form10k2007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
For the fiscal year ended December 31, 2007
OR
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.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
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 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. (Check one):
Large
accelerated
filer
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Accelerated
filer x
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Non-accelerated
filer
(Do
not check if a smaller reporting company) o
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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 Exchange Act).
Yes o
No x
As
of
June 29, 2007, the aggregate market value of the Registrant’s Common Shares (the
only common equity of the Registrant) held by non-affiliates was $263,018,000
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, at February 28, 2008: 10,382,991 common shares, without par
value.
Document
Incorporated by
Reference:
Portions
of Registrant's definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 10, 2008, are incorporated by reference into
Part
III of this Annual Report on Form 10-K.
PART
I
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Page
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PART
II
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PART
III
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PART
IV
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PART
I
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.
General
Peoples Bancorp
Inc.
is a financial holding company headquartered in Marietta, Ohio, that offers
diversified financial products and services through its wholly-owned
subsidiaries. At December 31, 2007, Peoples’ wholly-owned subsidiaries included
Peoples Bank, National Association (“Peoples Bank”), Peoples Investment Company
and PEBO Capital Trust I. Peoples Bank also owned Peoples Insurance
Agency, Inc. (“Peoples Insurance”), and two asset management
subsidiaries. Peoples Investment Company also owned a capital
management subsidiary.
Peoples’
primary business activities are conducted through Peoples Bank, a full service
community bank. Peoples Bank was first charted as an Ohio banking
corporation under the name “The Peoples Banking and Trust Company” in Marietta,
Ohio, in 1902 and reorganized as a national banking association under its
current name in 2000.
Peoples
Investment Company and its subsidiary, Peoples Capital Corporation, were formed
in 2001 to optimize Peoples’ consolidated capital position and improve
profitability by providing new investment opportunities that are either limited
or restricted at Peoples Bank. These investments include, but are not
limited to, low-income housing tax credit funds or projects, venture capital,
and other higher risk investments. Presently, the operations of both
companies do not represent a significant part of Peoples’ overall business
activities.
Business
Overview
Peoples
makes available a wide range of financial products and services to its customers
through its financial service locations and automated teller machines (“ATMs”)
in Ohio, West Virginia and Kentucky, as well as well as telephone and
internet-based banking, which include the following:
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various
interest-bearing and non-interest-bearing demand deposit
accounts
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savings
accounts, money market accounts and certificates of
deposit
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commercial,
consumer, and real estate mortgage loans (both commercial and
residential)
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credit
cards through an affiliated marketing
agreement
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corporate
and personal trust services
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safe
deposit rental facilities
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travelers
checks, money orders and cashier’s
checks
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Peoples
also offers a full range of life, health and property and casualty insurance
products through Peoples Insurance and makes available custom-tailored fiduciary
and wealth management services, including asset management, record keeping,
retirement services, and estate management, through Peoples Financial Advisors
(a division of Peoples Bank). Brokerage services are offered
exclusively through an unaffiliated registered broker-dealer located at Peoples
Bank’s offices.
Over
the
last several years, Peoples has undertaken a controlled and steady expansion
of
its business through a combination of internal and external
growth. These efforts have resulted in a growth in total assets and
an increase in its capital position. For the five-year period ended
December 31, 2007, Peoples’ total assets grew at a 6.2% compound annual growth
rate, while stockholders’ equity grew at a compound annual growth rate of
6.6%. Peoples also has a history of dividend growth, as dividends per
share grew at a compound annual rate of 9.5%, for the five-year period ended
December 31, 2007. The year 2007 marked the 42nd
consecutive year of increased dividends. Over the same five-year
period, Peoples’ annual return on average assets and annual return on average
stockholders’ equity averaged 1.05% and 10.52%, respectively.
Since
2001, Peoples has opened 3 de
novo banking offices and 2 loan production offices and has completed 3
branch acquisitions, 2 bank acquisitions and 2 insurance agency
acquisitions. During this time, Peoples has acquired approximately
$372 million of assets, which included $185 million of loans, $289 million
of
deposits, and 14 financial service offices. These acquisitions
produced benefits, including the expansion of Peoples’ customer base, and
provided opportunities to integrate non-traditional products and services,
such
as insurance and investments, with the traditional banking products currently
offered to clients in Peoples’ markets. These actions also enabled
Peoples to expand into new geographic markets.
Recent
Expansion
In
November 2007, Peoples Bank completed construction and opened a new full-service
financial service office in Huntington, West Virginia. The new office
includes an ATM and drive-through banking facilities and complements Peoples
Bank’s existing Huntington banking office. Insurance and investment
services are also provided at the new Huntington office.
Peoples
continues to explore opportunities for additional growth and expansion of its
core financial service businesses, including the acquisition of companies
engaged in similar activities. Management also focuses on internal
growth as a method for reaching performance goals. There can be no
assurance, however, that Peoples will be able to grow, or if it does, that
any
such growth or expansion will result in an increase in Peoples’ earnings,
dividends, book value or the market value of its common shares.
Customers
and Markets
Peoples
has expanded from Washington County, Ohio, where it maintains 9 financial
service locations, to a primary market area that encompasses 18 counties in
Ohio
and neighboring areas of northeastern Kentucky and northwestern West Virginia,
composed primarily of non-major urban areas. The primary market area
possesses a diverse economic base, with no single dominant industry or
employer. Principal industries in the market area include health
care, education and other social services; plastics and petrochemical
manufacturing; oil, gas and coal production; and tourism and other
service-related industries. 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. 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. In prior years, Peoples also
originated and retained various credit card loans. In 2003, Peoples
sold its existing credit card portfolio and entered into a joint marketing
alliance to serve the credit card needs of its customers and prospects, which
reduces Peoples’ risks since it does not own the loans.
Loan
types are spread over a broad range of industrial classifications, with no
concentration of loans to borrowers engaged in the same or similar industries
that exceed 10% of total loans and no loans to foreign
entities. Peoples’ lending activities are focused principally on
lending opportunities within its primary market areas, although Peoples
occasionally originates loans to creditworthy customers outside its primary
markets.
Legal
Lending Limit
At
December 31, 2007, Peoples’ legal lending limit was approximately $22.2
million. In 2007, 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 61.2% of total loans at December 31,
2007. Commercial lending inherently involves a significant degree of
risk of loss since commercial loan relationships generally involve larger loan
balances. 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.
LENDING
PRACTICES. Loan terms
include
amortization schedules commensurate with the purpose of each loan, the source
of
repayment and the risk involved. The primary analytical technique
used in determining whether to grant a commercial loan is the review of a
schedule of cash flows to evaluate whether anticipated future cash flows will
be
adequate to service both interest and principal due. Additionally,
collateral is reviewed to determine its value in relation to the
loan.
The
Peoples Bank Board of Directors is required to approve loans secured by real
estate in excess of $5 million; loans secured by all other assets in excess
of
$3 million and unsecured loans in excess of $1 million. However,
approval of the Board of Directors is required for all loans, regardless of
amount, to borrowers whose aggregate debt to Peoples, including the principal
amount of the proposed loan, exceeds $7 million.
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 gives
Peoples the opportunity to take effective and prompt action designed to assure
repayment of the loan or minimize Peoples’ risk of loss, including reviewing the
relationship on a quarterly basis depending on 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, including home equity loans, remains
a
major focus of Peoples’ lending efforts, whether the loans are ultimately sold
into the secondary market or retained on Peoples’ Consolidated Balance
Sheet. 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.
At
December 31, 2007, portfolio real estate loans (including home equity lines
of
credit) comprised 25.0% of total loans. Peoples also had $2.0 million
of real estate loans held for sale and was servicing $176.7 million of loans,
consisting primary one-to-four family residential mortgages, previously sold
in
the secondary market.
LENDING
PRACTICES. Peoples 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, unless
private mortgage insurance is obtained by the borrower for the percentage
exceeding 80%. On occasion, Peoples may lend up to 100% of the
appraised value of the real estate. The risk conditions of these
loans are considered during underwriting for the purposes of establishing an
interest rate commensurate with the risks inherent in mortgage lending and
remaining equity of the home, if any. 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
LOANS. Home
equity lines of credit, or Equilines, 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 100% of the appraised
value of the property at higher interest rates that are considered compatible
with the additional risk assumed in these types of equilines. The
home equity lines of credit are written with ten-year terms, but are subject
to
review upon request for renewal. Peoples offers home equity loans
with a fixed rate for the first five years which converts to a variable interest
rate for the remaining five years. Peoples also offers a home equity
line of credit with a variable rate for the entire term of the
loan.
Construction
Loans
Peoples
originates various construction loans to provide temporary financing during
the
construction phase for commercial and residential properties. At
December 31, 2007, construction loans comprised 6.4% 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 estimate
of construction cost proves to be inaccurate, Peoples may be required to advance
funds beyond the amount originally committed to permit completion of the
project.
LENDING
PRACTICES. Peoples’ construction
lending is focused primarily on single-family residential or owner-occupied
commercial projects being constructed by established contractors. Peoples also
originates other construction loans to select real estate developers and
homebuilders for the purpose of constructing a variety of commercial and
residential projects, including office, retail or industrial complexes and
land
development. The underwriting criteria for construction loans is
generally the same as for non-construction loans.
To
mitigate the risk of construction lending, Peoples requires periodic site
inspections by the construction loan manager, loan officer, 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, 2007, consumer loans comprised 7.2% of Peoples’ loan portfolio.
LENDING
PRACTICES. Consumer loans
generally
involve more risk as to collectibility 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.
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
Since
2001, Peoples has granted 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, 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 represent a significant portion of Peoples’ total
assets. The majority of Peoples’ investment activities are conducted
through Peoples Bank, which is subject to certain regulatory guidelines,
including limitations on the types of securities eligible for
purchase. 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. Other investment activities are conducted by Peoples or
its non-banking subsidiaries, although on a less frequent basis. The
investments owned by Peoples are comprised of common stocks issued by various
unrelated banking holding companies, which are subject to certain limitations
without regulatory approval. 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”). In general, the investment portfolio is managed in a manner
appropriate to achieve the following goals: (i) to provide a source of liquid
assets that can be used to meet unanticipated deposit and loan fluctuations
and
overall funds management objectives; (ii) to provide eligible securities to
secure public funds and trust deposits, as prescribed by law, and other
borrowings; and (iii) to earn the an adequate return on funds invested that
is
commensurate with the investment’s risk and meeting the requirements of (i) and
(ii). Investment strategies are reviewed and approved by the ALCO
upon consideration of 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
Operations” included in Item 7 of in this Form 10-K.
Funding
Sources
Deposits,
both interest-bearing and non-interest-bearing, are Peoples’ primary source of
funds for lending and investing activities. Additionally, interest
paid on deposits is the largest category of Peoples’ interest
expense. 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 as 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 Results of Operations and Financial
Condition” included in Item 7 of this Form 10-K.
The
following is a brief description of the various sources of funds utilized by
Peoples. Additional information can be found in the “Deposits” and
“Borrowed Funds” section of “Management’s Discussion and Analysis of Results of
Operations and Financial Condition” included in Item 7 and Notes 6, 7, 8, and 9
of the Notes to the Consolidated Financial Statements included in Item 8 of
this
Form 10-K.
Deposits
Deposits
are attracted principally from clients within Peoples’ primary market through
the offering of a broad selection of deposit products to individuals and
businesses. Retail deposit account terms vary with respect to the
minimum balance required, the time period the funds must remain on deposit
and
service charge schedules. Interest rates paid on specific deposit types are
determined based on (i) the interest rates offered by competitors, (ii) the
anticipated amount and timing of funding needs, (iii) the availability and
cost
of alternative sources of funding and (iv) 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 utilizes deposit brokers to attract deposits from clients outside
Peoples’ primary market area, generally in the form of certificates of
deposit. Brokered deposits are used to diversify funding sources, as
well as augment Peoples’ retail deposits to fund loans originated to customers
located outside Peoples’ primary market. Although brokered deposits
normally carry a slightly higher interest cost than other wholesale funds,
Peoples is not required to secure the funds with collateral, as is normally
the
case with its borrowed funds.
Borrowed
Funds
Peoples’
utilizes a variety of short-term borrowings, including advances from the Federal
Home Loan Bank of Cincinnati (“FHLB”), Federal funds purchases, repurchase
agreements, and an unsecured revolving line of credit with an unrelated
financial institution to manage Peoples’ daily liquidity needs since they
generally may be repaid, in whole or part, at anytime without a
penalty. See Note 7 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K for additional disclosures
related to these types of borrowings.
Peoples
also utilizes long-term borrowings, including FHLB advances and wholesale
repurchase agreements, to help manage its interest rate sensitivity and
liquidity. Long-term borrowings also provide cost-effective options
for funding asset growth and satisfying capital needs, due to the variety of
pricing and maturity options available. See Note 8 of the Notes to the
Consolidated Financial Statements included in Item 8 of this Form 10-K for
additional disclosures related to these types of borrowings.
Competition
The
financial services industry is highly competitive. Peoples is subject
to intense competition within its primary markets due to the presence of a
variety of traditional and non-traditional product and service providers,
including national, regional and local commercial banks, savings associations,
credit unions, insurance companies, money market and mutual funds and brokerage
firms. Peoples also experiences competition for commercial
loans from the capital markets. The primary factors in competing for
loans are interest rates, fees charged and overall lending
services. The primary factors in competing for deposits are interest
rates paid on deposits, account liquidity, convenience of office location and
quality of service provided. Management believes Peoples’ ability to
offer a wide array of financial products and services, along with Peoples’
strong financial condition, serve as the basis for a favorable competitive
position in Peoples’ primary markets.
Peoples
historically has focused on smaller metropolitan markets to provide its full
range of products and services. Management believes Peoples has
developed a niche and a certain level of expertise in serving the banking needs
of these communities. More recently, Peoples has expanded in the more
metropolitan area of central Ohio, where it has a loan production office and
three financial services offices. Peoples operates under a
“needs-based” selling approach that management believes has proven successful in
serving the financial needs of many customers. Management anticipates
Peoples will continue to increase its investment in sales training and education
in future periods to assist in the development of Peoples’ associates and their
identification of customer service opportunities.
Peoples’
strategy is not to compete solely on the basis of price but rather focus on
customer relationships, speed and quality of the delivery of service and
incentives to promote customers’ continued use of multiple financial products
and services that will lead to enhanced revenue
opportunities. Management believes the integration of traditional
financial products with non-traditional financial products, such as insurance
and investment products, will lead to enhanced revenues through complementary
product offerings.
Employees
At
December 31, 2007, Peoples had 559 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 have expiration dates ranging from 2014
to 2017, unless Peoples extends them for additional 10-year
periods. Registrations of service marks with the U.S. Patent and
Trademark Office generally may be renewed and continue indefinitely, provided
Peoples 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
The
following is a summary of certain statutes and regulations affecting Peoples
and
is qualified in its entirety by reference to such statutes and
regulations.
Peoples
and its subsidiaries are subject to extensive regulation by federal and state
agencies. The regulations are intended primarily for the protection
of borrowers, depositors, federal deposit insurance funds and the banking system
as a whole and not for the protection of shareholders.
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"). Peoples is also under the
jurisdiction of the Securities and Exchange Commission (the “SEC”) and certain
state securities commissions related 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, and the Securities Exchange Act of 1934,
as
amended (the “Exchange Act”), as administered by the SEC. Peoples'
common shares are listed on The NASDAQ Global Select Market under the symbol
"PEBO" and is subject to the rules for listed companies.
Peoples
Insurance Agency, Inc., an Ohio corporation licensed as an insurance agency,
is
subject to regulation, supervision and examination by the Ohio Department of
Insurance.
Regulation
of Financial Holding Companies
The
Gramm-Leach-Bliley Act of 1999 (also known as the Financial Services
Modernization Act of 1999) established a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms,
and
other financial service providers through the creation of a "financial holding
company" entity. Bank holding companies that elect to become
financial holding companies, as Peoples has elected, have the ability to expand
their activities from those historically permissible for bank holding companies
and engage in activities that are financial in nature or complementary to
financial activities, including securities underwriting and market making,
insurance underwriting and agency, sponsoring mutual funds and investment
companies and merchant banking. A financial holding company is also
permitted to conduct permissible new financial activities and acquire companies,
other than banks or savings associations, engaged in activities that are
financial in nature or incidental to activities that are financial in nature,
as
determined by the Federal Reserve Board, by providing after-the-fact notice
to
the Federal Reserve Board.
In
order
to become and remain a financial holding company, all subsidiary banks of the
holding company must be well capitalized and well managed and have at least
a
satisfactory rating under the Community Reinvestment Act.
In
2002, Peoples elected, and received
approval from the Federal Reserve Board, to become a financial holding
company.
Peoples
is subject to examination and supervision by the Federal Reserve Board as
provided under the BHC. Peoples is required to file reports with the
Federal Reserve Board. The BHC Act also requires the prior approval
of the Federal Reserve Board for Peoples to acquire direct or indirect ownership
or control of more than 5% of the voting shares of any bank that is not already
majority-owned by Peoples, acquire all or substantially all of the assets of
another bank or another financial or bank holding company, or merge or
consolidate with any other financial or bank holding company.
The
Federal Reserve Board also has extensive enforcement authority over bank holding
companies, including financial holding companies. Such authority
includes, among other things, the ability to:
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assess
civil money penalties;
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issue
cease and desist or removal orders;
and
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require
that a bank holding company divest subsidiaries (including its subsidiary
banks).
|
In
general, the Federal Reserve Board may initiate enforcement actions for
violations of laws and regulations and unsafe or unsound practices.
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 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.
Subsidiary
banks of a financial holding company are subject to certain restrictions imposed
by the Federal Reserve Act on 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. Further, a financial holding
company and its subsidiaries are prohibited from engaging in certain tying
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of any service. Various consumer laws and
regulations also affect the operations of these subsidiaries.
Regulation
of Bank Subsidiary
Peoples
Bank is a national banking association chartered under the National Bank Act
and
is regulated primarily by the Office of the Comptroller of the Currency
("OCC"). Peoples Bank and its subsidiaries are subject to examination
and supervision by the OCC.
THE
FEDERAL DEPOSIT
INSURANCE CORPORATION ("FDIC")/DEPOSITORY INSURANCE. Peoples Bank’s
deposits are insured up to statutorily prescribed limits by the
FDIC. Insurance premiums for insured institutions are determined
based upon the institution's capital level and supervisory rating provided
to
the FDIC by the institution's primary federal regulatory and other information
the FDIC determines to be relevant to the risk posed to the deposit insurance
fund by the institution. The assessment rate determined by
considering such factors is then applied to the amount of the institution's
deposits to determine the institution's insurance premium. An
increase in the assessment rate could have a material adverse effect on the
earnings of the institution.
Insurance
of deposits may be terminated by the FDIC upon a finding that the insured
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition enacted or imposed by the institution's
regulatory agency.
In
February 2006, President Bush
signed into law the Deposit Insurance Reform Act of 2005 and its companion
bill,
the Deposit Insurance Reform Conforming Amendments Act of 2005 (collectively,
the "Deposit Insurance Reform Acts").
Under
that legislation, the Bank Insurance Fund and the Savings Association Insurance
Fund were merged into a new Deposit Insurance Fund ("DIF"). The
Deposit Insurance Reform Acts provide for several additional changes to the
deposit insurance system, including the following:
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increasing
the deposit insurance limit for retirement accounts from $100,000
to
$250,000;
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adjusting
the deposit insurance limits (currently $100,000 for most accounts)
every
five years based on an inflation index, with the first adjustment
to be
effective on January 1, 2011;
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providing
pass-through deposit insurance for the deposits of employee benefit
plans
(but prohibiting undercapitalized depository institutions from accepting
employee benefit plan deposits);
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allocating
an aggregate of $4.7 billion of one-time credits to offset the premiums
of
depository institutions based on their assessment based at the end
of
1996;
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establishing
rules for awarding cash dividends to depository institutions, based
on
their relative contributions to the DIF and its predecessor funds,
when
the DIF reserve ratio reaches certain levels;
and
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revising
the rules and procedures for risk-based premium
assessments.
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On
January 1, 2007, final rules under
the Deposit Insurance Reform Acts became effective. The final rules
set a base assessment schedule for 2007 for DIF premiums. For banks
with less than $10 billion in assets, the premium assessment rates are based
on
a combination of financial ratios and CAMELS component ratings. The
final rules also provide a one-time credit to institutions to offset amounts
owed for deposit insurance. The credit will be applied by the FDIC to
offset 100% of a bank's FDIC premiums from June 29, 2007 through March 30,
2008,
up to 90% of a bank's FDIC premiums from June 30, 2008 through March 30, 2011,
and up to 100% of a bank's FDIC premiums from June 30, 2011 until the credit
is
exhausted.
Peoples
Bank received a one-time credit of $1.0 million that can be applied against
future premiums, subject to the foregoing limitations. In 2007,
Peoples Bank utilized $0.5 million of this credit and expects to utilize the
remaining credit in 2008.
LIABILITY
OF COMMONLY
CONTROLLED BANKS. Under the Federal Deposit Insurance Act, a bank is
generally liable for any loss incurred, or reasonably expected to be incurred,
by the FDIC in connection with (a) the default of a commonly controlled bank
or
(b) any assistance provided by the FDIC to a commonly controlled bank in danger
of default. "Default” means, generally, the appointment of a
conservator or receiver. "In danger of default" means,
generally,
the existence of conditions indicating that a default is likely to occur in
the
absence of regulatory assistance.
TRANSACTIONS
WITH
AFFILIATES, DIRECTORS, EXECUTIVE OFFICERS AND SHAREHOLDERS. Sections 23A
and 23B of the Federal Reserve Act and Federal Reserve Board Regulation W
restrict transactions by banks and their subsidiaries with their
affiliates. An affiliate of a bank is any company or entity that
controls, is controlled by or is under common control with the
bank. Generally, Sections 23A and 23B and Regulation W:
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limit
the extent to which a bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of
that
bank's capital stock and surplus (i.e., tangible
capital);
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limit
the extent to which a bank or its subsidiaries may engage in "covered
transactions" with all affiliates to 20% of that bank's capital stock
and
surplus; and
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require
that all such transactions be on terms substantially the same, or
at least
as favorable to the bank or subsidiary, as those provided to a
non-affiliate.
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The
term
"covered transaction" includes the making of loans to the affiliate, the
purchase of assets from the affiliate, the issuance of a guarantee on behalf
of
the affiliate, the purchase of securities issued by the affiliate and other
similar types of transactions.
A
bank's
authority to extend credit to executive officers, directors and greater than
10%
shareholders, as well as entities such persons control, is subject to Sections
22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated
thereunder by the Federal Reserve Board. Among other things, these
loans must be made on terms (including interest rates and collateral)
substantially the same as those offered to unaffiliated individuals or be made
as part of a benefit or compensation program and on terms widely available
to
employees, and must not involve a greater than normal risk of
repayment. In addition, the amount of loans a bank may make to these
persons is based, in part, on the bank's capital position, and specified
approval procedures must be followed in making loans that exceed specified
amounts.
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
must maintain an investment in the capital stock of the FHLB in a specified
amount. At December 31, 2007, Peoples held 188,198 shares of capital
stock of the FHLB of Cincinnati, which exceeded the required investment of
136,219 shares. 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 home
buyers.
LIMITS
ON DIVIDENDS AND
OTHER PAYMENTS. Peoples Bank may not pay dividends out of its surplus if,
after paying these dividends, it would fail to meet the required minimum levels
under the risk-based capital requirements and minimum leverage ratio
requirements established by the OCC. In addition, Peoples Bank must
have the approval of the OCC if a dividend in any year would cause the total
dividends for that year to exceed the sum of Peoples Bank's current year's
"net
profits" (or net income, less dividends declared during the period based on
regulatory accounting principles) and the retained net profits for the preceding
two years, less required transfers to surplus. Payments of dividends
by Peoples Bank may be restricted at any time at the discretion of its
regulators, if the regulators deem such dividends to constitute unsafe and/or
unsound banking practices or if necessary to maintain adequate
capital. Peoples serves as a source of strength to Peoples Bank,
which may restrict the dividends that can be paid to its shareholders. For
further discussion regarding regulatory restrictions on dividends, see Note
13
of the Notes to the Consolidated Financial Statements included in Item 8 of
this
Form 10-K.
Even
when
the legal ability exists, Peoples or Peoples Bank may decide to limit the
payment of dividends in order to retain earnings for corporate
use. Additionally, Peoples has an established business trust
subsidiary, which issued preferred securities. If Peoples suspends
interest payments relating to the trust preferred securities issued by its
trust
subsidiary, Peoples will be prohibited from paying dividends on its common
shares. For further discussion regarding Peoples’ trust subsidiary,
see Note 9 of the Notes to the Consolidated Financial Statements included in
Item 8 of this Form 10-K.
REGULATORY
CAPITAL AND
PROMPT CORRECTIVE ACTION. The Federal
Reserve
Board has adopted regulatory capital guidelines for all bank holding companies,
including financial holding companies, and the OCC has adopted regulatory
capital guidelines for national banks. The guidelines provide a
systematic analytical framework which makes regulatory capital requirements
sensitive to differences in risk profiles among banking organizations, takes
off-balance sheet exposures expressly into account in evaluating capital
adequacy and minimizes disincentives to holding liquid, low-risk
assets. Capital levels as measured by these standards are also used
to categorize financial institutions for purposes of certain prompt corrective
action regulatory provisions.
Bank
holding companies must maintain capital sufficient to meet both a risk-based
asset ratio test and a leverage ratio test on a consolidated
basis. The risk-based asset ratio is determined by allocating assets
and specified off-balance sheet commitments into four weighted categories,
with
higher weighting assigned to categories perceived as representing greater
risk. A bank holding company's risk-based capital ratio represents
total capital divided by total risk-weighted assets. The leverage
ratio is core capital divided by total assets adjusted as specified in the
guidelines. Peoples Bank is subject to substantially similar capital
requirements.
Generally,
a financial institution's capital is divided into two tiers.
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"Tier
1," or core capital, includes common shareholders’ equity, minority
interests in certain equity accounts of consolidated subsidiaries
and a
limited amount of qualifying preferred stock and qualified trust
preferred
securities, less goodwill and certain other deductions including
intangible assets and net unrealized gains and losses after applicable
taxes on available-for-sale securities carried at fair
value.
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"Tier
2," or supplementary capital, includes, among other things, certain
amounts of hybrid capital instruments, mandatory convertible debt,
subordinated debt, preferred stock not qualifying as Tier 1 capital,
loan
and lease loss allowance and net unrealized gains on certain
available-for-sale equity securities, all subject to limitations
established by the guidelines.
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"Total
capital" is Tier 1 plus Tier 2
capital.
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Financial
institutions are required to maintain a risk-based capital ratio of 8%, with
at
least 4% being Tier 1 capital. The appropriate regulator can require
higher capital when an institution's circumstances warrant.
The
leverage ratio requirement is Tier 1 capital to average assets (excluding the
loan and lease loss allowance, goodwill and certain other intangibles) of 3%
for
bank holding companies and banks that meet certain criteria, including having
the highest regulatory rating, and 4% for all other bank holding companies
and
banks. The guidelines further provide that bank holding companies
making acquisitions will be expected to maintain strong capital positions
substantially above the minimum levels.
The
federal banking agencies have 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," "under-capitalized," "significantly
under-capitalized," and "critically under-capitalized." In order to
be "well-capitalized," a bank must have total risk-based capital of at least
10%, Tier 1 risk-based capital of at least 6% and a leverage ratio of at least
5%, and the bank must not be subject to any written agreement, order, capital
directive or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure.
Throughout
2007 and at December 31, 2007, Peoples and Peoples Bank’s regulatory capital
ratios were in excess of the levels required to be deemed
“well-capitalized.” Additional information regarding Peoples and
Peoples Bank’s risk-based capital requirements can be found in Note 13 of the
Notes to the Consolidated Financial Statements included in Item 8 of this
Form
10-K.
A
financial institution is generally prohibited from making any capital
distribution, including payments of a cash dividend, or paying any management
fee to its holding company if the depository institution would be
"under-capitalized" after such payment. "Under-capitalized"
institutions are subject to growth limitations and are required by the
appropriate federal banking agency to submit a capital restoration
plan. 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
under-capitalized" 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 broker deposits
and offering interest rates on deposits higher than the prevailing rate in
its
market, and the holding company of any under-capitalized depository institution
must guarantee, in part, specific aspects of the bank's capital plan for the
plan to be acceptable.
The
risk-based capital guidelines adopted by the federal banking agencies are based
on the “International Convergence of Capital Measurement and Capital Standards”
(Basel I), published by the Basel Committee on Banking Supervision (the “Basel
Committee”) in 1988. In 2004, the Basel Committee published a new,
more risk-sensitive capital adequacy framework (Basel II) for large,
internationally active banking organizations. In September 2006, the
federal banking agencies issued a notice of proposed rulemaking regarding the
implementation of Basel II in the United States. As proposed, the
application of the new Basel II rules would be mandatory for any bank that
has
consolidated total assets of at least $250 billion or has consolidated
on-balance sheet foreign exposure of at least $10 billion, and would be
voluntary for all other banks.
In
response to concerns regarding the complexity and cost associated with
implementing the Basel II rules, in December 2006, the federal banking agencies
issued a notice of proposed rulemaking that would revise the existing risk-based
capital framework (Basel IA) for U.S. banks which will not be subject to the
Basel II rules. The proposed Basel IA rules would allow banks other
than the large Basel II banks to elect to adopt Basel IA or remain subject
to
the existing risk-based capital rules. Basel IA would increase the
number of risk-weight categories to which credit exposures may be assigned;
use
loan-to-value ratios to determine risk-weights for most residential mortgages;
expand the use of external credit ratings to risk-weight certain exposures;
expand the range of collateral and guarantors that may qualify an exposure
for
lower risk weights; increase the credit conversion factors for certain
commitments with an original maturity of less than one year; asses a risk-based
capital charge to reflect the risks of securitizations with early amortization
provisions that are backed by revolving exposures; and remove the 50% limit
on
the risk weight that applies to certain derivative contracts.
Until
the
final rules are adopted by the federal banking agencies, Peoples is unable
to
predict whether and when it will adopt the new capital guidelines.
CUSTOMER
PRIVACY AND OTHER
CONSUMER PROTECTIONS. Peoples 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 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.
PATRIOT
ACT. The Uniting
and
Strengthening of America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (the "Patriot Act") gives the United States
powers to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. The Patriot Act and related
regulations 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 are believed to be compliant with the requirements of the
Patriot Act.
Corporate
Governance
The
Sarbanes-Oxley Act of 2002 imposed new or revised corporate governance,
accounting and reporting requirements on Peoples and all other companies having
securities registered with the SEC. In addition to a requirement that
chief executive officers and chief financial officers certify financial
statements in writing, the statute imposed requirements affecting, among other
matters, the composition and activities of audit committees, disclosure relating
to corporate insiders and insider transactions, codes of ethics, and the
effectiveness of internal control over financial reporting.
Peoples’
Board
of Directors and
management have instituted a series of actions to enhance Peoples’ already
strong corporate governance practices. Included in those actions was
adoption of a formal Code of Ethics, a revision of the charter of the Audit
Committee and the formation of two new committees: a Disclosure Committee for
Financial Reporting and a Governance and Nominating Committee. The
current charters of the Audit Committee, the Governance and Nominating Committee
and the Compensation Committee can be found on Peoples’ website on the
“Corporate Governance & Ethics” page. Additionally, Peoples Bank
has maintained a conflict of interest policy applicable to its directors,
officers and employees for over 30 years.
Code
of Ethics
In
2003,
Peoples’ Board of Directors adopted a formal Code of Ethics applicable to all
directors, officers and employees of Peoples and its affiliates. The
Board of Directors adopted Peoples’ Code of Ethics to demonstrate to the public
and Peoples’ shareholders the importance the Board and management place on
ethical conduct, and to continue to set forth Peoples’ expectations for the
conduct of ethical business practices. Peoples’ Code of Ethics is
available, free of charge, to the public on Peoples’ website on the “Corporate
Governance & Ethics” page. Please also see Item 10 of this Form
10-K.
Disclosure
Committee for Financial Reporting
In
2003, Peoples established a
Disclosure Committee for Financial Reporting (the “Disclosure Committee”) to
formalize Peoples’ process of establishing and monitoring Peoples’ disclosure
controls and procedures and communicating the results of such controls and
procedures. The Disclosure Committee consists of key members of executive
management as well as senior professional support staff from the Legal
Department, Risk Management group and Controller. The Disclosure
Committee complements Peoples’ longstanding committee structure and process,
which has consistently provided an invaluable tool for communication of
disclosure information.
The
Disclosure Committee has the
responsibility to:
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As
necessary monitor the integrity and effectiveness of Peoples Disclosure
Controls defined as processes which seek to achieve objectives of
(a)
reliability of financial reporting, (b) effectiveness and efficiency
of
the operations, and (c) compliance with applicable
laws.
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Provide
a process of senior officer certifications on which the Chief Executive
Officer and Chief Financial Officer can rely in providing the
certifications required under Section 302 of the Sarbanes-Oxley Act
of
2002 to be filed with each Report.
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Review
and approve for filing or release of Peoples’ (1) periodic and current
reports, proxy statements, information statements, registration statements
and any other information filed with the SEC, (2) press releases
containing financial information, earnings guidance, conference calls,
investment conference presentations, information about material
acquisitions or dispositions or other information material to Peoples’
security holders, and (3) correspondence and other communications
containing financial information disseminated to shareholders (broadly),
the investment public and employees (collectively, the “Disclosure
Statements”). Disclosure Statements, other than information filed with the
SEC and press releases containing financial information, that are
initiated or approved by the Chief Executive Officer or the Chief
Financial Officer may be presented to the Committee as soon as possible
after issuance for review and
ratification.
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Review
and approve disclosure policies and other material connected to financial
information displayed on Peoples’ Web
site.
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Discuss
with the Senior Officers as necessary all relevant information with
respect to the Committee’s proceedings, the preparation of the Disclosure
Statements and the Committee’s evaluation of the effectiveness of Peoples
Disclosure Controls.
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Each
key element of operation is subject
to oversight by a committee to ensure proper administration, risk management
and
an up-streaming of critical management information and disclosures to finance
and control areas, executive management and the Board of
Directors. The Disclosure Committee’s responsibilities are designed
to capture information from all components of Peoples’ business. It
is believed that the addition of these processes has brought with it a broader
and more in-depth analysis to Peoples’ already effective and detailed disclosure
process, as well as enhanced Peoples’ overall disclosure control
environment.
Governance
and Nominating Committee
In
2003, the Board of Directors formally
established a Governance and Nominating Committee consisting of at least three
independent members of the Board. The purpose of the Governance and
Nominating Committee is to identify qualified candidates for election,
nomination or appointment to Peoples’ Board of Directors and recommend to the
full Board a slate of director nominees for each annual meeting of the
shareholders of Peoples or as vacancies occur. In addition, the
Governance and Nominating Committee oversees matters of corporate governance,
including the evaluation of Board performance and processes, and makes
recommendations to the Board and the Chairman of the Board regarding assignment
and rotation of members and chairs of committees of the Board. The
goal of the Governance and Nominating Committee is to assure that the
composition, practices and operation of the Board contribute to value creation
and to the effective representation of Peoples’
shareholders.
Effect
of Environmental Regulation
Peoples’
primary exposure to environmental risk is through Peoples Bank's lending
activities. When management believes environmental risk potentially
exists, Peoples mitigates its environmental risk exposure by requiring
environmental site assessments at the time of loan origination to confirm
collateral quality as to commercial real estate parcels posing higher than
normal potential for environmental impact, as determined by reference to present
and past uses of the subject property and adjacent
sites. Environmental assessments are typically required prior to any
foreclosure activity involving non-residential real estate
collateral. Management reviews residential real estate loans with
inherent environmental risk on an individual basis and makes decisions based
on
the dollar amount of the loan and the materiality of the specific credit.
Peoples
anticipates no material effect on capital expenditures, earnings or the
competitive position of itself or any subsidiary as a result of compliance
with
federal, state or local environmental protection laws or
regulations.
Monetary
Policy and Economic Conditions
The
business of financial institutions is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
agencies, including the Federal Reserve Board. The Federal Reserve
Board regulates money and credit conditions and interest rates in order to
influence general economic conditions primarily through open market operations
in U.S. government securities, changes in the discount rate on bank borrowings,
and changes in the reserve requirements against depository institutions’
deposits. These policies and regulations significantly affect the
overall growth and distribution of loans, investments and deposits, as well
as
interest rates charged on loans and paid on deposits.
The
monetary policies of the Federal Reserve Board have had a significant effect
on
the operating results of financial institutions in the past and are expected
to
continue to have significant effects in the future. In view of the
changing conditions in the economy, the money markets and the activities of
monetary and fiscal authorities, Peoples can make no definitive predictions
as
to future changes in interest rates, credit availability or deposit
levels.
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, as soon as reasonably practicable after Peoples
electronically files each such report or amendment with, or furnishes it to,
the
SEC.
The
following are certain risks that management believes are specific to Peoples’
business. This should not be viewed as an all-inclusive list or in any
particular order.
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Changes
in Interest Rates May Adversely Affect Peoples’
Profitability.
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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.
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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.
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Peoples’
Exposure to Credit Risk Could Adversely Affect Peoples’ Earnings and
Financial Condition.
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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
non-performing loans, and ultimately could have a material adverse
effect
on Peoples’ earnings and financial
condition.
|
·
|
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. There can
be no assurance on the timing or amount of actual loan losses or
that
charge-offs in future periods will not exceed the allowance for loan
losses. 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. |
·
|
Adverse
Economic Conditions May Adversely Impact Peoples’ Results of
Operations.
|
|
Peoples’
success
depends primarily on the
general economic conditions in the specific local markets in which
it
operates. The local economies 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, a downturn in real estate values in
Peoples’ market area could cause many loans to become inadequately
collateralized. |
·
|
Adverse
Changes in the Financial Markets May Adversely Impact Peoples’ Results of
Operations.
|
|
Peoples
generally invests in 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. While most of these investments may
have limited credit risk, all are subject to changes in market value
due
to changing interest rates and implied credit
spreads. Additionally, certain investment securities represent
beneficial interests in structured investments, which are collateralized
by residential mortgages, debt obligations and other similar asset-backed
assets. These structured investments are generally rated investment
grade
by credit rating agencies at the time of Peoples’ initial investment,
although the credit ratings are subject to change due to deterioration
in
the credit quality of the underlying collateral. In recent
months, these types of structured investments 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, which resulted
in Peoples recognizing impairment charges on certain investment securities
during 2007. Given recent market conditions and changing
economic factors, Peoples may be required to recognize additional
impairment charges on securities held in its investment portfolio in
the
future. |
·
|
Changes
in Accounting
Standards, Policies, Estimates or ProceduresMay 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. In addition, 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. |
·
|
Peoples
May Be Named as a Defendant From Time to Time in a Variety of
Litigation
And Other Actions, Which Could Have a Material Adverse Effect
on Peoples’
Financial Condition And Results of Operation.
|
|
Peoples
or one of its subsidiaries may be named as a defendant from time
to time
in a variety of litigation arising in the ordinary course of their
respective businesses. Such litigation is normally covered by
errors and omissions or other appropriate insurance. However,
significant litigation could cause Peoples to devote substantial
time and
resources to defending its business or result in judgments or settlements
that exceed insurance coverage, which could have a material adverse
effect
on Peoples’ financial condition and results of operation. Further, any
claims asserted against Peoples, regardless of merit or eventual
outcome,
may harm Peoples’ reputation and result in loss of business. In
addition, Peoples may not be able to obtain new or difference insurance
coverages, or adequate replacement policies with acceptable
terms. |
·
|
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 it originates and the
interest rates it may charge on these loans. 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 will lose market share and income from deposits,
loans and other products may be
reduced. |
·
|
Peoples’
Ability to Pay Dividends Is Limited.
|
|
Peoples
is a separate and distinct legal
entity from its 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 and
interest and principal on Peoples’ debt. The inability of
Peoples Bank to pay sufficient dividends to Peoples could have a material,
adverse effect on Peoples’ business. Further discussion of
Peoples’ ability to pay dividends can be found under the caption
“Supervision and Regulation-Limits on Dividends and Other Payments” in
Item 1 of this Form 10-K and Note 13 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Form
10-K. |
·
|
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’
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. |
·
|
Material
Breaches in Security of Peoples’ Systems May Have a Significant Effect on
Peoples’ Business
|
|
Peoples
collects, processes and stores sensitive consumer data by utilizing
computer systems and telecommunications networks operated by both Peoples
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 security to prevent unauthorized
access to the computer systems and requires its third party service
providers to maintain similar controls. However, management
cannot be certain that these measures will be successful. A
security breach of the computer systems and loss of confidential
information, such as customer account numbers and related information,
could result in a loss of customers’ confidence and, thus, loss of
business. |
·
|
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.
|
·
|
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. |
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, Lower
Salem, Reno, Nelsonville (2 offices), Athens (3 offices), The Plains,
Middleport, Rutland, Pomeroy (2 offices), Gallipolis, Cambridge (2 offices),
Byesville, Quaker City, Flushing, Caldwell, McConnelsville, Baltimore, Carroll,
Lancaster (2 offices) and Westerville. 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, Grayson, Ashland and Russell. Of these 48 offices,
12 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, Huntington, West Virginia and Ashland,
Kentucky. In November 2007, Peoples Insurance Agency moved its
Huntington, West Virginia operations into the newly constructed Peoples Bank
office. As a result, the lease for former office building will not be
renewed at the end of its current term.
Rent
expense on the leased properties totaled $738,000 in 2007. The
following are the only properties that have a lease term expiring on or before
June 2009:
|
|
Lease
Expiration Date (a)
|
|
|
|
Huntington
Putnam Agency Office
|
1439
Sixth Avenue
Huntington,
West Virginia
|
April
2008
|
|
|
|
Lancaster
Wheeling Street Office
|
117
West Wheeling Street
Lancaster,
Ohio
|
June
2008
|
|
|
|
Athens
Court Street Office
|
1
North Court Street
Athens
, Ohio
|
September
2008
|
|
|
|
Marietta
Kroger Office
|
40
Acme Street
Marietta,
Ohio
|
April
2009
|
|
|
|
New
Martinsville Wal-Mart Office
|
1142
South Bridge Street
New
Martinsville, West Virginia
|
April
2009
|
|
|
|
Barengo
Agency Office
|
416
Hart Street
Marietta,
Ohio
|
May
2009
|
|
|
|
Parkersburg
Pike Street Office
|
2107
Pike Street
Parkersburg,
West Virginia
|
May
2009
|
|
|
|
Vienna
Wal-Mart Office
|
701
Grand Central Avenue
Vienna,
West Virginia
|
June
2009
|
|
|
|
|
|
|
(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 included in Item 8 of this Form
10-K.
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.
Examination
by Ohio Department of Taxation
As
previously disclosed in “ITEM 1: LEGAL PROCEEDINGS” of Part II of
Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2007, Peoples Bank has undergone an examination by the Ohio Department
of
Taxation (the “Department”) of Peoples Bank’s Ohio Corporation Franchise Tax
reports related to fiscal years ended December 31, 2001 through 2005 (tax years
2002 through 2006). The Department has also examined other
subsidiaries of Peoples for the fiscal years ended December 31, 2002 through
2005 (tax years 2003 through 2006).
As
disclosed in a current report on Form 8-K filed December 27, 2007, in December
2007, Peoples entered into a settlement agreement with the Tax Commissioner
of
the State of Ohio (the "Commissioner") in order to resolve certain issues
concerning Peoples' Ohio Corporation Franchise Tax liability and associated
calculations for the 2002 through 2008 tax years (the fiscal years ended
December 31, 2001 through 2007). Under the terms of the settlement
agreement, which was executed by the Commissioner on December 20, 2007 and
on
behalf of Peoples on December 24, 2007, Peoples paid approximately $190,000
on
December 26, 2007 in full settlement of Peoples’ aggregate, additional Ohio
Corporation Franchise Tax liability for the 2002 through 2007 tax
years. The August 23, 2006 assessment issued by the Department, in
the amount of approximately $1,440,000 with respect to Peoples Bank's Ohio
Corporation Franchise Tax liability for the 2002 tax year (the fiscal year
ended
December 31, 2001), was adjusted to reflect the settlement. As a
result of the settlement, Peoples' franchise tax expense for the fourth quarter
of fiscal 2007 was reduced by approximately $782,000, which increased Peoples
income after taxes by approximately $508,000 or $0.05 per common share, on
a
diluted basis.
None.
Pursuant
to General Instruction G of Form 10-K and Instruction 3 to Item 401(b) of SEC
Regulation S-K, the following information regarding Peoples’ executive officers
is included as an unnumbered item in Part I of this Form 10-K in lieu of being
included in the Peoples’ definitive Proxy Statement relating to Peoples’ Annual
Meeting of Shareholders to be held April 10, 2008 (“Peoples’ 2008 Definitive
Proxy Statement”).
The
executive officers of Peoples as of February 11, 2008, were as
follows:
|
|
|
Mark
F. Bradley
|
38
|
President
and Chief Executive Officer
|
Deborah
K. Hill
|
43
|
Executive
Vice President, Consumer and Business Financial
Services
|
Carol
A. Schneeberger
|
51
|
Chief
Financial Officer, Treasurer and
Executive
Vice President of Operations
|
David
T. Wesel
|
46
|
Executive
Vice President
|
Joseph
S. Yazombek
|
54
|
Executive
Vice President, Chief Lending
Officer
|
Mr.
Bradley has been Chief Executive Officer of Peoples since May 2005 and President
of Peoples since June 2004. Mr. Bradley also has been Chief Executive
Officer of Peoples Bank since May 2005, and President since July
2002. Prior thereto, Mr. Bradley served as Chief Operating Officer of
Peoples from July 2003 to May 2005, and Executive Vice President and Chief
Integration Officer from February 2001 to July 2003. He also served
as Chief Operating Officer of Peoples Bank from July 2002 to May
2005. Between 1997 and 2001, Mr. Bradley served as Controller of
Peoples and Peoples Bank. Mr. Bradley joined Peoples in
1991. In January 2006, Mr. Bradley was appointed President of Peoples
Insurance. Mr. Bradley has been a director of Peoples since 2003 and
Peoples Bank since 2002.
Ms.
Hill
joined Peoples in September 2007 when she was appointed Executive Vice
President, Consumer and Business Financial Services of both Peoples and Peoples
Bank. Prior to joining Peoples, Ms. Hill served as Senior Vice
President and Regional Manager of U.S. Bank’s Wisconsin/Chicago region from 1994
to August 2007.
Ms.
Schneeberger, a Certified Public Accountant, was named interim Chief Financial
Officer and Treasurer of Peoples in April 2007, due to the resignation of the
then-serving Chief Financial Officer and Treasurer. She also serves
as Executive Vice President of Operations of Peoples and Peoples Bank, positions
she has held since April 1999 and February 2000, and she has served as Cashier
of Peoples Bank since March 2000. From October 1988 to April 1999,
Ms. Schneeberger was Vice President/Operations of Peoples. Prior
thereto, she was Auditor of Peoples from August 1987 to October 1988 and Auditor
of Peoples Bank from January 1986 to October 1988. Ms. Schneeberger
joined Peoples Bank in 1977.
Mr.
Wesel
became Executive Vice President of Peoples in January 2006. Mr. Wesel
was also appointed as President of Peoples Bank’s Peoples Financial Advisors
division in January 2006. Prior thereto, Mr. Wesel served as Sales
Manager of Peoples Financial Advisors from February 2004 to December
2005. Prior to joining Peoples, Mr. Wesel had over 20 years
experience in senior management and sales administration, including two years
experience from September 2002 to February 2004 with Parker Hunter, a regional
brokerage firm. Mr. Wesel is the son of Joseph H. Wesel, Chairman of
the Board and a Director of Peoples and Peoples Bank.
Mr.
Yazombek was appointed Executive Vice President/Chief Lending Officer of Peoples
in January 2000. Mr. Yazombek has also held the position of Executive
Vice President and Chief Lending Officer of Peoples Bank since October
1998. He was an Executive Vice President of Peoples Bank's Consumer
and Mortgage Lending areas from May 1996 to October 1998, where he also directly
managed Peoples Bank's collections efforts. Mr. Yazombek joined
Peoples Bank in 1983 and served as a real estate lender until May
1996.
Each
executive officer of Peoples is appointed by the Board of Directors and serves
at the pleasure of the Board. Each
of
the executive officers is a party to a Change in Control Agreement with Peoples
(a “CIC Agreement” and, collectively, the “CIC Agreements”). Each CIC
Agreement provides that, if the executive officer party thereto is terminated
by
Peoples or its successors for any reason other than cause or by the executive
officer for good reason (as defined in the CIC Agreements), within six months
prior to or within twenty-four months after a defined change in control, Peoples
will pay a specified change in control benefit to the executive
officer. If the executive officer receives a change in control
benefit as previously described, the executive officer will be subject to a
non-compete agreement for the same period of time as the benefit is
paid.
Additional
information required by Item 401(b) of SEC Regulation S-K regarding the CIC
Agreements is incorporated herein by reference to the section captioned
“EXECUTIVE COMPENSATION: OTHER POTENTIAL POST EMPLOYMENT PAYMENTS” of Peoples’
2008 Definitive Proxy Statement and the
forms
of
CIC Agreements incorporated by reference into this Annual Report of Form 10-K
and referenced as Exhibits 10.20, 10.21, 10.22 10.23, 10.24 and
10.25.
PART
II
|
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, 2007, Peoples had 1,241 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
|
2007
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
$
|
28.26
|
|
$
|
21.45
|
|
$
|
0.22
|
Third
Quarter
|
|
28.15
|
|
|
21.40
|
|
|
0.22
|
Second
Quarter
|
|
28.11
|
|
|
25.03
|
|
|
0.22
|
First
Quarter
|
|
30.39
|
|
|
25.30
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
$
|
31.24
|
|
$
|
28.37
|
|
$
|
0.21
|
Third
Quarter
|
|
30.70
|
|
|
27.25
|
|
|
0.21
|
Second
Quarter
|
|
31.73
|
|
|
27.69
|
|
|
0.21
|
First
Quarter
|
|
30.00
|
|
|
27.05
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
Peoples
plans to continue to pay quarterly cash dividends, subject to certain regulatory
restrictions described in Note 13 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K, as well as the “Supervision and
Regulation-Limits on Dividends and Other Payments” of Item 1 of this Form
10-K.
Issuer
Purchases of Equity Securities
The
following table details Peoples’ repurchases and purchases by “affiliated
purchasers” as defined in Rule 10b-18(a)(3) of Peoples’ common shares during the
three months ended December 31, 2007:
Period
|
(a)
Total Number of Common Shares
Purchased
|
(b)
Average Price Paid perShare
|
(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)(2)
|
October
1 - 31, 2007
|
260(3)
|
$26.43(3)
|
–
|
46,000
|
November
1 - 30, 2007
|
68,492(4)
|
$24.26(4)
|
59,600
|
486,400
|
December
1 - 31, 2007
|
25,442(5)
|
$24.42(5)
|
25,000
|
461,400
|
Total
|
94,194
|
$24.31
|
84,600
|
461,400
|
(1)
|
Information
reflects the 2007 Stock Repurchase Program originally announced on
January
12, 2007, which authorized the
repurchase
of 425,000 common shares, with an aggregate purchase price of not
more
than $12.1 million, and the stock
repurchase
program announced on November 9, 2007, which authorized the repurchase
of
up to 500,000 common shares,
with
an aggregate purchase price of not more than $14 million, upon the
completion of the 2007 Stock Repurchase Program
and
expiring on December 31, 2008. The 2007 Stock Repurchase
Program was completed on November 23, 2007.
|
(2)
|
Information
reflects maximum number of common shares that may be purchased at
the end
of the period indicated.
|
(3)
|
Information
reflects solely common shares purchased in open market transactions
by
Peoples Bank under the Rabbi Trust
Agreement
establishing a rabbi trust (the “Rabbi Trust”) holding assets
to provide payment of the benefits under the
Peoples
Bancorp Inc. Deferred Compensation Plan for Directors of Peoples
Bancorp
Inc. and Subsidiaries.
|
(4)
|
Information
includes 1,686 common shares purchased at an average price of $24.39
by
Peoples Bank under the Rabbi Trust
Agreement
and 7,206 common shares acquired as a stock-for-stock exchange at
an
average price of $24.74 related to
stock-based
compensation awards granted under Peoples’ equity plans.
|
(5)
|
Information
includes 346 common shares purchased at an average price of $26.97
by
Peoples Bank under the Rabbi Trust
Agreement
and 96 common shares acquired for tax withholding at an average price
of
$24.19 related to stock-based
compensation
awards granted under Peoples’ equity plans.
|
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 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, 2002, 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 institutions 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,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Peoples
Bancorp
Inc.
|
|
$ |
100.00 |
|
|
$ |
124.33 |
|
|
$ |
118.66 |
|
|
$ |
126.96 |
|
|
$ |
135.90 |
|
|
$ |
117.78 |
|
NASDAQ
Stocks (U.S.
Companies)
|
|
$ |
100.00 |
|
|
$ |
149.52 |
|
|
$ |
162.72 |
|
|
$ |
166.18 |
|
|
$ |
182.57 |
|
|
$ |
197.98 |
|
NASDAQ
Bank
Stocks
|
|
$ |
100.00 |
|
|
$ |
128.64 |
|
|
$ |
147.22 |
|
|
$ |
143.82 |
|
|
$ |
161.41 |
|
|
$ |
127.92 |
|
ITEM
6. SELECTED FINANCIAL DATA.
The information below has been derived from Peoples’ Consolidated Financial
Statements.
(Dollars
in
thousands, except per share data)
|
2007
|
2006
|
2005
|
2004
|
2003
|
Operating
Data
|
|
|
|
|
|
For
the year
ended:
|
|
|
|
|
|
Total
interest
income
|
$ 113,419
|
$ 108,794
|
$ 95,775
|
$ 87,030
|
$ 91,655
|
Total
interest
expense
|
59,498
|
55,577
|
43,469
|
35,160
|
38,050
|
Net
interest
income
|
53,921
|
53,217
|
52,306
|
51,870
|
53,605
|
Provision
for loan
losses
|
3,959
|
3,622
|
2,028
|
2,546
|
3,601
|
Net
(loss) gain on investment
securities
|
(6,062)
|
265
|
539
|
(3,040)
|
(1,905)
|
Other
income exclusive of (loss)
gain on securities
|
31,426
|
30,860
|
28,628
|
25,248
|
19,443
|
Amortization
of other intangible
assets
|
1,934
|
2,261
|
2,669
|
2,219
|
1,493
|
Other
expense
|
49,518
|
49,036
|
48,673
|
44,979
|
44,410
|
Net
income
|
$ 18,314
|
$ 21,558
|
$ 20,499
|
$ 18,275
|
$ 16,254
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet
Data
|
|
|
|
|
|
Total
assets
|
$1,885,553
|
$1,875,255
|
$1,855,277
|
$1,809,086
|
$1,736,104
|
Investment
securities
|
565,463
|
548,733
|
589,313
|
602,364
|
641,464
|
Net
loans
|
1,105,223
|
1,117,885
|
1,057,156
|
1,008,298
|
900,423
|
Total
intangible
assets
|
68,029
|
68,852
|
69,280
|
71,118
|
48,705
|
Total
deposits
|
1,186,377
|
1,233,529
|
1,089,286
|
1,069,421
|
1,028,530
|
Short-term
borrowings
|
222,541
|
194,883
|
173,696
|
51,895
|
108,768
|
Long-term
borrowings
|
231,979
|
200,793
|
362,466
|
464,864
|
388,647
|
Junior
subordinated notes held by
subsidiary trusts
|
22,460
|
29,412
|
29,350
|
29,263
|
29,177
|
Total
stockholders’
equity
|
202,836
|
197,169
|
183,077
|
175,418
|
170,880
|
Tangible
assets
(1)
|
1,817,524
|
1,806,403
|
1,785,997
|
1,737,968
|
1,687,399
|
Tangible
equity
(2)
|
$ 134,807
|
$ 128,317
|
$ 113,797
|
$ 104,300
|
$ 122,175
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
Ratios
|
|
|
|
|
|
Return
on average
assets
|
0.98%
|
1.15%
|
1.12%
|
1.04%
|
0.95%
|
Return
on average stockholders’
equity
|
9.21
|
11.33
|
11.52
|
10.60
|
9.75
|
Net
interest
margin
|
3.32
|
3.29
|
3.32
|
3.39
|
3.52
|
Efficiency
ratio(3)
|
57.07
|
57.51
|
59.05
|
57.18
|
51.06
|
Average
stockholders’ equity to
average assets
|
10.62
|
10.18
|
9.73
|
9.79
|
9.74
|
Average
loans to average
deposits
|
93.52
|
94.80
|
94.92
|
91.24
|
87.42
|
Allowance
for loan losses to total
loans
|
1.40
|
1.28
|
1.37
|
1.44
|
1.59
|
Total
risk-based capital
ratio
|
13.23
|
13.17
|
12.90
|
12.30
|
15.43
|
Dividend
payout
ratio
|
50.38%
|
41.09%
|
40.01%
|
41.66%
|
42.06%
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share
Data
|
|
|
|
|
|
Earnings
per share –
Basic
|
$ 1.75
|
$ 2.03
|
$ 1.96
|
$ 1.74
|
$ 1.56
|
Earnings
per share –
Diluted
|
1.74
|
2.01
|
1.94
|
1.71
|
1.52
|
Cash
dividends
paid
|
0.88
|
0.83
|
0.78
|
0.72
|
0.65
|
Book
value at end of
period
|
19.70
|
18.51
|
17.40
|
16.81
|
16.11
|
Tangible
book
value at end of period(4)
|
$ 13.09
|
$ 12.05
|
$ 10.82
|
$ 10.00
|
$ 11.76
|
Weighted-average
shares
outstanding:
|
|
|
|
|
|
Basic
|
10,462,933
|
10,606,570
|
10,444,854
|
10,529,332
|
10,433,708
|
Diluted
|
10,529,634
|
10,723,933
|
10,581,019
|
10,710,114
|
10,660,083
|
Common
shares outstanding at end
of period:
|
10,296,748
|
10,651,985
|
10,518,980
|
10,435,102
|
10,603,792
|
(1)
|
Total
assets less goodwill and other intangible assets.
|
(2)
|
Total
stockholders’ equity less goodwill and other intangible assets.
|
(3)
|
Non-interest
expense (less intangible amortization) as a percentage of fully
tax-equivalent net interest income plus non-interest income
(excludes
gains/losses on investment securities and asset disposals).
|
(4)
|
Tangible
book value per share reflects capital calculated for banking regulatory
requirements and excludes the balance sheet impact of
intangible
assets acquired through purchase accounting for acquisitions.
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS
OF
OPERATION.
Forward-Looking
Statements
Certain
statements in this Form 10-K which are not historical fact are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as
amended, Section 21E of the Securities Exchange Act of 1934, as amended,
and the
Private Securities Litigation Reform Act of 1995. Words such as
“expects,” “believes”, “plans”, “will”, “would”, “should”, “could”
and similar expressions are intended to identify these forward-looking
statements but are not the exclusive means of identifying such
statements. Forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ
materially. Factors that might cause such a difference include, but
are not limited to:
(1)
|
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, either national 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)
|
adverse
changes in the conditions and trends in the financial markets,
which may
adversely affect the fair value of securities within Peoples’ investment
portfolio;
|
(9)
|
a
delayed or incomplete resolution of regulatory issues that could
arise;
|
(10)
|
ability
to receive dividends from
subsidiaries;
|
(11)
|
the
impact of reputational risk created by these developments on such
matters
as business generation and retention, funding and
liquidity;
|
(12)
|
the
costs and effects of regulatory and legal developments, including
the
outcome of regulatory or other governmental inquiries and legal
proceedings and results of regulatory examinations;
and
|
(13)
|
other
risk factors relating to the banking industry or Peoples as detailed
from
time to time in Peoples’ reports filed with the Securities and Exchange
Commission (“SEC”), 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 execution date of this Form
10-K
and are expressly qualified in their entirety by the cautionary
statements. Although management believes the expectations in these
forward-looking statements are based on reasonable assumptions within the
bounds
of management’s knowledge of Peoples’ business and operations, it is possible
that actual results may differ materially from these
projections. Additionally, Peoples undertakes no obligation to update
these forward-looking statements to reflect events or circumstances after
the
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.
Summary
of Recent Transactions and Events
The
following discussion and analysis of the Consolidated Financial Statements
of
Peoples Bancorp Inc. and Subsidiaries (“Peoples”) is presented to provide
insight into management's assessment of the financial results. This
discussion and analysis should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto, as well as the ratios
and
statistics, contained elsewhere in this Form 10-K.
References
will be found in this Form 10-K to the following transactions that have impacted
or will impact Peoples’ results of operations:
·
|
As
disclosed in a Current Report on Form 8-K filed on January 22,
2008,
management determined that certain investments in preferred stocks
issued
by the Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation, three collateralized debt obligation investment
securities and common stock issued by an unrelated bank holding
company,
with an aggregate carrying value of $23.4 million, were deemed
to be
other-than-temporarily impaired at December 31, 2007. As
disclosed in Peoples’ Quarterly Report on Form 10-Q for the period ended
September 30, 2007, management also determined a collateralized
debt
obligation investment security with a carrying value of $1.1 million
was
other-than-temporarily impaired. As a result, Peoples recognized
other-than-temporary impairment charges totaling $6.2 million ($4.0
million, or $0.38 per diluted share, after-tax) in 2007 related
to these
investment securities.
|
·
|
As
described in “ITEM 3. LEGAL PROCEEDINGS” of this Form 10-K, 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 ($508,000, or $0.05 per diluted share, after-tax)
during the fourth quarter of 2007.
|
·
|
As
described in Note 9 of the
Notes to the Consolidated Financial Statements, on April 23, 2007,
Peoples
repaid the entire $7.2 million of variable rate junior subordinated
notes
issued to and held by its subsidiary, PEBO Capital Trust II, which
had a
then current rate of 9.10%. This redemption had minimal impact
on Peoples’ regulatory capital ratios and produced a modest improvement in
net interest income and margin, as the junior subordinated notes
were
replaced by lower cost
borrowings.
|
·
|
On
January 12, 2007, Peoples announced the authorization to repurchase
up to
425,000 of Peoples’ outstanding common shares in 2007 from time to time in
open market transactions (the “2007 Stock Repurchase
Program”). On November 9, 2007, Peoples announced the
authorization to repurchase up to 500,000 common shares upon the
completion of the 2007 Stock Repurchase Program and continuing
in 2008
until expiration on December 31, 2008. Peoples completed the
2007 Stock Repurchase Program on November 23, 2007. In 2007,
Peoples repurchased a total of 463,600 common shares between the
two
programs, at an average price of $26.21, which were held as treasury
shares and available for future issuances of common shares in connection
with equity awards granted from Peoples’ equity plans and other general
corporate purposes.
|
·
|
In
December 2006, Peoples sold approximately $11 million of tax-exempt
municipal securities resulting in a gain of $249,000, with no individual
sale generating a loss. The sale was part of tax planning
strategies designed to help Peoples manage its effective tax rate
and
overall tax burden by adjusting its mix of taxable and tax-exempt
income. The securities sold were selected because management
expected the issuers to call the securities in the near
future. The proceeds from the sale were used to reduce the
amount of short-term borrowings.
|
·
|
In
2006, Peoples Bank sold its banking offices located in Chesterhill,
Ohio
(the “Chesterhill Office”) and South Shore, Kentucky (the “South Shore
Office”) as part of Peoples’ strategy to optimize its branch network by
redirecting resources to markets that management believes has greater
growth potential. The sale of the South
Shore Office
included $4.6 million in deposits and approximately $600,000 of
loans,
while the sale of the Chesterhill Office involved $3.7 million
of
deposits. The sales of these offices resulted in an aggregate
pre-tax gain of $454,000 in 2006. As
further discussed
in Note 15 of the Notes to the Consolidated Financial Statements
included
in Item 8 of this Form 10-K, concurrent with the sale of the Chesterhill
Office, Peoples Bank acquired a full-service banking office located
in
Carroll,
Ohio
and its $5.4 million in
deposits. These transactions did not have a material impact on
Peoples’ financial statements taken as a
whole.
|
The
impact of these transactions, where significant, is discussed in the applicable
sections of this Management’s Discussion and Analysis.
Critical
Accounting Policies
The
accounting and reporting policies of Peoples conform to accounting principles
generally accepted in the United States of America (“US GAAP”) and to general
practices within the financial services industry. The preparation of
the financial statements in conformity with US GAAP requires management to
make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. 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. Estimates or judgments are necessary
when
assets or liabilities are required to be recorded at fair value, when a decline
in the value of an asset not carried on the financial statements at fair
value
warrants an impairment write-down or valuation reserve to be established,
or
when an asset or liability needs to be recorded contingent upon a future
event. Carrying assets and liabilities at fair value inherently
results in more financial statement volatility. The fair values and
the information used to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are provided by other
third-party sources, when available. When such information is not
available, management estimates valuation adjustments primarily through the
use
of discounted cash flow modeling techniques. Actual results could materially
differ from those estimates.
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 negatively impact interest income due
to the
corresponding acceleration of premium amortization.
In
the
event management believes collection of all or a portion of contractual interest
on a loan has become doubtful, which generally occurs after the loan is 90
days
past due, Peoples discontinues the accrual of interest. In addition,
previously accrued interest deemed uncollectible that was recognized in income
in the current year is reversed, while amounts recognized in income in the
prior
year are charged against the allowance for loan losses. Interest
received on nonaccrual loans is included in income only if principal recovery
is
reasonably assured. A nonaccrual loan is restored to accrual status
after appropriate review by lending and/or loan review personnel indicates
the
collectibility of the total contractual principal and interest is no longer
considered doubtful, among other criteria.
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 expected losses from existing loans based upon specific
allocations for individual lending relationships and historical loss experience
for each category of homogeneous loans. The allowance for loan losses
related to impaired loans is based on discounted cash flows using the loan’s
initial effective interest rate or the fair value of the collateral for certain
collateral dependent loans. This evaluation requires management to
make estimates of the amounts and timing of future cash flows on impaired
loans,
which 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.
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, personal loans, etc.) are evaluated based upon historical
loss
experience, trends in losses and delinquencies, growth of loans in particular
markets, and known changes in economic conditions in each lending
market. Consistent with the evaluation of allowances for homogenous
loans, 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,
2007, 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 its entire investment portfolio, which accounted for 30%
of
total assets at December 31, 2007, as available-for-sale and records changes
in
the estimated fair value of the portfolio in stockholders’ equity as a component
of comprehensive income. As a result, both the investment and equity
sections of Peoples’ Consolidated Balance Sheets are more sensitive to changes
in the overall market value of the investment portfolio, due to changes in
market interest rates, investor confidence and other factors affecting market
values, than if the investment portfolio was classified as
held-to-maturity.
While
temporary changes in the fair value of available-for-sale securities are
not
recognized in earnings, a decline in fair value below amortized cost deemed
to
be “other-than-temporary” results in an adjustment to the cost basis of the
investment, with a corresponding loss charged against
earnings. Management systematically evaluates Peoples’ investment
securities on a quarterly basis to identify potential other-than-temporary
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,
structure of the security, and Peoples’ ability and intent to continue holding
the investment for a period of time sufficient to allow for any anticipated
recovery in market value.
In
2007,
Peoples recognized other-than-temporary impairment charges on certain investment
securities whose market value had declined due primarily to increased risks
within the broader credit market and erratic market
liquidity. At December 31, 2007, there were no other investment
securities identified by management to be other-than-temporarily impaired
since
Peoples had the ability and intent to hold those securities for a period
of time
sufficient to recover the amortized cost. If investments decline in
fair value due to adverse changes in the financial markets, charges to income
could occur in future periods.
Goodwill
and Other Intangible Assets
Over
the
past several years, Peoples has grown through mergers and acquisitions accounted
for under the purchase method of accounting. Under the purchase
method, Peoples is required to allocate the cost of an acquired company to
the
assets acquired, including identified intangible assets, and liabilities
assumed
based on their estimated fair values at the date of acquisition. The
excess cost over the net assets acquired represents goodwill, which is not
subject to periodic amortization. At December 31, 2007, Peoples had
$62.5 million of goodwill and $4.8 million of identifiable intangible assets
acquired in acquisitions, comprised entirely of customer relationship
intangibles, which are subject to amortization.
The
determination of fair value and subsequent allocation of the cost of an acquired
company generally involves management making estimates based on other
third-party valuations, such as appraisals, or internal valuations based
on
discounted cash flow analyses or other valuation techniques. In
addition, the valuation and amortization of intangible assets representing
the
present value of future net income to be earned from customers (commonly
referred to as “customer relationship intangibles” or “core deposit
intangibles”) requires significant judgment and the use of estimates by
management. While management feels the assumptions and variables used
to value recent acquisitions were reasonable, the use of different, but still
reasonable, assumptions could produce materially different results.
Customer
relationship intangibles are required to be amortized over their estimated
useful lives. The method of amortization should reflect the pattern
in which the economic benefits of the intangible assets are consumed or
otherwise used up. Since Peoples’ acquired customer relationships are
subject to routine customer attrition, the relationships are more likely
to
produce greater benefits in the near-term than in the long-term, which typically
supports the use of an accelerated method of amortization for the related
intangible assets. Management is required to evaluate the useful life
of customer relationship intangibles to determine if events or circumstances
warrant a change in the estimated life. Should management determine
in future periods the estimated life of any intangible asset is shorter than
originally estimated, Peoples would adjust the amortization of that asset,
which
could increase future amortization expense.
Goodwill
arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Goodwill
recorded by Peoples in connection with its acquisitions relates to the inherent
value in the businesses acquired and this value is dependent upon Peoples’
ability to provide quality, cost effective services in a competitive market
place. As such, goodwill value is supported ultimately by revenue
that is driven by the volume of business transacted. A decline in
earnings as a result of a lack of growth or the inability to deliver cost
effective services over sustained periods can lead to impairment of goodwill
that could adversely impact earnings in future periods.
Peoples
has reviewed its recorded goodwill and concluded that no indicators of
impairment existed as of December 31, 2007. However, future events
could cause management to conclude that impairment indicators exist and
re-evaluate goodwill. If such re-evaluation indicated impairment,
Peoples would recognize the loss, if any. Any resulting impairment
loss could have a material, adverse impact on Peoples’ financial condition and
results of operations.
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 basis of assets and liabilities,
computed using enacted tax rates. 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
that 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.
EXECUTIVE
SUMMARY
Comparison
of 2007 to 2006
In
2007,
net income totaled $18.3 million
or $1.74 per diluted share compared to $21.6 million or $2.01 per diluted
share
for 2006. The lower earnings in 2007 were the result of $4.0 million
after-tax other-than-temporary impairment charges on available-for-sale
investment securities, tempered by the reduction in franchise tax
expense due
to the Ohio Franchise Tax Settlement. Peoples’ 2007 results reflect
success in diversifying revenues, improving operating efficiency and reducing
Peoples’ reliance on net interest income. Return on average
equity was 9.21% and return on average assets was 0.98% in 2007 compared
to
11.33% and 1.15%, respectively, a year ago, due to lower net
income.
Net
interest income totaled $53.9 million in 2007 versus $53.2 million in 2006,
as
$4.6 million additional interest income was mostly offset by a $3.9 million
increase in interest expense. Both of these increases were primarily
attributable to higher market interest rates during most of 2007. Net
interest margin expanded slightly to 3.32% in 2007 from 3.29%, a year ago,
due
mostly to changes in both the mix of earning assets and funding
sources.
In
2007, the provision for loan losses
totaled $4.0 million compared to $3.6 million in 2006. This modest
increase was based on management’s quarterly evaluation of the allowance for
loan losses and overall changes in Peoples’ loan quality and losses inherent in
the loan portfolio.
Other
income was $25.4 million in 2007, down from $31.1 million a year ago, due
to the
impairment charges on investment securities. Non-interest income,
which excludes gains and losses on investments and assets, grew 3% in 2007,
to
$31.4 million, from a $0.7 million increase in trust and investment income
and
$0.4 million higher electronic banking revenues. Total other expenses
were essentially unchanged in 2007, as higher salaries and benefit costs
of $1.4
million were offset by decreases in several other major expense categories,
including franchise taxes.
At
December 31, 2007, total assets were $1.89 billion, up $10.3 million since
at
year-end 2006. Investment securities grew $16.7 million during 2007,
to $565.5 million at December 31, 2007, cash and cash equivalents increased
$5.4
million to $45.2 million. Gross loans decreased $11.5 million to
$1.12 billion at December 31, 2007, due to significant commercial loan payoffs
throughout most of the year.
Total
liabilities were $1.68 billion at December 31, 2007, unchanged from the prior
year-end. In 2007, retail deposit balances, which exclude brokered
deposits, grew $22.4 million, or 2%, comprised of an $18.3 million increase
in
interest-bearing retail balances and $4.1 million growth in non-interest-bearing
balances. During this same period, Peoples reduced brokered deposits
by $69.5 million, due to growth in retail deposit balances and the use of
other
lower rate funding sources. As a result, borrowed funds increased
$51.9 million, or 12%, to $477.0 million at December 31, 2007.
Stockholders’
equity totaled $202.8 million at December 31, 2007, versus $197.2 million
at
December 31, 2006, as a $9.1 million increase in retained earnings and $6.0
million of other comprehensive income, net of tax, was impacted by treasury
stock purchases totaling $12.4 million.
Comparison
of 2006 to 2005
Peoples’
net income was $21.6 million in 2006, up 5% from $20.5 million in 2005, while
diluted earnings per share were $2.01 versus $1.94, a 4%
increase. The combination of higher net interest income, non-interest
income growth, and flat non-interest expense were the key drivers of Peoples’
year-over-year earnings improvement. Return on average equity was
11.33% and return on average assets was 1.15% in 2006 compared to 11.52%
and
1.12%, respectively, in 2005.
Net
interest income totaled $53.2 million in 2006, compared to $52.3 million
in
2005, as a $13.0 million increase in interest income was tempered by additional
interest expense of $12.1 million. However, net interest margin
compressed three basis points to 3.29% in 2006 as a result of a flatter yield
curve and competitive pricing for both loans and deposits.
The
provision for loan losses of $3.6 million for 2006 increased from a $2.0
million
provided for in 2005, primarily from losses associated with a single commercial
loan relationship during the fourth quarter of 2006. Peoples also
experienced a slight increase in the provision for losses related to the
Overdraft Privilege program, which was attributable to a higher volume of
accounts and activity in those accounts generated by Peoples’ direct mail and
free gift campaigns for new deposit openings.
In
2006,
other income was $31.1 million compared to $29.2 million in 2005. The
increase in total non-interest income was due mostly to a $1.0 million increase
in insurance revenues. Total other expenses were unchanged in 2006
compared to the $51.3 million incurred in 2005, as increased professional
fees,
marketing expenses and bankcard costs were offset by reductions in salaries
and
benefit costs and intangible amortization expense.
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’
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:
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
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
|
|
$ 2,435
|
|
$ 115
|
|
4.72%
|
|
|
$ 2,378
|
|
$ 100
|
|
4.21%
|
|
|
$ 2,260
|
|
$ 57
|
|
2.56%
|
Federal
funds
sold
|
|
1,077
|
|
55
|
|
5.11%
|
|
|
1,595
|
|
80
|
|
5.02%
|
|
|
484
|
|
15
|
|
3.27%
|
Total
short-term investments
|
|
3,512
|
|
170
|
|
4.84%
|
|
|
3,973
|
|
180
|
|
4.53%
|
|
|
2,744
|
|
72
|
|
2.68%
|
Investment
Securities
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
503,094
|
|
25,646
|
|
5.10%
|
|
|
505,586
|
|
24,417
|
|
4.83%
|
|
|
533,983
|
|
23,676
|
|
4.43%
|
Nontaxable
(2)
|
|
60,368
|
|
3,949
|
|
6.54%
|
|
|
67,454
|
|
4,411
|
|
6.54%
|
|
|
66,772
|
|
4,367
|
|
6.54%
|
Total
investment securities
|
|
563,462
|
|
29,595
|
|
5.25%
|
|
|
573,040
|
|
28,828
|
|
5.03%
|
|
|
600,755
|
|
28,043
|
|
4.67%
|
Loans
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
750,906
|
|
57,613
|
|
7.67%
|
|
|
726,702
|
|
54,181
|
|
7.46%
|
|
|
641,651
|
|
42,489
|
|
6.62%
|
Real
estate
(4)
|
|
292,867
|
|
20,985
|
|
7.17%
|
|
|
311,772
|
|
21,467
|
|
6.89%
|
|
|
337,892
|
|
21,525
|
|
6.37%
|
Consumer
|
|
79,035
|
|
6,552
|
|
8.29%
|
|
|
70,101
|
|
5,808
|
|
8.29%
|
|
|
60,486
|
|
5,294
|
|
8.75%
|
Total
loans
|
|
1,122,808
|
|
85,150
|
|
7.58%
|
|
|
1,108,575
|
|
81,456
|
|
7.35%
|
|
|
1,040,029
|
|
69,308
|
|
6.66%
|
Less:
Allowance for loan
loss
|
|
(14,775)
|
|
|
|
|
|
|
(15,216)
|
|
|
|
|
|
|
(14,930)
|
|
|
|
|
Net
loans
|
|
1,108,033
|
|
85,150
|
|
7.68%
|
|
|
1,093,359
|
|
81,456
|
|
7.45%
|
|
|
1,025,099
|
|
69,308
|
|
6.76%
|
Total
earning assets
|
|
1,675,007
|
|
114,915
|
|
6.86%
|
|
|
1,670,372
|
|
110,464
|
|
6.61%
|
|
|
1,628,598
|
|
97,423
|
|
5.98%
|
Intangible
assets
|
|
68,440
|
|
|
|
|
|
|
68,940
|
|
|
|
|
|
|
70,120
|
|
|
|
|
Other
assets
|
|
128,670
|
|
|
|
|
|
|
129,718
|
|
|
|
|
|
|
129,967
|
|
|
|
|
Total
assets
|
|
$
1,872,117
|
|
|
|
|
|
|
$
1,869,030
|
|
|
|
|
|
|
$
1,828,685
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$ 113,629
|
|
$ 725
|
|
0.64%
|
|
|
$ 122,682
|
|
$ 806
|
|
0.66%
|
|
|
$ 144,700
|
|
$ 1,039
|
|
0.72%
|
Interest-bearing
transaction
|
|
179,827
|
|
3,841
|
|
2.14%
|
|
|
180,419
|
|
3,312
|
|
1.84%
|
|
|
184,172
|
|
2,753
|
|
1.49%
|
Money
market
|
|
147,565
|
|
5,647
|
|
3.83%
|
|
|
122,053
|
|
4,404
|
|
3.61%
|
|
|
113,480
|
|
2,673
|
|
2.36%
|
Brokered
time
|
|
65,461
|
|
3,364
|
|
5.14%
|
|
|
75,182
|
|
3,540
|
|
4.71%
|
|
|
44,114
|
|
1,486
|
|
3.37%
|
Retail
time
|
|
521,506
|
|
23,398
|
|
4.49%
|
|
|
501,656
|
|
20,199
|
|
4.03%
|
|
|
450,476
|
|
14,599
|
|
3.24%
|
Total
interest-bearing deposits
|
|
1,027,988
|
|
36,975
|
|
3.60%
|
|
|
1,001,992
|
|
32,261
|
|
3.22%
|
|
|
936,942
|
|
22,550
|
|
2.41%
|
Borrowed
Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
197,915
|
|
10,065
|
|
5.09%
|
|
|
178,235
|
|
9,067
|
|
5.09%
|
|
|
107,184
|
|
3,652
|
|
3.41%
|
Retail
repurchase
agreements
|
|
34,802
|
|
1,528
|
|
4.39%
|
|
|
31,481
|
|
1,306
|
|
4.15%
|
|
|
21,129
|
|
572
|
|
2.71%
|
Wholesale
repurchase
agreements
|
|
4,425
|
|
242
|
|
5.47%
|
|
|
1,246
|
|
70
|
|
5.62%
|
|
|
–
|
|
–
|
|
–
|
Total
short-term borrowings
|
|
237,142
|
|
11,835
|
|
4.93%
|
|
|
210,962
|
|
10,443
|
|
4.95%
|
|
|
128,313
|
|
4,224
|
|
3.29%
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
advances
|
|
71,153
|
|
3,256
|
|
4.58%
|
|
|
127,981
|
|
5,545
|
|
4.33%
|
|
|
200,820
|
|
8,261
|
|
4.11%
|
Wholesale
repurchase
agreements
|
|
124,191
|
|
5,257
|
|
4.23%
|
|
|
114,768
|
|
4,035
|
|
3.52%
|
|
|
166,058
|
|
5,260
|
|
3.17%
|
Other
borrowings
|
|
24,571
|
|
2,175
|
|
8.73%
|
|
|
39,990
|
|
3,293
|
|
8.23%
|
|
|
43,666
|
|
3,174
|
|
7.27%
|
Total
long-term borrowings
|
|
219,915
|
|
10,688
|
|
4.81%
|
|
|
282,739
|
|
12,873
|
|
4.55%
|
|
|
410,544
|
|
16,695
|
|
4.07%
|
Total
borrowed funds
|
|
457,057
|
|
22,523
|
|
4.87%
|
|
|
493,701
|
|
23,316
|
|
4.72%
|
|
|
538,857
|
|
20,919
|
|
3.85%
|
Total
interest-bearing
liabilities
|
|
1,485,045
|
|
59,498
|
|
3.99%
|
|
|
1,495,693
|
|
55,577
|
|
3.72%
|
|
|
1,475,799
|
|
43,469
|
|
2.94%
|
Non-interest-bearing
deposits
|
|
172,571
|
|
|
|
|
|
|
167,440
|
|
|
|
|
|
|
158,693
|
|
|
|
|
Other
liabilities
|
|
15,707
|
|
|
|
|
|
|
15,604
|
|
|
|
|
|
|
16,253
|
|
|
|
|
Total
liabilities
|
|
1,673,323
|
|
|
|
|
|
|
1,678,737
|
|
|
|
|
|
|
1,650,745
|
|
|
|
|
Total
stockholders’ equity
|
|
198,794
|
|
|
|
|
|
|
190,293
|
|
|
|
|
|
|
177,940
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders’
equity
|
|
$
1,872,117
|
|
|
|
|
|
|
$
1,869,030
|
|
|
|
|
|
|
$
1,828,685
|
|
|
|
|
Interest
rate
spread
|
|
|
|
$
55,417
|
|
2.87%
|
|
|
|
|
$
54,887
|
|
2.89%
|
|
|
|
|
$
53,954
|
|
3.04%
|
Interest
income/earning
assets
|
|
|
|
|
|
6.86%
|
|
|
|
|
|
|
6.61%
|
|
|
|
|
|
|
5.98%
|
Interest
expense/earning
assets
|
|
|
|
|
|
3.54%
|
|
|
|
|
|
|
3.32%
|
|
|
|
|
|
|
2.66%
|
Net
interest
margin
|
|
|
|
|
|
3.32%
|
|
|
|
|
|
|
3.29%
|
|
|
|
|
|
|
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 statutory 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:
|
2007
|
|
2006
|
|
2005
|
(Dollars
in
thousands)
|
|
|
|
|
|
Net
interest income, as
reported
|
$ 53,921
|
|
$ 53,217
|
|
$ 52,306
|
Taxable
equivalent
adjustments
|
1,496
|
|
1,670
|
|
1,648
|
Fully
tax-equivalent net interest
income
|
$ 55,417
|
|
$ 54,887
|
|
$ 53,954
|
The
following table provides an analysis of the changes in net interest
income:
(Dollars
in
thousands)
|
Change
from
2006 to 2007 (1)
|
|
Change
from
2005 to 2006 (1)
|
Increase
(decrease)
in:
|
Volume
|
Rate
|
Total
|
|
Volume
|
Rate
|
Total
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
Short-term
investments
|
$ (22)
|
$ 12
|
$ (10)
|
|
$ 41
|
$ 67
|
$ 108
|
Investment
Securities:
(2)
|
|
|
|
|
|
|
|
Taxable
|
(121)
|
1,350
|
1,229
|
|
(1,301)
|
2,042
|
741
|
Nontaxable
|
(464)
|
2
|
(462)
|
|
45
|
(1)
|
44
|
Total
investment income
|
(585)
|
1,352
|
767
|
|
(1,256)
|
2,041
|
785
|
Loans:
|
|
|
|
|
|
|
|
Commercial
|
1,833
|
1,599
|
3,432
|
|
5,996
|
5,696
|
11,692
|
Real
estate
|
(1,333)
|
851
|
(482)
|
|
(1,730)
|
1,672
|
(58)
|
Consumer
|
741
|
3
|
744
|
|
808
|
(294)
|
514
|
Total
loan income
|
1,241
|
2,453
|
3,694
|
|
5,074
|
7,074
|
12,148
|
Total
interest income
|
634
|
3,817
|
4,451
|
|
3,859
|
9,182
|
13,041
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Savings
deposits
|
(58)
|
(23)
|
(81)
|
|
(149)
|
(84)
|
(233)
|
Interest-bearing
transaction
|
(11)
|
540
|
529
|
|
(57)
|
616
|
559
|
Money
market
|
964
|
279
|
1,243
|
|
146
|
1,585
|
1,731
|
Brokered
time
|
(482)
|
306
|
(176)
|
|
1,161
|
893
|
2,054
|
Retail
time
|
823
|
2,376
|
3,199
|
|
1,787
|
3,813
|
5,600
|
Total
deposit cost
|
1,236
|
3,478
|
4,714
|
|
2,888
|
6,823
|
9,711
|
Borrowed
funds:
|
|
|
|
|
|
|
|
Short-term
borrowings
|
1,306
|
86
|
1,392
|
|
3,490
|
2,729
|
6,219
|
Long-term
borrowings
|
(3,008)
|
823
|
(2,185)
|
|
(5,646)
|
1,824
|
(3,822)
|
Total
borrowed funds cost
|
(1,702)
|
909
|
(793)
|
|
(2,156)
|
4,553
|
2,397
|
Total
interest expense
|
(466)
|
4,387
|
3,921
|
|
732
|
11,376
|
12,108
|
Net
interest income
|
$ 1,100
|
$ (570)
|
$ 530
|
|
$ 3,127
|
$ (2,194)
|
$ 933
|
(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.
|
The
ability of financial institutions, including Peoples, to maintain and/or
grow
net interest income in 2006 and the first half of 2007 was challenging
due to an
inverted yield curve and a tight credit spread
environment. In the second half of 2007, the yield curve
steepened in anticipation of lower overnight funding rates and credit spreads
began to widen due to the mounting sub-prime related losses for financial
institutions. Although the reduction in short term interest rates
lowered some funding costs, the turmoil within the financial markets caused
some
liabilities, mainly brokered deposits, to remain at elevated
rates. Due to its sensitivity to falling short-term rates, Peoples
was able to stabilize and slightly improve net interest margin in the second
half of 2007, but not as much as anticipated since some funding costs remain
elevated due to the current market conditions.
Despite
these challenges, Peoples experienced slight growth in net interest income
in
both 2007 and 2006, due in large part to management’s interest rate risk
strategy during 2006. That strategy involved changing the mix of
earning assets and funding sources by using investment portfolio cash flows
to
fund higher yielding loans, while at the same time growing retail deposit
balances in order to reduce the amount of, and reliance on, wholesale funding
sources that generally carry higher market rates of interest. While
this strategy produced additional net interest income, net interest margin
has
remained basically flat due to the competitive interest rate
environment.
Peoples
saw continued loan growth into the first half of 2007, but began to experience
significant loan payoffs at the end of the second quarter of 2007. To
maintain earning asset levels, Peoples increased its holdings of investment
securities in the second half of 2007 to replace the loan payoffs of the
second
quarter of 2007. The newly added investment securities were not at
the same yield as the loan payoffs, thus having a negative impact on
margin. Although this asset mix shift did occur during 2007, the
average loan balance for 2007 was up versus 2006, but year ending loans
balance
was down from the prior year. Consequently, average investment
securities balance for 2007 was down versus 2006, but year ending investment
securities balance was up from the prior year.
In
2007,
Peoples’ funding costs increased due to matured deposits and borrowings being
replaced at current, higher market rates. These factors tempered the
overall improvement in net interest income and margin in
2007. However, management controlled the overall increase in funding
costs by adjusting the mix of wholesale funding by repaying higher-costing
funds, such as the junior subordinated notes held by PEBO Capital Trust
II,
using other lower cost borrowings. In the later half of 2007,
Peoples’ funding costs benefited from management reducing certain deposit rates
and taking advantage of lower cost funding available in the market place
in
response to the Federal Reserve’s actions to decrease 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
Peoples’
provision for loan losses totaled $4.0 million in 2007, compared to $3.6
million
and $2.0 million in 2006 and 2005, respectively. A portion of the
provision relates to the Overdraft Privilege program, which totaled $0.6
million, $0.7 million and $0.5 million in 2007, 2006 and 2005, respectively.
The
provision for loan losses is based on management’s quarterly evaluation of the
loan portfolio described in the “Critical Accounting Policies” section of this
discussion, which considers changes in Peoples’ overall loan quality and
estimated losses inherent in the loan portfolio. The higher
provisions in both 2007 and 2006 were primarily the result of losses associated
with a limited number of larger loan relationships.
When
expressed as a percentage of average loans, the provision was 0.35% in
2007,
0.33% in 2006 and 0.19% in 2005. Management believes the provisions
were appropriate for the overall quality, inherent risk and volume
concentrations of Peoples’ loan portfolio. Future provisions for loan
losses will be based on the results of management’s formal analysis of the
adequacy of the allowance for loan losses and procedural discipline used
to
estimate the amount of credit losses probable within the loan
portfolio. Additional information regarding changes in Peoples’
allowance for loan losses and loan credit quality can be found later in
this
discussion under the caption “Allowance for Loan Losses”.
Non-Interest
Income
Peoples
generates non-interest income, which excludes gains and losses on investments
and assets, from six primary sources: deposit account service charges,
trust and
investment activities, insurance commissions, electronic banking (“e-banking”),
mortgage banking and business owned life insurance (“BOLI”). In
recent years, Peoples has focused on reducing its reliance on net interest
income by growing non-interest income, especially fee-based revenues not
affected by interest rate changes. Non-interest income grew 3% in
2007 and 7% in 2006, due mostly to higher trust and investment income,
e-banking
revenues and insurance commissions. As a result, non-interest income
accounted for 36.8% of Peoples’ total revenues in 2007, compared to 36.3% in
2006 and 35.3% in 2005.
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 revenue. Management periodically evaluates its
cost recovery fees to ensure they are reasonable based on operational costs,
as
well as similar to fees charged in Peoples’ markets by
competitors. The following table details Peoples’ deposit account
service charges:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Overdraft
fees
|
$ 6,818
|
|
$ 6,868
|
|
$ 6,595
|
Non-sufficient
funds
fees
|
1,965
|
|
2,107
|
|
1,895
|
Other
fees and
charges
|
1,107
|
|
1,240
|
|
1,311
|
Total
deposit account service charges
|
$ 9,890
|
|
$ 10,215
|
|
$ 9,801
|
Deposit
account service charges were lower in 2007 due to the impact of higher than
normal fee waivers early in the year. Management was successful in
limiting the amount of fee waivers in the second half of 2007, resulting
in a 2%
increase in fourth quarter 2007 deposit account service charges over the
prior
year fourth quarter. In 2006, deposit account service charges
increased due in part to Peoples’ efforts to grow core deposits and add new
customers. The amount of deposit account service charges
ultimately recognized by Peoples in the future, particularly overdraft and
non-sufficient funds fees, is largely dependent on the timing and volume
of
customer activity.
Insurance
commissions also comprise a significant portion of Peoples’ total non-interest
income. The following table details Peoples’ insurance
commissions:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Property
and casualty
insurance
|
$ 7,997
|
|
$ 7,765
|
|
$ 7,397
|
Contingent
performance based
commissions
|
817
|
|
1,041
|
|
511
|
Life
and health
insurance
|
596
|
|
568
|
|
547
|
Credit
life and A&H
insurance
|
158
|
|
164
|
|
142
|
Total
insurance commissions
|
$ 9,568
|
|
$ 9,538
|
|
$ 8,597
|
Property
and casualty insurance sales commissions’ growth continued in 2007, as increased
production more than offset the impact of lower pricing margins within the
insurance industry. The bulk of the contingent performance based
commission income is earned annually by Peoples during the first quarter
of the
year 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 investments. The following table details
Peoples’ trust and investment revenues:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Fiduciary
|
$ 4,099
|
|
$ 3,508
|
|
$ 3,366
|
Brokerage
|
884
|
|
750
|
|
646
|
Total
trust and
investment income
|
$ 4,983
|
|
$ 4,258
|
|
$ 4,012
|
Over
the
last two years, Peoples has experienced growth in assets under management
from
the addition of seasoned sales personnel, coupled with an increase in cross
sales from retail banking operations. At December 31, 2007, trust and
brokerage assets under management had a market value of $1.02 billion, compared
to $932.3 million at year-end 2006 and $737.2 million at year-end
2005. These increases accounted for the 17% increase in income for
2007 and 6% increase for 2006.
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. E-banking revenues
have remained strong in both 2007 and 2006, increasing 14% and 10%,
respectively, from the combination of an increase in the number of deposit
relationships with debit cards and higher volumes of debit card
activity. At December 31, 2007, Peoples had 37,427 deposit
relationships with debit cards, or 53% of all eligible deposit accounts,
compared to 35,896 relationships, or 52% of eligible accounts, at year-end
2006
and 32,030 relationships, or 49% of eligible accounts at December 31,
2005. In 2007, Peoples’ customers used their debit cards to complete
$231 million of transactions, versus $194 million in 2006 and $162 million
in
2005, representing increases of 18% and 20%, respectively.
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
are largely dependent on customer demand and interest rates in
general. Mortgage-banking income increased 7% in 2007, due to a
higher volume of loans sold. In 2006, mortgage-banking income was
flat, due mostly to a net loss of $187,000 in 2005 from the sale of $11.6
million of fixed-rate loans acquired in a banking office purchase in late
2004.
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
Salary
and 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 benefit costs:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Salaries
and
wages
|
$ 17,403
|
|
$ 17,013
|
|
$ 17,239
|
Sales-based
and incentive
compensation
|
3,985
|
|
3,373
|
|
3,139
|
Employee
benefits
|
3,965
|
|
3,761
|
|
3,813
|
Payroll
taxes and other
employment-related costs
|
2,199
|
|
2,031
|
|
2,400
|
Total
salaries and benefit costs
|
$ 27,552
|
|
$
26,178
|
|
$
26,591
|
Full-time
equivalent
employees:
|
|
|
|
|
|
Actual
at
December 31
|
559
|
|
547
|
|
531
|
Average
during
the year
|
554
|
|
539
|
|
534
|
Salaries
and wages have increased from the combination of normal annual merit increases
and the higher number of full-time equivalent employees.
However, larger deferrals of salaries considered direct loan origination
costs caused an overall reduction of salaries and wages in 2006 from
2005. The increases in sales-based and incentive compensation over
the same period reflects higher insurance and investment sales-based
compensation, which was offset by decreased incentive compensation for incentive
plans based on Peoples’ earnings results.
Peoples’
employee benefit costs have been impacted by a steady increase in medical
costs
in recent years, coupled with the adoption of new stock-based compensation
accounting rules effective January 1, 2006. These increases have been
tempered by lower pension costs, due in part to the non-recurrence of pension
settlement charges. In 2005, Peoples incurred pension settlement
charges of $679,000 as a result of lump sum payments to participants from
Peoples’ defined benefit pension plan during 2005, while no such charges were
incurred in either 2007 or 2006.
In
2007,
Peoples recognized compensation expense of $391,000 versus $280,000 in 2006,
related to stock options and other share-based awards made after January
1,
2006. In prior years, Peoples had not recognized any stock-based
employee compensation expense related to the granting of stock
options. The amount of stock-based compensation expense recognized
annually is impacted by several factors, including the level and types of
awards
granted, the grant date fair value and length of the requisite service
periods. Additional information regarding Peoples’ stock-based
compensation plans and awards can be found in Note 16 of the Notes to the
Consolidated Financial Statements
included in Item 8 of this Form 10-K.
Peoples’
net occupancy and equipment expenses have remained fairly stable over the
last
two years, due in part to recent efforts to improve operating efficiencies,
and
were comprised of the following:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Depreciation
|
$ 2,061
|
|
$ 2,128
|
|
$ 2,264
|
Repairs
and maintenance
costs
|
1,142
|
|
1,056
|
|
1,035
|
Net
rent
expense
|
660
|
|
630
|
|
757
|
Property
taxes, utilities and
other costs
|
1,435
|
|
1,438
|
|
1,255
|
Total
|
$ 5,298
|
|
$ 5,252
|
|
$ 5,311
|
Depreciation
expense decreased in both 2007 and 2006 as the result of existing assets
becoming fully depreciated, coupled with fewer shorter-lived assets, such
as
computers and other office equipment, being placed in service. Peoples incurred
higher property taxes and utility costs from general increases in real estate
values and energy costs where Peoples operates.
Peoples’
intangible asset amortization expense decreased in both 2007 and 2006 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, 2007.
Professional
fees and other third-party services, which include accounting, legal and
other
professional expenses, experienced a 9% decline in 2007 over the prior
year. This decrease reflects the greater utilization of external
legal and consulting services for the review and administration of various
employee benefit plans during 2006, which was also the primary factor driving
the 8% increase in professional fees compared to
2005. Management anticipates professional fees for 2008 to be
comparable to the amount incurred for 2007.
Marketing
and public relations expense, which includes the cost of advertising, public
relations and charitable contributions, decreased 9% in 2007 mostly attributable
to a reduction in costs associated with Peoples’ direct mail and gift campaigns
initiated in late 2005. Compared to 2005, marketing costs were
up 7% in 2006, reflecting a full-year’s impact of the direct mail and gift
campaigns. Management expects marketing expense in 2008 to be
comparable to the amount incurred in 2007.
Peoples’
bankcard costs, which consist primarily of debit card and ATM processing
fees,
have risen steadily in recent years, with much of the increases corresponding
directly to the higher volumes of customer activity and additional debit
cards
issued to customers. These factors have also produced a greater
increase in the related bankcard revenue, including Peoples’ e-banking income,
over the same periods. Nearly one-third of the increase in bankcard
costs during 2007 was attributable to additional losses from fraudulent bankcard
activity and Peoples’ proportionate share of the liabilities associated with its
membership in the Visa USA network, detailed in Note 18 of the Notes to the
Consolidated Financial Statements.
Peoples
is subject to 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 been flat over the last two years, from relatively
stable equity levels at Peoples Bank, although the amount of franchise tax
expense recognized in 2007 was lower due to the Ohio Franchise Tax
Settlement. Management expects franchise tax expense to return to
more historic levels in 2008 due to relatively stable equity levels at Peoples
Bank. Peoples’ regularly evaluates the capital position of Peoples’
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.
Income
Tax Expense
Peoples’
effective income tax rate was 23.3% in 2007, compared to 26.7% in 2006 and
27.1%
in 2005. A reconciliation of income tax expense and effective tax
rate to the statutory tax rate can be found in Note 11 of the Notes to the
Consolidated Financial Statements included in Item 8 of this Form
10-K. In 2008, management expects a modest increase in Peoples’
effective tax rate from a lower utilization of tax credits.
Peoples
has made tax-advantaged investments in order to manage its effective tax
rate
and overall tax burden. The amount of tax-advantaged investments
totaled $143.2 million, $140.4 million and $155.9 million at December 31,
2007,
2006, 2005, respectively. The lower investment at year-end 2006 was
due mainly to the sale of $11 million of tax-exempt securities in late
2006. Depending on economic and regulatory conditions, Peoples may
make additional investments in various tax credit pools and other tax-advantaged
assets.
FINANCIAL
CONDITION
Cash
and Cash Equivalents
Peoples
considers cash and cash equivalents to consist of Federal Funds sold, cash
and
balances due from banks, interest-bearing balances in other institutions
and
other short-term investments that are readily liquid. The amount of
cash and cash equivalents fluctuates on a daily basis due to customer activity
and Peoples’ liquidity needs. At December 31, 2007, cash and cash
equivalents totaled $45.2 million, up 14% from year-end 2006, due mostly
to
additional items in process of collection.
Management
believes the current balance of cash and cash equivalents, 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. Further information regarding Peoples’ cash flows and
liquidity can be found later in this discussion under “Interest Rate Sensitivity
and Liquidity.”
Investment
Securities
The
following table details Peoples’ investment portfolio at December
31:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Obligations
of U.S.
Treasury and government agencies
|
$ 197
|
|
$ 282
|
|
$ 526
|
Obligations
of U.S.
government-sponsored agencies
|
84,457
|
|
130,600
|
|
109,847
|
Obligations
of states and
political subdivisions
|
69,247
|
|
53,938
|
|
69,482
|
Mortgage-backed
securities
|
358,683
|
|
304,413
|
|
353,084
|
Other
securities
|
52,879
|
|
59,500
|
|
56,374
|
Total
investment securities, at fair value
|
$ 565,463
|
|
$ 548,733
|
|
$ 589,313
|
Total
amortized
cost
|
$ 559,211
|
|
$ 550,239
|
|
$ 591,002
|
Net
unrealized gain
(loss)
|
$ 6,252
|
|
$ (1,506)
|
|
$ (1,689)
|
Overall,
the composition of Peoples’ investment portfolio has remained comparable in
recent periods. The higher investment in mortgage-backed securities
and tax-exempt municipal securities at year-end 2007 reflects management’s
efforts to minimize the impact of the significant commercial loan payoffs
and
prepayments of other investment securities during 2007, as well as manage
Peoples’ tax burden. A portion of the investment purchases were made
to take advantage of attractive yields during the third quarter of 2007 and
to
pre-fund expected near-term investment portfolio cash flows from calls and
normal principal paydowns. At December 31, 2006, the investment in
mortgage-backed securities was down compared to year-end 2005, as the result
of
management using the majority of the principal runoff during 2006 to fund
loan
growth and for other corporate liquidity purposes, while the investment in
municipal securities decreased due largely to the December 2006
sale. Additional information regarding the composition of the
investment portfolio can be found in Note 3 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Form 10-K.
In
2008,
Peoples will continue to actively manage the investment portfolio and may
adjust
the size or composition based on, among other factors, changes in the loan
portfolio, liquidity needs and interest rate conditions.
Included
in the other securities category are four separate collateralized debt
obligation (“CDO”) investment securities, which accounted for $2.9 million of
the other-than-temporary impairment charge recognized in 2007. During
2007, the market value of the CDO securities held by Peoples declined due
to
continued liquidity and credit concerns. Approximately 90% of the CDO
portfolio's collateral pools are comprised primarily of bank-issued trust
preferred securities and other debt obligations issued by financial services
companies, with the remainder comprised of trust preferred securities issued
by
insurance companies and real estate investment trusts. At December
31, 2007, the carrying value of Peoples’ CDO portfolio totaled $6.1 million, of
which $5.0 million still maintains BBB or equivalent rating by Fitch and/or
Moody's. The remaining $1.1 million are 100% bank income notes
originated in 2001 and 2002, and were never rated.
Loans
The
following table details total outstanding loans at December
31:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
Year-end
loan
balances:
|
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
$ 513,847
|
|
$ 469,934
|
|
$ 504,923
|
|
$ 450,270
|
|
$ 380,372
|
Commercial,
other
|
171,937
|
|
191,847
|
|
136,331
|
|
126,473
|
|
131,697
|
Real
estate,
mortgage
|
237,641
|
|
252,726
|
|
272,327
|
|
303,372
|
|
273,378
|
Real
estate,
construction
|
71,794
|
|
99,311
|
|
50,745
|
|
35,423
|
|
21,056
|
Home
equity
lines of credit
|
42,706
|
|
44,937
|
|
43,754
|
|
46,593
|
|
28,348
|
Consumer
|
80,544
|
|
72,531
|
|
62,737
|
|
59,572
|
|
78,416
|
Deposit
account
overdrafts
|
2,472
|
|
1,108
|
|
1,059
|
|
1,355
|
|
1,510
|
Credit
card
|
–
|
|
–
|
|
–
|
|
–
|
|
221
|
Total
loans
|
$ 1,120,941
|
|
$ 1,132,394
|
|
$ 1,071,876
|
|
$ 1,023,058
|
|
$ 914,998
|
Average
total
loans
|
1,122,808
|
|
1,108,575
|
|
1,040,029
|
|
942,761
|
|
894,419
|
Average
allowance for loan
losses
|
(14,775)
|
|
(15,216)
|
|
(14,930)
|
|
(14,974)
|
|
(14,093)
|
Average
loans, net of allowance
|
$ 1,108,033
|
|
$ 1,093,359
|
|
$ 1,025,099
|
|
$ 927,787
|
|
$ 880,326
|
Percent
of loans to total loans at
December 31:
|
|
|
|
|
|
|
|
|
Commercial,
mortgage
|
45.8%
|
|
41.5%
|
|
47.1%
|
|
44.0%
|
|
41.6%
|
Commercial,
other
|
15.3%
|
|
16.9%
|
|
12.7%
|
|
12.4%
|
|
14.4%
|
Real
estate,
mortgage
|
21.2%
|
|
22.3%
|
|
25.4%
|
|
29.7%
|
|
29.9%
|
Real
estate,
construction
|
6.4%
|
|
8.8%
|
|
4.7%
|
|
3.5%
|
|
2.3%
|
Home
equity
lines of credit
|
3.8%
|
|
4.0%
|
|
4.1%
|
|
4.6%
|
|
3.1%
|
Consumer
|
7.3%
|
|
6.4%
|
|
5.9%
|
|
5.7%
|
|
8.5%
|
Deposit
account
overdrafts
|
0.2%
|
|
0.1%
|
|
0.1%
|
|
0.1%
|
|
0.2%
|
Credit
card
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
Total
percentage
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
Over
the
past several years, Peoples has experienced continued demand for commercial
mortgage loans, especially in its more dynamic markets in and around central
Ohio, which has been the key driver of Peoples’ loan growth. Overall,
loan production remained steady throughout 2007 as loan balances grew $14.3
million in the fourth quarter of 2007, from commercial mortgage
production. However, higher than normal commercial loan payoffs
during most of 2007 resulted in lower loan balances at December 31, 2007,
compared to year-end 2006.
The
overall trend in Peoples’ construction loan portfolio in recent periods reflects
the demand for commercial construction loans, which comprise a significant
portion of the outstanding construction loan balances. However,
Peoples’ has experienced increased competition for these and other commercial
loans from the capital markets and other financial institutions, which has
impacted Peoples’ ability to retain these loans after the initial construction
term. The remaining portion of Peoples’ construction balances are comprised of
residential and other multifamily construction projects.
The
following table details the maturity of Peoples’ commercial and construction
loans at December 31, 2007:
(Dollars
in
thousands)
Loan
Type
|
Due
in One Year or
Less
|
Due
in One to Five
Years
|
Due
After Five
Years
|
Total
|
Commercial,
mortgage:
|
|
|
|
|
|
|
|
Fixed
|
$ 15,891
|
|
$ 57,728
|
|
$ 22,407
|
|
$ 96,026
|
Variable
|
44,610
|
|
33,758
|
|
339,453
|
|
417,821
|
Total
|
$ 60,501
|
|
$ 91,486
|
|
$ 361,860
|
|
$ 513,847
|
|
|
|
|
|
|
|
|
Commercial,
other:
|
|
|
|
|
|
|
|
Fixed
|
$ 4,192
|
|
$ 42,600
|
|
$ 4,093
|
|
$ 50,885
|
Variable
|
63,631
|
|
34,314
|
|
23,107
|
|
121,052
|
Total
|
$ 67,823
|
|
$ 76,914
|
|
$ 27,200
|
|
$ 171,937
|
|
|
|
|
|
|
|
|
Real
estate,
construction:
|
|
|
|
|
|
|
|
Fixed
|
$ -
|
|
$ 3,684
|
|
$ 3,143
|
|
$ 6,827
|
Variable
|
28,002
|
|
17,649
|
|
19,316
|
|
64,967
|
Total
|
$ 28,002
|
|
$ 21,333
|
|
$ 22,459
|
|
$ 71,794
|
Growth
of
real estate loan balances in recent periods has been impacted by customer
demand
for long-term, fixed-rate mortgages, which Peoples generally sells to the
secondary market with the servicing rights retained. During the
fourth quarter of 2006, Peoples also began selling certain long-term, fixed-rate
mortgages to the secondary market with servicing rights
released. Beginning in 2007, Peoples has originated and retained in
its loan portfolio certain fixed-rate mortgages, primarily loans with an
original maturity of 15 years or less.
Consumer
loan growth has occurred due mainly to the efforts of Peoples’ indirect lending
area, which also comprises a significant portion of Peoples’ consumer
loans. Peoples’ ability to maintain, or even grow, consumer loans in
future quarters continues to be impacted by strong competition for various
types
of consumer loans, especially automobile loans, as well as availability of
alternative credit products, such as home equity credit
lines. Additionally, Peoples’ commitment to originate quality loans
based on sound underwriting practices and appropriate loan pricing discipline
remains the paramount objective and could limit any future growth.
Loan
Concentration
Peoples'
loans consist of credits to borrowers spread over a broad range of industrial
classifications, with no concentration of loans to borrowers engaged in the
same
or similar industries that exceed 10% of total loans. Peoples currently has
no
loans to foreign entities. Peoples’ largest concentration of loans
consist of credits to borrowers in the assisted living facilities and nursing
homes industry. Those loans totaled $54.0 million at both December
31, 2007 and 2006, or 10.5% and 11.5% of total outstanding commercial real
estate loans, respectively. Loans to borrowers in the lodging and
lodging related industry also represent a significant portion of Peoples’
commercial real estate loans, totaling $50.6 million at December 31, 2007
and
$52.7 million at December 31, 2006, or 9.8% and 11.2%,
respectively. These credits were subjected to Peoples’ normal
commercial underwriting standards and did not present more than the normal
amount of risk assumed in Peoples’ other commercial lending
activities.
These
lending opportunities typically have arisen due to the growth of these
industries in markets served by Peoples or in neighboring areas, and also
from
sales associates’ efforts to develop these lending
relationships. Management believes these industrial concentrations do
not pose abnormal risk when compared to the risk assumed in other types of
lending since these credits have been subjected to Peoples’ normal underwriting
standards, which include an evaluation of the financial strength, market
expertise and experience of the borrowers and principals in these business
relationships. In addition, a sizeable portion of the loans to
lodging and lodging-related companies is spread over various geographic areas
and is guaranteed by principals with substantial net worth.
Allowance
for Loan Losses
The
following table details the changes in the allowance for loan losses for
the
years ended December 31:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
Allowance
for loan
losses:
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses, January
1
|
$ 14,509
|
|
$ 14,720
|
|
$ 14,760
|
|
$ 14,575
|
|
$ 13,086
|
Allowance
for loan losses
acquired
|
–
|
|
–
|
|
–
|
|
–
|
|
573
|
Gross charge-offs:
|
|
|
|
|
|
|
|
|
|
Commercial
|
2,265
|
|
3,485
|
|
1,745
|
|
961
|
|
1,036
|
Real
estate
|
606
|
|
361
|
|
827
|
|
677
|
|
449
|
Consumer
|
981
|
|
631
|
|
656
|
|
886
|
|
1,113
|
Overdrafts
|
849
|
|
1,007
|
|
965
|
|
1,130
|
|
967
|
Credit
card
|
–
|
|
–
|
|
–
|
|
133
|
|
221
|
Total
gross charge-offs
|
4,701
|
|
5,484
|
|
4,193
|
|
3,787
|
|
3,786
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Commercial
|
950
|
|
578
|
|
1,155
|
|
487
|
|
352
|
Real
estate
|
202
|
|
377
|
|
223
|
|
186
|
|
66
|
Consumer
|
513
|
|
389
|
|
394
|
|
431
|
|
399
|
Overdrafts
|
280
|
|
303
|
|
327
|
|
308
|
|
263
|
Credit
card
|
6
|
|
4
|
|
26
|
|
14
|
|
21
|
Total
recoveries
|
1,951
|
|
1,651
|
|
2,125
|
|
1,426
|
|
1,101
|
Net
charge-offs
(recoveries):
|
|
|
|
|
|
|
|
|
|
Commercial
|
1,315
|
|
2,907
|
|
590
|
|
474
|
|
684
|
Real
estate
|
404
|
|
(16)
|
|
604
|
|
491
|
|
383
|
Consumer
|
468
|
|
242
|
|
262
|
|
455
|
|
714
|
Overdrafts
|
569
|
|
704
|
|
638
|
|
822
|
|
704
|
Credit
card
|
(6)
|
|
(4)
|
|
(26)
|
|
119
|
|
200
|
Total
net charge-offs (recoveries)
|
2,750
|
|
3,833
|
|
2,068
|
|
2,361
|
|
2,685
|
Provision
for loan losses,
December 31
|
3,959
|
|
3,622
|
|
2,028
|
|
2,546
|
|
3,601
|
Allowance
for loan losses,
December 31
|
$ 15,718
|
|
$ 14,509
|
|
$ 14,720
|
|
$ 14,760
|
|
$ 14,575
|
Allowance
for loan losses as a
percent of total loans
|
1.40%
|
|
1.28%
|
|
1.37%
|
|
1.44%
|
|
1.59%
|
Ratio
of net charge-offs to
average loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
0.12%
|
|
0.27%
|
|
0.06%
|
|
0.05%
|
|
0.08%
|
Real
estate
|
0.04%
|
|
–
|
|
0.06%
|
|
0.05%
|
|
0.04%
|
Consumer
|
0.04%
|
|
0.02%
|
|
0.03%
|
|
0.05%
|
|
0.08%
|
Overdrafts
|
0.05%
|
|
0.06%
|
|
0.06%
|
|
0.09%
|
|
0.08%
|
Credit
card
|
–
|
|
–
|
|
–
|
|
0.01%
|
|
0.02%
|
Total
ratio of net charge-offs to average loans
|
0.25%
|
|
0.35%
|
|
0.21%
|
|
0.25%
|
|
0.30%
|
In
2007,
gross charge-offs remained at higher than historical levels due mostly to
losses
totaling $2.1 million from six unrelated loan relationships, which includes
the
impaired commercial relationship disclosed in the fourth quarter of
2006. That relationship also accounted for $2.9 million of the gross
charge-offs in 2006. Gross recoveries for 2007, 2006 and 2005 have been impacted
by sizeable, unanticipated recoveries related to a limited number of unrelated
loan relationships that have occurred during those years. These
recoveries were attributable to higher than expected proceeds from sale of
collateral and, when possible, enforcement of guarantees by the
principals.
The
allowance is allocated among the loan categories based on the consistent,
quarterly procedural discipline described in the “Critical Accounting Policies”
section of this discussion. However, the entire allowance for loan
losses is available to absorb future loan losses in any loan
category. The following
schedule details the allocation of the allowance for loan losses at December
31:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
Commercial
|
$ 14,147
|
|
$ 12,661
|
|
$ 11,883
|
|
$ 11,751
|
|
$ 11,232
|
Real
estate
|
419
|
|
957
|
|
1,400
|
|
1,175
|
|
1,234
|
Consumer
|
868
|
|
596
|
|
1,149
|
|
1,394
|
|
1,594
|
Overdrafts
|
284
|
|
295
|
|
288
|
|
327
|
|
283
|
Credit
card
|
–
|
|
–
|
|
–
|
|
113
|
|
232
|
Total
allowance for loan losses
|
$
15,718
|
|
$
14,509
|
|
$
14,720
|
|
$
14,760
|
|
$
14,575
|
The
significant allocation of the allowance 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 allowance
allocated to the real estate and consumer loan portfolios has fluctuated
in
recent years based on Peoples’ methodology for allocating the allowance to these
homogeneous loan pools, which includes a consideration of changes in total
balances in those portfolios and historical loss experience. In prior
periods, Peoples had maintained an allowance for credit cards that reflected
an
estimate of the loss from the retained recourse on the business cards included
in the credit card portfolio sale. This recourse arrangement expired
during the second quarter of 2005, eliminating the need for an allocation
for
credit cards.
Asset
quality remains a key focus, as management continues to emphasize loan
underwriting quality more than loan growth. The following table
details Peoples’ nonperforming assets:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
Loans
90+ days past
due
|
$ 378
|
|
$ 1
|
|
$ 251
|
|
$ 285
|
|
$ 188
|
Renegotiated
loans
|
–
|
|
1,218
|
|
–
|
|
1,128
|
|
–
|
Nonaccrual
loans
|
8,980
|
|
8,785
|
|
6,284
|
|
5,130
|
|
6,556
|
Total
nonperforming loans
|
9,358
|
|
10,004
|
|
6,535
|
|
6,543
|
|
6,744
|
Other
real estate
owned
|
343
|
|
–
|
|
308
|
|
1,163
|
|
392
|
Total
nonperforming assets
|
$ 9,701
|
|
$ 10,004
|
|
$ 6,843
|
|
$ 7,706
|
|
$ 7,136
|
Nonperforming
loans as a percent
of total loans
|
0.83%
|
|
0.88%
|
|
0.61%
|
|
0.64%
|
|
0.73%
|
Nonperforming
assets as a percent
of total assets
|
0.51%
|
|
0.53%
|
|
0.37%
|
|
0.43%
|
|
0.41%
|
Allowance
for loan losses as a
percent of
|
|
|
|
|
|
|
|
|
|
nonperforming
loans
|
168.0%
|
|
145.0%
|
|
225.2%
|
|
225.6%
|
|
216.1%
|
Peoples’
nonaccrual loans are comprised almost entirely of commercial and real estate
loans, with much of the increase isolated to a limited number of commercial
relationships. The loans classified as renegotiated at December 31,
2006, consisted of two commercial loans that were restructured in the second
half of 2006 and have returned to performing status. 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 $786,000, $567,000
and $393,000 for 2007, 2006 and 2005, respectively, of which $47,000, $34,000
and $97,000, 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. Information regarding Peoples’ impaired loans is included
in Note 4 of the Notes to the Consolidated Financial Statements included
in Item
8 of this Form 10-K.
Deposits
Peoples’
deposit balances were comprised of the following at December 31:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
Retail
certificates of
deposit
|
$ 499,684
|
|
$ 514,885
|
|
$ 465,148
|
|
$ 456,850
|
|
$ 451,923
|
Interest-bearing
transaction
accounts
|
191,359
|
|
170,022
|
|
178,030
|
|
165,144
|
|
157,410
|
Money
market deposit
accounts
|
153,299
|
|
134,387
|
|
110,372
|
|
107,394
|
|
104,019
|
Savings
accounts
|
107,389
|
|
114,186
|
|
131,221
|
|
157,145
|
|
171,488
|
Total
retail interest-bearing deposits
|
951,731
|
|
933,480
|
|
884,771
|
|
886,533
|
|
884,840
|
Brokered
certificates of
deposits
|
59,589
|
|
129,128
|
|
41,786
|
|
29,909
|
|
9,981
|
Total
interest-bearing deposits
|
1,011,320
|
|
1,062,608
|
|
926,557
|
|
916,442
|
|
894,821
|
Non-interest-bearing
deposits
|
175,057
|
|
170,921
|
|
162,729
|
|
152,979
|
|
133,709
|
Total
deposit balances
|
$
1,186,377
|
|
$
1,233,529
|
|
$
1,089,286
|
|
$
1,069,421
|
|
$
1,028,530
|
Deposit
growth has occurred in recent years from Peoples’ ability to attract retail
deposits, primarily money market balances and interest-bearing transaction
accounts. Money market balances increased 14% and 22%, in 2007 and
2006, respectively, due to Peoples offering a personal money market product
with
a very competitive rate. Interest-bearing transaction account
balances grew 13% in 2007, due to higher public funds balances, while balances
contracted in 2006, as additional public funds were more than offset by lower
consumer balances. In late 2005, Peoples’ implemented a direct mail
and free gift marketing strategy designed to attract new customers and increase
non-interest-bearing deposits. This strategy has resulted in many new
customer accounts and higher consumer balances, although the increase in
2007
was attributed more to commercial deposit growth. Peoples will
continue to focus on expanding core deposit balances as a means of reducing
reliance on higher costing, wholesale funding source. However,
Peoples’ ability to retain and expand retail deposit balances continues to be
impacted by intense competition for deposits within its markets.
In
2007,
Peoples reduced its amount of brokered deposits, due to the retail deposit
growth and availability of other lower rate wholesale
funding. Management plans to continue using brokered deposits in the
future to help manage interest rate sensitivity and liquidity, as well as
maintain diversity in funding sources.
The
maturities of certificates of deposit with total balances of $100,000 or
more at
December 31 were as follows:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
3
months or
less
|
$ 54,557
|
|
$ 26,601
|
|
$ 25,884
|
|
$ 17,772
|
|
$ 10,316
|
Over
3 to 6
months
|
28,732
|
|
47,738
|
|
25,628
|
|
17,923
|
|
18,964
|
Over
6 to 12
months
|
20,829
|
|
59,084
|
|
34,207
|
|
14,163
|
|
40,701
|
Over
12
months
|
40,206
|
|
89,049
|
|
82,174
|
|
76,267
|
|
49,765
|
Total
|
$144,324
|
|
$222,472
|
|
$167,893
|
|
$126,125
|
|
$119,746
|
Borrowed
Funds
At
December 31, 2007, borrowed funds totaled $477.0 million, up 12% from $425.1
million at year-end 2006. The majority of this increase was due to
additional advances from the FHLB, both short-term and long-term, which totaled
$270.7 million and $229.0 million at December 31, 2007 and 2006,
respectively. In the second half of 2007, management initiated a
strategy designed to reduce the impact of repricing of large blocks of funding,
such as a $45 million repurchase agreement that matured in January 2008,
by
“laddering” the maturities of a portion of Peoples’ borrowed
funds. Laddering involves systematically borrowing funds in a given
maturity range over a period of time creating a stream of future
maturities. The strategy implemented in the second half of the year
primarily targeted the 2-year timeframe. Additional information
regarding Peoples’ borrowed funds can be found in Notes 7 and 8 of the Notes to
the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Capital/Stockholders'
Equity
At
December 31, 2007, total stockholders’ equity was $202.8 million, up 3% since
year-end 2006 attributed to retained earnings of $9.1 million and comprehensive
income of $6.0 million, which was largely offset by a $10.2 million decrease
in
equity from treasury stock activity.
In
2007,
Peoples declared dividends totaling $9.2 million, or $0.88 per share, compared
to $8.9 million, or $0.83 per share, in 2006, representing dividend payout
ratios of 50.4% and 41.1%, respectively. While management anticipates
Peoples continuing its 42-year history of consistent dividend growth in future
periods, Peoples’ ability to pay dividends on its common shares is largely
dependent upon dividends from Peoples Bank. In addition, other
restrictions and limitations may prohibit Peoples from paying dividends even
when sufficient cash is available. Further discussion regarding
restrictions on Peoples’ ability to pay future dividends can be found in Note 13
of the Notes to the Consolidated Financial Statements included in Item 8
of this
Form 10-K, as well as the “Supervision and Regulation -Limits on Dividends and
Other Payments” section under Item 1 of this Form 10-K.
At
December 31, 2007, Peoples had treasury stock totaling $16.1 million versus
$5.9
million at year-end 2006. In 2007, Peoples repurchased 463,600 common
shares, at an average price of $26.21, under the previously announced 2007
Stock
Repurchase Program and the stock repurchase program announced November 9,
2007,
as well as 7,727 common shares at an average price of $25.95 in conjunction
with
the deferred compensation plan for directors of Peoples and
subsidiaries. During the same period, Peoples reissued 79,378
treasury shares in connection with stock option exercises and insurance agency
acquisitions completed in 2004. Peoples may repurchase additional
common shares in 2008 as authorized under the stock repurchase program announced
November 9, 2007 and deemed appropriate by management.
Management
uses the tangible capital ratio as one measure of the adequacy of Peoples’
equity. The ratio, defined as tangible equity as a percentage of
tangible assets, excludes the balance sheet impact of intangible assets acquired
through acquisitions. At December 31, 2007, Peoples’ tangible capital
ratio was 7.42% compared to 7.10% at December 31, 2006. The higher
ratio compared to the prior year-end is the result of a 5% increase in tangible
equity that exceeded a 1% increase in tangible assets.
In
addition to monitoring performance through traditional capital measurements
(i.e., dividend payout ratios and ROE), Peoples has complied with the capital
adequacy standards mandated by the banking regulators. Peoples and
Peoples Bank were categorized as well-capitalized institutions at December
31,
2007, based on the most recent regulatory notification. Further
information regarding Peoples and Peoples Bank’s risk-based capital ratios can
be found in Note 13 of the Notes to Consolidated Financial Statements included
in Item 8 of this Form 10-K.
Interest
Rate Sensitivity and Liquidity
While
Peoples is exposed to various business risks, the risks relating to interest
rate sensitivity and liquidity are typically the most complex and dynamic
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 for Peoples, as well as
the entire financial services industry, primarily arising in the normal course
of business. 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 Peoples’ 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 encourage adherence to sound fundamentals of banking,
while allowing sufficient flexibility to meet the challenges and opportunities
of changing markets.
While
the
ALCO uses various methods to assess and monitor the level of Peoples’ IRR, the
ALCO predominantly relies on simulation modeling in its overall management
of
IRR since it estimates the impact of potential changes in interest rates
on
Peoples’ 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. 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. 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 30% or less given an immediate and sustained 200 basis points
shift in interest rates. The following table is illustrates the
estimated earnings and economic value at risk at December 31, 2007 (dollars
in
thousands):
|
|
Estimated (Decrease)
Increase In
Net Interest Income
|
Estimated
Decrease in
Economic Value
of
Equity
|
200
|
|
$ (5,276)
|
|
(9.7)%
|
|
$ (19,186)
|
|
(7.6)%
|
100
|
|
(2,264)
|
|
(4.2)%
|
|
(7,830)
|
|
(3.1)%
|
(100)
|
|
1,152
|
|
2.1
%
|
|
(3,691)
|
|
(1.5)%
|
(200)
|
|
$ 1,234
|
|
2.3
%
|
|
$ (15,915)
|
|
(6.3)%
|
The
ALCO
also monitors the timing difference between the maturity or repricing of
earning
assets and interest-bearing liabilities, which is known as the sensitivity
gap,
focusing on the one-year cumulative gap position in assessing IRR. At December
31, 2007, Peoples’ one-year cumulative gap amount was negative 9.0% of earning
assets, which represented $151.2 million more in liabilities than assets
that
may contractually reprice or mature during that period. This compares
to a one-year cumulative gap of negative 17.3% of earning assets, or $292.7
million more in liabilities than assets, at year-end 2006. In 2007,
Peoples’ gap position became less liability sensitive due in part to management
selectively extending maturities on some borrowed funds as part of its ladder
strategy, coupled with a slight increase in customer preference for deposits
with terms greater than one year.
At
December 31, 2007, Peoples’ interest rate risk analysis showed that Peoples
remains liability sensitive, which indicates an immediate and sustained increase
in interest rates would negatively impact net interest income primarily due
to
more liabilities repricing upward than assets repricing. Conversely, a decrease
in interest rates provides slightly higher net interest
income. Improvement in asset yields in a rising rate environment may
be limited by variable rate loans that may reach their annual interest rate
cap,
or potentially their lifetime interest rate cap, and a slow down in the
prepayment amounts on loans and mortgage-backed securities, producing less
cash
flow to reinvest at current interest rates. Further, Peoples’
interest-bearing liabilities do not possess the same level of optionality
or
repricing characteristics as earning assets. Specifically, management
administers the rates paid on certain deposits, and thus, can control the
change
in rates in a rising rate environment and may decrease rates more quickly
in a
declining rate environment, which may mitigate some of the IRR
exposure.
The
ALCO
will continue to monitor Peoples’ overall IRR position and take appropriate
actions, when necessary, to 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 of Peoples and the concentration of non-core funding
sources, both wholesale funding and brokered deposits.
Typically,
the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided by cash generated from earning assets such as maturities,
calls, principal payments and interest income from loans and investment
securities. 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 unanticipated cash
needs.
As
part
of the process of the management of liquidity, the ALCO reviews trends of
deposits and loans, as well as other maturing liabilities, in relation to
the
need for cash or additional funding. A liquidity forecast is prepared
based on that information and the ALCO may discuss appropriate actions, if
any,
that should be taken. However, actual future cash flows may be
materially different from the forecast due to the level of uncertainty regarding
the timing and magnitude of anticipated cash flows, such as demands for funding
related to unfunded loan commitments and other contractual obligations and
prepayments on loans and investment securities.
In
2007,
net cash from operations of $30.9 million was mostly offset by cash used
in
investing and financing activities of $10.4 million and $15.1 million,
respectively, resulting in a $5.4 million increase in cash and cash
equivalents. Purchases of new investment securities exceeded the cash
flows from maturities, calls and principal payments and accounted for most
of
the cash used in investing activities, while the more active treasury stock
purchases accounted for most of the cash consumed by financing
activities. In comparison, cash and cash equivalents were flat
in 2006, as net cash from operations of $31.0 million and $0.4 million from
financing activities were used in investing activities. Much of the
cash used in investing activities was for net loan growth. While a
portion of the loan growth was funded by net cash flow from the investment
portfolio, while the remaining amount was funded by the cash from
operations. At
December 31, 2007, Peoples had available borrowing capacity of approximately
$261 million through its wholesale funding sources, along with unpledged
investment securities of approximately $59 million that can be utilized as
an
additional source of liquidity.
The
net
liquidity position of Peoples is calculated by subtracting volatile funds
from
liquid assets. Peoples’ volatile funds consist of deposits that are
considered short-term in nature along with a variable-rate loan from an
unrelated institution. Liquid assets include short-term investments
and unpledged available-for-sale securities. At December 31, 2007,
Peoples’ net liquidity position was $36.4 million, or 1.9% of total assets,
compared to $27.1 million, or 1.4% of total assets, at December 31,
2006. The liquidity position as of both dates was within Peoples’
policy limit of negative 10% of total assets.
Off-Balance
Sheet Activities and Contractual Obligations
Peoples
routinely engages in activities that involve, to varying degrees, elements
of
risk that are not reflected in whole or in part in the Consolidated Financial
Statements. These activities are part of Peoples’ normal course of
business and include traditional off-balance sheet credit-related financial
instruments, interest rate contracts, operating leases, long-term debt and
commitments to make additional capital contributions in low-income housing
tax
credit investments.
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
included in Item 8 of this Form 10-K as follows:
Activity
or Obligation
|
|
Note
|
Off-balance
sheet credit-related financial instruments
|
|
12
|
Interest
rate contracts
|
|
12
|
Low-income
housing tax credit investments
|
|
12
|
Operating
lease obligations
|
|
5
|
Long-term
debt obligations
|
|
8
|
Junior
subordinated notes held by subsidiary trusts
|
|
9
|
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.
At
December 31, 2007, Peoples held an
option to initiate an interest rate swap with a notional amount of $17
million. This interest rate contract is carried at fair value on
Peoples’ Consolidated Balance Sheets, with the fair value representing the net
present value of expected future cash receipts or payments based on market
interest rates as of the balance sheet date. As a result, the amounts
recorded do not represent the amounts that may ultimately be paid or received
under this contract. Peoples may consider using other interest rate
contracts or derivatives in the future, as deemed appropriate by management
and
the ALCO, to help manage Peoples’ interest rate risk position.
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,
2007, is not reflected on the Consolidated Balance Sheets.
Peoples
continues to lease certain facilities and equipment under noncancelable
operating leases with terms providing for fixed monthly payments over periods
generally ranging from two to ten years. Many of Peoples’ leased
facilities are inside retail shopping centers and, as a result, are not
available for purchase. Management believes these leased facilities
increase Peoples’ visibility within its markets and afford sales associates
additional access to current and potential clients.
The
following table details the aggregate amount of future payments Peoples is
required to make under certain contractual obligations as of December 31,
2007:
|
|
|
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)
|
$ 231,979
|
|
$ 53,682
|
|
$ 94,502
|
|
$ 72,706
|
|
$ 11,089
|
Junior
subordinated notes held
by
subsidiary
trusts (1)
|
22,460
|
|
–
|
|
–
|
|
–
|
|
22,460
|
Operating
leases
|
5,150
|
|
690
|
|
1,258
|
|
1,193
|
|
2,009
|
Time
deposits
|
559,273
|
|
399,696
|
|
136,961
|
|
22,378
|
|
238
|
Total
|
$ 818,862
|
|
$454,068
|
|
$232,721
|
|
$ 96,277
|
|
$ 35,796
|
(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.
Future
Outlook
In
2007,
management continued its strategy to diversify revenues, improve
operating
efficiency and reduce reliance on net interest income. Peoples also
experienced growth in core deposits, which helped improve net interest margin
and reduce our reliance on wholesale funding sources. While
Peoples’ near-term performance could be influenced by further
deterioration of economic conditions, management’s primary focus in 2008 will be
on earnings quality and conservative growth. Management also believes
Peoples’ capital position remains strong and will serve as a source of strength
during these times of uncertainty.
In
late 2007, Peoples benefited from its
liability sensitivity interest rate position and proactive management of
the
balance sheet, as short-term market rates fell in response to the Federal
Reserve lowering short-term rates. At year-end, Peoples’ interest
rate modeling indicated further reductions in rates, which materialized in
early
2008, should result in a slight increase in net interest income over the
next
twelve months. However, management believes Peoples will experience
even more competitive loan and deposit pricing, as well as an increase in
demand
from customers to refinance existing loans to lower rates, due to the magnitude
of the interest rate cuts and the expectation of further reductions in the
near
term. While these factors could
mitigate much of the
expected benefit of lower market rates, Peoples’ net interest margin and
income remain inherently difficult to predict and manage.
The
securities portfolio will continue
to be a significant portion of the earning asset base for Peoples in
2008. Peoples will continue to manage the interest rate and credit
risk within the securities portfolio in both isolation and aggregate form
in
relation to the rest of the balance sheet While management expects
to take actions to reduce
risk
exposures,Peoples may be
required to record additional other-than-temporary impairment charges on
securities held within the investment portfolio, due to the uncertainty that
exists in the financial markets.
Non-interest
income growth occurred in 2007,
due to good production from Peoples’ wealth management group. In
2008, Peoples will continue to focus on growing such revenues through the
addition of skilled sales personnel. Management also expects Peoples’
renewed focus on customer-focused delivery of financial services to increase
cross-sale activity among its business lines, which in turn enhances the
customer experience and should produce additional non-interest revenues.
Operating
expense growth has been minimal over the last couple years from management’s
efforts to improve efficiencies. In 2008, non-interest expenses are
expected to increase 3% to 5%, as continued investments in new sales associates,
technology, a full year’s expense of the new financial services office in
Huntington, West Virginia, and a return to more historic levels for franchise
tax expense will combine to increase operating expenses.
Loan
growth remains a key component of Peoples’ long-term strategic goals, and
management believes lending opportunities exist in Peoples’
markets. In 2008, Peoples will continue to emphasis maintaining loan
quality rather than simply generating loans for the sake of growth, especially
considering the current uncertain economic conditions. Further, some
commercial loan payoffs are expected to occur again during
2008. Consequently, loan growth will be challenged in the early parts
of the year, and management expects loan growth to be flat or minimal in
2008.
Peoples’
long-standing commitment to sound loan underwriting practices has produced
consistently good asset quality. In 2008, management anticipates that
net loan charge-offs will be in the range of 0.20% to 0.30% of average loans,
similar to the rates experienced over the last five years. Management
also expects the provision for loan losses to be comparable to the amount
provided in 2007, assuming loan quality remains consistent. Any
improvements could cause the provision to be lower, although the amounts
recognized each quarter will continue to be based on management’s evaluation of
the adequacy of the allowance for loan losses.
Growing
core deposit balances to reduce Peoples’ reliance on higher cost wholesale
funding sources will remain a point of emphasis in 2008, although competition
for such core deposits is fierce and could make it difficult for Peoples
to
build on its recent success. Still, Peoples’ sales associates are
also 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, and working to deliver the right
financial products and services to Peoples’ growing customer base.
In
recent
years, Peoples has been successful at growing its business and revenues through
strategic acquisitions and expansion. Economic conditions in several
markets served by Peoples remain reasonable, and, consequently, management
believes attractive opportunities for above average growth potential exist
in
these markets. 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.
In
2007,
Peoples returned value to its shareholders through the combination of increased
dividends and more active treasury purchases. While 461,400 common
shares remain authorized for repurchase under the stock repurchase program
announced November 9, 2007, management expects Peoples to be less active
with
purchases in 2008, compared to the amount purchased during 2007.
While
the
need to generate short-term results is understood, management believes its
disciplined, long-term approach to improving earnings through diversification
of
the revenue base will allow Peoples’ to build the greatest value for
shareholders. Peoples remains a service-oriented company with a focus
to satisfy clients through a relationship sales process. Through this
process, sales associates work to anticipate, uncover and solve their clients’
every financial need, from insurance to banking to investment
services.
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.
Disclosure
Controls and Procedures
Peoples’
management, with the participation of Peoples’ President and Chief Executive
Officer and Peoples’ 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) of the Securities Exchange Act of 1934, as
amended) (the “Exchange Act”) as of December 31, 2007. Based upon
that evaluation, Peoples’ President and Chief Executive Officer and Peoples’
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 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 48 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 49 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, 2007, no
significant 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.
No
response required.
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)
of
the Securities Exchange Act of 1934, as amended. Peoples’ internal
control over financial reporting has been designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation,
integrity, and fair presentation of Peoples’ Consolidated Financial Statements
for external reporting purposes in accordance with United States generally
accepted accounting principles.
With
the
supervision and participation of its President and Chief Executive Officer
and
its Chief Financial Officer, management evaluated the effectiveness of its
internal control over financial reporting as of December 31, 2007, 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, 2007, 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/
CAROL A.
SCHNEEBERGER.
Mark
F.
Bradley Carol
A. Schneeberger
President
and Chief Executive
Officer 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, 2007, 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, 2007, 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, 2007 and 2006, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007, and our report dated February
29,
2008 expressed an unqualified opinion thereon.
Charleston,
West Virginia
February
29,
2008
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, 2007 and 2006, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the three years
in
the period ended December 31, 2007, 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, 2007, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 29,
2008,
expressed an unqualified opinion thereon.
Charleston,
West Virginia
February
29, 2008
PEOPLES
BANCORP INC. AND
SUBSIDIARIES
|
|
|
|
CONSOLIDATED
BALANCE
SHEETS
|
|
|
|
|
|
|
|
(Dollars
in
thousands)
|
December
31,
|
Assets
|
2007
|
|
2006
|
Cash
and cash
equivalents:
|
|
|
|
Cash
and due from banks
|
$ 43,275
|
|
$ 35,405
|
Interest-bearing
deposits in other banks
|
1,925
|
|
1,101
|
Federal
funds sold
|
-
|
|
3,300
|
Total
cash and cash equivalents
|
45,200
|
|
39,806
|
|
|
|
|
Available-for-sale
investment
securities, at estimated fair value (amortized
|
|
|
|
cost
of $559,211
and $550,239 at December 31, 2007 and 2006,
respectively)
|
565,463
|
|
548,733
|
|
|
|
|
Loans,
net of deferred fees and
costs
|
1,120,941
|
|
1,132,394
|
Allowance
for loan
losses
|
(15,718)
|
|
(14,509)
|
Net
loans
|
1,105,223
|
|
1,117,885
|
|
|
|
|
Loans
held for
sale
|
1,994
|
|
1,041
|
Bank
premises and equipment,
net
|
24,803
|
|
23,455
|
Business
owned life
insurance
|
50,291
|
|
48,630
|
Goodwill
|
62,520
|
|
61,373
|
Other
intangible
assets
|
5,509
|
|
7,479
|
Other
assets
|
24,550
|
|
26,853
|
Total
assets
|
$
1,885,553
|
|
$
1,875,255
|
|
|
|
|
Liabilities
|
|
|
|
Deposits:
|
|
|
|
Non-interest-bearing
|
$ 175,057
|
|
$ 170,921
|
Interest-bearing
|
1,011,320
|
|
1,062,608
|
Total
deposits
|
1,186,377
|
|
1,233,529
|
|
|
|
|
Short-term
borrowings:
|
|
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
35,041
|
|
36,683
|
Federal
Home Loan Bank advances
|
187,500
|
|
158,200
|
Total
short-term borrowings
|
222,541
|
|
194,883
|
|
|
|
|
Long-term
borrowings
|
231,979
|
|
200,793
|
Junior
subordinated notes held by
subsidiary trusts
|
22,460
|
|
29,412
|
Accrued
expenses and other
liabilities
|
19,360
|
|
19,469
|
Total
liabilities
|
1,682,717
|
|
1,678,086
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
Common
stock, no par value,
24,000,000 shares authorized,
|
|
|
|
10,925,954
shares issued and 10,889,242 shares issued at December 31,
2007
|
|
|
and
2006, respectively, including shares in treasury
|
163,399
|
|
162,654
|
Retained
earnings
|
52,527
|
|
43,439
|
Accumulated
comprehensive income
(loss), net of deferred income taxes
|
3,014
|
|
(2,997)
|
Treasury
stock, at cost, 629,206
shares and 237,257 shares at December 31, 2007
|
|
|
and
2006, respectively
|
(16,104)
|
|
(5,927)
|
Total
stockholders’ equity
|
202,836
|
|
197,169
|
Total
liabilities and stockholders’ equity
|
$
1,885,553
|
|
$
1,875,255
|
See
Notes to Consolidated
Financial Statements
PEOPLES
BANCORP INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF
INCOME
|
Year
ended December
31,
|
(Dollars
in thousands, except per
share data)
|
2007
|
|
2006
|
|
2005
|
Interest
Income:
|
|
|
|
|
|
Interest
and fees on
loans
|
$ 85,035
|
|
$ 81,329
|
|
$ 69,188
|
Interest
and dividends
on taxable investment securities
|
25,647
|
|
24,418
|
|
23,676
|
Interest
on tax-exempt
investment securities
|
2,567
|
|
2,867
|
|
2,839
|
Other
interest
income
|
170
|
|
180
|
|
72
|
Total
interest income
|
113,419
|
|
108,794
|
|
95,775
|
Interest
Expense:
|
|
|
|
|
|
Interest
on
deposits
|
36,975
|
|
32,261
|
|
22,550
|
Interest
on short-term
borrowings
|
11,835
|
|
10,443
|
|
4,224
|
Interest
on long-term
borrowings
|
8,513
|
|
10,271
|
|
14,217
|
Interest
on junior
subordinated notes held by subsidiary trusts
|
2,175
|
|
2,602
|
|
2,478
|
Total
interest expense
|
59,498
|
|
55,577
|
|
43,469
|
Net
interest income
|
53,921
|
|
53,217
|
|
52,306
|
Provision
for loan
losses
|
3,959
|
|
3,622
|
|
2,028
|
Net
interest income after provision for loan losses
|
49,962
|
|
49,595
|
|
50,278
|
Other
Income:
|
|
|
|
|
|
Deposit
account
service charges
|
9,890
|
|
10,215
|
|
9,801
|
Insurance
commissions
|
9,568
|
|
9,538
|
|
8,597
|
Trust
and investment
commissions
|
4,983
|
|
4,258
|
|
4,012
|
Electronic
banking
income
|
3,524
|
|
3,080
|
|
2,790
|
Business
owned life
insurance
|
1,661
|
|
1,637
|
|
1,740
|
Mortgage
banking
income
|
885
|
|
825
|
|
826
|
(Loss)
gain on
investment securities
|
(6,062)
|
|
265
|
|
539
|
Gain
on sale of
banking offices
|
–
|
|
454
|
|
–
|
Other income
|
915
|
|
853
|
|
862
|
Total
other income
|
25,364
|
|
31,125
|
|
29,167
|
Other
Expenses:
|
|
|
|
|
|
Salaries
and employee
benefits
|
27,552
|
|
26,178
|
|
26,591
|
Net
occupancy and
equipment
|
5,298
|
|
5,252
|
|
5,311
|
Professional
fees
|
2,246
|
|
2,465
|
|
2,276
|
Data
processing and
software
|
2,210
|
|
1,905
|
|
1,924
|
Amortization
of other
intangible assets
|
1,934
|
|
2,261
|
|
2,669
|
Bankcard
costs
|
1,617
|
|
1,284
|
|
1,188
|
Marketing
|
1,515
|
|
1,659
|
|
1,554
|
Franchise
tax
|
973
|
|
1,760
|
|
1,793
|
Other expense
|
8,107
|
|
8,533
|
|
8,036
|
Total
other expenses
|
51,452
|
|
51,297
|
|
51,342
|
Income
before income
taxes
|
23,874
|
|
29,423
|
|
28,103
|
Income
taxes:
|
|
|
|
|
|
Current
|
6,548
|
|
8,121
|
|
8,539
|
Deferred
|
(988)
|
|
(256)
|
|
(935)
|
Total
income
taxes
|
5,560
|
|
7,865
|
|
7,604
|
Net
income
|
$ 18,314
|
|
$ 21,558
|
|
$ 20,499
|
|
|
|
|
|
|
Earnings
per
share:
|
|
|
|
|
|
Basic
|
$ 1.75
|
|
$ 2.03
|
|
$ 1.96
|
Diluted
|
$ 1.74
|
|
$ 2.01
|
|
$ 1.94
|
|
|
|
|
|
|
Weighted-average
number of shares
outstanding:
|
|
|
|
|
|
Basic
|
10,462,933
|
|
10,606,570
|
|
10,444,854
|
Diluted
|
10,529,634
|
|
10,723,933
|
|
10,581,019
|
See Notes to Consolidated Financial Statements
PEOPLES
BANCORP
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
Common
Stock
|
|
Retained
|
Accumulated
Comprehensive
|
Treasury
|
|
(Dollars
in thousands, except per
share data)
|
Shares
|
|
Amount
|
|
Earnings |
|
Income
(Loss)
|
|
Stock
|
|
|
Balance,
December 31,
2004
|
10,850,641
|
|
$
162,284
|
|
$ 18,442
|
|
$ 4,958
|
|
$
(10,266)
|
|
$ 175,418
|
Net
income
|
|
|
|
|
20,499
|
|
|
|
|
|
20,499
|
Other
comprehensive loss, net of
tax
|
|
|
|
|
|
|
(6,074)
|
|
|
|
(6,074)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
14,425
|
Cash
dividends declared of $0.78
per share
|
|
|
|
|
(8,201)
|
|
|
|
|
|
(8,201)
|
Stock
option
exercises (reissued 106,989 treasury
shares)
|
|
|
(1,003)
|
|
|
|
|
|
2,750
|
|
1,747
|
Tax
benefit from exercise of stock
options
|
|
|
305
|
|
|
|
|
|
|
|
305
|
Purchase
of treasury stock, 65,325
shares
|
|
|
|
|
|
|
|
|
(1,754)
|
|
(1,754)
|
Common
stock issued under dividend
reinvestment plan
|
19,014
|
|
513
|
|
|
|
|
|
|
|
513
|
Distribution
of treasury stock for
deferred
|
|
|
|
|
|
|
|
|
|
|
|
compensation
plan (reissued 14,860 treasury shares)
|
|
|
|
|
|
|
|
|
284
|
|
284
|
Stock-based
compensation
expense
|
|
|
122
|
|
|
|
|
|
|
|
122
|
Issuance
of common stock related
to acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Putnam
Agency, Inc. (reissued 4,662 treasury shares)
|
|
|
3
|
|
|
|
|
|
116
|
|
119
|
Barengo
Insurance Agency, Inc. (reissued
|
|
|
|
|
|
|
|
|
|
|
|
3,678
treasury shares)
|
|
|
7
|
|
|
|
|
|
92
|
|
99
|
Balance,
December 31,
2005
|
10,869,655
|
|
$ 162,231
|
|
$ 30,740
|
|
$ (1,116)
|
|
$ (8,778)
|
|
$ 183,077
|
Net
income
|
|
|
|
|
21,558
|
|
|
|
|
|
21,558
|
Other
comprehensive income, net of
tax
|
|
|
|
|
|
|
137
|
|
|
|
137
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
21,695
|
Cash
dividends declared of $0.83
per share
|
|
|
|
|
(8,859)
|
|
|
|
|
|
(8,859)
|
Stock
option exercises (reissued
137,286 treasury shares)
|
|
|
(878)
|
|
|
|
|
|
3,575
|
|
2,697
|
Tax
benefit from exercise of stock
options
|
|
|
384
|
|
|
|
|
|
|
|
384
|
Purchase
of treasury stock, 42,594
shares
|
|
|
|
|
|
|
|
|
(1,214)
|
|
(1,214)
|
Common
stock issued under dividend
reinvestment plan
|
19,587
|
|
577
|
|
|
|
|
|
|
|
577
|
Stock-based
compensation
expense
|
|
|
280
|
|
|
|
|
|
|
|
280
|
Issuance
of common stock related
to acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Putnam
Agency, Inc. (reissued 4,662 treasury shares)
|
|
|
19
|
|
|
|
|
|
121
|
|
140
|
Barengo
Insurance Agency, Inc. (reissued
|
|
|
41
|
|
|
|
|
|
369
|
|
410
|
14,064
treasury shares)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to initally apply SFAS
158, net of tax
|
|
|
|
|
|
|
(2,018)
|
|
|
|
(2,018)
|
Balance,
December 31,
2006
|
10,889,242
|
|
$
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
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
24,325
|
Cash
dividends declared of $0.88
per share
|
|
|
|
|
(9,226)
|
|
|
|
|
|
(9,226)
|
Stock
option exercises (reissued
57,988 treasury shares)
|
5,703
|
|
(626)
|
|
|
|
|
|
1,585
|
|
959
|
Tax
benefit from exercise of stock
options
|
|
|
146
|
|
|
|
|
|
|
|
146
|
Purchase
of treasury stock,
471,327 shares
|
|
|
|
|
|
|
|
|
(12,350)
|
|
(12,350)
|
Common
stock issued under dividend
reinvestment plan
|
31,009
|
|
848
|
|
|
|
|
|
|
|
848
|
Stock-based
compensation
expense
|
|
|
391
|
|
|
|
|
|
|
|
391
|
Issuance
of common stock related
to acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Putnam
Agency, Inc. (reissued 4,662 treasury shares)
|
|
|
(5)
|
|
|
|
|
|
129
|
|
124
|
Barengo
Insurance Agency, Inc. (reissued
|
|
|
(9)
|
|
|
|
|
|
459
|
|
450
|
16,728
treasury shares)
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31,
2007
|
10,925,954
|
|
$
163,399
|
|
$ 52,527
|
|
$ 3,014
|
|
$ (16,104)
|
|
$ 202,836
|
See
Notes to
Consolidated Financial Statements
PEOPLES
BANCORP INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year
ended December
31,
|
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Cash
flows from operating
activities:
|
|
|
|
|
|
Net
income
|
$ 18,314
|
|
$ 21,558
|
|
$ 20,499
|
Adjustments
to reconcile net income to net cash provided:
|
|
|
|
|
|
Depreciation,
amortization, and accretion, net
|
7,188
|
|
8,653
|
|
9,672
|
Provision
for loan losses
|
3,959
|
|
3,622
|
|
2,028
|
Business
owned life insurance income
|
(1,661)
|
|
(1,637)
|
|
(1,740)
|
Net
loss (gain) on investment securities
|
6,062
|
|
(265)
|
|
(539)
|
Loans
originated for sale
|
(40,582)
|
|
(36,285)
|
|
(42,201)
|
Proceeds
from sales of loans
|
40,065
|
|
36,806
|
|
42,058
|
Net
gains on sales of loans
|
(750)
|
|
(720)
|
|
(757)
|
Deferred
income tax (benefit)
|
(988)
|
|
(256)
|
|
(935)
|
(Decrease)
increase in accrued expenses
|
(1,941)
|
|
2,129
|
|
654
|
Decrease
(increase) in interest receivable
|
610
|
|
(1,099)
|
|
(755)
|
Other,
net
|
605
|
|
(1,533)
|
|
3,940
|
Net
cash provided by operating activities
|
30,881
|
|
30,973
|
|
31,924
|
|
|
|
|
|
|
Cash
flows from investing
activities:
|
|
|
|
|
|
Purchases
of available-for-sale securities
|
(151,912)
|
|
(52,195)
|
|
(110,521)
|
Proceeds
from sales of available-for-sale securities
|
151
|
|
11,101
|
|
995
|
Proceeds
from maturities, calls and prepayments of
|
|
|
|
|
|
available-for-
sale securities
|
136,491
|
|
82,013
|
|
111,971
|
Proceeds
from sales of portfolio loans
|
-
|
|
-
|
|
11,415
|
Net
decrease (increase) in loans
|
9,260
|
|
(64,493)
|
|
(64,766)
|
Net
expenditures for premises and equipment
|
(3,027)
|
|
(2,711)
|
|
(3,642)
|
Proceeds
from sales of other real estate owned
|
107
|
|
670
|
|
3,490
|
Acquisitions,
net of cash received
|
(1,070)
|
|
(1,453)
|
|
(1,157)
|
Sale
of banking offices
|
-
|
|
(2,843)
|
|
-
|
Investment
in limited partnership and tax credit funds
|
(426)
|
|
(1,349)
|
|
(3,919)
|
Net
cash used in investing activities
|
(10,426)
|
|
(31,260)
|
|
(56,134)
|
|
|
|
|
|
|
Cash
flows from financing
activities:
|
|
|
|
|
|
Net
increase in non-interest-bearing deposits
|
4,136
|
|
7,734
|
|
9,750
|
Net
(decrease) increase in interest-bearing deposits
|
(51,453)
|
|
139,497
|
|
10,726
|
Net
increase in short-term borrowings
|
27,658
|
|
21,187
|
|
121,801
|
Proceeds
from long-term borrowings
|
115,000
|
|
30,000
|
|
-
|
Payments
on long-term borrowings
|
(83,814)
|
|
(191,672)
|
|
(102,398)
|
Cash
dividends paid
|
(8,373)
|
|
(8,164)
|
|
(7,463)
|
Purchase
of treasury stock
|
(12,350)
|
|
(1,214)
|
|
(1,754)
|
Proceeds
from issuance of common stock
|
989
|
|
2,719
|
|
1,747
|
Redemption
of trust preferred securities
|
(7,000)
|
|
(25)
|
|
-
|
Excess
tax benefit for share based payments
|
146
|
|
383
|
|
-
|
Net
cash (used in) provided by financing activities
|
(15,061)
|
|
445
|
|
32,409
|
Net
increase in cash and cash equivalents
|
5,394
|
|
158
|
|
8,199
|
Cash
and cash equivalents at
beginning of year
|
39,806
|
|
39,648
|
|
31,449
|
Cash
and cash equivalents at end of year
|
$ 45,200
|
|
$ 39,806
|
|
$ 39,648
|
|
|
|
|
|
|
Supplemental
cash flow
information:
|
|
|
|
|
|
Interest
paid
|
$ 60,037
|
|
$ 54,444
|
|
$ 42,475
|
Income
taxes paid
|
5,253
|
|
5,446
|
|
3,248
|
Value
of shares issued for acquisitions
|
574
|
|
550
|
|
218
|
See Notes to 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 50 financial service locations
and 38 automated teller machines in Ohio, West Virginia and Kentucky, as
well as
internet-based banking.
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 accounting principles generally accepted
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. To conform to the 2007 presentation, brokerage income was
reclassified to trust and investment income from insurance and investment
commissions, which had no impact on net income, comprehensive income, 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 Bancorp
and
its consolidated subsidiaries, Peoples Bank and Peoples Investment Company,
along with their wholly-owned subsidiaries. Peoples Bancorp
previously formed two statutory business trusts described in Note 9 that
are
variable interest entities under FIN 46 for which Peoples Bancorp is not
the
primary beneficiary. As a result, the accounts of these trusts are
not included in Peoples’ Consolidated Financial Statements. All
significant intercompany accounts and transactions have been
eliminated.
Cash
and Cash
Equivalents: Cash and cash equivalents include cash and due from banks,
interest-bearing deposits in other banks, federal funds sold and other
short-term investments, all with original maturities of ninety days or
less.
Investment
Securities: Investment securities are recorded initially at cost, which
includes premiums and discounts if purchased at other than par or face
value. Peoples amortizes premiums and accretes discounts as an
adjustment to interest income 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. Presently, Peoples classifies its entire investment
portfolio as available-for-sale.
Certain
restricted equity securities that do not have readily determinable fair values
and for which Peoples does not exercise significant influence, are included
in
investment securities and carried at cost. Cost method securities
classified within other investment securities, which consist solely of shares
of
the Federal Home Loan Bank (“FHLB”) of Cincinnati and Federal Reserve Bank of
Cleveland, totaled $23.2 million at December 31, 2007 and 2006.
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, (3)
structure of the security and (4) Peoples’ ability and intent to continue
holding the investment for a period of time sufficient to allow for any
anticipated recovery in market value. Declines in estimated fair
value of investment securities below their cost that are deemed to be
other-than-temporary are recorded in earnings as realized losses.
Securities
Sold
Under Agreements to Repurchase: Peoples enters into sales of securities
under agreements to repurchase (“Repurchase Agreements”) with customers and
other financial service companies, which are treated as
financings. The obligations to repurchase securities sold are
recorded as a liability on the Consolidated Balance Sheets and disclosed
in
Notes 7 and 8. Securities pledged as collateral under Repurchase
Agreements are included in investment securities on the Consolidated Balance
Sheets. The fair value of the collateral pledged to a third party is
continually monitored and additional 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
(fees) were $578,000 and ($134,000) at December 31, 2007 and 2006,
respectively.
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 payment 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. Subsequent 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 an 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. 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.
Business
Owned
Life Insurance: Business owned life insurance (“BOLI”) represents life
insurance on the lives of certain employees who have provided positive consent
allowing Peoples Bank to be the beneficiary of such policies. These
policies are recorded at their cash surrender value, or the amount that can
be
realized upon surrender of the policy. Income from these policies and
changes in the cash surrender value are recorded in other income.
Other
Real Estate
Owned: Other real estate owned (“OREO”), included in other assets on the
Consolidated Balance 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. Bank premises that management has made the decision to sell
are transferred at the lower of carrying value or estimated fair value, less
estimated costs to sell the property. Peoples had OREO totaling
$343,000 at December 31, 2007, and none at December 31, 2006.
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. Peoples performed the required goodwill impairment
tests and concluded the recorded
value of goodwill was not impaired as of December 31, 2007, based upon
the estimated fair value of the reporting unit.
Other
intangible assets consist of
customer relationship intangible assets, primarily core deposit
intangibles, representing the present
value of future net income to be earned from acquired customer relationships
and
are amortized over their estimated
lives ranging from 7 to 10 years. Customer relationship intangible
assets totaled $16.7 million at
December 31, 2007 and 2006, net of
accumulated amortization of $12.0 million and $10.1 million, ,
respectively. The estimated aggregate amortization expense related to
customer relationship intangible assets for the each of the next five years
is
estimated as follows: $1.6 million in 2008; $1.3 million in 2009; $0.9 million
in 2010; $0.6 million in 2011 and $0.3 million in 2012.
Mortgage
Servicing Assets: 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 assess 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 and
totaled $756,000 and $792,000 at December 31, 2007 and 2006,
respectively. 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.
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, record
keeping, 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% statutory Federal tax
rate.
In
the
normal course of business, Peoples is routinely subject to examinations and
challenges from federal and state tax authorities regarding positions taken
in
its tax returns. 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. Such adjustments, if not resolved in Peoples’ favor,
could have a material adverse effect on Peoples’ financial condition and results
of operation.
Effective
January 1, 2007, Peoples adopted the provisions of FASB Interpretation No.
48,
“Accounting for Uncertainty in Income Taxes –an interpretation of FASB Statement
No. 109” (“FIN 48”), as required. FIN 48 prescribes a comprehensive
model for how companies should recognize, measure, present and disclose in
their
financial statements uncertain tax positions taken or expected to be taken
on a
tax return. FIN 48 applies solely to tax positions related to income
taxes subject to FASB Statement No. 109 and does not apply to taxes that
are not
based substantially on income, such as Peoples’ corporate franchise taxes that
are based primarily on equity.
Under
FIN 48, 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. FIN
48 permits companies the option to classify penalties and interest incurred
under the applicable tax law as either income tax expense or a component
of
other expenses.
In
connection with the adoption, Peoples elected to continue its existing
accounting policy of classifying penalties and interest as income tax
expense. The adoption of FIN 48 had no material impact on Peoples’
Consolidated Financial Statements taken as a whole and no cumulative effect
adjustments relating to the adoption were required. The amount of
Peoples’ uncertain income tax positions, unrecognized benefits and accrued
interest were immaterial at both December 31, 2007 and January 1,
2007.
Advertising
Costs:Advertising costs are
generally expensed as incurred.
Earnings
per
Share: Basic earnings per share are determined by dividing net income by
the weighted-average number of common shares outstanding. Diluted
earnings per share is determined by dividing net income by the weighted-average
number of common shares outstanding increased by the number of common shares
that would be issued pursuant to Peoples’ stock-based compensation
awards. The dilutive effect of stock-based compensation awards
approximated 66,701; 117,363 and 136,165 in 2007, 2006 and 2005,
respectively.
Operating
Segments: Peoples’ business activities are currently confined to one
reportable segment which is community banking. As a community banking
entity, Peoples offers its customers a full range of products through various
delivery channels.
Derivative
Financial Instruments: Peoples occasionally enters into derivative
transactions principally to protect against the risk of adverse interest
rate
movements. Peoples carries all derivative financial instruments at
fair value on the Consolidated Balance Sheets as a component of other
assets. Peoples’ derivative financial instruments did not have a
material effect on Peoples’ financial position at December 31, 2007 or 2006, or
results of operations and cash flows in 2007, 2006 and 2005.
Share-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.
Prior
to
January 1, 2006, Peoples accounted for stock-based compensation using the
intrinsic value method. Because the provisions of Peoples Bancorp’s
stock option plans prohibit the exercise price per share of each option granted
from being less than the fair market value of the underlying common shares
on
the date of grant, no stock-based employee compensation expense was recognized
in net income unless the terms of such options were modified.
New
Accounting
Pronouncements: On December 4, 2007, the FASB issued Statement
of Financial Accounting Standards No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”) and No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
160”). SFAS 141(R) replaces FASB Statement No. 141, “Business
Combinations” (“SFAS 141”) and applies to all transactions and other events in
which one entity obtains control over one or more other
businesses. SFAS 160 amends Accounting Research Bulletin (ARB)
No. 51, “Consolidated Financial Statements,” to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and
for the
deconsolidation of a subsidiary.
Under
SFAS 141(R), an acquirer, upon initially obtaining control of another entity,
is
required to recognize all assets acquired, liabilities assumed and
noncontrolling interests in the acquiree at the acquisition date, at fair
value
as of the acquisition date. Acquirers are no longer permitted to recognize
a
separate valuation allowance at acquisition date for loans acquired in a
business combination since the fair value measurement of loans would consider
the effects of any uncertainty about future cash flows. Contingent
consideration is required to be recognized and measured at fair value on
the
date of acquisition rather than at a later date when the amount of that
consideration may be determinable beyond a reasonable doubt. This fair value
approach replaces the cost-allocation process required under SFAS 141
whereby the cost of an acquisition was allocated to the individual assets
acquired and liabilities assumed based on their estimated fair
value.
SFAS 141(R)
also requires acquirers to expense acquisition-related costs as incurred
rather
than allocating such costs to the assets acquired and liabilities assumed,
as
was permitted previously under SFAS 141. Under SFAS 141(R), the
requirements of SFAS 146, “Accounting for Costs Associated with Exit or
Disposal Activities,” would have to be met in order to accrue for a
restructuring plan in purchase accounting. Pre-acquisition contingencies
are to
be recognized at fair value, unless it is a non-contractual contingency that
is
not likely to materialize, in which case, no amount should be recognized
in
purchase accounting and, instead, that contingency would be accounted for
under
the requirements of FASB Statement No. 5, “Accounting for
Contingencies.”
SFAS 160
clarifies that a non-controlling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in the consolidated
entity that should be reported as a component of equity in the consolidated
financial statements. Among other requirements, SFAS 160 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated income statement, of
the
amounts of consolidated net income attributable to the parent and to the
non-controlling interest.
Both
SFAS
141(R) and SFAS 160 are effective for fiscal years beginning on or after
December 15, 2008. Early adoption is
prohibited. Management is still evaluating the potential impact of
adopting these statements may have on Peoples’ financial statements taken as a
whole.
In
June
2007, the FASB Emerging Issues Task Force released Issue 06-11 “Accounting for
Income Tax Benefits of Dividends on Share-Based Payment Awards” (“Issue 06-11”),
which requires companies to recognize the tax benefit received on dividends
that
are charged to retained earnings under FASB Statement No.
123(R). Issue 06-11 requires companies to recognize tax benefits of
dividends on unvested share-based payments in equity as a component of
additional paid-in capital and reclassify those tax benefits from additional
paid-in capital to the income statement if the related award is
forfeited. Issue 06-11 is effective for dividends declared in fiscal
years beginning after December 15, 2007, and retrospective application
prohibited. Peoples will adopt the provisions of Issue 06-11 on
January 1, 2008, which is not expected to have a material impact on Peoples’
Consolidated Financial Statements taken as a whole.
On
February 15, 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115,” (“SFAS
159”), which permits companies to choose to measure many financial instruments
and certain other items at fair value. The objective of SFAS 159 is
to improve financial reporting by providing companies with the opportunity
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for fiscal years beginning after
November 15, 2007, but permitted companies an option for earlier
adoption. Peoples will adopt SFAS 159 effective January 1, 2008, as
required. Management does not expect Peoples will elect to measure
any permissible items at fair value. Thus, adoption of SFAS 159
should not have a material impact on Peoples’ Consolidated Financial
Statements.
On
September 29, 2006, the FASB issued Statement No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans – an amendment of
FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158
requires employers to recognize in their statement of financial position
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 changes occur. Peoples’ adopted the recognition
and disclosure provisions of SFAS 158 on December 31, 2006, as
required.
SFAS 158
also requires entities to measure a defined benefit postretirement
plan’s
assets and obligations that determine its funded status as of the end of
the
employer’s fiscal year. The measurement date change is
effective for fiscal years ending after December 15,
2008. Peoples currently measures its defined benefit pension plan
assets and obligations as of December 31. Thus, the adoption of the
measurement date provisions of SFAS 158 will have no impact on Peoples’
Consolidated Financial Statements taken as a whole. Refer to
Note 10 for these disclosures and further discussion on Peoples’ pension
and postretirement plans.
On
September 15, 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS 157”), which replaces various
definitions of fair value in existing accounting literature with a single
definition, establishes a framework for measuring fair value and requires
additional disclosures about fair value measurements upon
adoption. SFAS 157 clarifies that fair value is the price that would
be received to sell an asset or the price paid to transfer a liability in
the
most advantageous market available to the entity and emphasizes that fair
value
is a market-based measurement and should be based on the assumptions market
participants would use. SFAS 157 also creates a three-level hierarchy
under which individual fair value estimates are to be ranked based on the
relative reliability of the inputs used in the valuation. This
hierarchy is the basis for the disclosure requirements, with fair value
estimates based on the least reliable inputs requiring more extensive
disclosures about the valuation method used and the gains and losses associated
with those estimates. SFAS 157 is required to be applied
whenever another financial accounting standard requires or permits an asset
or
liability to be measured at fair value. The statement does not expand
the use of fair value to any new circumstances.
On
February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 amends SFAS 157 to
delay the effective date for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, which means at least annually. For
items within its scope, Peoples will be required to apply the new guidance
beginning January 1, 2009. Management is still determining the
impact adoption will have on Peoples’ Consolidated Financial
Statements. For all other items, Peoples will be required to apply
the new guidance beginning January 1, 2008, which is not expected to have a
material impact on Peoples’ Consolidated Financial Statements.
On
February 16, 2006, the FASB issued Statement of Financial Accounting Standards
No. 155, “Accounting for Certain Hybrid Instruments – an amendment of FASB
Statements No. 133 and 140” (“SFAS 155”). SFAS 155 amends FASB
Statements No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities” and resolves issues addressed in
Statement 133 Implementation Issue No. D1, “Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets.” Peoples
adopted SFAS 155 effective January 1, 2007, as required. The adoption
of SFAS 155 did not have a material impact on Peoples’ Consolidated Financial
Statements taken as a whole.
2. Fair
Values of Financial Instruments:
Peoples
used the following methods and assumptions in estimating its fair value
disclosures for financial instruments:
Cash
and Cash
Equivalents: The carrying amounts reported in the Consolidated Balance
Sheets for these captions approximate their fair values.
Investment
Securities: Fair values
for
investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
estimated using quoted market prices of comparable securities.
Loans: The
fair value of
performing variable rate loans that reprice frequently and performing demand
loans, with no significant change in credit risk, is based on carrying
value. The fair value of fixed rate performing loans is estimated
using discounted cash flow analyses and interest rates currently being offered
for loans with similar terms to borrowers of similar credit
quality.
The
fair
value of significant nonperforming loans is based on either the estimated
fair
value of underlying collateral or estimated cash flows, discounted at a rate
commensurate with the risk. Assumptions regarding credit risk, cash
flows, and discount rates are determined using available market information
and
specific borrower information.
Deposits:
The carrying amounts of demand deposits, savings accounts and certain
money market deposits approximate their fair values. The fair value
of fixed maturity certificates of deposit is estimated using a discounted
cash
flow calculation based on current rates offered for deposits of similar
remaining maturities.
Short-term
Borrowings: The carrying amounts of federal funds purchased, FHLB
advances, and securities sold overnight under repurchase agreements approximate
their fair values. The fair value of term national market repurchase
agreements is estimated using a discounted cash flow calculation based on
rates
currently available to Peoples for repurchase agreements with similar
terms.
Long-term
Borrowings: The fair
value of
long-term borrowings is estimated using discounted cash flow analysis based
on
rates currently available to Peoples for borrowings with similar
terms.
Junior
Subordinated Notes Held by Subsidiary Trusts: The fair value of the
junior subordinated notes held by subsidiary trusts is estimated using
discounted cash flow analysis based on current market rates of securities
with
similar risk and remaining maturity.
Interest
Rate
Contracts: Fair values
for interest
rate contracts are based on quoted market prices.
Financial
Instruments: The fair value of loan commitments and standby
letters of credit is estimated using the fees currently charged to enter
into
similar agreements considering the remaining terms of the agreements and
the
counter parties’ credit standing. The estimated fair value of these
commitments approximates their carrying value.
The
estimated fair values of Peoples' financial instruments at December 31 are
as
follows:
|
2007
|
|
2006
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
(Dollars
in
thousands)
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Financial
assets:
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
$ 45,200
|
|
$ 45,200
|
|
$ 39,806
|
|
$ 39,806
|
Investment
securities
|
565,463
|
|
565,463
|
|
548,733
|
|
548,733
|
Loans
|
1,105,223
|
|
1,111,215
|
|
1,117,885
|
|
1,112,677
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
Deposits
|
$ 1,186,377
|
|
$ 1,187,872
|
|
$ 1,233,529
|
|
$ 1,228,663
|
Short-term
borrowings
|
222,541
|
|
222,541
|
|
194,883
|
|
194,883
|
Long-term
borrowings
|
231,979
|
|
233,785
|
|
200,793
|
|
204,581
|
Junior
subordinated notes held by
subsidiary trusts
|
22,460
|
|
24,601
|
|
29,412
|
|
34,507
|
|
|
|
|
|
|
|
|
Other
financial
instruments:
|
|
|
|
|
|
|
|
Interest
rate
contracts
|
$ 5
|
|
$ 5
|
|
$ 45
|
|
$ 45
|
Bank
premises and equipment, customer relationships, deposit base, banking center
networks, and other information required to compute Peoples' aggregate fair
value are not included in the above information. Accordingly, the
above fair values are not intended to represent the aggregate fair value
of
Peoples.
3. Investment
Securities:
The
following tables present the amortized costs, gross unrealized gains and
losses
and estimated fair value of securities available-for-sale at December
31.
(Dollars
in
thousands)
|
Amortized
|
Gross
Unrealized
|
Gross
Unrealized
|
Estimated
|
2007
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair
Value
|
Obligations
of U.S. Treasury
and
|
|
|
|
|
|
|
|
government
agencies
|
$ 194
|
|
$ 4
|
|
$ (1)
|
|
$ 197
|
Obligations
of U.S. government
sponsored agencies
|
83,556
|
|
917
|
|
(16)
|
|
84,457
|
Obligations
of states and
political subdivisions
|
68,142
|
|
1,202
|
|
(97)
|
|
69,247
|
Mortgage-backed
securities
|
357,863
|
|
2,482
|
|
(1,662)
|
|
358,683
|
Other
securities
|
49,456
|
|
3,945
|
|
(522)
|
|
52,879
|
Total
available-for-sale securities
|
$ 559,211
|
|
$ 8,550
|
|
$ (2,298)
|
|
$ 565,463
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
Obligations
of U.S. Treasury
and
|
|
|
|
|
|
|
|
government
agencies
|
$ 272
|
|
$ 10
|
|
$ -
|
|
$ 282
|
Obligations
of U.S. government
sponsored agencies
|
131,603
|
|
358
|
|
(1,361)
|
|
130,600
|
Obligations
of states and
political subdivisions
|
52,922
|
|
1,099
|
|
(83)
|
|
53,938
|
Mortgage-backed
securities
|
309,715
|
|
229
|
|
(5,531)
|
|
304,413
|
Other
securities
|
55,727
|
|
4,159
|
|
(386)
|
|
59,500
|
Total
available-for-sale securities
|
$ 550,239
|
|
$ 5,855
|
|
$ (7,361)
|
|
$ 548,733
|
At
December 31, 2007, 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. Peoples realized gross gains of
$143,000, $265,000 and $539,000 in 2007, 2006 and 2005, respectively, and
gross
losses of $6,205,000 in 2007 and $0 in both 2006 and 2005. At
December 31, 2007 and 2006, investment securities having a carrying value
of
$500,845,000 and $478,289,000, respectively, were pledged to secure public
and
trust department deposits and repurchase agreements in accordance with federal
and state requirements.
The
following table presents a summary of available-for-sale investment securities
that had an unrealized loss at December 31:
(Dollars
in
thousands)
2007
|
Obligations
of
U.S.
Treasury
and
government
agencies
|
Obligations
of U.S. government
sponsored agencies
|
Obligations
of states and
political subdivisions
|
Mortgage-backed
securities
|
Other
securities
|
Total
available-for-sale
securities
|
Less
than 12
months
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair
value
|
$ –
|
|
$ –
|
|
$ 7,886
|
|
$ 5,174
|
|
$ 1,546
|
|
$ 14,606
|
Unrealized
loss
|
–
|
|
–
|
|
87
|
|
18
|
|
4
|
|
109
|
12
months or
more
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair
value
|
$ 32
|
|
$ 5,554
|
|
$ 4,182
|
|
$ 123,889
|
|
$ 3,623
|
|
$ 137,280
|
Unrealized
loss
|
1
|
|
16
|
|
10
|
|
1,644
|
|
518
|
|
2,189
|
Total
Estimated fair
value
|
$ 32
|
|
$ 5,554
|
|
$ 12,068
|
|
$ 129,063
|
|
$ 5,169
|
|
$ 151,886
|
Total
Unrealized
loss
|
1
|
|
16
|
|
97
|
|
1,662
|
|
522
|
|
2,298
|
(Dollars
in
thousands)
2006
|
Obligations
of
U.S.
Treasury
and
government
agencies
|
Obligations
of U.S. government
sponsored agencies
|
Obligations
of states and
political subdivisions
|
Mortgage-backed
securities
|
Other
securities
|
Total
available-for-sale
securities
|
Less
than 12
months
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair
value
|
$ –
|
|
$ 18,971
|
|
$ 9,919
|
|
$ 13,141
|
|
$ –
|
|
$ 42,031
|
Unrealized
loss
|
–
|
|
525
|
|
72
|
|
169
|
|
–
|
|
766
|
12
months or
more
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair
value
|
$ –
|
|
$ 90,670
|
|
$ 918
|
|
$ 267,538
|
|
$ 3,929
|
|
$ 363,055
|
Unrealized
loss
|
–
|
|
836
|
|
11
|
|
5,362
|
|
386
|
|
6,595
|
Total
Estimated fair
value
|
$ –
|
|
$ 109,641
|
|
$ 10,837
|
|
$ 280,679
|
|
$ 3,929
|
|
$ 405,086
|
Total
Unrealized
loss
|
–
|
|
1,361
|
|
83
|
|
5,531
|
|
386
|
|
7,361
|
The
majority of the unrealized losses at both December 31, 2007 and 2006, related
to
securities, including mortgage-backed securities, issued by U.S. agencies
and
corporations and U.S. government sponsored entities. These losses
were attributable to changes in market interest rates since the securities
were
purchased given the negligible inherent credit risk for these
securities. At December 31, 2007, management determined certain
investment securities with an aggregate carrying value of $23.4 million were
other-than-temporarily impaired, resulting in impairment charges totaling
$5.5
million. Management does not believe any of the remaining individual
investment securities with an unrealized loss at December 31, 2007, represented
an other-than-temporary impairment since Peoples has the ability and intent
to
hold those securities for a period of time sufficient to recover the amortized
cost.
The
following table presents the amortized costs, fair value and weighted-average
yield of securities by contractual maturity at December 31, 2007. 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)
|
Obligations
of
U.S.
Treasury
and
government
agencies
|
Obligations
of U.S. government
sponsored
agencies
|
Obligations
of states and
political
subdivisions
|
Mortgage-
backed
securities
|
Other
securities
|
Total
available-for-sale
securities
|
Within
one
year
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
$ –
|
|
$ –
|
|
$ 790
|
|
$ 7
|
|
$ –
|
|
$ 797
|
Fair
value
|
–
|
|
–
|
|
793
|
|
7
|
|
–
|
|
800
|
Average
yield
|
–
|
|
–
|
|
6.37%
|
|
5.63%
|
|
–
|
|
6.36%
|
1
to 5
years
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
$ –
|
|
$ 39,817
|
|
$ 16,480
|
|
$ 6,201
|
|
$ –
|
|
$ 62,498
|
Fair
value
|
–
|
|
40,214
|
|
16,757
|
|
6,256
|
|
–
|
|
63,227
|
Average
yield
|
–
|
|
5.36%
|
|
6.48%
|
|
5.11%
|
|
–
|
|
5.63%
|
5
to 10
years
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
$ 100
|
|
$ 23,926
|
|
$ 30,718
|
|
$ 22,005
|
|
$ –
|
|
$ 76,749
|
Fair
value
|
101
|
|
24,254
|
|
31,505
|
|
22,126
|
|
–
|
|
77,986
|
Average
yield
|
7.52%
|
|
5.79%
|
|
6.18%
|
|
4.85%
|
|
–
|
|
5.68%
|
Over
10
years
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
$ 94
|
|
$ 19,813
|
|
$ 20,154
|
|
$ 329,650
|
|
$ 49,456
|
|
$ 419,167
|
Fair
value
|
96
|
|
19,989
|
|
20,192
|
|
330,294
|
|
52,879
|
|
423,450
|
Average
yield
|
7.94%
|
|
6.93%
|
|
5.90%
|
|
5.02%
|
|
7.68%
|
|
5.47%
|
Total
amortized
cost
|
$ 194
|
|
$ 83,556
|
|
$ 68,142
|
|
$ 357,863
|
|
$ 49,456
|
|
$ 559,211
|
Total
fair
value
|
197
|
|
84,457
|
|
69,247
|
|
358,683
|
|
52,879
|
|
565,463
|
Total
average
yield
|
7.73%
|
|
5.86%
|
|
6.17%
|
|
5.01%
|
|
7.68%
|
|
5.52%
|
4. Loans:
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, northwestern 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)
|
2007
|
|
2006
|
Commercial,
mortgage
|
$ 513,847
|
|
$ 469,934
|
Commercial,
other
|
171,937
|
|
191,847
|
Real
estate,
construction
|
71,794
|
|
99,311
|
Real
estate,
mortgage
|
280,347
|
|
297,663
|
Consumer
|
80,544
|
|
72,531
|
Deposit
account
overdrafts
|
2,472
|
|
1,108
|
Total
loans
|
$1,120,941
|
|
$1,132,394
|
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, at acquisition, that all contractually required
payments would not be collected. The carrying amounts of these loans
at December 31 are included in the loan balances above are summarized as
follows:
(Dollars
in
thousands)
|
2007
|
|
2006
|
Commercial,
mortgage
|
$ 7,794
|
|
$ 9,624
|
Commercial,
other
|
1,464
|
|
1,577
|
Real
estate,
mortgage
|
30,294
|
|
37,787
|
Consumer
|
423
|
|
911
|
Total
outstanding
balance
|
$ 39,975
|
|
$ 49,899
|
Net
carrying
amount
|
$ 38,615
|
|
$ 47,294
|
Peoples
Bank has pledged certain loans secured by 1-4 family and multifamily residential
mortgages and commercial mortgages under a blanket collateral agreement to
secure borrowings from the FHLB as discussed in Note 7. At December
31, 2007, the amount of such pledged loans totaled $453.8 million.
Nonperforming/Past
Due Loans: Nonperforming loans at December 31 were as
follows:
(Dollars
in
thousands)
|
2007
|
|
2006
|
Loans
90+ days past due and
accruing
|
$ 378
|
|
$ 1
|
Renegotiated
loans
|
–
|
|
1,218
|
Nonaccrual
loans
|
8,980
|
|
8,785
|
Total
nonperforming loans
|
$ 9,358
|
|
$10,004
|
Impaired
Loans:
The following tables summarize loans classified as impaired at or
for the
years ended December 31:
(Dollars
in
thousands)
|
|
|
2007
|
|
2006
|
Impaired
loans with an allocated
allowance for loan losses
|
$ 8,457
|
|
$ 4,872
|
Impaired
loans with no allocated
allowance for loan losses
|
|
4,453
|
|
14,577
|
Total
impaired loans
|
|
|
$12,910
|
|
$
19,449
|
Allowance
for loan losses
allocated to impaired loans
|
|
$ 2,498
|
|
$ 1,457
|
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Average
investment in impaired
loans
|
$ 16,412
|
|
$ 18,374
|
|
$ 10,751
|
Interest
income recognized on
impaired loans
|
$ 826
|
|
$ 883
|
|
$ 668
|
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 and collateral, 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, 2007, 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, 2007:
(Dollars
in
thousands)
|
|
Balance,
January 1,
2007
|
$ 15,562
|
New
loans and
disbursements
|
9,285
|
Repayments
|
(10,641)
|
New
executive officer or
director
|
358
|
Other
changes
|
(58)
|
Balance,
December 31,
2007
|
$
14,506
|
Allowance
for
Loan Losses: Changes in the allowance for loan losses for each of the
three years in the period ended December 31, 2007, were as
follows:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Balance,
beginning of
year
|
$ 14,509
|
|
$ 14,720
|
|
$ 14,760
|
Charge-offs
|
(4,701)
|
|
(5,484)
|
|
(4,193)
|
Recoveries
|
1,951
|
|
1,651
|
|
2,125
|
Net
charge-offs
|
(2,750)
|
|
(3,833)
|
|
(2,068)
|
Provision
for loan
losses
|
3,959
|
|
3,622
|
|
2,028
|
Balance,
end of year
|
$
15,718
|
|
$
14,509
|
|
$
14,720
|
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)
|
2007
|
|
2006
|
Land
|
$ 5,331
|
|
$ 4,785
|
Building
and
premises
|
30,073
|
|
27,849
|
Furniture,
fixtures and
equipment
|
16,601
|
|
16,119
|
Total
bank
premises and equipment
|
52,005
|
|
48,753
|
Accumulated
depreciation
|
(27,202)
|
|
(25,298)
|
Net
book
value
|
$
24,803
|
|
$
23,455
|
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 $2,061,000, $2,128,000 and
$2,264,000, in 2007, 2006 and 2005, 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 $748,000, $725,000
and $854,000 in 2007, 2006 and 2005, respectively.
Peoples
leases certain properties from related parties. Payments related to
these leases totaled $183,000, $191,000 and $153,000 in 2007, 2006 and 2005,
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 noncancelable operating leases with initial
or
remaining terms of one year or more consisted of the following at December
31,
2007:
(Dollars
in
thousands)
|
|
2008
|
$ 690
|
2009
|
651
|
2010
|
607
|
2011
|
599
|
2012
|
594
|
Thereafter
|
2,009
|
Total
payments
|
$ 5,150
|
6. Deposits:
Peoples’
deposit balances were comprised of the following at December 31:
(Dollars
in
thousands)
|
2007
|
|
2006
|
Retail
certificates of
deposit
|
$ 499,684
|
|
$ 514,885
|
Interest-bearing
transaction
accounts
|
191,359
|
|
170,022
|
Money
market deposit
accounts
|
153,299
|
|
134,387
|
Savings
accounts
|
107,389
|
|
114,186
|
Total
retail interest-bearing deposits
|
951,731
|
|
933,480
|
Brokered
certificates of
deposits
|
59,589
|
|
129,128
|
Total
interest-bearing deposits
|
1,011,320
|
|
1,062,608
|
Non-interest-bearing
deposits
|
175,057
|
|
170,921
|
Total
deposit balances
|
$ 1,186,377
|
|
$ 1,233,529
|
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
|
2008
|
$ 345,084
|
|
$ 54,612
|
|
$ 399,696
|
2009
|
95,279
|
|
4,977
|
|
100,256
|
2010
|
36,705
|
|
-
|
|
36,705
|
2011
|
4,077
|
|
-
|
|
4,077
|
2012
|
18,301
|
|
-
|
|
18,301
|
Thereafter
|
238
|
|
-
|
|
238
|
Total
maturities
|
$
499,684
|
|
$ 59,589
|
|
$559,273
|
Included
in the amount to mature in 2008 are $24.9 million of callable brokered deposits
with a weighted-average rate of 5.26% that were called by Peoples in February
2008.
Deposits
from related parties approximated $8.0 million and $9.4 million at December
31,
2007 and 2006, respectively.
7.
Short-term Borrowings:
Peoples
utilizes various short-term borrowings as sources of funds, which are summarized
as follows:
(Dollars
in
thousands)
|
Federal
Funds
Purchased
|
Retail
Repurchase
Agreements
|
FHLB
Advances
|
National
Market
Repurchase
Agreements
|
2007
|
|
|
|
|
|
|
|
Ending
balance
|
$ –
|
|
$ 35,041
|
|
$ 187,500
|
|
$ –
|
Average
balance
|
33
|
|
34,770
|
|
197,915
|
|
4,425
|
Highest
month end
balance
|
–
|
|
36,515
|
|
264,400
|
|
7,000
|
Interest
expense
|
2
|
|
1,526
|
|
10,065
|
|
242
|
Weighted-average
interest
rate:
|
|
|
|
|
|
|
|
End
of year
|
–
%
|
|
3.96%
|
|
2.50%
|
|
–
%
|
During
the year
|
6.06%
|
|
4.39%
|
|
5.09%
|
|
5.47%
|
2006
|
|
|
|
|
|
|
|
Ending
balance
|
$ –
|
|
$ 31,683
|
|
$ 158,200
|
|
$ 5,000
|
Average
balance
|
2
|
|
31,479
|
|
178,235
|
|
1,246
|
Highest
month end
balance
|
–
|
|
36,768
|
|
259,700
|
|
5,000
|
Interest
expense
|
–
|
|
1,306
|
|
9,067
|
|
70
|
Weighted-average
interest
rate:
|
|
|
|
|
|
|
|
End
of year
|
–
%
|
|
4.57%
|
|
5.18%
|
|
5.34%
|
During
the year
|
–
%
|
|
4.15%
|
|
5.09%
|
|
5.62%
|
2005
|
|
|
|
|
|
|
|
Ending
balance
|
$ –
|
|
$ 35,896
|
|
$ 137,800
|
|
$ –
|
Average
balance
|
–
|
|
21,129
|
|
107,184
|
|
–
|
Highest
month end
balance
|
–
|
|
35,896
|
|
167,000
|
|
–
|
Interest
expense
|
–
|
|
572
|
|
3,652
|
|
–
|
Weighted-average
interest
rate:
|
|
|
|
|
|
|
|
End
of year
|
–
%
|
|
3.57%
|
|
4.12%
|
|
–
%
|
During
the year
|
–
%
|
|
2.71%
|
|
3.36%
|
|
–
%
|
Federal
funds purchased are short-term borrowings from correspondent banks that
typically mature within one to ninety days. Peoples has available
Federal funds of $33 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
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 8, are collateralized by residential
and
non-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. The most restrictive
requirement of the debt agreement requires Peoples to provide commercial
real
estate mortgage loans as collateral in an amount not less than 300% of advances
outstanding.
Peoples’
national market repurchase agreements consist of agreements with high quality,
financially secure 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.
Peoples
also has a $5 million unsecured revolving line of credit with an unrelated
financial institution. The line of credit is renewable annually and
bears interest at floating LIBOR-based rate.
8. Long-term
Borrowings:
Long-term
borrowings consisted of the following at December 31:
(Dollars
in
thousands)
|
2007
|
|
2006
|
Callable
national market
repurchase agreements, bearing
|
|
|
|
interest
at rates ranging from 3.60% to 4.81%
|
$ 95,000
|
|
$ 30,000
|
Non-callable
national market
repurchase agreements, bearing
|
|
|
|
interest
at rates ranging from 3.60% to 4.97%
|
53,750
|
|
100,000
|
FHLB
convertible rate advances,
bearing interest at rates
|
|
|
|
ranging
from 4.81% to 5.63%
|
24,500
|
|
32,000
|
FHLB
putable fixed rate advances,
bearing interest at a rate
|
|
|
|
of
3.20%
|
10,000
|
|
–
|
FHLB
amortizing, fixed rate
advances, bearing interest at rates
|
|
|
|
ranging
from 2.01% to 5.00%
|
13,729
|
|
32,793
|
FHLB
non-amortizing, fixed rate
advances, bearing interest at
|
|
|
|
rates
ranging from 3.93% to 5.42%
|
35,000
|
|
6,000
|
Total
long-term
borrowings
|
$231,979
|
|
$ 200,793
|
Peoples’
national market repurchase agreements consist of agreements with high quality,
financially secure financial service companies and have original maturities
ranging from 2 to 5 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 2
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
2
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 7, 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)
|
|
2008
|
$ 53,682
|
2009
|
74,342
|
2010
|
20,160
|
2011
|
37,625
|
2012
|
35,081
|
Thereafter
|
11,089
|
Total
long-term borrowings
|
$231,979
|
Included
in the amount to be repaid in 2008 is a $45 million national market repurchase
agreement at a rate of 3.60% that matured in January 2008.
9. Junior
Subordinated Notes Held By Subsidiary Trusts:
Peoples
previously formed two statutory business trusts (the “Trusts”) for the purpose
of issuing or participating in pools of corporation-obligated mandatorily
redeemable capital securities (the “Capital Securities” or “Trust Preferred
Securities”), with 100% of the common equity in the Trusts owned by
Peoples. 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 trusts are the sole assets of those
trusts. Distributions on the Capital Securities are payable
semiannually at a rate per annum equal to the interest rate being earned
by the
Trusts on the Debentures and are recorded as interest expense by
Peoples. Since the Trusts are variable interest entities and Peoples
is not deemed to be the primary beneficiary, the Trusts are not included
in
Peoples’ Consolidated Financial Statements. As a result, Peoples
includes the Debentures as a separate category of long-term debt on the
Consolidated Balance Sheets entitled “Junior Subordinated Notes Held by
Subsidiary Trusts” and the related expense as interest expense on the
Consolidated Statements of Income.
Under
the
provisions of the 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. 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 subject to mandatory redemption, in whole or in part,
upon repayment of the Debentures. The Debentures held by PEBO Capital
Trust I are first redeemable, in whole or in part, by Peoples on May 1,
2009. On April 23, 2007, Peoples repaid the entire $7.2 million of
the Debentures held by PEBO Capital Trust II, which had a then current rate
of
9.10%. As a result of this repayment, PEBO Capital Trust II redeemed
all of the outstanding Capital Securities and common equity and was dissolved
in
accordance with the terms of the Amended and Restated Declaration of Trust
of
PEBO Capital Trust II.
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 redemption of the Capital
Securities issued by PEBO Capital Trust II had a minimal impact on Peoples’
regulatory capital ratios.
The
Capital Securities issued by the Trusts at December 31 are summarized as
follows:
(Dollars
in
thousands)
|
|
2007
|
|
2006
|
Capital
Securities of PEBO Capital
Trust I, 8.62%, due May 1, 2029, net of unamortized issuance
costs
|
$ 22,460
|
|
$ 22,425
|
|
|
|
|
|
Capital
Securities of PEBO Capital
Trust II, 6-month LIBOR + 3.70%, due April 22, 2032, net of unamortized
issuance costs
|
–
|
|
6,987
|
|
|
|
|
|
Total
capital
securities
|
|
$ 22,460
|
|
$ 29,412
|
|
|
|
|
|
Total
capital securities
qualifying for Tier 1 capital
|
|
$ 22,460
|
|
$ 29,412
|
10. Employee
Benefit
Plans:
Peoples
sponsors a noncontributory defined benefit pension plan that covers
substantially all employees. The plan provides retirement benefits
based on an employee’s years of service and compensation. In
2003, Peoples changed the methodology used to determine the retirement benefits
for employees hired on or after January 1, 2003, which should result in a
lower
accumulated benefit obligation. 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, 2007, and a statement of the funded status as of December 31, 2007 and
2006:
|
Pension
Benefits
|
|
Postretirement
Benefits
|
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Change
in benefit
obligation:
|
|
|
|
|
|
|
|
Obligation
at January
1
|
$
13,548
|
|
$
13,361
|
|
$ 560
|
|
$ 515
|
Service
cost
|
847
|
|
869
|
|
–
|
|
–
|
Interest
cost
|
757
|
|
756
|
|
26
|
|
25
|
Plan
participants’
contributions
|
–
|
|
–
|
|
122
|
|
103
|
Actuarial
(gain)
loss
|
(1,954)
|
|
(42)
|
|
(234)
|
|
82
|
Benefit
payments
|
(1,331)
|
|
(1,396)
|
|
(194)
|
|
(165)
|
Increase
due to plan
changes
|
–
|
|
–
|
|
(34)
|
|
–
|
Obligation
at December
31
|
$
11,867
|
|
$
13,548
|
|
$ 246
|
|
$ 560
|
Accumulated
benefit obligation at
December 31
|
$ 9,574
|
|
$
10,646
|
|
$ –
|
|
$ –
|
|
|
|
|
|
|
|
|
Change
in plan
assets:
|
|
|
|
|
|
|
|
Fair
value of plan assets at
January 1
|
$
15,050
|
|
$
13,606
|
|
$ –
|
|
$ –
|
Actual
return on plan
assets
|
607
|
|
1,640
|
|
–
|
|
–
|
Employer
contributions
|
–
|
|
1,200
|
|
72
|
|
62
|
Plan
participants’
contributions
|
–
|
|
–
|
|
122
|
|
103
|
Benefit
payments
|
(1,331)
|
|
(1,396)
|
|
(194)
|
|
(165)
|
Fair
value of plan assets at
December 31
|
$
14,326
|
|
$
15,050
|
|
$ –
|
|
$ –
|
|
|
|
|
|
|
|
|
Funded
status:
|
|
|
|
|
|
|
|
Funded
status at December
31
|
$ 2,459
|
|
$ 1,502
|
|
$ (246)
|
|
$ (560)
|
Unrecognized
prior-service
cost
|
–
|
|
–
|
|
(34)
|
|
–
|
Unrecognized
net
loss
|
–
|
|
–
|
|
(64)
|
|
157
|
Net
amount
recognized
|
$ 2,459
|
|
$ 1,502
|
|
$ (344)
|
|
$ (403)
|
|
|
|
|
|
|
|
|
Amounts
recognized in Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
Prepaid
benefit
costs
|
$ 2,459
|
|
$ 1,502
|
|
$ –
|
|
$ –
|
Accrued
benefit
liability
|
–
|
|
–
|
|
(344)
|
|
(403)
|
Net
amount
recognized
|
$ 2,459
|
|
$ 1,502
|
|
$ (344)
|
|
$ (403)
|
|
|
|
|
|
|
|
|
Amounts
recognized in Other
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
Unrecognized
prior-service
cost
|
$ 23
|
|
$ 24
|
|
$ –
|
|
$ –
|
Unrecognized
net
loss
|
1,027
|
|
1,994
|
|
–
|
|
–
|
Total
|
$ 1,050
|
|
$ 2,018
|
|
$ –
|
|
$ –
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions at
year-end
|
|
|
|
|
|
|
|
Discount
rate
|
6.70%
|
|
6.00%
|
|
6.70%
|
|
6.00%
|
Rate
of compensation
increase
|
3.50%
|
|
3.50%
|
|
n/a
|
|
n/a
|
The
estimated costs relating to Peoples’ pension benefits that will be amortized
from accumulated comprehensive loss into net periodic cost over the next
fiscal
year are $4,000 of prior service costs.
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)
|
2007
|
2006
|
2005
|
|
2007
|
2006
|
2005
|
Service
cost
|
$ 847
|
$ 869
|
$ 867
|
|
$ –
|
$ –
|
$ –
|
Interest
cost
|
757
|
756
|
717
|
|
26
|
25
|
32
|
Expected
return on plan
assets
|
(1,191)
|
(1,164)
|
(1,127)
|
|
–
|
–
|
–
|
Amortization
of prior service
cost
|
2
|
2
|
2
|
|
–
|
–
|
11
|
Amortization
of net
loss
|
160
|
256
|
226
|
|
3
|
–
|
1
|
Settlements
|
–
|
–
|
679
|
|
–
|
–
|
–
|
Net
periodic benefit
cost
|
$ 575
|
$ 719
|
$ 1,364
|
|
$ 29
|
$ 25
|
$ 44
|
|
|
|
|
|
|
|
|
Weighted
average
assumptions:
|
|
|
|
|
|
|
|
Discount
rate
|
6.00%
|
5.75%
|
6.00%
|
|
6.00%
|
5.75%
|
6.00%
|
Expected
return on plan
assets
|
8.50%
|
8.50%
|
8.50%
|
|
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 2007,
grading down 1% per year to an ultimate rate of 5% in 2012. 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. 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. Peoples’ pension plan target and actual
weighted-average asset allocations by asset category at December 31 are as
follows:
|
Target
|
|
2007
|
|
2006
|
Equity
securities
|
60
– 75%
|
|
70%
|
|
68%
|
Debt
securities
|
24
– 39
|
|
26
|
|
28
|
Other
|
1
|
|
4
|
|
4
|
Total
|
100%
|
|
100%
|
|
100%
|
Equity
securities of Peoples’ pension plan did not include any securities of Peoples
Bancorp or related parties in 2007 or 2006.
Cash
Flows:
Peoples has not determined if any contributions will be made to its
pension plan in 2008; 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
|
2008
|
|
$ 735
|
|
$ 39
|
2009
|
|
1,004
|
|
39
|
2010
|
|
1,328
|
|
38
|
2011
|
|
1,110
|
|
37
|
2012
|
|
1,685
|
|
31
|
2013
to
2017
|
|
6,282
|
|
123
|
Total
|
|
$ 12,144
|
|
$ 307
|
Retirement
Savings Plan: Peoples also maintains a retirement savings plan, or 401(k)
plan, which covers substantially all employees. The plan provides
participants the opportunity to save for retirement on a tax-deferred
basis. In addition, Peoples makes matching contributions equal to
100% of participants’ contributions that do not exceed 3% of the participants’
compensation, plus 50% of participants’ contributions between 3% and 5% of the
participants’ compensation. Matching contributions made by Peoples
totaled $740,000, $698,000 and $628,000 for the years ended December 31,
2007,
2006 and 2005, respectively.
11.
Income
Taxes
The
reported income tax 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:
|
2007
|
|
2006
|
|
2005
|
(Dollars
in thousands) |
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
Income
tax computed at statutory
federal tax rate
|
$ 8,356
|
|
35.0%
|
|
$
10,298
|
|
35.0%
|
|
$ 9,836
|
|
35.0%
|
Differences
in rate resulting
from:
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
interest income
|
(831)
|
|
(3.5)
|
|
(940)
|
|
(3.2)
|
|
(958)
|
|
(3.4)
|
Investments
in tax credit funds
|
(640)
|
|
(2.7)
|
|
(613)
|
|
(2.1)
|
|
(803)
|
|
(2.8)
|
Business
owned life insurance
|
(581)
|
|
(2.4)
|
|
(573)
|
|
(2.0)
|
|
(609)
|
|
(2.2)
|
Change
in
valuation allowance
|
(635)
|
|
(2.6)
|
|
79
|
|
0.3
|
|
–
|
|
–
|
Other,
net
|
(109)
|
|
(0.5)
|
|
(386)
|
|
(1.3)
|
|
138
|
|
0.5
|
Total
income taxes
|
$ 5,560
|
|
23.3%
|
|
$ 7,865
|
|
26.7%
|
|
$ 7,604
|
|
27.1%
|
The
significant components of Peoples' deferred tax assets and liabilities consisted
of the following at December 31:
(Dollars
in
thousands)
|
2007
|
|
2006
|
Deferred
tax
assets:
|
|
|
|
Allowance
for loan losses
|
$ 6,292
|
|
$ 5,990
|
Accrued
employee benefits
|
97
|
|
370
|
Deferred
loan fees and costs
|
(202)
|
|
51
|
Available-for-sale
securities
|
–
|
|
527
|
AMT
credit carryforward
|
1,656
|
|
2,367
|
Other
|
260
|
|
623
|
Valuation
allowance
|
(321)
|
|
(956)
|
Total
deferred tax assets
|
7,782
|
|
8,972
|
|
|
|
|
Deferred
tax
liabilities:
|
|
|
|
Bank
premises and equipment
|
1,105
|
|
1,193
|
Deferred
income
|
1,108
|
|
895
|
Investments
|
(50)
|
|
2,197
|
Available-for-sale
securities
|
2,188
|
|
–
|
Other
|
3,651
|
|
3,702
|
Total
deferred tax liabilities
|
8,002
|
|
7,987
|
Net
deferred tax asset (liability)
|
$ (220)
|
|
$ 985
|
The
AMT tax credit carryforward at
December 31, 2007 and 2006 may be carried over indefinitely. The
valuation allowances at December 31, 2007 and 2006, represented the amount
of
the AMT credit carryforward that may not be realized in a reasonable
period. The related federal income tax (benefit) expense on
securities transactions approximated ($2,122,000) in 2007, $93,000 in 2006
and
$189,000 in 2005.
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, 2004 through 2006. The years open to examination by
state taxing authorities vary by jurisdiction.
12.
Financial Instruments with Off-Balance Sheet Risk:
In
the
normal course of business, Peoples is party to financial instruments with
off-balance sheet risk necessary to meet the financing needs of customers
and to
manage its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters
of
credit, and interest rate caps. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the Consolidated Balance Sheets. The contract or
notional amounts of these instruments express the extent of involvement Peoples
has in these financial instruments.
Loan
Commitments
and Standby Letters of Credit: Loan commitments are made to accommodate
the financial needs of Peoples' customers. Standby letters of credit
are instruments issued by Peoples Bank guaranteeing the beneficiary payment
by
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)
|
2007
|
|
2006
|
Loan
commitments
|
$
176,835
|
|
$
176,431
|
Standby
letters of
credit
|
34,200
|
|
43,900
|
Interest
Rate
Contracts: At December 31,
2007, Peoples held an option to initiate an interest rate swap beginning
on
October 19, 2002, and continuing on a quarterly basis until its
expiration in July 2009. Under the terms of the interest rate swap,
Peoples would receive LIBOR based variable rate payments and pay fixed rate
payments to a counter-party, computed on a notional amount of $17
million. Peoples entered into this interest rate contract to hedge a
$17 million long-term, fixed rate FHLB advance, which could convert to a
variable rate at the FHLB’s discretion. At December 31, 2007, Peoples
had not exercised its option under this interest rate contract since the
advance
remained a fixed rate advance. Changes in estimated fair value of
this interest rate contract are recorded in earnings and are
immaterial.
Other:
Peoples also has commitments to make additional capital contributions
in
low-income housing projects. Such commitments approximated $1.3
million at December 31, 2007, and $1.6 million at December 31,
2006. The maximum aggregate amounts Peoples could be required to make
for each of the next five years are as follows: $246,000 in 2008; $239,000
in
2009; $233,000 in 2010; $183,000 in 2011 and $123,000 in 2012.
The
following is a summary of certain regulatory matters affecting Peoples Bancorp
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.
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, 2007.
As
of
December 31, 2007, 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:
(Dollars
in
thousands)
|
Actual
|
|
For
Capital
Adequacy
|
|
To
Be Well
Capitalized
|
2007
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
Total
Capital (1)
|
|
|
|
|
|
|
|
|
|
|
|
Peoples
|
$
172,117
|
|
13.2%
|
|
$
104,043
|
|
8.0%
|
|
$
130,054
|
|
10.0%
|
Peoples
Bank
|
148,355
|
|
11.5%
|
|
103,509
|
|
8.0%
|
|
129,386
|
|
10.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 (2)
|
|
|
|
|
|
|
|
|
|
|
|
Peoples
|
154,933
|
|
11.9%
|
|
52,022
|
|
4.0%
|
|
78,032
|
|
6.0%
|
Peoples
Bank
|
132,637
|
|
10.3%
|
|
51,755
|
|
4.0%
|
|
77,632
|
|
6.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Leverage (3)
|
|
|
|
|
|
|
|
|
|
|
|
Peoples
|
154,933
|
|
8.5%
|
|
73,062
|
|
4.0%
|
|
91,328
|
|
5.0%
|
Peoples
Bank
|
132,637
|
|
7.3%
|
|
72,699
|
|
4.0%
|
|
90,873
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (1)
|
|
|
|
|
|
|
|
|
|
|
|
Peoples
|
$
177,523
|
|
13.2%
|
|
$
107,825
|
|
8.0%
|
|
$
134,782
|
|
10.0%
|
Peoples
Bank
|
153,716
|
|
11.5%
|
|
107,030
|
|
8.0%
|
|
133,787
|
|
10.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 (2)
|
|
|
|
|
|
|
|
|
|
|
|
Peoples
|
161,438
|
|
12.0%
|
|
53,913
|
|
4.0%
|
|
80,869
|
|
6.0%
|
Peoples
Bank
|
139,207
|
|
10.4%
|
|
53,515
|
|
4.0%
|
|
80,272
|
|
6.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Leverage (3)
|
|
|
|
|
|
|
|
|
|
|
|
Peoples
|
161,438
|
|
8.9%
|
|
72,521
|
|
4.0%
|
|
90,652
|
|
5.0%
|
Peoples
Bank
|
139,207
|
|
7.7%
|
|
71,966
|
|
4.0%
|
|
89,957
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Ratio represents total capital
to net risk-weighted assets.
|
|
|
|
|
|
|
(2)
Ratio represents Tier 1
capital to net risk-weighted assets.
|
|
|
|
|
|
|
(3)
Ratio represents Tier 1
capital to average assets.
|
|
|
|
|
|
|
|
|
Limits
on
Dividends: The primary source of funds for the dividends paid by Peoples
Bancorp is dividends received from Peoples Bank. The payment of
dividends by Peoples Bank is subject to various banking
regulations. The most restrictive provision requires regulatory
approval if dividends declared in any calendar year exceed the total net
profits
of that year plus the retained net profits of the preceding two
years. At December 31, 2007, Peoples Bank had no net profits
available for distribution to Peoples Bancorp as dividends without regulatory
approval. During 2008, only Peoples Bank’s retained net profits of
2008 through the dividend date will be available for distribution to Peoples
Bancorp 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, based on the amount of deposit
liabilities. Averaged required reserve balances were approximately
$4.8 million for the years ended December 31, 2007 and 2006.
14. Comprehensive
Income
The
components of other comprehensive income (loss) for the years ended December
31
were as follows:
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Net
income
|
$ 18,314
|
|
$ 21,558
|
|
$ 20,499
|
Other
comprehensive income
(loss):
|
|
|
|
|
|
Available-for-sale
investment securities:
|
|
|
|
|
|
Gross
unrealized holding gain (loss) arising in the
period
|
1,697
|
|
475
|
|
(9,079)
|
Related
tax (expense) benefit
|
(594)
|
|
(166)
|
|
3,178
|
Less:
reclassification adjustment for net (loss) gain included in net
income
|
(6,062)
|
|
265
|
|
539
|
Related
tax benefit (expense)
|
2,122
|
|
(93)
|
|
(189)
|
Net
effect on other comprehensive income
|
5,043
|
|
137
|
|
(6,251)
|
Defined
benefit plans:
|
|
|
|
|
|
Net
gain arising during the period
|
1,327
|
|
–
|
|
–
|
Related
tax expense
|
(464)
|
|
–
|
|
–
|
Amortization
of unrecognized loss and service cost on pension
plan
|
162
|
|
–
|
|
–
|
Related
tax expense
|
(57)
|
|
–
|
|
–
|
Net
effect on other comprehensive income
|
968
|
|
–
|
|
–
|
Cash
flow hedge derivatives:
|
|
|
|
|
|
Gross
unrealized holding gain arising in the period
|
–
|
|
–
|
|
23
|
Related
tax expense
|
–
|
|
–
|
|
(8)
|
Less:
reclassification adjustment for net loss included in net
income
|
–
|
|
–
|
|
(250)
|
Related
tax benefit
|
–
|
|
–
|
|
88
|
Net
effect on other comprehensive income
|
–
|
|
–
|
|
177
|
Total
other comprehensive income
(loss), net of tax
|
6,011
|
|
137
|
|
(6,074)
|
Total
comprehensive
income
|
$24,325
|
|
$21,695
|
|
$14,425
|
Changes
in the components of Peoples’ accumulated other comprehensive income (loss) for
years ended December 31, 2007, 2006 and 2005 were as follows:
|
|
|
Unrealized
|
|
Unrecognized
|
|
|
|
Unrealized
|
|
Gains
(Loss)
|
|
Net
Pension
and
|
|
Accumulated
|
|
Gains
(Loss)
|
|
on
Cash
Flow
|
|
Postretirement
|
|
Comprehensive
|
(Dollars
in
thousands) |
on
Securities
|
|
Hedge
Derivatives
|
|
Costs
|
|
Income
(Loss)
|
Balance,
December 31,
2004
|
$ 5,135
|
|
$ (177)
|
|
$ –
|
|
$ 4,958
|
Current
period change, net of
tax
|
(6,251)
|
|
177
|
|
–
|
|
(6,074)
|
Balance,
December 31,
2005
|
$ (1,116)
|
|
$ –
|
|
$ –
|
|
$ (1,116)
|
Current
period change, net of
tax
|
137
|
|
–
|
|
–
|
|
137
|
Adjustment
for initial application
of FAS 158
|
–
|
|
–
|
|
(2,018)
|
|
(2,018)
|
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
|
15.
Acquisitions:
At
the
close of business on November 10, 2006, Peoples acquired a full-service banking
office in Carroll, Ohio, (the “Carroll Office”) from First National Bank of
McConnelsville. In the Carroll Office acquisition, Peoples acquired $5.4
million
of deposits. Concurrent with this acquisition, Peoples sold its
Chesterhill, Ohio banking office (the “Chesterhill Office”) and its $3.7 million
of deposits to First National Bank of McConnelsville. The acquisition
of the Carroll Office was accounted for under the purchase method of
accounting. This transaction did not have a material impact on
Peoples’ Consolidated Financial Statements taken as a whole.
In
2004,
Peoples acquired Barengo Insurance Agency, Inc., (“Barengo”), based in Marietta,
Ohio, and substantially all of the assets of Putnam Agency, Inc. (“Putnam
Agency”), with offices in Ashland, Kentucky and Huntington, West
Virginia. Under the terms of the agreements, initial consideration of
$6.2 million ($3.0 million in cash and $3.2 million in Peoples Bancorp’s common
shares) and of $8.6 million ($6.6 million in cash and $2.0 million in Peoples
Bancorp’s common shares), respectively, was paid by Peoples. Peoples
accounted for both acquisitions using the purchase method and recorded goodwill
of $4.8 million and $5.5 million, respectively, and customer relationship
intangibles of $2.0 million and $3.2 million, respectively, as part of the
initial purchase price allocation.
The
agreements also provided for additional consideration to be earned and paid
by
Peoples in each of the subsequent three years, contingent on the acquired
agencies achieving certain revenue goals. Both Barengo and Putnam
Agency achieved revenue goals that resulted in contingent consideration totaling
$1.1 million, $1.5 million and $0.9 million being earned and paid by Peoples
in
2007, 2006 and 2005, respectively. In accordance with the agreements,
contingent consideration earned by Barengo was paid in Peoples Bancorp’s common
shares and the remainder in cash, and contingent consideration earned by
Putnam
Agency was paid in cash.
Both
Barengo and the Putnam Agency were full-service insurance agencies that offered
a wide range of insurance products to both commercial and individual
clients. Peoples operates the former agencies as divisions of Peoples
Insurance Agency, Inc., using the “Barengo Insurance Agency” and “Putnam Agency”
trade names.
The
balances and operations of the acquired businesses are included in Peoples’
Consolidated Financial Statements from the date of acquisition and do not
materially impact Peoples’ financial position, results of operations or cash
flows for any period presented. In addition, Peoples made several
other acquisitions in prior years accounted for under the purchase method
of
accounting. The purchase prices of these acquisitions were allocated
to the identifiable tangible and intangible assets acquired based upon their
fair value at the acquisition date.
The
changes in the carrying amount of goodwill for the years ended December 31,
were
as follows:
(Dollars
in
thousands)
|
2007
|
|
2006
|
Balance
at January
1
|
$ 61,373
|
|
$ 59,767
|
Goodwill
on branch
acquisition
|
–
|
|
110
|
Contingent
consideration
earned
|
1,147
|
|
1,496
|
Balance
at December
31
|
$
62,520
|
|
$
61,373
|
16.
Stock–Based Compensation:
Under
the
Peoples Bancorp Inc. 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. In prior years, 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 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, 2007:
|
Number
of
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted
Average
Remaining Contractual
Life
|
Aggregate
Intrinsic
Value
|
Outstanding
at January
1
|
397,766
|
|
$ 21.88
|
|
|
|
|
Granted
|
–
|
|
–
|
|
|
|
|
Exercised
|
66,733
|
|
17.68
|
|
|
|
|
Forfeited
|
5,572
|
|
21.85
|
|
|
|
|
Outstanding
at December
31
|
325,461
|
|
22.74
|
|
5.0
years
|
|
$ 952,000
|
|
|
|
|
|
|
|
|
Exercisable
at December
31
|
281,805
|
|
21.86
|
|
4.5
years
|
|
$ 952,000
|
The
weighted-average
estimated fair value of
options granted in 2006 and 2005 was $7.37 and $7.28,
respectively. The total intrinsic value of stock options exercised
was $0.6 million in 2007, $1.4 million in 2006 and $1.1 million
in 2005.
The
following summarizes information concerning Peoples’ stock options outstanding
at December 31, 2007:
|
|
|
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
|
$13.48
|
to
|
$16.10
|
80,219
|
|
1.8
years
|
|
$ 14.28
|
|
80,219
|
|
$ 14.28
|
$16.10
|
to
|
$22.32
|
69,742
|
|
4.5
years
|
|
21.71
|
|
69,742
|
|
21.71
|
$22.33
|
to
|
$27.38
|
78,687
|
|
5.6
years
|
|
25.22
|
|
78,687
|
|
25.22
|
$27.38
|
to
|
$30.00
|
96,813
|
|
7.4
years
|
|
28.48
|
|
53,157
|
|
28.51
|
|
|
Total
|
325,461
|
|
5.0
years
|
|
$ 22.74
|
|
281,805
|
|
$ 21.86
|
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, 2007:
|
Number
of
Shares
|
Weighted-Average
Exercise
Price
|
Weighted-
Average Remaining
Contractual
Life
|
Aggregate
Intrinsic
Value
|
Outstanding
at January
1
|
–
|
|
$ –
|
|
|
|
|
Granted
|
31,047
|
|
27.99
|
|
|
|
|
Exercised
|
–
|
|
–
|
|
|
|
|
Forfeited
|
673
|
|
29.25
|
|
|
|
|
Outstanding
at December
31
|
30,374
|
|
$ 27.96
|
|
9.1
years
|
|
$ 4,000
|
Exercisable
at December
31
|
535
|
|
$ 29.25
|
|
0.5
years
|
|
$ –
|
The
weighted-average estimated fair
value of the SARs granted in 2007 was $7.73.
The
following summarizes information concerning Peoples’ SARs outstanding at
December 31, 2007:
Exercise
Prices
|
Number
of
Shares
Outstanding
|
Weighted-
Average
Remaining
Contractural
Life
|
Number
of
Shares
Exercisable
|
$23.26
|
5,000
|
|
9.6
years
|
|
–
|
$23.80
|
1,000
|
|
9.9
years
|
|
–
|
$27.99
|
3,000
|
|
9.8
years
|
|
–
|
$29.25
|
21,374
|
|
8.9
years
|
|
535
|
Total
|
30,374
|
|
9.1
years
|
|
535
|
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. Peoples recognizes compensation expense over the restricted
period. The following summarizes the changes to Peoples’ restricted
common
shares for year ended December 31,
2007:
|
|
|
Weighted-
|
|
|
|
Average
|
|
Number
|
|
Grant
Date
|
|
of
Shares
|
|
Fair
Value
|
Outstanding
at January
1
|
–
|
|
$ –
|
Awarded
|
15,043
|
|
28.58
|
Released
|
5,703
|
|
28.70
|
Forfeited
|
192
|
|
29.25
|
Outstanding
at December
31
|
9,148
|
|
$ 28.49
|
The
total intrinsic value of restricted
stock released in 2007 was $220,000.
Stock-Based
Compensation: As a result of adopting SFAS 123(R) on January 1, 2006,
Peoples recognized stock-based
compensation expense, which is included as a component of Peoples’ salaries and 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:
|
2007
|
|
2006
|
Total
stock-based
compensation
|
$391,000
|
|
$ 280,000
|
Recognized
tax
benefit
|
(137,000)
|
|
(98,000)
|
Net
expense
recognized
|
$254,000
|
|
$ 182,000
|
The
following table illustrates the effect on net income and earnings per share
had
Peoples applied fair value recognition to stock-based employee compensation
in
2005, assuming the estimated fair value of the awards on the grant date
was amortized to expense over the vesting period:
(Dollars
in
thousands, except per share data)
|
2005
|
Net
Income, as
reported
|
$ 20,499
|
Addback:
stock-based compensation
expense included
|
|
in
net income, net of tax
|
79
|
Deduct:
stock-based compensation
expense determined
|
|
under
fair value based method, net of tax
|
733
|
Pro
forma net
income
|
$ 19,845
|
|
|
Basic
Earnings Per Share – As
Reported
|
$ 1.96
|
Basic
Earnings Per Share – Pro
forma
|
1.90
|
|
|
Diluted
Earnings Per Share – As
Reported
|
$ 1.94
|
Diluted
Earnings Per Share – Pro
forma
|
1.88
|
The
estimated fair value of stock
options and SARs was calculated at grant date using the Black-Scholes option
pricing model with the following weighted-average
assumptions:
|
|
2007
|
|
2006
|
|
2005
|
Risk-free
interest rate
|
|
4.82%
|
|
4.56%
|
|
4.37%
|
Dividend
yield
|
|
3.05%
|
|
2.65%
|
|
2.61%
|
Volatility
factor of the market price of parent stock
|
|
25.5%
|
|
25.8%
|
|
26.0%
|
Weighted-average
expected life
|
|
10.0
years
|
|
6.4
years
|
|
6.5
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 options 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 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 options.
Total
unrecognized stock-based
compensation expense related to unvested awards was $281,000 at December
31,
2007, which will be recognized over a weighted-average period of 1.8
years.
17.
Parent Company Only Financial Information:
Condensed
Balance
Sheets
|
December
31,
|
(Dollars
in
thousands)
|
2007
|
|
2006
|
Assets:
|
|
|
|
Cash
and due from other
banks
|
$ 2,111
|
|
$ 2,155
|
Interest-bearing
deposits in
subsidiary bank
|
12,437
|
|
11,809
|
Receivable
from subsidiary
bank
|
651
|
|
600
|
Available-for-sale
investment
securities, at estimated fair value (amortized
|
|
|
|
cost
of
$1,386 and $1,291 at December 31, 2007 and 2006,
respectively)
|
4,744
|
|
4,790
|
Investments
in
subsidiaries:
|
|
|
|
Bank
|
186,840
|
|
188,112
|
Non-bank
|
26,988
|
|
27,365
|
Other
assets
|
825
|
|
850
|
Total
assets
|
$234,596
|
|
$235,681
|
|
|
|
|
Liabilities:
|
|
|
|
Accrued
expenses and other
liabilities
|
$ 7,012
|
|
$ 6,847
|
Dividends
payable
|
2,288
|
|
2,253
|
Junior
subordinated debentures
held by subsidiary trusts
|
22,460
|
|
29,412
|
Total
liabilities
|
31,760
|
|
38,512
|
|
|
|
|
Stockholders'
equity
|
202,836
|
|
197,169
|
Total
liabilities and stockholders' equity
|
$234,596
|
|
$235,681
|
Condensed
Statements of
Income
|
Year
ended December
31,
|
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Income:
|
|
|
|
|
|
Dividends
from subsidiary
bank
|
$ 28,000
|
|
$ 21,750
|
|
$ 18,300
|
Dividends
from non-bank
subsidiary
|
1,000
|
|
2,300
|
|
-
|
Interest
|
392
|
|
598
|
|
270
|
Rental
income from
subsidiaries
|
-
|
|
-
|
|
32
|
Other
income
|
-
|
|
1
|
|
528
|
Total
income
|
29,392
|
|
24,649
|
|
19,130
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Interest
expense on junior
subordinated notes held by subsidiary trusts
|
2,223
|
|
2,689
|
|
2,564
|
Intercompany
management
fees
|
938
|
|
875
|
|
744
|
Interest
|
-
|
|
691
|
|
696
|
Other
expense
|
1,374
|
|
1,488
|
|
1,070
|
Total
expenses
|
4,535
|
|
5,743
|
|
5,074
|
|
|
|
|
|
|
Income
before federal income taxes
and (excess dividends from) equity
|
|
|
|
|
|
in
undistributed earnings of subsidiaries
|
24,857
|
|
18,906
|
|
14,056
|
Applicable
income tax
benefit
|
(2,345)
|
|
(2,160)
|
|
(1,178)
|
(Excess
dividends from) equity in
undistributed earnings of subsidiaries
|
(8,888)
|
|
492
|
|
5,265
|
Net
income
|
$
18,314
|
|
$
21,558
|
|
$
20,499
|
Statements
of Cash
Flows
|
Year
ended December
31,
|
(Dollars
in
thousands)
|
2007
|
|
2006
|
|
2005
|
Cash
flows from operating
activities:
|
|
|
|
|
|
Net
income
|
$ 18,314
|
|
$ 21,558
|
|
$ 20,499
|
Adjustment
to reconcile net income
to cash provided by operations:
|
|
|
|
|
|
Amortization
and
depreciation
|
2
|
|
12
|
|
33
|
Excess
dividends from
(equity in undistributed earnings of) subsidiaries
|
8,888
|
|
(492)
|
|
(5,265)
|
Other,
net
|
1,313
|
|
(610)
|
|
4,003
|
Net
cash provided by operating activities
|
28,517
|
|
20,468
|
|
19,270
|
|
|
|
|
|
|
Cash
flows from investing
activities:
|
|
|
|
|
|
Net
(purchases of) proceeds from
sales and maturity investment securities
|
(224)
|
|
100
|
|
907
|
Net
proceeds from sale of premises
and equipment
|
–
|
|
–
|
|
182
|
Acquisitions,
net of cash
received
|
(1,070)
|
|
(1,453)
|
|
(1,157)
|
Net
cash used in investing activities
|
(1,294)
|
|
(1,353)
|
|
(68)
|
|
|
|
|
|
|
Cash
flows from financing
activities:
|
|
|
|
|
|
Payments
on long-term
borrowings
|
–
|
|
(13,600)
|
|
(1,700)
|
Purchase
of treasury
stock
|
(12,350)
|
|
(1,214)
|
|
(1,754)
|
Change
in receivable from
subsidiary
|
(51)
|
|
(298)
|
|
328
|
Proceeds
from issuance of common
stock
|
989
|
|
2,719
|
|
1,747
|
Repurchase
of Trust Preferred
Securities
|
–
|
|
(25)
|
|
–
|
Redemption
of Trust Preferred
Securities
|
(7,000)
|
|
–
|
|
–
|
Cash
dividends
paid
|
(8,375)
|
|
(8,164)
|
|
(7,463)
|
Excess
tax benefit for share based
payments
|
148
|
|
–
|
|
–
|
Net
cash used in financing activities
|
(26,639)
|
|
(20,582)
|
|
(8,842)
|
Net
increase (decrease) in cash
|
584
|
|
(1,467)
|
|
10,360
|
Cash
and cash equivalents at the
beginning of the year
|
13,964
|
|
15,431
|
|
5,071
|
Cash
and cash
equivalents at the end of the year
|
$
14,548
|
|
$
13,964
|
|
$
15,431
|
|
|
|
|
|
|
Supplemental
cash flow
information:
|
|
|
|
|
|
Interest
paid
|
$ –
|
|
$ 732
|
|
$ 684
|
18.
Contingent Liabilities
In
December 2007, Peoples entered into and executed a settlement agreement with
the
Tax Commissioner of the State of Ohio to resolve controversies concerning
Peoples’ Ohio Corporation Franchise Tax liability and associated calculations
for the 2002 through 2008 tax years (the fiscal years ended December 31,
2001
through 2007). Peoples paid approximately $190,000 on December 26,
2007 in full settlement of Peoples aggregate, additional Ohio Corporation
Franchise Tax Liability for the 2002 through 2007 tax years. As a
result of this settlement, Peoples recorded an adjustment to its tax reserves
which decreased franchise tax expense by $782,000 in 2007, which increased
income before taxes by approximately $508,000 or $0.05 per common share,
on a
diluted basis.
Peoples
is a member of the Visa USA network, which was reorganized under a single
holding company, Visa, Inc. (“Visa”), during 2007. As a result of
Visa’s restructuring, Peoples’ membership interest was exchanged for a
negligible equity interest in Visa, Inc. Under the Visa bylaws,
Peoples is obligated to indemnify Visa for certain losses, with the amount
based
on Peoples’ proportionate equity interest in Visa. During 2007, Visa
announced it had recognized liabilities for probable settlements for two
pending
litigations. Peoples has accrued its proportional share of these
liabilities based on information provided by Visa, although the amounts did
not
have a material impact on the financial statements taken as a
whole. Peoples is unable to estimate its liability, if any, related
to the remaining unresolved Visa litigation.
In
November 2007, Visa filed a registration statement with the Securities and
Exchange Commission for the offer and sale of its common stock to the
public. Visa has disclosed that it plans to use the proceeds from its
initial public offering to redeem a portion of Visa USA member’s equity
interests and to fund the settlement of certain Visa USA related
litigation. If this public offering is completed successfully,
Peoples is expected to receive cash in partial redemption of its equity
interest, currently carried at zero value. Further, management
expects that the gain to be realized from the redemption will offset the
indemnification obligations recorded to date.
19.
Summarized Quarterly Information (Unaudited):
A
summary
of selected quarterly financial information for 2007 and 2006
follows:
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
(Dollars
in
thousands, except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Total
interest
income
|
|
$ |
28,360 |
|
|
$ |
28,080 |
|
|
$ |
28,241 |
|
|
$ |
28,738 |
|
Total
interest
expense
|
|
|
14,839 |
|
|
|
14,747 |
|
|
|
15,089 |
|
|
|
14,823 |
|
Net
interest
income
|
|
|
13,521 |
|
|
|
13,333 |
|
|
|
13,152 |
|
|
|
13,915 |
|
Provision
for loan
losses
|
|
|
623 |
|
|
|
847 |
|
|
|
967 |
|
|
|
1,522 |
|
Net
gain (loss) on investment
securities
|
|
|
17 |
|
|
|
21 |
|
|
|
(613 |
)
|
|
|
(5,487 |
)
|
Other
income
|
|
|
8,114 |
|
|
|
7,954 |
|
|
|
7,736 |
|
|
|
7,622 |
|
Intangible
asset
amortization
|
|
|
500 |
|
|
|
489 |
|
|
|
478 |
|
|
|
467 |
|
Other
expenses
|
|
|
12,842 |
|
|
|
12,661 |
|
|
|
12,121 |
|
|
|
11,894 |
|
Income
tax expense
(benefit)
|
|
|
2,041 |
|
|
|
1,962 |
|
|
|
1,594 |
|
|
|
(37 |
)
|
Net
income
|
|
$ |
5,646 |
|
|
$ |
5,349 |
|
|
$ |
5,115 |
|
|
$ |
2,204 |
|
Earnings
per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.53 |
|
|
$ |
0.51 |
|
|
$ |
0.49 |
|
|
$ |
0.21 |
|
Diluted
|
|
$ |
0.53 |
|
|
$ |
0.51 |
|
|
$ |
0.49 |
|
|
$ |
0.21 |
|
Weighted-average
shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,584,893 |
|
|
|
10,503,952 |
|
|
|
10,421,548 |
|
|
|
10,344,437 |
|
Diluted
|
|
|
10,670,148 |
|
|
|
10,574,250 |
|
|
|
10,483,657 |
|
|
|
10,398,806 |
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
(Dollars
in
thousands, except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Total
interest
income
|
|
$ |
25,748 |
|
|
$ |
27,006 |
|
|
$ |
27,649 |
|
|
$ |
28,391 |
|
Total
interest
expense
|
|
|
12,245 |
|
|
|
13,701 |
|
|
|
14,706 |
|
|
|
14,925 |
|
Net
interest
income
|
|
|
13,503 |
|
|
|
13,305 |
|
|
|
12,943 |
|
|
|
13,466 |
|
Provision
for loan
losses
|
|
|
268 |
|
|
|
573 |
|
|
|
929 |
|
|
|
1,852 |
|
Net
gain on investment
securities
|
|
|
– |
|
|
|
4 |
|
|
|
2 |
|
|
|
259 |
|
Gain
on sale of banking
offices
|
|
|
– |
|
|
|
– |
|
|
|
232 |
|
|
|
222 |
|
Other
income
|
|
|
8,114 |
|
|
|
7,605 |
|
|
|
7,316 |
|
|
|
7,371 |
|
Intangible
asset
amortization
|
|
|
582 |
|
|
|
567 |
|
|
|
556 |
|
|
|
556 |
|
Other
expenses
|
|
|
12,484 |
|
|
|
11,990 |
|
|
|
12,210 |
|
|
|
12,352 |
|
Income
tax
expense
|
|
|
2,352 |
|
|
|
2,248 |
|
|
|
1,476 |
|
|
|
1,789 |
|
Net
income
|
|
$ |
5,931 |
|
|
$ |
5,536 |
|
|
$ |
5,322 |
|
|
$ |
4,769 |
|
Earnings
per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.56 |
|
|
$ |
0.52 |
|
|
$ |
0.50 |
|
|
$ |
0.45 |
|
Diluted
|
|
$ |
0.56 |
|
|
$ |
0.52 |
|
|
$ |
0.50 |
|
|
$ |
0.44 |
|
Weighted-average
shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,530,444 |
|
|
|
10,591,926 |
|
|
|
10,638,824 |
|
|
|
10,663,272 |
|
Diluted
|
|
|
10,655,233 |
|
|
|
10,714,030 |
|
|
|
10,748,996 |
|
|
|
10,768,851 |
|
PART
III
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 10 ,2008 (“Peoples’ Definitive Proxy
Statement”), which sections are incorporated herein by reference.
The
information regarding Peoples’ executive officers required by Item 401 of SEC
Regulation S-K is included under Part I of this Form 10-K in the section
captioned “EXECUTIVE OFFICERS OF THE REGISTRANT”.
The
information required by Item 405 of 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 the
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 its Code of Ethics
that
|
(i)
|
applies
to the principal executive officer, principal financial officer,
principal
accounting officer or controller of Peoples, or persons performing
similar
functions,
|
(ii)
|
relates
to any element of the code of ethics definition set forth in
Item 406(b) of SEC Regulation S-K,
and
|
(iii)
|
is
not a technical, administrative or other non-substantive amendment;
and
|
(B)
|
a
description (including the nature of the waiver, the name of the
person to
whom the waiver was granted and the date of the waiver) of any waiver,
including an implicit waiver, from a provision of the Code of Ethics
to
the principal executive officer, principal financial officer, principal
accounting officer or controller of Peoples, or persons performing
similar
functions, that relates to one or more of the elements of the code
of
ethics definition set forth in Item 406(b) of SEC
Regulation S-K.
|
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.
The
information required by this Item 11 is included in the section captioned
“COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” of Peoples’
Definitive Proxy Statement, the section captioned “EXECUTIVE
COMPENSATION” of Peoples’ Definitive Proxy Statement and the section
captioned “COMPENSATION COMMITTEE REPORT” 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, 2007, with respect to compensation
plans under which common shares of Peoples are authorized for issuance to
directors, officers or employees in exchange for consideration in the form
of
goods or services. These compensation plans include:
(i)
|
the
Peoples Bancorp Inc. Amended and Restated 1993 Stock Option Plan
(the
“1993 Plan”);
|
(ii)
|
the
Peoples Bancorp Inc. 1995 Stock Option Plan (the “1995
Plan”);
|
(iii)
|
the
Peoples Bancorp Inc. 1998 Stock Option Plan (the “1998
Plan”);
|
(iv)
|
the
Peoples Bancorp Inc. 2002 Stock Option Plan (the “2002
Plan”);
|
(v)
|
the
Peoples Bancorp Inc. 2006 Equity Plan (the “2006 Plan”);
and
|
(vi)
|
the
Peoples Bancorp Inc. Deferred Compensation Plan for Directors of
Peoples
Bancorp Inc. and Subsidiaries (the “Deferred Compensation
Plan”).
|
All
of
these compensation plans were approved by the shareholders of
Peoples.
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
|
431,634(1)
|
$23.29(2)
|
451,019(3)
|
|
|
|
|
Equity
compensation plans not approved by shareholders
|
–
|
–
|
–
|
Total
|
431,634
|
$23.29
|
451,019
|
(1)
|
Includes
an aggregate of 363,125 common shares issuable upon exercise of options
granted under the 1993 Plan, the 1995 Plan, the 1998 Plan, the 2002
Plan
and options and rights granted under the 2006 Plan and 68,509 common
shares credited to participants’ accounts under the Deferred Compensation
Plan.
|
(2)
|
Represents
weighted-average exercise price of outstanding options under the
1993
Plan, the 1995 Plan, the 1998 Plan, the 2002 Plan and options and
rights
under the 2006 Plan.
|
(3)
|
Includes
436,759 common shares and 14,260 common shares remaining available
for
issuance under the 2006 Plan and the Deferred Compensation Plan,
respectively, at December 31, 2007. No common shares were
available for issuance under the 1993 Plan, the 1995 Plan, the 1998
Plan
and the 2002 Plan at December 31,
2006.
|
Additional
information regarding Peoples’ stock-based compensation plans can be found in
Note 16 of the Notes to the Consolidated Financial Statements included in Item
8
of this Form 10-K.
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 section captioned
“TRANSACTIONS WITH RELATED PERSONS” of Peoples’ Definitive Proxy Statement,
the sections captioned “PROPOSAL NUMBER 1: ELECTION OF DIRECTORS”
and “THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD” of
Peoples’ Definitive Proxy Statement and the section captioned “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
on Internal Control Over Financial Reporting
|
48
|
Report
of Independent Registered Public Accounting Firm (Ernst & Young LLP)
on Consolidated
|
|
Financial
Statements
|
50
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
51
|
Consolidated
Statements of Income for each of the three years ended December 31,
2007
|
52
|
Consolidated
Statements of Stockholders' Equity for each of the three years ended
December 31, 2007
|
53
|
Consolidated
Statements of Cash Flows for each of the three years ended December
31,
2007
|
54
|
Notes
to the Consolidated Financial Statements
|
55
|
Peoples
Bancorp Inc. (Parent Company Only Financial Information is included
in
Note 17 of the
|
|
Notes
to the Consolidated Financial Statements)
|
79
|
(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 88. 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 88.
(c) Financial
Statement
Schedules
None.
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:
February 27,
2008
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
|
|
2/28/2008
|
Mark
F.
Bradley
|
|
Director
|
|
|
|
|
|
|
|
/s/
CAROL A.
SCHNEEBERGER
|
|
Chief
Financial Officer and
Treasurer
|
|
2/28/2008
|
Carol
A.
Schneeberger
|
|
(Principal
Financial and
Accounting Officer)
|
|
|
|
|
|
|
/s/
CARL L. BAKER,
JR.
|
|
Director
|
|
2/28/2008
|
Carl
L. Baker,
Jr.
|
|
|
|
|
|
|
|
|
|
/s/
GEORGE W.
BROUGHTON
|
|
Director
|
|
2/27/2008
|
George
W.
Broughton
|
|
|
|
|
|
|
|
|
|
/s/
FRANK L.
CHRISTY
|
|
Director
|
|
2/28/2008
|
Frank
L.
Christy
|
|
|
|
|
|
|
|
|
|
/s/
WILFORD D.
DIMIT
|
|
Director
|
|
2/28/2008
|
Wilford
D.
Dimit
|
|
|
|
|
|
|
|
|
|
/s/
RICHARD
FERGUSON
|
|
Director
|
|
2/27/2008
|
Richard
Ferguson
|
|
|
|
|
|
|
|
|
|
/s/
DAVID L.
MEAD
|
|
Director
|
|
2/28/2008
|
David
L.
Mead
|
|
|
|
|
|
|
|
|
|
/s/
ROBERT W.
PRICE
|
|
Director
|
|
2/28/2008
|
Robert
W.
Price
|
|
|
|
|
|
|
|
|
|
/s/
THEODORE P.
SAUBER
|
|
Director
|
|
2/27/2008
|
Theodore
P.
Sauber
|
|
|
|
|
|
|
|
|
|
/s/
PAUL T.
THEISEN
|
|
Vice
Chairman of the Board and
Leadership
|
|
2/28/2008
|
Paul
T.
Theisen
|
|
Director
|
|
|
|
|
|
|
|
/s/
JOSEPH H.
WESEL
|
|
Chairman
of the Board and
Director
|
|
2/28/2008
|
Joseph
H.
Wesel
|
|
|
|
|
|
|
|
|
|
/s/
THOMAS J.
WOLF
|
|
Director
|
|
2/27/2008
|
Thomas
J.
Wolf
|
|
|
|
|
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2007
|
|
|
|
|
|
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)
|
|
Amended
Articles of Incorporation of Peoples Bancorp Inc. (reflecting amendments
through April 23, 2003) [For SEC reporting compliance purposes only
– not
filed with Ohio Secretary of State].
|
|
Incorporated
herein by reference to Exhibit 3(b) to Peoples' March 31, 2003 Form
10-Q.
|
|
|
|
|
|
3.2(a)
|
|
Code
of Regulations of Peoples Bancorp Inc.
|
|
Incorporated
herein by reference to Exhibit 3(b) to Peoples' Registration Statement
on
Form 8-B filed July 20, 1993 (File No. 0-16772).
|
|
|
|
|
|
3.2(b)
|
|
Certified
Resolutions 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.
|
|
|
|
|
|
3.2(c)
|
|
Certificate
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.
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2007
|
|
|
|
|
|
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)
|
|
|
|
|
|
10.1(a)
|
|
Peoples
Bancorp Inc. Deferred Compensation Plan for Directors of Peoples
Bancorp
Inc. and Subsidiaries (Amended and Restated Effective January 2,
1998.)*
|
|
Incorporated
herein by reference to Exhibit 10(a) to Peoples’ Registration Statement on
Form S-8 filed December 31, 1997 (Registration No.
333-43629).
|
|
|
|
|
|
10.1(b)
|
|
Amendment
No. 1 to Peoples Bancorp Inc. Deferred Compensation Plan for Directors
of
Peoples Bancorp Inc. and Subsidiaries effective as of January 2,
1998.*
|
|
Incorporated
herein by reference to Exhibit 10(b) to Peoples’ Post-Effective Amendment
No. 1 to Form S-8 filed September 4, 1998 (Registration No.
333-43629).
|
|
|
|
|
|
10.1(c)
|
|
Rabbi
Trust Agreement, made January 6, 1998, between Peoples Bancorp Inc.
and
The Peoples Banking and Trust Company (predecessor to Peoples Bank,
National Association)
|
|
Filed
herewith.
|
|
|
|
|
|
10.2
|
|
Summary
of the Performance Compensation Program for Peoples Bancorp Inc.
effective
for calendar years beginning on or after January 1, 2002.*
|
|
Incorporated
herein by reference to Exhibit 10(c) to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2003 (File No.
0-16772).
|
|
|
|
|
|
10.3
|
|
Amended
and Restated Peoples Bancorp Inc. 1993 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 4 to Peoples' Registration Statement
on
Form S-8 filed August 25, 1993 (Registration Statement No.
33-67878).
|
|
|
|
|
|
10.4
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options under Amended and Restated Peoples Bancorp Inc. 1993
Stock
Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(g) 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, dated May 20, 1993, used in connection
with
grant of incentive stock options under Amended and Restated Peoples
Bancorp Inc. 1993 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(h) to Peoples' 1995 Form
10-K.
|
|
|
|
|
|
*Management
Compensation Plan
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2007
|
|
10.6
|
|
Form
of Stock Option Agreement, dated November 10, 1994, used in connection
with grant of incentive stock options under Peoples Bancorp Inc.
Amended
and Restated 1993 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(i) to Peoples' 1995 Form
10-K.
|
|
|
|
|
|
10.7
|
|
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).
|
|
|
|
|
|
10.8
|
|
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. 1995 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(k) to Peoples' 1995 Form
10-K.
|
|
|
|
|
|
10.9
|
|
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.
|
|
|
|
|
|
10.10
|
|
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”).
|
|
|
|
|
|
10.11
|
|
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).
|
|
|
|
|
|
10.12
|
|
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. 1998 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(o) to Peoples' 1998 Form
10-K.
|
|
|
|
|
|
10.13
|
|
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.
|
|
|
|
|
|
10.14
|
|
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).
|
|
|
|
|
|
10.15
|
|
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).
|
|
|
|
|
|
|
*Management
Compensation Plan
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2007
|
|
10.16
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options to 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”).
|
|
|
|
|
|
10.17
|
|
Form
of Stock Option Agreement used in connection with grant of non-qualified
stock options to Peoples’ subsidiaries' directors under Peoples Bancorp
Inc. 2002 Stock Option Plan.*
|
|
Incorporated
herein by reference to Exhibit 10(s) to Peoples’ 2002 Form
10-K.
|
|
|
|
|
|
10.18
|
|
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.
|
|
|
|
|
|
10.19
|
|
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.
|
|
|
|
|
|
10.20
|
|
Form
of Change in Control Agreement, adopted August 11, 2004, applicable
to
Mark F. Bradley*
|
|
Incorporated
herein by reference to Exhibit 10(a) to Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2004 (File No.
0-16772)
(the “September 30, 2004 Form 10-Q”).
|
|
|
|
|
|
10.21
|
|
Form
of Change in Control Agreement, adopted August 11, 2004, applicable
to
Carol A. Schneeberger*
|
|
Incorporated
herein by reference to Exhibit 10(b) to Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2006 (the “June 30, 2006 Form
10-Q”) (File No. 0-16772)
|
|
|
|
|
|
10.22
|
|
Change
in Control Agreement, adopted January 1, 2006, between Peoples Bancorp
Inc. and David T. Wesel*
|
|
Incorporated
herein by reference
to Exhibit 10.2
to Peoples’
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2007 (the
“September
30, 2007
Form
10-Q”)
|
|
|
|
|
|
10.23
|
|
Change
in Control Agreement, adopted September 4, 2007, between Peoples
Bancorp
Inc. and Deborah K. Hill*
|
|
Incorporated
herein by reference
to Exhibit 10.1
to Peoples’
September
30, 2007
Form
10-Q.
|
|
|
|
|
|
10.24(a)
|
|
Change
in Control Agreement, adopted August 11, 2004, between Peoples Bancorp
Inc. and Larry E. Holdren*
|
|
Filed
herewith.
|
|
|
|
|
|
10.24(b)
|
|
First
Amendment to Change in Control Agreement, effective February 18,
2008,
between Peoples Bancorp Inc. and Larry E. Holdren*
|
|
Filed
herewith.
|
|
|
|
|
|
10.25
|
|
Change
in Control Agreement, adopted February 20, 2008, between Peoples
Bancorp
Inc. and Joseph S. Yazombek*
|
|
Filed
herewith.
|
|
|
|
|
|
*Management
Compensation Plan
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2007
|
|
10.26
|
|
Summary
of Perquisites for Executive Officers of Peoples Bancorp
Inc.
|
|
Incorporated
herein by reference to Exhibit 10.24 to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2006 (File No. 0-16772)
(“Peoples’ 2006 Form 10-K”).
|
|
|
|
|
|
10.27
|
|
Summary
of Base Salaries for Executive Officers of Peoples Bancorp
Inc.
|
|
Filed
herewith.
|
|
|
|
|
|
10.28
|
|
Summary
of Cash Compensation for Directors of Peoples Bancorp Inc. effective
May
1, 2006
|
|
Incorporated
herein by reference to Exhibit 10(b) to Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2006 (File No.
0-16772).
|
|
|
|
|
|
10.29(a)
|
|
Peoples
Bancorp Inc. 2006 Equity Plan*
|
|
Incorporated
herein by reference to Exhibit 10(a) of Peoples' June 30, 2006 Form
10-Q.
|
|
|
|
|
|
10.29(b)
|
|
Certificate
regarding adoption of Amendment to Peoples Bancorp Inc. 2006 Equity
Plan
by Board of Directors of Peoples Bancorp Inc. on June 8,
2006*
|
|
Incorporated
herein by reference to Exhibit 10(b) of Peoples' June 30, 2006 Form
10-Q.
|
|
|
|
|
|
10.29(c)
|
|
Second
Amendment to the Peoples Bancorp Inc. 2006 Equity Plan adopted on
February
8, 2007*
|
|
Incorporated
herein by reference to Exhibit 10.27(c) to Peoples’ 2006 Form
10-K.
|
|
|
|
|
|
10.30
|
|
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 director of Peoples Bancorp Inc.*
|
|
Incorporated
herein by reference to Exhibit 10(c) of Peoples' June 30, 2006 Form
10-Q.
|
|
|
|
|
|
10.31
|
|
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.*
|
|
Filed
with Peoples’ Annual Report on Form 10-K for the fiscal year ended
December 31, 2006.
|
|
|
|
|
|
10.32
|
|
Form
of Peoples Bancorp Inc. 2006 Equity Plan Restricted Stock Agreement
for
directors used and to be used to evidence awards of restricted stock
granted to directors of Peoples Bancorp Inc.*
|
|
Filed
with Peoples’ Annual Report on Form 10-K for the fiscal year ended
December 31, 2006.
|
|
|
|
|
|
10.33
|
|
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.
|
|
Filed
with Peoples’ Annual Report on Form 10-K for the fiscal year ended
December 31, 2006.
|
|
|
|
|
|
10.34
|
|
Resignation
and Severance Agreement, entered into effective April 26, 2007, by
and
between Peoples Bancorp Inc. and Peoples Bank, National Association
and
Donald J. Landers, Jr.*
|
|
Incorporated
herein by reference to Exhibit 10.1 to Peoples’ Current Report on Form
8-K/A dated and filed May 3, 2007 (File No. 0-16772).
|
|
|
|
|
|
12
|
|
Statements
of Computation of Ratios.
|
|
Filed
herewith.
|
*Management
Compensation Plan
|
EXHIBIT
INDEX
|
|
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2007
|
|
21
|
|
Subsidiaries
of Peoples Bancorp Inc.
|
|
Filed
herewith.
|
|
|
|
|
|
23
|
|
Consent
of Independent Registered Public Accounting Firm - Ernst & Young
LLP.
|
|
Filed
herewith.
|
|
|
|
|
|
31(a)
|
|
Certification
Pursuant to Rule 13a-14(a)/15d-14(a) [President and Chief Executive
Officer]
|
|
Filed
herewith.
|
|
|
|
|
|
31(b)
|
|
Certification
Pursuant to Rule 13a-14(a)/15d-14(a) [Chief Financial Officer and
Treasurer]
|
|
Filed
herewith.
|
|
|
|
|
|
32
|
|
Section
1350 Certification
|
|
Filed
herewith.
|