compensation is attributable to Peoples’ insurance and
investment sales activities. However, lower accruals for Peoples’
annual incentive award plan, which is based primarily upon corporate results,
accounted for the decreased sales-based and incentive compensation in 2009 and
2008 over the prior year. Peoples’ employee benefit costs have been
impacted by a steady increase in employee medical benefit costs in recent
years.
Stock-based
compensation is generally recognized over the vesting period, typically ranging
from 6 months to 3 years, although Peoples must immediately recognize the entire
expense for awards to employees who are eligible for retirement at the grant
date. The majority of Peoples’ stock-based compensation expense is
attributable to annual equity-based incentive awards to employees, which are
awarded in the first quarter and based upon Peoples achieving certain
performance goals during the prior year. In 2009, Peoples did not
grant any equity-based incentive awards to employees or non-employee directors
due to lower corporate performance results. As a result, the
stock-based compensation expense recognized in 2009 was attributable to
equity-based awards granted in prior years. Additional information
regarding Peoples’ stock-based compensation plans and awards can be found in
Note 18 of the Notes to the Consolidated Financial Statements.
Deferred
personnel costs represent the portion of current period salaries and employee
benefit costs considered direct loan origination costs. These costs
are recognized over the life of the loan through interest income as a yield
adjustment. During 2009, decreased commercial loan originations as a
result of recessionary economic conditions have resulted in lower deferred costs
compared to the same periods in 2008.
Peoples’
net occupancy and equipment expense was comprised of the following:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Depreciation
|
$1,998
|
|
$2,066
|
|
$2,061
|
Repairs
and maintenance costs
|
1,549
|
|
1,452
|
|
1,386
|
Net
rent expense
|
837
|
|
671
|
|
660
|
Property
taxes, utilities and other costs
|
1,372
|
|
1,351
|
|
1,191
|
Total
net occupancy and equipment expense
|
$5,756
|
|
$5,540
|
|
$5,298
|
Depreciation
expense decreased modestly in 2009 due to existing assets becoming fully
depreciated, coupled with fewer shorter-lived assets, such as computers and
other office equipment, being placed in service. Management continues
to monitor capital expenditures and explore opportunities to enhance Peoples’
operating efficiency.
While
actions taken by the FDIC resulted in higher FDIC insurance costs during 2009,
FDIC insurance expense in both 2007 and 2008 benefited from the utilization of a
$1.0 million one-time credit received in 2007. This credit was
received in connection with changes to the deposit insurance system for use to
offset future insurance premiums, subject to certain
limitations. Peoples utilized $0.5 million of this credit during 2007
and the remainder during the first nine months of 2008. Despite the
actions taken in 2009, the FDIC’s plan to restore the Deposit Insurance Fund to
its federally mandated level may not be successful during 2010, due to continued
bank failures. Should this occur, the FDIC may consider increasing
base assessments or imposing additional special assessments on all insured
institutions similar to the one levied in the second quarter of
2009. These or similar actions, if taken, could materially increase
the total FDIC insurance expense recognized by Peoples in future
quarters.
Peoples’
intangible asset amortization expense decreased in both 2009 and 2008 from the
use of an accelerated method of amortization for its customer-related
intangibles. As a result, amortization expense will continue to be
lower in subsequent years based on the intangible assets included on Peoples’
Consolidated Balance Sheets at December 31, 2009.
Professional
fees expense, which includes the cost of accounting, legal and other third-party
professional services, increased substantially in 2009 compared to
2008. This increase was due mainly to increased utilization of
external legal services attributable to higher levels of under performing
loans. Contributing to the year-to-date increase were legal and
consulting fees incurred in the first quarter of 2009 associated with the TARP
Capital Investment and preparation of proxy materials for the Special Meeting of
Shareholders and Annual Meeting of Shareholders.
Marketing
expense, which includes the cost of advertising, public relations and charitable
contributions, decreased 18% in 2009, due to a general reduction in advertising
and public relations activities. In comparison, marketing expense was
down 15% in 2008, compared to 2007, due to the completion of Peoples’ direct
mail and gift campaigns, which had been initiated in late 2005.
Peoples’
e-banking expense, which is comprised of bankcard and internet-based banking
costs, increased in both 2008 and 2009 as a result of customers completing a
larger percentage of their transactions using their debit cards and Peoples’
internet banking service. These factors have also produced a greater
increase in the corresponding e-banking revenues over the same
periods. Overall, management believes e-banking expense levels are
reasonable considering Peoples’ e-banking services have generated higher net
revenues and have helped to improve overall relationship profitability, due to
the lower transaction costs incurred by Peoples.
Peoples
is subject to state franchise taxes, which are based largely on Peoples Bank’s
equity at year-end, in the states where it has a physical
presence. Overall, state franchise taxes have remained consistent
over the last two years, from relatively stable equity levels at Peoples Bank,
although the 2007’s franchise tax expense was lower due to the Ohio Franchise
Tax Settlement. Peoples regularly evaluates the capital position of
its direct and indirect subsidiaries from both a cost and leverage
perspective. Ultimately, management seeks to optimize Peoples’
consolidated capital position through allocation of capital, which is intended
to enhance profitability and shareholder value.
In both
2008 and 2009, Peoples incurred additional loan-related expenses associated with
the higher level of impaired and nonperforming loans. These expenses
accounted for the 5% and 7% increases in other non-interest expense in 2009 and
2008, respectively, compared to prior year.
Income
Tax Benefit/Expense
Peoples
recognized an income tax benefit of $1.1 million in 2009, versus income tax
expense of $160,000 in 2008 and $5.6 million in 2007. These amounts
primarily reflect the reduction in pre-tax income due to higher provisions for
loan losses and OTTI charges in both 2008 and 2009, while income from tax-exempt
sources and tax benefits received from Peoples’ investments in tax credit funds
remained consistent with prior years. A reconciliation of income tax
expense and effective tax rate to the statutory tax rate can be found in Note 14
of the Notes to the Consolidated Financial Statements.
Management
anticipates an effective tax rate in 2010 of approximately
20%. However, the amount of pre-tax income derived from tax-exempt
sources will have a major impact on the annual effective tax rate.
FINANCIAL
CONDITION
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. During 2009, Peoples maintained excess
cash reserves at the Federal Reserve Bank of Cleveland rather than federal funds
sold due to more favorable current short-term interest rates. These
excess reserves are included in interest-bearing deposits in other banks on the
Consolidated Balance Sheets and totaled $11.4 million at year-end and $8.2
million at September 30, 2009. No excess reserves were maintained in
any period of 2008.
At
December 31, 2009, total cash and cash equivalents was consistent with the prior
quarter-end, totaling $41.8 million. In 2009, cash and cash
equivalents decreased $6.2 million, as the majority of net cash provided by
Peoples’ operating and investing activities of $23.3 million and $7.8 million,
respectively, was used in financing activities. Net cash provided by
investing activities was the result of loan payments and payoffs exceeding new
originations by $24.7 million, of which a portion was used for purchases of new
investment securities. Financing activities consumed $24.9 million of
net cash, as Peoples reduced borrowed funds by $84.1 million, which was
partially offset by $68.4 million of funds from net deposit growth and the TARP
Capital Investment.
In
comparison, cash and cash equivalents decreased $9.6 million in 2008, to $35.6
million at December 31, 2008. Investing activities consumed $168.9
million of net cash, while financing and operating activities provided net cash
of $123.8 million and $35.6 million, respectively. Purchases of new
investment securities exceeded the cash flows from sales, maturities, calls and
principal payments and accounted for most of the cash used in investing
activities.
Further
information regarding the management of Peoples’ liquidity position can be found
later in this discussion under “Interest Rate Sensitivity and
Liquidity.”
The
following table details Peoples’ available-for-sale investment portfolio at
December 31:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Available-for-sale
investment securities, at fair value:
|
|
|
|
|
|
Obligations
of:
|
|
|
|
|
|
U.S.
Treasury and government agencies
|
$82
|
|
$176
|
|
$197
|
U.S. government sponsored agencies
|
4,473
|
|
8,442
|
|
74,470
|
States and political subdivisions
|
62,953
|
|
68,930
|
|
69,247
|
Residential
mortgage-backed securities
|
558,825
|
|
511,201
|
|
356,605
|
Commercial
mortgage-backed securities
|
24,188
|
|
25,951
|
|
–
|
U.S.
government-backed student loan pools
|
59,442
|
|
44,985
|
|
–
|
Bank-issued
trust preferred securities
|
13,826
|
|
17,888
|
|
19,185
|
Collateralized
debt obligations
|
165
|
|
4,423
|
|
5,896
|
Preferred
stocks
|
–
|
|
–
|
|
12,065
|
Equity
securities
|
2,593
|
|
2,761
|
|
4,566
|
Total
available-for-sale investment securities
|
$726,547
|
|
$684,757
|
|
$542,231
|
Total
amortized cost
|
$706,444
|
|
$696,855
|
|
$535,979
|
Net
unrealized gain (loss)
|
$20,103
|
|
$(12,098)
|
|
$6,252
|
Overall,
the size and composition of the investment portfolio at December 31, 2009 was
fairly consistent with year-end 2008. However, throughout 2008,
management grew the investment portfolio to manage interest income and liquidity
levels in response to lower loan balances caused by commercial loan payoffs and
charge-offs, and significant deposit growth. Management also took
action to reduce credit and interest rate exposures in Peoples’ investment
portfolio, which accounted for much of the change in the investment portfolio
composition since December 31, 2007.
Peoples’
investment in mortgage-backed securities has increased as the result of
management reinvesting some of the principal runoff from the portfolio into
these types of securities, as well as repositioning of the portfolio during 2008
and 2009 to reduce credit and interest rate exposures.
A
significant portion of Peoples’ residential and commercial mortgage-backed
securities are comprised of securities either guaranteed by the U.S. government
or issued by U.S. government-sponsored agencies, such as Fannie Mae and Freddie
Mac. The remaining portion of Peoples’ mortgage-backed securities
consists of securities issued by other entities, including other financial
institutions, which are not guaranteed by the U.S. government. The
amount of these “non-agency” securities included in the residential and
commercial mortgage-backed securities totals above were as
follows:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Residential
|
$153,621
|
|
$192,133
|
|
$ 46,990
|
Commercial
|
24,188
|
|
25,951
|
|
–
|
Total
fair value
|
$177,809
|
|
$218,084
|
|
$46,990
|
Total
amortized cost
|
$177,370
|
|
$231,153
|
|
$47,757
|
Net
unrealized gain (loss)
|
$439
|
|
$(13,069)
|
|
$(767)
|
The
non-agency portfolio consists entirely of first lien residential and commercial
mortgages and all securities are rated AAA or equivalent by Moody’s, Standard
& Poor’s or Fitch. Approximately 96% of the portfolio consists of
2003 or earlier originations and 99% of the portfolio consists of underlying
fixed-rate mortgages.
At
December 31, 2009, Peoples’ investment in individual bank-issued trust preferred
securities consisted of holdings of 9 unrelated issuers. All of these
securities remain current on contractual interest payment. In
addition, an aggregate of $10 million of these securities relate to issuers that
were involved in the comprehensive capital assessment conducted by federal bank
supervisors in the first half of 2009 – known as the Supervisory Capital
Assessment Program or “government stress test”.
Peoples
previously invested in CDO securities issued by special purpose vehicles holding
pools of collateral consisting of trust preferred and subordinated debt
securities issued by banks, bank holding companies, insurance companies and real
estate investment trusts. CDO securities are generally segregated
into several classes, known as tranches, with the typical structure including
senior, mezzanine and equity tranches. In these structures, an
investor holding the equity tranche has the first loss
position. Interest and principal collected from the collateral is
distributed with a priority that provides the highest level of protection to the
senior-most tranches. In order to provide a high level of protection
to the senior tranches, cash flows are diverted to higher-level tranches if
certain tests are not met.
Peoples’
CDO investment has been limited to two lower mezzanine tranche CDO securities
issued in 2006 and 2007 and two equity tranche CDO securities issued in 2002 and
2003. During 2009, management determined the mezzanine tranche CDO
securities were total losses based on the cash flows expected to be
received. As a result, Peoples’ CDO investment was limited to the two
equity tranche CDO securities, which had an aggregate book value of $1.0 million
or approximately 25% of their original value.
At
December 31, 2009, Peoples’ investment portfolio included a single qualified
school construction bond purchased during the fourth quarter of
2009. Qualified school construction bonds were created under the
American Recovery and Reinvestment Act of 2009 enacted during the first quarter
of 2009. Holders of these bonds receive federal income tax credits in
lieu of interest, which significantly reduces borrowing costs for public school
construction projects. The federal income tax credit rate is fixed for the life
of the bonds. However, there currently exists uncertainty regarding
ownership rights of associated tax credits if the bonds are sold or
transferred. Given this uncertainty, management intends to hold this
security to maturity and believes Peoples has the ability to do
so. Consequently, this security was designated as “held-to-maturity”
at the time of its purchase. In January 2010, Peoples purchased an
additional $2 million of qualified school construction bonds, which were also
designated as “held-to-maturity”.
Additional
information regarding Peoples’ investment portfolio can be found in Note 3 of
the Notes to the Consolidated Financial Statements.
Loans
The
following table details total outstanding loans at December 31:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
Year-end
loan balances:
|
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
$503,034
|
|
$478,298
|
|
$513,847
|
|
$469,934
|
|
$504,923
|
Commercial,
other
|
159,915
|
|
178,834
|
|
171,937
|
|
191,847
|
|
136,331
|
Real
estate, mortgage
|
215,735
|
|
231,778
|
|
237,641
|
|
252,726
|
|
272,327
|
Real
estate, construction
|
32,427
|
|
77,917
|
|
71,794
|
|
99,311
|
|
50,745
|
Home
equity lines of credit
|
49,183
|
|
47,635
|
|
42,706
|
|
44,937
|
|
43,754
|
Consumer
|
90,144
|
|
87,902
|
|
80,544
|
|
72,531
|
|
62,737
|
Deposit
account overdrafts
|
1,620
|
|
1,668
|
|
2,472
|
|
1,108
|
|
1,059
|
Total
loans
|
$1,052,058
|
|
$1,104,032
|
|
$1,120,941
|
|
$1,132,394
|
|
$1,071,876
|
Average
total loans
|
$1,093,057
|
|
$1,113,247
|
|
$1,122,808
|
|
$1,108,575
|
|
$1,040,029
|
Average
allowance for loan losses
|
(25,081)
|
|
(17,428)
|
|
(14,775)
|
|
(15,216)
|
|
(14,930)
|
Average
loans, net of allowance
|
$1,067,976
|
|
$1,095,819
|
|
$1,108,033
|
|
$1,093,359
|
|
$1,025,099
|
Percent
of loans to total loans at December 31:
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
47.8%
|
|
43.3%
|
|
45.8%
|
|
41.5%
|
|
47.1%
|
Commercial,
other
|
15.2%
|
|
16.2%
|
|
15.3%
|
|
16.9%
|
|
12.7%
|
Real
estate, mortgage
|
20.5%
|
|
21.0%
|
|
21.2%
|
|
22.3%
|
|
25.4%
|
Real
estate, construction
|
3.1%
|
|
7.1%
|
|
6.4%
|
|
8.8%
|
|
4.7%
|
Home
equity lines of credit
|
4.7%
|
|
4.3%
|
|
3.8%
|
|
4.0%
|
|
4.1%
|
Consumer
|
8.5%
|
|
7.9%
|
|
7.3%
|
|
6.4%
|
|
5.9%
|
Deposit
account overdrafts
|
0.2%
|
|
0.2%
|
|
0.2%
|
|
0.1%
|
|
0.1%
|
Total
percentage
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
In 2008
and 2009, commercial real estate loan balances were impacted by payoffs and
charge-offs offsetting new production. In addition, depressed
conditions in the commercial real estate market and general economy resulted in
lower commercial lending activity in both years. During the fourth
quarter of 2009, several large commercial construction loans, with total
outstanding balances of approximately $40 million, were converted to term
commercial mortgage loans, which accounted for the changes in commercial
mortgage and real estate construction loan balances since year-end
2008.
The
following table details the maturities of Peoples’ commercial and construction
loans at December 31, 2009:
(Dollars
in thousands)
|
Due
in One Year or Less
|
|
Due
in One to Five Years
|
|
Due
After Five Years
|
|
Total
|
Loan
Type
|
|
|
|
|
|
|
|
Commercial,
mortgage:
|
|
|
|
|
|
|
|
Fixed
|
$27,606
|
|
$74,375
|
|
$73,545
|
|
$175,526
|
Variable
|
26,505
|
|
39,456
|
|
261,547
|
|
327,508
|
Total
|
$54,111
|
|
$113,831
|
|
$335,092
|
|
$503,034
|
Commercial,
other:
|
|
|
|
|
|
|
|
Fixed
|
$9,279
|
|
$62,784
|
|
$9,439
|
|
$81,502
|
Variable
|
46,399
|
|
18,763
|
|
13,251
|
|
78,413
|
Total
|
$55,678
|
|
$81,547
|
|
$22,690
|
|
$159,915
|
Real
estate, construction:
|
|
|
|
|
|
|
|
Fixed
|
$2,708
|
|
$4,693
|
|
$847
|
|
$8,248
|
Variable
|
3,153
|
|
417
|
|
20,609
|
|
24,179
|
Total
|
$5,861
|
|
$5,110
|
|
$21,456
|
|
$32,427
|
Peoples’
real estate loan balances in recent periods have been impacted by customer
demand for long-term, fixed-rate mortgages, which Peoples generally sells to the
secondary market with servicing rights retained. In 2009, residential
real estate loan balances were impacted by existing residential real estate
loans being refinanced and sold to the secondary market in response to
historically low long-term fixed rates being offered during the first half of
the year. As a result, Peoples’ serviced loan portfolio has increased
26% since year-end 2008, to $227.8 million at December 31, 2009.
In recent
years, Peoples experienced steady growth in consumer loan balances, due mainly
to the efforts in indirect lending. Peoples’ indirect lending
activity involves the origination of consumer loans primarily through automobile
dealers and comprises a significant portion of its total consumer
loans. Management remains committed to originating quality consumer
loans based on sound underwriting practices and appropriate loan pricing
discipline, which could limit opportunities for future growth.
Loan
Concentration
Peoples
categorizes its commercial loans according to standard industry classifications
and monitors for concentrations in a single industry or multiple industries that
could be impacted by changes in economic conditions in a similar
manner. Peoples’ commercial lending activities continue to be spread
over a diverse range of businesses from all sectors of the economy, with no
single industry comprising over 10% of Peoples’ total loan
portfolio.
Loans
secured by commercial real estate, including commercial construction loans,
continue to comprise nearly half of Peoples’ loan portfolio. The
following table provides information regarding the largest concentrations of
commercial real estate loans within the loan portfolioat December 31,
2009:
|
Outstanding
|
|
Loan
|
|
Total
|
|
%
of
|
(Dollars
in thousands)
|
Balance
|
|
Commitments
|
|
Exposure
|
|
Total
|
Real
estate, construction loans:
|
|
|
|
|
|
|
|
Lodging
and lodging related
|
$ 14,790
|
|
$ 2,362
|
|
$ 17,152
|
|
38.5%
|
Land
and land development
|
7,057
|
|
1,136
|
|
8,193
|
|
18.4%
|
Apartment
complexes
|
1,286
|
|
343
|
|
1,629
|
|
3.7%
|
Other
|
9,294
|
|
8,242
|
|
17,536
|
|
39.4%
|
Total
real estate, construction
|
$ 32,427
|
|
$ 12,083
|
|
$ 44,510
|
|
100.0%
|
|
Outstanding
|
|
Loan
|
|
Total
|
|
%
of
|
(Dollars
in thousands)
|
Balance
|
|
Commitments
|
|
Exposure
|
|
Total
|
Commercial,
mortgage loans:
|
|
|
|
|
|
|
|
Lodging
and lodging related
|
$ 59,417
|
|
$ 1,223
|
|
$ 60,640
|
|
11.8%
|
Office
buildings and complexes:
|
|
|
|
|
|
|
|
Owner
occupied
|
5,928
|
|
242
|
|
6,170
|
|
1.2%
|
Non-owner
occupied
|
46,248
|
|
506
|
|
46,754
|
|
9.1%
|
Total
office buildings and complexes
|
52,176
|
|
748
|
|
52,924
|
|
10.3%
|
Apartment
complexes
|
64,415
|
|
1,428
|
|
65,843
|
|
12.8%
|
Retail
facilities:
|
|
|
|
|
|
|
|
Owner
occupied
|
13,230
|
|
616
|
|
13,846
|
|
2.7%
|
Non-owner
occupied
|
35,736
|
|
331
|
|
36,067
|
|
7.0%
|
Total
retail facilities
|
48,966
|
|
947
|
|
49,913
|
|
9.7%
|
Residential
property:
|
|
|
|
|
|
|
|
Owner
occupied
|
6,452
|
|
680
|
|
7,132
|
|
1.4%
|
Non-owner
occupied
|
35,501
|
|
280
|
|
35,781
|
|
7.0%
|
Total
residential property
|
41,953
|
|
960
|
|
42,913
|
|
8.4%
|
Light
industrial facilities:
|
|
|
|
|
|
|
|
Owner
occupied
|
29,649
|
|
182
|
|
29,831
|
|
5.8%
|
Non-owner
occupied
|
10,136
|
|
–
|
|
10,136
|
|
2.0%
|
Total
light industrial facilities
|
39,785
|
|
182
|
|
39,967
|
|
7.8%
|
Assisted
living facilities and nursing homes
|
39,317
|
|
–
|
|
39,317
|
|
7.7%
|
Land
and land development
|
30,150
|
|
3,749
|
|
33,899
|
|
6.6%
|
Health
care facilities
|
21,462
|
|
26
|
|
21,488
|
|
4.2%
|
Other
|
105,393
|
|
663
|
|
106,056
|
|
20.7%
|
Total
commercial, mortgage
|
$ 503,034
|
|
$ 9,926
|
|
$ 512,960
|
|
100.0%
|
Peoples’
commercial lending activities continue to focus on lending opportunities inside
its primary market areas, with loans outside Peoples’ primary market areas
comprising approximately 10% of total outstanding loan balances, at both
December 31, 2009 and 2008. The majority of those out-of-market loans
are still based in Ohio, West Virginia and Kentucky, with total outstanding
balances of $77.9 million and $76.6 million at year-end 2009 and 2008,
respectively. In all other states, the aggregate outstanding balance
in each state was less than $5.0 million, except Florida, which had outstanding
balances of $7.0 million at December 31, 2009. The Florida loans were
generated primarily through existing central Ohio-based client
relationships.
Allowance
for Loan Losses
The
amount of the allowance for loan losses for the various loan types represents
management’s estimate of expected losses from existing loans. These
estimates are based upon the formal quarterly analysis of the loan portfolio
described in the “Critical Accounting Policies” section of this
discussion. While allocations are made to specific loans and pools of
loans, the allowance is available for all loan losses.
The
following details the allocation of the allowance for loan
losses:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
Commercial,
mortgage
|
$22,125
|
|
|
|
|
|
|
|
|
Commercial,
other
|
1,586
|
|
|
|
|
|
|
|
|
Total
commercial
|
23,711
|
|
$19,757
|
|
$14,147
|
|
$12,661
|
|
$11,883
|
|
|
|
|
|
|
|
|
|
|
Real
estate, mortgage
|
1,619
|
|
1,414
|
|
419
|
|
957
|
|
1,400
|
Home
equity lines of credit
|
528
|
|
526
|
|
433
|
|
247
|
|
426
|
Consumer
|
1,074
|
|
789
|
|
435
|
|
349
|
|
723
|
Deposit
account overdrafts
|
325
|
|
445
|
|
284
|
|
295
|
|
288
|
Total
allowance for loan losses
|
$27,257
|
|
$22,931
|
|
$15,718
|
|
$14,509
|
|
$14,720
|
As
a percentage of total loans
|
2.59%
|
|
2.08%
|
|
1.40%
|
|
1.28%
|
|
1.37%
|
The
significant allocations to commercial loans reflects the higher credit risk
associated with this type of lending and the size of this loan category in
relationship to the entire loan portfolio. The higher allocations in
2008 and 2009 primarily reflect the elevated level of charge-offs in both years,
which resulted in higher loss factors for graded loans, along with continued
deterioration in credit quality of various commercial loans based on the
financial condition of the borrowers. Another significant
contributing factor was the impact of distressed commercial real estate values
and general economic conditions on specific reserves for impaired
loans. Given the continued rate of loss being experienced on
commercial real estate loans, in the fourth quarter of 2009, management refined
its methodology for estimating inherent losses on Peoples’ commercial loans by
performing separate evaluations of, and allocations for, commercial mortgage
loans and other commercial loans. This refinement did not have a
significant impact on the allowance for loan losses.
The
allowance allocated to the real estate and consumer loan categories is based
upon Peoples’ allowance methodology for homogeneous pools of
loans. The fluctuations in these allocations have been directionally
consistent with the changes in loan quality, loss experience and changes in loan
balances in each category.
The
following table details the changes in the allowance for loan losses for the
years ended December 31:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses, January 1
|
$22,931
|
|
$15,718
|
|
$14,509
|
|
$14,720
|
|
$14,760
|
Gross
charge-offs:
|
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
18,802
|
|
16,138
|
|
892
|
|
1,620
|
|
838
|
Commercial,
other
|
817
|
|
1,923
|
|
1,056
|
|
550
|
|
450
|
Real
estate, mortgage
|
1,544
|
|
1,524
|
|
864
|
|
842
|
|
869
|
Real
estate, construction
|
–
|
|
–
|
|
53
|
|
855
|
|
482
|
Home
equity lines of credit
|
82
|
|
145
|
|
400
|
|
82
|
|
70
|
Consumer
|
1,381
|
|
941
|
|
587
|
|
528
|
|
519
|
Deposit
account overdrafts
|
1,294
|
|
1,298
|
|
849
|
|
1,007
|
|
965
|
Total
gross charge-offs
|
23,920
|
|
21,969
|
|
4,701
|
|
5,484
|
|
4,193
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
1,162
|
|
278
|
|
245
|
|
269
|
|
391
|
Commercial,
other
|
91
|
|
239
|
|
662
|
|
319
|
|
197
|
Real
estate, mortgage
|
257
|
|
121
|
|
214
|
|
406
|
|
266
|
Real
estate, construction
|
–
|
|
156
|
|
54
|
|
–
|
|
572
|
Home
equity lines of credit
|
55
|
|
27
|
|
144
|
|
18
|
|
4
|
Consumer
|
584
|
|
388
|
|
352
|
|
336
|
|
368
|
Deposit
account overdrafts
|
376
|
|
333
|
|
280
|
|
303
|
|
327
|
Total
recoveries
|
2,525
|
|
1,542
|
|
1,951
|
|
1,651
|
|
2,125
|
Net
charge-offs (recoveries):
|
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
17,640
|
|
15,860
|
|
647
|
|
1,351
|
|
447
|
Commercial,
other
|
726
|
|
1,684
|
|
394
|
|
231
|
|
253
|
Real
estate, mortgage
|
1,287
|
|
1,403
|
|
650
|
|
436
|
|
603
|
Real
estate, construction
|
–
|
|
(156)
|
|
(1)
|
|
855
|
|
(90)
|
Home
equity lines of credit
|
27
|
|
118
|
|
256
|
|
64
|
|
66
|
Consumer
|
797
|
|
553
|
|
235
|
|
192
|
|
151
|
Deposit
account overdrafts
|
918
|
|
965
|
|
569
|
|
704
|
|
638
|
Total
net charge-offs
|
21,395
|
|
20,427
|
|
2,750
|
|
3,833
|
|
2,068
|
Provision
for loan losses, December 31
|
25,721
|
|
27,640
|
|
3,959
|
|
3,622
|
|
2,028
|
Allowance
for loan losses, December 31
|
$27,257
|
|
$22,931
|
|
$15,718
|
|
$14,509
|
|
$14,720
|
Net
charge-offs to average loans:
|
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
1.61%
|
|
1.42%
|
|
0.06%
|
|
0.12%
|
|
0.04%
|
Commercial,
other
|
0.07%
|
|
0.15%
|
|
0.04%
|
|
0.02%
|
|
0.03%
|
Real
estate, mortgage
|
0.12%
|
|
0.13%
|
|
0.06%
|
|
0.04%
|
|
0.06%
|
Real
estate, construction
|
0.00%
|
|
-0.01%
|
|
0.00%
|
|
0.08%
|
|
-0.01%
|
Home
equity lines of credit
|
0.00%
|
|
0.01%
|
|
0.02%
|
|
0.01%
|
|
0.01%
|
Consumer
|
0.07%
|
|
0.04%
|
|
0.02%
|
|
0.02%
|
|
0.02%
|
Deposit
account overdrafts
|
0.09%
|
|
0.09%
|
|
0.05%
|
|
0.06%
|
|
0.06%
|
Total
net charge-offs to average loans
|
1.96%
|
|
1.83%
|
|
0.25%
|
|
0.35%
|
|
0.21%
|
Gross
charge-offs were significantly higher in 2008 and 2009 compared to prior years,
due largely to losses on a limited number of impaired commercial loan
relationships attributable to lower collateral values and associated workout
costs. The majority of these relationships were identified as being
impaired during 2008. Gross recoveries for 2009 were higher than
recent periods as a result of a $1.0 million recovery on a single impaired
commercial relationship during the second quarter of 2009. This
recovery was the result of higher than expected proceeds from sale of the
underlying collateral.
The
following table details Peoples’ nonperforming assets at December
31:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
Loans
90+ days past due and accruing:
|
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
$
164
|
|
$ –
|
|
$
–
|
|
$
–
|
|
$
–
|
Commercial,
other
|
–
|
|
–
|
|
378
|
|
–
|
|
176
|
Real
estate, mortgage
|
238
|
|
–
|
|
–
|
|
–
|
|
75
|
Consumer
|
9
|
|
–
|
|
–
|
|
1
|
|
–
|
Total
loans 90+ days past due and accruing
|
411
|
|
–
|
|
378
|
|
1
|
|
251
|
|
|
|
|
|
|
|
|
|
|
Renegotiated
loans
|
–
|
|
–
|
|
–
|
|
1,218
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
25,852
|
|
36,768
|
|
4,832
|
|
5,346
|
|
3,679
|
Commercial,
other
|
2,884
|
|
1,734
|
|
656
|
|
34
|
|
–
|
Real
estate, mortgage
|
4,687
|
|
2,271
|
|
2,906
|
|
3,071
|
|
2,549
|
Home
equity lines of credit
|
546
|
|
543
|
|
583
|
|
327
|
|
17
|
Consumer
|
3
|
|
4
|
|
3
|
|
7
|
|
39
|
Total
nonaccrual loans
|
33,972
|
|
41,320
|
|
8,980
|
|
8,785
|
|
6,284
|
Total
nonperforming loans
|
34,383
|
|
41,320
|
|
9,358
|
|
10,004
|
|
6,535
|
Other
real estate owned
|
|
|
|
|
|
|
|
|
|
Commercial
|
6,087
|
|
378
|
|
–
|
|
–
|
|
308
|
Residential
|
226
|
|
147
|
|
343
|
|
–
|
|
–
|
Total
other real estate owned
|
6,313
|
|
525
|
|
343
|
|
–
|
|
308
|
Total
nonperforming assets
|
$ 40,696
|
|
$
41,845
|
|
$
9,701
|
|
$
10,004
|
|
$
6,843
|
Nonperforming
loans as a percent of total loans
|
3.27%
|
|
3.74%
|
|
0.83%
|
|
0.88%
|
|
0.61%
|
Nonperforming
assets as a percent of total assets
|
2.03%
|
|
2.09%
|
|
0.51%
|
|
0.53%
|
|
0.37%
|
Allowance
for loan losses as a percent of
|
|
|
|
|
|
|
|
|
|
nonperforming
loans
|
79.3%
|
|
55.5%
|
|
168.0%
|
|
145.0%
|
|
225.2%
|
Peoples’
nonaccrual commercial real estate loans primarily consist of non-owner occupied
commercial properties and real estate development projects. The
combination of increased unemployment and depressed commercial real estate
values in certain markets continue to challenge Peoples’ asset quality, as
reflected by the higher level of nonperforming assets in 2008 and 2009, compared
to prior years.
In 2009,
Peoples placed additional commercial real estate loans on nonaccrual status,
although the overall increase in nonperforming assets was offset by charge-downs
and payoffs on existing nonaccrual loans. Additionally, Peoples
completed the foreclosure process on a $5.0 million commercial real estate loan
in the fourth quarter of 2009 by acquiring ownership of the property securing
the loan. This action resulted in the loan being reclassified as
other real estate owned at December 31, 2009.
Several nonperforming
loans have been charged down to estimated net realizable fair value of the
underlying collateral, resulting in a lower allowance for loan losses to
nonperforming loans ratio in recent quarters compared to Peoples’ historical
levels.
Interest
income on loans classified as nonaccrual and renegotiated at each year-end that
would have been recorded under the original terms of the loans was $1,850,000;
$1,936,000 and $786,000 for 2009; 2008 and 2007, respectively, of which $41,000;
$20,000 and $47,000, respectively, was actually recorded consistent with the
income recognition policy described in the “Critical Accounting Policies”
section of this discussion.
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,
less selling costs. Information regarding Peoples’ impaired loans is
included in Note 4 of the Notes to the Consolidated Financial
Statements.
Deposits
Peoples’
deposit balances were comprised of the following at December 31:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
Retail
certificates of deposit
|
$ 537,549
|
|
$ 626,195
|
|
$ 499,684
|
|
$ 514,885
|
|
$ 465,148
|
Money
market deposit accounts
|
263,257
|
|
213,498
|
|
153,299
|
|
134,387
|
|
110,372
|
Interest-bearing
transaction accounts
|
229,232
|
|
187,100
|
|
191,359
|
|
170,022
|
|
178,030
|
Savings
accounts
|
122,465
|
|
115,419
|
|
107,389
|
|
114,186
|
|
131,221
|
Total
retail interest-bearing deposits
|
1,152,503
|
|
1,142,212
|
|
951,731
|
|
933,480
|
|
884,771
|
Brokered
certificates of deposits
|
45,383
|
|
44,116
|
|
59,589
|
|
129,128
|
|
41,786
|
Total
interest-bearing deposits
|
1,197,886
|
|
1,186,328
|
|
1,011,320
|
|
1,062,608
|
|
926,557
|
Non-interest-bearing
deposits
|
198,000
|
|
180,040
|
|
175,057
|
|
170,921
|
|
162,729
|
Total
deposit balances
|
$
1,395,886
|
|
$
1,366,368
|
|
$
1,186,377
|
|
$
1,233,529
|
|
$
1,089,286
|
Overall,
Peoples ability to attract and retain retail certificates of deposit (“CDs”) in
recent years has been challenged by progressively intense competition for
deposits within its markets. During 2008, Peoples successfully grew
retail CDs by attracting nearly $108 million of funds from customers outside its
primary market area as an alternative to higher-cost brokered
deposits. Contributing to the higher retail CD balances in 2008 were
$35.7 million of funds deposited by customers through the Certificate of Deposit
Account Registry System, or CDARS, program, with $18 million attributable to a
single commercial deposit during the fourth quarter of 2008. Given
the growth in low-cost and non-interest-bearing core deposits in 2009,
management decided to reduce the amount of these higher-cost balances, which
resulted in lower retail CD balances at year-end 2009.
Money
market balances have more than doubled since year-end 2005, due largely to
Peoples offering a consumer money market product with a very competitive
rate. Growth in money market balances also occurred in 2008 and 2009
due to customer preference for insured deposits over short-term investment
alternatives and additional funds from trust customers. In prior
years, Peoples’ trust department had utilized money market funds offered by
unaffiliated providers for its customers. In late 2008, the ultra-low
short-term interest rates caused certain money market funds to be closed to new
deposits, which resulted in an influx of trust funds. Management
considers these additional trust funds to be a short-term, inexpensive funding
source, although the amounts could change unexpectedly in future
periods.
A
significant portion of Peoples’ interest-bearing transaction account balances is
comprised of deposits from state and local governmental entities, which are
subject to periodic fluctuations based on the timing of tax collections and
subsequent expenditures or disbursements. While Peoples has
experienced steady growth in these public funds over the last few years,
management believes these balances could decrease slightly in 2010, as Peoples
continues to emphasize growth of other low-cost deposits that do not require
Peoples to pledge assets as collateral.
In late
2005, Peoples implemented a direct mail and free gift marketing campaign
designed to attract new customers and increase non-interest-bearing
deposits. This campaign, which ended during 2007, generated many new
customer accounts and higher consumer balances. Peoples experienced
continued success in growing non-interest-bearing deposit balances in 2008 and
2009, due largely to its focus on expanding core deposit balances as a means of
reducing reliance on typically higher-costing, wholesale funding
sources.
The
maturities of CDs with total balances of $100,000 or more at December 31 were as
follows:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
3
months or less
|
$60,882
|
|
$66,757
|
|
$42,809
|
|
$26,601
|
|
$25,884
|
Over
3 to 6 months
|
25,637
|
|
50,545
|
|
33,411
|
|
47,738
|
|
25,628
|
Over
6 to 12 months
|
35,412
|
|
54,610
|
|
24,718
|
|
59,084
|
|
34,207
|
Over
12 months
|
93,002
|
|
63,345
|
|
43,386
|
|
89,049
|
|
82,174
|
Total
|
$214,933
|
|
$235,257
|
|
$144,324
|
|
$222,472
|
|
$167,893
|
Borrowed
Funds
In 2009,
Peoples reduced total borrowed funds by 20%, to $345.6 million at December 31,
2009. This reduction occurred as a result of Peoples using funds
generated from retail deposit growth and the TARP Capital Investment to repay
maturing long-term borrowings. Additional information regarding
Peoples’ borrowed funds can be found in Notes 8 and 9 of the Notes to the
Consolidated Financial Statements.
Capital/Stockholders'
Equity
In 2009,
total stockholders’ equity increased $57.3 million, to $244.0 million at
year-end, due to the TARP Capital Investment and improvement in fair value of
Peoples’ available-for-sale investment portfolio.
At
December 31, 2009, capital levels for both Peoples and Peoples Bank remained
substantially higher than the minimum amounts needed to be considered well
capitalized institutions under banking regulations. Since year-end
2008, regulatory capital ratios for both Peoples and Peoples Bank improved from
already healthy levels, due to the TARP Capital Investment. Further
information regarding Peoples and Peoples Bank’s risk-based capital ratios can
be found in Note 17 of the Notes to Consolidated Financial
Statements.
In 2009,
Peoples took steps to preserve capital by reducing the quarterly cash dividend
to common shareholders in the second half of the year. As a result,
Peoples declared cash dividends of $0.66 per common share for 2009, compared to
$0.91 per common share for 2008. The decision to reduce the quarterly
cash dividend was based largely on Peoples’ desire to maintain a dividend payout
consistent with then current earnings levels, as well as projected short-term
earning levels and long-term capital needs.
Peoples
historically has paid between 30% and 50% of quarterly earnings as dividends to
shareholders. However, future dividend payments will continue to be
determined each quarter based upon Peoples’ performance and capital
needs. 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 17 of the Notes to the
Consolidated Financial Statements, as well as the “Supervision and Regulation
–TARP Capital Purchase Program” and “Supervision and Regulation – Dividend
Restrictions” sections under Item 1 of this Form 10-K.
In
addition to traditional capital measurements, management uses tangible equity to
evaluate the adequacy of Peoples’ stockholders’ equity. This non-GAAP
financial measure and related ratios facilitate comparisons with peers since it
removes the impact of intangible assets acquired through acquisitions on the
Consolidated Balance Sheets. The following table reconciles the
calculation of tangible equity reported in Peoples’ Consolidated Financial
Statements:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Tangible
Equity:
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity, as reported
|
$ 243,968
|
|
$ 186,626
|
|
$ 202,836
|
|
$ 197,169
|
|
$ 183,077
|
Less:
goodwill and other intangible assets
|
65,599
|
|
66,406
|
|
68,029
|
|
68,852
|
|
69,280
|
Tangible
equity
|
$ 178,369
|
|
$ 120,220
|
|
$ 134,807
|
|
$ 128,317
|
|
$ 113,797
|
|
|
|
|
|
|
|
|
|
|
Tangible
Common Equity:
|
|
|
|
|
|
|
|
|
|
Tangible
equity
|
$ 178,369
|
|
$ 120,220
|
|
$ 134,807
|
|
$ 128,317
|
|
$ 113,797
|
Less:
preferred stockholders' equity
|
38,543
|
|
–
|
|
–
|
|
–
|
|
–
|
Tangible
common equity
|
$ 139,826
|
|
$ 120,220
|
|
$ 134,807
|
|
$ 128,317
|
|
$ 113,797
|
|
|
|
|
|
|
|
|
|
|
Tangible
Assets:
|
|
|
|
|
|
|
|
|
|
Total
assets, as reported
|
$
2,001,827
|
|
$
2,002,338
|
|
$
1,885,553
|
|
$
1,875,255
|
|
$
1,855,277
|
Less:
goodwill and other intangible assets
|
65,599
|
|
66,406
|
|
68,029
|
|
68,852
|
|
69,280
|
Tangible
assets
|
$
1,936,228
|
|
$
1,935,932
|
|
$
1,817,524
|
|
$
1,806,403
|
|
$
1,785,997
|
|
|
|
|
|
|
|
|
|
|
Tangible
Book Value per Share:
|
|
|
|
|
|
|
|
|
|
Tangible
common equity
|
$ 139,826
|
|
$ 120,220
|
|
$ 134,807
|
|
$ 128,317
|
|
$ 113,797
|
Common
shares outstanding
|
10,374,637
|
|
10,333,884
|
|
10,296,748
|
|
10,651,985
|
|
10,518,980
|
|
|
|
|
|
|
|
|
|
|
Tangible
book value per share
|
$ 13.48
|
|
$ 11.63
|
|
$ 13.09
|
|
$ 12.05
|
|
$ 10.82
|
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Tangible
Equity to Tangible Assets Ratio:
|
|
|
|
|
|
|
|
|
|
Tangible
equity
|
$ 178,369
|
|
$ 120,220
|
|
$ 134,807
|
|
$ 128,317
|
|
$ 113,797
|
Total
tangible assets
|
$
1,936,228
|
|
$
1,935,932
|
|
$
1,817,524
|
|
$
1,806,403
|
|
$
1,785,997
|
|
|
|
|
|
|
|
|
|
|
Tangible
equity to tangible assets
|
9.21%
|
|
6.21%
|
|
7.42%
|
|
7.10%
|
|
6.37%
|
|
|
|
|
|
|
|
|
|
|
Tangible
Common Equity to Tangible Assets Ratio:
|
|
|
|
|
|
|
|
|
Tangible
common equity
|
$ 139,826
|
|
$ 120,220
|
|
$ 134,807
|
|
$ 128,317
|
|
$ 113,797
|
Tangible
assets
|
$
1,936,228
|
|
$
1,935,932
|
|
$
1,817,524
|
|
$
1,806,403
|
|
$
1,785,997
|
|
|
|
|
|
|
|
|
|
|
Tangible
common equity to tangible assets
|
7.22%
|
|
6.21%
|
|
7.42%
|
|
7.10%
|
|
6.37%
|
Interest
Rate Sensitivity and Liquidity
While
Peoples is exposed to various business risks, the risks relating to interest
rate sensitivity and liquidity are typically the most complex and dynamic risks
that can materially impact future results of operations and financial
condition. The objective of Peoples’ asset/liability management
(“ALM”) function is to measure and manage these risks in order to optimize net
interest income within the constraints of prudent capital adequacy, liquidity
and safety. This objective requires Peoples to focus on interest rate
risk exposure and adequate liquidity through its management of the mix of assets
and liabilities, their related cash flows and the rates earned and paid on those
assets and liabilities. Ultimately, the ALM function is intended to
guide management in the acquisition and disposition of earning assets and
selection of appropriate funding sources.
Interest
Rate Risk
Interest
rate risk (“IRR”) is one of the most significant risks arising in the normal
course of business of financial services companies like Peoples. 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 assigned overall management of IRR to the ALCO, which has established an IRR
management policy that sets minimum requirements and guidelines for monitoring
and managing the level and amount of IRR. The objective of Peoples’
IRR policy is to assist the ALCO in its
evaluation of the impact of changing interest rate conditions on earnings and
economic value of equity, as well as assist with the implementation of
strategies intended to reduce Peoples’ IRR. The management of
IRR involves either maintaining or changing the level of risk exposure by changing the repricing and
maturity characteristics of the cash flows for specific assets or
liabilities.
The ALCO
uses various methods to assess and monitor the current level of Peoples’ IRR and
the impact of potential strategies or other changes. However, the
ALCO predominantly relies on simulation modeling in its overall management of
IRR since it is a dynamic measure. Simulation modeling also estimates
the impact of potential changes in interest rates and balance sheet structures
on future earnings and projected fair value of equity.
The
modeling process starts with a base case simulation using the current balance
sheet and current interest rates held constant for the next twelve
months. Alternate scenarios are prepared which simulate the impact of
increasing and decreasing market interest rates, assuming parallel yield curve
shifts. Comparisons produced from the simulation data, showing the
changes in net interest income from the base interest rate scenario, illustrate
the risks associated with the current balance sheet
structure. Additional simulations, when deemed appropriate or
necessary, are prepared using different interest rate scenarios than those used
with the base case simulation and/or possible changes in balance sheet
composition. Comparisons showing the earnings and equity value
variance from the base case are provided to the ALCO for review and
discussion.
The ALCO
has established limits on changes in net interest income and the economic value
of equity. In general, the ALCO limits the decrease in net interest
income to 15% or less from base case for each 200 basis point shift in interest
rates measured over a twelve-month period. The ALCO limits the
negative impact on net equity to 20% or less given an immediate and sustained
200 basis point shift in interest rates.
The
following table illustrates the estimated impact of an immediate and sustained
change in interest rates (dollars in thousands):
Increase
in
|
|
Estimated
Increase (Decrease)
|
|
Estimated
Increase (Decrease)
|
Interest
Rate
|
|
in
Net Interest Income
|
|
in
Economic Value of Equity
|
(in
Basis Points)
|
|
December
31, 2009
|
|
December
31, 2008
|
|
December
31, 2009
|
|
December
31, 2008
|
300
|
|
$ 2,836
|
|
4.6
%
|
|
$ (1,713)
|
|
(2.9)%
|
|
$ 2,974
|
|
1.1
%
|
|
$ (5,386)
|
|
(2.4)%
|
200
|
|
3,010
|
|
4.8
%
|
|
(418)
|
|
(0.7)%
|
|
9,730
|
|
3.5
%
|
|
(1,048)
|
|
(0.5)%
|
100
|
|
2,100
|
|
3.4
%
|
|
84
|
|
0.1
%
|
|
9,447
|
|
3.4
%
|
|
2,946
|
|
1.3
%
|
This
table uses a standard, parallel shock analysis for assessing the IRR to net
interest income and the economic value of equity. A parallel shock
means all points on the yield curve (one year, two year, three year, etc.) are
directionally shocked the same amount of basis points – 100 basis points equal
to 1%. While management regularly assesses the impact of both
increasing and decreasing interest rates, the table above only reflects the
impact of upward shocks due the fact a downward parallel shock of 100 basis
points or more is not possible given that some short-term rates are currently
less than 1%.
Although
a parallel shock table can give insight into the current direction and magnitude
of IRR inherent in the balance sheet, interest rates do not always move in a
complete parallel manner during interest rate cycles. These
nonparallel movements in interest rates, commonly called yield curve steepening
or flattening movements, tend to occur during the beginning and end of an
interest rate cycle. As a result, management conducts more advanced
interest rate shock scenarios to gain a better understanding of Peoples’
exposure to nonparallel rate shifts.
During
2009, management shifted the balance sheet from a generally neutral interest
risk position to an asset sensitive position in anticipation of eventual rising
interest rates. This change occurred largely as the result of
management selectively extending maturities on the liability side of the balance
sheet by issuing brokered deposits with maturities of five years or longer,
while shortening the duration of the investment portfolio. The ALCO
will continue to monitor Peoples’ overall IRR position and take appropriate
actions, when necessary, to preserve the current balance sheet risk position and
minimize the impact of changes in interest rates on future
earnings.
Liquidity
In
addition to IRR management, another major objective of the ALCO is to maintain a
sufficient level of liquidity. The ALCO defines liquidity as the
ability to meet anticipated and unanticipated operating cash needs, loan demand
and deposit withdrawals, without incurring a sustained negative impact on
profitability. The ALCO’s liquidity management policy sets limits on
the net liquidity position and the concentration of non-core funding sources,
both wholesale funding and brokered deposits.
Typically,
the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided by cash generated from earning assets such as maturities,
calls, principal payments and interest income from loans and investment
securities. Peoples also uses various wholesale funding sources to
supplement funding from customer deposits. These external sources
also provide Peoples with the ability to obtain large quantities of funds in a
relatively short time period in the event of sudden unanticipated cash
needs. Peoples also has a contingency funding plan that serves as an
action plan for management in the event of a short-term or long-term funding
crisis caused by a single or series of unexpected events.
At
December 31, 2009, Peoples had available borrowing capacity through its
wholesale funding sources and unpledged investment securities totaling
approximately $185 million that can be used to satisfy liquidity needs, up from
$124 million at year-end 2008. This liquidity position excludes the
$11 million excess cash reserves at the Federal Reserve Bank of Cleveland and
the impact of Peoples’ ability to obtain additional funding by either offering
higher rates on retail deposits or issuing additional brokered
deposits. Management believes the current balance of cash and cash
equivalents and anticipated cash flows from the investment portfolio, along with
the availability of other funding sources, will allow Peoples to meet
anticipated cash obligations, as well as special needs and off-balance sheet
commitments.
Future
Outlook
In 2009,
financial services companies, including Peoples, continued to navigate through a
variety of challenges resulting from the economic turmoil that has existed over
the last two years. These challenges included asset quality
deterioration, additional regulatory burden and FDIC premium expense, plus
depressed real estate values. While national statistics may be
showing signs of an economic recovery, management expects many of these
challenges will persist in 2010. As a result, Peoples’ key
priorities will include improving asset quality, maintaining liquidity,
preserving capital and realizing operating efficiencies, while continuing to
grow its business through client-focused strategies.
One of
Peoples’ recent successes was a modest reduction in nonperforming loans compared
to year-end 2008 levels. While nonperforming asset reduction will
remain a priority in 2010, many of Peoples’ commercial borrowers continue to
experience financial difficulty due to current economic conditions and reduced
consumer spending. Additionally, the market for selling commercial
properties is expected to remain slower than prior years. These
conditions could limit any improvement in Peoples’ asset
quality. Even still, Peoples will remain diligent in its workout
efforts and could take more aggressive actions to resolve existing problem
loans. However, such actions could require Peoples to recognize
additional charge-offs, which may result in provision for loan losses remaining
elevated in 2010.
Peoples
also maintained sound capital positions, despite higher provision for loan
losses and investment securities impairment losses, due in part to the capital
received in the TARP Capital Investment. While the TARP Capital
Investment has afforded Peoples greater flexibility to work through asset
quality issues and provided additional strength to continue lending in a
difficult environment, this capital is not part of Peoples’ long-term capital
plan. Consequently, management anticipates repaying the TARP Capital
Investment sooner than the 3 to 5 years originally planned, but only if it makes
sense to do so based on asset quality and capital levels.
In 2009,
Peoples’ interest rate strategies emphasized reducing funding costs by replacing
higher-cost wholesale funding with lower-cost core deposits. In 2010,
Peoples will continue to grow low-cost core deposits and price some higher-cost
deposits more selectively, especially in segments like government deposits that
require pledging of investments. Management anticipates a modest
decrease in governmental deposits in 2010 in response to less aggressive pricing
during the year. However, Peoples’ ability to improve net interest
income and margin may be limited as some contraction in earning asset levels
could occur. Loan growth could be minimal given the impact of
economic conditions on loan demand and possibility charge-offs could remain
elevated.
Peoples’
balance sheet is positioned for a rising interest rate environment, and
management would expect net interest income and margin to benefit should
interest rates increase during the year. Given the uncertainty
surrounding the timing and magnitude of future interest rate changes, as well as
the impact of competition for loans and deposits, Peoples’ net interest margin
and income remain inherently difficult to predict and manage.
Peoples’
investment securities portfolio could remain a significant portion of the
earning asset base in 2010. Given the limited opportunities to find
attractive long-term investments, management believes it is likely the
investment portfolio could experience a modest decrease in the early part of
2010. Most of the reduction could occur as a result of normal monthly
cash flows generated by the portfolio, given the significant investment in
mortgage-backed securities. However, Peoples could adjust the size or
composition of the portfolio based on, among other factors, changes in the loan
portfolio, liquidity needs and interest rate conditions.
In 2009,
Peoples’ non-interest income benefited from sizable growth in mortgage banking
activity and related income. This increased activity was mostly
attributable to significantly higher refinancing activity from customers taking
advantage of historically low fixed interest rates. Management does
not anticipate the same level of secondary market loan production in 2010, which
would result in lower mortgage banking income. Non-interest income
could be challenged further by new regulations governing overdraft fees that
take effect on July 1, 2010, which impact Peoples’ ability to assess overdraft
fees on certain transactions without the prior consent of
customers. Given the nature of this new regulation, management is
unable to estimate the potential impact on Peoples’ deposit account services
charges and earnings. However, management continues to evaluate
opportunities to mitigate the impact by enhancing other revenues and products to
be offered to customers. Additionally, Peoples remains committed to
customer-focused delivery of financial services and increasing cross-sale
activity among its business lines, which could produce additional non-interest
revenues.
Operating
expenses were controlled in 2009, with the overall increase in total
non-interest expense limited to higher FDIC expenses, professional fees
associated with problem loans and employee medical benefit plan
costs. During the second half of 2009, management intensified its
cost control efforts and will be working to build on that progress in
2010. Some of the initiatives implemented include freezing virtually
all base salaries and curtailing certain employee benefits. A key to
achieving Peoples’ 2010 operating goals will be reductions in various operating
expenses and improvement in overall operating efficiency. Management
continues to monitor expenses closely and seek additional efficiencies wherever
possible, while at the same time evaluate opportunities to expand Peoples’
customer base and grow the company in a disciplined manner commensurate with the
greater value of capital in the current operating environment.
Growing
retail deposit balances and reducing Peoples’ reliance on higher-cost wholesale
funding sources will remain a point of emphasis in 2010. Competition
for deposits could make it difficult for Peoples to build on its recent
success. Still, Peoples’ sales associates are focused on developing
long-term relationships and uncovering other financial needs of these new
customers, while at the same time expanding relationships with existing
customers.
Over the
past couple decades, Peoples grew its business and revenues through strategic
acquisitions and expansion. Management believes conditions in several
markets served by Peoples could provide opportunities for potential
growth. Further, management believes Peoples’ capital position
remains at levels that will support disciplined balance sheet growth
opportunities. The evaluation of potential acquisitions will be more
strenuous and selective, especially considering the value of capital during
difficult economic times. Ultimately, any future expansion will be
driven by growth opportunities in both deposits and loans.
The
economic outlook for 2010, and even 2011, also indicates the potential for a new
set of challenges for financial services companies in the coming year due to
sustained high unemployment and depressed prices of commercial real
estate. Management remains focused on building upon Peoples’
strengths to help its clients with financial solutions that fit their needs,
while also investing in client services that add to Peoples’ growing customer
base.
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.
The
following is a summary of Peoples’ significant off-balance sheet activities and
contractual obligations. Detailed information regarding these
activities and obligations can be found in the Notes to the Consolidated
Financial Statements as follows:
Activity
or Obligation
|
|
Note
|
Off-balance
sheet credit-related financial instruments
|
|
16
|
Low-income
housing tax credit investments
|
|
16
|
Operating
lease obligations
|
|
5
|
Long-term
debt obligations
|
|
9
|
Junior
subordinated notes held by subsidiary trusts
|
|
10
|
Traditional
off-balance sheet credit-related financial instruments are primarily commitments
to extend credit and standby letters of credit. These activities are
necessary to meet the financing needs of customers and could require Peoples to
make cash payments to third parties in the event certain specified future events
occur. The contractual amounts represent the extent of Peoples’
exposure in these off-balance sheet activities. However, since
certain off-balance sheet commitments, particularly standby letters of credit,
are expected to expire or only partially be used, the total amount of
commitments does not necessarily represent future cash
requirements.
Peoples
also 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, the total amount of future equity contributions at December 31,
2009, is not reflected on the Consolidated Balance Sheets.
Peoples
continues to lease certain facilities and equipment under noncancellable
operating leases with terms providing for fixed monthly payments over periods
generally ranging from two to ten years. Several of Peoples’ leased
facilities are inside retail shopping centers or office buildings and, as a
result, are not available for purchase. Management believes these
leased facilities increase Peoples’ visibility within its markets and afford
sales associates additional access to current and potential
clients.
The
following table details the aggregate amount of future payments Peoples is
required to make under certain contractual obligations as of December 31,
2009:
|
|
|
Payments
due by period
|
(Dollars
in thousands)
|
Total
|
|
Less
than 1 year
|
|
1-3
years
|
|
3-5
years
|
|
More
than 5 years
|
Long-term
debt
(1)
|
$246,113
|
|
$33,281
|
|
$82,435
|
|
$3,555
|
|
$126,842
|
Junior
subordinated notes held by
subsidiary
trust (1)
|
22,530
|
|
–
|
|
–
|
|
–
|
|
22,530
|
Operating
leases
|
6,410
|
|
850
|
|
1,669
|
|
1,451
|
|
2,440
|
Time
deposits
|
582,932
|
|
310,575
|
|
182,227
|
|
53,887
|
|
36,243
|
Total
|
$857,985
|
|
$344,706
|
|
$266,331
|
|
$58,893
|
|
$188,055
|
(1)
Amounts reflect solely the minimum required principal
payments.
|
Management
does not anticipate Peoples’ current off-balance sheet activities and
contractual obligations will have a material impact on future results of
operations and financial condition based on past experience.
Effects
of Inflation on Financial Statements
Substantially
all of Peoples’ assets relate to banking and are monetary in
nature. As a result, inflation does not impact Peoples to the same
degree as companies in capital-intensive industries in a replacement cost
environment. During a period of rising prices, a net monetary asset
position results in a loss in purchasing power and conversely a net monetary
liability position results in an increase in purchasing power. The
opposite would be true during a period of decreasing prices. In the
banking industry, monetary assets typically exceed monetary
liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore,
inflation has had little impact on Peoples’ net assets.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Please
refer to the section captioned “Interest Rate Sensitivity and Liquidity” under
Item 7 of this Form 10-K, which section is incorporated herein by
reference.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
The
Consolidated Financial Statements and accompanying notes, and the report of
independent registered public accounting firm, are set forth immediately
following Item 9B of this Form 10-K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
|
No
response required.
ITEM
9A. CONTROLS AND
PROCEDURES
|
Disclosure
Controls and Procedures
Peoples’
management, with the participation of Peoples’ President and Chief Executive
Officer and Peoples’ Executive Vice President, Chief Financial Officer and
Treasurer, has evaluated the effectiveness of Peoples’ disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) (the “Exchange Act”) as of December 31,
2009. Based upon that evaluation, Peoples’ President and Chief
Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer
and Treasurer have concluded that:
(a)
|
information
required to be disclosed by Peoples in this Annual Report on Form 10-K and
other reports Peoples files or submits under the Exchange Act would be
accumulated and communicated to Peoples’ management, including its
President and Chief Executive Officer and its Executive Vice President,
Chief Financial Officer and Treasurer, as appropriate to allow timely
decisions regarding required
disclosure;
|
(b)
|
information
required to be disclosed by Peoples in this Annual Report on Form 10-K and
other reports Peoples files or submits under the Exchange Act would be
recorded, processed, summarized and reported within the timeframe
specified in the SEC’s rules and forms;
and
|
(c)
|
Peoples’
disclosure controls and procedures were effective as of the end of the
fiscal year covered by this Annual Report on Form
10-K.
|
Management’s
Annual Report on Internal Control Over Financial Reporting
The
“Report of Management’s Assessment of Internal Control Over Financial Reporting”
required by Item 308(a) of SEC Regulation S-K is included on page 55 of
this Annual Report on Form 10-K.
Attestation
Report of Independent Registered Public Accounting Firm
The
“Report of Independent Registered Public Accounting Firm on Effectiveness of
Internal Control Over Financial Reporting” required by Item 308(b) of SEC
Regulation S-K is included on page 56 of this Annual Report on
Form 10-K.
Changes
in Internal Control over Financial Reporting
During
the fourth quarter of Peoples’ fiscal year ended December 31, 2009, no changes
were made in Peoples’ internal control over financial reporting that have
materially effected, or are reasonably likely to materially effect, Peoples’
internal control over financial reporting.
ITEM 9B. OTHER
INFORMATION
On
February 25, 2010, Peoples’ Board of Directors established the 2010 corporate
incentive performance goals for Peoples’ executive officers, which maintained
the “balanced scorecard” approach adopted in 2009. The “balanced
scorecard” approach adopted is comprised of the following components and their
corresponding weightings: (i) Earnings Per Share Available to Common
Shareholders (30% weighting); (ii) Total Revenue (5% weighting); (iii)
Efficiency Ratio (5% weighting); (iv) Tier 1 Common Capital Ratio (15%
weighting); (v) Non-Performing Assets as a Percent of Loans and Other Real
Estate Owned (15% weighting); and (vi) Discretionary Measure (30%
weighting). The Discretionary Measure is unique to each executive
officer and consists of quantitative and qualitative measures such as
effectiveness in strategic planning and implementation of long-range plans,
reduction in classified assets and other leadership-based
factors. These measures are intended to reflect results achieved for
shareholders while ensuring that the compensation arrangement does not encourage
unnecessary and excessive risk-taking that could threaten the value of
Peoples. The absolute minimum level of corporate performance remains
in effect for 2010, but the Compensation Committee of the Board of Directors
(the “Committee”) retains the ability to award both cash and equity-based
incentive compensation based on results achieved by the individual executive
officer if the absolute minimum level of performance is not
achieved.
There are
three levels of incentive awards under the plans: threshold, target and
maximum. Payouts as a percent of salary have been increased for
achieving the threshold level of performance and decreased for achieving target
and maximum levels of performance in an effort to reduce the magnitude of the
potential incentives compared to risk-taking. Fifty percent of the
payout level attributable to achievement of the performance goals in the
balanced scorecard would be awarded to the executive officer in the form of an
annual cash incentive. The remaining 50% of the payout level achieved
would be in the form of restricted stock, 33% of which would be in the form of
restricted stock with a two-year time-based vesting period and 67% of which
would be in the form of restricted stock with a performance-based vesting based
upon the achievement of an Earnings Per Share Available to Common Shareholders
performance goal for the three-year period ending December 31,
2012. The Committee believes restricted stock awards better align the
interests of management with those of the shareholders than other forms of
equity. As a result, the Committee has increased the amount of the
total performance-based compensation that would be awarded in equity-based
awards from approximately one-third of aggregate incentive awards to one-half of
the incentive awards, and from two forms of equity (split equally between SARs
to be settled in stock and restricted stock) to a blend of time-vested and
performance-vested restricted stock. The addition of
performance-based vesting lengthens the performance period being measured for
one-third of the total incentive award from one year to three years, making it
easier to factor in risk and risk outcome. Additionally, the
mandatory 25% deferral of the cash incentive award has been eliminated for 2010
since the retention benefit is now achieved through the use of time-vested and
performance-vested restricted stock.
A summary
of the incentive plan for Peoples’ executive officers is included as Exhibit
10.2(b) to this Form 10-K.
Report
of Management’s Assessment of Internal Control Over Financial
Reporting
Peoples’
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under 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 purposes in accordance with United States generally
accepted accounting principles.
With the
supervision and participation of its President and Chief Executive Officer and
its Executive Vice President, Chief Financial Officer and Treasurer, management
evaluated the effectiveness of its internal control over financial reporting as
of December 31, 2009, 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, 2009, and, based on this assessment, has concluded Peoples’
internal control over financial reporting is effective as of that
date.
Peoples’
independent registered public accounting firm, Ernst & Young LLP has audited
the Consolidated Financial Statements included in this Annual Report and has
issued an attestation report on Peoples’ internal control over financial
reporting.
/s/ MARK F.
BRADLEY /s/ EDWARD G.
SLOANE
Mark F.
Bradley
Edward G. Sloane
President
and Chief Executive
Officer
Executive Vice President,
Chief Financial Officer and Treasurer
Report of
Independent Registered Public Accounting Firm on Effectiveness of Internal
Control Over Financial Reporting
The
Board of Directors and Shareholders of Peoples Bancorp Inc.
We have
audited Peoples Bancorp Inc.’s internal control over financial reporting as of
December 31, 2009, 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 included in the accompanying Report of Management’s Assessment of
Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on 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, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, 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, Peoples Bancorp Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, 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, 2009 and 2008, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2009, and our report dated March 1,
2010 expressed an unqualified opinion thereon.
Charleston,
West Virginia
March
1, 2010
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
The
Board of Directors and Shareholders of Peoples Bancorp Inc.
We have
audited the accompanying consolidated balance sheets of Peoples Bancorp Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2009. 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, 2009 and 2008, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009, 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), Peoples Bancorp Inc.’s internal control over
financial reporting as of December 31, 2009, 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 1,
2010, expressed an unqualified opinion thereon.
Charleston,
West Virginia
March 1,
2010
PEOPLES
BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
(Dollars
in thousands)
|
2009
|
|
2008
|
Assets
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
Cash
and due from banks
|
$29,969
|
|
$34,389
|
Interest-bearing
deposits in other banks
|
11,804
|
|
1,209
|
Total
cash and cash equivalents
|
41,773
|
|
35,598
|
|
|
|
|
Available-for-sale
investment securities, at fair value (amortized cost of
|
|
|
|
$706,444
and $696,855 at December 31, 2009 and 2008, respectively)
|
726,547
|
|
684,757
|
Held-to-maturity
investment securities, at amortized cost (fair value of
|
|
|
|
$963
and $0 at December 31, 2009 and 2008, respectively)
|
963
|
|
–
|
Other
investment securities, at cost
|
24,356
|
|
23,996
|
Total
investment securities
|
751,866
|
|
708,753
|
|
|
|
|
Loans,
net of deferred fees and costs
|
1,052,058
|
|
1,104,032
|
Allowance
for loan losses
|
(27,257)
|
|
(22,931)
|
Net
loans
|
1,024,801
|
|
1,081,101
|
|
|
|
|
Loans
held for sale
|
1,874
|
|
791
|
Bank
premises and equipment, net
|
24,844
|
|
25,111
|
Bank
owned life insurance
|
52,924
|
|
51,873
|
Goodwill
|
62,520
|
|
62,520
|
Other
intangible assets
|
3,079
|
|
3,886
|
Other
assets
|
38,146
|
|
32,705
|
Total
assets
|
$2,001,827
|
|
$2,002,338
|
|
|
|
|
Liabilities
|
|
|
|
Deposits:
|
|
|
|
Non-interest-bearing
|
$198,000
|
|
$180,040
|
Interest-bearing
|
1,197,886
|
|
1,186,328
|
Total
deposits
|
1,395,886
|
|
1,366,368
|
|
|
|
|
Short-term
borrowings:
|
|
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
51,921
|
|
68,852
|
Federal
Home Loan Bank advances
|
25,000
|
|
30,000
|
Total
short-term borrowings
|
76,921
|
|
98,852
|
|
|
|
|
Long-term
borrowings
|
246,113
|
|
308,297
|
Junior
subordinated notes held by subsidiary trust
|
22,530
|
|
22,495
|
Accrued
expenses and other liabilities
|
16,409
|
|
19,700
|
Total
liabilities
|
1,757,859
|
|
1,815,712
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
Preferred
stock, no par value, 50,000 shares authorized, 39,000
shares
|
|
|
|
issued
at December 31, 2009, and no shares issued at December 31,
2008
|
38,543
|
|
–
|
Common
stock, no par value, 24,000,000 shares authorized,
|
|
|
|
11,031,892
shares issued and 10,975,364 shares issued at December 31,
2009
|
|
|
|
and
2008, respectively, including shares in treasury
|
166,227
|
|
164,716
|
Retained
earnings
|
46,229
|
|
50,512
|
Accumulated
comprehensive income (loss), net of deferred income taxes
|
9,487
|
|
(12,288)
|
Treasury
stock, at cost, 657,255 shares and 641,480 shares at December 31,
2009
|
|
|
|
and
2008, respectively
|
(16,518)
|
|
(16,314)
|
Total
stockholders’ equity
|
243,968
|
|
186,626
|
Total
liabilities and stockholders’ equity
|
$2,001,827
|
|
$2,002,338
|
See
Notes to the Consolidated Financial Statements.
PEOPLES
BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
Year
Ended December 31,
|
(Dollars
in thousands, except per share data)
|
2009
|
|
2008
|
|
2007
|
Interest
Income:
|
|
|
|
|
|
Interest
and fees on loans
|
$64,701
|
|
$74,268
|
|
$85,035
|
Interest
and dividends on taxable investment securities
|
34,522
|
|
29,106
|
|
25,647
|
Interest
on tax-exempt investment securities
|
2,811
|
|
2,788
|
|
2,567
|
Other
interest income
|
71
|
|
65
|
|
170
|
Total
interest income
|
102,105
|
|
106,227
|
|
113,419
|
Interest
Expense:
|
|
|
|
|
|
Interest
on deposits
|
26,123
|
|
31,310
|
|
36,975
|
Interest
on short-term borrowings
|
482
|
|
3,383
|
|
11,835
|
Interest
on long-term borrowings
|
11,677
|
|
11,079
|
|
8,513
|
Interest
on junior subordinated notes held by subsidiary trust
|
1,980
|
|
1,976
|
|
2,175
|
Total
interest expense
|
40,262
|
|
47,748
|
|
59,498
|
Net
interest income
|
61,843
|
|
58,479
|
|
53,921
|
Provision
for loan losses
|
25,721
|
|
27,640
|
|
3,959
|
Net
interest income after provision for loan losses
|
36,122
|
|
30,839
|
|
49,962
|
|
|
|
|
|
|
Gross
impairment losses
|
(7,406)
|
|
(4,260)
|
|
(6,170)
|
Less:
Non-credit losses included in other comprehensive income
|
301
|
|
–
|
|
–
|
Net
impairment losses
|
(7,707)
|
|
(4,260)
|
|
(6,170)
|
|
|
|
|
|
|
Other
Income:
|
|
|
|
|
|
Deposit
account service charges
|
10,390
|
|
10,137
|
|
9,890
|
Insurance
income
|
9,390
|
|
9,902
|
|
9,701
|
Trust
and investment income
|
4,722
|
|
5,139
|
|
4,983
|
Electronic
banking income
|
3,954
|
|
3,882
|
|
3,524
|
Mortgage
banking income
|
1,719
|
|
681
|
|
885
|
Bank
owned life insurance
|
1,051
|
|
1,582
|
|
1,661
|
Gain
on investment securities
|
1,446
|
|
1,668
|
|
108
|
Gain
on sale of banking offices
|
–
|
|
775
|
|
–
|
Other
non-interest income
|
721
|
|
755
|
|
782
|
Total
other income
|
33,393
|
|
34,521
|
|
31,534
|
Other
Expenses:
|
|
|
|
|
|
Salaries
and employee benefit costs
|
29,394
|
|
28,521
|
|
27,552
|
Net
occupancy and equipment
|
5,756
|
|
5,540
|
|
5,298
|
FDIC
insurance
|
3,442
|
|
361
|
|
146
|
Professional
fees
|
3,042
|
|
2,212
|
|
2,246
|
Data
processing and software
|
2,417
|
|
2,181
|
|
2,210
|
Electronic
banking expense
|
2,401
|
|
2,289
|
|
2,206
|
Franchise
taxes
|
1,601
|
|
1,609
|
|
973
|
Amortization
of other intangible assets
|
1,252
|
|
1,586
|
|
1,934
|
Marketing
|
1,061
|
|
1,293
|
|
1,515
|
Other
non-interest expense
|
8,316
|
|
7,893
|
|
7,372
|
Total
other expenses
|
58,682
|
|
53,485
|
|
51,452
|
Income
before income taxes
|
3,126
|
|
7,615
|
|
23,874
|
Income
tax (benefit) expense
|
(1,064)
|
|
160
|
|
5,560
|
Net
income
|
$4,190
|
|
$7,455
|
|
$18,314
|
Preferred
dividends
|
1,876
|
|
–
|
|
–
|
Net
income available to common shareholders
|
$2,314
|
|
$7,455
|
|
$18,314
|
|
|
|
|
|
|
Earnings
per common share - basic
|
$0.22
|
|
$0.72
|
|
$1.75
|
Earnings
per common share - diluted
|
$0.22
|
|
$0.72
|
|
$1.74
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding - basic
|
10,363,975
|
|
10,315,263
|
|
10,462,933
|
Weighted-average
number of common shares outstanding - diluted
|
10,374,792
|
|
10,348,579
|
|
10,529,634
|
See
Notes to the Consolidated Financial Statements.
PEOPLES
BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
Accumulated
Comprehensive
|
|
|
|
Preferred
Stock
|
Common
Stock
|
Retained
Earnings
|
Treasury
|
(Dollars
in thousands, except per share data)
|
Income
(Loss)
|
Stock
|
Total
|
Balance,
December 31, 2006
|
$
–
|
$162,654
|
$43,439
|
$(2,997)
|
$(5,927)
|
$197,169
|
Net
income
|
|
|
18,314
|
|
|
18,314
|
Other
comprehensive income, net of tax
|
|
|
|
6,011
|
|
6,011
|
Cash
dividends declared of $0.88 per share
|
|
|
(9,226)
|
|
|
(9,226)
|
Stock
option exercises
|
|
(626)
|
|
|
1,585
|
959
|
Tax
benefit from exercise of stock options
|
|
146
|
|
|
|
146
|
Purchase
of treasury stock
|
|
|
|
|
(12,350)
|
(12,350)
|
Common
stock issued under dividend
|
|
|
|
|
|
|
reinvestment
plan
|
|
848
|
|
|
|
848
|
Stock-based
compensation expense
|
|
391
|
|
|
|
391
|
Issuance
of common stock related to acquisitions:
|
|
|
|
|
|
Putnam
Agency, Inc.
|
|
(5)
|
|
|
129
|
124
|
Barengo
Insurance Agency, Inc.
|
|
(9)
|
|
|
459
|
450
|
Balance,
December 31, 2007
|
$ –
|
$163,399
|
$52,527
|
$3,014
|
$(16,104)
|
$202,836
|
Net
income
|
|
|
7,455
|
|
|
7,455
|
Other
comprehensive loss, net of tax
|
|
|
|
(15,302)
|
|
(15,302)
|
Cash
dividends declared of $0.91 per share
|
|
|
(9,470)
|
|
|
(9,470)
|
Stock
option exercises
|
|
(113)
|
|
|
296
|
183
|
Tax
benefit from exercise of stock options
|
|
(32)
|
|
|
|
(32)
|
Purchase
of treasury stock
|
|
|
|
|
(506)
|
(506)
|
Common
stock issued under dividend
|
|
|
|
|
|
|
reinvestment
plan
|
|
964
|
|
|
|
964
|
Stock-based
compensation expense
|
|
498
|
|
|
|
498
|
Balance,
December 31, 2008
|
$
–
|
$164,716
|
$50,512
|
$(12,288)
|
$(16,314)
|
$186,626
|
Net
income
|
|
|
4,190
|
|
|
4,190
|
Other
comprehensive income, net of tax
|
|
|
|
22,079
|
|
22,079
|
Issuance
of preferred shares and common
|
|
|
|
|
|
|
stock
warrant
|
38,454
|
546
|
|
|
|
39,000
|
Accrued
dividends on preferred shares
|
|
|
(1,787)
|
|
|
(1,787)
|
Amortization
of discount on preferred shares
|
89
|
|
(89)
|
|
|
–
|
Cash
dividends declared of $0.66 per common share
|
|
(6,901)
|
|
|
(6,901)
|
Tax
benefit from exercise of stock options
|
|
(14)
|
|
|
|
(14)
|
Purchase
of treasury stock
|
|
|
|
|
(249)
|
(249)
|
Common
shares issued under dividend
|
|
|
|
|
|
|
reinvestment
plan
|
|
830
|
|
|
|
830
|
Stock-based
compensation expense
|
|
149
|
|
|
|
149
|
Reissuance
of treasury stock for deferred
|
|
|
|
|
|
|
compensation
plan
|
|
|
|
|
45
|
45
|
Cumulative
effect adjustment for non-credit
|
|
|
|
|
|
|
portion
of previously recorded OTTI losses
|
|
|
304
|
(304)
|
|
–
|
Balance,
December 31, 2009
|
$
38,543
|
$166,227
|
$46,229
|
$9,487
|
$(16,518)
|
$243,968
|
See
Notes to the Consolidated Financial Statements.
PEOPLES
BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Operating
activities
|
|
|
|
|
|
Net
income
|
$4,190
|
|
$7,455
|
|
$18,314
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
Depreciation,
amortization, and accretion, net
|
4,088
|
|
5,749
|
|
7,188
|
Provision
for loan losses
|
25,721
|
|
27,640
|
|
3,959
|
Bank
owned life insurance income
|
(1,051)
|
|
(1,582)
|
|
(1,661)
|
Net
loss on investment securities
|
6,261
|
|
2,592
|
|
6,062
|
Loans
originated for sale
|
(96,731)
|
|
(31,069)
|
|
(40,582)
|
Proceeds
from sales of loans
|
96,399
|
|
32,546
|
|
40,065
|
Net
gains on sales of loans
|
(1,602)
|
|
(555)
|
|
(750)
|
Deferred
income tax benefit
|
–
|
|
(2,861)
|
|
(988)
|
Increase
(Decrease) in accrued expenses
|
155
|
|
(429)
|
|
(1,941)
|
(Decrease)
increase in interest receivable
|
(41)
|
|
1,055
|
|
610
|
Other,
net
|
(14,133)
|
|
(4,977)
|
|
605
|
Net
cash provided by operating activities
|
23,256
|
|
35,564
|
|
30,881
|
Investing
activities
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
Purchases
|
(279,018)
|
|
(457,226)
|
|
(151,912)
|
Proceeds
from sales
|
90,239
|
|
156,767
|
|
151
|
Proceeds
from maturities, calls and prepayments
|
174,808
|
|
137,292
|
|
136,491
|
Purchases
of held-to-maturity securities
|
(963)
|
|
–
|
|
–
|
Net
decrease (increase) in loans
|
24,670
|
|
(3,109)
|
|
9,260
|
Net
expenditures for premises and equipment
|
(2,154)
|
|
(3,449)
|
|
(3,027)
|
Proceeds
from sales of other real estate owned
|
512
|
|
273
|
|
107
|
Acquisitions,
net of cash received
|
–
|
|
–
|
|
(1,070)
|
Sale
of banking offices and other assets
|
–
|
|
775
|
|
–
|
Investment
in limited partnership and tax credit funds
|
(248)
|
|
(249)
|
|
(426)
|
Net
cash provided by (used in) investing activities
|
7,846
|
|
(168,926)
|
|
(10,426)
|
Financing
activities
|
|
|
|
|
|
Net
increase in non-interest-bearing deposits
|
17,960
|
|
4,983
|
|
4,136
|
Net
increase (decrease) in interest-bearing deposits
|
11,455
|
|
174,900
|
|
(51,453)
|
Net
(decrease) increase in short-term borrowings
|
(21,931)
|
|
(123,689)
|
|
27,658
|
Proceeds
from long-term borrowings
|
5,000
|
|
140,000
|
|
115,000
|
Payments
on long-term borrowings
|
(67,184)
|
|
(63,682)
|
|
(83,814)
|
Issuance
of preferred shares and common stock warrant
|
39,000
|
|
–
|
|
–
|
Preferred
stock dividends
|
(1,543)
|
|
–
|
|
–
|
Cash
dividends paid on common shares
|
(7,426)
|
|
(8,423)
|
|
(8,373)
|
Purchase
of treasury stock
|
(249)
|
|
(506)
|
|
(12,350)
|
Proceeds
from issuance of common stock
|
5
|
|
210
|
|
989
|
Redemption
of trust preferred securities
|
–
|
|
–
|
|
(7,000)
|
Excess
tax (expense) benefit for share based payments
|
(14)
|
|
(33)
|
|
146
|
Net
cash (used in) provided by financing activities
|
(24,927)
|
|
123,760
|
|
(15,061)
|
Net
increase (decrease) in cash and cash equivalents
|
6,175
|
|
(9,602)
|
|
5,394
|
Cash
and cash equivalents at beginning of year
|
35,598
|
|
45,200
|
|
39,806
|
Cash
and cash equivalents at end of year
|
$41,773
|
|
$35,598
|
|
$45,200
|
Supplemental
cash flow information:
|
|
|
|
|
|
Interest
paid
|
$41,015
|
|
$48,138
|
|
$60,037
|
Income
taxes paid
|
1,262
|
|
4,395
|
|
5,253
|
Value
of shares issued for acquisitions
|
–
|
|
–
|
|
574
|
See
Notes to the Consolidated Financial Statements.
PEOPLES
BANCORP INC. AND SUBSIDIARIES
Notes
to the Consolidated Financial Statements
Peoples
Bancorp Inc. is a financial holding company that offers a full range of
financial services and products, including commercial and retail banking,
insurance, brokerage and trust services, through its principal operating
subsidiary, Peoples Bank, National Association (“Peoples
Bank”). Services are provided through 47 financial service locations
and 39 automated teller machines in Ohio, West Virginia and Kentucky, as well as
internet-based banking.
Note
1. Summary
of Significant Accounting Policies
The
accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries
(“Peoples” refers to, Peoples Bancorp Inc. and its consolidated subsidiaries
collectively, except where the context indicates the reference relates solely to
Peoples Bancorp Inc.) conform to generally accepted accounting principles in the
United States of America (“US GAAP”) and to general practices within the banking
industry. The preparation of the financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those
estimates. Certain items in prior financial statements have been
reclassified to conform to the current presentation, which had no impact on net
income, comprehensive income or loss, net cash provided by operating activities
or stockholders’ equity.
The
following is a summary of significant accounting policies followed in the
preparation of the financial statements:
Consolidation:
Peoples’ Consolidated Financial Statements include subsidiaries in which
Peoples has a controlling financial interest, principally defined as owning a
voting interest greater than 50%. In addition, entities not
controlled by voting interests or in which the equity investors do not bear the
residual economic risks, but for which Peoples is the primary beneficiary are
also consolidated.
The
Consolidated Financial Statements include the accounts of Peoples and its
consolidated subsidiaries, Peoples Bank and Peoples Investment Company, along
with their wholly-owned subsidiaries. Peoples previously formed a
statutory business trust described in Note 10 that is a variable interest entity
for which Peoples is not the primary beneficiary. As a result, the
accounts of this trust 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 on a level yield basis. The cost of
investment securities sold, and any resulting gain or loss, is based on the
specific identification method and recognized as of the trade date.
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 or loss, 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.
Certain
restricted equity securities that do not have readily determinable fair values
and for which Peoples does not exercise significant influence, are carried at
cost. These cost method securities are reported as other investment
securities on the Consolidated Balance Sheets and consist solely of shares of
the Federal Home Loan Bank (“FHLB”) of Cincinnati and the Federal Reserve Bank
of Cleveland.
Management
systematically evaluates investment securities for other-than-temporary declines
in fair value on a quarterly basis. This analysis requires management
to consider various factors, which include (1) duration and magnitude of the
decline in value, (2) the financial condition of the issuer or issuers and (3)
structure of the security.
An
impairment loss is recognized in earnings only when (1) Peoples intends to sell
the debt security; (2) it is more likely than not that Peoples will be required
to sell the security before recovery of its amortized cost basis or (3) Peoples
does not expect to recover the entire amortized cost basis of the
security. In situations where Peoples intends to sell or when it is
more likely than not that Peoples will be required to sell the security, the
entire impairment loss must be recognized in earnings. In all other
situations, only the portion of the impairment loss representing the credit loss
must be recognized in earnings, with the remaining portion being recognized in
stockholders’ equity as a component of other comprehensive income, net of
deferred taxes.
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 8 and 9. Securities pledged as collateral under Repurchase
Agreements are included in investment securities on the Consolidated Balance
Sheets and are disclosed in Note 3. The fair value of the collateral
pledged to a third party is continually monitored and additional collateral is
pledged or returned, as deemed appropriate.
Loans:
Loans originated that Peoples has the positive intent and ability to hold
for the foreseeable future or to maturity or payoff are reported at the
principal balance outstanding, net of deferred loan fees and costs and an
allowance for loan losses. The foreseeable future is based upon
current market conditions and business strategies, as well as balance sheet
management and liquidity. As the conditions change, so may
management’s view of the foreseeable future. Net deferred loan costs
were $1.1 million and $946,000 at December 31, 2009 and 2008,
respectively.
A loan is
considered impaired, based on current information and events, if it is probable
that collection of principal and interest payments when due according to the
contractual terms of the loan agreement is doubtful. Impaired loans
include commercial loans placed on nonaccrual status, renegotiated or internally
classified as substandard or doubtful (as those terms are defined by banking
regulations) and meet the definition of impaired loans. The amount of
impairment is based on the fair value of the underlying collateral if repayment
is expected solely from the sale of the collateral. Amounts deemed
uncollectible are charged-off against the allowance for loan
losses. Consumer and residential real estate loans typically are not
placed on nonaccrual, and instead are charged down to the net realizable
value.
Loans
acquired in a business combination that have evidence of deterioration of credit
quality since origination and for which it is probable, at acquisition, that
Peoples will be unable to collect all contractually required payments receivable
are initially recorded at fair value (the present value of the amounts expected
to be collected) with no valuation allowance. The difference between
the undiscounted cash flows expected at acquisition and the investment in the
loan, or the “accretable yield”, is recognized as interest income on a
level-yield method over the life of the loan. Contractually required payments
for interest and principal that exceed the undiscounted cash flows expected at
acquisition, or the “nonaccretable difference”, are not recognized as a yield
adjustment or as a loss accrual or a valuation allowance.
Over the
life of these acquired loans, management continues to monitor each acquired loan
portfolio for changes in credit quality. Increases in expected cash
flows subsequent to acquisition are recognized prospectively over their
remaining life as a yield adjustment on the loans. Subsequent
decreases in expected cash flows are recognized as impairment, with the amount
of the expected loss included in management’s evaluation of the adequacy of the
allowance for loan loss.
Loans Held for
Sale: Loans originated and intended to be sold in the secondary market,
generally one-to-four family residential loans, are carried at the lower of cost
or estimated fair value determined on an aggregate basis. Gains and
losses on sales of loans held for sale are included in mortgage banking
income.
Peoples
enters into interest rate lock commitments with borrowers and best efforts
commitments with investors on loans originated for sale into the secondary
markets. Peoples uses these commitments to manage the inherent
interest rate and pricing risk associated with selling loans in the secondary
market. The interest rate lock commitments generally terminate once
the loan is funded, the lock period expires or the borrower decides not to
contract for the loan. The best efforts commitments generally
terminate once the loan is sold, the commitment period expires or the borrower
decides not to contract for the loan. These commitments are
considered derivatives which are generally accounted for by recognizing their
estimated fair value on the Consolidated Balance Sheets 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 adjusted for certain qualitative risk
factors. The allowance for loan loss related to an impaired loan 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 consist
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.
Bank Owned Life
Insurance: Bank 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
upon surrender of the policy. Income from these policies and changes
in the cash surrender value are recorded in other income.
Investments in
Affordable Housing Limited Partnerships: Investments in affordable
housing consist of investments in limited partnerships that operate qualified
affordable housing projects or that invest in other limited partnerships formed
to operate affordable housing projects. These investments are
considered variable interest entities for which Peoples is not the primary
beneficiary. Peoples generally utilizes the effective yield method to
account for these investments with the tax credits, net of the amortization of
the investment, reflected in the Consolidated Statements of Income as a
reduction of income tax expense. The unamortized amount of the
investments is recorded in other assets. Peoples’ investments in
affordable housing limited partnerships were $3.8 million and $5.3
million at December 31, 2009 and 2008, respectively.
Other Real Estate
Owned: Other real estate owned (“OREO”), included in other assets on the
Consolidated Balance Sheets, is comprised primarily of commercial and
residential real estate properties acquired by Peoples Bank in satisfaction of a
loan. OREO obtained in satisfaction of a loan is recorded at the
lower of cost or estimated fair value based on appraised value at the date
actually or constructively received, less estimated costs to sell the
property. Peoples had OREO totaling $6.3 million at December 31,
2009, and $525,000 at December 31, 2008.
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 the business
combination. Goodwill is not amortized but is tested for impairment
at least annually and updated quarterly if necessary. Based upon the
most recently completed goodwill impairment test, Peoples concluded the recorded
value of goodwill was not impaired as of December 31, 2009, based upon the
estimated fair value of Peoples’ single reporting unit.
Peoples’
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 with
definite useful lives. These intangible assets are amortized on an
accelerated basis over their estimated lives ranging from 7 to 10
years.
Mortgage
Servicing Rights: Mortgage servicing rights (“MSRs”) represent the right
to service loans sold to third party investors. MSRs are recognized
separately as a servicing asset or liability whenever Peoples undertakes an
obligation to service financial assets.
Peoples
initially records MSRs at fair value at the time of the sale of the loans to the
third party investor. Peoples follows the amortization method for the
subsequent measurement of each class of separately recognized servicing assets
and liabilities. Under the amortization method, Peoples amortizes the
value of servicing assets or liabilities in proportion to and over the period of
estimated net servicing income or net servicing loss and assesses servicing
assets or liabilities for impairment or increased obligation based on fair value
at each reporting date. 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.
MSRs are
reported in other intangible assets on the Consolidated Balance
Sheets. Serviced loans are not included in the Consolidated Balance
Sheets. Loan servicing income included in mortgage banking income
includes servicing fees received from the third party investors and certain
charges collected from the borrowers.
Preferred Stock
and Common Stock Warrant: As more fully described in Note 11, Peoples
issued preferred stock and a common stock warrant, which are classified in
stockholders’ equity on the Consolidated Balance Sheets. The
outstanding preferred stock has similar characteristics of an “Increasing Rate
Security” as described by Securities and Exchange Commission (“SEC”) Staff
Accounting Bulletin Topic 5Q, Increasing Rate Preferred Stock. The
proceeds received in conjunction with the issuance of the preferred stock and
common stock warrant were allocated to the preferred stock and common stock
warrant based on their relative fair values. Discounts on the
increasing rate preferred stock are amortized over the expected life of the
preferred stock (5 years), by charging imputed dividend cost against retained
earnings and increasing the carrying amount of the preferred stock by a
corresponding amount. The discount at the time of issuance is
computed as the present value of the difference between dividends that will be
payable in future periods and the dividend amount for a corresponding number of
periods, discounted at a market rate for dividend yield on comparable
securities. The amortization in each period is the amount which,
together with the stated dividend in the period, results in a constant rate of
effective cost with regard to the carrying amount of the preferred
stock.
Common
stock warrants are evaluated for liability or equity treatment. The
common stock warrant outstanding is carried in stockholders’ equity until
exercised or expired based on the view of both the SEC and Financial Accounting
Standards Board (the “FASB”) that they would not object to classification of
such warrants as permanent equity. This view is consistent with the
objective of the Capital Purchase Program that equity in these securities should
be considered part of equity for regulatory reporting purposes. The
fair value of the common stock warrant used in allocating total proceeds
received was determined based on a binomial model.
Trust Assets
Under Management: Peoples Bank manages certain assets held in a fiduciary
or agency capacity for customers. These assets under management,
other than cash on deposit at Peoples Bank, are not included in the Consolidated
Balance Sheets since they are not assets of Peoples Bank.
Interest Income
Recognition: Interest income on loans and investment securities is
recognized by methods that result in level rates of return on principal amounts
outstanding. Amortization of premiums has been deducted from, and
accretion of discounts has been added to, the related interest
income. Nonrefundable loan fees and direct loan costs are deferred
and recognized over the life of the loan as an adjustment of the
yield.
Peoples
discontinues the accrual of interest on loans when management believes
collection of all or a portion of contractual interest has become doubtful,
which generally occurs when a contractual payment on a loan is 90 days past
due. When interest is deemed uncollectible, amounts accrued in the
current year are reversed and amounts accrued in prior years are charged against
the allowance for loan losses. Interest received on nonaccrual loans
is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status when it is
brought current, has performed in accordance with contractual terms for a
reasonable period of time, and the collectibility of the total contractual
principal and interest is no longer in doubt.
Other Income
Recognition: Service charges on deposits include cost recovery fees
associated with services provided, such as overdraft and non-sufficient
funds. Trust and investment income consists of revenue from fiduciary
activities, which include fees for services such as asset management,
recordkeeping, retirement services and estate management, and investment
commissions and fees related to the sale of investments. Income from
these activities is recognized at the time the related services are
performed.
Insurance
income consists of commissions and fees from the sales of insurance policies and
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 received and no contingencies remain.
Income Taxes:
Peoples and its subsidiaries file a consolidated federal income tax
return. 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 Consolidated Financial Statements at the statutory Federal tax
rate. A valuation allowance, if needed, reduces deferred tax assets
to the expected amount most likely to be realized. Realization of
deferred tax assets is dependent upon the generation of a sufficient level of
future taxable income and recoverable taxes paid in prior years. The
components of other comprehensive income or loss included in the Consolidated
Statements of Stockholders’ Equity have been computed based upon a 35% Federal
tax rate.
A tax
position is initially recognized in the financial statements when it is more
likely than not the position will be sustained upon examination by the tax
authorities. Such tax positions are initially and subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of
being realized upon ultimate settlement with the tax authority assuming full
knowledge of the position and all relevant facts. Penalties and
interest incurred under the applicable tax law are classified as income tax
expense. The amount of Peoples’ uncertain income tax positions, unrecognized
benefits and accrued interest were immaterial at both December 31, 2009 and
2008.
Advertising
Costs: Advertising costs are generally expensed as
incurred.
Earnings per
Share: Basic earnings per common share are computed by dividing net
income available to common shareholders by the weighted-average number of common
shares outstanding. Diluted earnings per common share is computed by
dividing net income available to common shareholders by the weighted-average
number of common shares outstanding adjusted to include the effect of
potentially dilutive common shares. Potentially dilutive common
shares include incremental shares issuable upon exercise of outstanding stock
options, SARs and non-vested restricted common shares using the treasury stock
method.
Operating
Segments: Peoples’ business activities are currently confined to one
reporting unit and reportable segment which is community banking. As
a community banking entity, Peoples offers its customers a full range of
products through various delivery channels.
Stock-Based
Compensation: Compensation costs for stock options, restricted stock
awards and stock appreciation rights are measured at the fair value of these
awards on their grant date. The fair value of stock options and stock
appreciation rights is estimated based upon a Black-Scholes model, while the
market price of Peoples’ common shares at the grant date is used to estimate the
fair value of restricted stock awards. Compensation expense is
recognized over the required service period, generally the vesting period for
stock options and stock appreciation rights and the restriction period for
restricted stock awards. Compensation expense for awards granted to
employees who are eligible for retirement is recognized to the date the employee
is first eligible to retire.
New Accounting
Pronouncements: On June 29, 2009, the FASB issued an accounting
pronouncement establishing the FASB Accounting Standards
CodificationTM (the
“ASC”) as the source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities. This pronouncement
was effective for financial statements issued for interim and annual periods
ending after September 15, 2009, for most entities. On the effective
date, all non-SEC accounting and reporting standards were
superseded. Peoples adopted this new accounting pronouncement for the
quarter ended September 30, 2009, as required, and adoption did not have a
material impact on Peoples’ financial statements taken as a whole.
On June
12, 2009, the FASB issued two related accounting pronouncements changing the
accounting principles and disclosure requirements related to securitizations and
special-purpose entities. Specifically, these pronouncements
eliminate the concept of a “qualifying special-purpose entity”, change the
requirements for derecognizing financial assets and change how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be
consolidated. These pronouncements also expand existing disclosure
requirements to include more information about transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. These
pronouncements will be effective as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application is
prohibited. The recognition and measurement provisions regarding
transfers of financial assets shall be applied to transfers that occur on or
after the effective date. Peoples will adopt these new pronouncements
on January 1, 2010, as required. Management does not anticipate
adoption will have a material impact on Peoples’ consolidated financial
statements.
On May
28, 2009, the FASB issued an accounting pronouncement establishing general
standards of accounting for and disclosure of subsequent events, which are
events occurring after the balance sheet date but before the date the financial
statements are issued or available to be issued. In particular, the
pronouncement requires entities to recognize in the financial statements the
effect of all subsequent events that provide additional evidence of conditions
that existed at the balance sheet date, including the estimates inherent in the
financial preparation process. Entities may not recognize the impact
of subsequent events that provide evidence about conditions that did not exist
at the balance sheet date but arose after that date. This
pronouncement also requires entities to disclose the date through which
subsequent events have been evaluated. This pronouncement was
effective for interim and annual reporting periods ending after June 15,
2009. Peoples adopted the provisions of this pronouncement for the
quarter ended June 30, 2009, as required, and adoption did not have a material
impact on Peoples’ financial statements taken as a whole.
On April
9, 2009, the FASB issued three related accounting pronouncements intended to
provide additional application guidance and enhance disclosures regarding fair
value measurements and impairments of securities. In particular,
these pronouncements: (1) provide guidelines for making fair value measurements
more consistent with the existing accounting principles when the volume and
level of activity for the asset or liability have decreased significantly; (2)
enhance consistency in financial reporting by increasing the frequency of fair
value disclosures and (3) modify existing general standards of accounting for
and disclosure of other-than-temporary impairment (“OTTI”) losses for impaired
debt securities.
The fair
value measurement guidance of these pronouncements reaffirms the need for
entities to use judgment in determining if a formerly active market has become
inactive and in determining fair values when markets have become
inactive. The changes to fair value disclosures relate to financial
instruments that are not currently reflected on the balance sheet at fair
value. Prior to these pronouncements, fair value disclosures for
these instruments were required for annual statements only. These
disclosures now are required to be included in interim financial
statements. The general standards of accounting for OTTI losses were
changed to require the recognition of an OTTI loss in earnings only when an
entity (1) intends to sell the debt security; (2) more likely than not will be
required to sell the security before recovery of its amortized cost basis or (3)
does not expect to recover the entire amortized cost basis of the
security. In situations when an entity intends to sell or more likely
than not will be required to sell the security, the entire OTTI loss must be
recognized in earnings. In all other situations, only the portion of
the OTTI losses representing the credit loss must be recognized in earnings,
with the remaining portion being recognized in other comprehensive income, net
of deferred taxes.
All three
pronouncements were effective for interim and annual periods ending after June
15, 2009. Entities were permitted to early adopt the provisions of
these pronouncements for interim and annual periods ending after March 15, 2009,
but had to adopt all three concurrently. Peoples adopted these
provisions of these pronouncements for the quarterly period ending June 30,
2009, as required. As a result of adoption, Peoples recorded a
cumulative effect adjustment on April 1, 2009, which increased retained earnings
by $304,000, net of tax, for the non-credit portion of previously recorded OTTI
losses, with a corresponding reduction in accumulated comprehensive income
(loss) included in stockholders’ equity on the Consolidated Balance
Sheet. The adoption of the remaining provisions of these
pronouncements did not have any material impact on Peoples’ financial statements
taken as a whole.
Note
2. Fair
Values of Financial Instruments
The
measurement of fair value under US GAAP uses a hierarchy intended to maximize
the use of observable inputs and minimize the use of unobservable
inputs. This hierarchy uses three levels of inputs to measure the
fair value of assets and liabilities as follows:
Level 1:
Quoted prices in active exchange markets for identical assets or liabilities;
also includes certain U.S. Treasury and other U.S. government and agency
securities actively traded in over-the-counter markets.
Level 2:
Observable inputs other than Level 1 including quoted prices for similar
assets or liabilities, quoted prices in less active markets, or other observable
inputs that can be corroborated by observable market data; also includes
derivative contracts whose value is determined using a pricing model with
observable market inputs or can be derived principally from or corroborated by
observable market data. This category generally includes certain U.S.
government and agency securities, corporate debt securities, derivative
instruments, and residential mortgage loans held for sale.
Level 3:
Unobservable inputs supported by little or no market activity for
financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which
the determination of fair value requires significant management judgment or
estimation; also includes observable inputs for single dealer nonbinding quotes
not corroborated by observable market data. This category generally includes
certain private equity investments, retained interests from securitizations, and
certain collateralized debt obligations.
Assets
measured at fair value on a recurring basis comprised the following at December
31:
|
|
|
Fair
Value Measurements at Reporting Date Using
|
(Dollars
in thousands)
|
Fair
Value
|
Quoted
Prices
in
Active
Markets
for Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
Obligations
of:
|
|
|
|
|
|
|
|
|
U.S.
Treasury and government agencies
|
$
|
81
|
$
|
–
|
$
|
81
|
$
|
–
|
U.S.
government sponsored agencies
|
|
4,473
|
|
–
|
|
4,473
|
|
–
|
States
and political subdivisions
|
|
62,954
|
|
–
|
|
62,954
|
|
–
|
Residential
mortgage-backed securities
|
|
558,826
|
|
–
|
|
558,826
|
|
–
|
Commercial
mortgage-backed securities
|
|
24,188
|
|
–
|
|
24,188
|
|
–
|
U.S.
government-backed student loan pools
|
|
59,440
|
|
–
|
|
59,440
|
|
–
|
Bank-issued
trust preferred securities
|
|
13,826
|
|
–
|
|
12,826
|
|
1,000
|
Collateralized
debt obligations
|
|
165
|
|
–
|
|
–
|
|
165
|
Equity
securities
|
|
2,594
|
|
2,420
|
|
174
|
|
–
|
Total
available-for-sale securities
|
$
|
726,547
|
$
|
2,420
|
$
|
722,962
|
$
|
1,165
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
Obligations
of:
|
|
|
|
|
|
|
|
|
U.S.
Treasury and government agencies
|
$
|
176
|
$
|
–
|
$
|
176
|
$
|
–
|
U.S.
government sponsored agencies
|
|
8,442
|
|
–
|
|
8,442
|
|
–
|
States
and political subdivisions
|
|
68,930
|
|
–
|
|
68,930
|
|
–
|
Residential
mortgage-backed securities
|
|
511,201
|
|
–
|
|
511,201
|
|
–
|
Commercial
mortgage-backed securities
|
|
25,952
|
|
–
|
|
25,952
|
|
–
|
U.S.
government-backed student loan pools
|
|
44,985
|
|
–
|
|
44,985
|
|
–
|
Bank-issued
trust preferred securities
|
|
17,888
|
|
–
|
|
16,888
|
|
1,000
|
Collateralized
debt obligations
|
|
4,422
|
|
–
|
|
–
|
|
4,422
|
Equity
securities
|
|
2,761
|
|
2,575
|
|
186
|
|
–
|
Total
available-for-sale securities
|
$
|
684,757
|
$
|
2,575
|
$
|
676,760
|
$
|
5,422
|
|
|
|
|
|
|
|
|
|
The fair
values used by Peoples are obtained from an independent pricing service and
represent either quoted market prices for the identical securities (Level 1
inputs) or fair values determined by pricing models that consider observable
market data, such as interest rate volatilities, LIBOR yield curve, credit
spreads and prices from market makers and live trading systems. The
investment securities measured at fair value using Level 3 inputs are comprised
of four collateralized debt obligations, for which there is not an active
market. Peoples uses multiple input factors to determine the fair
value of these securities. Those input factors are discounted cash
flow analysis, structure of the security in relation to current level of
deferrals and/or defaults, changes in credit ratings, financial condition of the
debtors within the underlying securities, broker quotes for securities with
similar structure and credit risk, interest rate movements and pricing of new
issuances.
The
following is a reconciliation of activity for assets measured at fair value
based on significant unobservable (non-market) information:
(Dollars
in thousands)
|
Obligations
of
U.S.
Government Sponsored Agencies
|
Bank-Issued
Trust Preferred Securities
|
Collateralized
Debt Obligations
|
Balance,
December 31, 2007
|
$2,078
|
$1,030
|
$5,896
|
Transfers
into Level 3
|
–
|
2,083
|
–
|
Transfers
out of Level 3
|
(2,078)
|
–
|
–
|
Other-than-temporary
impairment loss included in earnings
|
–
|
(2,080)
|
(1,920)
|
Unrealized
loss included in comprehensive income
|
–
|
(33)
|
446
|
Balance,
December 31, 2008
|
$
–
|
$1,000
|
$4,422
|
Other-than-temporary
impairment loss included in earnings
|
–
|
–
|
(3,706)
|
Unrealized
loss included in comprehensive income
|
–
|
–
|
(1,018)
|
Cumulative
effect adjustment for non-credit
|
|
|
|
portion
of previously recorded OTTI losses
|
–
|
–
|
467
|
Balance,
December 31, 2009
|
$
–
|
$1,000
|
$165
|
Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment). Financial assets measured at fair value on a
non-recurring basis included the following:
Impaired Loans:
Impaired loans are measured and reported at fair value when management
believes collection of contractual interest and principal payments is
doubtful. Management’s determination of the fair value for these
loans represents the estimated net proceeds to be received from the sale of the
collateral based on observable market prices and market value provided by
independent, licensed or certified appraisers (Level 2 Inputs). At
December 31, 2009, impaired loans with an aggregate outstanding principal
balance of $26.6 million were measured and reported at a fair value of $20.6
million. During 2009, Peoples recognized losses of $13.2 million on
these impaired loans through the allowance for loan losses.
The
following table presents the fair values of financial assets and liabilities
carried on Peoples’ consolidated balance sheet, including those financial assets
and financial liabilities that are not measured and reported at fair value on a
recurring basis or non-recurring basis:
|
2009
|
2008
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
(Dollars
in thousands)
|
Amount
|
Value
|
Amount
|
Value
|
Financial
assets:
|
|
|
|
|
Cash
and cash equivalents
|
$41,773
|
$41,773
|
$35,598
|
$35,598
|
Investment
securities
|
751,866
|
751,866
|
708,753
|
708,753
|
Loans
|
1,026,675
|
892,182
|
1,081,101
|
1,088,322
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
Deposits
|
$1,395,886
|
$1,406,371
|
$1,366,368
|
$1,376,614
|
Short-term
borrowings
|
76,921
|
76,921
|
98,852
|
98,852
|
Long-term
borrowings
|
246,113
|
253,943
|
308,297
|
324,809
|
Junior
subordinated notes held by
subsidiary
trust
|
22,530
|
25,968
|
22,495
|
26,009
|
The
methodologies for estimating the fair value of financial assets and liabilities
that are measured at fair value on a recurring or non-recurring basis are
discussed above. For certain financial assets and liabilities,
carrying value approximates fair value due to the nature of the financial
instrument. These instruments include cash and cash equivalents,
demand and other non-maturity deposits and overnight
borrowings. Peoples used the following methods and assumptions in
estimating the fair value of the following financial instruments:
Loans: The
fair value of portfolio loans assumes sale of the notes to a third party
financial investor. Accordingly, the value to Peoples if the notes
were held to maturity is not included in the fair value
estimate. Peoples considered interest rate, credit and market factors
in estimating the fair value of loans. In the current whole loan
market, financial investors are generally requiring a much higher rate of return
than the return inherent in loans if held to maturity given the lack of market
liquidity. This divergence accounts for the majority of the
difference in carrying amount over fair value.
Deposits:
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.
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 Held by Subsidiary Trust: The fair value of the junior
subordinated notes held by subsidiary trust is estimated using discounted cash
flow analysis based on current market rates of securities with similar risk and
remaining maturity.
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.
Note
3. Investment
Securities
Available-for-sale
The
following table summarizes Peoples’ available-for-sale securities at December
31:
|
|
|
|
Non-Credit
|
|
|
|
|
|
Losses
included
|
|
|
|
Gross
|
Gross
|
in
Other
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Comprehensive
|
Fair
|
(Dollars
in thousands)
|
Cost
|
Gains
|
Losses
|
Income
|
Value
|
December
31, 2009
|
|
|
|
|
|
Obligations
of:
|
|
|
|
|
|
U.S.
Treasury and government agencies
|
$81
|
$1
|
$
–
|
$
–
|
$82
|
U.S.
government sponsored agencies
|
4,384
|
89
|
–
|
–
|
4,473
|
States
and political subdivisions
|
60,943
|
2,064
|
(54)
|
–
|
62,953
|
Residential
mortgage-backed securities
|
546,131
|
17,576
|
(4,882)
|
–
|
558,825
|
Commercial
mortgage-backed securities
|
23,656
|
675
|
(143)
|
–
|
24,188
|
U.S.
government-backed student loan pools
|
52,972
|
6,547
|
(77)
|
–
|
59,442
|
Bank-issued
trust preferred securities
|
16,073
|
47
|
(2,294)
|
–
|
13,826
|
Collateralized
debt obligations
|
986
|
–
|
(655)
|
(166)
|
165
|
Equity
securities
|
1,218
|
1,426
|
(51)
|
–
|
2,593
|
Total
available-for-sale securities
|
$706,444
|
$28,425
|
$(8,156)
|
$(166)
|
$726,547
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
Obligations
of:
|
|
|
|
|
|
U.S.
Treasury and government agencies
|
$176
|
$1
|
$(1)
|
$
–
|
$176
|
U.S.
government sponsored agencies
|
8,160
|
282
|
–
|
–
|
8,442
|
States
and political subdivisions
|
67,830
|
1,356
|
(256)
|
–
|
68,930
|
Residential
mortgage-backed securities
|
519,744
|
4,618
|
(13,161)
|
–
|
511,201
|
Commercial
mortgage-backed securities
|
26,835
|
5
|
(889)
|
–
|
25,951
|
U.S.
government-backed student loan pools
|
47,915
|
21
|
(2,951)
|
–
|
44,985
|
Bank-issued
trust preferred securities
|
20,742
|
992
|
(3,846)
|
–
|
17,888
|
Collateralized
debt obligations
|
4,225
|
198
|
–
|
–
|
4,423
|
Equity
securities
|
1,228
|
1,581
|
(48)
|
–
|
2,761
|
Total
available-for-sale securities
|
$696,855
|
$9,054
|
$(21,152)
|
$
–
|
$684,757
|
At
December 31, 2009, there were no securities of a single issuer, other than U.S.
Treasury and government agencies and U.S. government sponsored agencies that
exceeded 10% of stockholders' equity. At December 31, 2009 and 2008,
investment securities having a carrying value of $492.8 million and $444.9
million, respectively, were pledged to secure public and trust department
deposits and repurchase agreements in accordance with federal and state
requirements. Peoples also had investment securities pledged with
carrying values of $121.3 million and $174.4 million at December 31, 2009 and
2008, respectively, to secure additional borrowing capacity at the Federal Home
Loan Bank of Cincinnati and Federal Reserve Bank of Cleveland.
The gross
gains and gross losses realized by Peoples from sales of available-for-sale
securities for the years ended December 31 were as follows:
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
Gross
gains realized
|
$1,460
|
$2,740
|
$143
|
Gross
losses realized
|
14
|
1,072
|
35
|
Net
gain realized
|
$1,446
|
$1,668
|
$108
|
The
following table presents a summary of available-for-sale investment securities
that had an unrealized loss at December 31:
|
Less
than 12 Months
|
|
12
Months or More
|
|
Total
|
(Dollars
in thousands)
|
Fair
Value
|
|
Unrealized
Loss
|
Fair
Value
|
|
Unrealized
Loss
|
Fair
Value
|
|
Unrealized
Loss
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and government agencies
|
$ –
|
|
$ –
|
|
$ –
|
|
$ –
|
|
$ –
|
|
$ –
|
U.S.
government sponsored agencies
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
States
and political subdivisions
|
3,284
|
|
54
|
|
–
|
|
–
|
|
3,284
|
|
54
|
Residential
mortgage-backed securities
|
37,720
|
|
2,400
|
|
60,120
|
|
2,482
|
|
97,840
|
|
4,882
|
Commercial
mortgage-backed securities
|
1,966
|
|
143
|
|
–
|
|
–
|
|
1,966
|
|
143
|
U.S.
government-backed student loan pools
|
–
|
|
–
|
|
2,923
|
|
77
|
|
2,923
|
|
77
|
Bank-issued
trust preferred securities
|
–
|
|
–
|
|
11,574
|
|
2,294
|
|
11,574
|
|
2,294
|
Collateralized
debt obligations
|
–
|
|
–
|
|
165
|
|
655
|
|
165
|
|
655
|
Equity
securities
|
–
|
|
–
|
|
125
|
|
51
|
|
125
|
|
51
|
Total
available-for-sale securities
|
$ 42,970
|
|
$ 2,597
|
|
$ 74,907
|
|
$ 5,559
|
|
$ 117,877
|
|
$ 8,156
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and government agencies
|
$ –
|
|
$ –
|
|
$ 29
|
|
$ 1
|
|
$ 29
|
|
$ 1
|
U.S.
government sponsored agencies
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
States
and political subdivisions
|
10,521
|
|
256
|
|
–
|
|
–
|
|
10,521
|
|
256
|
Residential
mortgage-backed securities
|
197,594
|
|
10,485
|
|
38,318
|
|
2,676
|
|
235,912
|
|
13,161
|
Commercial
mortgage-backed securities
|
20,283
|
|
889
|
|
–
|
|
–
|
|
20,283
|
|
889
|
U.S.
government-backed student loan pools
|
38,261
|
|
2,951
|
|
–
|
|
–
|
|
38,261
|
|
2,951
|
Bank-issued
trust preferred securities
|
5,675
|
|
1,719
|
|
3,342
|
|
2,127
|
|
9,017
|
|
3,846
|
Collateralized
debt obligations
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
Equity
securities
|
353
|
|
48
|
|
–
|
|
–
|
|
353
|
|
48
|
Total
available-for-sale securities
|
$ 272,687
|
|
$ 16,348
|
|
$ 41,689
|
|
$ 4,804
|
|
$ 314,376
|
|
$ 21,152
|
The
unrealized losses at both December 31, 2009 and December 31, 2008, were
attributable to changes in market interest rates and spreads since the
securities were purchased. Management systematically evaluates
investment securities for other-than-temporary declines in fair value on a
quarterly basis.
During
2009, management concluded an individual bank-issued trust preferred security,
with a book value of $4.0 million, and two collateralized debt obligation
investment securities (“CDOs”), with an aggregate book value of $3.7 million,
were other-than-temporarily impaired. These securities were deemed
total losses based on management’s evaluation of the underlying credit quality
of the securities and estimations of cash flows expected to be collected from
the securities, which indicated it was probable Peoples would not recover the
amortized cost of the securities. As a result, Peoples recognized a
non-cash impairment loss of $7.7 million ($5.0 million after-tax) in earnings
for the year ended December 31, 2009.
The
measurement of the credit loss incurred on the mezzanine tranche CDOs was based
on a comparison of management’s estimate of future cash flows versus the cash
flows projected previously. In estimating future cash flows,
management considers the structure and term of the pool and the financial
condition of the underlying issuers. Specifically, the evaluation
incorporates factors such as over-collateralization and interest coverage tests,
interest rates and appropriate risk premiums, the timing and amount of interest
and principal payments and the allocation of payments to the various
tranches. Current estimates of cash flows are based on the recent
trustee reports, announcements of deferrals or defaults and assumptions
regarding expected future default rates, prepayment and recovery rates and other
relevant information. Additionally, management considers the impact
on future cash flows should institutions identified as possessing a higher
probability of default, based upon an evaluation of performance metrics, were to
default in the near term. Key assumptions used include: (1) current
defaults would have no recovery and (2) current deferrals considered as defaults
with no expected recovery.
Management
performed its analysis of the remaining securities with an unrealized loss at
December 31, 2009, and concluded no other individual securities were
other-than-temporarily impaired.
The
following table summarizes the roll-forward of cumulative credit losses on
available-for-sale securities for which a portion of an other-than-temporary
impairment is recognized in other comprehensive income, including those
securities for which a cumulative effect adjustment was recorded (dollars in
thousands):
Balance,
January 1, 2009
|
$1,200
|
Cumulative
effect adjustment for non-credit
|
|
portion
of previously recorded OTTI losses
|
(166)
|
Balance,
December 31, 2009
|
$1,034
|
The
following table presents the amortized costs, fair value and weighted-average
yield of securities by contractual maturity at December 31, 2009. The
average yields are based on the amortized cost. In some cases, the
issuers may have the right to call or prepay obligations without call or
prepayment penalties prior to the contractual maturity date. Rates
are calculated on a fully tax-equivalent basis using a 35% Federal income tax
rate.
(Dollars
in thousands)
|
Within
1 Year
|
1
to 5 Years
|
5
to 10 Years
|
Over
10
Years
|
Total
|
Amortized
cost
|
|
|
|
|
|
Obligations
of:
|
|
|
|
|
|
U.S.
Treasury and government agencies
|
$
–
|
$
–
|
$81
|
$
–
|
$81
|
U.S.
government sponsored agencies
|
–
|
–
|
4,384
|
–
|
4,384
|
States
and political subdivisions
|
1,482
|
13,984
|
17,289
|
28,188
|
60,943
|
Residential
mortgage-backed securities
|
–
|
2,719
|
112,434
|
430,978
|
546,131
|
Commercial
mortgage-backed securities
|
–
|
–
|
–
|
23,656
|
23,656
|
U.S.
government-backed student loan pools
|
–
|
–
|
15,851
|
37,121
|
52,972
|
Bank-issued
trust preferred securities
|
–
|
–
|
–
|
16,073
|
16,073
|
Collateralized
debt obligations
|
–
|
–
|
–
|
986
|
986
|
Equity
securities
|
–
|
–
|
–
|
1,218
|
1,218
|
Total
available-for-sale securities
|
$1,482
|
$16,703
|
$150,039
|
$538,220
|
$706,444
|
|
|
|
|
|
|
Fair
value
|
|
|
|
|
|
Obligations
of:
|
|
|
|
|
|
U.S.
Treasury and government agencies
|
$
–
|
$
–
|
$82
|
$
–
|
$82
|
U.S.
government sponsored agencies
|
–
|
–
|
4,473
|
–
|
4,473
|
States
and political subdivisions
|
1,513
|
14,455
|
18,124
|
28,862
|
62,954
|
Residential
mortgage-backed securities
|
–
|
2,807
|
114,602
|
441,416
|
558,825
|
Commercial
mortgage-backed securities
|
–
|
–
|
–
|
24,188
|
24,188
|
U.S.
government-backed student loan pools
|
–
|
–
|
17,021
|
42,419
|
59,440
|
Bank-issued
trust preferred securities
|
–
|
–
|
–
|
13,826
|
13,826
|
Collateralized
debt obligations
|
–
|
–
|
–
|
165
|
165
|
Equity
securities
|
–
|
–
|
–
|
2,594
|
2,594
|
Total
available-for-sale securities
|
$1,513
|
$17,262
|
$154,302
|
$553,470
|
$726,547
|
Total
average yield
|
7.04%
|
6.04%
|
4.86%
|
4.97%
|
4.97%
|
Held-to-Maturity
At
December 31, 2009, Peoples’ held-to-maturity investment consisted of a single
qualified school construction bond and is classified as held-to-maturity because
of Peoples’ intent and ability to hold the security to maturity given
uncertainty regarding ownership rights of associated tax
credits. This security is carried at an amortized cost of $963,000,
has a cash coupon rate of 1.18%, tax credit rate of 6.04% and matures in
2025.
Peoples
Bank originates various types of loans including commercial loans, real estate
loans and consumer loans, focusing primarily on lending opportunities in central
and southeastern Ohio, west central West Virginia, and northeastern Kentucky
markets.
The major
classifications of loan balances, excluding loans held for sale, at December 31
were as follows:
(Dollars
in thousands)
|
2009
|
2008
|
Commercial,
mortgage
|
$503,034
|
$478,298
|
Commercial,
other
|
159,915
|
178,834
|
Real
estate, construction
|
32,427
|
77,917
|
Real
estate, mortgage
|
264,918
|
279,413
|
Consumer
|
90,144
|
87,902
|
Deposit
account overdrafts
|
1,620
|
1,668
|
Total
loans
|
$1,052,058
|
$1,104,032
|
Peoples
has acquired various loans through business combinations for which there was, at
acquisition, evidence of deterioration of credit quality since origination and
for which it was probable that all contractually required payments would not be
collected. The carrying amounts of these loans at December 31
included in the loan balances above are summarized as follows:
(Dollars
in thousands)
|
2009
|
2008
|
Commercial,
mortgage
|
$4,112
|
$5,330
|
Commercial,
other
|
896
|
1,277
|
Real
estate, mortgage
|
20,242
|
23,781
|
Consumer
|
186
|
263
|
Total
outstanding balance
|
$25,436
|
$30,651
|
Net
carrying amount
|
$24,734
|
$29,900
|
Peoples
Bank has pledged certain loans secured by 1-4 family and multifamily residential
mortgages under a blanket collateral agreement to secure borrowings from the
FHLB as discussed in Note 8. At December 31, 2009, the amount of such
pledged loans totaled $200.8 million. In February 2010, Peoples
pledged commercial loans with outstanding balances totaling approximately $233
million to secure borrowings with the Federal Reserve Bank of
Cleveland.
Nonperforming/Past
Due Loans
Nonperforming
loans at December 31 were as follows:
(Dollars
in thousands)
|
2009
|
2008
|
Loans
90+ days past due and accruing
|
$411
|
$
–
|
Nonaccrual
loans
|
33,972
|
41,320
|
Total
nonperforming loans
|
$34,383
|
$41,320
|
Certain
loans included in the nonaccrual loan totals above are not considered impaired
and evaluated individually by Peoples. These loans consist primarily
of smaller balance homogenous consumer and residential real estate loans that
are collectively evaluated for impairment and totaled $1.7 million and $1.8
million at December 31, 2009 and December 31, 2008, respectively.
Impaired
Loans
The
following tables summarize loans classified as impaired at or for the years
ended December 31:
(Dollars
in thousands)
|
|
2009
|
2008
|
Impaired
loans with an allocated allowance for loan losses
|
$18,188
|
$11,504
|
Impaired
loans with no allocated allowance for loan losses
|
15,052
|
28,146
|
Total
impaired loans
|
|
$33,240
|
$39,650
|
Allowance
for loan losses allocated to impaired loans
|
$5,738
|
$4,340
|
|
|
|
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
Average
investment in impaired loans
|
$38,109
|
$25,644
|
$16,412
|
Interest
income recognized on impaired loans
|
$19
|
$108
|
$826
|
Interest
received on impaired loans is included in income if principal recovery is
reasonably assured.
Related Party
Loans
In the normal course of its business,
Peoples Bank has granted loans to executive officers and directors of
Peoples. Related party loans were made on substantially the same
terms, including interest rates charged and collateral required, as those
prevailing at the time for comparable loans with unrelated persons and did not
involve more than normal risk of collectibility. At December 31,
2009, no related party loan was past due 90 or more days, renegotiated or on
nonaccrual status. The following is an analysis of activity of
related party loans for the year ended December 31,
2009:
(Dollars
in thousands)
|
|
Balance,
December 31, 2008
|
$ 13,187
|
New
loans and disbursements
|
10,391
|
Repayments
|
(14,237)
|
Other
changes
|
(558)
|
Balance,
December 31, 2009
|
$ 8,783
|
Allowance
for Loan Losses
Changes
in the allowance for loan losses for each of the three years in the period ended
December 31, 2009, were as follows:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Balance,
beginning of year
|
$ 22,931
|
|
$ 15,718
|
|
$ 14,509
|
Charge-offs
|
(23,922)
|
|
(21,969)
|
|
(4,701)
|
Recoveries
|
2,527
|
|
1,542
|
|
1,951
|
Net
charge-offs
|
(21,395)
|
|
(20,427)
|
|
(2,750)
|
Provision
for loan losses
|
25,721
|
|
27,640
|
|
3,959
|
Balance,
end of year
|
$
27,257
|
|
$
22,931
|
|
$
15,718
|
Note
5. Bank
Premises and Equipment
The major
categories of bank premises and equipment and accumulated depreciation at
December 31 are summarized as follows:
(Dollars
in thousands)
|
2009
|
|
2008
|
Land
|
$ 5,699
|
|
$ 5,764
|
Building
and premises
|
31,358
|
|
30,737
|
Furniture,
fixtures and equipment
|
18,377
|
|
17,626
|
Total
bank premises and equipment
|
55,434
|
|
54,127
|
Accumulated
depreciation
|
(30,590)
|
|
(29,016)
|
Net
book value
|
$
24,844
|
|
$
25,111
|
Peoples
depreciates its building and premises and furniture, fixtures and equipment over
estimated useful lives generally ranging from 5 to 40 years and 2 to 10 years,
respectively. Depreciation expense was $1,998,000, $2,066,000 and
$2,061,000, in 2009, 2008 and 2007, respectively.
Leases
Peoples
leases certain banking facilities and equipment under various agreements with
original terms providing for fixed monthly payments over periods generally
ranging from two to ten years. Certain leases contain renewal options
and rent escalation clauses calling for rent increases over the term of the
lease. All leases which contain a rent escalation clause are
accounted for on a straight-line basis. Rent expense was $901,000, $739,000 and
$748,000 in 2009, 2008 and 2007, respectively.
Peoples
leases certain properties from related parties. Payments related to
these leases totaled $160,000, $162,000 and $183,000 in 2009, 2008 and 2007,
respectively. The terms of these leases are substantially the same as
those offered for comparable transactions with non-related parties at the time
the lease transactions were consummated.
The
future minimum payments under noncancellable operating leases with initial or
remaining terms of one year or more consisted of the following at December 31,
2009:
(Dollars
in thousands)
|
|
2010
|
$850
|
2011
|
838
|
2012
|
831
|
2013
|
842
|
2014
|
609
|
Thereafter
|
2,440
|
Total
payments
|
$6,410
|
Note
6. Goodwill
and Other Intangible Assets
Goodwill
There
were no changes in the carrying amount of goodwill for the years ended December
31, 2009 and 2008.
Peoples
performed the required goodwill impairment tests and concluded the recorded
value of goodwill was not impaired as of December 31, 2009, based upon the
estimated fair value of the single reporting unit.
Other
intangible assets
Other
intangible assets were comprised of the following at December 31:
|
Gross
|
|
Net
|
|
Intangible
|
Accumulated
|
Intangible
|
(Dollars
in thousands)
|
Asset
|
Amortization
|
Asset
|
2009
|
|
|
|
Core
deposits
|
$10,564
|
$(9,719)
|
$845
|
Customer
relationships
|
6,182
|
(5,112)
|
1,070
|
|
$16,746
|
$(14,831)
|
$1,915
|
Mortgage
servicing rights
|
|
|
1,164
|
Total
other intangible assets
|
|
|
$3,079
|
|
|
|
|
2008
|
|
|
|
Core
deposits
|
$10,564
|
$(9,042)
|
$1,522
|
Customer
relationships
|
6,182
|
(4,537)
|
1,645
|
|
$16,746
|
$(13,579)
|
$3,167
|
Mortgage
servicing rights
|
|
|
719
|
Total
other intangible assets
|
|
|
$3,886
|
The
estimated aggregate future amortization expense of core deposit and customer
relationship intangible assets at December 31, 2009, is as
follows:
|
Core
|
|
Customer
|
|
|
(Dollars
in thousands)
|
Deposits
|
|
Relationships
|
|
Total
|
2010
|
$ 472
|
|
$ 446
|
|
$ 918
|
2011
|
269
|
|
316
|
|
585
|
2012
|
104
|
|
202
|
|
306
|
2013
|
–
|
|
106
|
|
106
|
2014
|
–
|
|
–
|
|
–
|
Thereafter
|
–
|
|
–
|
|
–
|
Total
|
$ 845
|
|
$ 1,070
|
|
$ 1,915
|
The
following is an analysis of activity of MSRs for the years ended December
31:
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
Balance,
beginning of year
|
$719
|
$756
|
$792
|
Amortization
|
(406)
|
(318)
|
(350)
|
Servicing
rights originated
|
851
|
281
|
314
|
Balance,
end of year
|
$1,164
|
$719
|
$756
|
No
valuation allowances were required at December 31, 2009, 2008 and 2007 for
Peoples’ MSRs since the fair value exceeded the book value.
Peoples’
deposit balances were comprised of the following at December 31:
(Dollars
in thousands)
|
2009
|
|
2008
|
Retail
certificates of deposit:
|
|
|
|
$100,000
or more
|
$ 214,933
|
|
$ 235,257
|
Less
than $100,000
|
322,616
|
|
390,938
|
Total
retail certificates of deposit
|
537,549
|
|
626,195
|
Interest-bearing
transaction accounts
|
229,232
|
|
187,100
|
Money
market deposit accounts
|
263,257
|
|
213,498
|
Savings
accounts
|
122,465
|
|
115,419
|
Total
retail interest-bearing deposits
|
1,152,503
|
|
1,142,212
|
Brokered
certificates of deposits
|
45,383
|
|
44,116
|
Total
interest-bearing deposits
|
1,197,886
|
|
1,186,328
|
Non-interest-bearing
deposits
|
198,000
|
|
180,040
|
Total
deposit balances
|
$ 1,395,886
|
|
$ 1,366,368
|
The
contractual maturities of certificates of deposits for each of the next five
years and thereafter are as follows:
(Dollars
in thousands)
|
Retail
|
Brokered
|
Total
|
2010
|
$305,575
|
$5,000
|
$310,575
|
2011
|
118,882
|
–
|
118,882
|
2012
|
63,345
|
–
|
63,345
|
2013
|
24,099
|
–
|
24,099
|
2014
|
24,702
|
5,086
|
29,788
|
Thereafter
|
946
|
35,297
|
36,243
|
Total
maturities
|
$537,549
|
$45,383
|
$582,932
|
Included
in the amount to mature in 2009 is $5 million of brokered deposits with a total
interest cost of 4.75% that matured in January 2010. Deposits from
related parties approximated $8.8 million and $9.9 million at December 31, 2009
and 2008, respectively.
Note
8. Short-Term
Borrowings
Peoples
utilizes various short-term borrowings as sources of funds, which are summarized
as follows:
(Dollars
in thousands)
|
Retail
Repurchase Agreements
|
FHLB
Advances
|
National
Market
Repurchase
Agreements
|
Other
Short-Term Borrowings
|
2009
|
|
|
|
|
Ending
balance
|
$51,921
|
$25,000
|
$
–
|
$
–
|
Average
balance
|
52,905
|
6,867
|
–
|
150
|
Highest
month end balance
|
53,931
|
25,000
|
–
|
10,000
|
Interest
expense
|
468
|
13
|
–
|
1
|
Weighted-average
interest rate:
|
|
|
|
|
End
of year
|
0.54%
|
0.09%
|
–
%
|
–
%
|
During
the year
|
0.88%
|
0.19%
|
–
%
|
0.67%
|
|
|
|
|
|
2008
|
|
|
|
|
Ending
balance
|
$54,452
|
$30,000
|
$
–
|
$14,400
|
Average
balance
|
39,329
|
102,146
|
–
|
1,195
|
Highest
month end balance
|
56,079
|
186,100
|
–
|
14,400
|
Interest
expense
|
813
|
2,557
|
–
|
13
|
Weighted-average
interest rate:
|
|
|
|
|
End
of year
|
1.26%
|
0.34%
|
–
%
|
0.50%
|
During
the year
|
2.07%
|
2.50%
|
–
%
|
1.09%
|
|
|
|
|
|
2007
|
|
|
|
|
Ending
balance
|
$35,041
|
$187,500
|
$
–
|
$
–
|
Average
balance
|
34,770
|
197,915
|
4,425
|
33
|
Highest
month end balance
|
36,515
|
264,400
|
7,000
|
–
|
Interest
expense
|
1,526
|
10,065
|
242
|
2
|
Weighted-average
interest rate:
|
|
|
|
|
End
of year
|
3.96%
|
2.50%
|
–
%
|
–
%
|
During
the year
|
4.39%
|
5.09%
|
5.47%
|
6.06%
|
The FHLB
advances consist of overnight borrowings and other advances with an original
maturity of one year or less. These advances, along with the
long-term advances disclosed in Note 9, are collateralized by residential
mortgage loans and investment securities. Peoples’ borrowing capacity
with the FHLB is based on the amount of collateral pledged and the amount of
FHLB common stock owned.
Peoples’
national market repurchase agreements consist of agreements with unrelated
financial service companies that have original maturities of one year or
less.
Peoples’
retail repurchase agreements consist of overnight agreements with Peoples’
commercial customers and serve as a cash management tool.
Other
short-term borrowings consist of Federal Funds purchased and advances from the
Federal Reserve Discount Window. Federal Funds purchased are
short-term borrowings from correspondent banks that typically mature within one
to ninety days. Peoples has available Federal Funds of $25 million
from certain of its correspondent banks. Interest on Federal funds
purchased is set daily by the correspondent bank based on prevailing market
rates. The Federal Reserve Discount Window provides credit facilities
to financial institutions, which are designed to ensure adequate liquidity by
providing a source of short-term funds. Discount Window advances are
typically overnight and must be secured by collateral acceptable to the lending
Federal Reserve Bank.
Note
9. Long-Term
Borrowings
Long-term
borrowings consisted of the following at December 31:
|
2009
|
2008
|
(Dollars
in thousands)
|
Balance
|
Weighted-
Average
Rate
|
Balance
|
Weighted-
Average
Rate
|
Callable
national market repurchase agreements
|
$145,000
|
4.01%
|
$155,000
|
4.06%
|
Non-callable
national market repurchase agreements
|
–
|
–
%
|
5,000
|
4.97%
|
FHLB
convertible rate advances
|
7,500
|
4.81%
|
24,500
|
5.38%
|
FHLB
putable, fixed rate advances
|
10,000
|
3.20%
|
10,000
|
3.20%
|
FHLB
amortizing, fixed rate advances
|
18,613
|
3.56%
|
23,797
|
3.94%
|
FHLB
non-amortizing, non-callable, fixed rate advances
|
15,000
|
3.90%
|
40,000
|
4.62%
|
FHLB
non-amortizing, callable, fixed rate advances
|
50,000
|
3.29%
|
50,000
|
3.29%
|
Total
long-term borrowings
|
$246,113
|
3.82%
|
$308,297
|
4.09%
|
Peoples’
national market repurchase agreements consist of agreements with unrelated
financial service companies and have original maturities ranging from 3 to 10
years. In general, these agreements may not be terminated by Peoples
prior to the maturity without incurring additional costs. The
callable agreements contain call option features, in which the buyer has the
right, at its discretion, to terminate the repurchase agreement after an initial
period ranging from 3 months to 5 years. After the initial call
period, the buyer has the right to terminate the agreement on a quarterly basis
thereafter until maturity. If the buyer exercises its option, Peoples
would be required to repay the agreement in whole at the quarterly
date.
The FHLB
advances consist of various borrowings with original maturities ranging from 3
to 20 years that generally may not be repaid prior to maturity without Peoples
incurring 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. For the putable advances, the FHLB has the option, at its
sole discretion following an initial period of three months, to terminate the
debt and require Peoples to repay the advance prior to the final stated
maturity. After the initial period, the FHLB has the option to
terminate the debt on a quarterly basis. If the advance is terminated
prior to maturity, the FHLB will offer Peoples replacement funding at the
then-prevailing rate on an advance product then-offered by the FHLB, subject to
normal FHLB underwriting criteria. As discussed in Note 8, long-term FHLB
advances are collateralized by assets owned by Peoples.
The aggregate minimum annual
retirements of long-term borrowings in the next five years and thereafter are as
follows:
(Dollars
in thousands)
|
Balance
|
|
Weighted-Average
Rate
|
2010
|
$ 33,281
|
|
4.27%
|
2011
|
45,212
|
|
4.50%
|
2012
|
37,223
|
|
4.18%
|
2013
|
2,033
|
|
3.68%
|
2014
|
1,522
|
|
3.54%
|
Thereafter
|
126,842
|
|
3.36%
|
Total
long-term borrowings
|
$246,113
|
|
3.82%
|
Note
10. Junior
Subordinated Notes Held By Subsidiary Trust
Peoples
previously formed a statutory business trust (the “Trust”) for the purpose of
issuing corporation-obligated mandatorily redeemable capital securities (the
“Capital Securities” or “Trust Preferred Securities”), with 100% of the common
equity in the Trust owned by Peoples. The proceeds from the Capital
Securities and common equity were invested in junior subordinated debt
securities of Peoples (the “Debentures”).
The
Debentures held by the trust are the sole assets of the
trust. Distributions on the Capital Securities are payable
semiannually at a rate per annum equal to the interest rate being earned by the
Trust on the Debentures and are recorded as interest expense by
Peoples. Since the Trust is a variable interest entity and Peoples is
not deemed to be the primary beneficiary, the Trust is 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 Trust” and the
related expense as interest expense on the Consolidated Statements of
Income.
Under the
provisions of the Debentures, Peoples has the right to defer payment of interest
on the Debentures at any time, or from time to time, for periods not exceeding
five years. If interest payments on the Debentures are deferred, the
dividends on the Capital Securities are also deferred and Peoples will be
prohibited from paying dividends on its common shares. Interest on
the Debentures is cumulative. Peoples has entered into agreements
which, taken collectively, fully and unconditionally guarantee the Capital
Securities subject to the terms of each of the guarantees.
The
Capital Securities are mandatorily redeemable upon maturity of the Debentures on
May 1, 2029, and Peoples has the right to redeem the Debentures, in whole or in
part, after May 1, 2009. If redeemed prior to maturity, the
redemption price of the Debentures will be the principal amount, plus any unpaid
accrued interest, and a premium if redeemed before 2019.
Under the
risk-based capital standards for bank holding companies adopted by the Board of
Governors of the Federal Reserve System, the Trust Preferred Securities qualify
as Tier 1 capital for regulatory capital purposes, subject to certain
quantitative limits and qualitative standards. Specifically, the
aggregate amount of trust preferred securities and certain other capital
elements that qualify as Tier 1 capital is limited to 25% of core capital
elements, net of goodwill, with the excess amount not qualifying for Tier 1
capital being included in Tier 2 capital. Additionally, trust
preferred securities no longer qualify for Tier 1 capital within
five years of their maturity.
The
Capital Securities issued by the Trust at December 31 are summarized as
follows:
(Dollars
in thousands)
|
2009
|
2008
|
Capital
Securities of PEBO Capital Trust I, 8.62%, due May 1,
2029,
|
$22,530
|
$22,495
|
net
of unamortized issuance costs
|
|
|
|
|
|
Amount
qualifying for Tier 1 capital
|
$22,530
|
$22,495
|
Note
11. Stockholders’
Equity
The
following table details the progression in balances of Peoples’ preferred,
common and treasury stock during the years presented:
|
Preferred
|
Common
|
Treasury
Stock
|
|
Stock
|
Stock
|
Balance,
December 31, 2006
|
–
|
10,889,242
|
237,257
|
Changes
related to stock-based compensation awards:
|
|
|
|
Exercise
of stock options for common shares
|
|
5,703
|
(57,988)
|
Purchase
of treasury stock
|
|
|
471,327
|
Common
shares issued under dividend reinvestment plan
|
|
31,009
|
|
Issuance
of common stock related to acquisitions:
|
|
|
|
Putnam
Agency, Inc.
|
|
|
(4,662)
|
Barengo
Insurance Agency, Inc.
|
|
|
(16,728)
|
Balance,
December 31, 2007
|
–
|
10,925,954
|
629,206
|
Changes
related to stock-based compensation awards:
|
|
|
|
Exercise
of stock options for common shares
|
|
7,475
|
(11,093)
|
Purchase
of treasury stock
|
|
|
23,367
|
Common
shares issued under dividend reinvestment plan
|
|
41,935
|
|
Balance,
December 31, 2008
|
–
|
10,975,364
|
641,480
|
|
Preferred
|
|
Common
|
|
Treasury
|
|
Stock
|
|
Stock
|
|
Stock |
Balance,
December 31, 2008
|
–
|
|
10,975,364
|
|
641,480
|
Issuance
of preferred shares
|
39,000
|
|
|
|
|
Changes
related to stock-based compensation awards:
|
|
|
|
|
|
Release
of restricted common shares
|
|
|
3,415
|
|
|
Changes
related to deferred compensation plan:
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
|
|
17,984
|
Reissuance
of treasury stock
|
|
|
|
|
(2,209)
|
Common
shares issued under dividend reinvestment plan
|
|
|
53,113
|
|
|
Balance,
December 31, 2009
|
39,000
|
|
11,031,892
|
|
657,255
|
On
January 22, 2009, Peoples’ shareholders adopted an amendment to Article FOURTH
of Peoples’ Amended Articles of Incorporation to authorize the issuance of up to
50,000 preferred shares. The preferred shares may be issued by
Peoples’ Board of Directors in one or more series, from time to time, with each
such series to consist of such number of shares and to have such voting powers,
designations, preferences, rights, qualifications, limitations and restrictions
as determined by the Board of Directors. On January 28, 2009,
Peoples’ Board of Directors adopted an amendment to Peoples’ Amended Articles of
Incorporation to create a series of preferred shares designated as Peoples’
Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par
value and having a liquidation preference of $1,000 per share (the “Series A
Preferred Shares”). These actions enabled Peoples to obtain final
approval for a $39 million capital investment from the United States Department
of the Treasury (“U.S. Treasury”) through the TARP Capital Purchase Program
established by the U.S. Treasury under the Emergency Economic Stabilization Act
of 2008.
On
January 30, 2009, Peoples issued and sold to the U.S. Treasury (i) 39,000 of
Peoples’ Series A Preferred Shares, and (ii) a ten-year warrant (the “Warrant”)
to purchase 313,505 Peoples common shares (“Common Shares”), at an exercise
price of $18.66 per share (subject to certain anti-dilution and other
adjustments), for an aggregate purchase price of $39 million in
cash.
Under
standardized TARP Capital Purchase Program terms, cumulative dividends on the
Series A Preferred Shares will accrue on the liquidation preference at a rate of
5% per annum until February 14, 2014, and at a rate of 9% per annum
thereafter. These dividends will be paid only if, as and when
declared by Peoples’ Board of Directors. The Series A Preferred
Shares have no maturity date and rank senior to the Common Shares with respect
to the payment of dividends and distributions and amounts payable upon
liquidation, dissolution and winding up of Peoples. Subject to the
approval of the Appropriate Federal Banking Agency (as defined in the Securities
Purchase Agreement, which for Peoples is the Board of Governors of the Federal
Reserve System), the Series A Preferred Shares are redeemable at the option of
Peoples at 100% of their liquidation preference plus accrued and unpaid
dividends, without penalty, delay or the need to raise additional replacement
capital. The Series A Preferred Shares are generally
non-voting.
The U.S.
Treasury has agreed not to exercise voting power with respect to any Common
Shares issued to it upon exercise of the Warrant. Any Common Shares
issued by Peoples upon exercise of the Warrant will be issued from Common Shares
held in treasury to the extent available. If no treasury shares are
available, Common Shares will be issued from authorized but unissued Common
Shares.
The
Securities Purchase Agreement, pursuant to which the Series A Preferred
Shares and the Warrant were sold, contains limitations on the payment of
dividends on the Common Shares after January 30, 2009. Prior to the
earlier of (i) January 30, 2012 and (ii) the date on which the
Series A Preferred Shares have been redeemed in whole or the U.S. Treasury
has transferred the Series A Preferred Shares to third parties which are
not Affiliates (as defined in the Securities Purchase Agreement) of the U.S.
Treasury, any increase in common share dividends by Peoples or any of its
subsidiaries would be prohibited without the prior approval of the U.S.
Treasury.
The
American Recovery and Reinvestment Act of 2009 (the “ARRA”) passed by the United
States Congress and signed by the President on February 17, 2009, provides
that the U.S. Treasury, subject to consultation with the Appropriate Federal
Banking Agency, must permit a TARP recipient to repay any assistance previously
provided under TARP, without regard to whether the TARP recipient has replaced
those funds from any other source or to any waiting period. As a
result, subject to consultation with the Federal Reserve Board, the U.S.
Treasury must permit Peoples to redeem the Series A Preferred Shares at the
appropriate redemption price without regard to whether the redemption price is
to be paid from proceeds of a qualified equity offering or any other source or
when the redemption date occurs. If the Series A Preferred Shares
were redeemed, Peoples has the right to repurchase the Warrant at its appraised
value. If Peoples chooses not to repurchase the Warrant, the U.S.
Treasury must liquidate the related Warrant at the current market
price.
Note
12. Comprehensive
Income (Loss)
The
components of other comprehensive income (loss) for the years ended December 31
were as follows:
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Net
income
|
$ 4,190
|
|
$ 7,455
|
|
$ 18,314
|
Other
comprehensive income (loss):
|
|
|
|
|
|
Available-for-sale investment
securities:
|
|
|
|
|
|
Gross
unrealized holding gain (loss) arising in the period
|
26,573
|
|
(20,941)
|
|
1,697
|
Related
tax (expense) benefit
|
(9,301)
|
|
7,329
|
|
(594)
|
Non-credit
losses arising on securities during the period
|
(166)
|
|
–
|
|
–
|
Related
tax benefit
|
58
|
|
–
|
|
–
|
Less:
reclassification adjustment for net loss included in
earnings
|
(6,261)
|
|
(2,592)
|
|
(6,062)
|
Related
tax benefit
|
2,190
|
|
907
|
|
2,122
|
Net
effect on other comprehensive income (loss)
|
21,235
|
|
(11,927)
|
|
5,043
|
Defined benefit plans:
|
|
|
|
|
|
Net
gain (loss) arising during the period
|
1,151
|
|
(5,206)
|
|
1,327
|
Related
tax (expense) benefit
|
(403)
|
|
1,822
|
|
(464)
|
Amortization
of unrecognized loss and service cost on pension plan
|
148
|
|
13
|
|
162
|
Related
tax expense
|
(52)
|
|
(4)
|
|
(57)
|
Net
effect on other comprehensive income (loss)
|
844
|
|
(3,375)
|
|
968
|
Total
other comprehensive income (loss), net of tax
|
22,079
|
|
(15,302)
|
|
6,011
|
Total
comprehensive income (loss)
|
$26,269
|
|
$
(7,847)
|
|
$24,325
|
Changes
in the components of Peoples’ accumulated other comprehensive income (loss) for
years ended December 31, 2009, 2008 and 2007 were as follows:
|
|
|
Unrecognized
|
|
|
|
Unrealized
|
|
Net
Pension and
|
|
Accumulated
|
|
Gain
(Loss)
|
|
Postretirement
|
|
Comprehensive
|
(Dollars
in thousands)
|
on
Securities
|
|
Costs
|
|
Income
(Loss)
|
Balance,
December 31, 2006
|
$
(979)
|
|
$ (2,018)
|
|
$ (2,997)
|
Current
period change, net of tax
|
5,043
|
|
968
|
|
6,011
|
Balance,
December 31, 2007
|
$
4,064
|
|
$ (1,050)
|
|
$
3,014
|
Current
period change, net of tax
|
(11,927)
|
|
(3,375)
|
|
(15,302)
|
Balance,
December 31, 2008
|
$ (7,863)
|
|
$ (4,425)
|
|
$ (12,288)
|
Current
period change, net of tax
|
21,235
|
|
844
|
|
22,079
|
Cumulative
effect adjustment for non-credit
|
|
|
|
|
|
portion
of previously recorded OTTI losses
|
(304)
|
|
–
|
|
(304)
|
Balance,
December 31, 2009
|
$ 13,068
|
|
$ (3,581)
|
|
$ 9,487
|
Note
13. Employee
Benefit Plans
Peoples
sponsors a noncontributory defined benefit pension plan that covers
substantially all employees hired before January 1, 2010. The plan
provides retirement benefits based on an employee’s years of service and
compensation. For employees hired before January 1, 2003, the
amount of postretirement benefit is based on the employee’s average monthly
compensation pay over the highest five consecutive years out of the employee’s
last ten years with Peoples while an eligible employee. For employees
hired on or after January 1, 2003, the amount of postretirement benefit is based
on 2% of the employee’s annual compensation plus accrued
interest. Effective January 1, 2010, the pension plan was closed to
new entrants. Peoples also has a contributory postretirement benefit
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, 2009, and a statement of the funded status as of December 31, 2009 and
2008:
|
Pension
Benefits
|
Postretirement
Benefits
|
(Dollars
in thousands)
|
2009
|
2008
|
2009
|
2008
|
Change
in benefit obligation:
|
|
|
|
|
Obligation
at January 1
|
$12,938
|
$11,868
|
$226
|
$246
|
Service
cost
|
799
|
763
|
–
|
–
|
Interest
cost
|
785
|
781
|
16
|
15
|
Plan
participants’ contributions
|
–
|
–
|
128
|
123
|
Actuarial
loss (gain)
|
(82)
|
492
|
11
|
(35)
|
Benefit
payments
|
(1,365)
|
(966)
|
(138)
|
(123)
|
Increase
due to plan changes
|
–
|
–
|
–
|
–
|
Obligation
at December 31
|
$13,075
|
$12,938
|
$243
|
$226
|
Accumulated
benefit obligation at December 31
|
$11,379
|
$11,164
|
$
–
|
$
–
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
Fair
value of plan assets at January 1
|
$9,840
|
$14,326
|
$
–
|
$
–
|
Actual
return on plan assets
|
2,261
|
(3,520)
|
–
|
–
|
Employer
contributions
|
1,150
|
–
|
10
|
–
|
Plan
participants’ contributions
|
–
|
–
|
128
|
123
|
Benefit
payments
|
(1,365)
|
(966)
|
(138)
|
(123)
|
Fair
value of plan assets at December 31
|
$11,886
|
$9,840
|
$
–
|
$
–
|
|
|
|
|
|
Funded
status:
|
|
|
|
|
Funded
status at December 31
|
$(1,189)
|
$(3,098)
|
$(243)
|
$(226)
|
Unrecognized
prior service cost
|
–
|
–
|
–
|
–
|
Unrecognized
net loss
|
–
|
–
|
–
|
–
|
Net
amount recognized
|
$(1,189)
|
$(3,098)
|
$(243)
|
$(226)
|
|
|
|
|
|
Amounts
recognized in Consolidated Balance Sheets:
|
|
|
|
|
Prepaid
benefit costs
|
$
–
|
$
–
|
$
–
|
$
–
|
Accrued
benefit liability
|
(1,189)
|
(3,098)
|
(243)
|
(226)
|
Net
amount recognized
|
$(1,189)
|
$(3,098)
|
$(243)
|
$(226)
|
|
|
|
|
|
Amounts
recognized in Accumulated Comprehensive Income (Loss):
|
|
|
|
Unrecognized
prior service cost
|
$18
|
$20
|
$18
|
$20
|
Unrecognized
net loss
|
3,568
|
4,410
|
52
|
61
|
Total
|
$3,586
|
$4,430
|
$70
|
$81
|
|
|
|
|
|
Weighted-average
assumptions at year-end:
|
|
|
|
|
Discount
rate
|
6.40%
|
6.30%
|
6.40%
|
6.30%
|
Rate
of compensation increase
|
2.50%
|
2.50%
|
n/a
|
n/a
|
The
estimated costs relating to Peoples’ pension benefits that will be amortized
from accumulated comprehensive income (loss) into net periodic cost over the
next fiscal year are $4,000 of prior service costs and $238,000 of net
loss.
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)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
Service
cost
|
$799
|
$763
|
$847
|
$
–
|
$
–
|
$
–
|
Interest
cost
|
785
|
781
|
757
|
16
|
15
|
26
|
Expected
return on plan assets
|
(1,194)
|
(1,202)
|
(1,191)
|
–
|
–
|
–
|
Amortization
of prior service cost
|
4
|
4
|
2
|
(3)
|
–
|
–
|
Amortization
of net loss
|
145
|
10
|
160
|
(3)
|
(7)
|
3
|
Net
periodic benefit cost
|
$539
|
$356
|
$575
|
$10
|
$8
|
$29
|
|
|
|
|
|
|
|
Weighted-average
assumptions:
|
|
|
|
|
|
|
Discount
rate
|
6.30%
|
6.70%
|
6.00%
|
6.30%
|
6.70%
|
6.00%
|
Expected
return on plan assets
|
8.50%
|
8.50%
|
8.50%
|
n/a
|
n/a
|
n/a
|
Rate
of compensation increase
|
2.50%
|
3.50%
|
3.50%
|
n/a
|
n/a
|
n/a
|
For
measurement purposes, a 10% annual rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) was assumed for 2009,
grading down 1% per year to an ultimate rate of 5% in 2014. 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.
Determination
of Expected Long-term Rate of Return
The
expected long-term rate of return on the plans’ total assets is based on the
expected return of each category of the plan’s assets. Management
considers the long-term historical returns of the assets within the portfolio
and adjusts the rate, as necessary, for expected future returns on the assets in
the plans in determining the rate.
Plan
Assets
Peoples’
investment strategy, as established by Peoples’ Retirement Plan Committee, is to
invest assets based upon established target allocations, which include a target
range of 60-75% allocation in equity securities, 24-39% in debt securities and
approximately 1% of other investments. The assets are reallocated
periodically to meet the target allocations. The investment policy is
reviewed periodically, under the advisement of a certified investment advisor,
to determine if the policy should be changed.
The
following table provides the fair values of investments held in Peoples’ pension
plan at December 31, by major asset category:
(Dollars
in thousands)
|
|
|
|
Quoted
Prices
in
Active
Markets for
Identical
|
Significant
Other
Observable
|
2009
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$
|
9,357
|
|
$
|
9,357
|
|
$
|
–
|
Debt
securities
|
|
|
1,945
|
|
|
924
|
|
|
1,021
|
Other
|
|
|
584
|
|
|
–
|
|
|
584
|
Total
fair value of pension assets
|
|
$
|
11,886
|
|
$
|
10,281
|
|
$
|
1,605
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
$
|
6,072
|
|
$
|
5,247
|
|
$
|
825
|
Debt
securities
|
|
|
2,769
|
|
|
1,134
|
|
|
1,635
|
Other
|
|
|
999
|
|
|
–
|
|
|
999
|
Total
fair value of pension assets
|
|
$
|
9,840
|
|
$
|
6,381
|
|
$
|
3,459
|
The
equity securities measured at fair value consist primarily of stock mutual funds
(Level 1 inputs) and common and collective trust funds (Level 2
inputs). Debt securities include corporate bonds and bond mutual
funds (Level 1 inputs), U.S. government and agency securities and obligations of
state and political subdivisions (Level 2 inputs). Other investments
consist of cash, money market deposits, and certificates of deposit (Level 2
inputs). For further information regarding levels of input used to
measure fair value, please refer to Note 2.
Equity
securities of Peoples’ pension plan did not include any securities of Peoples or
related parties in 2009 or 2008.
Cash
Flows
Peoples
has not determined if any contributions will be made to its pension plan in
2010; however, actual contributions are made at the discretion of the Retirement
Plan Committee and Peoples’ Board of Directors. Estimated future
benefit payments, which reflect benefits attributable to estimated future
service, for the years ending December 31 are as follows:
(Dollars
in thousands)
|
|
Pension
Benefits
|
Post-
retirement
Benefits
|
2010
|
|
$ 920
|
|
$ 31
|
2011
|
|
1,022
|
|
31
|
2012
|
|
1,604
|
|
28
|
2013
|
|
1,130
|
|
26
|
2014
|
|
1,402
|
|
24
|
2015
to 2019
|
|
7,153
|
|
94
|
Total
|
|
$ 13,231
|
|
$ 234
|
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. During
2009 and in prior years, Peoples made matching contributions equal to 100% of
participants’ contributions that did not exceed 3% of the participants’
compensation, plus 50% of participants’ contributions between 3% and 5% of the
participants’ compensation. Effective January 1, 2010, Peoples began
making matching contributions equal to 100% of participants’ contributions that
do not exceed 2% of the participants’ compensation. Matching
contributions made by Peoples totaled $775,000, $776,000 and $740,000 for the
years ended December 31, 2009, 2008 and 2007, respectively.
Peoples’
reported income tax (benefit) expense consisted of the following for the years
ended December 31:
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
Current
income tax
|
$4,148
|
$3,021
|
$6,548
|
Deferred
income tax
|
(5,212)
|
(2,861)
|
(988)
|
Total
income tax (benefit) expense
|
$(1,064)
|
$160
|
$5,560
|
The
reported income tax (benefit) expense and effective tax rate in the Consolidated
Statements of Income differs from the amounts computed by applying the statutory
corporate tax rate as follows for the years ended December 31:
|
2009
|
|
2008
|
|
2007
|
(Dollars
in thousands)
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
Income
tax computed at statutory federal tax rate
|
$ 1,063
|
|
34.0%
|
|
$ 2,665
|
|
35.0%
|
|
$ 8,356
|
|
35.0%
|
Differences
in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
interest income
|
(921)
|
|
(29.5)
|
|
(924)
|
|
(12.1)
|
|
(831)
|
|
(3.5)
|
Investments
in tax credit funds
|
(625)
|
|
(20.0)
|
|
(689)
|
|
(9.0)
|
|
(640)
|
|
(2.7)
|
Bank
owned life insurance
|
(357)
|
|
(11.4)
|
|
(554)
|
|
(7.3)
|
|
(581)
|
|
(2.4)
|
Change
in valuation allowance
|
–
|
|
–
|
|
(321)
|
|
(4.2)
|
|
(635)
|
|
(2.6)
|
Other,
net
|
(224)
|
|
(7.2)
|
|
(17)
|
|
(0.3)
|
|
(109)
|
|
(0.5)
|
Total
income tax (benefit) expense
|
$(1,064)
|
|
-34.1%
|
%
|
$ 160
|
|
2.1%
|
|
$ 5,560
|
|
23.3%
|
Peoples’
income tax returns are subject to review and examination by federal and state
taxing authorities. Peoples is currently open to audit under the
applicable statutes of limitations by the Internal Revenue Service for the years
ended December 31, 2006 through 2008. The years open to
examination by state taxing authorities vary by jurisdiction. The
significant components of Peoples' deferred tax assets and liabilities consisted
of the following at December 31:
(Dollars
in thousands)
|
2009
|
2008
|
Deferred
tax assets:
|
|
|
Allowance
for loan losses
|
$10,002
|
$8,548
|
Accrued
employee benefits
|
1,482
|
2,103
|
Available-for-sale
securities
|
–
|
4,234
|
Investments
|
2,229
|
–
|
AMT
credit carryforward
|
3,676
|
2,069
|
Other
|
283
|
315
|
Total
deferred tax assets
|
17,672
|
17,269
|
|
|
|
Deferred
tax liabilities:
|
|
|
Bank
premises and equipment
|
1,317
|
1,183
|
Deferred
income
|
1,170
|
1,013
|
Deferred
net loan costs
|
389
|
331
|
Available-for-sale
securities
|
7,036
|
–
|
Investments
|
–
|
351
|
Other
|
3,556
|
3,510
|
Total
deferred tax liabilities
|
13,468
|
6,388
|
Net
deferred tax asset
|
$4,204
|
$10,881
|
The AMT
tax credit carryforward at December 31, 2009 and 2008 may be carried over
indefinitely. No valuation allowance for deferred tax assets was
required at December 31, 2009 as it is more likely than not that all of the
deferred tax assets will be realized in future periods. The related
federal income tax expense on securities transactions approximated $506,000 in
2009, $584,000 in 2008 and $38,000 in 2007.
Note
15. Earnings
Per Share
The
calculations of basic and diluted earnings per common share for years ended
December 31 were as follows:
(Dollars
in thousands, except per share data)
|
2009
|
2008
|
2007
|
Net
income
|
$4,190
|
$7,455
|
$18,314
|
Preferred
dividends
|
1,876
|
-
|
-
|
Net
income available to common shareholders
|
2,314
|
7,455
|
18,314
|
|
|
|
|
Weighted-average
common shares outstanding
|
10,363,975
|
10,315,263
|
10,462,933
|
Effect
of potentially dilutive common shares
|
10,817
|
33,316
|
66,701
|
Total
weighted-average diluted common
|
|
|
|
shares
outstanding
|
10,374,792
|
10,348,579
|
10,529,634
|
|
|
|
|
Earnings
per common share:
|
|
|
|
Basic
|
$0.22
|
$0.72
|
$1.75
|
Diluted
|
$0.22
|
$0.72
|
$1.74
|
As
disclosed in Note 11, during 2009 Peoples issued a warrant to purchase 313,505
common shares, which remained outstanding at December 31, 2009. This
warrant was excluded from the calculation of diluted earnings per common share
since it was anti-dilutive. In addition, stock options and SARs
covering 285,678; 282,604 and 142,306 common shares were excluded from the
calculations for 2009, 2008 and 2007, respectively, since they were
anti-dilutive.
Note
16. 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. These financial instruments include commitments to extend
credit and standby letters of credit. The instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the Consolidated Balance Sheets. The contract 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 Peoples Bank in the event
of default by Peoples Bank's customer in the nonperformance 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 at December 31 are
summarized as follows:
|
Contractual
Amount
|
(Dollars
in thousands)
|
2009
|
2008
|
Home
equity lines of credit
|
$40,169
|
$40,909
|
Unadvanced
construction loans
|
12,921
|
49,615
|
Other
loan commitments
|
113,072
|
110,670
|
Loan
commitments
|
166,162
|
201,194
|
|
|
|
Standby
letters of credit
|
$44,048
|
$46,788
|
Other
Peoples
also has commitments to make additional capital contributions in low-income
housing projects. Such commitments approximated $0.9 million at
December 31, 2009, and $1.1 million at December 31, 2008. The maximum
aggregate amounts Peoples could be required to make for each of the next five
years are as follows: $240,000 in 2010; $234,000 in 2011; $185,000 in 2012;
$125,000 in 2013 and $66,000 in 2014.
Note
17. Regulatory
Matters
The
following is a summary of certain regulatory matters affecting Peoples and its
subsidiaries:
Capital
Requirements
Peoples
and Peoples Bank are subject to various regulatory capital guidelines
administered by the banking regulatory agencies. Under capital
adequacy requirements 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. Failure to meet future
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a material effect on Peoples’ financial results.
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, 2009.
As of
December 31, 2009, 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 Peoples Bank's
category.
Peoples
and Peoples Bank’s actual capital amounts and ratios as of December 31 are also
presented in the following table:
|
December
31, 2009
|
December
31, 2008
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
PEOPLES
|
|
|
|
|
Total
Capital (1)
|
|
|
|
|
Actual
|
$209,144
|
16.8%
|
$173,470
|
13.2%
|
For
capital adequacy
|
99,577
|
8.0%
|
105,253
|
8.0%
|
To
be well capitalized
|
124,471
|
10.0%
|
131,566
|
10.0%
|
|
|
|
|
|
Tier
1 (2)
|
|
|
|
|
Actual
|
$192,822
|
15.5%
|
$156,254
|
11.9%
|
For
capital adequacy
|
49,788
|
4.0%
|
52,626
|
4.0%
|
To
be well capitalized
|
74,682
|
6.0%
|
78,939
|
6.0%
|
|
|
|
|
|
Tier
1 Leverage (3)
|
|
|
|
|
Actual
|
$192,822
|
10.1%
|
$156,254
|
8.2%
|
For
capital adequacy
|
76,653
|
4.0%
|
76,443
|
4.0%
|
To
be well capitalized
|
95,817
|
5.0%
|
95,554
|
5.0%
|
Net
Risk-Weighted Assets
|
$1,244,707
|
|
$1,315,657
|
|
|
|
|
|
|
PEOPLES BANK
|
|
|
|
|
Total
Capital (1)
|
|
|
|
|
Actual
|
$178,798
|
14.4%
|
$158,030
|
12.1%
|
For
capital adequacy
|
99,150
|
8.0%
|
104,715
|
8.0%
|
To
be well capitalized
|
123,938
|
10.0%
|
130,894
|
10.0%
|
|
|
|
|
|
Tier
1 (2)
|
|
|
|
|
Actual
|
$163,161
|
13.2%
|
$141,587
|
10.8%
|
For
capital adequacy
|
49,575
|
4.0%
|
52,357
|
4.0%
|
To
be well capitalized
|
74,363
|
6.0%
|
78,536
|
6.0%
|
|
|
|
|
|
Tier
1 Leverage (3)
|
|
|
|
|
Actual
|
$163,161
|
8.6%
|
$141,587
|
7.5%
|
For
capital adequacy
|
76,277
|
4.0%
|
75,866
|
4.0%
|
To
be well capitalized
|
95,346
|
5.0%
|
94,833
|
5.0%
|
Net
Risk-Weighted Assets
|
$1,239,379
|
|
$1,308,937
|
|
(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
As more
fully disclosed in Note 11, on January 30, 2009, Peoples received $39.0 million
of new equity capital from the sale of Series A Preferred Shares and the Warrant
to U.S. Treasury as part of the TARP Capital Purchase Program. All of
the proceeds from the sale of the Series A Preferred Shares and the Warrant
qualified as Tier 1 capital for regulatory purposes.
Limits
on Dividends
The
primary source of funds for the dividends paid by Peoples 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, 2009, Peoples Bank had
approximately $6.3 million of net profits available for distribution to Peoples
as dividends without regulatory approval.
Federal
Reserve Requirements
Peoples
Bank is required to maintain a minimum level of reserves, consisting of cash on
hand and non-interest-bearing balances with the Federal Reserve Bank of
Cleveland, based on the amount of deposit liabilities. Average
required reserve balances were approximately $5.1 million and $4.9 million for
the years ended December 31, 2009 and 2008.
Note
18. Stock–Based
Compensation
Under the
Peoples Bancorp Inc. Amended and Restated 2006 Equity Plan (the “2006 Equity
Plan”) approved by shareholders, Peoples may grant, among other awards,
nonqualified stock options, incentive stock options, restricted stock awards,
stock appreciation rights or any combination thereof covering up to 500,000
common shares to employees and non-employee directors. Prior to 2007,
Peoples granted nonqualified and incentive stock options to employees and
nonqualified stock options to non-employee directors under the 2006 Equity Plan
and predecessor plans. Since February 2007, Peoples has granted a
combination of restricted common shares and stock appreciation rights (“SARs”)
to be settled in common shares to employees and restricted common shares to
non-employee directors subject to the terms and conditions prescribed by the
2006 Equity Plan. In general, common shares issued in connection with
stock-based awards are issued from treasury shares to the extent
available. If no treasury shares are available, common shares are
issued from authorized but unissued common shares.
Stock
Options
Under the
provisions of the 2006 Equity Plan and predecessor stock option plans, the
exercise price per share of any stock option granted may not be less than the
fair market value of the underlying common shares on the date of grant of the
stock option. The most recent stock options granted to employees and
non-employee directors occurred in 2006. The stock options granted to
employees will vest three years from the grant date, while the stock options
granted to non-employee directors vested six months from the grant
date. All stock options granted to both employees and non-employee
directors expire ten years from the date of grant.
The
following summarizes the changes to Peoples’ stock options for the year ended
December 31, 2009:
|
Number
of
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
|
Outstanding
at January 1
|
304,447
|
$22.91
|
|
|
Granted
|
–
|
–
|
|
|
Exercised
|
–
|
–
|
|
|
Expired
|
33,690
|
15.00
|
|
|
Outstanding
at December 31
|
270,757
|
$23.90
|
3.5
years
|
$
–
|
|
|
|
|
|
Exercisable
at December 31
|
270,757
|
$23.90
|
3.5
years
|
$
–
|
The total
intrinsic value of stock options exercised was $0, $61,000 and $0.6 million
in 2009, 2008 and 2007, respectively.
The
following summarizes information concerning Peoples’ stock options outstanding
at December 31, 2009:
|
|
|
Options
Outstanding
|
Options
Exercisable
|
Range
of Exercise Prices
|
Option
Shares Outstanding
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Price
|
Option
Shares Exercisable
|
Weighted-
Average
Exercise
Price
|
$13.00
|
to
|
$22.24
|
51,491
|
0.8
years
|
$15.14
|
51,491
|
$15.14
|
$22.25
|
to
|
$23.49
|
48,603
|
3.2
years
|
22.32
|
48,603
|
22.32
|
$23.50
|
to
|
$25.99
|
44,824
|
2.4
years
|
23.95
|
44,824
|
23.95
|
$26.00
|
to
|
$28.24
|
45,767
|
4.5
years
|
27.06
|
45,767
|
27.06
|
$28.25
|
to
|
$28.49
|
39,538
|
5.8
years
|
28.25
|
39,538
|
28.25
|
$28.50
|
to
|
$32.00
|
40,534
|
4.7
years
|
29.03
|
40,534
|
29.03
|
Total
|
|
|
270,757
|
3.5
years
|
$23.90
|
270,757
|
$23.90
|
Stock
Appreciation Rights
SARs
granted to employees have an exercise price equal to the fair market value of
Peoples’ common shares on the date of grant and will be settled using common
shares of Peoples. Additionally, the SARs granted will vest three
years from the grant date and expire ten years from the date of
grant. The following summarizes the changes to Peoples’ SARs for the
year ended December 31, 2009:
|
Number
of Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
|
Outstanding
at January 1
|
57,433
|
|
$ 25.92
|
|
|
|
|
Granted
|
–
|
|
–
|
|
|
|
|
Exercised
|
–
|
|
–
|
|
|
|
|
Forfeited
|
3,677
|
|
27.62
|
|
|
|
|
Outstanding
at December 31
|
53,756
|
|
$ 25.80
|
|
7.6
years
|
|
$ –
|
Exercisable
at December 31
|
1,124
|
|
$ 26.49
|
|
0.7
years
|
|
$ –
|
The
weighted-average estimated fair value of the SARs granted in 2008 and 2007 was
$5.46 and $7.73, respectively. The following summarizes information
concerning Peoples’ SARs outstanding at December 31, 2009:
Exercise Prices
|
Number
of
Shares
Outstanding
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Price
|
Number
of
Shares
Exercisable
|
$23.26
|
5,000
|
7.6
years
|
$23.26
|
–
|
$23.77
|
25,765
|
8.0
years
|
23.77
|
567
|
$23.80 to
$27.99 |
3,000
|
8.2
years
|
24.52
|
–
|
$29.25
|
19,991
|
6.9
years
|
29.25
|
557
|
Total
|
53,756
|
7.6
years
|
$25.80
|
1,124
|
Restricted
Shares
Under
the 2006 Equity Plan, Peoples may award restricted common shares to officers,
key employees and non-employee directors. In general, the
restrictions on common shares awarded to non-employee directors expire after six
months, while the restrictions on common shares awarded to employees expire
after three years. The following
summarizes the changes to Peoples’ restricted common shares for year ended
December 31, 2009:
|
|
|
Weighted-
|
|
|
|
Average
|
|
Number
|
|
Grant
Date
|
|
of
Shares
|
|
Fair
Value
|
Outstanding
at January 1
|
15,578
|
|
$ 26.10
|
Awarded
|
2,000
|
|
13.14
|
Released
|
3,415
|
|
25.16
|
Forfeited
|
172
|
|
26.26
|
Outstanding
at December 31
|
13,991
|
|
$ 24.48
|
The total
intrinsic value of restricted stock released was $37,000, $158,000 and $220,000
in 2009, 2008 and 2007, respectively.
Stock-Based
Compensation
Peoples
recognized stock-based compensation expense, which is included as a component of
Peoples’ salaries and employee benefits costs, based on the estimated fair value
of the awards on the grant date. The following summarizes the amount
of stock-based compensation expense and related tax benefit recognized for the
years ended December 31:
|
2009
|
|
2008
|
|
2007
|
Total
stock-based compensation
|
$ 149,000
|
|
$ 498,000
|
|
$ 391,000
|
Recognized
tax benefit
|
(52,000)
|
|
(174,000)
|
|
(137,000)
|
Net
expense recognized
|
$ 97,000
|
|
$ 324,000
|
|
$ 254,000
|
In 2009,
restricted common shares were the only stock-based compensation awards granted
by Peoples. The estimated fair value of SARs granted in 2008 and 2007
was calculated at grant date using the Black-Scholes option pricing model with
the following weighted-average assumptions:
|
2008
|
2007
|
Risk-free
interest rate
|
4.38%
|
4.82%
|
Dividend
yield
|
3.88%
|
3.05%
|
Volatility
factor of the market price of parent stock
|
26.3%
|
25.5%
|
Weighted-average
expected life
|
10.0
years
|
10.0
years
|
The
Black-Scholes option valuation model was originally developed for use in
estimating the fair value of traded options, which have different
characteristics than equity awards granted by Peoples, such as no vesting or
transfer restrictions. The model requires the input of highly
subjective assumptions, including the expected stock price volatility, which can
materially affect the fair value estimate. The expected volatility
and expected life assumptions were based solely on historical
data. The expected dividend yield is computed based on the then
current dividend rate, and the risk-free interest rate is based on
U.S. Treasury zero-coupon issues with a remaining term approximating the
expected life of the equity awards.
Total
unrecognized stock-based compensation expense related to unvested awards was
$85,000 at December 31, 2009, which will be recognized over a weighted-average
period of 0.8 years.
Note
19. Parent
Company Only Financial Information
Condensed
Balance Sheets
|
December
31,
|
(Dollars
in thousands)
|
2009
|
|
2008
|
Assets:
|
|
|
|
Cash
and due from other banks
|
$ 996
|
|
$ 2,209
|
Interest-bearing
deposits in subsidiary bank
|
22,780
|
|
3,776
|
Receivable
from subsidiary bank
|
575
|
|
423
|
Available-for-sale
investment securities, at estimated fair value (amortized
|
|
|
|
cost
of $1,394 and $1,405 at December 31, 2009 and 2008,
respectively)
|
2,771
|
|
2,940
|
Investments
in subsidiaries:
|
|
|
|
Bank
|
216,339
|
|
179,193
|
Non-bank
|
28,975
|
|
28,025
|
Other
assets
|
1,342
|
|
1,305
|
Total
assets
|
$ 273,778
|
|
$ 217,871
|
|
|
|
|
Liabilities:
|
|
|
|
Accrued
expenses and other liabilities
|
$ 5,545
|
|
$ 5,872
|
Dividends
payable
|
1,291
|
|
2,398
|
Junior
subordinated debentures held by subsidiary trust
|
22,975
|
|
22,975
|
Total
liabilities
|
29,811
|
|
31,245
|
|
|
|
|
Preferred
stockholders' equity
|
38,543
|
|
–
|
Common
stockholders' equity
|
205,424
|
|
186,626
|
Total
stockholders' equity
|
243,967
|
|
186,626
|
Total liabilities and
stockholders' equity
|
$ 273,778
|
|
$ 217,871
|
Condensed
Statements of Income
|
Year
Ended December 31,
|
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Income:
|
|
|
|
|
|
Dividends
from subsidiary bank
|
$ 3,000
|
|
$ 2,000
|
|
$ 28,000
|
Dividends
from non-bank subsidiary
|
5,250
|
|
–
|
|
1,000
|
Interest
and other income
|
495
|
|
361
|
|
392
|
Total
income
|
8,745
|
|
2,361
|
|
29,392
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Interest
expense on junior subordinated notes held by subsidiary
trusts
|
2,015
|
|
2,011
|
|
2,223
|
Intercompany
management fees
|
909
|
|
821
|
|
938
|
Other
expense
|
1,067
|
|
1,380
|
|
1,374
|
Total
expenses
|
3,991
|
|
4,212
|
|
4,535
|
|
|
|
|
|
|
Income
(loss) before federal income taxes and (excess dividends from)
equity
|
|
|
|
|
|
in
undistributed earnings of subsidiaries
|
4,754
|
|
(1,851)
|
|
24,857
|
Applicable
income tax benefit
|
(1,522)
|
|
(1,798)
|
|
(2,345)
|
(Excess
dividends from) equity in undistributed earnings of
subsidiaries
|
(2,086)
|
|
7,508
|
|
(8,888)
|
Net
income
|
$ 4,190
|
|
$ 7,455
|
|
$
18,314
|
Statements
of Cash Flows
|
Year
Ended December 31,
|
(Dollars
in thousands)
|
2009
|
|
2008
|
|
2007
|
Operating
activities
|
|
|
|
|
|
Net
income
|
$ 4,190
|
|
$ 7,455
|
|
$ 18,314
|
Adjustment
to reconcile net income to cash provided by operations:
|
|
|
|
|
|
Amortization
and depreciation
|
–
|
|
–
|
|
2
|
Excess
dividends from (equity in) undistributed earnings of
subsidiaries
|
2,086
|
|
(7,508)
|
|
8,888
|
Other,
net
|
(142)
|
|
59
|
|
1,313
|
Net
cash provided by operating activities
|
6,134
|
|
6
|
|
28,517
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
Net
proceeds from sales and maturities (purchases of) investment
securities
|
38
|
|
(45)
|
|
(224)
|
Investment
in subsidiaries
|
(18,000)
|
|
–
|
|
–
|
Change
in receivable from subsidiary
|
(153)
|
|
228
|
|
(51)
|
Acquisitions,
net of cash received
|
–
|
|
–
|
|
(1,070)
|
Net
cash (used in) provided by investing activities
|
(18,115)
|
|
183
|
|
(1,345)
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
Issuance
of preferred shares and common stock warrant
|
39,000
|
|
–
|
|
–
|
Preferred
stock dividends
|
(1,543)
|
|
–
|
|
–
|
Purchase
of treasury stock
|
(249)
|
|
(506)
|
|
(12,350)
|
Proceeds
from issuance of common stock
|
4
|
|
210
|
|
989
|
Redemption
of Trust Preferred Securities
|
–
|
|
–
|
|
(7,000)
|
Cash
dividends paid
|
(7,426)
|
|
(8,423)
|
|
(8,375)
|
Excess
tax (expense) benefit for share based payments
|
(14)
|
|
(33)
|
|
148
|
Net
cash provided by (used in) financing activities
|
29,772
|
|
(8,752)
|
|
(26,588)
|
Net
increase (decrease) in cash and cash equivalents
|
17,791
|
|
(8,563)
|
|
584
|
Cash
and cash equivalents at the beginning of year
|
5,985
|
|
14,548
|
|
13,964
|
Cash and cash equivalents at
the end of year
|
$
23,776
|
|
$ 5,985
|
|
$
14,548
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
Interest
paid
|
$ 1,980
|
|
$ 1,980
|
|
$ 2,302
|
Note
20. Summarized
Quarterly Information (Unaudited)
A summary
of selected quarterly financial information for 2009 and 2008
follows:
|
2009
|
|
First
|
Second
|
Third
|
Fourth
|
(Dollars
in thousands, except per share data)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
interest income
|
$26,334
|
$25,745
|
$25,472
|
$24,554
|
Total
interest expense
|
10,807
|
10,315
|
10,003
|
9,137
|
Net
interest income
|
15,527
|
15,430
|
15,469
|
15,417
|
Provision
for loan losses
|
4,063
|
4,734
|
10,168
|
6,756
|
Net
impairment losses
|
–
|
–
|
(5,930)
|
(1,777)
|
Net
gain on investment securities
|
326
|
262
|
276
|
582
|
Other
income
|
8,118
|
8,302
|
7,745
|
7,782
|
Intangible
asset amortization
|
330
|
319
|
307
|
296
|
FDIC
insurance
|
487
|
1,608
|
687
|
660
|
Other
expenses
|
13,685
|
13,594
|
13,093
|
13,616
|
Income
tax expense (benefit)
|
1,211
|
893
|
(2,630)
|
(538)
|
Net
income (loss)
|
4,195
|
2,846
|
(4,065)
|
1,214
|
Preferred
dividends
|
341
|
511
|
512
|
512
|
Net
income (loss) available to common shareholders
|
$3,854
|
$2,335
|
$(4,577)
|
$702
|
|
|
|
|
|
Earnings
per common share - Basic
|
$0.37
|
$0.23
|
$(0.44)
|
$0.07
|
Earnings
per common share - Diluted
|
$0.37
|
$0.23
|
$(0.44)
|
$0.07
|
|
|
|
|
|
Weighted-average
common shares outstanding - Basic
|
10,344,862
|
10,360,590
|
10,372,946
|
10,376,956
|
Weighted-average
common shares outstanding - Diluted
|
10,355,280
|
10,377,105
|
10,390,275
|
10,387,400
|
|
2008
|
|
First
|
Second
|
Third
|
Fourth
|
(Dollars
in thousands, except per share data)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
interest income
|
$27,299
|
$26,548
|
$26,063
|
$26,317
|
Total
interest expense
|
13,013
|
11,674
|
11,461
|
11,600
|
Net
interest income
|
14,286
|
14,874
|
14,602
|
14,717
|
Provision
for loan losses
|
1,437
|
6,765
|
5,996
|
13,442
|
Net
impairment losses
|
–
|
(260)
|
–
|
(4,000)
|
Net
gain (loss) on investment securities
|
293
|
(48)
|
(111)
|
1,534
|
Other
income
|
8,234
|
7,886
|
8,142
|
8,591
|
Intangible
asset amortization
|
415
|
403
|
390
|
378
|
FDIC
insurance
|
34
|
52
|
55
|
219
|
Other
expenses
|
13,293
|
12,589
|
12,748
|
12,909
|
Income
tax expense (benefit)
|
1,986
|
690
|
493
|
(3,009)
|
Net
income (loss) available to common shareholders
|
$5,648
|
$1,953
|
$2,951
|
$(3,097)
|
|
|
|
|
|
Earnings
per common share - Basic
|
$0.55
|
$0.19
|
$0.29
|
$(0.30)
|
Earnings
per common share - Diluted
|
$0.55
|
$0.19
|
$0.28
|
$(0.30)
|
|
|
|
|
|
Weighted-average
common shares outstanding - Basic
|
10,302,713
|
10,304,666
|
10,319,534
|
10,333,888
|
Weighted-average
common shares outstanding - Diluted
|
10,345,180
|
10,352,135
|
10,354,522
|
10,359,491
|
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
information concerning (a) directors of Peoples Bancorp Inc. (“Peoples”), (b)
the procedures by which shareholders of Peoples may recommend nominees to
Peoples’ Board of Directors, (c) the Audit Committee of Peoples’ Board of
Directors and (d) the Board of Directors’ determination that Peoples has an
“audit committee financial expert” serving on its Audit Committee required by
Items 401, 407(c)(3), 407(d)(4) and 407(d)(5) of SEC Regulation S-K is included
in the sections captioned “PROPOSAL NUMBER 1: ELECTION OF DIRECTORS”, “THE BOARD
OF DIRECTORS AND COMMITTEES OF THE BOARD” and “NOMINATING PROCEDURES” of the
definitive Proxy Statement of Peoples Bancorp Inc. relating to the Annual
Meeting of Shareholders to be held April 22, 2010 (“Peoples’ Definitive Proxy
Statement”), which sections are incorporated herein by reference. The
procedures by which shareholders of Peoples may recommend nominees to Peoples’
Board of Directors have not changed materially from those described in Peoples’
definitive Proxy Statement for the 2009 Annual Meeting of Shareholders held on
April 23, 2009.
The
information regarding Peoples’ executive officers required by Item 401 of SEC
Regulation S-K is included in the section captioned “EXECUTIVE OFFICERS” of
Peoples’ Definitive Proxy Statement, which section is incorporated herein by
reference.
The
information required by Item 405 of SEC Regulation S-K is included under the
caption “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” 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
LLC Marketplace Rules, the Board of Directors of Peoples has adopted a Code of
Ethics covering the directors, officers and employees of Peoples and its
affiliates, including, without limitation, the principal executive officer, the
principal financial officer and principal accounting officer of
Peoples. Peoples intends to disclose the following events, if they
occur, in a Current Report on Form 8-K and on the “Corporate Governance &
Ethics” page of Peoples’ Internet website at www.peoplesbancorp.com within four
business days following their occurrence:
(A)
|
the
date and nature of any amendment to a provision of Peoples’ 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
granted 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.
|
In
addition, Peoples will disclose any waivers from the provisions of the Code of
Ethics granted to a director or executive officer of Peoples in a Current Report
on Form 8-K within four business days following their occurrence.
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 & Ethics” page of Peoples’ Internet
website. 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 sections captioned
“COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION”, “EXECUTIVE
COMPENSATION: COMPENSATION DISCUSSION AND ANALYSIS”, “LONG-TERM EQUITY-BASED
INCENTIVE COMPENSATION”, “SUMMARY COMPENSATION TABLE FOR 2009”, “GRANTS OF
PLAN-BASED AWARDS FOR 2009”, “OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
2009”, “OPTION EXERCISES AND STOCK VESTED FOR 2009”, “PENSION BENEFITS FOR
2009”, “NON-QUALIFIED DEFERRED COMPENSATION FOR 2009” and “OTHER POTENTIAL POST
EMPLOYMENT PAYMENTS” of Peoples’ Definitive Proxy Statement, which sections are
incorporated herein by reference.
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” 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, 2009, 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. 1995 Stock Option Plan (the “1995
Plan”);
|
(ii)
|
the
Peoples Bancorp Inc. 1998 Stock Option Plan (the “1998
Plan”);
|
(iii)
|
the
Peoples Bancorp Inc. 2002 Stock Option Plan (the “2002
Plan”);
|
(iv)
|
the
Peoples Bancorp Inc. Amended and Restated 2006 Equity Plan (the “2006
Plan”); and
|
(v)
|
the
Peoples Bancorp Inc. Second Amended and Restated 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.
Plan
Category
|
(a)
Number
of
common
shares to
be
issued upon
exercise
of
outstanding
options,
warrants
and
rights
|
(b)
Weighted-average
exercise price of outstanding
options,
warrants
and
rights
|
(c)
Number
of common
shares
remaining
available
for future
issuance
under equity compensation plans (excluding common
shares
reflected in
column
(a))
|
Equity
compensation plans approved by shareholders
|
416,617(1)
|
$24.74(2)
|
396,732(3)
|
|
|
|
|
Equity
compensation plans not approved by shareholders
|
–
|
–
|
–
|
Total
|
416,617
|
$24.74
|
396,732
|
(1)
|
Includes
an aggregate of 324,513 common shares issuable upon exercise of options
granted under the 1995 Plan, the 1998 Plan and the 2002 Plan and options
and stock appreciation rights granted under the 2006 Plan and 92,104
common shares allocated to participants’ bookkeeping accounts under the
Deferred Compensation Plan.
|
(2)
|
Represents
weighted-average exercise price of outstanding options granted under the
1995 Plan, the 1998 Plan and the 2002 Plan and options and stock
appreciation rights granted under the 2006 Plan. The
weighted-average exercise price does not take into account the common
shares allocated to participants’ bookkeeping accounts under the Deferred
Compensation Plan.
|
(3)
|
Includes
395,055 common shares remaining available for future grants under the 2006
Plan at December 31, 2009. No common shares were available for
future grants under the 1995 Plan, the 1998 Plan and the 2002 Plan at
December 31, 2009. No amount is included for potential future
allocations to participants’ bookkeeping accounts under the Deferred
Compensation Plan since the terms of the Deferred Compensation Plan do not
provide for a specified limit on the number of common shares which may be
allocated to participants’ bookkeeping
accounts.
|
Additional
information regarding Peoples’ stock-based compensation plans can be found in
Note 18 of the Notes to the Consolidated Financial Statements.
Since
1991, Peoples has maintained the Deferred Compensation Plan for Directors, which
provides a non-employee director of Peoples the ability to defer all or part of
the compensation, and related federal income tax, received for services provided
as a director of Peoples or one of its subsidiaries. Since 1998,
directors participating in the Deferred Compensation Plan have been permitted to
allocate their deferrals between a cash account and a stock
account. The cash account earns interest equal to Peoples Bank’s
three-year certificate of deposit interest rate. The stock account
receives allocations of Peoples’ common shares on the first business day of each
calendar quarter based upon amounts deferred during the quarter and fair market
value of Peoples’ common shares and is credited with subsequent cash dividends
on the common shares previously allocated to the account. The only
right a participant in the Deferred Compensation Plan for Directors has with
respect to his or her cash account and/or stock account is to receive
distributions upon termination of service as a director. Distribution
of the deferred amounts is made in a lump sum or annual
installments. The stock account is distributed in common shares of
Peoples or in cash and the cash account is distributed only in
cash.
In
addition, Peoples maintains the Peoples Bancorp Inc. Retirement Savings Plan,
which is intended to meet the qualification requirements of Section 401(a) of
the Internal Revenue Code of 1986, as amended.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
|
The
information required by this Item 13 is included in the sections captioned
“TRANSACTIONS WITH RELATED PERSONS”, “PROPOSAL NUMBER 1: ELECTION OF DIRECTORS”,
“THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD” and “COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION” 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 “INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM” of Peoples’ Definitive Proxy Statement, which section is 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 Effectiveness of
|
|
Internal
Control Over Financial Reporting
|
56
|
Report
of Independent Registered Public Accounting Firm (Ernst & Young LLP)
on Consolidated
|
|
Financial
Statements
|
57
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
58
|
Consolidated
Statements of Income for each of the three years ended December 31,
2009
|
59
|
Consolidated
Statements of Stockholders’ Equity for each of the three years ended
December 31, 2009
|
60
|
Consolidated
Statements of Cash Flows for each of the three years ended December 31,
2009
|
61
|
Notes
to the Consolidated Financial Statements
|
62
|
Peoples
Bancorp Inc. (Parent Company Only Financial Information is included in
Note 19 of the
|
|
Notes
to the Consolidated Financial Statements)
|
90
|
(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 98. 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 98.
(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
1,
2010
By: /s/ MARK F. BRADLEY
Mark F.
Bradley, President and
Chief
Executive Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
MARK F. BRADLEY
|
|
President,
Chief Executive Officer and Director
|
|
03/01/2010
|
Mark
F. Bradley
|
|
|
|
|
|
|
|
|
|
/s/
EDWARD G. SLOANE
|
|
Executive
Vice President, Chief Financial Officer and
|
|
03/01/2010
|
Edward
G. Sloane
|
|
Treasurer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
DAVID M. ARCHER*
|
|
Director
|
|
03/01/2010
|
David
M. Archer
|
|
|
|
|
|
|
|
|
|
/s/
CARL L. BAKER, JR.*
|
|
Director
|
|
03/01/2010
|
Carl
L. Baker, Jr.
|
|
|
|
|
|
|
|
|
|
/s/
GEORGE W. BROUGHTON*
|
|
Director
|
|
03/01/2010
|
George
W. Broughton
|
|
|
|
|
|
|
|
|
|
/s/
WILFORD D. DIMIT*
|
|
Director
|
|
03/01/2010
|
Wilford
D. Dimit
|
|
|
|
|
|
|
|
|
|
/s/
RICHARD FERGUSON*
|
|
Chairman
of the Board and Director
|
|
03/01/2010
|
Richard
Ferguson
|
|
|
|
|
|
|
|
|
|
/s/
BRENDA F. JONES, M.D.*
|
|
Director
|
|
03/01/2010
|
Brenda
F. Jones, M.D.
|
|
|
|
|
|
|
|
|
|
/s/
DAVID L. MEAD*
|
|
Director
|
|
03/01/2010
|
David
L. Mead
|
|
|
|
|
|
|
|
|
|
/s/
ROBERT W. PRICE*
|
|
Director
|
|
03/01/2010
|
Robert
W. Price
|
|
|
|
|
|
|
|
|
|
/s/
THEODORE P. SAUBER*
|
|
Director
|
|
03/01/2010
|
Theodore
P. Sauber
|
|
|
|
|
|
|
|
|
|
/s/
PAUL T. THEISEN*
|
|
Vice
Chairman of the Board and Director
|
|
03/01/2010
|
Paul
T. Theisen
|
|
|
|
|
|
|
|
|
|
/s/
JOSEPH H. WESEL*
|
|
Director
|
|
03/01/2010
|
Joseph
H. Wesel
|
|
|
|
|
|
|
|
|
|
/s/
THOMAS J. WOLF*
|
|
Director
|
|
03/01/2010
|
Thomas
J. Wolf
|
|
|
|
|
*
|
The
above-named directors of the Registrant sign this Annual Report on Form
10-K by Mark F. Bradley, their attorney-in-fact, pursuant to Powers of
Attorney signed by the above-named directors, which Powers of Attorney are
filed with this Annual Report on Form 10-K as exhibits, in the capacities
indicated and on the 1st
day of March, 2010.
|
|
|
By:
|
/s/ MARK
F.
BRADLEY
Mark F. Bradley
President and Chief Executive
Officer
|
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Exhibit
Location
|
3.1(a)
|
|
Amended
Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio
Secretary of State on May 3, 1993).
|
|
Incorporated
herein by reference to Exhibit 3(a) to the Registration Statement of
Peoples Bancorp Inc. (“Peoples”) on Form 8-B filed July 20, 1993 (File No.
0-16772).
|
|
|
|
|
|
3.1(b)
|
|
Certificate
of Amendment to the Amended Articles of Incorporation of Peoples Bancorp
Inc. (as filed with the Ohio Secretary of State on April 22,
1994).
|
|
Incorporated
herein by reference to Exhibit 3(a)(2) to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 1997 (File No. 0-16772)
(“Peoples’ 1997 Form 10-K”).
|
|
|
|
|
|
3.1(c)
|
|
Certificate
of Amendment to the Amended Articles of Incorporation of Peoples Bancorp
Inc. (as filed with the Ohio Secretary of State on April 9,
1996).
|
|
Incorporated
herein by reference to Exhibit 3(a)(3) to Peoples’ 1997 Form
10-K.
|
|
|
|
|
|
3.1(d)
|
|
Certificate
of Amendment to the Amended Articles of Incorporation of Peoples Bancorp
Inc. (as filed with the Ohio Secretary of State on April 23,
2003).
|
|
Incorporated
herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2003 (File No.
0-16772)(“Peoples’ March 31, 2003 Form 10-Q”).
|
|
|
|
|
|
3.1(e)
|
|
Certificate
of Amendment by Shareholders or Members to the Amended Articles of
Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of
State on January 22, 2009).
|
|
Incorporated
herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K
dated January 22, 2009 and filed on January 23, 2009 (File No.
0-16772).
|
|
|
|
|
|
3.1(f)
|
|
Certificate
of Amendment by Directors or Incorporators to Articles filed with the
Secretary of State of the State of Ohio on January 28, 2009, evidencing
adoption of amendments by the Board of Directors of Peoples Bancorp Inc.
to Article FOURTH of Amended Articles of Incorporation to establish
express terms of Fixed Rate Cumulative Perpetual Preferred Shares, Series
A, each without par value, of Peoples Bancorp Inc.
|
|
Incorporated
herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K
dated and filed on February 2, 2009 (File No. 0-16772) (“Peoples’ February
2, 2009 Form 8-K”).
|
|
|
|
|
|
3.1(g)
|
|
Amended
Articles of Incorporation of Peoples Bancorp Inc. (reflecting amendments
through January 28, 2009) [For SEC reporting compliance purposes only –
not filed with Ohio Secretary of State].
|
|
Incorporated
herein by reference to Exhibit 3.1(g) to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2008 (File No. 0-16772)
(“Peoples’ 2008 Form 10-K”).
|
|
|
|
|
|
3.2(a)
|
|
Code
of Regulations of Peoples Bancorp Inc.
|
|
Incorporated
herein by reference to Exhibit 3(b) to Peoples’ Registration Statement on
Form 8-B filed July 20, 1993 (File No. 0-16772).
|
|
|
|
|
|
3.2(b)
|
|
Certificate
of Amendment to the Code of Regulations of Peoples Bancorp Inc. regarding
adoption of amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, 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.
|
|
Incorporated
herein by reference to Exhibit 3(c) to Peoples’ March 31, 2003 Form
10-Q.
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Exhibit
Location
|
3.2(c)
|
|
Certificate
of Amendment to the Code of Regulations of Peoples Bancorp Inc. regarding
adoption of amendments to Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.07,
3.08 and 3.11 of the Code of Regulations of Peoples Bancorp Inc. by
shareholders on April 8, 2004.
|
|
Incorporated
herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2004 (File No.
0-16772)(“Peoples’ March 31, 2004 Form 10-Q”).
|
|
|
|
|
|
3.2(d)
|
|
Certificate
regarding adoption of amendments to Sections 2.06, 2.07, 3.01 and 3.04 of
Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April
13, 2006
|
|
Incorporated
herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K
dated and filed on April 14, 2006 (File No. 0-16772) (“Peoples’ April 14,
2006 Form 8-K”)
|
|
|
|
|
|
3.2(e)
|
|
Code
of Regulations of Peoples Bancorp Inc. (reflecting amendments through
April 13, 2006)
[For
SEC reporting compliance purposes only]
|
|
Incorporated
herein by reference to Exhibit 3(b) to Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2006 (File No.
0-16772)
|
|
|
|
|
|
4.1
|
|
Agreement
to furnish instruments and agreements defining rights of holders of
long-term debt.
|
|
Filed
herewith.
|
|
|
|
|
|
4.2
|
|
Indenture,
dated as of April 20, 1999, between Peoples Bancorp Inc. and Wilmington
Trust Company, as Debenture Trustee, relating to Junior Subordinated
Deferrable Interest Debentures.
|
|
Incorporated
herein by reference to Exhibit 4.1 to the Registration Statement on Form
S-4 (Registration No. 333-81251) filed on June 22, 1999 by
Peoples Bancorp Inc. and PEBO Capital Trust I (“Peoples’ 1999 Form
S-4”).
|
|
|
|
|
|
4.3
|
|
Amended
and Restated Declaration of Trust of PEBO Capital Trust I, dated and
effective as of April 20, 1999.
|
|
Incorporated
herein by reference to Exhibit 4.5 to Peoples’ 1999 Form
S-4.
|
|
|
|
|
|
4.4
|
|
Series
B Capital Securities Guarantee Agreement, dated as of September 23,
1999, between Peoples Bancorp Inc. and Wilmington Trust Company, as
Guarantee Trustee, relating to Series B 8.62% Capital
Securities.
|
|
Incorporated
herein by reference to Exhibit 4 (i) to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 1999. (File No.
0-16772)
|
|
|
|
|
|
4.5
|
|
Warrant
to purchase 313,505 Shares of Common Stock (common shares) of Peoples
Bancorp Inc., issued to the United States Department of the Treasury on
January 30, 2009
|
|
Incorporated
herein by reference to Exhibit 4.1 to Peoples’ February 2, 2009 Form
8-K.
|
|
|
|
|
|
4.6
|
|
Letter
Agreement, dated January 30, 2009, including Securities Purchase
Agreement – Standard Terms attached thereto as Exhibit A, between
Peoples Bancorp Inc. and the United States Department of the Treasury
[Note: Annex A to Securities Purchase Agreement is not included therewith;
filed as Exhibit 3.1 to Peoples’ February 2, 2009 Form 8-K and
incorporated by reference at Exhibit 3.1(f) of this Annual Report on Form
10-K]
|
|
Incorporated
herein by reference to Exhibit 10.1 to Peoples’ February 2, 2009 Form
8-K.
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Exhibit
Location
|
10.1(a)
|
|
Peoples
Bancorp Inc. Second Amended and Restated Deferred Compensation Plan for
Directors of Peoples Bancorp Inc. and Subsidiaries (Amended and Restated
Effective December 11, 2008.)*
|
|
Incorporated
herein by reference to Exhibit 10.1(a) to Peoples’ 2008 Form
10-K.
|
|
|
|
|
|
10.1(b)
|
|
Rabbi
Trust Agreement, made January 6, 1998, between Peoples Bancorp Inc. and
The Peoples Banking and Trust Company (predecessor to Peoples Bank,
National Association)*
|
|
Incorporated
herein by reference to Exhibit 10.1(c) of Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2007 (File No. 0-16772)
(“Peoples’ 2007 Form 10-K”).
|
|
|
|
|
|
10.2(a)
|
|
Peoples
Bancorp Inc. Amended and Restated Incentive Award Plan (Amended and
Restated Effective December 11, 2008) [Effective for the fiscal year ended
December 31, 2009]*
|
|
Incorporated
herein by reference to Exhibit 10.2 of Peoples’ 2008 Form
10-K.
|
|
|
|
|
|
10.2(b)
|
|
Summary
of Incentive Plan for Executive Officers and other employees of Peoples
Bancorp Inc. [Effective for the fiscal year ended December 31,
2010]*
|
|
Filed
herewith.
|
|
|
|
|
|
10.3
|
|
Peoples
Bancorp Inc. 1995 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 4 to Peoples’ Registration Statement on
Form S-8 filed May 24, 1995 (Registration Statement No.
33-59569).
|
|
|
|
|
|
10.4
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options to non-employee directors of Peoples under Peoples Bancorp
Inc. 1995 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(k) to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 1995 (File No. 0-16772)
(“Peoples’ 1995 Form 10-K”).
|
|
|
|
|
|
10.5
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options to non-employee directors of Peoples’ subsidiaries under
Peoples Bancorp Inc. 1995 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(l) to Peoples’ 1995 Form
10-K.
|
|
|
|
|
|
10.6
|
|
Form
of Stock Option Agreement used in connection with grant of incentive stock
options under Peoples Bancorp Inc. 1995 Stock Option
Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(m) to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 1998 (File No. 0-16772)
(“Peoples’ 1998 Form 10-K”).
|
|
|
|
|
|
10.7
|
|
Peoples
Bancorp Inc. 1998 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10 to Peoples’ Registration Statement on
Form S-8 filed September 4, 1998 (Registration Statement No.
333-62935).
|
|
|
|
|
|
10.8
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options to non-employee directors of Peoples under Peoples Bancorp
Inc. 1998 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(o) to Peoples’ 1998 Form
10-K.
|
|
|
|
|
|
*Management
Compensation Plan
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Exhibit
Location
|
10.9
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options to consultants/advisors of Peoples under Peoples Bancorp
Inc. 1998 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(p) to Peoples’ 1998 Form
10-K.
|
|
|
|
|
|
10.10
|
|
Form
of Stock Option Agreement used in connection with grant of incentive stock
options under Peoples Bancorp Inc. 1998 Stock Option
Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(o) to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 1999 (File No.
0-16772).
|
|
|
|
|
|
10.11
|
|
Peoples
Bancorp Inc. 2002 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10 to Peoples’ Registration Statement on
Form S-8 filed April 15, 2002 (Registration Statement No.
333-86246).
|
|
|
|
|
|
10.12
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options to non-employee directors of Peoples under Peoples Bancorp
Inc. 2002 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(r) to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2002 (File No. 0-16772)
(“Peoples’ 2002 Form 10-K”).
|
|
|
|
|
|
10.13
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options to directors of Peoples’ subsidiaries under Peoples Bancorp
Inc. 2002 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(s) to Peoples’ 2002 Form
10-K.
|
|
|
|
|
|
10.14
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options to employees of Peoples under Peoples Bancorp Inc. 2002
Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(t) to Peoples’ 2002 Form
10-K.
|
|
|
|
|
|
10.15
|
|
Form
of Stock Option Agreement used in connection with grant of incentive stock
options under Peoples Bancorp Inc. 2002 Stock Option
Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(u) to Peoples’ 2002 Form
10-K.
|
|
|
|
|
|
10.16
|
|
Amended
and Restated Change in Control Agreement, between Peoples Bancorp Inc. and
Mark F. Bradley (amended and restated effective December 11,
2008)*
|
|
Incorporated
herein by reference to Exhibit 10.20 to Peoples’ 2008 Form
10-K.
|
|
|
|
|
|
10.17
|
|
Amended
and Restated Change in Control Agreement, between Peoples Bancorp Inc. and
Carol A. Schneeberger (amended and restated effective December 11,
2008)*
|
|
Incorporated
herein by reference to Exhibit 10.21 to Peoples’ 2008 Form
10-K.
|
|
|
|
|
|
10.18
|
|
Amended
and Restated Change in Control Agreement between Peoples Bancorp Inc. and
David T. Wesel (amended and restated effective December 11,
2008)*
|
|
Incorporated
herein by reference to Exhibit 10.22 to Peoples’ 2008 Form
10-K.
|
|
|
|
|
|
10.19
|
|
Amended
and Restated Change in Control Agreement between Peoples Bancorp Inc. and
Joseph S. Yazombek (amended and restated effective December 11,
2008)*
|
|
Incorporated
herein by reference to Exhibit 10.24 to Peoples’ 2008 Form
10-K.
|
|
|
|
|
|
|
*Management
Compensation Plan
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Exhibit
Location
|
10.20
|
|
Summary
of Perquisites for Executive Officers of Peoples Bancorp
Inc.*
|
|
Filed
herewith.
|
|
|
|
|
|
10.21
|
|
Summary
of Base Salaries for Executive Officers of Peoples Bancorp
Inc.*
|
|
Filed
herewith.
|
|
|
|
|
|
10.22
|
|
Summary
of Cash Compensation for Directors of Peoples Bancorp Inc.
|
|
Filed
herewith.
|
|
|
|
|
|
10.23
|
|
Peoples
Bancorp Inc. Amended and Restated 2006 Equity Plan*
|
|
Incorporated
herein by reference to Exhibit 10.28 to Peoples’ 2008 Form
10-K.
|
|
|
|
|
|
10.24
|
|
Form
of Peoples Bancorp Inc. 2006 Equity Plan Nonqualified Stock Option
Agreement used and to be used to evidence grant of nonqualified stock
option to non-employee directors of Peoples Bancorp Inc.*
|
|
Incorporated
herein by reference to Exhibit 10(c) of Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2006 (File No.
0-16772).
|
|
|
|
|
|
10.25
|
|
Form
of Peoples Bancorp Inc. 2006 Equity Plan Restricted Stock Agreement for
employees used and to be used to evidence awards of restricted stock
granted to employees of Peoples Bancorp Inc.*
|
|
Incorporated
herein by reference to Exhibit 10.29 of Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2006 (File No. 0-16722)
(“Peoples’ 2006 Form 10-K”).
|
|
|
|
|
|
10.26
|
|
Form
of Peoples Bancorp Inc. 2006 Equity Plan Restricted Stock Agreement for
non-employee directors used and to be used to evidence awards of
restricted stock granted to directors of Peoples Bancorp
Inc.*
|
|
Incorporated
herein by reference to Exhibit 10.30 of Peoples’ 2006 Form
10-K.
|
|
|
|
|
|
10.27
|
|
Form
of Peoples Bancorp Inc. 2006 Equity Plan SAR Agreement for employees used
and to be used to evidence awards of stock appreciation rights granted to
employees of Peoples Bancorp Inc.
|
|
Incorporated
herein by reference to Exhibit 10.31 of Peoples’ 2006 Form
10-K.
|
|
|
|
|
|
10.28(a)
|
|
Letter
Agreement, dated July 22, 2009, between Peoples Bancorp Inc. and Mark F.
Bradley.*
|
|
Incorporated
herein by reference to Exhibit 10.1 to Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2009 (File No. 0-16722)
(“Peoples’ June 30, 2009 Form 10-Q”).
|
|
|
|
|
|
10.28(b)
|
|
Letter
Agreement, dated July 22, 2009, between Peoples Bancorp Inc. and Edward G.
Sloane.*
|
|
Incorporated
herein by reference to Exhibit 10.2 to Peoples’ June 30, 2009 Form
10-Q
|
|
|
|
|
|
10.28(c)
|
|
Letter
Agreement, dated July 22, 2009, between Peoples Bancorp Inc. and Carol A.
Schneeberger.*
|
|
Incorporated
herein by reference to Exhibit 10.4 to Peoples’ June 30, 2009 Form
10-Q
|
|
|
|
|
|
10.28(d)
|
|
Letter
Agreement, dated Jull 22, 2009, between Peoples Bancorp Inc. and David T.
Wesel.*
|
|
Incorporated
herein by reference to Exhibit 10.5 to Peoples’ June 30, 2009 Form
10-Q
|
|
|
|
|
|
10.28(e)
|
|
Letter
Agreement, dated July 22, 2009, between Peoples Bancorp Inc. and Joseph S.
Yazombek.*
|
|
Incorporated
herein by reference to Exhibit 10.6 to Peoples’ June 30, 2009 Form
10-Q
|
|
|
|
|
|
*Management
Compensation Plan
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Exhibit
Location
|
10.29
|
|
Amended
and Restated Change in Control Agreement between Peoples Bancorp Inc. and
Edward G. Sloane (amended and restated effective December 11,
2008)*
|
|
Incorporated
herein by reference to Exhibit 10.34 to Peoples’ 2008 Form
10-K.
|
|
|
|
|
|
10.30
|
|
Change
in Control Agreement between Peoples Bancorp Inc. and Daniel K. McGill
(adopted September 14, 2009)*
|
|
Incorporated
herein by reference to Exhibit 10.1 to Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2009 (File No.
0-16722).
|
|
|
|
|
|
10.31
|
|
Change
in Control Agreement between Peoples Bancorp Inc. and Richard W. Stafford
(adopted February 8, 2010)*
|
|
Filed
herewith.
|
|
|
|
|
|
10.32 |
|
Letter
Agreement between Peoples Bancorp Inc. and Daniel K.
McGill.*
|
|
Filed
herewith. |
|
|
|
|
|
12
|
|
Statements
of Computation of Ratios.
|
|
Filed
herewith.
|
|
|
|
|
|
21
|
|
Subsidiaries
of Peoples Bancorp Inc.
|
|
Filed
herewith.
|
|
|
|
|
|
23
|
|
Consent
of Independent Registered Public Accounting Firm - Ernst & Young
LLP.
|
|
Filed
herewith.
|
|
|
|
|
|
24
|
|
Powers
of Attorney of Directors and Executive Officers of Peoples Bancorp
Inc.
|
|
Filed
herewith.
|
|
|
|
|
|
31(a)
|
|
Rule
13a-14(a)/15d-14(a) Certifications [President and Chief Executive
Officer]
|
|
Filed
herewith.
|
|
|
|
|
|
31(b)
|
|
Rule
13a-14(a)/15d-14(a) Certifications[Executive Vice President, Chief
Financial Officer and Treasurer]
|
|
Filed
herewith.
|
|
|
|
|
|
32
|
|
Section
1350 Certifications
|
|
Filed
herewith.
|
|
|
|
|
|
99.1
|
|
Certification
Pursuant to Section 111(B)(4)
of
the Emergency Economic Stabilization
Act
of 2008 and 31 CFR § 30.15[President and Chief Executive
Officer]
|
|
Filed
herewith.
|
|
|
|
|
|
99.2
|
|
Certification
Pursuant to Section 111(B)(4)
of
the Emergency Economic Stabilization
Act
of 2008 and 31 CFR § 30.15 [Executive Vice President, Chief Financial
Officer and Treasurer]
|
|
Filed
herewith.
|
|
|
|
|
|
*Management
Compensation Plan
|