UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
For
the fiscal year ended December 31, 2008
OR
For
the transition period from ____ to ____
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o
No
x
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate
by check mark 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.
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Large
accelerated
filer
o
|
Accelerated
filer
x
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Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
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Smaller reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
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o
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x
As of
June 30, 2008, the aggregate market value of the Registrant’s Common Shares (the
only common equity of the Registrant) held by non-affiliates was $182,062,000
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 March 2, 2009: 10,439,168 common shares, without par
value.
Portions
of Registrant’s definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 23, 2009, are incorporated by reference into Part
III of this Annual Report on Form 10-K.
As used
in this Annual Report on Form 10-K (“Form 10-K”), “Peoples” refers to Peoples
Bancorp Inc. and its consolidated subsidiaries collectively, except where the
context indicates the reference relates solely to the registrant, Peoples
Bancorp Inc. Unless otherwise indicated, all note references
contained in this Form 10-K refer to the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
Corporate
Overview
Peoples
Bancorp Inc. is a financial holding company organized in
1980. Peoples operates principally through its wholly-owned
subsidiary, Peoples Bank, National Association (“Peoples Bank”). At
December 31, 2008, Peoples’ other wholly-owned subsidiaries included Peoples
Investment Company and PEBO Capital Trust I. Peoples Bank also owned
Peoples Insurance Agency, Inc. (“Peoples Insurance”) and PBNA, L.L.C., an asset
management company. Peoples Investment Company also owned Peoples
Capital Corporation.
Peoples
Bank was first chartered in 1902 as an Ohio banking corporation under the name
“The Peoples Banking and Trust Company” in Marietta, Ohio, and was later
reorganized as a national banking association under its current name in
2000. Peoples Insurance was first chartered in 1994 as an Ohio
corporation under the name “Northwest Territory Property and Casualty Insurance
Agency, Inc.” and awarded insurance agency powers in the State of Ohio in late
1995, becoming the first insurance agency in Ohio to be affiliated with a
financial institution. Peoples Insurance was reorganized 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. These products and services include the
following:
o
various
demand deposit accounts, savings accounts, money market accounts and
certificates of deposit
o
commercial,
consumer and real estate mortgage loans (both commercial and
residential)
o
debit
cards
o
credit
cards through an affiliated marketing agreement
o
corporate
and personal trust services
o
safe
deposit rental facilities
o
travelers
checks, money orders and cashier’s checks
Peoples
also offers a full range of life, health and property and casualty insurance
products through Peoples Insurance and provides custom-tailored fiduciary and
wealth management services, including asset management, recordkeeping,
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.
Since
1996, Peoples has undertaken a controlled and steady expansion strategy
involving a combination of internal and external growth. This
strategy has included the opening of
de novo
banking and loan
production offices, acquisitions of existing banking offices, both individually
and as part of entire institutions, and acquisitions of two insurance
agencies. As a result, Peoples has experienced growth in total assets
and its capital position, as well as expansion of its customer base and primary
market area. This strategy has also provided opportunities for
Peoples to integrate non-traditional products and services, such as insurance
and investments, with the traditional banking products being offered to its
clients.
Since
2003, Peoples has taken steps to improve operating efficiency by redirecting
resources to offices and markets with greater growth potential. These
actions have included the consolidation of existing banking offices with
acquired offices that were in close proximity to each other and sale of selected
banking offices. During 2008, Peoples completed the sale of its
Grayson, Kentucky banking office and its $13.4 million of deposits and $2.0
million of loans.
For the
five-year period ended December 31, 2008, Peoples’ total assets and total
stockholders’ equity grew at compound annual growth rates of 2.9% and 1.8%,
respectively, while return on average assets and average stockholders’ equity
averaged 0.94% and 9.30%, respectively, during this five-year
period. Peoples also has a history of dividend growth, with 2008
marking the 43
rd
consecutive year of increased dividends and a five-year compound annual growth
rate of 7.1%.
Recent
Corporate Developments
On
November 12, 2008, Peoples received preliminary approval from the United States
Department of the Treasury (the “U.S. Treasury”) for a capital investment of $39
million through the voluntary TARP Capital Purchase Program established by the
U.S. Treasury under the Emergency Economic Stabilization Act of
2008. At the time of this preliminary approval, Peoples was not
authorized to issue preferred shares under its Amended Articles of
Incorporation. This investment, which represented 3% of Peoples’
total risk-weighted assets, was the maximum that Peoples was allowed to receive
under the TARP Capital Purchase Program.
On
January 22, 2009, Peoples’ shareholders adopted an amendment to Article FOURTH
of Peoples’ Amended Articles of Incorporation to authorize the issuance of up to
50,000 preferred shares. The preferred shares may be issued from time
to time by Peoples’ Board of Directors in one or more series, with each series
to consist of such number of shares and to have such voting powers,
designations, preferences, rights, qualifications, limitations and restrictions
as determined by the Board of Directors. On January 28, 2009,
Peoples’ Board of Directors adopted an amendment to Peoples’ Amended Articles of
Incorporation to create a series of preferred shares designated as Peoples’
Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par
value and having a liquidation preference of $1,000 per share (the “Series A
Preferred Shares”). These actions enabled Peoples to obtain final
approval for the $39 million capital investment through the TARP Capital
Purchase Program.
On
January 30, 2009, Peoples issued and sold to the U.S. Treasury (i) 39,000 of
Peoples’ Series A Preferred Shares, and (ii) a ten-year warrant (the “Warrant”)
to purchase 313,505 Peoples common shares, each without par value (“Common
Shares”), at an exercise price of $18.66 per share (subject to certain
anti-dilution and other adjustments), for an aggregate purchase price of $39
million in cash. This issuance and sale was a private placement
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof. Additional information regarding
the Series A Preferred Shares and the Warrant can be found in Note 11 of the
Notes to the Consolidated Financial Statements.
To
finalize Peoples’ participation in the TARP Capital Purchase Program, Peoples
entered into certain agreements with the U.S. Treasury. Additional
information regarding the TARP Capital Purchase Program and the restrictions
imposed on Peoples can be found under the “TARP Capital Purchase Program”
heading in the “Supervision and Regulation” section included later in this
item.
Primary
Market Area and Customers
Peoples
considers its primary market area to consist of the counties where it has a
physical presence and neighboring counties. This market area
currently includes the counties of Athens, Belmont, Fairfield, Franklin, Gallia,
Guernsey, Meigs, Morgan, Noble and Washington in Ohio; Cabell, Mason, Wetzel and
Wood in West Virginia; and Boyd, Carter and Greenup in
Kentucky,. This market area encompasses the Metropolitan Statistical
Areas (“MSA”) of Parkersburg-Marietta-Vienna, WV-OH and Huntington-Ashland,
WV-KY-OH, and portions of the Columbus OH and Wheeling, WV-OH
MSAs. This primary market area largely consists of rural or small
urban areas with a diverse group of industries and
employers. Principal industries in this area include health care,
education and other social services; plastics and petrochemical manufacturing;
oil, gas and coal production; and tourism and other service-related
industries. Because of this diversity, Peoples is not dependent upon
any single industry segment for its business opportunities.
Lending
Activities
Peoples
originates various types of loans, including commercial and commercial real
estate loans, residential real estate loans, home equity lines of credit, real
estate construction loans, and consumer loans. In prior years,
Peoples also originated and retained various credit card loans. In
2003, Peoples sold its existing credit card portfolio and entered into 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.
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. In general,
Peoples retains the majority of loans it originates; however, certain
longer-term fixed-rate mortgage loan originations, primarily one-to-four family
residential mortgages, are sold into the secondary market.
Peoples’
loans consist of credits to borrowers spread over a broad range of industrial
classifications. At December 31, 2008, Peoples had no concentration
of loans to borrowers engaged in the same or similar industries that exceeded
10% of total loans nor had any loans outstanding to non-U.S.
entities.
Legal
Lending Limit
Federal
regulations impose a limit on the aggregate amount that financial institutions
may lend to one borrower, including certain related or affiliated
borrowers. This legal lending limit is generally 15% of the
institution’s total capital, as defined by risk-based capital regulations, plus
any allowance for loan losses not already included in total
capital. At December 31, 2008, Peoples’ legal lending limit was
approximately $24.5 million. During 2008, 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 59.5% of total loans at December 31,
2008. Commercial lending inherently involves a significant degree of
risk of loss since commercial loan relationships generally involve larger loan
balances than other loan classes. Additionally, repayment of
commercial loans normally depends on adequate cash flows of a business, which
can be negatively impacted by adverse changes in the general economy or in a
specific industry.
Commercial
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
the borrower’s anticipated
future cash flows will be adequate to service both interest and principal
due. Additionally, collateral is reviewed to determine its value in
relation to the loan.
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, unsecured loans in excess of $1 million and all loans, regardless of
amount, to borrowers whose aggregate debt to Peoples Bank, 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 remains a major focus of Peoples’
lending efforts, whether the loans are ultimately sold into the secondary market
or retained on Peoples’ Consolidated Balance Sheets. At December 31,
2008, portfolio real estate loans comprised 21.0% of total
loans. Peoples also had $0.8 million of real estate loans held for
sale and was servicing $181.4 million of loans, consisting primarily of
one-to-four family residential mortgages, previously sold in the secondary
market.
Peoples
originates both fixed-rate and adjustable-rate real estate
loans. Typically, the longer-term fixed-rate real estate loans are
sold in the secondary market, with Peoples retaining servicing rights on those
loans. In select cases, Peoples may retain certain fixed-rate real
estate loans or sell the loans without retaining the servicing
rights.
Real Estate Lending
Practices.
Peoples typically requires residential real estate
loan amounts to be no more than 80% of the purchase price or the appraised value
of the real
estate
securing the loan, unless private mortgage insurance is obtained by the borrower
for the percentage exceeding 80%. In certain circumstances, Peoples
may lend up to
100% of the appraised value of the real estate, although such lending currently
is limited to loans that qualify under established rural housing
programs. 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 Lines of Credit
Peoples
originates home equity lines of credit that provide consumers with greater
flexibility in financing personal expenditures. At December 31, 2008,
home equity lines of credit comprised 4.3% of Peoples’ total
loans. Peoples offers home equity lines of credit 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.
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Home Equity Lending
Practices.
Home equity lines
of credit are generally made as second mortgages by
Peoples. The maximum amount of a home equity line of credit is
generally limited to 80% of the appraised value of the property less the
balance of the first mortgage. Peoples will lend up to 90% of
the appraised value of the property at
higher interest rates that are commensurate with the additional risk being
assumed in these situations. The home equity lines of credit
are written with ten-year terms and are
subject to review upon request for
renewal.
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Construction
Loans
Peoples
originates various construction loans to provide temporary financing during the
construction phase for commercial and residential properties. At
December 31, 2008, construction loans comprised 7.1% of Peoples’ loan
portfolio. Construction financing is generally considered to involve
the highest risk since Peoples is dependent largely upon the accuracy of the
initial estimate of the property’s value at completion of construction and the
estimated cost (including interest) of construction. If the estimated
construction cost proves to be inaccurate, Peoples may be required to advance
funds beyond the amount originally committed to enable completion of the
project.
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Construction 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.
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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, 2008, consumer loans comprised 7.9% of Peoples’ loan portfolio.
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Consumer Lending
Practices.
Consumer loans
generally involve more risk as to collectability than real estate mortgage
loans because of the type and nature of the collateral and,
in certain instances, the absence of collateral. As a result,
consumer-lending collections are dependent upon the borrower’s continued
financial stability, and are at more risk
from adverse changes in personal circumstances. In addition,
application of various state and federal laws, including bankruptcy and
insolvency laws, could limit the amount
that may be recovered under these loans. Credit approval for
consumer loans typically requires demonstration of sufficiency of income
to repay principal and interest due,
stability of employment, credit history and sufficient collateral for
secured loans. It is the policy of Peoples to review its
consumer loan portfolio monthly and to charge-off
loans that do not meet its standards, and to adhere strictly to all laws
and regulations governing consumer lending. A qualified
compliance officer is responsible for
monitoring regulatory compliance performance and for advising and updating
loan personnel.
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Peoples
makes credit life insurance and accident and health insurance available to all
qualified borrowers, thus reducing risk of loss when a borrower’s income is
terminated or interrupted due to accident, disability or death.
Overdraft
Privilege
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 comprise a significant portion of Peoples’ total
assets. The majority of Peoples’ investment activities are conducted
through Peoples Bank, although Peoples and its non-banking subsidiaries engage
in investment activities from time-to-time. Investment activity by
Peoples Bank is subject to certain regulatory guidelines and limitations on the
types of securities eligible for purchase. As a result, the
investment securities owned by Peoples Bank include obligations of the U.S.
Treasury, agencies and corporations of the U.S. government, including
mortgage-backed securities, bank eligible obligations of any state or political
subdivision in the U.S. and bank eligible corporate obligations, including
private-label mortgage-backed securities. The investments owned by
Peoples are comprised of common stocks issued by various unrelated banking
holding companies and tax-exempt municipal obligations. The
investments owned by Peoples’ non-banking subsidiaries currently consist of tax
credit funds and corporate obligations.
Peoples’
investment activities are governed internally by a written, board-approved
policy, which is administered by Peoples’ Asset-Liability Management Committee
(“ALCO”). The primary purpose of Peoples’ investment portfolio is to:
(1) employ excess funds not needed for loan demand; (2) provide a source of
liquid assets to accommodate unanticipated deposit and loan fluctuations and
overall liquidity needs; (3) provide eligible securities to secure public and
trust funds; and (4) earn the maximum overall return commensurate with the
investment’s risk and corporate needs. Investment strategies to
achieve these objectives are reviewed and approved by the ALCO. In
its evaluation of investment strategies, the ALCO considers various factors,
including the interest rate environment, balance sheet mix, actual and
anticipated loan demand, funding opportunities and Peoples’ overall interest
rate sensitivity. The ALCO also has much broader responsibilities,
which are discussed in the “Interest Rate Sensitivity and Liquidity” section of
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in Item 7 of in this Form 10-K.
Funding
Sources
Peoples’
primary sources of funds for lending and investing activities are
interest-bearing and non-interest bearing deposits. Cash flows from
both the loan and investment portfolios, which include scheduled payments, as
well as prepayments, calls and maturities, also provide a relatively stable
source of funds. Peoples also utilizes a variety of short-term and
long-term borrowings to fund asset growth and satisfy liquidity
needs. Peoples’ funding sources are monitored and managed through
Peoples’ asset-liability management process, which is discussed further in the
“Interest Rate Sensitivity and Liquidity” section of “Management’s Discussion
and Analysis of 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:
Deposits
Peoples
obtains deposits principally from individuals and businesses within its primary
market area by offering a broad selection of deposit products to
clients. Retail deposit account terms vary with respect to the
minimum balance required, the time the funds must remain on deposit and service
charge schedules. Interest rates paid on specific deposit types are
determined based on (1) the interest rates offered by competitors, (2) the
anticipated amount and timing of funding needs, (3) the availability and cost of
alternative sources of funding and (4) the anticipated future economic
conditions and interest rates. Retail deposits are attractive sources
of funding because of their stability and relative cost in addition to providing
opportunities for Peoples to build long-term client relationships through the
cross-selling of its other products and services.
Peoples
occasionally obtains deposits from clients outside Peoples’ primary market area
through deposit brokers, generally in the form of certificates of
deposit. These brokered deposits are used to augment Peoples’ retail
deposits to fund loans originated to customers located outside Peoples’ primary
market area, as well as provide diversity in funding sources. While
brokered deposits normally carry a slightly higher interest cost than other
wholesale funds, they do not require Peoples to secure the funds with
collateral, unlike most other borrowed funds.
Additional
information regarding the amounts and composition of Peoples’ deposits can be
found in the “Deposits” section of “Management’s Discussion and Analysis of
Results of Operations and Financial Condition” included in Item 7 of this Form
10-K and in Note 7 of the Notes to the Consolidated Financial
Statements.
Borrowed
Funds
Peoples
obtains funds through a variety of short-term and long-term borrowings, which
typically include advances from the Federal Home Loan Bank of Cincinnati
(“FHLB”), Federal Funds purchased, advances from the Federal Reserve Discount
Window and repurchase agreements. Occasionally, Peoples obtains funds
from unrelated financial institutions in the form of loans or revolving lines of
credit. Short-term borrowings are used generally to manage Peoples’
daily liquidity needs since they typically may be repaid, in whole or part, at
any time without a penalty. Long-term borrowings provide
cost-effective options for funding asset growth and satisfying capital needs,
due to the variety of pricing and maturity options available.
Additional
information regarding the amounts and composition of Peoples’ borrowed funds can
be found in the “Borrowed Funds” section of “Management’s Discussion and
Analysis of Results of Operations and Financial Condition” included in Item 7 of
this Form 10-K and in Notes 8 and 9 of the Notes to the Consolidated Financial
Statements.
Peoples
has an established business trust subsidiary that was formed for the sole
purpose of issuing preferred securities and investing the proceeds in junior
subordinated debt securities of Peoples. The trust preferred
securities qualify as Tier 1 capital for regulatory capital purposes, subject to
certain quantitative limits and qualitative standards, which makes them an
attractive funding source for financial institutions. Additional
information can be found in Note 10 of the Notes to the Consolidated Financial
Statements.
Competition
Peoples
experiences intense competition within its primary market area due to the
presence of several national, regional and local financial institutions and
other service providers, including finance companies, insurance agencies and
mutual funds. Competition within the financial service industry
continues to increase as a result of mergers between, and expansion of,
financial service providers within and outside of Peoples’ primary market
areas. In addition, the deregulation of the financial services
industry (see the discussion of the Gramm-Leach-Bliley Act of 1999 in the
section of this item captioned “Supervision and Regulation-Bank Holding Company
Act”) has allowed securities firms and insurance companies that have elected to
become financial holding companies to acquire commercial banks and other
financial institutions, which can create additional competitive
pressure.
Peoples
primarily competes based on client service, convenience and responsiveness to
customer needs, available products, rates of interest on loans and deposits, and
the availability and pricing of trust, brokerage and insurance
services. However, some competitors may have greater resources and,
as such, higher lending limits than Peoples, which adversely affects Peoples’
ability to compete. Peoples’ business strategy includes the use of a
“needs-based” sales and service approach to serve customers and incentives
intended to promote customers’ continued use of multiple financial products and
services. In addition, Peoples continues to emphasize the integration
of traditional commercial banking products with non-traditional financial
products, such as insurance and investment products.
Peoples
historically has focused on providing its full range of products and services in
smaller metropolitan markets rather than major metropolitan
areas. While management believes Peoples has developed a level of
expertise in serving the financial service needs of smaller communities,
Peoples’ primary market area has expanded into larger metropolitan areas, like
central Ohio. These larger areas typically contain entrenched service
providers with an existing customer base much larger than Peoples’ initial entry
position. As a result, Peoples may be forced to compete more
aggressively in order to grow its market share in these areas, which could
reduce current and future profit potential from such markets.
Employees
At
December 31, 2008, Peoples had 546 full-time equivalent employees.
Intellectual
Property and Proprietary Rights
Peoples
has registered the service marks “Peoples Bank (with logo)”, “Peoples Bancorp
(with logo)”, “Peoples Financial Advisors (with logo)”, “Connect Card”, “Peoples
Bank” and “peoplesbancorp.com” with the U.S. Patent and Trademark
Office. These service marks currently have expiration dates ranging
from 2014 to 2017. Peoples may renew the registrations of service
marks with the U.S. Patent and Trademark Office generally for additional 10-year
periods indefinitely, provided it continues to use the service marks and files
appropriate maintenance and renewal documentation with the U.S. Patent and
Trademark Office at times required by the federal trademark laws and
regulations.
Peoples
has a proprietary interest in the Internet Domain name
“pebo.com”. Internet Domain names in the U.S. and in foreign
countries are regulated, but the laws and regulations governing the Internet are
continually evolving.
Supervision
and Regulation
Peoples
and its subsidiaries are subject to extensive supervision and regulation by
federal and state agencies. The following is summary of the
regulatory agencies, statutes and related regulations that have, or could have,
a significant impact on Peoples’ business. This discussion is
qualified in its entirety by reference to such regulations and
statutes.
Financial
Holding Company
Peoples
is a legal entity separate and distinct from its subsidiaries and affiliated
companies. As a financial holding company, Peoples is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the “BHC
Act”), and to inspection, examination and supervision by the Board of Governors
of the Federal Reserve System (the “Federal Reserve Board”).
The
Federal Reserve Board also has extensive enforcement authority over financial
holding companies. In general, the Federal Reserve Board may initiate
enforcement actions for violations of laws and regulations and unsafe or unsound
practices. Peoples is also required to file reports and other
information with the Federal Reserve Board regarding its business operations and
those of its subsidiaries.
Subsidiary
Bank
Peoples
Bank is subject to regulation and examination primarily by the Office of the
Comptroller of the Currency (“OCC”) and secondarily by the Federal Reserve Board
and the Federal Deposit Insurance Corporation (“FDIC”).
Peoples
Bank is subject to certain restrictions imposed by the Federal Reserve Act and
Federal Reserve Board regulations regarding such matters as the maintenance of
reserves against deposits, extensions of credit to the financial holding company
or any of its subsidiaries, investments in the stock or other securities of the
financial holding company or its subsidiaries and the taking of such stock or
securities as collateral for loans to any borrower.
Non-Banking
Subsidiaries
Peoples’
non-banking subsidiaries are also subject to regulation by the Federal Reserve
Board and other applicable federal and state agencies. Peoples
Insurance, as a licensed insurance agency, is subject to regulation by the Ohio
Department of Insurance and the state insurance regulatory agencies of those
states where it may conduct business.
Other
Regulatory Agencies
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Securities
and Exchange Commission (“SEC”) and NASDAQ
.
Peoples is also under the jurisdiction of the SEC and certain state
securities commissions for matters
relating to
the offering and sale of its securities. Peoples is subject to
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 Stock
Market LLC
(“NASDAQ”) under
the
symbol “PEBO” and is subject to the rules for NASDAQ listed
companies.
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Federal Home Loan
Bank
.
Peoples Bank is a member of the FHLB, which
provides credit to its members in the form of advances. As a
member of the FHLB, Peoples must
maintain an investment in the capital stock of the FHLB in a specified
amount. Upon the origination or renewal of an advance, the FHLB
is required by law to obtain and
maintain a security interest in certain types of
collateral. The FHLB is required to establish standards of
community investment or service that its members must maintain
for continued access to long-term advances from the FHLB. The
standards take into account a member’s performance under the Community
Reinvestment Act and its
record of lending to first-time
homebuyers.
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The Federal Deposit Insurance
Corporation (“FDIC”)/Depository Insurance.
The FDIC is an
independent federal agency which insures the deposits, up to prescribed
statutory
limits, of federally-insured banks and savings associations and safeguards
the safety and soundness of the financial institution
industry. Peoples Bank’s
deposits
are insured up to applicable limits by Deposit Insurance Fund of the FDIC
and subject to deposit insurance assessments to maintain the Deposit
Insurance Fund.
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The FDIC
utilizes a risk-based assessment system that imposes insurance premiums based
upon a four-tier risk matrix based upon a bank’s capital level and supervisory,
or CAMELS, rating. Currently, most banks, including Peoples Bank, are
in the best risk category and pay deposit assessments ranging from 12 to 14
cents per $100 of assessable deposits. On February 27, 2009, the FDIC
adopted a final rule that changes the way its assessment system differentiates
risk and changes assessment rates beginning April 1, 2009. For banks
in the best risk category, the initial base rates will range from 12 to 16 cents
per $100 of assessable deposits on an annual basis effective April 1,
2009. The FDIC also adopted an interim rule imposing
an emergency special assessment of 20 cents per $100 of assessable
deposits on all insured institutions on June 30, 2009, which will be
collected on September 30, 2009. The interim rule also permits the
FDIC to impose an emergency special assessment after June 30, 2009, of up
to 10 cents per $100 of assessable deposits if necessary to maintain
public confidence in federal deposit insurance. The interim rule is
subject to a 30-day comment period. The FDIC may take further actions
in the future that result in higher assessment rates that could have a material
adverse effect on earnings.
The
FDIC may terminate insurance coverage 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.
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U.S. Treasury and Special
Inspector General.
As a result of
Peoples’ participation in the TARP Capital Purchase Program, Peoples is
also subject to the regulatory
authority granted to the U.S. Treasury and the Special Inspector General
for the Troubled Assets Relief Program under EESA and ARRA, as discussed
below under the
caption “TARP Capital Purchase
Program”.
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Bank
Holding Company Act
In
general, the BHC Act limits the business of bank holding companies to banking,
managing or controlling banks and other activities that the Federal Reserve
Board has determined to be so closely related to banking as to be a proper
incident thereto. As a result of the Gramm-Leach-Bliley Act of 1999 –
also known as the Financial Services Modernization Act of 1999
– (“GLB Act”), which amended the BHC Act, bank holding companies that
are financial holding companies may engage in any activity, or acquire and
retain the shares of a company engaged in any activity that is either (1)
financial in nature or incidental to such financial activity (as determined by
the Federal Reserve Board in consultation with the OCC) or (2) complementary to
a financial activity, and that does not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally (as
solely determined by the Federal Reserve Board). Activities that are
financial in nature include securities underwriting and dealing, insurance
underwriting and making merchant banking investments. In 2002,
Peoples elected, and received approval from the Federal Reserve Board, to become
a financial holding company.
In order
for a financial holding company to commence any new activity permitted by the
BHC Act, or to acquire a company engaged in any new activity permitted by the
BHC Act, each insured depository institution subsidiary of the financial holding
company must have received a rating of at least “satisfactory” in its most
recent examination under the Community Reinvestment Act. See the
section captioned “Community Reinvestment Act” included later in this
item. In addition, financial holding companies like Peoples are also
permitted to acquire companies engaged in activities that are financial in
nature and in activities that are incidental and complementary to financial
activities without prior Federal Reserve Board approval.
The BHC
Act and other federal and state statutes regulate acquisitions of commercial
banks. The BHC Act requires the prior approval of the Federal Reserve
Board for the direct or indirect acquisition of more than 5% of the voting
shares of a commercial bank or its parent holding company. Under the
Federal Bank Merger Act, the prior approval of the OCC is required for a
national bank to merge with another bank or purchase the assets or assume the
deposits of another bank. In reviewing applications seeking approval
of merger and acquisition transactions, the bank regulatory authorities will
consider, among other things, the competitive effect and public benefits of the
transactions, the capital position of the combined organization, the applicant’s
performance record under the Community Reinvestment Act (see the section
captioned “Community Reinvestment Act” included later in this item) and fair
housing laws and the effectiveness of the subject organizations in combating
money laundering activities.
Capital Adequacy and Prompt
Corrective Action
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among
other things, identifies five capital categories for insured depository
institutions and requires the respective federal regulatory agencies to
implement systems for “prompt corrective action” for insured depository
institutions that do not meet minimum capital requirements within such
categories. The federal regulatory agencies, including the Federal
Reserve Board and the OCC, have adopted substantially similar regulatory capital
guidelines and regulations consistent with the requirements of FDICIA, as well
as established a system of prompt corrective action to resolve certain of the
problems of undercapitalized institutions. This system is based on
five capital level categories for insured depository
institutions: “well capitalized”, “adequately capitalized”, “under
capitalized”, “significantly under capitalized” and “critically under
capitalized”.
Both
Peoples and Peoples Bank are subject to risk-based capital requirements and
guidelines imposed by their respective primary regulatory
agencies. These capital guidelines and regulations are based on the
1998 capital accord of the Basel Committee on Banking Supervision (the “Basel
Committee”) and divide the capital of Peoples and Peoples Bank into two
tiers:
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“Tier
1 capital” consists of (1) common shareholders’ equity; (2) qualifying
perpetual preferred stock and trust preferred securities (up to 25% of
total Tier 1 capital); and (3) minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other deductions
including intangible assets and net unrealized gains and losses on
available-for-sale securities.
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“Tier
2 capital” consists primarily of allowance for loan losses and net
unrealized gains on certain available-for-sale equity securities, subject
to limitations established by the guidelines, as well as any qualifying
perpetual preferred stock and trust preferred securities amounts excluded
from Tier 1 capital. Tier 2 capital may also include, among
other things, certain amounts of hybrid capital instruments, mandatory
convertible debt and subordinated
debt.
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In addition, each asset
on Peoples and Peoples Bank’s balance sheets, as well as credit equivalent
amounts of certain derivatives and off-balance sheet items, are assigned to one
of several broad risk weight categories: 0%, 20%, 50%, 100% and in some cases
200%, resulting in a calculation of “total risk-weighted assets”.
Peoples
and Peoples Bank are required to maintain sufficient capital to meet both a
risk-based asset ratio test and leverage ratio test. From time to
time, the regulatory agencies may require Peoples and Peoples Bank to maintain
capital above these minimum levels should certain conditions exist, such as
deterioration of their financial condition or growth in assets, either actual or
expected. Additional information regarding Peoples and Peoples Bank’s
risk-based capital requirements and ratios can be found in Note 16 of the Notes
to the Consolidated Financial Statements.
In 2004,
the Basel Committee published a new capital accord to replace its 1988 capital
accord (“Basel II”). Basel II provides two approaches for setting
capital standards for credit risk, sets capital requirements for operational
risk and refines the existing capital requirements for market risk
exposures. In November 2007, the U.S. federal regulatory agencies
adopted a definitive final rule for implementing Basel II in the United States
that was effective April 1, 2008. The final rule applies only to
internationally active banking organizations and organizations with consolidated
total assets of at least $250 billion or consolidated on-balance sheet foreign
exposures of at least $10 billion. Other U.S. banking organizations
may elect to adopt the requirements of this rule provided they met certain
requirements. The final rule also permits an institution’s primary
federal regulator to waive application of the final rule if that
regulator determines applying the rule would not be appropriate given the
institution’s asset size, level of complexity, risk profile or scope of
operations. Currently, Peoples and Peoples Bank are not required to
comply with Basel II.
Community
Reinvestment Act
The
Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to
assist in meeting the credit needs of their market areas consistent with safe
and sound banking practice. Under the CRA, each depository
institution is required to help meet the credit needs of its market areas by,
among other things, providing credit to low and moderate-income individuals and
communities. Depository institutions are periodically examined for
compliance with the CRA and are assigned ratings. As of December 31,
2008, the most recent performance evaluation by the OCC resulted in an overall
rating of “Outstanding”.
TARP
Capital Purchase Program
On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (the “EESA”) enacted by the U.S. Congress, which
appropriated $700 billion for the purpose of restoring liquidity and stability
in the U.S. financial system. On October 14, 2008, the U.S. Treasury
established the TARP Capital Purchase Program under the authority granted by the
EESA. Under the TARP Capital Purchase Program, the U.S. Treasury made
$250 billion of capital available to U.S. financial institutions in the form of
senior preferred stock investments. In connection with the
purchase of preferred stock, the U.S. Treasury will receive a warrant entitling
the U.S. Treasury to buy the participating institution’s common stock with a
market price equal to 15% of the preferred stock.
In
connection with the EESA, there have been numerous actions by the Federal
Reserve Board, the U.S. Congress, the U.S. Treasury, the FDIC, the SEC and
others to further the economic and banking industry stabilization efforts under
the EESA. It remains unclear at this time what further legislative
and regulatory measures will be implemented under the EESA that affect
Peoples.
As
discussed in more detail above under the caption “Recent Corporate
Developments,” Peoples elected to participate in the TARP Capital Purchase
Program and received $39 million of new equity capital from the U.S. Treasury on
January 30, 2009. As part of its participation in the TARP Capital
Purchase Program, Peoples agreed to various requirements and restrictions
imposed on all participants in the TARP Capital Purchase
Program. Among the terms of participation was a provision that the U.
S. Treasury could change the terms of participation at any time.
On
February 17, 2009, President Obama signed into law the American Recovery and
Reinvestment Act of 2009 (the “ARRA”) enacted by the U.S.
Congress. The ARRA, among other things, imposed certain new executive
compensation and corporate expenditure limits on all current and future
recipients of funds under the TARP Capital Purchase Program, including Peoples,
as long as any obligation arising from the financial assistance provided to the
recipient under the TARP Capital Purchase Program remains outstanding, excluding
any period during which the U.S. Treasury holds only warrants to purchase common
stock of a TARP participation (the “Covered Period”).
The
current terms of participation in the TARP Capital Purchase Program include the
following:
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Peoples
must file with the SEC a registration statement under the Securities Act
of 1933 registering for resale the Series A Preferred Shares and the
Warrant;
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as
long as the Series A Preferred Shares remain outstanding, unless all
accrued and unpaid dividends for all past dividend periods on the Series A
Preferred Shares are fully paid, Peoples will not be permitted to declare
or pay dividends on any Common Shares, any junior preferred shares or,
generally, any preferred shares ranking
pari passu
with the
Series A Preferred Shares (other than in the case of
pari passu
preferred
shares, dividends on a pro rata basis with the Series A Preferred Shares),
nor will Peoples be permitted to repurchase or redeem any Common Shares or
preferred shares other than the Series A Preferred
Shares;
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until
the Series A Preferred Shares have been transferred or redeemed in whole,
until January 20, 2012, the U.S. Treasury's approval is required for any
increase in Common Share dividends or any share repurchases other than
repurchases of the Series A Preferred Shares, repurchases
of junior preferred shares, or repurchases of Common Shares in
connection with the administration of any employee benefit plan in the
ordinary course of business and consistent with past
practice;
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Peoples
must comply with the U. S. Treasury's standards for executive compensation
and corporate governance while the U. S. Treasury holds the securities
issued by Peoples. Such standards apply to Peoples’ Senior
Executive Officers (as defined in the ARRA) as well as other
employees. The current standards include the
following:
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incentive
compensation for Senior Executive Officers must not encourage unnecessary
and excessive risks that threaten the value of the financial
institution;
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any
bonus or incentive compensation paid (or under a legally binding
obligation to pay) to a Senior Executive Officer or any of Peoples’ next
20 most highly-compensated employees based on statements of earnings,
gains or other criteria that are later proven to be materially inaccurate
must be subject to recovery, or “clawback”, by
Peoples;
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Peoples
is prohibited from paying or accruing any bonus, retention award or
incentive compensation with respect to its five most highly-compensated
employees or such higher number as the Secretary of the U.S. Treasury may
determine is in the public interest, except for grants of restricted stock
that do not fully vest during the Covered Period and do not have a value
which exceeds one-third of an employee’s total annual
compensation;
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severance
payments to a Senior Executive Officer and the five next most
highly-compensated employees, generally referred to as "golden parachute"
payments, are prohibited , except for payments for services performed or
benefits accrued;
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compensation
plans that encourage manipulation of reported earnings are
prohibited;
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the
U.S. Treasury may retroactively review bonuses, retention awards and other
compensation previously paid to a Senior Executive Officer or any of
Peoples’ 20 next most highly-compensated employees that the U.S. Treasury
finds to be inconsistent with the purposes of TARP or otherwise contrary
to the public interest;
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Peoples’
Board of Directors must establish a company-wide policy regarding
excessive or luxury expenditures;
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Peoples’
proxy statements for annual shareholder meetings must permit a nonbinding
“say on pay” shareholder vote on the compensation of
executives;
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executive
compensation in excess of $500,000 for each Senior Executive Officer must
not be deducted for federal income tax purposes;
and
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compliance
with the executive compensation reporting and recordkeeping requirements
established by the U.S. Treasury.
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The ARRA
permits such recipients, subject to consultation with the appropriate federal
banking agency, to repay to the U.S. Treasury any financial assistance received
under the TARP Capital Purchase Program without penalty, delay or the need to
raise additional replacement capital. The U.S. Treasury is to promulgate
regulations to implement the procedures under which a TARP participant may repay
any assistance received. As of the date of this Form 10-K, the U.S.
Treasury had not yet issued such regulations.
Detailed
information regarding the Series A Preferred Shares and the Warrant can be found
in Note 11 of the Notes to the Consolidated Financial Statements.
Dividend
Restrictions
Current
federal banking regulations impose restrictions on Peoples Bank’s ability to pay
dividends to Peoples. These restrictions include a limit on the
amount of dividends that may be paid in a given year without prior approval of
the OCC and a prohibition on paying dividends that would cause Peoples Bank’s
total capital to be less than the required minimum levels under the risk-based
capital requirements imposed by the OCC. Peoples Bank’s regulators
may prohibit the payment of dividends at any time if the regulators determine
the dividends represent unsafe and/or unsound banking practices or reduce
Peoples Banks’ total capital below adequate levels. For further
discussion regarding regulatory restrictions on dividends, see Note 16 of the
Notes to the Consolidated Financial Statements.
Peoples’
ability to pay dividends to its shareholders may also be
restricted. Under current Federal Reserve Board policy, Peoples is
expected to act as a source of financial strength to, and commit resources to
support, Peoples Bank. Under this policy, the Federal Reserve Board
may require Peoples to contribute additional capital to Peoples Bank, which
could restrict the amount of cash available for dividends. In
addition, Peoples has entered into certain agreements that place restrictions on
dividends. Specifically, Peoples will be prohibited from paying
dividends on its Common Shares if it suspends interest payments related to the
trust preferred securities issued by its trust subsidiary. Additional
information regarding Peoples’ trust subsidiary can be found in Note 10 of the
Notes to the Consolidated Financial Statements. The dividend rights
of holders of Peoples’ Common Shares are also qualified and subject to the
dividend rights of holders of Series A Preferred Shares described above under
the caption “Supervision and Regulation – TARP Capital Purchase
Program”.
Even when
the legal ability exists, Peoples or Peoples Bank may decide to limit the
payment of dividends in order to retain earnings for corporate use.
Customer
Privacy and Other Consumer Protections
Peoples
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.
USA
Patriot Act
The
Uniting and Strengthening of America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) and related
regulations, among other things, require financial institutions to establish
programs specifying procedures for obtaining identifying information from
customers and establishing enhanced due diligence policies, procedures and
controls designed to detect and report suspicious activity. Peoples
Bank has established policies and procedures that Peoples believes comply with
the requirements of the USA Patriot Act.
Monetary
Policy
The
Federal Reserve Board regulates money and credit conditions and interest rates
in order to influence general economic conditions primarily through open market
operations in U.S. government securities, changes in the discount rate on bank
borrowings, and changes in the reserve requirements against depository
institutions’ deposits. These policies and regulations significantly
affect the overall growth and distribution of loans, investments and deposits,
as well as interest rates charged on loans and paid on deposits.
The
monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of financial institutions in the past and are expected to
continue to have significant effects in the future. In view of the
changing conditions in the economy, the money markets and the activities of
monetary and fiscal authorities, Peoples can make no definitive predictions as
to future changes in interest rates, credit availability or deposit
levels.
Corporate
Governance
In 2003,
Peoples’ Board of Directors and management instituted a series of actions to
enhance Peoples’ already strong corporate governance practices and to comply
with the requirements imposed by the Sarbanes-Oxley Act of
2002. These actions included the 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. Additionally, Peoples Bank has maintained a
conflict of interest policy applicable to its directors, officers and employees
for over 30 years. 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.
Code
of Ethics
Peoples’
Code of Ethics is 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 formally establish 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
The
Disclosure Committee for Financial Reporting (the “Disclosure Committee”)
consists of key members of executive management and senior professional support
staff from legal, risk management and accounting areas and is designed to
capture information from all components of Peoples’ business.
Peoples
established the Disclosure Committee to formalize its process of establishing
and monitoring disclosure controls and procedures and communicating the results
of such controls and procedures. As such, the Disclosure Committee is
expected to provide a process 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. Thus, the primary
responsibility of the Disclosure Committee is to review and approve (1) all
reports and other documents file with the SEC and (2) all press releases or
other public communications containing financial information.
Governance
and Nominating Committee
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
ensure that the composition, practices and operation of the Board contribute to
value creation and to the effective representation of Peoples’
shareholders.
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 of risks or
presenting the risk factors listed in any particular order.
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Changes
in Interest Rates May Adversely Affect Peoples’
Profitability.
Peoples’ earnings are dependent to a
significant degree on net interest income, which is the amount by which
interest income exceeds interest expense. Interest rates are
highly sensitive to many factors that are beyond Peoples’ control,
including general economic conditions and policies of various governmental
and regulatory agencies and, in particular, the Federal Reserve
Board. Changes in monetary policy, including changes in
interest rates, could influence not only the interest Peoples receives on
loans and securities and the amount of interest it pays on deposits and
borrowings, but such changes could also affect (i) Peoples’ ability
to originate loans and obtain deposits, (ii) the fair value of
Peoples’ financial assets and liabilities, and (iii) the average
duration of Peoples’ mortgage-backed securities portfolio. If
the interest rates paid on deposits and other borrowings increase at a
faster rate than the interest rates received on loans and other
investments, Peoples’ net interest income, and therefore earnings, could
be adversely affected. Earnings could also be adversely
affected if the interest rates received on loans and other investments
fall more quickly than the interest rates paid on deposits and other
borrowings.
Management uses various measures to monitor
interest rate risk and believes it has implemented effective asset and
liability management strategies to reduce the potential effects of changes
in interest rates on Peoples’ results of operations. Management
also periodically adjusts the mix of assets and liabilities to manage
interest rate risk. However, any substantial, unexpected,
prolonged change in market interest rates could have a material adverse
effect on Peoples’ financial condition and results of
operations. See the sections captioned “Interest Income and
Expense” and “Interest Rate Sensitivity and Liquidity” in Item 7 of
this Form 10-K for further discussion related to Peoples’ interest rate
risk.
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Peoples’
Exposure to Credit Risk Could Adversely Affect Peoples’ Earnings and
Financial Condition.
There are certain risks inherent in making
loans. These risks include interest rate changes over the time
period in which loans may be repaid, risks resulting from changes in the
economy, risks inherent in dealing with borrowers and, in the case of
loans secured by collateral, risks resulting from uncertainties about the
future value of the collateral.
Commercial and commercial real estate loans
comprise a significant portion of Peoples’ loan
portfolio. Commercial loans generally are viewed as having a
higher credit risk than residential real estate or consumer loans because
they usually involve larger loan balances to a single borrower and are
more susceptible to a risk of default during an economic
downturn. Since Peoples’ loan portfolio contains a significant
number of commercial and commercial real estate loans, the deterioration
of one or a few of these loans could cause a significant increase in
nonperforming loans, and ultimately could have a material adverse effect
on Peoples’ earnings and financial
condition.
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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.
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Adverse
Conditions in the Real Estate Markets and General Economy May Adversely
Impact Peoples’ Results of Operations.
During
2008, general economic conditions throughout the United States
deteriorated and unemployment increased, as business activity across a
wide range of industries and regions reduced significantly from a lack of
consumer spending and lack of liquidity in the credit
markets. In addition, the values of nearly all asset classes,
including commercial real estate, decreased significantly, which has led
to many loans becoming under-collateralized. These conditions
have caused many financial institutions, including Peoples, to increase
their allowance for loan losses, thereby reducing earnings. The
conditions have also led to the failure or merger of a number of prominent
financial institutions. The increased level of financial
institution failures, or near failures, has resulted in higher default
rates on securities, including bank-issued trust preferred securities, and
contracts entered into with such entities as counterparties, which placed
additional stress on the market and reduced investor
confidence. Consequently, the cost and availability of
liquidity have been adversely affected, despite significant actions by the
Federal Reserve Board and the Federal government. In addition,
Peoples could recognize additional impairment losses on its investment in
trust preferred securities should default rates increase due to adverse
conditions within the financial services industry.
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,
continued declines in real estate values could cause additional loans to
become under-collateralized and require further increases to the allowance
for loan losses.
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Adverse
Changes in the Financial Markets May Adversely Impact Peoples’ Results of
Operations.
Over the last several months, the global
financial markets have been characterized by substantially increased
volatility and short-selling and an overall loss of investor confidence,
initially in financial institutions, but more recently in companies in a
number of other industries and in the broader markets. 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 held by Peoples 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 and
2008. 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 Procedures
May Impact Peoples’ Reported
Financial Condition or Results of Operations.
The accounting standard setters, including the
Financial Accounting Standards Board, the SEC and other regulatory bodies,
periodically change the financial accounting and reporting standards that
govern the preparation of Peoples’ Consolidated Financial Statements.
These changes can be difficult to predict and can materially impact how
Peoples records and reports its financial condition and results of
operations. In some cases, Peoples could be required to apply a new or
revised standard retroactively, resulting in the restatement of prior
period financial statements. 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 Operations.
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 different 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. In addition, Peoples’
participation in the U.S. Treasury’s TARP Capital Purchase Program
currently restricts the ability to increase the dividend payable to
holders of Common Shares without prior approval of the U.S.
Treasury. Further discussion of Peoples’ ability to pay
dividends can be found under the captions “Supervision and Regulation-TARP
Capital Purchase Program” and “Supervision and Regulation-Dividend
Restrictions” in Item 1 of this Form 10-K and Note 16 of the Notes to the
Consolidated Financial Statements.
|
|
·
|
Government
Regulation Significantly Affects Peoples’ Business.
The
banking industry is heavily regulated under both federal and state
law. Peoples is subject to regulation and supervision by the
Federal Reserve Board, and Peoples Bank is subject to regulation and
supervision by the OCC, and secondarily the FDIC. These
regulations are primarily intended to protect depositors and the federal
deposit insurance funds, not Peoples’ 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.
As
a participant in the TARP Capital Purchase Program, Peoples agreed to
various requirements and restrictions imposed by the U.S. Treasury on all
participants, which included a provision that the U. S. Treasury could
change the terms of participation at any time. Further information
regarding the current requirements and restrictions imposed on Peoples can
be found under the caption “Supervision and Regulation – TARP Capital
Purchase Program” in Item 1 of this Form
10-K.
|
|
·
|
Recent
Legislative and Regulatory Initiatives to Address Difficult Market and
Economic Conditions May Not Stabilize the U. S. Banking System and
May Significantly Affect Peoples’ Financial Condition, Results of
Operation, Liquidity or Stock Price.
In
2008 and continuing into 2009, the U.S. government and various regulatory
agencies, including the Federal Reserve Board, FDIC and SEC, have
undertaken numerous initiatives intended to stabilize the U.S. banking
system and address the liquidity and credit crisis that has followed the
sub-prime mortgage market crisis that began in 2007.
Specifically,
the EESA created the Troubled Assets Relief Program (“TARP”) intended to
encourage financial institutions to increase their lending to customers
and each other, as well as increased federal deposit insurance coverage
limits through the end of 2009. The ARRA includes a wide array
of programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health and education needs. Other
initiatives have included homeowner relief that encourages loan
restructuring and modification; the establishment of significant liquidity
and credit facilities for financial institutions and investment banks; the
lowering of the Federal Funds rate; emergency action against short selling
practices; a temporary guarantee program for money market funds; the
establishment of a commercial paper funding facility to provide back-stop
liquidity to commercial paper issuers; and coordinated international
efforts to address illiquidity and other weaknesses in the banking
sector.
The
legislative and regulatory initiatives described above may not have their
desired effects, as asset values have continued to decline and access to
liquidity continues to be limited. If the volatility in the
markets continues and economic conditions fail to improve or worsen,
Peoples’ business, financial condition and results of operations could be
materially and adversely
affected.
|
|
·
|
Because
of Peoples’ Participation in the TARP Capital Purchase Program, Peoples Is
Subject to Several Restrictions on Compensation Paid to Peoples’ Executive
Officers.
As a recipient of government funding under the
TARP Capital Purchase Program, Peoples must comply with the executive
compensation and corporate governance standards imposed by the
ARRA. These restriction are more fully described in Item 1 of
this Form 10-K under the caption “Supervision and Regulation-TARP Capital
Purchase Program”. These standards, which are more stringent
than those previously proposed by the U.S. Treasury, could impact Peoples’
ability to retain key executives or cause Peoples to make material changes
to its current compensation plans and philosophy that could result in
higher compensation costs in future periods. It is unclear how
these standards will relate to the similar standards announced by the U.S.
Treasury in the guidelines it issued on February 4, 2009, or whether
the standards will be considered effective immediately or only after the
U.S. Treasury adopts implementing
regulations.
|
|
·
|
The
Series A Preferred Shares Impact Net Income Available to Peoples’
Common Shareholders And the Warrant May Be Dilutive to Peoples’ Common
Shareholders.
While the additional capital Peoples raised
through its participation in the TARP Capital Purchase Program provides
further funding to Peoples’ business and Peoples believes has improved
investor perceptions with regard to Peoples’ financial position, such
capital has increased Peoples’ equity and the number of dilutive
outstanding Common Shares as well as Peoples’ preferred dividend
requirements. The dividends declared and the accretion of
discount on the Series A Preferred Shares will reduce the net income
available to holders of Peoples’ Common Shares and Peoples’ earnings per
common share. The Series A Preferred Shares will also
receive preferential treatment in the event of Peoples’ liquidation,
dissolution or winding up. Additionally, the ownership interest
of the existing holders of Peoples’ Common Shares will be diluted to the
extent the Warrant Peoples issued to the U.S. Treasury in conjunction with
the sale to the U.S. Treasury of the Series A Preferred Shares is
exercised. Although the U.S. Treasury has agreed not to vote
any of the Common Shares it receives upon exercise of the Warrant, a
transferee of any portion of the Warrant or of any Common Shares acquired
upon exercise of the Warrant is not bound by this
restriction.
|
|
·
|
If
Peoples Is Unable To Redeem The Series A Preferred Shares After Five
Years, The Cost Of This Capital To Peoples Will Increase
Substantially.
If Peoples is unable to redeem the
Series A Preferred Shares prior to February 15, 2014, the cost
of this capital to Peoples will increase substantially on that date, from
5.0% per annum to 9.0% per annum. Depending on Peoples’
financial condition at the time, this increase in the annual dividend rate
on the Series A Preferred Shares could have a material negative
effect on Peoples’ liquidity.
|
|
·
|
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 implemented security controls 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, Ashland and
Russell. Of these 47 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, and Ashland, Kentucky.
Rent expense
on the leased properties totaled $732,000 in 2008, which excludes intercompany
rent expense. The following are the only properties that have a lease
term expiring on or before June 2010:
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.
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.
None.
Peoples’
common shares are traded on The NASDAQ Global Select Market under the symbol
PEBO. At December 31, 2008, Peoples had 1,221 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
|
||||||
|
2008
|
||||||||
|
Fourth
Quarter
|
$
|
22.92
|
$
|
13.59
|
$
|
0.23
|
||
|
Third
Quarter
|
29.25
|
17.33
|
0.23
|
|||||
|
Second
Quarter
|
25.75
|
18.33
|
0.23
|
|||||
|
First
Quarter
|
26.10
|
20.38
|
0.22
|
|||||
|
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
|
|||||
Peoples plans
to continue to pay quarterly cash dividends, subject to certain regulatory
restrictions described in Note 16 of the Notes to the Consolidated Financial
Statements, as well as in the sections captioned “Supervision and
Regulation-TARP Capital Purchase Program” and “Supervision and
Regulation-Dividend Restrictions” of Item 1 of this Form 10-K.
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, 2008:
|
(a)
Total
Number
of
Common Shares
Purchased
|
(b)
Average
Price
Paid
per
Share
|
(c)
Total Number
of Common Shares Purchased as
Part of
Publicly Announced Plans
or Programs
(1)
|
(d)
Maximum
Number of
Common
Shares
that May
Yet Be Purchased Under
the
Plans or Programs
(1)(2)
|
|||||
|
October
1 – 31, 2008
|
1,800
|
(3)
|
$ 21.66
|
(3)
|
–
|
447,800
|
||
|
November
1 – 30, 2008
|
435
|
(3)
|
$ 17.21
|
(3)
|
–
|
447,800
|
||
|
December
1 – 31, 2008
|
619
|
(4)
|
$ 15.93
|
(4)
|
–
|
–
|
||
|
Total
|
2,854
|
$ 19.74
|
–
|
–
|
||||
|
|
(1)
Information reflects 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, which expired on
December 31, 2008.
|
|
|
(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 holding assets to provide payment of the benefits under the
Peoples Bancorp Inc. Deferred Compensation Plan for Directors of Peoples
Bancorp Inc. and Subsidiaries (the “Rabbi
Trust”).
|
|
|
(4)
Information includes 278 common shares purchased at an average price of
$16.16 by Peoples Bank under the Rabbi Trust and 341 common shares
acquired at an average price of $15.75 to satisfy tax withholding
requirements related to stock-based compensation awards granted under
Peoples’ equity plans.
|
|
Performance
Graph
|
The following
Performance Graph and related information shall not be deemed “soliciting
material” or to be “filed” with the Securities and Exchange Commission, nor
shall such information be deemed to be incorporated by reference into any future
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
each as amended, except to the extent that Peoples specifically incorporates it
by reference into such filing.
The following
line graph compares the five-year cumulative total shareholder return of
Peoples’ common shares, based on an initial investment of $100 on December 31,
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 institution holding companies (SIC Code #671) that are
traded on The NASDAQ Stock Market (“NASDAQ Bank Stocks”).
|
COMPARISON
OF FIVE-YEAR TOTAL RETURN AMONG
|
|
PEOPLES
BANCORP INC., NASDAQ STOCKS (U.S.
COMPANIES),
|
|
AND
NASDAQ BANK
STOCKS
|
|
At
December 31,
|
|||||||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
||||||
|
Peoples
Bancorp Inc.
|
$100.00
|
$ 95.44
|
$102.12
|
$109.31
|
$ 94.73
|
$
76.06
|
|||||
|
NASDAQ
Stocks (U.S. Companies)
|
$100.00
|
$108.84
|
$111.16
|
$122.11
|
$132.42
|
$
63.80
|
|||||
|
NASDAQ
Bank Stocks
|
$100.00
|
$114.44
|
$111.80
|
$125.47
|
$ 99.45
|
$
72.51
|
|||||
The
information below has been derived from Peoples’ Consolidated Financial
Statements.
|
(
Dollars in thousands, except
per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
Operating
Data
|
|||||
|
For
the year ended:
|
|||||
|
Total
interest income
|
$ 106,227
|
$ 113,419
|
$ 108,794
|
$ 95,775
|
$ 87,030
|
|
Total
interest expense
|
47,748
|
59,498
|
55,577
|
43,469
|
35,160
|
|
Net
interest income
|
58,479
|
53,921
|
53,217
|
52,306
|
51,870
|
|
Provision
for loan losses
|
27,640
|
3,959
|
3,622
|
2,028
|
2,546
|
|
Net
(loss) gain on investment securities
|
(2,592)
|
(6,062)
|
265
|
539
|
(3,040)
|
|
Other
income exclusive of (loss) gain on securities
|
32,853
|
31,426
|
30,860
|
28,628
|
25,248
|
|
Amortization
of other intangible assets
|
1,586
|
1,934
|
2,261
|
2,669
|
2,219
|
|
Other
expense
|
51,899
|
49,518
|
49,036
|
48,673
|
44,979
|
|
Net
income
|
$ 7,455
|
$ 18,314
|
$ 21,558
|
$ 20,499
|
$ 18,275
|
|
Balance
Sheet Data
|
|||||
|
Total
assets
|
$ 2,002,338
|
$ 1,885,553
|
$ 1,875,255
|
$ 1,855,277
|
$ 1,809,086
|
|
Investment
securities
|
708,753
|
565,463
|
548,733
|
589,313
|
602,364
|
|
Net
loans
|
1,081,101
|
1,105,223
|
1,117,885
|
1,057,156
|
1,008,298
|
|
Total
intangible assets
|
66,406
|
68,029
|
68,852
|
69,280
|
71,118
|
|
Total
deposits
|
1,366,368
|
1,186,377
|
1,233,529
|
1,089,286
|
1,069,421
|
|
Short-term
borrowings
|
98,852
|
222,541
|
194,883
|
173,696
|
51,895
|
|
Long-term
borrowings
|
308,297
|
231,979
|
200,793
|
362,466
|
464,864
|
|
Junior
subordinated notes held by subsidiary trusts
|
22,495
|
22,460
|
29,412
|
29,350
|
29,263
|
|
Total
stockholders’ equity
|
186,626
|
202,836
|
197,169
|
183,077
|
175,418
|
|
Tangible assets
(1)
|
1,935,932
|
1,817,524
|
1,806,403
|
1,785,997
|
1,737,968
|
|
Tangible equity
(2)
|
$ 120,220
|
$ 134,807
|
$ 128,317
|
$ 113,797
|
$ 104,300
|
|
Significant
Ratios
|
|||||
|
Return
on average assets
|
0.39%
|
0.98%
|
1.15%
|
1.12%
|
1.04%
|
|
Return
on average stockholders’ equity
|
3.67
|
9.21
|
11.33
|
11.52
|
10.60
|
|
Net
interest margin
|
3.51
|
3.32
|
3.29
|
3.32
|
3.39
|
|
Efficiency ratio
(3)
|
56.30
|
57.07
|
57.51
|
59.05
|
57.18
|
|
Average
stockholders’ equity to average assets
|
10.62
|
10.62
|
10.18
|
9.73
|
9.79
|
|
Average
loans to average deposits
|
88.10
|
93.52
|
94.80
|
94.92
|
91.24
|
|
Allowance
for loan losses to total loans
|
2.08
|
1.40
|
1.28
|
1.37
|
1.44
|
|
Total
risk-based capital ratio
|
13.19
|
13.23
|
13.17
|
12.90
|
12.30
|
|
Dividend
payout ratio
|
127.03%
|
50.38%
|
41.09%
|
40.01%
|
41.66%
|
|
Per
Share Data
|
|||||
|
Earnings
per share – Basic
|
$ 0.72
|
$ 1.75
|
$ 2.03
|
$ 1.96
|
$ 1.74
|
|
Earnings
per share – Diluted
|
0.72
|
1.74
|
2.01
|
1.94
|
1.71
|
|
Cash
dividends paid
|
0.91
|
0.88
|
0.83
|
0.78
|
0.72
|
|
Book
value at end of period
|
18.06
|
19.70
|
18.51
|
17.40
|
16.81
|
|
Tangible book value at end of
period
(4)
|
$ 11.63
|
$ 13.09
|
$ 12.05
|
$ 10.82
|
$ 10.00
|
|
Weighted-average
shares outstanding:
|
|||||
|
Basic
|
10,315,263
|
10,462,933
|
10,606,570
|
10,444,854
|
10,529,332
|
|
Diluted
|
10,348,579
|
10,529,634
|
10,723,933
|
10,581,019
|
10,710,114
|
|
Common
shares outstanding at end of period:
|
10,333,884
|
10,296,748
|
10,651,985
|
10,518,980
|
10,435,102
|
|
(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.
|
|
(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)
|
continued
deterioration in the credit quality of Peoples’ loan portfolio could occur
due to a number of factors, such as adverse changes in economic conditions
that impair the ability of borrowers to repay their loans, the underlying
value of the collateral could prove less valuable than otherwise assumed
and assumed cash flows may be worse than expected, which may adversely
impact the provision for loan
losses;
|
|
(2)
|
Peoples’
ability to deploy the capital received through the U.S. Treasury’s TARP
Capital Purchase Program;
|
|
(3)
|
competitive
pressures among financial institutions or from non-financial institutions,
which may increase significantly;
|
|
(4)
|
changes
in the interest rate environment, which may adversely impact interest
margins;
|
|
(5)
|
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;
|
|
(6)
|
general
economic conditions and weakening in the real estate market, either
national or in the states in which Peoples and its subsidiaries do
business, which may be less favorable than
expected;
|
|
(7)
|
political
developments, wars or other hostilities, which may disrupt or increase
volatility in securities markets or other economic
conditions;
|
|
(8)
|
legislative
or regulatory changes or actions, which may adversely affect the business
of Peoples and its subsidiaries;
|
|
(9)
|
adverse
changes in the conditions and trends in the financial markets, which may
adversely affect the fair value of securities within Peoples’ investment
portfolio;
|
|
(10)
|
a
delayed or incomplete resolution of regulatory issues that could
arise;
|
|
(11)
|
ability
to receive dividends from its
subsidiaries;
|
|
(12)
|
Peoples’
ability to maintain required capital levels and adequate sources of
funding and liquidity;
|
|
(13)
|
changes
in accounting standards, policies, estimates or practices, which may
impact Peoples’ reported financial condition or results of
operations;
|
|
(14)
|
the
impact of reputational risk created by these developments on such matters
as business generation and retention, funding and
liquidity;
|
|
(15)
|
the
costs and effects of regulatory and legal developments, including the
outcome of regulatory or other governmental inquiries and legal
proceedings and results of regulatory examinations;
and
|
|
(16)
|
other
risk factors relating to the banking industry or Peoples as detailed from
time to time in Peoples’ reports filed with the Securities and Exchange
Commission (“SEC”), including those risk factors included in the
disclosure under the heading “ITEM 1A. RISK FACTORS” of Part I of this
Form 10-K.
|
All
forward-looking statements speak only as of the filing date of this Form 10-K
and are expressly qualified in their entirety by the cautionary
statements. Although management believes the expectations in these
forward-looking statements are based on reasonable assumptions within the bounds
of management’s knowledge of Peoples’ business and operations, it is possible
that actual results may differ materially from these
projections. Additionally, Peoples undertakes no obligation to update
these forward-looking statements to reflect events or circumstances after the
filing date of this Form 10-K or to reflect the occurrence of unanticipated
events except as may be required by applicable legal
requirements. Copies of documents filed with the SEC are available
free of charge at the SEC’s website at http://www.sec.gov and/or from Peoples
Bancorp’s website.
Summary
of Recent Transactions and Events
The
following discussion and analysis of Peoples’ Consolidated Financial Statements
is presented to provide insight into management's assessment of the financial
results. This discussion and analysis should be read in conjunction
with the audited Consolidated Financial Statements and Notes thereto, as well as
the ratios and statistics, contained elsewhere in this Form 10-K.
References
will be found in this Form 10-K to the following transactions that have impacted
or will impact Peoples’ results of operations:
|
·
|
As
described in “ITEM 1. BUSINESS-Recent Corporate Developments”, on January
30, 2009, Peoples received $39 million of new equity capital from the U.S.
Treasury’s TARP Capital Purchase Program. The investment was in
the form of newly-issued non-voting cumulative perpetual preferred shares
and a related 10-year warrant sold by Peoples to the U.S. Treasury (the
“TARP Capital Investment”).
|
|
·
|
As
disclosed in a Current Report on Form 8-K filed on January 12, 2009,
management determined certain available-for-sale investment securities
were other-than-temporarily impaired at December 31, 2008. As a
result, Peoples recorded a $4.0 million non-cash impairment charge in the
fourth quarter of 2008, of which $2.0 million related to a single
bank-issued trust preferred security previously carried at $2.0 million
and $2.0 million related to four collateralized debt obligation (“CDO”)
investments previously carried at $6.1 million. These charges
were based upon management’s evaluation of the credit quality of
underlying issuers. In comparison, Peoples recognized
other-than-temporary impairment charges totaling $6.2 million in 2007, of
which $3.2 million related to preferred stocks issued by the Federal
National Mortgage Association (“Fannie Mae”) and the Federal Home Loan
Mortgage Corporation (“Freddie Mac”) and $2.9 million related to the CDO
investments.
|
|
·
|
Between
August 2007 and December 2008, the Federal Reserve’s Open Market Committee
reduced the target Federal Funds rate 500 basis points and the Discount
Rate 575 basis points. These actions caused a corresponding
downward shift in short-term interest rates, while longer-term rates have
not decreased to the same extent. This steepening of the yield
curve has provided Peoples with opportunities to improve net interest
income and margin by taking advantage of lower-cost funding available in
the market place and reducing certain deposit
costs.
|
|
·
|
From
mid-2004 through mid-2006, the Federal Reserve’s Open Market Committee
increased the target Federal Funds rate by 425 basis points, causing
short-term market interest rates to increase. However,
longer-term interest rates increased at a much slower pace, resulting in a
flattened, and sometimes inverted, yield curve. These
conditions resulted in increases in Peoples’ funding costs that outpaced
the improvement in asset yields.
|
|
·
|
During
2008, Peoples’ loan quality was impacted by the contracting economy and
commercial real estate market, which caused declines in commercial real
estate values and deterioration in financial condition of various
commercial borrowers. These conditions led to Peoples
downgrading the loan quality ratings on various commercial real estate
loans through its normal loan review process. In addition,
several impaired loans became under-collateralized due to the reduction in
the estimated net realizable fair value of the underlying collateral. As a
result, Peoples experienced significant increases in provision for loan
losses, including a $13.4 million fourth quarter provision, net
charge-offs and nonperforming loans in 2008 compared to historical
periods.
|
|
·
|
During
the fourth quarter of 2008, Peoples Bank sold its merchant credit card
payment processing services to First Data Merchant Services Corporation
(“First Data”). Peoples Bank will continue to serve the credit
card processing needs of its commercial customers through a referral
program with First Data. As a result of this transaction,
Peoples recognized a pre-tax gain of $500,000 in the fourth quarter of
2008, which was not material to Peoples’ Consolidated Financial
Statements.
|
|
·
|
At
the close of business on October 17, 2008, Peoples Bank completed the
previously announced sale of its Grayson, Kentucky banking office to First
National Bank of Grayson. This sale was consistent with
Peoples’ strategic plan to optimize its branch network for better growth
opportunities. Under the terms of the agreement, Peoples
received $475,000 for the Grayson office’s $13.4 million of deposits and
$220,000 of fixed assets and sold $2.0 million of loans at book value,
resulting in a fourth quarter 2008 pre-tax gain of
$255,000. This sale was not material to Peoples’ Consolidated
Financial Statements.
|
|
·
|
During
2008, Peoples systematically sold the preferred stocks issued by Fannie
Mae and Freddie Mac held in its investment portfolio, due to the
uncertainty surrounding these entities. These securities had a
total recorded value of $12.1 million at December 31, 2007. In
July 2008, Peoples sold its remaining Fannie Mae preferred stocks, which
completely eliminated all equity holdings in Fannie Mae and Freddie
Mac. As a result of the sales, Peoples recognized cumulative
pre-tax losses of $1,243,000 ($808,000 after-tax) in
2008.
|
|
·
|
Also
during 2008, Peoples sold selected lower yielding, longer-term investment
securities, primarily obligations of U.S. government-sponsored
enterprises, U.S. agency mortgage-backed securities and tax-exempt
municipal bonds, as well as several small-lot mortgage-backed
securities. The proceeds from these sales were reinvested into
similar securities with less price risk volatility. These actions were
intended to reposition the investment portfolio to reduce interest rate
exposures and resulted in a cumulative pre-tax gain of $2.5 million in
2008, of which $1.5 million was recognized in the fourth quarter of
2008.
|
|
·
|
As
described in “ITEM 3. LEGAL PROCEEDINGS” of Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2007, in December 2007,
Peoples resolved certain issues concerning its Ohio corporation franchise
tax liability and associated calculations for the fiscal years ended
December 31, 2001 through 2007 (the “Ohio Franchise Tax
Settlement”). As a result, Peoples’ franchise tax expense was
reduced by $782,000 ($508,000, or $0.05 per diluted share, after-tax)
during the fourth quarter of 2007.
|
|
·
|
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.
|
|
·
|
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 have 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. 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 or events, where significant, is discussed in the
applicable sections of this Management’s Discussion and Analysis.
Critical
Accounting Policies
The
accounting and reporting policies of Peoples conform to generally accepted
accounting principles in the United States of America (“US GAAP”) and to general
practices within the financial services industry. A summary of
significant accounting policies is contained in Note 1 of the Notes to the
Consolidated Financial Statements. While all of these policies
are important to understanding the Consolidated Financial Statements, certain
accounting policies require management to exercise judgment and make estimates
or assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates and assumptions are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates or assumptions.
Management
views critical accounting policies to be those that are highly dependent on
subjective or complex judgments, estimates and assumptions, and where changes in
those estimates and assumptions could have a significant impact on the financial
statements. Management has identified the accounting policies
described below as those that, due to the judgments, estimates and assumptions
inherent in the policies, are critical to an understanding of Peoples’
Consolidated Financial Statements and management’s discussion and analysis of
financial condition and results of operation.
Income
Recognition
Interest
income on loans and investment securities is recognized by methods that result
in level rates of return on principal amounts outstanding, including yield
adjustments resulting from the amortization of loan costs and premiums on
investment securities and accretion of loan fees and discounts on investment
securities. Since mortgage-backed securities comprise a sizable
portion of Peoples’ investment portfolio, a significant increase in principal
payments on those securities could impact interest income due to the
corresponding acceleration of premium amortization or discount
accretion.
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 loans placed on nonaccrual status, restructured or
internally classified as substandard or doubtful. While allocations
are made to specific loans and pools of loans, the allowance is available for
all loan losses.
Individual
loan reviews are based upon specific quantitative and qualitative criteria,
including the size of the loan, the loan cash flow characteristics, loan quality
ratings, value of collateral, repayment ability of borrowers, and historical
experience factors. The historical experience factors utilized for
individual loan reviews are based upon past loss experience, known trends in
losses and delinquencies, the growth of loans in particular markets and
industries, and known changes in economic conditions in particular lending
markets. Allowances for homogeneous loans (such as residential
mortgage loans, 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,
2008, 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 35% of
total assets at December 31, 2008, 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 2008
and 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, 2008, 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.
Customer
relationship intangibles are required to be amortized over their estimated
useful lives. The method of amortization reflects the pattern in
which the economic benefits of the intangible assets are estimated to be
consumed or otherwise used up. Since Peoples’ acquired customer
relationships are subject to routine customer attrition, the relationships are
more likely to produce greater benefits in the near-term than in the long-term,
which typically supports the use of an accelerated method of amortization for
the related intangible assets. Management is required to evaluate the
useful life of customer relationship intangibles to determine if events or
circumstances warrant a change in the estimated life. Should
management determine 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
reviewed its recorded goodwill at December 31, 2008, and concluded no impairment
existed since the fair value of the single reporting unit exceeded its carrying
value. Based on its most recently completed analysis, management
believes a 20-25% sustained decline in future earnings would have to occur for
any recorded goodwill to be considered impaired. Other future events,
such as adverse changes to Peoples’ business, could cause management to conclude
that impairment indicators exist and require management to re-evaluate
goodwill. Should such re-evaluation determine goodwill is
impaired, any resulting impairment loss recognized could have a material,
adverse impact on Peoples’ financial condition and results of
operations.
Peoples
records mortgage servicing rights (“MSRs”) in connection with its mortgage
banking activities, which are intangible assets representing the right to
service loans sold to third party investors. These intangible assets
are recorded initially at fair value and subsequently amortized over the
estimated life of the loans sold. MSRs are assessed for impairment at
each reporting date based on their fair value. At December 31, 2008,
management concluded no portion of the recorded MSRs was impaired since the fair
value exceeded the carrying value. However, future events, such as a
significant increase in prepayment speeds, could result in a fair value that is
less than the carrying amount, which would require the recognition of an
impairment loss in earnings.
Income
Taxes
Income
taxes are provided based on the liability method of accounting, which includes
the recognition of deferred tax assets and liabilities for the temporary
differences between carrying amounts and tax 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.
Fair
Value Measurements
As a
financial services company, the carrying value of certain financial assets and
liabilities is impacted by the application of fair value measurements, either
directly or indirectly. In certain cases, an asset or liability is
measured and reported at fair value on a recurring basis, such as
available-for-sale investment securities. In other cases, management
must rely on estimates or judgments to determine if an asset or liability not
measured at fair value warrants an impairment write-down or whether a valuation
reserve should be established. Given the inherent volatility, the use
of fair value measurements may have a significant impact on the carrying value
of assets or liabilities, or result in material changes to the financial
statements, from period to period.
Detailed
information regarding fair value measurements can be found in Note 2 of the
Notes to the Consolidated Financial Statements. The following is a
summary of those assets and liabilities that may be affected by fair value
measurements, as well as a brief description of the current accounting practices
and valuation methodologies employed by Peoples:
Available-for-Sale
Investment Securities
Investment
securities classified as available-for-sale are measured and reported at fair
value on a recurring basis. For most securities, the fair value is
based upon quoted market prices or determined by pricing models that consider
observable market data. However, the fair value of certain investment
securities, such as collateralized debt obligations, must be based upon
unobservable market data, such as non-binding broker quotes and discounted cash
flow analysis or similar models, due to the absence of an active market for
these securities. As a result, management’s determination of fair
value for these securities is highly dependent on subjective or complex
judgments, estimates and assumptions, which could change materially between
periods. Management occasionally uses information from independent
third-party consultants in its determination of the fair value of more complex
investment securities, such as the collateralized debt
obligations. At December 31, 2008, nearly all of Peoples’
available-for-sale investment securities were measured using observable market
data, with less than 1% measured using non-observable data.
Impaired
loans
For loans
considered impaired, the amount of impairment loss recognized is determined
based on a discounted cash flow analysis or the fair value of the underlying
collateral if repayment is expected solely from the sale of the
collateral. Management typically relies on the fair value of the
underlying collateral due to the significant uncertainty surrounding the
borrower’s ability to make future payments. The vast majority of the
collateral securing impaired loans is real estate, although it may also include
accounts receivable and equipment, inventory or similar personal
property. The fair value of the collateral used by management
represents the estimated proceeds to be received from the sale of the
collateral, less costs incurred during the sale, based upon observable market
data and market value data provided by independent, licensed or certified
appraisers.
Goodwill
Goodwill
is not amortized but is tested for impairment at least
annually. Potential goodwill impairment exists when the fair value of
the reporting unit (as defined by US GAAP) is less than its carrying
value. Peoples currently possesses a single reporting unit for
goodwill impairment testing. While quoted market prices exist for
Peoples’ common shares since they are publicly traded, these market prices do
not necessarily reflect the value associated with gaining control of an
entity. Thus, management takes into account all appropriate fair
value measurements in determining the estimated fair value of the reporting
unit. These measurements include valuations of recently acquired
institutions based upon multiples of book value or earnings and discounted cash
flow analysis.
Should
management determine the potential for goodwill impairment exists, the
measurement of any actual impairment loss requires management to calculate the
implied fair value of goodwill by deducting the fair value of all tangible and
separately identifiable intangible net assets (including unrecognized intangible
assets) from the fair value of the reporting unit. This process
involves highly subjective or complex judgments, estimates and
assumptions. As a result, changes to these judgments, estimates and
assumptions in future periods could result in materially different
results.
Mortgage
Servicing Rights
MSRs are
carried at the lower of cost or market value, and, therefore, can be subject to
fair value measurements on a nonrecurring basis. MSRs do not trade in
an active market with readily observable prices. Thus, management
determines fair value based upon a valuation model that calculates the present
value of estimated future net servicing income provided by an independent
third-party consultant. This valuation model is affected by various
input factors, such as servicing costs, expected prepayment speeds and discount
rates, which are subject to change between reporting periods. As a
result, significant changes to these factors could result in a material change
to the calculated fair value of MSRs.
Pension
and Other Postretirement Benefit Plans
Peoples
is required to recognize the funded status of defined benefit pension and other
postretirement benefit plans on its Consolidated Balance Sheet as an asset for a
plan’s overfunded status or a liability for a plan’s underfunded status, with
fluctuations in the funded status recognized through comprehensive income in the
year in which the change occurs. The funded status is based upon the
fair value of plan assets compared to the projected benefit
obligation. The determination of the projected benefit obligation and
periodic benefit costs involves significant judgment and estimation of
employees’ length of service and future compensation levels, discount rate and
expected rate of return on plan assets. While these variables are
equally important, changes to the discount rate can have a greater impact on the
projected benefit obligation, and thus the amount of the asset or liability
recognized, as well as the amount of pension plan expense recorded each
period.
EXECUTIVE
SUMMARY
In 2008,
Peoples’ net income was $7.5 million, compared to $18.3 million for 2007 and
$21.6 million for 2006, while diluted earnings per share were $0.72, $1.74 and
$2.01, respectively. The lower earnings in 2008 reflects the
challenging conditions within the financial services industry due to the
contracting economy and commercial real estate market, which resulted in higher
provision for loan losses. Earnings for both 2008 and 2007 were
impacted by the other-than-temporary impairment charges on available-for-sale
investment securities. Despite these challenges, Peoples generated
positive results in several key areas, including growth and diversification of
revenues, expansion of retail deposits and expense control.
Net
interest income increased 8% to $58.5 million in 2008, while net interest margin
expanded 19 basis points to 3.51%. These improvements were driven by
lower short-term market rates and resulted in a greater reduction in Peoples’
funding costs in comparison to asset yields. Net interest income and
margin also benefited from retail deposit growth in 2008, which has allowed
Peoples to reduce the amount of higher-cost wholesale funding. In
2007, both net interest income and margin were up compared to 2006, primarily
attributable to higher market interest rates during most of 2007.
Non-interest
income totaled $32.1 million in 2008, versus $31.4 million in 2007 and $30.4
million in 2006. Peoples experienced growth in several areas in 2008,
which were partially offset by lower mortgage banking income. The
largest increase in 2008 occurred in electronic banking income, which increased
10% due to sustained growth in debit card activity. In 2007, the
combination of higher trust and investment income and electronic banking income
was partially offset by lower deposit account service charges.
Total
non-interest expense was $53.5 million in 2008 compared to $51.5 million in
2007, due largely to a combination of normal base salary adjustments, higher
employee medical benefit costs, increased FDIC insurance expense and the impact
of the Ohio Franchise Tax Settlement on 2007 franchise tax
expense. Compared to 2006, total non-interest expense was essentially
unchanged in 2007, as higher salaries and employee benefit costs of $1.4 million
were offset by decreases in several other major expense categories, including
franchise taxes.
At
December 31, 2008, total assets were $2.00 billion, up $116.8 million compared
to year-end 2007. Gross portfolio loan balances decreased $16.9
million in 2008, due primarily to normal commercial loan payoffs and the impact
of charge-offs in 2008. Total investment securities increased to
$708.8 million at December 31, 2008, versus $565.5 million at year-end 2007,
with most of the increase occurring during the fourth quarter in response to
deposit growth. Another contributing factor to the increase was the
purchase of securities during the first half of 2008 intended to offset the
impact of loan payoffs and charge-offs.
Total
liabilities were $1.82 billion at December 31, 2008, up $133.0 million compared
to December 31, 2007. Total deposit balances increased $180.0 million
in 2008, due mostly to higher interest-bearing retail balances from Peoples
attracting approximately $108 million of funds from customers outside its
primary market area. This growth enabled Peoples to reduce higher
rate brokered certificates of deposit balances by $15.5 million and contributed
to the $47.3 million reduction in borrowed funds since year-end
2007.
Total
stockholders’ equity decreased $16.2 million in 2008, to $186.6 million at
year-end 2008. This decline was largely attributable to a $15.3
million reduction in accumulated comprehensive income due mostly to the change
in fair value of the available-for-sale investment portfolio. Despite
this decrease and higher loan losses in 2008, Peoples’ regulatory capital ratios
remained relatively stable and significantly above amounts needed to be
considered well capitalized by banking regulations. At December 31,
2008, Peoples’ Tier 1 and Total Risk-Based capital ratios were 11.88% and
13.19%, respectively, compared to the prior year ratios of 11.91% and 13.23%,
respectively, while the ratio of tangible equity to tangible assets was 6.21% at
year-end 2008. These strong capital positions allowed Peoples to
increase dividends to shareholders during 2008.
RESULTS
OF OPERATION
Interest
Income and Expense
Peoples
earns interest income on loans and investments and incurs interest expense on
interest-bearing deposits and borrowed funds. Net interest income,
the amount by which interest income exceeds interest expense, remains Peoples’
largest source of revenue. The amount of net interest income earned
by Peoples is affected by various factors, including changes in market interest
rates due to the Federal Reserve Board’s monetary policy, the level and degree
of pricing competition for both loans and deposits in Peoples markets and the
amount and composition of Peoples’ earning assets and interest-bearing
liabilities.
Peoples
monitors net interest income performance and manages its balance sheet
composition through regular Asset-Liability Management Committee (“ALCO”)
meetings. The asset/liability management process employed by the ALCO
is intended to minimize the impact of future interest rate changes on Peoples’
net interest income and earnings. However, the frequency and/or
magnitude of changes in market interest rates are difficult to predict, and may
have a greater impact on net interest income than adjustments by
management.
As part
of the analysis of net interest income, management converts tax-exempt income to
the pre-tax equivalent of taxable income using an effective tax rate of
35%. Management believes the resulting fully tax-equivalent (“FTE”)
net interest income allows for a more meaningful comparison of tax-exempt income
and yields to their taxable equivalents. Net interest margin,
calculated by dividing FTE net interest income by average interest-earning
assets, serves as the primary measure used in evaluating the net revenue stream
generated by the mix and pricing of Peoples’ earning assets and interest-bearing
liabilities.
The
following table details Peoples’ average balance sheet for the years ended
December 31:
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
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
|
$ 2,363
|
$ 53
|
2.26%
|
$ 2,435
|
$ 115
|
4.72%
|
$ 2,378
|
$ 100
|
4.21%
|
|||||||||||
|
Federal
funds sold
|
508
|
12
|
2.36%
|
1,077
|
55
|
5.11%
|
1,595
|
80
|
5.02%
|
|||||||||||
|
Total
short-term investments
|
2,871
|
65
|
2.28%
|
3,512
|
170
|
4.84%
|
3,973
|
180
|
4.53%
|
|||||||||||
|
Investment
Securities (1):
|
||||||||||||||||||||
|
Taxable
|
549,687
|
29,106
|
5.30%
|
503,094
|
25,646
|
5.10%
|
505,586
|
24,417
|
4.83%
|
|||||||||||
|
Nontaxable
(2)
|
65,624
|
4,289
|
6.54%
|
60,368
|
3,949
|
6.54%
|
67,454
|
4,411
|
6.54%
|
|||||||||||
|
Total
investment securities
|
615,311
|
33,395
|
5.43%
|
563,462
|
29,595
|
5.25%
|
573,040
|
28,828
|
5.03%
|
|||||||||||
|
Loans
(3):
|
||||||||||||||||||||
|
Commercial
|
744,584
|
48,291
|
6.49%
|
750,906
|
57,613
|
7.67%
|
726,702
|
54,181
|
7.46%
|
|||||||||||
|
Real
estate (4)
|
283,285
|
19,221
|
6.79%
|
292,867
|
20,985
|
7.17%
|
311,772
|
21,467
|
6.89%
|
|||||||||||
|
Consumer
|
85,378
|
6,861
|
8.04%
|
79,035
|
6,552
|
8.29%
|
70,101
|
5,808
|
8.29%
|
|||||||||||
|
Total
loans
|
1,113,247
|
74,373
|
6.69%
|
1,122,808
|
85,150
|
7.58%
|
1,108,575
|
81,456
|
7.35%
|
|||||||||||
|
Less:
Allowance for loan loss
|
(17,428)
|
(14,775)
|
(15,216)
|
|||||||||||||||||
|
Net
loans
|
1,095,819
|
74,373
|
6.79%
|
1,108,033
|
85,150
|
7.68%
|
1,093,359
|
81,456
|
7.45%
|
|||||||||||
|
Total
earning assets
|
1,714,001
|
107,833
|
6.29%
|
1,675,007
|
114,915
|
6.86%
|
1,670,372
|
110,464
|
6.61%
|
|||||||||||
|
Intangible
assets
|
67,203
|
68,440
|
68,940
|
|||||||||||||||||
|
Other
assets
|
128,798
|
128,670
|
129,718
|
|||||||||||||||||
|
Total
assets
|
$
1,910,002
|
$
1,872,117
|
$
1,869,030
|
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
||||||||||||
|
(
Dollars in
thousands)
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
|||||||||||
|
Deposits:
|
||||||||||||||||||||
|
Savings
|
$ 114,651
|
$ 583
|
0.51%
|
$ 113,629
|
$ 725
|
0.64%
|
$ 122,682
|
$ 806
|
0.66%
|
|||||||||||
|
Interest-bearing
transaction
|
199,639
|
3,578
|
1.79%
|
179,827
|
3,841
|
2.14%
|
180,419
|
3,312
|
1.84%
|
|||||||||||
|
Money
market
|
168,075
|
3,482
|
2.07%
|
147,565
|
5,647
|
3.83%
|
122,053
|
4,404
|
3.61%
|
|||||||||||
|
Brokered
time
|
39,151
|
1,843
|
4.71%
|
65,461
|
3,364
|
5.14%
|
75,182
|
3,540
|
4.71%
|
|||||||||||
|
Retail
time
|
561,143
|
21,824
|
3.89%
|
521,506
|
23,398
|
4.49%
|
501,656
|
20,199
|
4.03%
|
|||||||||||
|
Total
interest-bearing deposits
|
1,082,659
|
31,310
|
2.89%
|
1,027,988
|
36,975
|
3.60%
|
1,001,992
|
32,261
|
3.22%
|
|||||||||||
|
Borrowed
Funds:
|
||||||||||||||||||||
|
Short-term:
|
||||||||||||||||||||
|
FHLB
advances
|
102,146
|
2,557
|
2.46%
|
197,915
|
10,065
|
5.09%
|
178,235
|
9,067
|
5.09%
|
|||||||||||
|
Retail
repurchase agreements
|
40,524
|
826
|
2.00%
|
34,802
|
1,528
|
4.39%
|
31,481
|
1,306
|
4.15%
|
|||||||||||
|
Wholesale
repurchase agreements
|
-
|
-
|
0.00%
|
4,425
|
242
|
5.47%
|
1,246
|
70
|
5.62%
|
|||||||||||
|
Total
short-term borrowings
|
142,670
|
3,383
|
2.37%
|
237,142
|
11,835
|
4.93%
|
210,962
|
10,443
|
4.95%
|
|||||||||||
|
Long-term:
|
||||||||||||||||||||
|
FHLB
advances
|
116,176
|
4,856
|
4.18%
|
71,153
|
3,256
|
4.58%
|
127,981
|
5,545
|
4.33%
|
|||||||||||
|
Wholesale
repurchase agreements
|
148,251
|
6,223
|
4.13%
|
124,191
|
5,257
|
4.23%
|
114,768
|
4,035
|
3.52%
|
|||||||||||
|
Other
borrowings
|
22,478
|
1,976
|
8.65%
|
24,571
|
2,175
|
8.73%
|
39,990
|
3,293
|
8.23%
|
|||||||||||
|
Total
long-term borrowings
|
286,905
|
13,055
|
4.55%
|
219,915
|
10,688
|
4.81%
|
282,739
|
12,873
|
4.55%
|
|||||||||||
|
Total
borrowed funds
|
429,575
|
16,438
|
3.78%
|
457,057
|
22,523
|
4.87%
|
493,701
|
23,316
|
4.72%
|
|||||||||||
|
Total
interest-bearing liabilities
|
1,512,234
|
47,748
|
3.15%
|
1,485,045
|
59,498
|
3.99%
|
1,495,693
|
55,577
|
3.72%
|
|||||||||||
|
Non-interest-bearing
deposits
|
180,973
|
172,571
|
167,440
|
|||||||||||||||||
|
Other
liabilities
|
13,892
|
15,707
|
15,604
|
|||||||||||||||||
|
Total
liabilities
|
1,707,099
|
1,673,323
|
1,678,737
|
|||||||||||||||||
|
Total
stockholders’ equity
|
202,903
|
198,794
|
190,293
|
|||||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||
|
stockholders’
equity
|
$
1,910,002
|
$
1,872,117
|
$
1,869,030
|
|||||||||||||||||
|
Interest
rate spread
|
$
60,085
|
3.14%
|
$
55,417
|
2.87%
|
$
54,887
|
2.89%
|
||||||||||||||
|
Interest
income/earning assets
|
6.29%
|
6.86%
|
6.61%
|
|||||||||||||||||
|
Interest
expense/earning assets
|
2.78%
|
3.54%
|
3.32%
|
|||||||||||||||||
|
Net
interest margin
|
3.51%
|
3.32%
|
3.29%
|
|
(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:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Net
interest income, as reported
|
$ 58,479
|
$ 53,921
|
$ 53,217
|
||
|
Taxable
equivalent adjustments
|
1,606
|
1,496
|
1,670
|
||
|
Fully
tax-equivalent net interest income
|
$ 60,085
|
$ 55,417
|
$ 54,887
|
The
following table provides an analysis of the changes in net interest
income:
|
(Dollars
in thousands)
|
Change from 2007 to 2008
(1)
|
Change from 2006 to 2007
(1)
|
|||||
|
Increase
(decrease) in:
|
Rate
|
Volume
|
Total
|
Rate
|
Volume
|
Total
|
|
|
INTEREST
INCOME:
|
|||||||
|
Short-term
investments
|
$ (81)
|
$ (24)
|
$ (105)
|
$ 12
|
$ (22)
|
$ (10)
|
|
|
Investment
Securities:
(2)
|
|||||||
|
Taxable
|
1,037
|
2,423
|
3,460
|
1,350
|
(121)
|
1,229
|
|
|
Nontaxable
|
-
|
340
|
340
|
2
|
(464)
|
(462)
|
|
|
Total
investment income
|
1,037
|
2,763
|
3,800
|
1,352
|
(585)
|
767
|
|
|
Loans
:
|
|||||||
|
Commercial
|
(8,839)
|
(483)
|
(9,322)
|
1,599
|
1,833
|
3,432
|
|
|
Real
estate
|
(1,086)
|
(678)
|
(1,764)
|
851
|
(1,333)
|
(482)
|
|
|
Consumer
|
(203)
|
512
|
309
|
3
|
741
|
744
|
|
|
Total
loan income
|
(10,128)
|
(649)
|
(10,777)
|
2,453
|
1,241
|
3,694
|
|
|
Total
interest income
|
(9,172)
|
2,090
|
(7,082)
|
3,817
|
634
|
4,451
|
|
|
INTEREST
EXPENSE:
|
|||||||
|
Deposits:
|
|||||||
|
Savings
deposits
|
(149)
|
7
|
(142)
|
(23)
|
(58)
|
(81)
|
|
|
Interest-bearing
transaction
|
(660)
|
397
|
(263)
|
540
|
(11)
|
529
|
|
|
Money
market
|
(2,867)
|
702
|
(2,165)
|
279
|
964
|
1,243
|
|
|
Brokered
time
|
(262)
|
(1,259)
|
(1,521)
|
306
|
(482)
|
(176)
|
|
|
Retail
time
|
(3,272)
|
1,698
|
(1,574)
|
2,376
|
823
|
3,199
|
|
|
Total
deposit cost
|
(7,210)
|
1,545
|
(5,665)
|
3,478
|
1,236
|
4,714
|
|
|
Borrowed
funds:
|
|||||||
|
Short-term
borrowings
|
(4,924)
|
(3,528)
|
(8,452)
|
86
|
1,306
|
1,392
|
|
|
Long-term
borrowings
|
(441)
|
2,808
|
2,367
|
823
|
(3,008)
|
(2,185)
|
|
|
Total
borrowed funds cost
|
(5,365)
|
(720)
|
(6,085)
|
909
|
(1,702)
|
(793)
|
|
|
Total
interest expense
|
(12,575)
|
825
|
(11,750)
|
4,387
|
(466)
|
3,921
|
|
|
Net
interest income
|
$ 3,403
|
$ 1,265
|
$ 4,668
|
$ (570)
|
$ 1,100
|
$ 530
|
|
|
(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 both 2008 and 2007 has been impacted by the extreme
changes in market interest rates and slope of the yield curve in response to
monetary actions by the Federal Reserve. These events have produced
disproportionate changes in Peoples’ asset yields and funding costs, thereby
impacting the amount of net interest income generated.
During
the recent periods of changing interest rate conditions, Peoples has actively
managed its balance sheet and interest rate risk profile to minimize the impact
on earnings. These actions have included adjusting the mix of earning
assets and funding sources when opportunities were presented from loan demand
and retail deposit growth. However, significant commercial loan
payoffs during the second half of 2007 and an elevated level of charge-offs in
2008 have hampered management’s efforts and necessitated growing the investment
portfolio in order to maintain interest income levels. In addition,
retail deposit growth during the fourth quarter of 2008 resulted in excess funds
that were used to purchase investment securities. This expansion of
the investment portfolio has contributed to the reduction in overall yield on
earning assets, considering investment securities purchased by Peoples carry
lower yields compared to loans originated.
Retail
deposit growth in 2007 and 2008 allowed Peoples to reduce the amount of, and
reliance on, wholesale funding sources that typically carry higher market rates
of interest. These efforts, coupled with lower short-term interest
rates, produced a lower overall cost of funds in 2008. During most of
2007, Peoples’ funding costs increased due to matured deposits and borrowings
being replaced at the higher market rates that existed. 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. Management also initiated a strategy in
the second half of 2007 designed to reduce the impact of repricing large blocks
of funding by systematically borrowing funds in a given maturity range over a
period of time thus creating a stream of smaller future
maturities. This strategy accounted for much of the increase in
average long-term borrowings in 2008 compared to prior periods.
Detailed
information regarding changes in Peoples’ Consolidated Balance Sheets can be
found under appropriate captions of the “FINANCIAL CONDITION” section of this
discussion. Additional information regarding Peoples’ interest rate
risk and the potential impact of interest rate changes on Peoples’ results of
operations and financial condition can be found later in this discussion under
the caption “Interest Rate Sensitivity and Liquidity”.
Provision
for Loan Losses
The
following table details Peoples’ provision for loan losses:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Provision
for checking account overdrafts
|
1,125
|
558
|
712
|
||
|
Provision
for other loan losses
|
26,515
|
3,401
|
2,910
|
||
|
Total
provision for loan losses
|
$ 27,640
|
$ 3,959
|
$ 3,622
|
||
|
As
a percentage of average gross loans
|
2.48%
|
0.35%
|
0.33%
|
The
provision for loan losses is based on management’s formal quarterly evaluation
of the loan portfolio and analysis of the adequacy of the allowance for loan
losses described in the “Critical Accounting Policies” section of this
discussion. This analysis considers various factors that affect losses, such as
changes in Peoples’ loan quality, historical loss experience and current
economic conditions.
The
higher provision for loan losses in 2008 compared to prior periods reflects an
increase in the allowance for loan losses throughout most of the year in
response to changes in loan quality, coupled with losses on impaired loans from
declines in commercial real estate values. In the fourth quarter of
2008, Peoples recorded a provision for loan losses of $13.4 million, compared to
$6.0 million and $1.5 million for the third quarter of 2008 and fourth quarter
of 2007, respectively. Approximately $6.1 million, or 45%, of the
fourth quarter 2008 provision was attributed to continued deterioration in loan
quality within the commercial loan portfolio, while another $5.8 million, or
43%, was due to continued declines in commercial real estate collateral
values. The provision for loan losses for both 2007 and 2006 were
higher than historical levels from losses associated with a limited number of
larger loan relationships.
Additional
information regarding changes in the allowance for loan losses and loan credit
quality can be found later in this discussion under the caption “Allowance for
Loan Losses”.
Non-Interest
Income
Peoples
generates non-interest income, which excludes gains and losses on investments
and assets, from six primary sources: deposit account service charges, trust and
investment activities, insurance sales revenues, electronic banking
(“e-banking”), mortgage banking and bank owned life insurance
(“BOLI”).
In recent
years, Peoples has placed increased emphasis on reducing its reliance on net
interest income by growing non-interest income, especially fee-based revenues
not affected by interest rate changes, and, thus, diversifying its revenue
stream. While this focus has resulted in enhanced non-interest
income, the downturn in the market values of investments during 2008 has
impacted fiduciary and brokerage revenues and restrained the overall increase in
total revenues. In addition, insurance revenues in both 2007 and 2008
have been challenged by tighter pricing margins within the insurance industry
caused by insurance companies reducing premiums to attract market
share. As a result, non-interest income accounted for 35.4% of
Peoples’ total revenues in 2008, compared to 36.8% in 2007 and 36.3% in
2006.
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 and similar to fees charged in Peoples’ markets by
competitors. The following table details Peoples’ deposit account
service charges:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Overdraft
fees
|
$ 7,356
|
$ 6,818
|
$ 6,868
|
||
|
Non-sufficient
funds fees
|
1,682
|
1,965
|
2,107
|
||
|
Other
fees and charges
|
1,099
|
1,107
|
1,240
|
||
|
Total
deposit account service charges
|
$ 10,137
|
$ 9,890
|
$ 10,215
|
The
amount of deposit account service charges, particularly overdraft and
non-sufficient funds fees, is largely dependent on the timing and volume of
customer activity. As a result, the amount ultimately recognized by
Peoples can fluctuate from period to period. The lower deposit
account service charges in 2007 were caused by higher than normal fee waivers
early in the year. Fee waivers moderated in the second half of 2007,
which contributed to the increased amount of deposit account service charges in
2008.
Insurance
income also comprises a significant portion of Peoples’ total non-interest
income. The following table details Peoples’ insurance
income:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Property
and casualty insurance commissions
|
$ 7,982
|
$ 7,997
|
$ 7,765
|
||
|
Life
and health insurance commissions
|
645
|
596
|
568
|
||
|
Credit
life and A&H insurance commissions
|
175
|
158
|
164
|
||
|
Performance
based commissions
|
864
|
817
|
1,041
|
||
|
Other
fees and charges
|
236
|
133
|
81
|
||
|
Total
insurance income
|
$ 9,902
|
$ 9,701
|
$ 9,619
|
Property
and casualty insurance sales remain the major component of Peoples’ insurance
activities. The related commission revenues remained stable in 2008
and 2007, as increased production more than offset the impact of lower pricing
margins within the insurance industry. The bulk of the performance
based commission income is received annually by Peoples during the first quarter
and is based on a combination of factors, including loss experience of insurance
policies sold, production volumes and overall financial performance of the
insurance industry during the preceding year. As a result, the amount
of contingent income recognized by Peoples is difficult to predict and could
fluctuate from year to year.
Peoples’
trust and investment income is comprised of revenue generated from its fiduciary
activities and the sale of investment services. The following tables
detail Peoples’ trust and investment income and managed assets:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Fiduciary
|
$ 4,113
|
$ 4,099
|
$ 3,508
|
||
|
Brokerage
|
1,026
|
884
|
750
|
||
|
Total
trust and investment income
|
$ 5,139
|
$ 4,983
|
$ 4,258
|
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Trust
assets under management
|
$ 685,705
|
$ 797,443
|
$ 736,745
|
||
|
Brokerage
assets under management
|
184,301
|
223,950
|
195,617
|
||
|
Total
managed assets
|
$ 870,006
|
$
1,021,393
|
$ 932,362
|
Both
fiduciary and brokerage revenues are based in part on the value of assets under
management. Over the last several quarters, Peoples has been
successful in attracting new clients and during 2008 attracted over $50 million
in new assets, which generated additional revenues in 2008. However,
the downturn in the financial markets in the second half of 2008 caused the
decline in asset value since year-end 2007.
Peoples’
e-banking services include ATM and debit cards, direct deposit services and
Internet banking, and serve as alternative delivery channels to traditional
sales offices for providing services to clients. In 2008 and 2007,
Peoples’ e-banking income experienced double-digit year-over-year growth,
increasing 10% and 14%, respectively, as the result of sustained growth in debit
card activity. At December 31, 2008, Peoples had 39,279 deposit
relationships with debit cards, or 57% of all eligible deposit accounts,
compared to 37,427 relationships, or 53% of eligible accounts, at year-end 2007
and 35,896 relationships, or 52% of eligible accounts at December 31,
2006. In 2008, Peoples’ customers used their debit cards to complete
$272 million of transactions, versus $231 million in 2007 and $194 million in
2006, representing increases of 17% and 18%, 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
is largely dependent on customer demand and interest rates in
general. In 2008, Peoples experienced decreased mortgage banking
activity, due largely to conditions in the real estate market and economy as a
whole, while in 2007, mortgage-banking income increased 7%, from a higher volume
of loans sold.
Income
generated by Peoples’ BOLI investment serves to enhance operating efficiency by
partially offsetting rising employee benefit costs. Changes in the
interest rate environment can have an impact on the associated investment funds
and thus the amount of BOLI income recognized by Peoples. Management
monitors the performance of Peoples’ BOLI and may make adjustments to improve
the income streams and overall performance. Still, management
believes BOLI provides a better long-term vehicle for funding future employee
benefit costs, and offsetting the related expense, than alternative investment
opportunities with similar risk characteristics.
Non-Interest
Expense
Salaries
and employee benefit costs represent Peoples’ largest non-interest expense,
accounting for over 50% of total non-interest expense, which is inherent in a
service-based industry such as financial services.
The
following table details Peoples’ salaries and employee benefit
costs:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Salaries
and wages
|
$ 18,386
|
$ 17,403
|
$ 17,013
|
||
|
Sales-based
and incentive compensation
|
3,672
|
3,985
|
3,373
|
||
|
Employee
benefits
|
3,983
|
3,574
|
3,481
|
||
|
Stock-based
compensation
|
498
|
391
|
280
|
||
|
Payroll
taxes and other employment-related costs
|
1,982
|
2,199
|
2,031
|
||
|
Total
salaries and employee benefit costs
|
$ 28,521
|
$
27,552
|
$
26,178
|
||
|
Full-time
equivalent employees:
|
|||||
|
Actual
at December 31
|
546
|
559
|
547
|
||
|
Average
during the year
|
552
|
554
|
539
|
Normal
base salary adjustments produced higher salaries and wages in both 2008 and
2007, although larger deferrals of salaries attributed to loan origination costs
offset much of the impact on 2007’s expense. The majority of the
sales-based and incentive compensation is attributable to Peoples’ insurance and
investment sales activities. While Peoples has incurred higher
insurance and investment sales-based compensation in both 2008 and 2007, the
additional expense in 2008 was more than offset by lower incentive plan expense
tied to Peoples’ full year 2008 results of operation. Peoples’
employee benefit costs have been impacted by a steady increase in employee
medical benefit costs in recent years. These increases have been
tempered by lower pension costs.
Stock-based
compensation expense reflects the impact of equity-based incentive awards to
employees and directors since January 1, 2006. Compensation expense
is generally recognized over the vesting period, which is typically three years
for most awards to employees. However, Peoples must immediately
recognize the entire expense for awards to employees who are eligible for
retirement at the grant date. As a result, 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 17 of the Notes to the Consolidated Financial Statements.
Peoples’
net occupancy and equipment expense was comprised of the following:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Depreciation
|
$ 2,066
|
$ 2,061
|
$ 2,128
|
||
|
Repairs
and maintenance costs
|
1,452
|
1,386
|
1,313
|
||
|
Net
rent expense
|
671
|
660
|
630
|
||
|
Property
taxes, utilities and other costs
|
1,351
|
1,191
|
1,181
|
||
|
Total
net occupancy and equipment expense
|
$ 5,540
|
$ 5,298
|
$ 5,252
|
Depreciation
expense, although flat in 2008, decreased in 2007 due to 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 as a result of normal increases in assessed values and
increased utility costs from rising energy costs in 2008. Management
continues to monitor capital expenditures and explore opportunities to enhance
Peoples’ operating efficiency.
In 2007
and 2008, FDIC insurance expense was impacted by the utilization of a one-time
credit of $1.0 million received in 2007. This credit was received in
connection with other changes to the deposit insurance system and to offset
future insurance premiums, subject to certain limitations. Peoples
utilized $0.5 million of this credit during 2007 and the remainder during the
first nine months of 2008. As a result, FDIC insurance expense was
$219,000 for the fourth quarter of 2008 versus $55,000 for the third quarter of
2008.
Peoples’
intangible asset amortization expense decreased in both 2008 and 2007 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, 2008.
Professional
fees and other third-party services, which include accounting, legal and other
professional expenses, declined 2% in 2008 and 9% in 2007. These
reductions were due to an overall lower utilization of external legal and
consulting services. During 2006, Peoples incurred additional
professional fees related to the review and administration of various employee
benefit plans, which also contributed to the overall decrease in
2007.
Marketing
and public relations expense, which includes the cost of advertising, public
relations and charitable contributions, decreased over the last two years from a
reduction in costs associated with Peoples’ direct mail and gift campaigns
initiated in late 2005. Management believes 2009 marketing expense
will be comparable to 2008’s expense.
Peoples’
e-banking expense, which is comprised of bankcard and internet-based banking
costs, increased in both 2007 and 2008 as a result of customers completing a
larger percentage of their transactions using their debit cards and Peoples’
internet banking service. These factors have also produced a greater
increase in the corresponding e-banking revenues over the same
periods. Overall, management believes e-banking expense levels are
reasonable considering Peoples’ e-banking services have generated higher net
revenues and have helped to improve overall relationship profitability, due to
the lower transaction costs incurred by Peoples.
Peoples
is subject to franchise taxes, which are based largely on Peoples Bank’s equity
at year-end, in the states where it has a physical presence. Overall,
state franchise taxes have remained consistent over the last two years, from
relatively stable equity levels at Peoples Bank, although the 2007’s franchise
tax expense was lower due to the Ohio Franchise Tax
Settlement. Peoples regularly evaluates the capital position of its
direct and indirect subsidiaries from both a cost and leverage
perspective. Ultimately, management seeks to optimize Peoples’
consolidated capital position through allocation of capital, which is intended
to enhance profitability and shareholder value.
In 2008,
other non-interest expense increased 7% compared to 2007, due largely to
additional loan-related expenses associated with the higher level of impaired
and nonperforming loans. Compared to 2006, other non-interest expense
was down in 2007, due largely to modest decreases in losses from deposit
accounts and correspondent bank processing fees.
Income
Tax Expense
Peoples’
effective income tax rate was 2.1% in 2008 versus 23.3% in 2007 and 26.7% in
2006. The lower effective tax rate in 2008 was largely attributable
to the reduction in pre-tax income from higher loan loss provision and
impairment charges without a corresponding decrease in income from tax-exempt
sources. A reconciliation of income tax expense and effective tax
rate to the statutory tax rate can be found in Note 14 of the Notes to the
Consolidated Financial Statements. While management anticipates an
effective tax rate in 2009 comparable to 2007 and 2006, the amount of pre-tax
income derived from tax-exempt sources will have a major impact on the annual
effective tax rate.
FINANCIAL
CONDITION
Cash
and Cash Equivalents
Peoples
considers cash and cash equivalents to consist of Federal Funds sold, cash and
balances due from banks, interest-bearing balances in other institutions and
other short-term investments that are readily liquid. The amount of
cash and cash equivalents fluctuates on a daily basis due to customer activity
and Peoples’ liquidity needs.
In 2008,
cash and cash equivalents decreased $9.6 million to $35.6 million at December
31, 2008. Investing activities consumed $168.9 million of net cash,
while financing and operating activities provided net cash of $123.8 million and
$35.6 million, respectively. Purchases of new investment securities
exceeded the cash flows from sales, maturities, calls and principal payments and
accounted for most of the cash used in investing activities.
In
comparison, cash and cash equivalents increased $5.4 million in 2007, as 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. In 2006, cash and cash equivalents were flat, as net
cash from operations of $31.0 million and $0.4 million from financing activities
were used in investing activities.
Further
information regarding the management of Peoples’ liquidity position can be found
later in this discussion under “Interest Rate Sensitivity and
Liquidity.”
Investment
Securities
The following
table details Peoples’ investment portfolio at December 31:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Available-for-sale
investment securities, at fair value:
|
|||||
|
Obligations
of U.S. Treasury and government agencies
|
$ 176
|
$ 197
|
$ 282
|
||
|
Obligations
of U.S. government-sponsored enterprises
|
6,585
|
84,457
|
130,600
|
||
|
Obligations
of states and political subdivisions
|
68,930
|
69,247
|
53,938
|
||
|
Mortgage-backed
securities
|
535,475
|
358,683
|
304,413
|
||
|
Corporate
obligations and other securities
|
73,591
|
29,647
|
36,302
|
||
|
Total
available-for-sale investment securities
|
$ 684,757
|
$ 542,231
|
$ 525,535
|
||
|
Total
amortized cost
|
$ 696,855
|
$ 535,979
|
$ 527,041
|
||
|
Net
unrealized (loss) gain
|
$ (12,098)
|
$ 6,252
|
$ (1,506)
|
||
|
Other
investment securities, at cost:
|
|||||
|
FHLB
of Cincinnati stock
|
$ 19,584
|
$ 18,820
|
$ 18,820
|
||
|
Federal
Reserve Bank of Cleveland stock
|
4,412
|
4,412
|
4,378
|
||
|
Total
other investment securities
|
$ 23,996
|
$ 23,232
|
$ 23,198
|
||
|
Total
investment securities
|
$ 708,753
|
$ 565,463
|
$ 548,733
|
Management
grew the investment portfolio in 2007 and early 2008 to lessen the impact of
higher levels of loan payoffs in both years and sizable charge-offs in 2008 on
interest income levels. Much of 2008 growth occurred during the
fourth quarter when management invested excess funding from an increase in
deposit balances. A portion of the 2007 growth occurred during the
third quarter when Peoples took advantage of attractive yields that existed at
the time and pre-funded expected near-term investment portfolio cash flows from
calls and normal principal paydowns. Peoples’ investment in
mortgage-backed securities has increased as the result of management reinvesting
some of the principal runoff from the portfolio into these types of securities,
as well as the repositioning of the portfolio during 2008 to reduce credit and
interest rate exposures. The sale of the preferred stocks issued by
Fannie Mae and Freddie Mac during the first half of 2008 was a contributing
factor to the reduced investment in obligations of U.S. government-sponsored
enterprises. While these preferred stocks were sold at a net loss,
Peoples was able to avoid even larger losses from those investments had they
remained in its investment portfolio.
Peoples’
corporate obligations and other securities historically have consisted of
various individual bank-issued trust preferred securities, four separate
collateralized debt obligation (“CDO”) investment securities and common stocks
issued by unrelated bank holding companies. During 2008, Peoples
purchased several asset-backed securities collateralized by U.S.
government-backed student loan pools, which had a total fair value of $48.5
million at December 31, 2008.
Since
year-end 2007, the fair value of the available-for-sale investment portfolio has
decreased as the result of conditions in the financial markets. At
December 31, 2008, management determined certain investment securities were
other-than-temporarily impaired based upon an evaluation of the credit quality
of underlying issuers. As a result, Peoples recorded a $4.0 million
other-than-temporary impairment charge, of which $2.0 million related to a
single bank-issued trust preferred security previously carried at $2.0 million
and $2.0 million related to four CDO investments previously carried at $6.1
million. After the fourth quarter impairment charges, the carrying
values of Peoples’ individual trust preferred and CDO portfolios were $20.8
million and $4.1 million, respectively, at December 31,
2008. Management concluded no other material individual securities
with an unrealized loss at December 31, 2008, were other-than-temporarily
impaired.
Additional
information regarding Peoples’ investment portfolio can be found in Note 3 of
the Notes to the Consolidated Financial Statements.
Loans
The following
table details total outstanding loans at December 31:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||
|
Year-end
loan balances:
|
|||||||||
|
Commercial,
mortgage
|
$ 478,298
|
$ 513,847
|
$ 469,934
|
$ 504,923
|
$ 450,270
|
||||
|
Commercial,
other
|
178,834
|
171,937
|
191,847
|
136,331
|
126,473
|
||||
|
Real
estate, mortgage
|
231,778
|
237,641
|
252,726
|
272,327
|
303,372
|
||||
|
Real
estate, construction
|
77,917
|
71,794
|
99,311
|
50,745
|
35,423
|
||||
|
Home
equity lines of credit
|
47,635
|
42,706
|
44,937
|
43,754
|
46,593
|
||||
|
Consumer
|
87,902
|
80,544
|
72,531
|
62,737
|
59,572
|
||||
|
Deposit
account overdrafts
|
1,668
|
2,472
|
1,108
|
1,059
|
1,355
|
||||
|
Total
loans
|
$1,104,032
|
$1,120,941
|
$1,132,394
|
$1,071,876
|
$1,023,058
|
||||
|
Average
total loans
|
1,113,247
|
1,122,808
|
1,108,575
|
1,040,029
|
942,761
|
||||
|
Average
allowance for loan losses
|
(17,428)
|
(14,775)
|
(15,216)
|
(14,930)
|
(14,974)
|
||||
|
Average
loans, net of allowance
|
$1,095,819
|
$1,108,033
|
$1,093,359
|
$1,025,099
|
$ 927,787
|
||||
|
Percent
of loans to total loans at December 31:
|
|||||||||
|
Commercial,
mortgage
|
43.3%
|
45.8%
|
41.5%
|
47.1%
|
44.0%
|
||||
|
Commercial,
other
|
16.2%
|
15.3%
|
16.9%
|
12.7%
|
12.4%
|
||||
|
Real
estate, mortgage
|
21.0%
|
21.2%
|
22.3%
|
25.4%
|
29.7%
|
||||
|
Real
estate, construction
|
7.1%
|
6.4%
|
8.8%
|
4.7%
|
3.5%
|
||||
|
Home
equity lines of credit
|
4.3%
|
3.8%
|
4.0%
|
4.1%
|
4.6%
|
||||
|
Consumer
|
7.9%
|
7.3%
|
6.4%
|
5.9%
|
5.7%
|
||||
|
Deposit
account overdrafts
|
0.2%
|
0.2%
|
0.1%
|
0.1%
|
0.1%
|
||||
|
Total
percentage
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
||||
Although
loan production remained steady in 2008, total loan balances declined since
year-end 2007, due to normal commercial mortgage loan payoffs offsetting new
production and the impact of charge-offs in 2008. In prior years,
Peoples experienced growth in commercial mortgage loan balances due to strong
demand in and around central Ohio, although higher than normal payoffs during
2007 produced lower commercial balances at December 31, 2007.
The
changes in Peoples’ construction loan balances reflect the demand for commercial
construction loans, which comprise a significant portion of the outstanding
construction loan balances. In prior years, Peoples 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 maturities of Peoples’ commercial and construction
loans at December 31, 2008:
|
(Dollars
in thousands)
|
Due
in One
Year
or Less
|
Due
in One
to
Five Years
|
Due
After
Five
Years
|
Total
|
|||
|
Loan
Type
|
|||||||
|
Commercial,
mortgage:
|
|||||||
|
Fixed
|
$ 24,727
|
$ 45,712
|
$ 20,943
|
$ 91,382
|
|||
|
Variable
|
46,140
|
30,100
|
310,676
|
386,916
|
|||
|
Total
|
$ 70,867
|
$ 75,812
|
$ 331,619
|
$ 478,298
|
|||
|
Commercial,
other:
|
|||||||
|
Fixed
|
$ 10,001
|
$ 56,612
|
$ 9,851
|
$ 76,464
|
|||
|
Variable
|
63,000
|
20,967
|
18,403
|
102,370
|
|||
|
Total
|
$ 73,001
|
$ 77,579
|
$ 28,254
|
$ 178,834
|
|||
|
Real
estate, construction:
|
|||||||
|
Fixed
|
$ 34
|
$ 9,032
|
$ 2,677
|
$ 11,743
|
|||
|
Variable
|
16,430
|
11,529
|
38,215
|
66,174
|
|||
|
Total
|
$ 16,464
|
$ 20,561
|
$ 40,892
|
$ 77,917
|
|||
Peoples
also experienced continued growth in consumer loan balances, due mainly to the
efforts in its indirect lending area. Peoples’ indirect lending
activity involves the origination of consumer loans primarily through automobile
dealers and comprises a significant portion of its total consumer
loans. Management remains committed to originating quality consumer
loans based on sound underwriting practices and appropriate loan pricing
discipline, which could limit opportunities for future growth.
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 originated and retained in its
loan portfolio certain fixed-rate mortgages, primarily loans with an original
maturity of 15 years or less.
Loan
Concentration
Peoples’
largest industrial concentration of loans consists of credits to borrowers in
the lodging and lodging related industry, with total outstanding balances of
$60.5 million at December 31, 2008, and $50.6 million at December 31, 2007,
representing 12.7% and 9.8% of total outstanding commercial real estate loans,
respectively. Loans to borrowers in the assisted living facilities
and nursing home industry also represent a significant portion of Peoples’
commercial real estate loans. Total outstanding balances of these
loans were $54.9 million, or 11.5% of total outstanding commercial real estate
loans, at December 31, 2008, compared to $54.0 million, or 10.5%, at December
31, 2007. These credits were subjected to Peoples’ normal commercial
underwriting standards, which include an evaluation of the financial strength,
market expertise and experience of the borrowers and principals in these
business relationships.
Peoples’
commercial lending activities continue to focus primarily on lending
opportunities inside its primary market areas, with loans outside Peoples’
primary market areas comprising approximately 10% of total outstanding loan
balances, at both December 31, 2008 and 2007. The majority of loans
are located in Ohio, West Virginia and Kentucky, with total outstanding balances
of $76.6 million and $59.9 million at year-end 2008 and 2007,
respectively. In all other states, the aggregate outstanding balance
in the state was less than $5 million, except Arizona and Florida, which had
outstanding balances of $10.0 million and $8.2 million, respectively, at
December 31, 2008. The Arizona and Florida loans were generated
primarily through existing central Ohio-based client relationships.
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)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||
|
Allowance
for loan losses:
|
|||||||||
|
Allowance
for loan losses, January 1
|
$ 15,718
|
$ 14,509
|
$ 14,720
|
$ 14,760
|
$ 14,575
|
||||
|
Gross
charge offs:
|
|||||||||
|
Commercial
|
18,672
|
2,265
|
3,485
|
1,745
|
961
|
||||
|
Real
estate
|
911
|
606
|
361
|
827
|
677
|
||||
|
Consumer
|
1,088
|
981
|
631
|
656
|
886
|
||||
|
Overdrafts
|
1,298
|
849
|
1,007
|
965
|
1,130
|
||||
|
Credit
card
|
–
|
–
|
–
|
–
|
133
|
||||
|
Total
gross charge offs
|
21,969
|
4,701
|
5,484
|
4,193
|
3,787
|
||||
|
Recoveries:
|
|||||||||
|
Commercial
|
647
|
950
|
578
|
1,155
|
487
|
||||
|
Real
estate
|
96
|
202
|
377
|
223
|
186
|
||||
|
Consumer
|
454
|
513
|
389
|
394
|
431
|
||||
|
Overdrafts
|
333
|
280
|
303
|
327
|
308
|
||||
|
Credit
card
|
12
|
6
|
4
|
26
|
14
|
||||
|
Total
recoveries
|
1,542
|
1,951
|
1,651
|
2,125
|
1,426
|
||||
|
Net
charge-offs (recoveries):
|
|||||||||
|
Commercial
|
18,025
|
1,315
|
2,907
|
590
|
474
|
||||
|
Real
estate
|
815
|
404
|
(16)
|
604
|
491
|
||||
|
Consumer
|
634
|
468
|
242
|
262
|
455
|
||||
|
Overdrafts
|
965
|
569
|
704
|
638
|
822
|
||||
|
Credit
card
|
(12)
|
(6)
|
(4)
|
(26)
|
119
|
||||
|
Total
net charge-offs
|
20,427
|
2,750
|
3,833
|
2,068
|
2,361
|
||||
|
Provision
for loan losses, December 31
|
27,640
|
3,959
|
3,622
|
2,028
|
2,546
|
||||
|
Allowance
for loan losses, December 31
|
$ 22,931
|
$ 15,718
|
$ 14,509
|
$ 14,720
|
$ 14,760
|
In 2008,
gross charge-offs increased significantly compared to the prior year largely
attributable to losses totaling $16.6 million on impaired commercial loans that
became under-collateralized during the year, due to declines in the estimated
net realizable fair value of the underlying collateral. Gross
charge-offs in 2007 were higher than historical levels related primarily to
losses totaling $2.1 million from six unrelated loan
relationships. One of these relationships also accounted for $2.9
million of the gross charge-offs in 2006. Gross recoveries for 2008
were lower than recent periods as the result of sizeable, unanticipated
recoveries in previous years, which were related to a limited number of
unrelated loan relationships. 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)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||
|
Commercial
|
$ 19,757
|
$ 14,147
|
$ 12,661
|
$ 11,883
|
$ 11,751
|
||||
|
Real
estate
|
1,414
|
419
|
957
|
1,400
|
1,175
|
||||
|
Consumer
|
1,315
|
868
|
596
|
1,149
|
1,394
|
||||
|
Overdrafts
|
445
|
284
|
295
|
288
|
327
|
||||
|
Credit
card
|
–
|
–
|
–
|
–
|
113
|
||||
|
Total
allowance for loan losses
|
$
22,931
|
$
15,718
|
$
14,509
|
$
14,720
|
$
14,760
|
||||
|
As
a percentage of total loans
|
2.08%
|
1.40%
|
1.28%
|
1.37%
|
1.44%
|
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. Since year-end
2007, this allocation has increased due mostly to management downgrading the
loan quality ratings of certain commercial real estate loans and placing
additional loans on nonaccrual status as part of its normal loan review
process. These actions reflect the deterioration in the financial
condition of various commercial borrowers and declines in the underlying
collateral values of several large commercial real estate loans caused by the
contracting economy and commercial real estate market during 2008. In
addition, the weakening economic conditions during 2008 resulted in changes to
the qualitative factors used in determining the appropriate level of allowance
for loan losses for non-impaired commercial loans, which contributed to the
higher allowance for loan losses compared to prior periods.
The
allowance allocated to the real estate and consumer loan categories is based
upon Peoples’ allowance methodology for homogeneous pools of
loans. The fluctuations in these allocations have been directionally
consistent with the changes in loan quality, loss experience and changes in loan
balances in these categories.
In prior
periods, Peoples 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.
The
following table details Peoples’ nonperforming assets at December
31:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||
|
Loans
90+ days past due and accruing
|
$ –
|
$ 378
|
$ 1
|
$ 251
|
$ 285
|
||||
|
Renegotiated
loans
|
–
|
–
|
1,218
|
–
|
1,128
|
||||
|
Nonaccrual
loans
|
41,320
|
8,980
|
8,785
|
6,284
|
5,130
|
||||
|
Total
nonperforming loans
|
41,320
|
9,358
|
10,004
|
6,535
|
6,543
|
||||
|
Other
real estate owned
|
525
|
343
|
–
|
308
|
1,163
|
||||
|
Total
nonperforming assets
|
$ 41,845
|
$ 9,701
|
$ 10,004
|
$ 6,843
|
$ 7,706
|
||||
|
Nonperforming
loans as a percent of total loans
|
3.74%
|
0.83%
|
0.88%
|
0.61%
|
0.64%
|
||||
|
Nonperforming
assets as a percent of total assets
|
2.09%
|
0.51%
|
0.53%
|
0.37%
|
0.43%
|
||||
|
Allowance
for loan losses as a percent of
|
|||||||||
|
nonperforming
loans
|
55.5%
|
168.0%
|
145.0%
|
225.2%
|
225.6%
|
Peoples’
nonaccrual loans are comprised almost entirely of commercial and real estate
loans, with much of the increase in 2008 isolated to eight large commercial real
estate loan relationships. Several of the loans placed on nonaccrual status
during 2008 were charged down to the estimated net realizable fair value of the
underlying collateral, resulting in the lower allowance for loan losses to
nonperforming loans ratios compared to prior periods. Interest income
on loans classified as nonaccrual and renegotiated at each year-end that would
have been recorded under the original terms of the loans was $1,936,000;
$786,000 and $567,000 for 2008; 2007 and 2006, respectively, of which $20,000;
$47,000 and $34,000, 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.
Deposits
Peoples’
deposit balances were comprised of the following at December
31:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||
|
Retail
certificates of deposit
|
$ 626,195
|
$ 499,684
|
$ 514,885
|
$ 465,148
|
$ 456,850
|
||||
|
Money
market deposit accounts
|
213,498
|
153,299
|
134,387
|
110,372
|
107,394
|
||||
|
Interest-bearing
transaction accounts
|
187,100
|
191,359
|
170,022
|
178,030
|
165,144
|
||||
|
Savings
accounts
|
115,419
|
107,389
|
114,186
|
131,221
|
157,145
|
||||
|
Total
retail interest-bearing deposits
|
1,142,212
|
951,731
|
933,480
|
884,771
|
886,533
|
||||
|
Brokered
certificates of deposits
|
44,116
|
59,589
|
129,128
|
41,786
|
29,909
|
||||
|
Total
interest-bearing deposits
|
1,186,328
|
1,011,320
|
1,062,608
|
926,557
|
916,442
|
||||
|
Non-interest-bearing
deposits
|
180,040
|
175,057
|
170,921
|
162,729
|
152,979
|
||||
|
Total
deposit balances
|
$
1,366,368
|
$
1,186,377
|
$
1,233,529
|
$
1,089,286
|
$
1,069,421
|
Overall,
Peoples ability to attract and retain retail deposits in recent years has been
challenged by progressively intense competition for deposits within its
markets. During 2008, Peoples successfully grew retail certificates
of deposit (“CDs”) by attracting nearly $108 million of funds from customers
outside its primary market area as an alternative to higher-cost brokered
deposits. Contributing to the higher retail CD balances in 2008 were
$35.7 million of funds deposited by customers through the Certificate of Deposit
Account Registry System, or CDARS, program, with $18 million attributable to a
single commercial deposit during the fourth quarter of 2008. These
increases were partially offset by an $18.7 million decline in governmental
deposits, which are subject to competitive bidding and typically require
pledging of investment securities as collateral.
Money
market balances have nearly doubled since year-end 2005, due largely to Peoples
offering a personal money market product with a more competitive
rate. In 2008, money market balances increased 39% in response to
Peoples offering more competitive rates, coupled with $45.6 million of
additional funds from trust customers. The increase in trust funds
was largely the result of certain alternative money market funds offered by
unaffiliated providers, which Peoples’ trust department had utilized for its
customers, being closed to new deposits late in the fourth quarter of 2008, due
to the ultra-low short-term interest rates. Management considers
these additional trust funds as short-term, inexpensive funding source, although
the amounts could change unexpectedly in future periods.
A
significant portion of Peoples’ interest-bearing transaction account balances
are comprised of deposits from state and local governmental entities, which are
subject to periodic fluctuations based on the timing of tax collections and
subsequent expenditures or disbursements. While Peoples has
experienced steady growth in these public funds over the last few years,
consumer balances contracted in 2008 and 2006, resulting in an overall decline
in interest-bearing transaction account 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 generated many new customer accounts and
higher consumer balances. The increase in 2007 was attributed to
commercial deposit growth. Peoples continues to focus on expanding
core deposit balances as a means of reducing reliance on typically higher
costing, wholesale funding sources.
In both
2008 and 2007, Peoples reduced its amount of brokered deposits, due to the
retail deposit growth and availability of other lower rate wholesale
funding. Management may continue to use 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)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||
|
3
months or less
|
$ 66,757
|
$ 42,809
|
$ 26,601
|
$ 25,884
|
$ 17,772
|
||||
|
Over
3 to 6 months
|
50,545
|
33,411
|
47,738
|
25,628
|
17,923
|
||||
|
Over
6 to 12 months
|
54,610
|
24,718
|
59,084
|
34,207
|
14,163
|
||||
|
Over
12 months
|
63,345
|
43,386
|
89,049
|
82,174
|
76,267
|
||||
|
Total
|
$235,257
|
$144,324
|
$222,472
|
$167,893
|
$126,125
|
Borrowed
Funds
In 2008,
Peoples reduced total borrowed funds 10%, to $429.6 million at December 31,
2008, as a $157.5 million decrease in short-term FHLB borrowings was partially
offset by a $76.3 million increase in long-term borrowings, primarily FHLB
advances, and higher balances in retail repurchase agreements. The
reduction in short-term FHLB borrowings occurred as a result of the retail
deposit growth. Long-term borrowings increased due largely to an
interest rate risk management strategy initiated in the second half of
2007. Retail repurchase agreements were up in 2008, due primarily to
a single commercial customer transferring approximately $14 million of money
market deposits to an overnight repurchase agreement late in the third quarter
of 2008. Additional information regarding Peoples’ borrowed funds can
be found in Notes 8 and 9 of the Notes to the Consolidated Financial
Statements.
Capital/Stockholders'
Equity
At
December 31, 2008, total stockholders’ equity was $186.6 million, down 8%
compared to year-end 2007, due mostly to a lower fair value of Peoples’
available-for-sale investments. Peoples also declared dividends
totaling $9.5 million, or $0.91 per share, in 2008, which exceeded net income by
$2.0 million, compared to dividends of $9.2 million, or $0.88 per share, in
2007, which represented 50.4% of 2007’s net income.
Throughout
2008, the capital positions of Peoples and its banking subsidiary have remained
substantially above amounts needed to be considered well capitalized by banking
regulations. These capital positions allowed Peoples to increase
dividends declared to shareholders during 2008, despite lower
earnings. However, Peoples’ ability to increase its quarterly
dividend in future periods, from its current rate of $0.23 per share, is
restricted as the result of participating in the TARP Capital Purchase
Program. 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 16 of the Notes to the
Consolidated Financial Statements, as well as the “Supervision and Regulation
–TARP Capital Purchase Program” and “Supervision and Regulation -Dividend
Restrictions” sections under Item 1 of this Form 10-K.
During
2008, Peoples has been less active with treasury stock purchases, as management
has focused on maintaining Peoples’ capital position, especially considering the
uncertainty that existed in the financial markets and economy as a
whole. In 2008, Peoples repurchased 13,600 of its common shares, at
an average price of $21.59, under its announced stock repurchase program,
compared to 463,600 common shares, at an average price of $26.21, in
2007. Peoples’ ability to repurchase common shares in future periods
will be limited since the announced stock repurchase program expired on December
31, 2008, and Peoples’ participation in the TARP Capital Purchase Program
restricts repurchases of common shares. Additional information
regarding these restrictions can be found in the “Supervision and
Regulation-TARP Capital Purchase Program” section under Item 1 of this Form
10-K.
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, 2008, Peoples’ tangible capital
ratio was 6.21% compared to 7.42% at December 31, 2007. The lower
ratio compared to the prior year-end was the result of an 11% decrease in
tangible equity, due mostly to the lower fair value of the investment portfolio,
coupled with a 7% increase in tangible assets from purchases of investment
securities.
Further
information regarding Peoples and Peoples Bank’s risk-based capital ratios can
be found in Note 16 of the Notes to Consolidated Financial
Statements
Interest
Rate Sensitivity and Liquidity
While
Peoples is exposed to various business risks, the risks relating to interest
rate sensitivity and liquidity are typically the most complex and dynamic risks
that can materially impact future results of operations and financial
condition. The objective of Peoples’ asset/liability management
(“ALM”) function is to measure and manage these risks in order to optimize net
interest income within the constraints of prudent capital adequacy, liquidity
and safety. This objective requires Peoples to focus on interest rate
risk exposure and adequate liquidity through its management of the mix of assets
and liabilities, their related cash flows and the rates earned and paid on those
assets and liabilities. Ultimately, the ALM function is intended to
guide management in the acquisition and disposition of earning assets and
selection of appropriate funding sources.
Interest
Rate Risk
Interest
rate risk (“IRR”) is one of the most significant risks arising in the normal
course of business of financial services companies like Peoples. IRR
is the potential for economic loss due to future interest rate changes that can
impact both the earnings stream as well as market values of financial assets and
liabilities. Peoples’ exposure to IRR is due primarily to differences
in the maturity or repricing of earning assets and interest-bearing
liabilities. In addition, other factors, such as prepayments of loans
and investment securities or early withdrawal of deposits, can expose Peoples to
IRR and increase interest costs or reduce revenue streams.
Peoples
has assigned overall management of IRR to the ALCO, which has established an IRR
management policy that sets minimum requirements and guidelines for monitoring
and managing the level and amount of IRR. The objective of Peoples’
IRR policy is to
assist the ALCO in its
evaluation of the impact of changing interest rate conditions on earnings and
economic value of equity, as well as assist with the implementation of
strategies intended to reduce Peoples’ IRR
. The management of
IRR involves either maintaining or changing the level of risk exposure by
changing the repricing and
maturity characteristics of the cash flows for specific assets or
liabilities.
The ALCO
uses various methods to assess and monitor the current level of Peoples’ IRR and
the impact of potential strategies or other changes. However, the
ALCO predominantly relies on simulation modeling in its overall management of
IRR since it is a dynamic measure. Simulation modeling also estimates
the impact of potential changes in interest rates and balance sheet structures
on future earnings and projected fair value of equity.
The
modeling process starts with a base case simulation using the current balance
sheet and current interest rates held constant for the next twelve
months. Alternate scenarios are prepared which simulate the impact of
increasing and decreasing market interest rates, assuming parallel yield curve
shifts. Comparisons produced from the simulation data, showing the
changes in net interest income from the base interest rate scenario, illustrate
the risks associated with the current balance sheet
structure. Additional simulations, when deemed appropriate or
necessary, are prepared using different interest rate scenarios than those used
with the base case simulation and/or possible changes in balance sheet
composition. Comparisons showing the earnings and equity value
variance from the base case are provided to the ALCO for review and
discussion.
The ALCO
has established limits on changes in net interest income and the economic value
of equity. 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 point shift
in interest rates.
The
following table illustrates the estimated impact of an immediate and sustained
change in interest rates (dollars in thousands):
|
Increase
in
|
Estimated
(Decrease) Increase
|
Estimated
(Decrease) Increase
|
||||||||||||||
|
Interest
Rate
|
in
Net Interest Income
|
in
Economic Value of Equity
|
||||||||||||||
|
(in
Basis Points)
|
December
31, 2008
|
December
31, 2007
|
December
31, 2008
|
December
31, 2007
|
||||||||||||
|
300
|
$ (1,713)
|
(2.9)%
|
$ (8,730)
|
(16.1)%
|
$ (5,386)
|
(2.4)%
|
$
(30,772)
|
(12.1)%
|
||||||||
|
200
|
(418)
|
(0.7)%
|
(5,276)
|
(9.7)%
|
(1,048)
|
(0.5)%
|
(19,186)
|
(7.6)%
|
||||||||
|
100
|
84
|
0.1
%
|
(2,264)
|
(4.2)%
|
2,946
|
1.3
%
|
(7,830)
|
(3.1)%
|
||||||||
This
table uses a standard, parallel shock analysis for assessing the IRR to net
interest income and the economic value of equity. A parallel shock
means all points on the yield curve (one year, two year, three year, etc.) are
directionally shocked the same amount of basis points (100 basis points equal to
1%). Although a parallel shock table can give insight into the
current direction and magnitude of IRR inherent in the balance sheet, interest
rates do not always move in a complete parallel manner during interest rate
cycles. These nonparallel movements in interest rates, commonly
called yield curve steepening or flattening movements, tend to occur during the
beginning and end of an interest rate cycle. As a result, management
conducts more advanced interest rate shock scenarios to gain a better
understanding of Peoples’ exposure to nonparallel rate shifts.
Throughout
2008, management shifted the balance sheet from its liability sensitive interest
risk position at year-end 2007 to a more neutral position given the uncertainty
regarding future interest rate changes. During the fourth quarter of
2008, management took steps to move the balance sheet to an asset sensitive
position in preparation for a rising interest rate
environment. Specifically, management selectively increased and
extended the maturities of borrowed funds and retail CDs, thereby reducing
overnight funding, and took steps to reposition the investment portfolio to
reduce price volatility. Due to these changes, management has reduced
net interest income at risk in an “up 100 basis point” rate shock as of December
31, 2008.
While the
balance sheet positioning at December 31, 2008, shows a reduction in net
interest income for various parallel rate shock scenarios, these shocks do not
take into account Peoples positioning along the interest rate curve or ALCO's
ability to take appropriate actions, when necessary, to further minimize the
impact of changes in interest rates on future earnings. The ALCO will
continue to monitor Peoples’ overall IRR position and take appropriate actions,
when necessary, to preserve the current balance sheet risk position and minimize
the impact of changes in interest rates on future earnings.
Liquidity
In
addition to IRR management, another major objective of the ALCO is to maintain a
sufficient level of liquidity. The ALCO defines liquidity as the
ability to meet anticipated and unanticipated operating cash needs, loan demand
and deposit withdrawals, without incurring a sustained negative impact on
profitability. The ALCO’s liquidity management policy sets limits on
the net liquidity position and the concentration of non-core funding sources,
both wholesale funding and brokered deposits.
Typically,
the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided by cash generated from earning assets such as maturities,
calls, principal payments and interest income from loans and investment
securities. Peoples also uses various wholesale funding sources to
supplement funding from customer deposits. These external sources
also provide Peoples with the ability to obtain large quantities of funds in a
relatively short time period in the event of unanticipated cash
needs.
At
December 31, 2008, Peoples had available borrowing capacity through its
wholesale funding sources and unpledged investment securities totaling
approximately $124 million that can be used to satisfy liquidity needs,
unchanged versus year-end 2007. This liquidity position excludes the
impact of Peoples’ ability to obtain additional funding by either offering
higher rates on retail deposits or issuing additional brokered
deposits. During 2008, management took steps to enhance the diversity
of the liquidity sources as a means of reducing reliance of the FHLB for
liquidity. Management believes the current balance of cash and cash
equivalents and anticipated cash flows from the investment portfolio, along with
the availability of other funding sources, will allow Peoples to meet
anticipated cash obligations, as well as special needs and off-balance sheet
commitments.
Off-Balance
Sheet Activities and Contractual Obligations
Peoples
routinely engages in activities that involve, to varying degrees, elements of
risk that are not reflected in whole or in part in the Consolidated Financial
Statements. These activities are part of Peoples’ normal course of
business and include traditional off-balance sheet credit-related financial
instruments, interest rate contracts, operating leases, long-term debt and
commitments to make additional capital contributions in low-income housing tax
credit investments.
The
following is a summary of Peoples’ significant off-balance sheet activities and
contractual obligations. Detailed information regarding these
activities and obligations can be found in the Notes to the Consolidated
Financial Statements as follows:
|
Activity
or Obligation
|
Note
|
|
|
Off-balance
sheet credit-related financial instruments
|
15
|
|
|
Interest
rate contracts
|
15
|
|
|
Low-income
housing tax credit investments
|
15
|
|
|
Operating
lease obligations
|
5
|
|
|
Long-term
debt obligations
|
9
|
|
|
Junior
subordinated notes held by subsidiary trusts
|
10
|
Traditional
off-balance sheet credit-related financial instruments are primarily commitments
to extend credit and standby letters of credit. These activities are
necessary to meet the financing needs of customers and could require Peoples to
make cash payments to third parties in the event certain specified future events
occur. The contractual amounts represent the extent of Peoples’
exposure in these off-balance sheet activities. However, since
certain off-balance sheet commitments, particularly standby letters of credit,
are expected to expire or only partially be used, the total amount of
commitments does not necessarily represent future cash
requirements.
At
December 31, 2008, 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,
2008, 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,
2008:
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
Peoples
continues to focus on serving clients, diversifying revenues, improving
operating efficiency and reducing reliance on net interest
income. However, contraction in the economy and commercial real
estate markets created increasingly difficult conditions within the financial
services industry. The impact of these adverse conditions on loan
quality and certain investment securities overshadowed any positive results in
2008 but highlighted the value of Peoples’ strong capital position and liquidity
levels.
A major
emphasis for management in 2008 was protecting Peoples’ capital and improving
liquidity levels. This focus provided stable capital
ratios. In January 2009, Peoples took steps to fortify its capital
position by participating in the TARP Capital Purchase Program, which generated
$39 million of new equity capital. With this additional capital,
Peoples’ Tier 1 and Total Risk-Based Capital ratios increased to 13.55% and
16.15%, using the risk-based capital data at December 31, 2008, compared to the
year-end 2008 ratios of 11.88% and 13.19%, respectively. Peoples’
primary intent is to use the new capital for loan originations, although the
stronger capital position also affords greater capacity to work through problem
loans and to provide appropriate relief to struggling mortgage and consumer
borrowers.
In 2008,
net interest income and margin improvement occurred from the combination of
lower short-term market rates and retail deposit growth. During the
fourth quarter of 2008, the aggressive action by the Federal Reserve resulted in
short-term rates falling to historically low levels. Management
believes net interest margin pressure could intensify if the Federal Reserve
keeps rates at current ultra-low levels for an extended
period. However, management remains focused on maintaining net
interest income levels and preserving Peoples’ current asset sensitive interest
rate risk position in preparation for the eventual rising interest rate
environment. Given the uncertainty surrounding the timing and
magnitude of future interest rate changes, as well as the impact of competition
for loans and deposits, Peoples’ net interest margin and income remain
inherently difficult to predict and manage.
The
investment securities portfolio could remain a significant portion of the
earning asset base in 2009. Peoples may take additional steps to
reposition the investment portfolio and further reduce interest rate exposures
as opportunities arise due to changes in market conditions. In
addition, the cash flow being generated from the investment portfolio on a
monthly basis has increased significantly due largely to overall increase in the
size of the portfolio and higher investment in mortgage-backed
securities. As a result, Peoples could adjust the size or composition
of the portfolio based on, among other factors, changes in the loan portfolio,
liquidity needs and interest rate conditions.
In 2007
and 2008, total loan balances were impacted by elevated levels of payoffs and
charge-offs, which offset new production. In 2009, management does
not anticipate the same level of payoffs or charge-offs. Loan growth
still could be challenged by economic conditions and the impact of selling
residential real estate loans to the secondary market. Peoples’
lenders remain committed to originating loans that meet prudent underwriting
standards given current economic conditions.
In 2008,
non-interest income benefited from growth in deposit account service charges and
e-banking income. While management believes similar increases could
occur in these areas during 2009, total non-interest income levels could be
challenged by the continued pressure on fiduciary and brokerage revenues from
lower market values of investments. Mortgage banking income could
benefit from customers seeking to refinance existing loans due to the lower
interest rate, although the impact of sluggish conditions in the housing market
and economy in general could reduce home sales and, thus, demand for new
mortgage loans. Peoples remains committed to customer-focused
delivery of financial services and increasing cross-sale activity among its
business lines, which should produce additional non-interest
revenues.
Operating
expense growth has been minimal over the last couple years due to management’s
efforts to improve efficiencies. While cost control will remain a
priority in 2009, management anticipates a modest increase in total non-interest
expense in 2009, due mostly to higher deposit insurance
costs. Peoples’ election to participate in the FDIC’s Temporary
Liquidity Guarantee Program, which provides unlimited deposit insurance on funds
in non-interest-bearing transaction deposit accounts, will result in slightly
higher assessment rates during 2009. In addition, the FDIC has
announced plans to impose emergency special assessments on all insured
institutions during 2009 to ensure the continued strength of the deposit
insurance fund. If these special assessments are imposed, Peoples’
2009 FDIC insurance expense could be significantly higher than recent
periods. The increased number of bank failures during 2008, coupled
with the potential for additional failures in 2009, may cause the deposit
insurance fund to decrease to levels that will require further increases in the
assessment rates. Management believes the trend in recent periods of
rising employee medical benefit costs will continue and anticipates an increase
in pension expense from changes to certain variables, such as the discount rate,
used to determine the net periodic benefit cost. These increases
could result in higher salary and employee benefit costs compared to the amount
incurred in 2008. However, the increase in base salaries and wages in
2009 should be minimal, as upper management will not accept any salary increases
for 2009.
Peoples
continues to be proactive in identifying possible problem loans and remains
diligent in its collection efforts. Asset quality will remain a major
focal point in 2009, as management works through extremely difficult market
conditions. A key goal for 2009 will be reducing nonperforming
loans. However, the market for selling properties is much slower than
in past years, so it will take time to resolve some of these problem
loans.
Growing
retail deposit balances and reducing Peoples’ reliance on higher cost wholesale
funding sources will remain a point of emphasis in 2009. Competition
for deposits could make it difficult for Peoples to build on its recent
success. Still, Peoples’ sales associates are focused on developing
long-term relationships and uncovering other financial needs of these new
customers, while at the same time expanding relationships with existing
customers, 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. Management believes conditions
in several markets served by Peoples could provide opportunities for potential
growth. Further, management believes Peoples’ capital position
remains at levels that will support disciplined balance sheet growth
opportunities. The evaluation of potential acquisitions will be more
strenuous and selective, especially considering the value of capital during
difficult economic times. Ultimately, any future expansion will be
driven by growth opportunities in both deposits and loans.
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
on satisfying 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.
|
ITEM 9A. CONTROLS
AND
PROCEDURES
|
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) under the Securities Exchange Act of 1934, as
amended) (the “Exchange Act”) as of December 31, 2008. 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 Executive Vice President,
Chief Financial Officer and Treasurer, as appropriate to allow timely
decisions regarding required
disclosure;
|
|
(b)
|
information
required to be disclosed by Peoples in this Annual Report on Form 10-K and
other reports Peoples files or submits under the Exchange Act would be
recorded, processed, summarized and reported within the timeframe
specified in the SEC’s rules and forms;
and
|
|
(c)
|
Peoples’
disclosure controls and procedures were effective as of the end of the
fiscal year covered by this Annual Report on Form
10-K.
|
Management’s
Annual Report on Internal Control Over Financial Reporting
The
“Report of Management’s Assessment of Internal Control Over Financial Reporting”
required by Item 308(a) of SEC Regulation S-K is included on page 49 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 50
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, 2008, no changes
were made in Peoples’ internal control over financial reporting that have
materially effected, or are reasonably likely to materially effect, Peoples’
internal control over financial reporting.
ITEM
9B. OTHER
INFORMATION
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)
under the Securities Exchange Act of 1934, as amended. Peoples’
internal control over financial reporting has been designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation, integrity, and fair presentation of Peoples’ Consolidated Financial
Statements for external purposes in accordance with United States generally
accepted accounting principles.
With the
supervision and participation of its President and Chief Executive Officer and
its Executive Vice President, Chief Financial Officer and Treasurer, management
evaluated the effectiveness of its internal control over financial reporting as
of December 31, 2008, 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, 2008, and, based on this assessment, has concluded Peoples’
internal control over financial reporting is effective as of that
date.
Peoples’
independent registered public accounting firm, Ernst & Young LLP has audited
the Consolidated Financial Statements included in this Annual Report and has
issued an attestation report on Peoples’ internal control over financial
reporting.
|
/s/
MARK F. BRADLEY
|
|
/s/ EDWARD G. SLOANE | |
| Mark F. Bradley |
Edward
G. Sloane
|
||
| President and Chief Executive Officer |
Executive
Vice President,
|
||
| Chief Financial Officer and Treasurer |
Report
of Independent Registered Public Accounting Firm on Effectiveness of Internal
Control Over Financial Reporting
The
Board of Directors and Shareholders of Peoples Bancorp Inc.
We have
audited Peoples Bancorp Inc.’s internal control over financial reporting as of
December 31, 2008, 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, 2008, 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, 2008 and 2007, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2008, and our report dated March 2, 2009
expressed an unqualified opinion thereon.
Charleston, West Virginia
March 2,
2009
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, 2008 and 2007, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2008. 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, 2008 and 2007, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2008, 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, 2008, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 2, 2009,
expressed an unqualified opinion thereon.
Charleston,
West Virginia
March 2,
2009
PEOPLES BANCORP INC.
AND SUBSIDIARIES
CONSOLIDATED
BALANCE
SHEETS
|
December
31,
|
|||
|
(Dollars
in thousands)
|
2008
|
2007
|
|
|
Assets
|
|||
|
Cash
and cash equivalents:
|
|||
|
Cash
and due from banks
|
$ 34,389
|
$ 43,275
|
|
|
Interest-bearing
deposits in other banks
|
1,209
|
1,925
|
|
|
Total
cash and cash equivalents
|
35,598
|
45,200
|
|
|
Available-for-sale
investment securities, at fair value (amortized cost
of
|
|||
|
$696,855
and $535,979 at December 31, 2008 and 2007, respectively)
|
684,757
|
542,231
|
|
|
Other
investment securities, at cost
|
23,996
|
23,232
|
|
|
Total
investment securities
|
708,753
|
565,463
|
|
|
Loans,
net of deferred fees and costs
|
1,104,032
|
1,120,941
|
|
|
Allowance
for loan losses
|
(22,931)
|
(15,718)
|
|
|
Net
loans
|
1,081,101
|
1,105,223
|
|
|
Loans
held for sale
|
791
|
1,994
|
|
|
Bank
premises and equipment, net
|
25,111
|
24,803
|
|
|
Bank
owned life insurance
|
51,873
|
50,291
|
|
|
Goodwill
|
62,520
|
62,520
|
|
|
Other
intangible assets
|
3,886
|
5,509
|
|
|
Other
assets
|
32,705
|
24,550
|
|
|
Total
assets
|
$
2,002,338
|
$
1,885,553
|
|
|
Liabilities
|
|||
|
Deposits:
|
|||
|
Non-interest-bearing
|
$ 180,040
|
$ 175,057
|
|
|
Interest-bearing
|
1,186,328
|
1,011,320
|
|
|
Total
deposits
|
1,366,368
|
1,186,377
|
|
|
Short-term
borrowings:
|
|||
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
68,852
|
35,041
|
|
|
Federal
Home Loan Bank advances
|
30,000
|
187,500
|
|
|
Total
short-term borrowings
|
98,852
|
222,541
|
|
|
Long-term
borrowings
|
308,297
|
231,979
|
|
|
Junior
subordinated notes held by subsidiary trusts
|
22,495
|
22,460
|
|
|
Accrued
expenses and other liabilities
|
19,700
|
19,360
|
|
|
Total
liabilities
|
1,815,712
|
1,682,717
|
|
|
Stockholders’
Equity
|
|||
|
Common
stock, no par value, 24,000,000 shares authorized,
|
|||
|
10,975,364
shares issued and 10,925,954 shares issued at December 31,
2008
|
|||
|
and
2007, respectively, including shares in treasury
|
164,716
|
163,399
|
|
|
Retained
earnings
|
50,512
|
52,527
|
|
|
Accumulated
comprehensive (loss) income, net of deferred income taxes
|
(12,288)
|
3,014
|
|
|
Treasury
stock, at cost, 641,480 shares and 629,206 shares at December 31,
2008
|
|||
|
and
2007, respectively
|
(16,314)
|
(16,104)
|
|
|
Total
stockholders’ equity
|
186,626
|
202,836
|
|
|
Total
liabilities and stockholders’ equity
|
$
2,002,338
|
$
1,885,553
|
|
PEOPLES BANCORP INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
Year
Ended December 31,
|
|||||
|
(Dollars
in thousands, except per share data)
|
2008
|
2007
|
2006
|
||
|
Interest
Income:
|
|||||
|
Interest
and fees on loans
|
$ 74,268
|
$ 85,035
|
$ 81,329
|
||
|
Interest
and dividends on taxable investment securities
|
29,106
|
25,647
|
24,418
|
||
|
Interest
on tax-exempt investment securities
|
2,788
|
2,567
|
2,867
|
||
|
Other
interest income
|
65
|
170
|
180
|
||
|
Total
interest income
|
106,227
|
113,419
|
108,794
|
||
|
Interest
Expense:
|
|||||
|
Interest
on deposits
|
31,310
|
36,975
|
32,261
|
||
|
Interest
on short-term borrowings
|
3,383
|
11,835
|
10,443
|
||
|
Interest
on long-term borrowings
|
11,079
|
8,513
|
10,271
|
||
|
Interest
on junior subordinated notes held by subsidiary trusts
|
1,976
|
2,175
|
2,602
|
||
|
Total
interest expense
|
47,748
|
59,498
|
55,577
|
||
|
Net
interest income
|
58,479
|
53,921
|
53,217
|
||
|
Provision
for loan losses
|
27,640
|
3,959
|
3,622
|
||
|
Net
interest income after provision for loan losses
|
30,839
|
49,962
|
49,595
|
||
|
Other
Income:
|
|||||
|
Deposit
account service charges
|
10,137
|
9,890
|
10,215
|
||
|
Insurance
income
|
9,902
|
9,701
|
9,619
|
||
|
Trust
and investment income
|
5,139
|
4,983
|
4,258
|
||
|
Electronic
banking income
|
3,882
|
3,524
|
3,080
|
||
|
Bank
owned life insurance
|
1,582
|
1,661
|
1,637
|
||
|
Mortgage
banking income
|
681
|
885
|
825
|
||
|
(Loss)
gain on investment securities
|
(2,592)
|
(6,062)
|
265
|
||
|
Gain
on sale of banking offices
|
775
|
–
|
454
|
||
|
Other
non-interest income
|
755
|
782
|
772
|
||
|
Total
other income
|
30,261
|
25,364
|
31,125
|
||
|
Other
Expenses:
|
|||||
|
Salaries
and employee benefit costs
|
28,521
|
27,552
|
26,178
|
||
|
Net
occupancy and equipment
|
5,540
|
5,298
|
5,252
|
||
|
Electronic
banking expense
|
2,289
|
2,206
|
1,793
|
||
|
Professional
fees
|
2,212
|
2,246
|
2,465
|
||
|
Data
processing and software
|
2,181
|
2,210
|
1,905
|
||
|
Franchise
tax
|
1,609
|
973
|
1,760
|
||
|
Amortization
of other intangible assets
|
1,586
|
1,934
|
2,261
|
||
|
Marketing
|
1,293
|
1,515
|
1,659
|
||
|
FDIC
insurance
|
361
|
146
|
143
|
||
|
Other
non-interest expense
|
7,893
|
7,372
|
7,881
|
||
|
Total
other expenses
|
53,485
|
51,452
|
51,297
|
||
|
Income
before income taxes
|
7,615
|
23,874
|
29,423
|
||
|
Income
taxes:
|
|||||
|
Current
|
3,021
|
6,548
|
8,121
|
||
|
Deferred
|
(2,861)
|
(988)
|
(256)
|
||
|
Total
income taxes
|
160
|
5,560
|
7,865
|
||
|
Net
income
|
$ 7,455
|
$ 18,314
|
$ 21,558
|
||
|
Earnings
per share:
|
|||||
|
Basic
|
$ 0.72
|
$ 1.75
|
$ 2.03
|
||
|
Diluted
|
$ 0.72
|
$ 1.74
|
$ 2.01
|
||
|
Weighted-average
number of shares outstanding:
|
|||||
|
Basic
|
10,315,263
|
10,462,933
|
10,606,570
|
||
|
Diluted
|
10,348,579
|
10,529,634
|
10,723,933
|
||
PEOPLES BANCORP INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
| (Dollars in thousands , except per share data) |
Common
Stock
|
Retained
Earnings
|
Accumulated
Comprehensive (Loss) Income
|
Treasury
Stock
|
Total
|
||||
|
Balance,
December 31, 2005
|
$ 162,231
|
$ 30,740
|
$ (1,116)
|
$ (8,778)
|
$ 183,077
|
||||
|
Net
income
|
21,558
|
21,558
|
|||||||
|
Other
comprehensive income, net of tax
|
137
|
137
|
|||||||
|
Cash
dividends declared of $0.83 per share
|
(8,859)
|
(8,859)
|
|||||||
|
Stock
option exercises
|
(878)
|
3,575
|
2,697
|
||||||
|
Tax
benefit from exercise of stock options
|
384
|
384
|
|||||||
|
Purchase
of treasury stock
|
(1,214)
|
(1,214)
|
|||||||
|
Common
stock issued under dividend
|
577
|
577
|
|||||||
|
reinvestment
plan
|
|||||||||
|
Stock-based
compensation expense
|
280
|
280
|
|||||||
|
Issuance
of common stock related to acquisitions:
|
|||||||||
|
Putnam
Agency, Inc.
|
19
|
121
|
140
|
||||||
|
Barengo
Insurance Agency, Inc.
|
41
|
369
|
410
|
||||||
|
Adjustment
to initally apply SFAS 158, net of tax
|
(2,018)
|
(2,018)
|
|||||||
|
Balance,
December 31, 2006
|
$ 162,654
|
$ 43,439
|
$ (2,997)
|
$ (5,927)
|
$ 197,169
|
||||
|
Net
income
|
18,314
|
18,314
|
|||||||
|
Other
comprehensive income, net of tax
|
6,011
|
6,011
|
|||||||
|
Cash
dividends declared of $0.88 per share
|
(9,226)
|
(9,226)
|
|||||||
|
Stock
option exercises
|
(626)
|
1,585
|
959
|
||||||
|
Tax
benefit from exercise of stock options
|
146
|
146
|
|||||||
|
Purchase
of treasury stock
|
(12,350)
|
(12,350)
|
|||||||
|
Common
stock issued under dividend
|
848
|
848
|
|||||||
|
reinvestment
plan
|
|||||||||
|
Stock-based
compensation expense
|
391
|
391
|
|||||||
|
Issuance
of common stock related to acquisitions:
|
|||||||||
|
Putnam
Agency, Inc.
|
(5)
|
129
|
124
|
||||||
|
Barengo
Insurance Agency, Inc.
|
(9)
|
459
|
450
|
||||||
|
Balance,
December 31, 2007
|
$ 163,399
|
$ 52,527
|
$ 3,014
|
$ (16,104)
|
$ 202,836
|
||||
|
Net
income
|
7,455
|
7,455
|
|||||||
|
Other
comprehensive loss, net of tax
|
(15,302)
|
(15,302)
|
|||||||
|
Cash
dividends declared of $0.91 per share
|
(9,470)
|
(9,470)
|
|||||||
|
Stock
option exercises
|
(113)
|
296
|
183
|
||||||
|
Tax
benefit from exercise of stock options
|
(32)
|
(32)
|
|||||||
|
Purchase
of treasury stock
|
(506)
|
(506)
|
|||||||
|
Common
stock issued under dividend
|
964
|
964
|
|||||||
|
reinvestment
plan
|
|||||||||
|
Stock-based
compensation expense
|
498
|
498
|
|||||||
|
Balance,
December 31, 2008
|
$ 164,716
|
$ 50,512
|
$ (12,288)
|
$ (16,314)
|
$ 186,626
|
||||
PEOPLES BANCORP INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
ended December 31,
|
|||||
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Operating
activities
|
|||||
|
Net
income
|
$ 7,455
|
$ 18,314
|
$ 21,558
|
||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||
|
Depreciation,
amortization, and accretion, net
|
5,749
|
7,188
|
8,653
|
||
|
Provision
for loan losses
|
27,640
|
3,959
|
3,622
|
||
|
Bank
owned life insurance income
|
(1,582)
|
(1,661)
|
(1,637)
|
||
|
Net
loss (gain) on investment securities
|
2,592
|
6,062
|
(265)
|
||
|
Loans
originated for sale
|
(31,069)
|
(40,582)
|
(36,285)
|
||
|
Proceeds
from sales of loans
|
32,546
|
40,065
|
36,806
|
||
|
Net
gains on sales of loans
|
(555)
|
(750)
|
(720)
|
||
|
Deferred
income tax benefit
|
(2,861)
|
(988)
|
(256)
|
||
|
(Decrease)
increase in accrued expenses
|
(429)
|
(1,941)
|
2,129
|
||
|
Decrease
(increase) in interest receivable
|
1,055
|
610
|
(1,099)
|
||
|
Other,
net
|
(4,977)
|
605
|
(1,533)
|
||
|
Net
cash provided by operating activities
|
35,564
|
30,881
|
30,973
|
||
|
Investing
activities
|
|||||
|
Available-for-sale
securities:
|
|||||
|
Purchases
|
(457,226)
|
(151,912)
|
(52,195)
|
||
|
Proceeds
from sales
|
156,767
|
151
|
11,101
|
||
|
Proceeds
from maturities, calls and prepayments
|
137,292
|
136,491
|
82,013
|
||
|
Net
(increase) decrease in loans
|
(3,109)
|
9,260
|
(64,493)
|
||
|
Net
expenditures for premises and equipment
|
(3,449)
|
(3,027)
|
(2,711)
|
||
|
Proceeds
from sales of other real estate owned
|
273
|
107
|
670
|
||
|
Acquisitions,
net of cash received
|
–
|
(1,070)
|
(1,453)
|
||
|
Sale
of banking offices and other assets
|
775
|
–
|
(2,843)
|
||
|
Investment
in limited partnership and tax credit funds
|
(249)
|
(426)
|
(1,349)
|
||
|
Net
cash used in investing activities
|
(168,926)
|
(10,426)
|
(31,260)
|
||
|
Financing
activities
|
|||||
|
Net
increase in non-interest-bearing deposits
|
4,983
|
4,136
|
7,734
|
||
|
Net
increase (decrease) in interest-bearing deposits
|
174,900
|
(51,453)
|
139,497
|
||
|
Net
(decrease) increase in short-term borrowings
|
(123,689)
|
27,658
|
21,187
|
||
|
Proceeds
from long-term borrowings
|
140,000
|
115,000
|
30,000
|
||
|
Payments
on long-term borrowings
|
(63,682)
|
(83,814)
|
(191,672)
|
||
|
Cash
dividends paid on common shares
|
(8,423)
|
(8,373)
|
(8,164)
|
||
|
Purchase
of treasury stock
|
(506)
|
(12,350)
|
(1,214)
|
||
|
Proceeds
from issuance of common stock
|
210
|
989
|
2,719
|
||
|
Redemption
of trust preferred securities
|
–
|
(7,000)
|
(25)
|
||
|
Excess
tax (expense) benefit for share based payments
|
(33)
|
146
|
383
|
||
|
Net
cash provided by (used in) financing activities
|
123,760
|
(15,061)
|
445
|
||
|
Net
(decrease) increase in cash and cash equivalents
|
(9,602)
|
5,394
|
158
|
||
|
Cash
and cash equivalents at beginning of year
|
45,200
|
39,806
|
39,648
|
||
|
Cash
and cash equivalents at end of year
|
$ 35,598
|
$ 45,200
|
$ 39,806
|
||
|
Supplemental
cash flow information:
|
|||||
|
Interest
paid
|
$ 48,138
|
$ 60,037
|
$ 54,444
|
||
|
Income
taxes paid
|
4,395
|
5,253
|
5,446
|
||
|
Value
of shares issued for acquisitions
|
–
|
574
|
550
|
||
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 49 financial service locations
and 38 automated teller machines in Ohio, West Virginia and Kentucky, as well as
internet-based banking.
Note
1.
Summary
of Significant Accounting Policies
The
accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries
(“Peoples” refers to, Peoples Bancorp Inc. and its consolidated subsidiaries
collectively, except where the context indicates the reference relates solely to
Peoples Bancorp Inc.) conform to generally accepted accounting principles in the
United States of America (“US GAAP”) and to general practices within the banking
industry. The preparation of the financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those
estimates. Certain items in prior financial statements have been
reclassified to conform to the current presentation, which had no impact on net
income, comprehensive income or loss, net cash provided by operating activities
or stockholders’ equity.
The
following is a summary of significant accounting policies followed in the
preparation of the financial statements:
Consolidation:
Peoples’ Consolidated Financial Statements include subsidiaries in which
Peoples has a controlling financial interest, principally defined as owning a
voting interest greater than 50%. In addition, entities not
controlled by voting interests or in which the equity investors do not bear the
residual economic risks, but for which Peoples is the primary beneficiary are
also consolidated.
The
Consolidated Financial Statements include the accounts of Peoples and its
consolidated subsidiaries, Peoples Bank and Peoples Investment Company, along
with their wholly-owned subsidiaries. Peoples previously formed two
statutory business trusts described in Note 10 that are variable interest
entities under FIN 46 for which Peoples 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 carried at
cost. These cost method securities are reported as other investment
securities on the Consolidated Balance Sheets and consist solely of shares of
the Federal Home Loan Bank (“FHLB”) of Cincinnati and the Federal Reserve Bank
of Cleveland.
Management
systematically evaluates investment securities for other-than-temporary declines
in fair value on a quarterly basis. This analysis requires management
to consider various factors, which include (1) duration and magnitude of the
decline in value, (2) the financial condition of the issuer or issuers, (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 8 and 9. 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
were $946,000 and $578,000 at December 31, 2008 and 2007,
respectively.
A loan is
considered impaired, based on current information and events, if it is probable
that collection of principal and interest payments when due according to the
contractual terms of the loan agreement is doubtful. Impaired loans
include commercial loans placed on nonaccrual status, renegotiated or internally
classified as substandard or doubtful (as those terms are defined by banking
regulations) and meet the definition of impaired loans. The amount of
impairment is based on the fair value of the underlying collateral if repayment
is expected solely from the sale of the collateral. Amounts deemed
uncollectible are charged-off against the allowance for loan
losses. Consumer and residential real estate loans typically are not
placed on nonaccrual, and instead are charged down to the net realizable
value.
Loans
acquired in a business combination that have evidence of deterioration of credit
quality since origination and for which it is probable, at acquisition, that
Peoples will be unable to collect all contractually required payments receivable
are initially recorded at fair value (the present value of the amounts expected
to be collected) with no valuation allowance. The difference between
the undiscounted cash flows expected at acquisition and the investment in the
loan, or the “accretable yield”, is recognized as interest income on a
level-yield method over the life of the loan. Contractually required payments
for interest and principal that exceed the undiscounted cash flows expected at
acquisition, or the “nonaccretable difference”, are not recognized as a yield
adjustment or as a loss accrual or a valuation allowance.
Over the
life of these acquired loans, management continues to monitor each acquired loan
portfolio for changes in credit quality. 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 impairment, with the amount
of the expected loss included in management’s evaluation of the adequacy of the
allowance for loan loss.
Loans Held for
Sale:
Loans originated and intended to be sold in the secondary market,
generally one-to-four family residential loans, are carried at the lower of cost
or estimated fair value determined on an aggregate basis. Gains and
losses on sales of loans held for sale are included in mortgage banking
income.
Peoples
enters into interest rate lock commitments with borrowers and best efforts
commitments with investors on loans originated for sale into the secondary
markets. Peoples uses these commitments to manage the inherent
interest rate and pricing risk associated with selling loans in the secondary
market. The interest rate lock commitments generally terminate once
the loan is funded, the lock period expires or the borrower decides not to
contract for the loan. The best efforts commitments generally
terminate once the loan is sold, the commitment period expires or the borrower
decides not to contract for the loan. These commitments are
considered derivatives which are generally accounted for by recognizing their
estimated fair value on the Consolidated Balance Sheets as either a freestanding
asset or liability. The valuation of such commitments does not
consider expected cash flows related to the servicing of the future
loan. Management has determined these derivatives do not have a
material effect on Peoples’ financial position, results of operations or cash
flows.
Allowance for
Loan Losses:
The allowance for loan losses is a valuation allowance for
management’s estimate of the probable credit losses inherent in the loan
portfolio. Management’s evaluation of the adequacy of the allowance
for loan loss and the appropriate provision for loan losses is based upon a
quarterly evaluation of the portfolio. This formal analysis is
inherently subjective and requires management to make significant estimates of
factors affecting loan losses, including specific losses, levels and trends in
impaired and nonperforming loans, historical loan loss experience, current
national and local economic conditions, volume, growth and composition of the
portfolio, regulatory guidance and other relevant factors. Loans
deemed to be uncollectible are charged against the allowance for loan losses,
while recoveries of previously charged-off amounts are credited to the allowance
for loan losses.
The
amount of the allowance for the various loan types represents management’s
estimate of expected losses from existing loans based upon specific allocations
for individual lending relationships and historical loss experience for each
category of homogeneous loans adjusted for certain qualitative risk
factors. The allowance for loan loss related to an impaired loan is
based on discounted cash flows using the loan’s initial effective interest rate
or the fair value of the collateral for certain collateral dependent
loans. This evaluation requires management to make estimates of the
amounts and timing of future cash flows on impaired loans, which consist
primarily of nonaccrual and restructured loans. While allocations are
made to specific loans and pools of loans, the allowance is available for all
loan losses.
Bank Premises and
Equipment:
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the
straight-line method over the estimated useful lives of the related assets
owned. Major improvements to leased facilities are capitalized and
included in bank premises at cost less accumulated depreciation, which is
calculated on the straight-line method over the lesser of the remaining term of
the leased facility or the estimated economic life of the
improvement.
Bank Owned Life
Insurance:
Bank owned life insurance (“BOLI”) represents life insurance
on the lives of certain employees who have provided positive consent allowing
Peoples Bank to be the beneficiary of such policies. These policies
are recorded at their cash surrender value, or the amount that can be realized
upon surrender of the policy. Income from these policies and changes
in the cash surrender value are recorded in other income.
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
$525,000 at December 31, 2008, and $343,000 at December 31, 2007.
Goodwill and
Other Intangible Assets:
Goodwill represents the excess of the cost of an
acquisition over the fair value of the net assets acquired in the business
combination. Goodwill is not amortized but is tested for impairment
at least annually and updated quarterly if necessary. Based upon the
most recently completed goodwill impairment test, Peoples concluded the recorded
value of goodwill was not impaired as of December 31, 2008, based upon the
estimated fair value of Peoples’ single reporting unit.
Peoples’
other intangible assets consist of customer relationship intangible assets,
primarily core deposit intangibles, representing the present value of
future net income to be earned from acquired customer relationships with
definite useful lives. These intangible assets are amortized on an
accelerated basis over their estimated lives ranging from 7 to 10
years.
Mortgage
Servicing 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 assesses servicing
assets or liabilities for impairment or increased obligation based on fair value
at each reporting date. The fair value of the mortgage servicing
rights is determined by using a discounted cash flow model, which estimates the
present value of the future net cash flows of the servicing portfolio based on
various factors, such as servicing costs, expected prepayment speeds and
discount rates.
MSRs are
reported in other intangible assets on the Consolidated Balance
Sheets. Serviced loans are not included in the Consolidated Balance
Sheets. Loan servicing income included in mortgage banking
income includes servicing fees received from the third party investors and
certain charges collected from the borrowers.
Trust Assets
Under Management:
Peoples Bank manages certain assets held in a fiduciary
or agency capacity for customers. These assets under management,
other than cash on deposit at Peoples Bank, are not included in the Consolidated
Balance Sheets since they are not assets of Peoples Bank.
Interest Income
Recognition:
Interest income on loans and investment securities is
recognized by methods that result in level rates of return on principal amounts
outstanding. Amortization of premiums has been deducted from, and
accretion of discounts has been added to, the related interest
income. Nonrefundable loan fees and direct loan costs are deferred
and recognized over the life of the loan as an adjustment of the
yield.
Peoples
discontinues the accrual of interest on loans when management believes
collection of all or a portion of contractual interest has become doubtful,
which generally occurs when a contractual payment on a loan is 90 days past
due. When interest is deemed uncollectible, amounts accrued in the
current year are reversed and amounts accrued in prior years are charged against
the allowance for loan losses. Interest received on nonaccrual loans
is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status when it is
brought current, has performed in accordance with contractual terms for a
reasonable period of time, and the collectibility of the total contractual
principal and interest is no longer in doubt.
Other Income
Recognition:
Service charges on deposits include cost recovery fees
associated with services provided, such as overdraft and non-sufficient
funds. Trust and investment income consists of revenue from fiduciary
activities, which include fees for services such as asset management,
recordkeeping, retirement services and estate management, and investment
commissions and fees related to the sale of investments. Income from
these activities is recognized at the time the related services are
performed.
Insurance
income consists of commissions and fees from the sales of insurance policies and
related insurance services. Insurance commission income is recognized
as of the effective date of the insurance policy, net of adjustments, including
policy cancellations. Such adjustments are recorded when the amount
can be reasonably estimated, which is generally in the period in which they
occur. Contingent performance-based commissions from insurance
companies are recognized when received and no contingencies remain.
Income Taxes:
Peoples and its subsidiaries file a consolidated federal income tax
return. Deferred income tax assets and liabilities are provided for temporary
differences between the tax basis of an asset or liability and its reported
amount in the Consolidated Financial Statements at the statutory Federal tax
rate. A valuation allowance, if needed, reduces deferred tax assets
to the expected amount most likely to be realized. Realization of
deferred tax assets is dependent upon the generation of a sufficient level of
future taxable income and recoverable taxes paid in prior years. The
components of other comprehensive income or loss included in the Consolidated
Statements of Stockholders’ Equity have been computed based upon a 35% 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.
A
tax position is initially recognized in the financial statements when it is more
likely than not the position will be sustained upon examination by the tax
authorities. Such tax positions are initially and subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of
being realized upon ultimate settlement with the tax authority assuming full
knowledge of the position and all relevant facts. Penalties and
interest incurred under the applicable tax law are classified as income tax
expense. The amount of Peoples’ uncertain income tax positions, unrecognized
benefits and accrued interest were immaterial at both December 31, 2008 and
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 33,316; 66,701 and 117,363 in 2008; 2007 and 2006,
respectively.
Operating
Segments:
Peoples’ business activities are currently confined to one
reporting unit and reportable segment which is community banking. As
a community banking entity, Peoples offers its customers a full range of
products through various delivery channels.
Stock-Based
Compensation:
Compensation costs for stock options, restricted stock
awards and stock appreciation rights are measured at the fair value of these
awards on their grant date. The fair value of stock options and stock
appreciation rights is estimated based upon a Black-Scholes model, while the
market price of Peoples’ common shares at the grant date is used to estimate the
fair value of restricted stock awards. Compensation expense is
recognized over the required service period, generally the vesting period for
stock options and stock appreciation rights and the restriction period for
restricted stock awards. Compensation expense for awards granted to
employees who are eligible for retirement is recognized to the date the employee
is first eligible to retire.
New Accounting
Pronouncements:
On January 12, 2009, the FASB issued FASB Staff Position
No. EITF 99-20-1,
Amendments
to the Impairment Guidance of EITF Issue No. 99-20
(“FSP 99-20-1”) to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. FSP 99-20-1 retains and emphasizes the
objective of other-than-temporary impairment assessment and the related
disclosure requirements in FASB Statement No. 115,
Accounting for Certain Investments
in Debt and Equity Securities
, and other related guidance. FSP
99-20-1 is effective for interim and annual reporting periods ending after
December 15, 2008, and shall be applied prospectively. Retrospective
application to prior reporting periods is prohibited. Peoples adopted
the measurement and disclosure requirements of FSP 99-20-1 on December 31, 2008,
as required, which did not have a material impact.
On
December 30, 2008, the FASB issued FASB Staff Position No. FAS 132(r)-1,
Employers’ Disclosures about
Postretirement
Benefit
Plan Assets
(“FSP 132(r)-1”). FSP 132(r)-1 amended FASB
Statement No. 132(r),
Employers’ Disclosures about
Pensions and Other Postretirement Benefit Plans
to require additional
disclosures about assets held in an employer’s defined
benefit pension or other postretirement benefit plan, including the
fair value of each major asset category. FSP 132(r)-1 is
effective for fiscal years ending after December 15, 2009, with early
application permitted. Peoples will adopt the disclosure requirements
of FSP 132(r)-1 on December 31, 2009, as required, and adoption is not expected
to have a material impact.
On May 9,
2008, the FASB issued Statement of Financial Accounting Standards No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(“SFAS 162”). SFAS 162 established a
framework for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with US GAAP. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board Auditing amendments to AU Section 411,
The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles
, and is not
expected to have an impact on Peoples’ Consolidated Financial
Statements.
On April
25, 2008, the FASB issued FASB Staff Position No. FAS 142-3,
Determination of the Useful Life of
Intangible Assets
(“FSP 142-3”). FSP 142-3 amends FASB
Statement No. 142,
Goodwill
and Other Intangible Assets
, to require an entity to consider its own
assumptions about renewal or extension assumptions used to determine the useful
life over which to amortize the cost of a recognized intangible
asset. FSP 142-3 is required to be applied prospectively to
intangible assets acquired after December 15, 2008. The impact of
adopting FSP 142-3 will depend on the amount and nature of intangible assets
acquired through future acquisitions.
On March
19, 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative
Instruments and Hedging Activities–an amendment of FASB Statement No. 133
(“SFAS 161”), which requires enhanced disclosures about an entity’s
derivative and hedging activities intended to improve the transparency of
financial reporting. Under SFAS 161, entities will be required to
provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. SFAS 161 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. Peoples
will adopt SFAS 161 effective January 1, 2009 and adoption is not anticipated to
have a material impact on Peoples’ Consolidated Financial
Statements.
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
noncontrolling 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 noncontrolling 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 noncontrolling 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
noncontrolling interest.
Both SFAS
141(R) and SFAS 160 are effective for fiscal years beginning on or after
December 15, 2008. Early adoption is prohibited. Peoples
will adopt the provisions of these statements on January 1, 2009, as required,
and adoption is not expected to have a material impact on Peoples’ Consolidated
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 is
prohibited. Peoples adopted the provisions of Issue 06-11 on January
1, 2008, which did not 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. Peoples adopted SFAS 159 effective January 1, 2008, as
required, but has not elected to measure any permissible items at fair
value. As a result, the adoption of SFAS 159 has not had any 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 13 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 applied the guidance as of January 1, 2008, as required, and adoption
did not have a material impact on Peoples’ Consolidated Financial
Statements.
On
October 10, 2008, the FASB issued FASB Staff Position No. FAS 157-3,
Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active
(“FSP
157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 was effective immediately upon
issuance, and includes prior periods for which financial statements have not
been issued. Peoples applied the guidance contained in FSP 157-3 in
determining fair values at September 30, 2008, although it did not have a
material impact on Peoples’ Consolidated Financial Statements.
Note
2.
Fair
Values of Financial Instruments
Effective
January 1, 2008, Peoples adopted SFAS 157, which established a hierarchy for
measuring fair value that is intended to maximize the use of observable inputs
and minimize the use of unobservable inputs. This hierarchy uses
three levels of inputs to measure the fair value of assets and liabilities as
follows:
Level 1:
Quoted prices in active exchange markets for identical assets or liabilities;
also includes certain U.S. Treasury and other U.S. government and agency
securities actively traded in over-the-counter markets.
Level 2:
Observable inputs other than Level 1 including quoted prices for similar
assets or liabilities, quoted prices in less active markets, or other observable
inputs that can be corroborated by observable market data; also includes
derivative contracts whose value is determined using a pricing model with
observable market inputs or can be derived principally from or corroborated by
observable market data. This category generally includes certain U.S.
government and agency securities, corporate debt securities, derivative
instruments, and residential mortgage loans held for sale.
Level 3:
Unobservable inputs supported by little or no market activity for
financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which
the determination of fair value requires significant management judgment or
estimation; also includes observable inputs for single dealer nonbinding quotes
not corroborated by observable market data. This category generally includes
certain private equity investments, retained interests from securitizations, and
certain collateralized debt obligations.
Assets
measured at fair value on a recurring basis comprise the following at December
31, 2008:
|
Fair
Value Measurements at Reporting Date Using
|
|||||||||||
|
(Dollars
in thousands)
|
Fair
Value
|
Quoted
Prices
in
Active Markets for Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable Inputs
|
|||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||
|
Available-for-sale
investment securities
|
$
|
684,757
|
$
|
2,575
|
$
|
676,760
|
$
|
5,422
|
|||
The
investment securities measured at fair value utilizing Level 1 and 2 inputs
are 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., bank eligible corporate
obligations, including private-label mortgage-backed securities and common
stocks issued by various unrelated banking holding companies. The
fair values used by Peoples are obtained from an independent pricing service and
represent either quoted market prices for the identical securities (Level 1
inputs) or fair values determined by pricing models that consider observable
market data, such as interest rate volatilities, LIBOR yield curve, credit
spreads and prices from market makers and live trading systems.
The
investment securities measured at fair value using Level 3 inputs are comprised
of four collateralized debt obligations, with a total book value of $4.2
million, and a single corporate obligation, with a total book value of $1.0
million, for which there is not an active market. Peoples uses
multiple input factors to determine the fair value of these
securities. Those input factors are discounted cash flow analysis,
structure of the security in relation to current level of deferrals and/or
defaults, changes in credit ratings, financial condition of the debtors within
the underlying securities, broker quotes for securities with similar structure
and credit risk, interest rate movements and pricing of new
issuances.
The
following is a reconciliation of activity for assets measured at fair value
based on significant unobservable (non-market) information:
|
Investment
Securities
|
||
|
Balance,
January 1, 2008
|
$
|
9,004
|
|
Transfers
into Level 3
|
2,083
|
|
|
Transfers
out of Level 3
|
(2,078)
|
|
|
Other-than-temporary
impairment loss recognized in earnings
|
(4,000)
|
|
|
Unrealized
gain included in comprehensive income
|
413
|
|
|
Balance,
December 31, 2008
|
$
|
5,422
|
Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of
impairment). Financial assets measured at fair value on a
non-recurring basis included the following:
Impaired Loans:
Impaired loans are measured and reported at fair value in accordance with
the provisions of FASB Statement No. 114,
Accounting by Creditors for
Impairment of a Loan.
Management’s determination of the fair
value for these loans represents the estimated net proceeds to be received from
the sale of the collateral based on observable market prices and market value
provided by independent, licensed or certified appraisers (Level 2
Inputs). At December 31, 2008, impaired loans with an aggregate
outstanding principal balance of $28.9 million were measured and reported at a
fair value of $24.0 million. During 2008, Peoples recognized losses
on impaired loans of $18.0 million through the allowance for loan
losses.
FASB
Statement No. 107,
Disclosures
about Fair Value of Financial Instruments
, requires disclosure of the
fair value of financial assets and financial liabilities, including those
financial assets and financial liabilities that are not measured and reported at
fair value on a recurring basis or non-recurring basis. The
methodologies for estimating the fair value of financial assets and financial
liabilities that are measured at fair value on a recurring or non-recurring
basis are discussed above. The estimated fair value approximates
carrying value for cash and cash equivalents, demand and other non-maturity
deposits and overnight borrowings. Peoples used the following methods
and assumptions in estimating the fair value of the following financial
instruments:
Loans:
The
fair value of 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 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 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.
Other 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:
Bank premises
and equipment, customer relationships, deposit base, banking center networks,
and other information required to compute Peoples' aggregate fair value are not
included in the above information. Accordingly, the above fair values
are not intended to represent the aggregate fair value of Peoples.
Note
3.
Investment
Securities
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
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|||
|
2008
|
|||||||
|
Obligations
of U.S. Treasury and
|
|||||||
|
government
agencies
|
$ 176
|
$ 1
|
$ (1)
|
$ 176
|
|||
|
Obligations
of U.S. government sponsored agencies
|
6,308
|
277
|
-
|
6,585
|
|||
|
Obligations
of states and political subdivisions
|
67,830
|
1,356
|
(256)
|
68,930
|
|||
|
Mortgage-backed
securities
|
544,897
|
4,628
|
(14,050)
|
535,475
|
|||
|
Other
securities
|
77,644
|
2,792
|
(6,845)
|
73,591
|
|||
|
Total
available-for-sale securities
|
$ 696,855
|
$ 9,054
|
$ (21,152)
|
$ 684,757
|
|||
|
2007
|
|||||||
|
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
|
26,224
|
3,945
|
(522)
|
29,647
|
|||
|
Total
available-for-sale securities
|
$ 535,979
|
$ 8,550
|
$ (2,298)
|
$ 542,231
|
|||
At
December 31, 2008, there were no securities of a single issuer, other than U.S.
Treasury and government agencies and U.S. government sponsored agencies that
exceeded 10% of stockholders' equity. At December 31, 2008 and 2007,
investment securities having a carrying value of $619,347,000 and $500,845,000,
respectively, were pledged to secure public and trust department deposits and
repurchase agreements in accordance with federal and state
requirements.
The gross
gains and gross losses realized by Peoples from sales of available-for-sale for
the years ended December 31 were as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Gross
gains realized
|
$ 2,740
|
$ 143
|
$ 265
|
||
|
Gross
losses realized
|
$ 1,072
|
$ 6,205
|
$ –
|
||
|
Net
gain (loss) realized
|
$ 1,668
|
$ (6,062)
|
$ 265
|
The
following table presents a summary of available-for-sale investment securities
that had an unrealized loss at December 31:
|
(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
|
|||||
|
2008
|
|||||||||||
|
Less
than 12 months
|
|||||||||||
|
Estimated
fair value
|
$ –
|
$ –
|
$ 10,521
|
$ 217,877
|
$ 44,289
|
$ 272,687
|
|||||
|
Unrealized
loss
|
–
|
–
|
256
|
11,374
|
4,718
|
16,348
|
|||||
|
12
months or more
|
|||||||||||
|
Estimated
fair value
|
$ 29
|
$ –
|
$ –
|
$ 38,318
|
$ 3,342
|
$ 41,689
|
|||||
|
Unrealized
loss
|
1
|
–
|
–
|
2,676
|
2,127
|
4,804
|
|||||
|
Total
Estimated fair value
|
$ 29
|
$ –
|
$ 10,521
|
$ 256,195
|
$ 47,631
|
$ 314,376
|
|||||
|
Total
Unrealized loss
|
1
|
–
|
256
|
14,050
|
6,845
|
21,152
|
|||||
|
2007
|
|||||||||||
|
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
|
|||||
The
unrealized losses at both December 31, 2008 and 2007, were attributable to
changes in market interest rates since the securities were
purchased. During 2008, management determined certain investment
securities with an aggregate carrying value of $8.1 million were
other-than-temporarily impaired, resulting in impairment charges totaling $4.0
million. Management does not believe any of the remaining individual
investment securities with an unrealized loss at December 31, 2008, 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, 2008. 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
|
$ –
|
$ –
|
$ 1,133
|
$ 18
|
$ –
|
$ 1,151
|
|||||
|
Fair
value
|
–
|
–
|
1,146
|
18
|
–
|
1,164
|
|||||
|
Average
yield
|
–
|
–
|
5.86%
|
9.81%
|
–
|
5.92%
|
|||||
|
1
to 5 years
|
|||||||||||
|
Amortized
cost
|
$ –
|
$ –
|
$ 15,964
|
$ 6,280
|
$ –
|
$ 22,244
|
|||||
|
Fair
value
|
–
|
–
|
16,255
|
6,423
|
–
|
22,678
|
|||||
|
Average
yield
|
–
|
–
|
6.30%
|
4.51%
|
–
|
5.79%
|
|||||
|
5
to 10 years
|
|||||||||||
|
Amortized
cost
|
$ 92
|
$ 6,308
|
$ 23,891
|
$ 110,104
|
$ –
|
$ 140,395
|
|||||
|
Fair
value
|
92
|
6,585
|
24,696
|
105,483
|
–
|
136,856
|
|||||
|
Average
yield
|
4.24%
|
5.62%
|
6.21%
|
4.89%
|
–
|
5.15%
|
|||||
|
Over
10 years
|
|||||||||||
|
Amortized
cost
|
$ 84
|
$ –
|
$ 26,842
|
$ 428,495
|
$ 77,644
|
$ 533,065
|
|||||
|
Fair
value
|
84
|
–
|
26,833
|
423,551
|
73,591
|
524,059
|
|||||
|
Average
yield
|
5.36%
|
–
|
6.01%
|
5.34%
|
5.99%
|
5.47%
|
|||||
|
Total
amortized cost
|
$ 176
|
$ 6,308
|
$ 67,830
|
$ 544,897
|
$ 77,644
|
$ 696,855
|
|||||
|
Total
fair value
|
176
|
6,585
|
68,930
|
535,475
|
73,591
|
684,757
|
|||||
|
Total
average yield
|
4.77%
|
5.62%
|
6.14%
|
5.24%
|
5.99%
|
5.42%
|
|||||
Note
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)
|
2008
|
2007
|
|
|
Commercial,
mortgage
|
$ 478,298
|
$ 513,847
|
|
|
Commercial,
other
|
178,834
|
171,937
|
|
|
Real
estate, construction
|
77,917
|
71,794
|
|
|
Real
estate, mortgage
|
279,413
|
280,347
|
|
|
Consumer
|
87,902
|
80,544
|
|
|
Deposit
account overdrafts
|
1,668
|
2,472
|
|
|
Total
loans
|
$1,104,032
|
$1,120,941
|
Peoples
has acquired various loans through business combinations for which there was, at
acquisition, evidence of deterioration of credit quality since origination and
for which it was probable that all contractually required payments would not be
collected. The carrying amounts of these loans at December 31
included in the loan balances above are summarized as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
|
|
Commercial,
mortgage
|
$ 5,330
|
$ 7,794
|
|
|
Commercial,
other
|
1,277
|
1,464
|
|
|
Real
estate, mortgage
|
23,781
|
30,294
|
|
|
Consumer
|
263
|
423
|
|
|
Total
outstanding balance
|
$ 30,651
|
$ 39,975
|
|
|
Net
carrying amount
|
$ 29,900
|
$ 38,615
|
Peoples
Bank has pledged certain loans secured by 1-4 family and multifamily residential
mortgages and commercial mortgages under a blanket collateral agreement to
secure borrowings from the FHLB as discussed in Note 8. At December
31, 2008, the amount of such pledged loans totaled $394.5 million.
Nonperforming/Past
Due Loans
Nonperforming
loans at December 31 were as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
|
|
Loans
90+ days past due and accruing
|
$ –
|
$ 378
|
|
|
Nonaccrual
loans
|
41,320
|
8,980
|
|
|
Total
nonperforming loans
|
$41,320
|
$ 9,358
|
Certain loans
included in the nonaccrual loan totals above are not considered impaired and
evaluated individually by Peoples. These loans consist primarily of
smaller balance homogenous consumer and residential real estate loans that are
collectively evaluated for impairment and totaled $1.8 million at both December
31, 2008 and 2007.
Impaired
Loans
The
following tables summarize loans classified as impaired at or for the years
ended December 31:
|
(Dollars
in thousands)
|
2008
|
2007
|
|||
|
Impaired
loans with an allocated allowance for loan losses
|
$ 11,504
|
$ 8,457
|
|||
|
Impaired
loans with no allocated allowance for loan losses
|
28,146
|
4,453
|
|||
|
Total
impaired loans
|
$39,650
|
$
12,910
|
|||
|
Allowance
for loan losses allocated to impaired loans
|
$ 4,340
|
$ 2,498
|
|||
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Average
investment in impaired loans
|
$ 25,644
|
$ 16,412
|
$ 18,374
|
||
|
Interest
income recognized on impaired loans
|
$ 108
|
$ 826
|
$ 883
|
||
Interest
received on impaired loans is included in income if principal recovery is
reasonably assured.
Related
Party
Loans
In the normal
course of its business, Peoples Bank has granted loans to executive officers and
directors of Peoples. Related party loans were made on substantially
the same terms, including interest rates charged and collateral required, as
those prevailing at the time for comparable loans with unrelated persons and did
not involve more than normal risk of collectibility. At December 31,
2008, 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, 2008:
|
(Dollars
in thousands)
|
|
|
Balance,
December 31, 2007
|
$ 14,506
|
|
New
loans and disbursements
|
8,958
|
|
Repayments
|
(10,126)
|
|
Other
changes
|
(151)
|
|
Balance,
December 31, 2008
|
$
13,187
|
Allowance
for Loan Losses
Changes
in the allowance for loan losses for each of the three years in the period ended
December 31, 2008, were as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Balance,
beginning of year
|
$ 15,718
|
$ 14,509
|
$ 14,720
|
||
|
Charge-offs
|
(21,969)
|
(4,701)
|
(5,484)
|
||
|
Recoveries
|
1,542
|
1,951
|
1,651
|
||
|
Net
charge-offs
|
(20,427)
|
(2,750)
|
(3,833)
|
||
|
Provision
for loan losses
|
27,640
|
3,959
|
3,622
|
||
|
Balance,
end of year
|
$
22,931
|
$
15,718
|
$
14,509
|
Note
5.
Bank
Premises and Equipment
The major
categories of bank premises and equipment and accumulated depreciation at
December 31 are summarized as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
|
|
Land
|
$ 5,764
|
$ 5,331
|
|
|
Building
and premises
|
30,737
|
30,073
|
|
|
Furniture,
fixtures and equipment
|
17,626
|
16,601
|
|
|
Total
bank premises and equipment
|
54,127
|
52,005
|
|
|
Accumulated
depreciation
|
(29,016)
|
(27,202)
|
|
|
Net
book value
|
$
25,111
|
$
24,803
|
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 $2,066,000, $2,061,000 and
$2,128,000, in 2008, 2007 and 2006, 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 $739,000, $748,000 and
$725,000 in 2008, 2007 and 2006, respectively.
Peoples
leases certain properties from related parties. Payments related to
these leases totaled $162,000, $183,000 and $191,000 in 2008, 2007 and 2006,
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,
2008:
|
(Dollars
in thousands)
|
|
|
2009
|
$ 861
|
|
2010
|
845
|
|
2011
|
831
|
|
2012
|
824
|
|
2013
|
842
|
|
Thereafter
|
2,309
|
|
Total
payments
|
$ 6,512
|
Note
6.
Goodwill
and Other Intangible Assets
Goodwill
Changes
in the carrying amount of goodwill for the years ended December 31, were as
follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
|
|
Balance
at January 1
|
$ 62,520
|
$ 61,373
|
|
|
Contingent
consideration earned
|
–
|
1,147
|
|
|
Balance
at December 31
|
$
62,520
|
$ 62,520
|
The
increase in goodwill in 2007 relates to contingent consideration earned and paid
by Peoples in connection with the acquisitions of 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, both of which occurred in 2004.
Peoples
performed the required goodwill impairment tests and concluded the recorded
value of goodwill was not impaired as of December 31, 2008, based upon the
estimated fair value of the single reporting unit.
Other
intangible assets
Other
intangible assets were comprised of the following at December 31:
|
Gross
|
Net
|
||||
|
Intangible
|
Accumulated
|
Intangible
|
|||
|
(Dollars
in thousands)
|
Asset
|
Amortization
|
Asset
|
||
|
2008
|
|||||
|
Core
deposits
|
$ 10,564
|
$ (9,042)
|
$ 1,522
|
||
|
Customer
relationships
|
6,182
|
(4,537)
|
1,645
|
||
|
$ 16,746
|
$ (13,579)
|
$ 3,167
|
|||
|
Mortgage
servicing rights
|
719
|
||||
|
Total
other intangible assets
|
$ 3,886
|
||||
|
2007
|
|||||
|
Core
deposits
|
$ 10,564
|
$ (8,159)
|
$ 2,405
|
||
|
Customer
relationships
|
6,182
|
(3,834)
|
2,348
|
||
|
$ 16,746
|
$ (11,993)
|
$ 4,753
|
|||
|
Mortgage
servicing rights
|
756
|
||||
|
Total
other intangible assets
|
$ 5,509
|
The estimated
aggregate future amortization expense of core deposit and customer relationship
intangible assets at December 31, 2008, is as follows:
|
Core
|
Customer
|
||||
|
(Dollars
in thousands)
|
Deposits
|
Relationships
|
Total
|
||
|
2009
|
$ 677
|
$ 575
|
$ 1,252
|
||
|
2010
|
472
|
446
|
918
|
||
|
2011
|
269
|
316
|
585
|
||
|
2012
|
104
|
202
|
306
|
||
|
2013
|
–
|
106
|
106
|
||
|
Thereafter
|
–
|
–
|
–
|
||
|
Total
|
$ 1,522
|
$ 1,645
|
$ 3,167
|
The
following is an analysis of activity of MSRs for the years ended December
31:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Balance,
beginning of year
|
$ 756
|
$ 792
|
$ 813
|
||
|
Amortization
|
(318)
|
(350)
|
(282)
|
||
|
Servicing
rights originated
|
281
|
314
|
261
|
||
|
Balance,
end of year
|
$ 719
|
$ 756
|
$ 792
|
No
valuation allowances were required at December 31, 2008, 2007 and 2006 for
Peoples’ MSRs since the fair value exceeded the book value.
Peoples’
deposit balances were comprised of the following at December
31:
|
(Dollars
in thousands)
|
2008
|
2007
|
|
|
Retail
certificates of deposit:
|
|||
|
$100,000
or more
|
$ 235,257
|
$ 144,324
|
|
|
Less
than $100,000
|
390,938
|
355,360
|
|
|
Total
retail certificates of deposit
|
626,195
|
499,684
|
|
|
Interest-bearing
transaction accounts
|
187,100
|
191,359
|
|
|
Money
market deposit accounts
|
213,498
|
153,299
|
|
|
Savings
accounts
|
115,419
|
107,389
|
|
|
Total
retail interest-bearing deposits
|
1,142,212
|
951,731
|
|
|
Brokered
certificates of deposits
|
44,116
|
59,589
|
|
|
Total
interest-bearing deposits
|
1,186,328
|
1,011,320
|
|
|
Non-interest-bearing
deposits
|
180,040
|
175,057
|
|
|
Total
deposit balances
|
$ 1,366,368
|
$ 1,186,377
|
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
|
||
|
2009
|
$ 421,816
|
$ 39,128
|
$ 460,944
|
||
|
2010
|
108,841
|
4,988
|
113,829
|
||
|
2011
|
50,815
|
–
|
50,815
|
||
|
2012
|
29,316
|
–
|
29,316
|
||
|
2013
|
15,169
|
–
|
15,169
|
||
|
Thereafter
|
238
|
–
|
238
|
||
|
Total
maturities
|
$
626,195
|
$ 44,116
|
$670,311
|
Included
in the amount to mature in 2009 is $19.2 million of brokered deposits with a
total interest cost of 2.50% that matured in January 2009. Deposits
from related parties approximated $9.9 million and $8.0 million at December 31,
2008 and 2007, respectively.
Note
8.
Short-term
Borrowings
Peoples
utilizes various short-term borrowings as sources of funds, which are summarized
as follows:
|
(Dollars
in thousands)
|
Retail
Repurchase
Agreements
|
FHLB
Advances
|
National
Market
Repurchase
Agreements
|
Other
Short-
Term
Borrowings
|
|||
|
2008
|
|||||||
|
Ending
balance
|
$ 54,452
|
$ 30,000
|
$ –
|
$ 14,400
|
|||
|
Average
balance
|
39,329
|
102,146
|
–
|
1,195
|
|||
|
Highest
month end balance
|
56,079
|
186,100
|
–
|
14,400
|
|||
|
Interest
expense
|
813
|
2,557
|
–
|
13
|
|||
|
Weighted-average
interest rate:
|
|||||||
|
End
of year
|
1.26%
|
0.34%
|
–
%
|
0.50%
|
|||
|
During
the year
|
2.07%
|
2.50%
|
–
%
|
1.09%
|
|||
|
(Dollars
in thousands)
|
Retail
Repurchase
Agreements
|
FHLB
Advances
|
National
Market
Repurchase
Agreements
|
Other
Short-
Term
Borrowings
|
|||
|
2007
|
|||||||
|
Ending
balance
|
$ 35,041
|
$ 187,500
|
$ –
|
$ –
|
|||
|
Average
balance
|
34,770
|
197,915
|
4,425
|
33
|
|||
|
Highest
month end balance
|
36,515
|
264,400
|
7,000
|
–
|
|||
|
Interest
expense
|
1,526
|
10,065
|
242
|
2
|
|||
|
Weighted-average
interest rate:
|
|||||||
|
End
of year
|
3.96%
|
2.50%
|
–
%
|
–
%
|
|||
|
During
the year
|
4.39%
|
5.09%
|
5.47%
|
6.06%
|
|||
|
2006
|
|||||||
|
Ending
balance
|
$ 31,683
|
$ 158,200
|
$ 5,000
|
$ –
|
|||
|
Average
balance
|
31,479
|
178,235
|
1,246
|
2
|
|||
|
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%
|
–
%
|
|||
The FHLB
advances consist of overnight borrowings and other advances with an original
maturity of one year or less. These advances, along with the
long-term advances disclosed in Note 9, are collateralized by residential 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 unrelated
financial service companies that have original maturities of one year or
less.
Peoples’
retail repurchase agreements consist of overnight agreements with Peoples’
commercial customers and serve as a cash management tool.
Other
short-term borrowings consist of Federal Funds purchased and advances from the
Federal Reserve Discount Window. Federal Funds purchased are
short-term borrowings from correspondent banks that typically mature within one
to ninety days. Peoples has available Federal Funds of $25 million
from certain of its correspondent banks. Interest on Federal funds
purchased is set daily by the correspondent bank based on prevailing market
rates. The Federal Reserve Discount Window provides credit facilities
to financial institutions, which are designed to ensure adequate liquidity by
providing a source of short-term funds. Discount Window advances are
typically overnight and must be secured by collateral acceptable to the lending
Federal Reserve Bank.
Long-term
borrowings consisted of the following at December 31:
|
2008
|
2007
|
||||||
|
(Dollars
in thousands)
|
Balance
|
Weighted-Average
Rate
|
Balance
|
Weighted-Average
Rate
|
|||
|
Callable
national market repurchase agreements
|
$ 155,000
|
4.06%
|
$ 95,000
|
4.45%
|
|||
|
Non-callable
national market repurchase agreements
|
5,000
|
4.97%
|
53,750
|
3.76%
|
|||
|
FHLB
convertible rate advances
|
24,500
|
5.38%
|
24,500
|
5.38%
|
|||
|
FHLB
putable, fixed rate advances
|
10,000
|
3.20%
|
10,000
|
3.20%
|
|||
|
FHLB
amortizing, fixed rate advances
|
23,797
|
3.94%
|
13,729
|
3.93%
|
|||
|
FHLB
non-amortizing, non-callable fixed rate advances
|
40,000
|
4.62%
|
35,000
|
4.82%
|
|||
|
FHLB
non-amortizing, callable, fixed rate advances
|
50,000
|
3.29%
|
-
|
0.00%
|
|||
|
Total
long-term borrowings
|
$308,297
|
4.09%
|
$231,979
|
4.36%
|
|||
Peoples’
national market repurchase agreements consist of agreements with unrelated
financial service companies and have original maturities ranging from 2 to 10
years. In general, these agreements may not be terminated by Peoples
prior to the maturity without incurring additional costs. The
callable agreements contain call option features, in which the buyer has the
right, at its discretion, to terminate the repurchase agreement after an initial
period ranging from 3 months to 5 years. After the initial call
period, the buyer has the right to terminate the agreement on a quarterly basis
thereafter until maturity. If the buyer exercises its option, Peoples
would be required to repay the agreement in whole at the quarterly
date.
The FHLB
advances consist of various borrowings with original maturities ranging from 2
to 25 years that generally may not be repaid prior to maturity without Peoples
incurring a penalty. The rate on the convertible rate advances are
fixed from initial periods ranging from one to four years, depending on the
specific advance. After the initial fixed rate period, the FHLB has
the option to convert each advance to a LIBOR based, variable rate
advance. If the FHLB exercises its option, Peoples may repay the
advance in whole or in part on the conversion date or any subsequent repricing
date without a prepayment fee. At all other times, early repayment of
any convertible rate advance would result in Peoples incurring a prepayment
penalty. For the putable advances, the FHLB has the option, at its
sole discretion following an initial period of three months, to terminate the
debt and require Peoples to repay the advance prior to the final stated
maturity. After the initial period, the FHLB has the option to
terminate the debt on a quarterly basis. If the advance is terminated
prior to maturity, the FHLB will offer Peoples replacement funding at the
then-prevailing rate on an advance product then-offered by the FHLB, subject to
normal FHLB underwriting criteria. As discussed in Note 8, long-term FHLB
advances are collateralized by assets owned by Peoples.
The aggregate minimum annual
retirements of long-term borrowings in the next five years and thereafter are as
follows:
|
(Dollars
in thousands)
|
Balance
|
Weighted-Average
Rate
|
|
|
2009
|
$ 67,025
|
4.98%
|
|
|
2010
|
32,393
|
4.33%
|
|
|
2011
|
44,472
|
4.53%
|
|
|
2012
|
36,615
|
4.20%
|
|
|
2013
|
1,532
|
3.98%
|
|
|
Thereafter
|
126,260
|
3.37%
|
|
|
Total
long-term borrowings
|
$308,297
|
4.09%
|
Note
10.
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 and Peoples will be
prohibited from paying dividends on its common shares. Interest on
the Debentures is cumulative. Peoples has entered into agreements
which, taken collectively, fully and unconditionally guarantee the Capital
Securities subject to the terms of each of the guarantees.
The
Capital Securities are 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)
|
2008
|
2007
|
||
|
Capital
Securities of PEBO Capital Trust I, 8.62%, due May 1,
2029,
|
$ 22,495
|
$ 22,460
|
||
|
net
of unamortized issuance costs
|
||||
|
Amount
qualifying for Tier 1 capital
|
$ 22,495
|
$ 22,460
|
||
Note
11.
Stockholders’
Equity
The
following table details the progression in balances of Peoples’ common and
treasury stock during the years presented:
|
Common
|
Treasury
|
||
|
Stock
|
Stock | ||
|
Balance,
December 31, 2005
|
10,869,655
|
350,675
|
|
|
Stock-based
compensation
|
(137,286)
|
||
|
Purchase
of treasury stock
|
42,594
|
||
|
Common
stock issued under dividend
|
19,587
|
||
|
reinvestment
plan
|
|||
|
Issuance
of common stock related to acquisitions:
|
|||
|
Putnam
Agency, Inc.
|
(4,662)
|
||
|
Barengo
Insurance Agency, Inc.
|
(14,064)
|
||
|
Balance,
December 31, 2006
|
10,889,242
|
237,257
|
|
Common
|
Treasury
|
||
|
Stock
|
Stock
|
||
|
Balance,
December 31, 2006
|
10,889,242
|
237,257
|
|
|
Stock-based
compensation
|
5,703
|
(57,988)
|
|
|
Purchase
of treasury stock
|
471,327
|
||
|
Common
stock issued under dividend
|
31,009
|
||
|
reinvestment
plan
|
|||
|
Issuance
of common stock related to acquisitions:
|
|||
|
Putnam
Agency, Inc.
|
(4,662)
|
||
|
Barengo
Insurance Agency, Inc.
|
(16,728)
|
||
|
Balance,
December 31, 2007
|
10,925,954
|
629,206
|
|
|
Stock-based
compensation
|
7,475
|
(11,093)
|
|
|
Purchase
of treasury stock
|
23,367
|
||
|
Common
stock issued under dividend
|
41,935
|
||
|
reinvestment
plan
|
|||
|
Balance,
December 31, 2008
|
10,975,364
|
641,480
|
On
January 22, 2009, Peoples’ shareholders adopted an amendment to Article FOURTH
of Peoples’ Amended Articles of Incorporation to authorize the issuance of up to
50,000 preferred shares. The preferred shares may be issued by
Peoples’ Board of Directors in one or more series, from time to time, with each
such series to consist of such number of shares and to have such voting powers,
designations, preferences, rights, qualifications, limitations and restrictions
as determined by the Board of Directors. On January 28, 2009,
Peoples’ Board of Directors adopted an amendment to Peoples’ Amended Articles of
Incorporation to create a series of preferred shares designated as Peoples’
Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par
value and having a liquidation preference of $1,000 per share (the “Series A
Preferred Shares”). These actions enabled Peoples to obtain final
approval for a $39 million capital investment from the United States Department
of the Treasury (“U.S. Treasury”) through the TARP Capital Purchase Program
established by the U.S. Treasury under the Emergency Economic Stabilization Act
of 2008.
On
January 30, 2009, Peoples issued and sold to the U.S. Treasury (i) 39,000 of
Peoples’ Series A Preferred Shares, and (ii) a ten-year warrant (the “Warrant”)
to purchase 313,505 Peoples common shares (“Common Shares”), at an exercise
price of $18.66 per share (subject to certain anti-dilution and other
adjustments), for an aggregate purchase price of $39 million in
cash.
Under
standardized TARP Capital Purchase Program terms, cumulative dividends on the
Series A Preferred Shares will accrue on the liquidation preference at a rate of
5% per annum for the first five years and at a rate of 9% per annum
thereafter. These dividends will be paid only if, as and when
declared by Peoples’ Board of Directors. The Series A Preferred
Shares have no maturity date and rank senior to the Common Shares with respect
to the payment of dividends and distributions and amounts payable upon
liquidation, dissolution and winding up of Peoples. Subject to the
approval of the Appropriate Federal Banking Agency (as defined in the Securities
Purchase Agreement, which for Peoples is the Board of Governors of the Federal
Reserve System), the Series A Preferred Shares are redeemable at the option of
Peoples at 100% of their liquidation preference plus accrued and unpaid
dividends, provided that the Series A Preferred Shares may be redeemed prior to
February 15, 2012, only if (i) Peoples has raised aggregate gross proceeds in
one or more Qualified Equity Offerings (as defined in the Securities Purchase
Agreement) in excess of $9,750,000 and (ii) the aggregate redemption price of
the Series A Preferred Shares does not exceed the aggregate net proceeds from
such Qualified Equity Offerings. The Series A Preferred Shares are
generally non-voting.
The U.S.
Treasury may not transfer a portion or portions of the Warrant with respect to,
and/or exercise the Warrant for more than one-half of, the 313,505 Common Shares
issuable upon exercise of the Warrant, in the aggregate, until the earlier of
(i) the date on which Peoples has received aggregate gross proceeds of not
less than $39 million from one or more Qualified Equity Offerings and (ii)
December 31, 2009. In the event Peoples completes one or more
Qualified Equity Offerings on or prior to December 31, 2009, that result in
Peoples receiving aggregate gross proceeds of not less than $39 million, the
number of the Common Shares underlying the portion of the Warrant then held by
the U.S. Treasury will be reduced by one-half of the Common Shares originally
covered by the Warrant. The U.S. Treasury has agreed not to exercise
voting power with respect to any Common Shares issued to it upon exercise of the
Warrant. Any Common Shares issued by Peoples upon exercise of the
Warrant will be issued from Common Shares held in treasury to the extent
available. If no treasury shares are available, Common Shares will be
issued from authorized but unissued Common Shares.
The
Securities Purchase Agreement, pursuant to which the Series A Preferred
Shares and the Warrant were sold, contains limitations on the payment of
dividends on the Common Shares after January 30, 2009. Prior to the
earlier of (i) January 30, 2012 and (ii) the date on which the
Series A Preferred Shares have been redeemed in whole or the U.S. Treasury
has transferred the Series A Preferred Shares to third parties which are
not Affiliates (as defined in the Securities Purchase Agreement) of the U.S.
Treasury, any increase in common share dividends by Peoples or any of its
subsidiaries would be prohibited without the prior approval of the U.S.
Treasury.
The
American Recovery and Reinvestment Act of 2009 (the “ARRA”) passed by the United
States Congress and signed by the President on February 17, 2009, provides
that the U.S. Treasury, subject to consultation with the Appropriate Federal
Banking Agency, must permit a TARP recipient to repay any assistance previously
provided under TARP, without regard to whether the TARP recipient has replaced
those funds from any other source or to any waiting period. As a
result, subject to consultation with the Federal Reserve Board, the U.S.
Treasury must permit Peoples to redeem the Series A Preferred Shares at the
appropriate redemption price without regard to whether the redemption price is
to be paid from proceeds of a qualified equity offering or any other source or
when the redemption date occurs. If the Series A Preferred Shares
were redeemed, the U.S. Treasury must liquidate the related Warrant at the
current market price. The U.S. Treasury is to promulgate regulations
to implement the procedures under which a TARP participant may repay any
assistance received. As of the date of this Annual Report, the U.S.
Treasury had not yet issued such regulations.
Note
12.
Comprehensive
(Loss) Income
The
components of other comprehensive (loss) income for the years ended December 31
were as follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Net
income
|
$ 7,455
|
$ 18,314
|
$ 21,558
|
||
|
Other
comprehensive (loss) income:
|
|||||
|
Available-for-sale
investment securities:
|
|||||
|
Gross
unrealized holding (loss) gain arising in the period
|
(20,941)
|
1,697
|
475
|
||
|
Related
tax benefit (expense)
|
7,329
|
(594)
|
(166)
|
||
|
Less:
reclassification adjustment for net (loss) gain included in net
income
|
(2,592)
|
(6,062)
|
265
|
||
|
Related
tax benefit (expense)
|
907
|
2,122
|
(93)
|
||
|
Net
effect on other comprehensive (loss) income
|
(11,927)
|
5,043
|
137
|
||
|
Defined benefit
plans:
|
|||||
|
Net
(loss) gain arising during the period
|
(5,206)
|
1,327
|
–
|
||
|
Related
tax benefit (expense)
|
1,822
|
(464)
|
–
|
||
|
Amortization
of unrecognized loss and service cost on pension plan
|
13
|
162
|
–
|
||
|
Related
tax expense
|
(4)
|
(57)
|
–
|
||
|
Net
effect on other comprehensive (loss) income
|
(3,375)
|
968
|
–
|
||
|
Total
other comprehensive (loss) income, net of tax
|
(15,302)
|
6,011
|
137
|
||
|
Total
comprehensive (loss) income
|
$
(7,847)
|
$24,325
|
$21,695
|
Changes
in the components of Peoples’ accumulated other comprehensive (loss) income for
years ended December 31, 2008, 2007 and 2006 were as follows:
|
Unrecognized
|
|||||
|
Unrealized
|
Net
Pension and
|
Accumulated
|
|||
|
(Loss)
Gain
|
Postretirement
|
Comprehensive
|
|||
|
(Dollars
in thousands)
|
on
Securities
|
Costs
|
(Loss)
Income
|
||
|
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
|
||
|
Current
period change, net of tax
|
(11,927)
|
(3,375)
|
(15,302)
|
||
|
Balance,
December 31, 2008
|
$ (7,863)
|
$ (4,425)
|
$ (12,288)
|
Note
13.
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, 2008, and a
statement of the funded status as of December 31, 2008 and 2007:
statement of the funded status as of December 31, 2008 and 2007:
|
Pension
Benefits
|
Postretirement
Benefits
|
||||||
|
(Dollars
in thousands)
|
2008
|
2007
|
2008
|
2007
|
|||
|
Change
in benefit obligation:
|
|||||||
|
Obligation
at January 1
|
$
11,868
|
$
13,548
|
$ 246
|
$ 560
|
|||
|
Service
cost
|
763
|
847
|
–
|
–
|
|||
|
Interest
cost
|
781
|
757
|
15
|
26
|
|||
|
Plan
participants’ contributions
|
–
|
–
|
123
|
122
|
|||
|
Actuarial
loss (gain)
|
492
|
(1,954)
|
(35)
|
(234)
|
|||
|
Benefit
payments
|
(966)
|
(1,331)
|
(123)
|
(194)
|
|||
|
Increase
due to plan changes
|
–
|
–
|
–
|
(34)
|
|||
|
Obligation
at December 31
|
$
12,938
|
$
11,867
|
$ 226
|
$ 246
|
|||
|
Accumulated
benefit obligation at December 31
|
$
11,164
|
$ 9,574
|
$ –
|
$ –
|
|||
|
Change
in plan assets:
|
|||||||
|
Fair
value of plan assets at January 1
|
$
14,326
|
$
15,050
|
$ –
|
$ –
|
|||
|
Actual
return on plan assets
|
(3,520)
|
607
|
–
|
–
|
|||
|
Employer
contributions
|
–
|
–
|
–
|
72
|
|||
|
Plan
participants’ contributions
|
–
|
–
|
123
|
122
|
|||
|
Benefit
payments
|
(966)
|
(1,331)
|
(123)
|
(194)
|
|||
|
Fair
value of plan assets at December 31
|
$ 9,840
|
$
14,326
|
$ –
|
$ –
|
|||
|
Funded
status:
|
|||||||
|
Funded
status at December 31
|
$ (3,098)
|
$ 2,459
|
$ (226)
|
$ (246)
|
|||
|
Unrecognized
prior service cost
|
–
|
–
|
–
|
(34)
|
|||
|
Unrecognized
net loss
|
–
|
–
|
–
|
(64)
|
|||
|
Net
amount recognized
|
$ (3,098)
|
$ 2,459
|
$ (226)
|
$ (344)
|
|||
|
Amounts
recognized in Consolidated Balance Sheets:
|
|||||||
|
Prepaid
benefit costs
|
$ –
|
$ 2,459
|
$ –
|
$ –
|
|||
|
Accrued
benefit liability
|
(3,098)
|
–
|
(226)
|
(344)
|
|||
|
Net
amount recognized
|
$ (3,098)
|
$ 2,459
|
$ (226)
|
$ (344)
|
|||
|
Amounts
recognized in Accumulated Comprehensive (Loss) Income:
|
|||||||
|
Unrecognized
prior service cost
|
$ 20
|
$ 23
|
$ 20
|
$ –
|
|||
|
Unrecognized
net loss
|
4,410
|
1,027
|
61
|
–
|
|||
|
Total
|
$ 4,430
|
$ 1,050
|
$ 81
|
$ –
|
|||
|
Weighted-average
assumptions at year-end:
|
|||||||
|
Discount
rate
|
6.30%
|
6.70%
|
6.30%
|
6.70%
|
|||
|
Rate
of compensation increase
|
2.50%
|
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 and $126,000 of net loss.
Net
Periodic Benefit Cost
The
following table provides the components of net periodic benefit cost for the
plans:
|
Pension
Benefits
|
Postretirement
Benefits
|
||||||
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|
|
Service
cost
|
$ 763
|
$ 847
|
$ 869
|
$ –
|
$ –
|
$ –
|
|
|
Interest
cost
|
781
|
757
|
756
|
15
|
26
|
25
|
|
|
Expected
return on plan assets
|
(1,202)
|
(1,191)
|
(1,164)
|
–
|
–
|
–
|
|
|
Amortization
of prior service cost
|
4
|
2
|
2
|
–
|
–
|
–
|
|
|
Amortization
of net loss
|
10
|
160
|
256
|
(7)
|
3
|
–
|
|
|
Settlements
|
–
|
–
|
–
|
–
|
–
|
–
|
|
|
Net
periodic benefit cost
|
$ 356
|
$ 575
|
$ 719
|
$ 8
|
$ 29
|
$ 25
|
|
|
Weighted-average
assumptions:
|
|||||||
|
Discount
rate
|
6.70%
|
6.00%
|
5.75%
|
6.70%
|
6.00%
|
5.75%
|
|
|
Expected
return on plan assets
|
8.50%
|
8.50%
|
8.50%
|
n/a
|
n/a
|
n/a
|
|
|
Rate
of compensation increase
|
3.50%
|
3.50%
|
3.50%
|
n/a
|
n/a
|
n/a
|
|
For
measurement purposes, a 10% annual rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) was assumed for 2008,
grading down 1% per year to an ultimate rate of 5% in 2013. 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
|
2008
|
2007
|
|||
|
Equity
securities
|
60
– 75%
|
62%
|
70%
|
||
|
Debt
securities
|
24
– 39
|
34
|
26
|
||
|
Other
|
1
|
4
|
4
|
||
|
Total
|
100%
|
100%
|
100%
|
Equity
securities of Peoples’ pension plan did not include any securities of Peoples or
related parties in 2008 or 2007.
Cash
Flows
Peoples has
not determined if any contributions will be made to its pension plan in 2009;
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
|
||
|
2009
|
$ 1,033
|
$ 35
|
||
|
2010
|
929
|
34
|
||
|
2011
|
1,092
|
34
|
||
|
2012
|
1,760
|
27
|
||
|
2013
|
1,147
|
25
|
||
|
2014
to 2018
|
6,836
|
91
|
||
|
Total
|
$ 12,797
|
$ 246
|
||
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
$776,000, $740,000 and $698,000 for the years ended December 31, 2008, 2007 and
2006, respectively.
Note
14.
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:
|
2008
|
2007
|
2006
|
|||||||||
|
(Dollars
in thousands)
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||
|
Income
tax computed at statutory federal tax rate
|
$ 2,665
|
35.0%
|
$ 8,356
|
35.0%
|
$
10,298
|
35.0%
|
|||||
|
Differences
in rate resulting from:
|
|||||||||||
|
Tax-exempt
interest income
|
(924)
|
(12.1)
|
(831)
|
(3.5)
|
(940)
|
(3.2)
|
|||||
|
Investments
in tax credit funds
|
(689)
|
(9.0)
|
(640)
|
(2.7)
|
(613)
|
(2.1)
|
|||||
|
Bank
owned life insurance
|
(554)
|
(7.3)
|
(581)
|
(2.4)
|
(573)
|
(2.0)
|
|||||
|
Change
in valuation allowance
|
(321)
|
(4.2)
|
(635)
|
(2.6)
|
79
|
0.3
|
|||||
|
Other,
net
|
(17)
|
(0.3)
|
(109)
|
(0.5)
|
(386)
|
(1.3)
|
|||||
|
Total
income taxes
|
$ 160
|
2.1%
|
$ 5,560
|
23.3%
|
$ 7,865
|
26.7%
|
|||||
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, 2005 through 2007. The years open to examination by
state taxing authorities vary by jurisdiction.
The
significant components of Peoples' deferred tax assets and liabilities consisted
of the following at December 31:
|
(Dollars
in thousands)
|
2008
|
2007
|
|
|
Deferred
tax assets:
|
|||
|
Allowance
for loan losses
|
$ 8,548
|
$ 6,292
|
|
|
Accrued
employee benefits
|
2,103
|
97
|
|
|
Deferred
loan fees and costs
|
(331)
|
(202)
|
|
|
Available-for-sale
securities
|
4,234
|
–
|
|
|
AMT
credit carryforward
|
2,069
|
1,656
|
|
|
Other
|
315
|
260
|
|
|
Valuation
allowance
|
–
|
(321)
|
|
|
Total
deferred tax assets
|
16,938
|
7,782
|
|
|
Deferred
tax liabilities:
|
|||
|
Bank
premises and equipment
|
1,183
|
1,105
|
|
|
Deferred
income
|
1,013
|
1,108
|
|
|
Investments
|
351
|
(50)
|
|
|
Available-for-sale
securities
|
–
|
2,188
|
|
|
Other
|
3,510
|
3,651
|
|
|
Total
deferred tax liabilities
|
6,057
|
8,002
|
|
|
Net
deferred tax asset (liability)
|
$ 10,881
|
$ (220)
|
The AMT
tax credit carryforward at December 31, 2008 and 2007 may be carried over
indefinitely. The valuation allowance at December 31, 2007,
represented the amount of the AMT credit carryforward that was estimated to not
be realized in a reasonable period. The related federal income tax
(benefit) expense on securities transactions approximated ($907,000) in 2008,
($2,122,000) in 2007 and $93,000 in 2006.
Note
15.
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)
|
2008
|
2007
|
|
|
Loan
commitments
|
$
201,194
|
$
176,835
|
|
|
Standby
letters of credit
|
46,788
|
34,200
|
|
Interest
Rate Contracts
At
December 31, 2008, 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, 2008, 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 $1.1 million at
December 31, 2008, and $1.3 million at December 31, 2007. The maximum
aggregate amounts Peoples could be required to make for each of the next five
years are as follows: $247,000 in 2009; $240,000 in 2010; $234,000 in 2011;
$185,000 in 2012 and $125,000 in 2013.
Note
16.
Regulatory
Matters
The
following is a summary of certain regulatory matters affecting Peoples and its
subsidiaries:
Capital
Requirements
Peoples
and Peoples Bank are subject to various regulatory capital guidelines
administered by the banking regulatory agencies. Under capital
adequacy requirements and the regulatory framework for prompt corrective action,
Peoples and its banking subsidiary must meet specific capital guidelines that
involve quantitative measures of each entity's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. Peoples' and Peoples Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Failure to meet future
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a material effect on Peoples’ financial results.
Quantitative
measures established by regulation to ensure capital adequacy require Peoples
and Peoples Bank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as
defined). Peoples and Peoples Bank met all capital adequacy
requirements at December 31, 2008.
As of
December 31, 2008, 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:
|
Peoples
|
Peoples
Bank
|
||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||
|
2008
|
|||||||
|
Total
Capital
(1)
|
|||||||
|
Actual
|
$ 173,470
|
13.2%
|
$ 158,030
|
12.1%
|
|||
|
For
capital adequacy
|
105,253
|
8.0%
|
104,715
|
8.0%
|
|||
|
To
be well capitalized
|
131,566
|
10.0%
|
130,894
|
10.0%
|
|||
|
Tier
1
(2)
|
|||||||
|
Actual
|
$ 156,254
|
11.9%
|
$ 141,587
|
10.8%
|
|||
|
For
capital adequacy
|
52,626
|
4.0%
|
52,357
|
4.0%
|
|||
|
To
be well capitalized
|
78,939
|
6.0%
|
78,536
|
6.0%
|
|||
|
Tier
1 Leverage
(3)
|
|||||||
|
Actual
|
$ 156,254
|
8.2%
|
$ 141,587
|
7.5%
|
|||
|
For
capital adequacy
|
76,443
|
4.0%
|
75,866
|
4.0%
|
|||
|
To
be well capitalized
|
95,554
|
5.0%
|
94,833
|
5.0%
|
|||
As more
fully disclosed in Note 11, on January 30, 2009, Peoples received $39.0 million
of new equity capital from the sale of Series A Preferred Shares and the Warrant
to U.S. Treasury as part of the TARP Capital Purchase Program. All of
the proceeds from the sale of the Series A Preferred Shares and the Warrant will
qualify as Tier 1 capital for regulatory purposes.
Limits
on Dividends
The
primary source of funds for the dividends paid by Peoples is dividends received
from Peoples Bank. The payment of dividends by Peoples Bank is
subject to various banking regulations. The most restrictive
provision requires regulatory approval if dividends declared in any calendar
year exceed the total net profits of that year plus the retained net profits of
the preceding two years. At December 31, 2008, Peoples Bank had
approximately $3.9 million of net profits available for distribution to Peoples
as dividends without regulatory approval.
Federal
Reserve Requirements
Peoples
Bank is required to maintain a minimum level of reserves, consisting of cash on
hand and non-interest-bearing balances with the Federal Reserve Bank, based on
the amount of deposit liabilities. Average required reserve balances
were approximately $4.9 million and $4.8 million for the years ended December
31, 2008 and 2007.
Note
17.
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. Prior to 2007, Peoples granted nonqualified
and incentive stock options to employees and nonqualified stock options to
non-employee directors under the 2006 Equity Plan and predecessor
plans. Since February 2007, Peoples has granted a combination of
restricted common shares and stock appreciation rights (“SARs”) to be settled in
common shares to employees and restricted common shares to non-employee
directors subject to the terms and conditions prescribed by the 2006 Equity
Plan. In general, common shares issued in connection with stock-based
awards are issued from treasury shares to the extent available. If no
treasury shares are available, common shares are issued from authorized but
unissued common shares.
Stock
Options
Under the
provisions of the 2006 Equity Plan and predecessor stock option plans, the
exercise price per share of any stock option granted may not be less than the
fair market value of the underlying common shares on the date of grant of the
stock option. The most recent stock options granted to employees and
non-employee directors occurred in 2006. The stock options granted to
employees will vest three years from the grant date, while the stock options
granted to non-employee directors vested six months from the grant
date. All stock options granted to both employees and non-employee
directors expire ten years from the date of grant.
The
following summarizes the changes to Peoples’ stock options for the year ended
December 31, 2008:
|
Number
of Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining Contractual
Life
|
Aggregate
Intrinsic Value
|
||||
|
Outstanding
at January 1
|
325,461
|
$ 22.74
|
|||||
|
Granted
|
–
|
–
|
|||||
|
Exercised
|
13,064
|
17.36
|
|||||
|
Forfeited
|
7,950
|
24.98
|
|||||
|
Outstanding
at December 31
|
304,447
|
22.91
|
4.2
years
|
$
367,000
|
|||
|
Exercisable
at December 31
|
261,909
|
22.01
|
3.7
years
|
$
367,000
|
|||
The
weighted-average estimated fair value of options granted in 2006 was
$7.37. The total intrinsic value of stock options exercised was
$61,000, $0.6 million and $1.4 million in 2008, 2007 and 2006,
respectively.
The
following summarizes information concerning Peoples’ stock options outstanding
at December 31, 2008:
|
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
|
$15.45
|
71,112
|
0.8
years
|
$ 14.20
|
71,112
|
$ 14.20
|
||||
|
$15.45
|
to
|
$22.32
|
62,672
|
4.0
years
|
21.71
|
62,672
|
21.71
|
||||
|
$22.33
|
to
|
$26.01
|
56,953
|
4.1
years
|
24.39
|
56,953
|
24.39
|
||||
|
$26.01
|
to
|
$28.25
|
73,176
|
6.4
years
|
27.88
|
36,638
|
27.50
|
||||
|
$28.25
|
to
|
$30.00
|
40,534
|
6.3
years
|
29.03
|
34,534
|
28.91
|
||||
|
Total
|
304,447
|
4.2
years
|
$ 22.91
|
261,909
|
$ 22.01
|
||||||
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, 2008:
|
Number
of
Shares
|
Weighted-Average
Exercise
Price
|
Weighted-
Average Remaining Contractual
Life
|
Aggregate
Intrinsic Value
|
||||
|
Outstanding
at January 1
|
30,374
|
$ 27.96
|
|||||
|
Granted
|
28,170
|
23.85
|
|||||
|
Exercised
|
–
|
–
|
|||||
|
Forfeited
|
1,111
|
29.25
|
|||||
|
Outstanding
at December 31
|
57,433
|
$ 25.92
|
8.7
years
|
$ –
|
|||
|
Exercisable
at December 31
|
–
|
$ –
|
–
|
$ –
|
|||
The
weighted-average estimated fair value of the SARs granted in 2008 and 2007 was
$5.46 and $7.73, respectively. The following summarizes information
concerning Peoples’ SARs outstanding at December 31, 2008:
|
Exercise
Prices
|
Number
of
Shares
Outstanding
|
Weighted-
Average
Remaining
Contractural
Life
|
Weighted-
Average
Exercise
Price
|
Number
of
Shares
Exercisable
|
|||||
|
$23.26
|
5,000
|
8.6
years
|
$ 23.26
|
–
|
|||||
|
$23.77
|
26,170
|
9.1
years
|
23.77
|
–
|
|||||
|
$23.80
|
to
|
$27.99
|
6,000
|
9.0
years
|
26.26
|
–
|
|||
|
$29.25
|
20,263
|
8.1
years
|
29.25
|
–
|
|||||
|
Total
|
57,433
|
8.7
years
|
$ 25.92
|
–
|
|||||
Restricted
Shares
Under the 2006 Equity Plan, Peoples may award restricted common shares to
officers, key employees and non-employee directors. In general, the
restrictions on common shares
awarded
to non-employee directors expire after six months, while the restrictions on
common shares awarded to employees expire after three years. The
following summarizes the changes to Peoples’ restricted common shares for year
ended December 31, 2008:
|
Weighted-
|
|||
|
Average
|
|||
|
Number
|
Grant
Date
|
||
|
of
Shares
|
Fair
Value
|
||
|
Outstanding
at January 1
|
9,148
|
$ 28.49
|
|
|
Awarded
|
14,069
|
23.72
|
|
|
Released
|
7,475
|
24.47
|
|
|
Forfeited
|
164
|
29.25
|
|
|
Outstanding
at December 31
|
15,578
|
$ 26.10
|
The total
intrinsic value of restricted stock released was $158,000 and $220,000 in 2008
and 2007, respectively.
Stock-Based
Compensation
Peoples
recognized stock-based compensation expense, which is included as a component of
Peoples’ salaries and employee benefits costs, based on the estimated fair value
of the awards on the grant date. The following summarizes the amount
of stock-based compensation expense and related tax benefit recognized for the
years ended December 31:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Total
stock-based compensation
|
$ 498,000
|
$ 391,000
|
$ 280,000
|
||
|
Recognized
tax benefit
|
(174,000)
|
(137,000)
|
(98,000)
|
||
|
Net
expense recognized
|
$ 324,000
|
$ 254,000
|
$ 182,000
|
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:
|
2008
|
2007
|
2006
|
||||
|
Risk-free
interest rate
|
4.38%
|
4.82%
|
4.56%
|
|||
|
Dividend
yield
|
3.88%
|
3.05%
|
2.65%
|
|||
|
Volatility
factor of the market price of parent stock
|
26.3%
|
25.5%
|
25.8%
|
|||
|
Weighted-average
expected life
|
10.0
years
|
10.0
years
|
6.4
years
|
The
Black-Scholes option valuation model was originally developed for use in
estimating the fair value of traded options, which have different
characteristics than equity awards granted by Peoples, such as no vesting or
transfer restrictions. The model requires the input of highly
subjective assumptions, including the expected stock price volatility, which can
materially affect the fair value estimate. The expected volatility
and expected life assumptions were based solely on historical
data. The expected dividend yield is computed based on the then
current dividend rate, and the risk-free interest rate is based on
U.S. Treasury zero-coupon issues with a remaining term approximating the
expected life of the equity awards.
Total
unrecognized stock-based compensation expense related to unvested awards was
$213,000 at December 31, 2008, which will be recognized over a weighted-average
period of 1.6 years.
Note
18.
Parent
Company Only Financial Information
|
Condensed
Balance Sheets
|
December
31,
|
||
|
(Dollars
in thousands)
|
2008
|
2007
|
|
|
Assets:
|
|||
|
Cash
and due from other banks
|
$ 2,209
|
$ 2,111
|
|
|
Interest-bearing
deposits in subsidiary bank
|
3,776
|
12,437
|
|
|
Receivable
from subsidiary bank
|
423
|
651
|
|
|
Available-for-sale
investment securities, at estimated fair value (amortized
|
|||
|
cost
of $1,405 and $1,386 at December 31, 2008 and 2007,
respectively)
|
2,940
|
4,744
|
|
|
Investments
in subsidiaries:
|
|||
|
Bank
|
179,193
|
186,840
|
|
|
Non-bank
|
28,025
|
26,988
|
|
|
Other
assets
|
1,305
|
825
|
|
|
Total
assets
|
$217,871
|
$234,596
|
|
|
Liabilities:
|
|||
|
Accrued
expenses and other liabilities
|
$ 5,872
|
$ 7,012
|
|
|
Dividends
payable
|
2,398
|
2,288
|
|
|
Junior
subordinated debentures held by subsidiary trusts
|
22,975
|
22,460
|
|
|
Total
liabilities
|
31,245
|
31,760
|
|
|
Stockholders'
equity
|
186,626
|
202,836
|
|
|
Total liabilities and
stockholders' equity
|
$217,871
|
$234,596
|
|
|
Condensed
Statements of Income
|
Year
Ended December 31,
|
||||
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Income:
|
|||||
|
Dividends
from subsidiary bank
|
$ 2,000
|
$ 28,000
|
$ 21,750
|
||
|
Dividends
from non-bank subsidiary
|
-
|
1,000
|
2,300
|
||
|
Interest
|
361
|
392
|
598
|
||
|
Other
income
|
-
|
-
|
1
|
||
|
Total
income
|
2,361
|
29,392
|
24,649
|
||
|
Expenses:
|
|||||
|
Interest
expense on junior subordinated notes held by subsidiary
trusts
|
2,011
|
2,223
|
2,689
|
||
|
Intercompany
management fees
|
821
|
938
|
875
|
||
|
Interest
|
-
|
-
|
691
|
||
|
Other
expense
|
1,380
|
1,374
|
1,488
|
||
|
Total
expenses
|
4,212
|
4,535
|
5,743
|
||
|
(Loss)
income before federal income taxes and (excess dividends from)
equity
|
|||||
|
in
undistributed earnings of subsidiaries
|
(1,851)
|
24,857
|
18,906
|
||
|
Applicable
income tax benefit
|
(1,798)
|
(2,345)
|
(2,160)
|
||
|
Equity
in (excess dividends from) undistributed earnings of
subsidiaries
|
7,508
|
(8,888)
|
492
|
||
|
Net
income
|
$ 7,455
|
$
18,314
|
$
21,558
|
||
|
Statements
of Cash Flows
|
Year
Ended December 31,
|
||||
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||
|
Operating
activities
|
|||||
|
Net
income
|
$ 7,455
|
$ 18,314
|
$ 21,558
|
||
|
Adjustment
to reconcile net income to cash provided by operations:
|
|||||
|
Amortization
and depreciation
|
–
|
2
|
12
|
||
|
(Equity
in) excess dividends from undistributed earnings of
subsidiaries
|
(7,508)
|
8,888
|
(492)
|
||
|
Other,
net
|
59
|
1,313
|
(610)
|
||
|
Net
cash provided by operating activities
|
6
|
28,517
|
20,468
|
||
|
Investing
activities
|
|||||
|
Net
(purchases of) proceeds from sales and maturity investment
securities
|
(45)
|
(224)
|
100
|
||
|
Change
in receivable from subsidiary
|
228
|
(51)
|
(298)
|
||
|
Acquisitions,
net of cash received
|
–
|
(1,070)
|
(1,453)
|
||
|
Net
cash provided by (used in) investing activities
|
183
|
(1,345)
|
(1,651)
|
||
|
Financing
activities
|
|||||
|
Payments
on long-term borrowings
|
–
|
–
|
(13,600)
|
||
|
Purchase
of treasury stock
|
(506)
|
(12,350)
|
(1,214)
|
||
|
Proceeds
from issuance of common stock
|
210
|
989
|
2,719
|
||
|
Repurchase
of Trust Preferred Securities
|
–
|
–
|
(25)
|
||
|
Redemption
of Trust Preferred Securities
|
–
|
(7,000)
|
–
|
||
|
Cash
dividends paid
|
(8,423)
|
(8,375)
|
(8,164)
|
||
|
Excess
tax (expense) benefit for share based payments
|
(33)
|
148
|
–
|
||
|
Net
cash used in financing activities
|
(8,752)
|
(26,588)
|
(20,284)
|
||
|
Net
(decrease) increase in cash and cash equivalents
|
(8,563)
|
584
|
(1,467)
|
||
|
Cash
and cash equivalents at the beginning of year
|
14,548
|
13,964
|
15,431
|
||
|
Cash and cash equivalents at
the end of year
|
$ 5,985
|
$
14,548
|
$
13,964
|
||
|
Supplemental
cash flow information:
|
|||||
|
Interest
paid
|
$ 1,980
|
$ 2,302
|
$ 3,322
|
||
Note
19.
Summarized
Quarterly Information (Unaudited)
A summary of
selected quarterly financial information for 2008 and 2007
follows:
|
2008
|
|||||||
|
First
|
Second
|
Third
|
Fourth
|
||||
|
(Dollars
in thousands, except per share data)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||
|
Total
interest income
|
$ 27,299
|
$ 26,548
|
$ 26,063
|
$ 26,317
|
|||
|
Total
interest expense
|
13,013
|
11,674
|
11,461
|
11,600
|
|||
|
Net
interest income
|
14,286
|
14,874
|
14,602
|
14,717
|
|||
|
Provision
for loan losses
|
1,437
|
6,765
|
5,996
|
13,442
|
|||
|
Net
gain (loss) on investment securities
|
293
|
(308)
|
(111)
|
(2,466)
|
|||
|
Other
income
|
8,234
|
7,886
|
8,142
|
8,591
|
|||
|
Intangible
asset amortization
|
415
|
403
|
390
|
378
|
|||
|
Other
expenses
|
13,327
|
12,641
|
12,803
|
13,128
|
|||
|
Income
tax expense (benefit)
|
1,986
|
690
|
493
|
(3,009)
|
|||
|
Net
income
|
$ 5,648
|
$ 1,953
|
$ 2,951
|
$ (3,097)
|
|||
|
Earnings
per share:
|
|||||||
|
Basic
|
$ 0.55
|
$ 0.19
|
$ 0.29
|
$ (0.30)
|
|||
|
Diluted
|
$ 0.55
|
$ 0.19
|
$ 0.28
|
$ (0.30)
|
|||
|
Weighted-average
shares outstanding:
|
|||||||
|
Basic
|
10,302,713
|
10,304,666
|
10,319,534
|
10,333,888
|
|||
|
Diluted
|
10,345,180
|
10,352,135
|
10,354,522
|
10,359,491
|
|||
Included in
net gain (loss) on investment securities are other-than-temporary non-cash
impairment charges of approximately $4.0 million and $260,000 during the fourth
and second quarters of 2008, respectively.
|
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
|
|||
Included in
net gain (loss) on investment securities are other-than-temporary non-cash
impairment charges of approximately $5.5 million in the fourth quarter and
$675,000 in the third quarter.
|
ITEM 10. DIRECTORS
, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
|
The
information concerning (a) directors of Peoples Bancorp Inc. (“Peoples”), (b)
the procedures by which shareholders of Peoples may recommend nominees to
Peoples’ Board of Directors, (c) the Audit Committee of Peoples’ Board of
Directors and (d) the Board of Directors’ determination that Peoples has an
“audit committee financial expert” serving on its Audit Committee required by
Items 401, 407(c)(3), 407(d)(4) and 407(d)(5) of SEC Regulation S-K is included
in the sections captioned “PROPOSAL NUMBER 1: ELECTION OF DIRECTORS”, “THE BOARD
OF DIRECTORS AND COMMITTEES OF THE BOARD” and “NOMINATING PROCEDURES” of the
definitive Proxy Statement of Peoples Bancorp Inc. relating to the Annual
Meeting of Shareholders to be held April 23, 2009 (“Peoples’ Definitive Proxy
Statement”), which sections are incorporated herein by reference. The
procedures by which shareholders of Peoples may recommend nominees to Peoples’
Board of Directors have not changed materially from those described in Peoples’
definitive Proxy Statement for the 2008 Annual Meeting of Shareholders held on
April 10, 2008.
The
information regarding Peoples’ executive officers required by Item 401 of SEC
Regulation S-K is included in the section captioned “EXECUTIVE OFFICERS” of
Peoples’ Definitive Proxy Statement, which section is incorporated herein by
reference.
The
information required by Item 405 of SEC Regulation S-K is included under the
caption “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” of Peoples’
Definitive Proxy Statement, which section is incorporated herein by
reference.
The Board of
Directors of Peoples has adopted charters for each of the Audit Committee, the
Compensation Committee and the Governance and Nominating Committee.
In accordance
with the requirements of Rule 4350(n) of The NASDAQ Stock Market LLC
Marketplace Rules, the Board of Directors of Peoples has adopted a Code of
Ethics covering the directors, officers and employees of Peoples and its
affiliates, including, without limitation, the principal executive officer, the
principal financial officer and principal accounting officer of
Peoples. Peoples intends to disclose the following events, if they
occur, in a Current Report on Form 8-K and on the “Corporate Governance &
Ethics” page of Peoples’ Internet website at www.peoplesbancorp.com within four
business days following their occurrence:
|
(A)
|
the
date and nature of any amendment to a provision of Peoples’ Code of Ethics
that
|
|
(i)
|
applies
to the principal executive officer, principal financial officer, principal
accounting officer or controller of Peoples, or persons performing similar
functions,
|
|
(ii)
|
relates
to any element of the code of ethics definition set forth in
Item 406(b) of SEC Regulation S-K,
and
|
|
(iii)
|
is
not a technical, administrative or other non-substantive amendment;
and
|
|
(B)
|
a
description (including the nature of the waiver, the name of the person to
whom the waiver was granted and the date of the waiver) of any waiver,
including an implicit waiver, from a provision of the Code of Ethics
granted to the principal executive officer, principal financial officer,
principal accounting officer or controller of Peoples, or persons
performing similar functions, that relates to one or more of the elements
of the code of ethics definition set forth in Item 406(b) of SEC
Regulation S-K.
|
In addition,
Peoples will disclose any waivers from the provisions of the Code of Ethics
granted to a director or executive officer of Peoples in a Current Report on
Form 8-K within four business days following their occurrence.
Each of the
Code of Ethics, the Audit Committee Charter, the Governance and Nominating
Committee Charter and the Compensation Committee Charter is posted on the
“Corporate Governance & Ethics” page of Peoples’ Internet
website. Interested persons may also obtain copies of the Code of
Ethics without charge by writing to Peoples Bancorp Inc., Attention: Corporate
Secretary, 138 Putnam Street, P.O. Box 738, Marietta, Ohio
45750-0738.
|
ITEM 11. EXECUTIVE
COMPENSATION
|
The
information required by this Item 11 is included in the sections captioned
“COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION”, “EXECUTIVE
COMPENSATION: COMPENSATION DISCUSSION AND ANALYSIS”, “ANNUAL CASH INCENTIVE
COMPENSATION”, “LONG-TERM EQUITY-BASED INCENTIVE COMPENSATION”, “SUMMARY
COMPENSATION TABLE FOR 2008”, “GRANTS OF PLAN-BASED AWARDS FOR 2008”,
“OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2008”, “OPTION EXERCISES AND STOCK
VESTED FOR 2008”, “PENSION BENEFITS FOR 2008”, “NON-QUALIFIED DEFERRED
COMPENSATION FOR 2008” and “OTHER POTENTIAL POST EMPLOYMENT PAYMENTS” of
Peoples’ Definitive Proxy Statement, which sections are incorporated herein by
reference.
|
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
The
information required by this Item 12 regarding the security ownership of certain
beneficial owners and management is included in the section
captioned “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT” of Peoples’ Definitive Proxy Statement, which section is
incorporated herein by reference.
Equity Compensation Plan
Information
The table
below provides information as of December 31, 2008, 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. Amended and Restated 2006 Equity Plan (the “2006
Plan”); and
|
|
(vi)
|
the
Peoples Bancorp Inc. Second Amended and Restated Deferred Compensation
Plan for Directors of Peoples Bancorp Inc. and Subsidiaries (the “Deferred
Compensation Plan”).
|
All of
these compensation plans were approved by the shareholders of
Peoples.
|
Plan
Category
|
(a)
Number
of common shares to be issued upon exercise of outstanding options,
warrants and rights
|
(b)
Weighted-average
exercise price of outstanding options, warrants and rights
|
(c)
Number
of common shares remaining available for future issuance under equity
compensation plans (excluding common shares reflected in column
(a))
|
|
Equity
compensation plans approved by shareholders
|
434,699
(1)
|
$23.39
(2)
|
405,005
(3)
|
|
Equity
compensation plans not approved by shareholders
|
–
|
–
|
–
|
|
Total
|
434,699
|
$23.39
|
405,005
|
|
(1)
|
Includes
an aggregate of 361,880 common shares issuable upon exercise of options
granted under the 1993 Plan, the 1995 Plan, the 1998 Plan and the 2002
Plan and options and stock appreciation rights granted under the 2006 Plan
and 72,819 common shares allocated to participants’ bookkeeping accounts
under the Deferred Compensation
Plan.
|
|
(2)
|
Represents
weighted-average exercise price of outstanding options granted under the
1993 Plan, the 1995 Plan, the 1998 Plan and the 2002 Plan and options and
stock appreciation rights granted under the 2006 Plan. The
weighted-average exercise price does not take into account the common
shares allocated to participants’ bookkeeping accounts under the Deferred
Compensation Plan.
|
|
(3)
|
Includes
395,055 common shares and 9,950 common shares remaining available for
future grants under the 2006 Plan and future allocations to bookkeeping
accounts under the Deferred Compensation Plan, respectively, at December
31, 2008. No common shares were available for future grants
under the 1993 Plan, the 1995 Plan, the 1998 Plan and the 2002 Plan at
December 31, 2008.
|
Additional
information regarding Peoples’ stock-based compensation plans can be found in
Note 17 of the Notes to the Consolidated Financial Statements.
In addition,
Peoples maintains the Peoples Bancorp Inc. Retirement Savings Plan, which is
intended to meet the qualification requirements of Section 401(a) of the
Internal Revenue Code of 1986, as amended.
|
ITEM 13. CERTAIN
RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this Item 13 is included in the sections captioned
“TRANSACTIONS WITH RELATED PERSONS”, “PROPOSAL NUMBER 1: ELECTION OF DIRECTORS”,
“THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD” and “COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION” of Peoples’ Definitive Proxy Statement,
which sections are incorporated by reference.
|
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
|
The information
required by this Item 14 is included in the section captioned “INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM” of Peoples’ Definitive Proxy Statement, which
section is incorporated herein by reference.
|
ITEM 15. EXHIBITS
AND FINANCIAL
STATEMENT SCHEDULES
|
(a)(1)
Financial
Statements:
The following consolidated financial
statements of Peoples Bancorp Inc. and subsidiaries are included in Item
8:
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm (Ernst & Young LLP)
on Effectiveness of
|
|
|
Internal
Control Over Financial Reporting
|
51
|
|
Report
of Independent Registered Public Accounting Firm (Ernst & Young LLP)
on Consolidated
|
|
|
Financial
Statements
|
52
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
53
|
|
Consolidated
Statements of Income for each of the three years ended December 31,
2008
|
54
|
|
Consolidated
Statements of Stockholders' Equity for each of the three years ended
December 31, 2008
|
55
|
|
Consolidated
Statements of Cash Flows for each of the three years ended December 31,
2008
|
56
|
|
Notes
to the Consolidated Financial Statements
|
57
|
|
Peoples
Bancorp Inc. (Parent Company Only Financial Information is included in
Note 18 of
the
|
|
|
Notes
to the Consolidated Financial Statements)
|
85
|
(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 93 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 93.
(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: March
3, 2009
|
By:
|
/s/ MARK F. BRADLEY | |
|
Mark
F. Bradley, President and
|
|||
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signatures
|
Title
|
Date
|
||
|
/s/
MARK F. BRADLEY
|
President,
Chief Executive Officer and Director
|
03/03/2009
|
||
|
Mark
F. Bradley
|
|
|||
|
/s/
EDWARD G. SLOANE
|
Executive
Vice President, Chief Financial Officer and
|
03/03/2009
|
||
|
Edward
G. Sloane
|
Treasurer
(Principal Financial and Accounting Officer)
|
|||
|
/s/
CARL L. BAKER, JR.*
|
Director
|
03/03/2009
|
||
|
Carl
L. Baker, Jr.
|
||||
|
/s/
GEORGE W. BROUGHTON*
|
Director
|
03/03/2009
|
||
|
George
W. Broughton
|
||||
|
/s/
FRANK L. CHRISTY*
|
Director
|
03/03/2009
|
||
|
Frank
L. Christy
|
||||
|
/s/
WILFORD D. DIMIT*
|
Director
|
03/03/2009
|
||
|
Wilford
D. Dimit
|
||||
|
/s/
RICHARD FERGUSON*
|
Chairman
of the Board and Director
|
03/03/2009
|
||
|
Richard
Ferguson
|
||||
|
/s/
DAVID L. MEAD*
|
Director
|
03/03/2009
|
||
|
David
L. Mead
|
||||
|
/s/
ROBERT W. PRICE*
|
Director
|
03/03/2009
|
||
|
Robert
W. Price
|
||||
|
/s/
THEODORE P. SAUBER*
|
Director
|
03/03/2009
|
||
|
Theodore
P. Sauber
|
||||
|
/s/
PAUL T. THEISEN*
|
Vice
Chairman of the Board
|
03/03/2009
|
||
|
Paul
T. Theisen
|
||||
|
/s/
JOSEPH H. WESEL*
|
Director
|
03/
03
/
2009
|
||
|
Joseph
H. Wesel
|
||||
|
/s/
THOMAS J. WOLF*
|
Director
|
03/03/2009
|
||
|
Thomas
J. Wolf
|
|
*
|
The
above-named directors of the Registrant sign this Annual Report on Form
10-K by Mark F. Bradley, their attorney-in-fact, pursuant to Powers of
Attorney signed by the above-named directors, which Powers of Attorney are
filed with this Annual Report on Form 10-K as exhibits, in the capacities
indicated and on the 3
rd
day of March, 2009.
|
|
By:
|
/s/ MARK F. BRADLEY |
| Mark F. Bradley | |
|
|
President and Chief Executive Officer |
93
|
EXHIBIT
INDEX
|
|||||
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
|||||
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2008
|
|||||
|
3.2(c)
|
Certificate
of Amendment to the Code of Regulations of Peoples Bancorp Inc. regarding
adoption of amendments to Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.07,
3.08 and 3.11 of the Code of Regulations of Peoples Bancorp Inc. by
shareholders on April 8, 2004.
|
Incorporated
herein by reference to Exhibit 3(a) to Peoples' Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2004 (File No.
0-16772)(“Peoples’ March 31, 2004 Form 10-Q”).
|
|||
|
3.2(d)
|
Certificate
regarding adoption of amendments to Sections 2.06, 2.07, 3.01 and 3.04 of
Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April
13, 2006
|
Incorporated
herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K
dated and filed on April 14, 2006 (File No. 0-16772) (“Peoples’ April 14,
2006 Form 8-K”)
|
|||
|
3.2(e)
|
Code
of Regulations of Peoples Bancorp Inc. (reflecting amendments through
April 13, 2006)
[For
SEC reporting compliance purposes only]
|
Incorporated
herein by reference to Exhibit 3(b) to Peoples’ Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2006 (File No.
0-16772)
|
|||
|
4.1
|
Agreement
to furnish instruments and agreements defining rights of holders of
long-term debt.
|
Filed
herewith.
|
|||
|
4.2
|
Indenture,
dated as of April 20, 1999, between Peoples Bancorp Inc. and Wilmington
Trust Company, as Debenture Trustee, relating to Junior Subordinated
Deferrable Interest Debentures.
|
Incorporated
herein by reference to Exhibit 4.1 to the Registration Statement on Form
S-4 (Registration No. 333-81251) filed on June 22, 1999 by
Peoples Bancorp Inc. and PEBO Capital Trust I (“Peoples’ 1999 Form
S-4”).
|
|||
|
4.3
|
Amended
and Restated Declaration of Trust of PEBO Capital Trust I, dated and
effective as of April 20, 1999.
|
Incorporated
herein by reference to Exhibit 4.5 to Peoples’ 1999 Form
S-4.
|
|||
|
4.4
|
Series
B Capital Securities Guarantee Agreement, dated as of September 23,
1999, between Peoples Bancorp Inc. and Wilmington Trust Company, as
Guarantee Trustee, relating to Series B 8.62% Capital
Securities.
|
Incorporated
herein by reference to Exhibit 4 (i) to Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 1999. (File No.
0-16772)
|
|||
|
4.5
|
Warrant
to purchase 313,505 Shares of Common Stock (common shares) of Peoples
Bancorp Inc., issued to the United States Department of the Treasury on
January 30, 2009
|
Incorporated
herein by reference to Exhibit 4.1 to Peoples’ February 2, 2009 Form
8-K.
|
|||
|
4.6
|
Letter
Agreement, dated January 30, 2009, including Securities Purchase
Agreement – Standard Terms attached thereto as Exhibit A, between
Peoples Bancorp Inc. and the United States Department of the Treasury
[Note: Annex A to Securities Purchase Agreement is not included therewith;
filed as Exhibit 3.1 to Peoples’ February 2, 2009 Form 8-K and
incorporated by reference at Exhibit 3.1(f) of this Annual Report on Form
10-K]
|
Incorporated
herein by reference to Exhibit 10.1 to Peoples’ February 2, 2009 Form
8-K.
|
|||
94
|
EXHIBIT
INDEX
|
|||||
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
|||||
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2008
|
|||||
|
10.1(a)
|
Peoples
Bancorp Inc. Second Amended and Restated Deferred Compensation Plan for
Directors of Peoples Bancorp Inc. and Subsidiaries (Amended and Restated
Effective December 11, 2008.)*
|
Filed
herewith.
|
|||
|
10.1(b)
|
Rabbi
Trust Agreement, made January 6, 1998, between Peoples Bancorp Inc. and
The Peoples Banking and Trust Company (predecessor to Peoples Bank,
National Association)*
|
Incorporated
herein by reference to Exhibit 10.1(c) of Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2007 (File No. 0-16772)
(“Peoples’ 2007 Form 10-K”).
|
|||
|
10.2
|
Peoples
Bancorp Inc, Amended and Restated Incentive Award Plan (Amended and
Restated Effective December 11, 2008)*
|
Filed
herewith.
|
|||
|
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.
|
|||
|
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.
|
|||
|
*Management
Compensation Plan
|
|||||
95
|
EXHIBIT
INDEX
|
|||||
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
|||||
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2008
|
|||||
|
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).
|
|||
|
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.
|
|||
|
*Management
Compensation Plan
|
|||||
96
|
EXHIBIT
INDEX
|
|||||
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
|||||
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2008
|
|||||
|
10.20
|
Amended
and Restated Change in Control Agreement, between Peoples Bancorp Inc. and
Mark F. Bradley (amended and restated effective December 11,
2008)*
|
Filed
herewith.
|
|||
|
10.21
|
Amended
and Restated Change in Control Agreement, between Peoples Bancorp Inc. and
Carol A. Schneeberger (amended and restated effective December 11,
2008)*
|
Filed
herewith.
|
|||
|
10.22
|
Amended
and Restated Change in Control Agreement between Peoples Bancorp Inc. and
David T. Wesel (amended and restated effective December 11,
2008)*
|
Filed
herewith.
|
|||
|
10.23
|
Amended
and Restated Change in Control Agreement between Peoples Bancorp Inc. and
Deborah K. Hill (amended and restated effective December 11,
2008)*
|
Filed
herewith.
|
|||
|
10.24
|
Amended
and Restated Change in Control Agreement between Peoples Bancorp Inc. and
Joseph S. Yazombek (amended and restated effective December 11,
2008)*
|
Filed
herewith.
|
|||
|
10.25
|
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”).
|
|||
|
10.26
|
Summary
of Base Salaries for Executive Officers of Peoples Bancorp
Inc.*
|
Filed
herewith.
|
|||
|
10.27
|
Summary
of Cash Compensation for Directors of Peoples Bancorp Inc.
|
Filed
herewith.
|
|||
|
10.28
|
Peoples
Bancorp Inc. Amended and Restated 2006 Equity Plan*
|
Filed
herewith.
|
|||
|
10.29
|
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’ Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2006 (File No.
0-16772).
|
|||
|
10.30
|
Form
of Peoples Bancorp Inc. 2006 Equity Plan Restricted Stock Agreement for
employees used and to be used to evidence awards of restricted stock
granted to employees of Peoples Bancorp Inc.*
|
Incorporated
herein by reference to Exhibit 10.29 of Peoples’ Annual Report on Form
10-K for the fiscal year ended December 31, 2006 (File No. 0-16722)
(“Peoples’ 2006 Form 10-K”).
|
|||
|
*Management
Compensation Plan
|
|||||
97
|
EXHIBIT
INDEX
|
|||||
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
|||||
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2008
|
|||||
|
10.31
|
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.*
|
Incorporated
herein by reference to Exhibit 10.30 of Peoples’ 2006 Form
10-K.
|
|||
|
10.32
|
Form
of Peoples Bancorp Inc. 2006 Equity Plan SAR Agreement for employees used
and to be used to evidence awards of stock appreciation rights granted to
employees of Peoples Bancorp Inc.
|
Incorporated
herein by reference to Exhibit 10.31 of Peoples’ 2006 Form
10-K.
|
|||
|
10.33(a)
|
Letter
Agreement between Peoples Bancorp Inc. and Mark F. Bradley, executed on
behalf of Peoples Bancorp Inc. on January 23, 2009 and by Mark F. Bradley
on January 23, 2009 and effective January 30, 2009 [Note: Appendix A to
Letter Agreement is not included therewith; filed as Exhibit 10.1 to
Peoples’ February 2, 2009 Form 8-K and incorporated by reference at
Exhibit 4.6 of this Annual Report on Form 10-K]*
|
Incorporated
herein by reference to Exhibit 10.2(a) to Peoples’ February 2, 2009 Form
8-K.
|
|||
|
10.33(b)
|
Letter
Agreement between Peoples Bancorp Inc. and Edward G. Sloane, executed on
behalf of Peoples Bancorp Inc. on January 22, 2009 and by Edward G. Sloane
on January 22, 2009 and effective January 30, 2009[Note: Appendix A to
Letter Agreement is not included therewith; filed as Exhibit 10.1 to
Peoples’ February 2, 2009 Form 8-K and incorporated by reference at
Exhibit 4.6 of this Annual Report on Form 10-K]*
|
Incorporated
herein by reference to Exhibit 10.2(b)to Peoples’ February 2, 2009 Form
8-K.
|
|||
|
10.33(c)
|
Letter
Agreement between Peoples Bancorp Inc. and Deborah K. Hill, executed on
behalf of Peoples Bancorp Inc. on January 22, 2009 and by Deborah K. Hill
on January 22, 2009 and effective January 30, 2009[Note: Appendix A to
Letter Agreement is not included therewith; filed as Exhibit 10.1 to
Peoples’ February 2, 2009 Form 8-K and incorporated by reference at
Exhibit 4.6 of this Annual Report on Form 10-K]*
|
Incorporated
herein by reference to Exhibit 10.2(c) to Peoples’ February 2, 2009 Form
8-K.
|
|||
|
10.33(d)
|
Letter
Agreement between Peoples Bancorp Inc. and Carol A. Schneeberger, executed
on behalf of Peoples Bancorp Inc. on January 23, 2009 and by Carol A.
Schneeberger on January 23, 2009 and effective January 30, 2009[Note:
Appendix A to Letter Agreement is not included therewith; filed as Exhibit
10.1 to Peoples’ February 2, 2009 Form 8-K and incorporated by reference
at Exhibit 4.6 of this Annual Report on Form 10-K]*
|
Incorporated
herein by reference to Exhibit 10.2(d) to Peoples’ February 2, 2009 Form
8-K.
|
|||
|
*Management
Compensation Plan
|
|||||
|
EXHIBIT
INDEX
|
|||||
|
PEOPLES
BANCORP INC. ANNUAL REPORT ON FORM 10-K
|
|||||
|
FOR
FISCAL YEAR ENDED DECEMBER 31, 2008
|
|||||
|
10.33(e)
|
Letter
Agreement between Peoples Bancorp Inc. and David T. Wesel, executed on
behalf of Peoples Bancorp Inc. on January 23, 2009 and by David T. Wesel
on January 25, 2009 and effective January 30, 2009[Note: Appendix A to
Letter Agreement is not included therewith; filed as Exhibit 10.1 to
Peoples’ February 2, 2009 Form 8-K and incorporated by reference at
Exhibit 4.6 of this Annual Report on Form 10-K]*
|
Incorporated
herein by reference to Exhibit 10.2(e) to Peoples’ February 2, 2009 Form
8-K.
|
|||
|
10.33(f)
|
Letter
Agreement between Peoples Bancorp Inc. and Joseph S. Yazombek, executed on
behalf of Peoples Bancorp Inc. on January 23, 2009 and by Joseph S.
Yazombek on January 23, 2009 and effective January 30, 2009[Note: Appendix
A to Letter Agreement is not included therewith; filed as Exhibit 10.1 to
Peoples’ February 2, 2009 Form 8-K and incorporated by reference at
Exhibit 4.6 of this Annual Report on Form 10-K]*
|
Incorporated
herein by reference to Exhibit 10.2(f) to Peoples’ February 2, 2009 Form
8-K.
|
|||
|
10.34
|
Amended
and Restated Change in Control Agreement between Peoples Bancorp Inc. and
Edward G. Sloane (amended and restated effective December 11,
2008)*
|
Filed
herewith.
|
|||
|
12
|
Statements
of Computation of Ratios.
|
Filed
herewith.
|
|||
|
21
|
Subsidiaries
of Peoples Bancorp Inc.
|
Filed
herewith.
|
|||
|
23
|
Consent
of Independent Registered Public Accounting Firm - Ernst & Young
LLP.
|
Filed
herewith.
|
|||
|
24
|
Powers
of Attorney of Directors and Executive Officers of Peoples Bancorp
Inc.
|
Filed
herewith.
|
|||
|
31(a)
|
Rule
13a-14(a)/15d-14(a) Certifications [President and Chief Executive
Officer]
|
Filed
herewith.
|
|||
|
31(b)
|
Rule
13a-14(a)/15d-14(a) Certifications[Chief Financial Officer and
Treasurer]
|
Filed
herewith.
|
|||
|
32
|
Section
1350 Certifications
|
Filed
herewith.
|
|||
|
*Management
Compensation Plan
|
|||||