UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio
---------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
31-0987416
----------------------------------------------
(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750-0738
------------------------------------------------ -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
------------------
Securities registered pursuant to Section 12(b) of the Act: None
----------
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, No Par Value (10,540,628 outstanding at February 26, 2004)
- -------------------------------------------------------------------------
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
--------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes X No
--------- ----------
Based upon the closing price of the Common Shares of the Registrant (the only
common equity of the Registrant) on The NASDAQ National Market as of June 30,
2003, the aggregate market value of the Common Shares of the Registrant held by
non-affiliates on that date was $226,211,000. For this purpose, executive
officers and directors of the Registrant are considered affiliates.
Documents Incorporated by Reference:
Portions of Registrant's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 8, 2004, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I Page
- ------ ------
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Executive Officers of the Registrant 15
PART II
- -------
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 40
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 40
Item 9A. Controls and Procedures 40
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant 70
Item 11. Executive Compensation 70
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 70
Item 13. Certain Relationships and Related Transactions 71
Item 14. Principal Accountant Fees and Services 71
PART IV
- -------
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 72
Signatures 73
Exhibit Index 74
PART I
ITEM 1. BUSINESS.
- --------------------
GENERAL
- -------
Peoples Bancorp Inc. ("Peoples") is a financial holding company organized in
1980, with origins in the Mid-Ohio Valley dating back to 1902. At December 31,
2003, Peoples' wholly-owned subsidiaries included Peoples Bank, National
Association ("Peoples Bank"), Peoples Investment Company, PEBO Capital Trust I
and PEBO Capital Trust II. Peoples Bank also owns an insurance agency subsidiary
and an asset management subsidiary. Peoples Investment Company also owns a
capital management subsidiary.
Peoples' principal executive office is located at 138 Putnam Street, Marietta,
Ohio 45750, and its telephone number is (740) 373-3155. Peoples' common shares
are traded on the NASDAQ National Market under the symbol PEBO and its web site
is www.peoplesbancorp.com (this uniform resource located, or URL, is an inactive
textual reference only and is not intended to incorporate Peoples' website into
this Form 10-K).
Peoples' primary business activities currently are confined to the financial
services industry, which are conducted through Peoples Bank, its principal
operating subsidiary. Peoples Bank is a full service community bank that
provides an array of financial products and services to its customers, which
include the following:
o various interest-bearing and non-interest-bearing demand deposit
accounts
o savings and money market accounts o certificates of deposit
o commercial, installment, and real estate mortgage loans (both
commercial and residential)
o credit and debit cards
o corporate and personal trust services
o safe deposit rental facilities
Peoples also sells travelers checks, money orders and cashier's checks. Services
are provided through Peoples Bank's 49 financial service locations and 32
automated teller machines ("ATMs") in Ohio, West Virginia and Kentucky, as well
as banking by telephone, and internet-based banking. Peoples Bank offers a full
range of life, health, property and casualty insurance products through Peoples
Insurance Agency, Inc. and provides custom-tailored solutions for asset
management needs through its Peoples Financial Advisors division, including
investment products through an unaffiliated registered broker-dealer.
At December 31, 2003, Peoples and its subsidiaries had 511 full-time equivalent
employees, total assets of $1.7 billion, total loans of $915.0 million, total
deposits of $1.0 billion, and total stockholders' equity of $170.9 million.
Peoples Bank held trust assets with an approximate market value of $633 million
at December 31, 2003. For the year ended December 31, 2003, Peoples' return on
average assets was 0.95% and return on average stockholders' equity was 9.75%.
For the five-year period ended December 31, 2003, Peoples' assets grew at a
14.5% compound annual growth rate, while stockholders' equity grew at a compound
annual growth rate of 14.7%. Peoples also has a history of earnings and dividend
growth, as earnings and dividends per share grew at compound rates of 6.7% and
13.5%, respectively, for the five-year period ended December 31, 2003. Over that
same period, Peoples' annual return on average assets and annual return on
stockholders' equity averaged 1.12% and 13.85%, respectively.
Peoples has experienced significant growth in assets and increased its capital
position through a combination of internal and external growth. In December 2002
and January 2003, Peoples increased its capital position through the sale of 1.7
million common shares, which generated capital of nearly $37 million. In
addition to core organic growth, Peoples has undertaken a controlled and steady
expansion and acquisition strategy. In the past five years, Peoples has opened
four de novo banking branches in its market area and has completed two branch
acquisitions, three bank acquisitions and one insurance agency acquisition. In
the aggregate, Peoples has acquired $313 million of assets, including $162
million of loans, $234 million of deposits, and 12 financial service offices
since year-end 1998. These acquisitions produced benefits, including the
expansion of Peoples' customer base, and provided opportunities to integrate
non-traditional products and services, such as insurance and investments, with
the traditional banking products currently offered to clients in Peoples'
markets. These acquisitions also enabled Peoples to expand into new markets.
Peoples routinely explores opportunities for additional growth and expansion of
its core financial service businesses, including the acquisition of companies
engaged in similar activities. Management also focuses on internal growth as a
method for reaching performance goals and reviews key performance indicators on
a regular basis to measure Peoples' success. There can be no assurance, however,
that Peoples will be able to grow, or if it does, that any such growth or
expansion will result in an increase in Peoples' earnings, dividends, book value
or the market value of its common shares.
RECENT ACQUISITIONS AND ADDITIONS
- ---------------------------------
On May 8, 2003, Peoples Bank opened a loan production office in Delaware, Ohio.
The primary focus of this new office is serving the commercial credit needs of
Delaware, Marion, Union and Franklin Counties, plus surrounding areas in central
Ohio. The Delaware office is located at 351 West Central Avenue .
On May 9, 2003, Peoples completed the acquisition of Kentucky Bancshares
Incorporated ("Kentucky Bancshares"), the holding company of Kentucky Bank &
Trust, for total consideration of $29.1 million ($14.8 million in cash and $14.3
million in Peoples' common shares).
The acquisition of Kentucky Bancshares included the merger of Kentucky Bank &
Trust into Peoples Bank. As a result, the five former Kentucky Bank & Trust
offices in the northeastern Kentucky communities of Ashland, Russell, Flatwoods,
Greenup and South Shore now operate as full-service financial service offices of
Peoples Bank. In this transaction, Peoples acquired loans of $75 million,
deposits of $113 million, and trust assets under management of $182 million, as
well as three ATMs. As part of this transaction, Peoples Bank closed its
Russell, Kentucky, office located at 404 Ferry Street concurrent with the
acquisition and closed its Catlettsburg, Kentucky, office on October 17, 2003.
These office closings were due to the proximity of the newly acquired offices in
Russell and Ashland, Kentucky that continue to serve these markets.
In November 2003, Peoples Bank expanded its operations in central Ohio by
converting a loan production office in Lancaster, Ohio, to a full-service
business banking facility. The primary focus of the relocated and expanded
office remains business clients in Ohio's Fairfield County and surrounding
markets. However, the Lancaster office will ultimately offer Peoples' complete
line of products and services, including mortgage banking, insurance and
investment services.
CUSTOMERS AND MARKETS
- ---------------------
Peoples has expanded from its roots in Washington County, Ohio, where it
maintains nine financial service locations, to a market area that encompasses 17
counties in southeastern Ohio and neighboring areas of Kentucky and West
Virginia, focusing on non-major urban areas. The primary market area possesses a
diverse economic base, with no single dominant industry or employer. Principal
industries in the market area include health care, education and other social
services; plastics and petrochemical manufacturing; oil, gas and coal
production; and tourism, education and other service-related industries.
Consequently, Peoples is not dependent upon any single industry segment for its
business opportunities, and management believes Peoples' market area is somewhat
insulated from some of the fluctuations of national economic cycles as a result
of the diverse economic base.
Peoples Bank originates various types of loans, including commercial and
commercial real estate loans, residential real estate loans, home equity lines
of credit, real estate construction loans, and consumer loans (including loans
to individuals and indirect loans). In general, Peoples Bank retains the
majority of loans it originates; however, certain fixed rate mortgage loan
originations, primarily one-to-four family residential mortgages, are sold into
the secondary market. In prior years, Peoples also originated various credit
card loans. In late 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 Bank's risks since it does not
own the loans.
Loans are spread over a broad range of industrial classifications. Management
believes it has no significant concentrations of loans to borrowers engaged in
the same or similar industries and no loans to foreign entities. The lending
market areas served are concentrated primarily in southeastern Ohio,
northeastern Kentucky and northwestern West Virginia. In addition, loan
production offices and full-service banking offices in central Ohio provide
opportunities to serve customers in that economic region.
Legal Lending Limit
- -------------------
At December 31, 2003, Peoples Bank's legal lending limit was approximately $23.0
million. In 2003, Peoples Bank did not extend credit to any one borrower in
excess of its legal lending limit.
Commercial Loans
- ----------------
At December 31, 2003, Peoples Bank had $512.1 million in commercial, financial
and agricultural loans, including loans secured by commercial real estate
("commercial loans") outstanding, representing approximately 56.0% of the total
aggregate loan portfolio. Loans secured by commercial real estate, excluding
construction loans, totaled $380.4 million at December 31, 2003.
LENDING PRACTICES. Commercial lending entails significant additional risks
compared to consumer lending (i.e., single-family residential mortgage lending,
installment lending, credit card loans and indirect lending). In addition, the
payment experience on commercial loans typically depends on adequate cash flow
of a business and thus may be subject, to a greater extent, to adverse
conditions in the general economy or in a specific industry. Loan terms include
amortization schedules commensurate with the purpose of each loan, the source of
repayment and the risk involved. The primary analytical technique used in
determining whether to grant a commercial loan is the review of a schedule of
cash flows to evaluate whether anticipated future cash flows will be adequate to
service both interest and principal due. Additionally, collateral is reviewed to
determine its value in relation to the loan.
The Peoples Bank Board of Directors is required to approve loans in excess of
$3.0 million secured by real estate and loans in excess of $1.5 million secured
by all other assets; however, approval of the Board of Directors is required for
all loans, regardless of amount, to borrowers whose aggregate debt to Peoples
Bank, including the principal amount of the proposed loan, exceeds $4.0 million.
Peoples Bank periodically evaluates all new commercial loan relationships
greater than $250,000 and, on an annual basis, all loan relationships greater
than $500,000. If deterioration of the loan has occurred, Peoples takes
effective and prompt action designed to assure repayment of the loan. Upon
detection of the reduced ability of a borrower to meet cash flow obligations,
the loan is considered an impaired loan and reviewed for possible downgrading or
placement on non-accrual status.
Consumer Loans
- --------------
At December 31, 2003, Peoples Bank had outstanding consumer loans (including
indirect loans but excluding real estate loans) in an aggregate amount of $79.9
million, or 8.7% of the aggregate total loan portfolio.
LENDING PRACTICES. Consumer loans generally involve more risk as to
collectibility than mortgage loans because of the type and nature of the
collateral and, in certain instances, the absence of collateral. As a result,
consumer lending collections are dependent upon the borrower's continued
financial stability, and thus are at more risk from adverse personal
circumstances. In addition, application of various state and federal laws,
including bankruptcy and insolvency laws, could limit the amount that may be
recovered under these loans. Credit approval for consumer loans typically
requires demonstration of sufficiency of income to repay principal and interest
due, stability of employment, a positive credit record and sufficient collateral
for secured loans. It is the policy of Peoples Bank to review its consumer loan
portfolio monthly and to chargeoff loans that do not meet its standards, and to
adhere strictly to all laws and regulations governing consumer lending. A
qualified compliance officer is responsible for monitoring regulatory compliance
performance and for advising and updating loan personnel.
Peoples Bank makes credit life insurance and health and accident insurance
available to all qualified borrowers, thus reducing risk of loss when a
borrower's income is terminated or interrupted due to accident, disability or
death.
Real Estate Loans
- -----------------
At December 31, 2003, Peoples Bank had $322.8 million of real estate loans
outstanding (including home equity and construction loans), representing 35.3%
of total loans outstanding. Home equity lines of credit and construction
mortgages totaled $28.3 million and $21.1 million, respectively. Peoples also
had approximately $2.8 million of real estate loans (primary one-to-four family
residential mortgages) held for sale into the secondary market at December 31,
2003.
LENDING PRACTICES. Peoples Bank requires residential real estate loan amounts to
be no more than 90% of the purchase price or the appraised value of the real
estate securing the loan, unless private mortgage insurance is obtained by the
borrower for the percentage exceeding 90%. On occasion, Peoples Bank may lend up
to 100% of the appraised value of the real estate. The risk conditions of these
loans are considered during underwriting for the purposes of establishing an
interest rate compatible with the risks inherent in mortgage lending and
remaining equity of the home, if any. Peoples Bank originates both fixed rate
and one-to-five year adjustable rate, fully amortizing real estate loans.
Typically, the fixed rate real estate loans are sold in the secondary market,
with Peoples retaining servicing rights on those loans. In select cases, Peoples
Bank may retain certain fixed rate real estate loans. All real estate loans are
secured by first mortgages with evidence of title in favor of Peoples Bank in
the form of an attorney's opinion of the title or a title insurance policy.
Peoples also requires proof of hazard insurance, with Peoples Bank named as the
mortgagee and as the loss payee. Licensed appraisals are required for loans in
excess of $250,000.
HOME EQUITY LOANS. Home equity lines of credit, or Equilines, are generally made
as second mortgages by Peoples Bank. The maximum amount of a home equity line of
credit is generally limited to 80% of the appraised value of the property less
the balance of the first mortgage. Peoples Bank will lend up to 100% of the
appraised value of the property at higher interest rates that are considered
compatible with the additional risk assumed in these types of equilines. The
home equity lines of credit are written with ten-year terms, but are subject to
review upon request for renewal. Peoples Bank offers home equity loans with a
fixed rate for the first five years and converting to a variable interest rate
for the remaining five years. Peoples Bank also offers a home equity line of
credit with a variable rate for the entire term of the loan.
CONSTRUCTION LOANS. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, Peoples Bank may be
required to advance funds beyond the amount originally committed to permit
completion of the project.
Overdraft Privilege
- -------------------
In December 2001, Peoples introduced Overdraft Privilege, a service that
provides qualified customers with virtually automatic protection by establishing
an Overdraft Privilege amount. After a 30-day waiting period to verify deposit
ability, each new checking account usually receives an Overdraft Privilege
amount of either $400 or $700, based on the type of account and other
parameters. Once established, customers are permitted to overdraw their checking
account, up to their Overdraft Privilege limit, with each item being charged
Peoples' regular overdraft fee. Customers repay the overdraft with their next
deposit. Overdraft Privilege is designed to allow Peoples to fill the void
between traditional overdraft protection, such as a line of credit, and "check
cashing stores". While Overdraft Privilege generates fee income, Peoples
maintains an allowance for losses from checking accounts with overdrafts deemed
uncollectible. This allowance, along with the related provision and net
chargeoffs, is included in Peoples' allowance for loan losses.
WEB SITE ACCESS TO PEOPLES' SECURITIES AND EXCHANGE COMMISSION FILINGS
- ----------------------------------------------------------------------
Peoples makes available free of charge on or through its website, its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") as soon as
reasonably practicable after Peoples electronically files each such report or
amendment with, or furnishes it to, the Securities and Exchange Commission
("SEC").
CORPORATE GOVERNANCE
- --------------------
Peoples' Board of Directors and management has instituted a series of actions to
strengthen and improve Peoples' already strong corporate governance practices.
Included in those actions was adoption of a Code of Ethics, a revision of
charter of the Audit Committee and the formation two new committees: the
Disclosure Committee for Financial Reporting and the Governance and Nominating
Committee. The current charters of these committees and the Compensation
Committee can be found on Peoples' website under the "Corporate Governance and
Code of Ethics and Ethics Hotline" section.
Code of Ethics
- --------------
In December 2003, Peoples' Board of Directors adopted a formal Code of Ethics
applicable to all directors, officers and associates of Peoples and its
affiliates. The Board of Directors adopted Peoples' Code of Ethics to
demonstrate to the public and Peoples' shareholders the importance the Board and
management place on ethical conduct, and to continue to set forth Peoples'
expectations for the conduct of ethical business practices. Peoples' Code of
Ethics is available, free of charge, to the public on Peoples' website on the
"Corporate Governance and Code of Ethics and Ethics Hotline" page. Please also
see Item 10 of Part III of this Form 10-K.
Disclosure Committee for Financial Reporting
- --------------------------------------------
In 2003, Peoples established the Disclosure Committee for Financial Reporting
(the "Disclosure Committee") to formalize Peoples' process of establishing and
monitoring Peoples' disclosure controls and procedures and communicating the
results of such controls and procedures. The Disclosure Committee consists of
key members of executive management as well as senior professional supporting
staff from the Legal Department, Audit Department and Controller. The Disclosure
Committee complements Peoples' longstanding committee structure and process,
which has consistently provided an invaluable tool for communication of
disclosure information.
The Disclosure Committee has the responsibility to:
o ensure that Peoples' Chief Executive Officer and Chief Financial
Officer can evaluate the effectiveness of Peoples' disclosure controls
and procedures, for the purpose of improving these controls and
procedures as necessary and disclosing the results of the evaluation in
the reports Peoples files with the SEC.
o ensure management has timely access to all information which is
necessary or desirable to disclose in Peoples' reports for the purpose
of discharging Peoples' responsibilities in providing accurate and
complete information to security holders, including, but not limited
to, a fair presentation of Peoples' financial condition, results of
operations and cash flows.
o facilitate determinations regarding the appropriate disclosure of the
results of Peoples' disclosure controls and procedures in Peoples'
reports, including the determination of the materiality of risks or
events for the purposes of disclosure in reports.
o provide a process on which Peoples' Chief Executive Officer and Chief
Financial Officer can rely in providing the certifications required
under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 to be
filed, or furnished, with each report.
Each key element of operation is subject to oversight by a committee to ensure
proper administration, risk management and an up-streaming of critical
management information and disclosures to finance and control areas, executive
management and the Board of Directors. The Disclosure Committee agenda is
designed to capture information from all components of Peoples' business. It is
believed that the addition of these new processes has brought with it a broader
and more in depth analysis to Peoples' already effective and detailed disclosure
process. These more recent additions to the process are expected to enhance
Peoples' overall disclosure control environment.
Governance and Nominating Committee
- -----------------------------------
In 2003, the Board of Directors formally developed a Governance and Nominating
Committee consisting of at least three independent members of the Board. The
purpose of the Governance and Nominating Committee is to identify qualified
candidates for election, nomination or appointment to Peoples' Board of
Directors and recommend to the Board a slate of director nominees for each
annual meeting of the shareholders of Peoples' or as vacancies occur. In
addition, the Governance and Nominating Committee shall oversee matters of
corporate governance, including the evaluation of Board performance and
processes, and make recommendations to the Board and the Chairman of the Board
regarding assignment and rotation of members and chairs of committees of the
Board. The goal of the Governance and Nominating Committee is to assure that the
composition, practices and operation of the Board contribute to value creation
and to the effective representation of Peoples' shareholders.
COMPETITION
- -----------
The financial services industry is highly competitive, especially in Peoples'
primary markets. Continued deregulation and other dynamic changes in the
financial services industry subjects Peoples to intense competition by providing
customers the opportunity to select from a growing variety of traditional and
nontraditional alternatives. Competition in Peoples Bank's lending activities
comes principally from other commercial banks, savings associations, insurance
companies, governmental agencies, credit unions, brokerage firms and pension
funds. The primary factors in competing for loans are interest rate and overall
lending services. Competition for deposits comes from other commercial banks,
savings associations, money market and mutual funds, credit unions, insurance
companies and brokerage firms. The primary factors in competing for deposits are
interest rates paid on deposits, account liquidity, convenience of office
location and overall financial condition. Peoples believes that its size
provides flexibility, which enables Peoples Bank to offer an array of banking
products and services. Peoples' financial condition also contributes to a
favorable competitive position in the markets Peoples serves.
Peoples primarily focuses on non-major metropolitan markets in which to provide
products and services. Management believes Peoples has developed a niche and a
certain level of expertise in serving these communities. Peoples historically
has operated under a "needs-based" selling approach that management believes has
proven successful in serving the financial needs of many customers. Management
anticipates Peoples will continue to increase its investment in sales training
and education in future periods to assist in the development of Peoples'
associates and their identification of customer service opportunities.
It is not Peoples' strategy to compete solely on the basis of price. Management
believes a focus on customer relationships, speed in the delivery of service and
incentives to promote customers continued use of Peoples' financial products and
services will lead to enhanced revenue opportunities. Management believes the
integration of traditional financial products with non-traditional financial
products, such as insurance and investment products, will lead to enhanced
revenues through complementary product offerings.
SUPERVISION AND REGULATION
- --------------------------
The following is a summary of certain statutes and regulations affecting Peoples
and its subsidiaries and is qualified in its entirety by reference to such
statutes and regulations:
General
- -------
BANK HOLDING COMPANY ACT. Peoples is subject to regulation under the Bank
Holding Company Act of 1956, as amended, (the "BHC Act"). The BHC Act requires
the prior approval of the Federal Reserve Board for Peoples to acquire or hold
more than a 5% voting interest in any bank. In addition, the BHC Act restricts
interstate banking activities; although, interstate bank acquisitions and
interstate branching by acquisition and consolidation are permitted under the
BHC Act with some state law limitation mostly regarding deposit concentrations.
FINANCIAL HOLDING COMPANY. The Gramm-Leach-Bliley Act (also known as the
Financial Services Modernization Act of 1999) established a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers through the creation of
a "financial holding company" entity. Bank holding companies that elect to
become financial holding companies have the ability to expand their activities
from those historically permissible for bank holding companies and engage in
activities that are financial in nature or complementary to financial
activities, including securities and insurance activities, sponsoring mutual
funds and investment companies, and merchant banking. Financial holding
companies are also permitted to acquire, without regulatory approval, a company,
other than a bank or savings association, engaged in activities that are
financial in nature or incidental to activities that are deemed financial in
nature by the Federal Reserve Board.
In order to become a financial holding company, a bank holding company must file
a declaration with the Federal Reserve Bank indicating its desire to become a
financial holding company. In addition, all subsidiary banks of the bank holding
company must be well-capitalized, well managed and have at least a satisfactory
rating under the Community Reinvestment Act. Failure to maintain the
"well-capitalized" standard or the other criteria for a financial holding
company may result in requirements to correct the deficiency or limit activities
to those allowed bank holding companies.
In 2002, Peoples elected to become a financial holding company and received
notification from the Federal Reserve Board on August 5, 2002, that the election
had been approved.
BANKING SUBSIDIARY. Peoples Bank is a national banking association chartered
under the National Bank Act and is regulated by the Office of the Comptroller of
the Currency. Peoples Bank provides Federal Deposit Insurance Corporation
("FDIC") insurance on its deposits and is a member of the Federal Home Loan Bank
of Cincinnati. As a national bank, Peoples Bank may engage, subject to
limitations on investment and capital requirements, in activities that are
financial in nature, other than insurance underwriting, real estate development
and real estate investment, through a financial subsidiary of Peoples Bank, as
along as Peoples Bank remains well-capitalized, well managed and continues to
have at least a satisfactory Community Reinvestment Act rating.
Peoples Bank is also subject to restrictions imposed by the Federal Reserve Act
on transactions with affiliates, including any loans or extensions of credit to
Peoples or its subsidiaries; investments in the stock or other securities
thereof, and the taking of such stock or securities as collateral for loans to
any borrower; the issuance of guarantees, acceptances or letters of credit on
behalf of Peoples and its subsidiaries; purchases or sales of securities or
other assets; and the payment of money or furnishing of services to Peoples and
other subsidiaries.
Federal Reserve Board
- ---------------------
Peoples is subject to the reporting requirements of, and examination and
regulation by, the Federal Reserve Board. In addition, the Federal Reserve Board
has adopted risk-based capital guidelines for financial holding companies. The
risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning assets and
off-balance sheet items to broad risk categories.
Federal Deposit Insurance Corporation
- -------------------------------------
The FDIC insures the deposits of Peoples Bank up to the applicable legal limit,
subject to the applicable provisions of the Federal Deposit Insurance Act.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition enacted or imposed by the bank's regulatory
agency.
Federal Home Loan Bank
- ----------------------
The Federal Home Loan Banks ("FHLBs") provide credit to their members in the
form of collateralized advances. As a member of the FHLB of Cincinnati, Peoples
Bank must maintain an investment in the capital stock of that FHLB in an amount
equal to the greater of 1% of the aggregate outstanding principal amount of its
respective residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB.
Capital Requirements
- --------------------
Peoples and its banking subsidiary are subject to various regulatory capital
requirements administered by the banking regulatory agencies. The Federal
Reserve Board, the Office of the Comptroller of Currency and the FDIC have
substantially similar risk-based capital ratio and leverage ratio guidelines for
banking organizations. The guidelines are intended to ensure that banking
organizations have adequate capital given the risk levels of assets and
off-balance sheet financial instruments. For further discussion regarding
Peoples and Peoples Bank's risk-based capital requirements, see Note 13 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Limits on Dividends
- -------------------
Peoples' ability to pay dividends depends largely on the amount of dividends
declared by Peoples Bank and Peoples' other subsidiaries. However, the Federal
Reserve Board expects Peoples to serve as a source of strength to Peoples Bank
and may require Peoples to retain capital for further investment in Peoples
Bank, rather than pay dividends to its shareholders. Since Peoples is a
financial holding company, Peoples Bank is required to maintain capital
sufficient to meet the "well-capitalized" standard set by the regulators and
will be able to pay dividends only so long as its capital continues to exceed
these levels. Peoples Bank is also limited in the total amount of dividends it
may pay in any year without prior approval from the Office of the Comptroller of
Currency. For further discussion regarding regulatory restrictions on dividends,
see Note 13 of the Notes to the Consolidated Financial Statements included in
Item 8 of this Form 10-K.
Even when the legal ability exists, Peoples or Peoples Bank may decide to limit
the payment of dividends in order to retain earnings for corporate use.
Additionally, Peoples has established two trust subsidiaries, which issued
preferred securities. If Peoples suspends interest payments relating to the
trust preferred securities issued by either of the two trust subsidiaries,
Peoples will be prohibited from paying dividends on its common shares. For
further discussion regarding Peoples' trust subsidiaries, see Note 9 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Federal and State Laws
- ----------------------
Peoples Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of Peoples Bank to open
a new branch or engage in a merger transaction. Community reinvestment
regulations evaluate how well and to what extent Peoples Bank lends and invests
in its designated service area, with particular emphasis on low-to-moderate
income communities and borrowers in such areas.
Recent Legislation
- ------------------
In 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws. The proposed changes are
intended to allow shareholders to monitor the performance of companies and
directors more easily and efficiently.
The Sarbanes-Oxley Act generally applies to all companies, both U.S. and
non-U.S., that file or are required to file periodic reports with the SEC under
the Exchange Act. Further, the Sarbanes-Oxley Act includes very specific
additional disclosure requirements and new corporate governance rules, requires
the SEC, securities exchanges and the NASDAQ Stock Market to adopt extensive
additional disclosure, corporate governance and other related rules and mandates
further studies of certain issues by the SEC and the Comptroller General. Given
the extensive SEC role in implementing rules relating to many of the
Sarbanes-Oxley Act's new requirements, the final scope of these requirements
remains to be determined.
The Sarbanes-Oxley Act addresses, among other matters: audit committees;
certification of financial statements by the chief executive officer and the
chief financial officer; the forfeiture of bonuses and profits made by directors
and senior officers in the twelve month period covered by restated financial
statements; a prohibition on insider trading during pension plan black out
periods; disclosure of off-balance sheet transactions; a prohibition on personal
loans to directors and officers (excluding federally insured financial
institutions); expedited filing requirements for stock transaction reports by
officers and directors; the formation of a public accounting oversight board;
auditor independence; and various increased criminal penalties for violations of
securities laws.
MONETARY POLICY AND ECONOMIC CONDITIONS
- ---------------------------------------
The business of financial institutions is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
agencies, including the Federal Reserve Board. The Federal Reserve Board
regulates money and credit conditions and interest rates in order to influence
general economic conditions primarily through open market operations in U.S.
government securities, changes in the discount rate on bank borrowings, and
changes in the reserve requirements against depository institutions' deposits.
These policies and regulations significantly affect the overall growth and
distribution of loans, investments and deposits, as well as interest rates
charged on loans and paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of financial institutions in the past and are expected
to continue to have significant effects in the future. In view of the changing
conditions in the economy, the money markets and the activities of monetary and
fiscal authorities, Peoples can make no definitive predictions as to future
changes in interest rates, credit availability or deposit levels.
EFFECT OF ENVIRONMENTAL REGULATION
- ----------------------------------
Peoples' primary exposure to environmental risk is through Peoples Bank's
lending activities. When management believes environmental risk potentially
exists, Peoples mitigates its environmental risk exposures by requiring
environmental site assessments at the time of loan origination to confirm
collateral quality as to commercial real estate parcels posing higher than
normal potential for environmental impact, as determined by reference to present
and past uses of the subject property and adjacent sites. Environmental
assessments are typically required prior to any foreclosure activity involving
non-residential real estate collateral.
In regards to residential real estate lending, management reviews those loans
with inherent environmental risk on an individual basis and makes decisions
based on the dollar amount of the loan and the materiality of the specific
credit.
Peoples anticipates no material effect on capital expenditures, earnings or the
competitive position of itself or any subsidiary as a result of compliance with
federal, state or local environmental protection laws or regulations.
STATISTICAL FINANCIAL INFORMATION REGARDING PEOPLES
- ---------------------------------------------------
The following listing of statistical financial information provides comparative
data for Peoples over the past three and five years, as appropriate. These
tables should be read in conjunction with Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operation, of this Form 10-K and
the Consolidated Financial Statements of Peoples and its subsidiaries found at
pages 42 through 69 of this Form 10-K.
LOAN PORTFOLIO ANALYSIS:
(Dollars in Thousands) 2003 2002 2001 2000 1999
Year-end loan balances:
Commercial, financial and agricultural $ 512,069 $ 392,528 $ 343,800 $ 310,558 $ 272,219
Real estate, mortgage 301,726 330,840 295,944 283,323 252,427
Real estate, construction 21,056 16,231 14,530 20,267 14,067
Consumer 79,926 103,635 111,912 115,913 114,412
Credit card 221 6,549 6,670 6,904 6,708
- ----------------------------------------------------------------------------------------------------------------------
Total $ 914,998 $ 849,783 $ 772,856 $ 736,965 $ 659,833
======================================================================================================================
Average total loans 894,419 824,731 753,777 698,144 603,922
Average allowance for loan losses (14,093) (12,779) (12,164) (10,979) (10,121)
- ----------------------------------------------------------------------------------------------------------------------
Average loans, net of allowance $ 880,326 $ 811,952 $ 741,613 $ 687,165 $ 593,801
======================================================================================================================
Allowance for loan losses:
Allowance for loan losses, January 1 $ 13,086 $ 12,357 $ 10,930 $ 10,264 $ 9,509
Allowance for loan losses acquired 573 304 967 - -
Loans charged off:
Commercial, financial and agricultural 1,036 1,935 1,048 780 306
Real estate 449 268 154 74 77
Consumer 1,113 1,054 1,188 1,018 932
Overdrafts 967 880 - - -
Credit card 221 191 248 189 203
- ----------------------------------------------------------------------------------------------------------------------
Total 3,786 4,328 2,638 2,061 1,518
- ----------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 352 41 124 78 44
Real estate 66 58 5 2 23
Consumer 399 387 286 303 304
Overdrafts 263 175 - - -
Credit card 21 25 24 22 24
- ----------------------------------------------------------------------------------------------------------------------
Total 1,101 686 439 405 395
- ----------------------------------------------------------------------------------------------------------------------
Net chargeoffs:
Commercial, financial and agricultural 684 1,894 924 702 262
Real estate 383 210 149 72 54
Consumer 714 667 902 715 628
Overdrafts 704 705 - - -
Credit card 200 166 224 167 179
- ----------------------------------------------------------------------------------------------------------------------
Total 2,685 3,642 2,199 1,656 1,123
- ----------------------------------------------------------------------------------------------------------------------
Provision for loan losses, December 31 3,601 4,067 2,659 2,322 1,878
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 14,575 $ 13,086 $ 12,357 $ 10,930 $ 10,264
======================================================================================================================
Allocation of allowance for loan losses at December 31:
Commercial $ 11,232 $ 8,846 $ 7,950 $ 5,992 $ 5,164
Real estate 1,234 1,617 1,602 1,112 1,557
Consumer 1,594 2,075 2,447 2,701 2,161
Overdrafts 283 206 - - -
Credit card 232 342 358 432 434
General risk - - - 693 948
- -------------------------------------------------------------------------------------------------------------------------
Total $ 14,575 $ 13,086 $ 12,357 $ 10,930 $ 10,264
======================================================================================================================
(Dollars in Thousands) 2003 2002 2001 2000 1999
Ratio of net chargeoffs to average total loans:
Commercial 0.08% 0.23% 0.12% 0.10% 0.04%
Real estate 0.04 0.03 0.02 0.01 0.01
Consumer 0.08 0.08 0.12 0.10 0.11
Overdrafts 0.08 0.09 - - -
Credit card 0.02 0.02 0.03 0.02 0.03
- -------------------------------------------------------------------------------------------------------------------------
Total 0.30% 0.45% 0.29% 0.23% 0.19%
=========================================================================================================================
Percent of loans to total loans at December 31:
Commercial 56.0% 46.1% 44.5% 42.1% 41.3%
Real estate, mortgage 33.0 39.0 38.3 38.4 38.3
Real estate, construction 2.3 1.9 1.9 2.8 2.1
Consumer 8.7 12.2 14.5 15.8 17.3
Credit card 0.0 0.8 0.8 0.9 1.0
- ------------------------------------------------------------------------------------------------------------------------
Total 100.00% 100.0% 100.0% 100.0% 100.0%
========================================================================================================================
Nonperforming assets:
Loans 90+ days past due $ 188 $ 407 $ 686 $ 344 $ 249
Renegotiated loans - 2,439 425 518 747
Nonaccrual loans 6,556 4,617 4,380 4,280 1,109
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 6,744 7,463 5,491 5,142 2,105
=========================================================================================================================
Other real estate owned 392 148 181 86 207
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,136 $ 7,611 $ 5,672$$$ 5,228 $ 2,312
=========================================================================================================================
Nonperforming loans as a percent of total loans 0.73% 0.88% 0.71% 0.70% 0.32%
=========================================================================================================================
Nonperforming assets as a percent of total assets 0.41% 0.55% 0.48% 0.46% 0.21%
=========================================================================================================================
Allowance for loan losses as a percent of total loans 1.59% 1.54% 1.60% 1.48% 1.56%
=========================================================================================================================
Allowance for loan losses as a percent of nonperforming
loans 216.1% 175.3% 225.0% 212.6% 487.6%
=========================================================================================================================
Interest income on nonaccrual and renegotiated loans that would have been
recorded under the original terms of the loans for 2003, 2002 and 2001 was
$387,000 ($59,000 was actually recorded), $632,000 ($23,000 was actually
recorded) and $328,000 ($9,000 was actually recorded), respectively.
Peoples discontinues the accrual of interest on loans when management believes
collection of all or a portion of contractual interest has become doubtful,
which generally occurs when a loan is 90 days past due. A nonaccrual loan is
restored to accrual status when it is brought current, has performed in
accordance with contractual terms for a reasonable period of time, and the
collectibility of the total contractual principal and interest is no longer in
doubt.
LOAN MATURITIES AT DECEMBER 31, 2003:
Due in
(Dollars in Thousands) Due in One Year Due
One Year Through After
Loan Type Or Less Five Years Five Years Total
Commercial loans:
Fixed $ 23,839 $ 46,538 $ 14,991 $ 85,368
Variable 86,446 64,400 275,855 426,701
- ----------------------------------------------------------------------------------------------------------------------
Total commercial loans 110,285 110,938 290,846 512,069
- ----------------------------------------------------------------------------------------------------------------------
Real estate loans:
Fixed 2,997 11,112 95,274 109,383
Variable 34,458 6,786 172,155 213,399
- ----------------------------------------------------------------------------------------------------------------------
Total real estate loans 37,455 17,898 267,429 322,782
- ----------------------------------------------------------------------------------------------------------------------
Consumer loans:
Fixed 6,361 64,326 7,117 77,804
Variable 818 897 628 2,343
- ----------------------------------------------------------------------------------------------------------------------
Total consumer loans 7,179 65,223 7,745 80,147
- ----------------------------------------------------------------------------------------------------------------------
Total loans $ 154,919 $ 194,059 $ 566,020 $ 914,998
======================================================================================================================
AVERAGE BALANCES AND ANALYSIS OF NET INTEREST INCOME:
(Dollars in Thousands) 2003 2002 2001
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------------------
Securities (1):
Taxable $ 609,453 $ 26,429 4.34% $ 298,850 $ 17,615 5.89% $ 279,546 $ 18,526 6.63%
Nontaxable (2) 66,232 4,433 6.69% 62,561 4,349 6.95% 39,461 2,800 7.09%
------------- ----------- ------- ----------- ----------- ------- ------------ --------- --------
Total 675,685 30,862 4.57% 361,411 21,964 6.08% 319,007 21,326 6.68%
Loans (3) (4):
Commercial 471,145 29,786 6.32% 386,812 26,620 6.88% 334,043 27,527 8.24%
Real estate (5) 324,778 22,970 7.07% 322,627 24,365 7.55% 296,908 24,713 8.32%
Consumer 98,496 9,514 9.66% 115,292 11,527 10.00% 122,826 12,994 10.58%
Valuation reserve (14,093) (12,779) (12,164)
------------- ----------- ------- ----------- ----------- ------- ------------ --------- --------
Total 880,326 62,270 7.07% 811,952 62,512 7.70% 741,613 65,234 8.80%
Short-term Investments:
Interest-bearing
deposits
in other banks 2,917 21 0.72% 2,041 28 1.35% 2,472 91 3.69%
Federal funds sold 15,453 164 1.06% 5,294 75 1.43% 13,499 544 4.03%
------------- ----------- ------- ----------- ----------- ------- ------------ --------- --------
Total 18,370 185 1.01% 7,335 103 1.42% 15,971 635 3.98%
------------- ----------- ------- ----------- ----------- ------- ------------ --------- --------
Total earnings assets 1,574,381 93,317 5.93% 1,180,698 84,579 7.16% 1,076,591 87,195 8.10%
Other assets 135,661 107,623 86,283
------------- ----------- ------------
Total assets $ 1,710,042 $ 1,288,321 $ 1,162,874
============= =========== ============
Deposits:
Savings $ 172,240 $ 1,733 1.01% $ 116,512 $ 1,731 1.49% $ 77,543 $ 1,432 1.85%
Interest-bearing
demand 272,800 2,667 0.98% 279,407 4,481 1.60% 275,331 8,768 3.18%
Time 453,488 14,171 3.12% 393,676 15,945 4.05% 370,704 21,881 5.90%
------------- ----------- ------- ----------- ----------- ------- ------------ --------- --------
Total 898,528 18,571 2.07% 789,595 22,157 2.81% 723,578 32,081 4.43%
------------- ----------- ------- ----------- ----------- ------- ------------ --------- --------
Borrowed Funds:
Short-term 54,219 793 1.46% 45,847 869 1.89% 71,504 3,241 4.53%
Long-term 457,858 18,686 4.08% 236,251 12,290 5.20% 180,842 10,238 5.64%
------------- ----------- ------- ----------- ----------- ------- ------------ --------- --------
Total 512,077 19,479 3.78% 282,098 13,159 4.65% 252,346 13,479 5.31%
------------- ----------- ------- ----------- ----------- ------- ------------ --------- --------
Total interest-bearing
liabilities 1,410,605 38,050 2.69% 1,071,693 35,316 3.29% 975,924 45,560 4.66%
------------- ----------- ------- ----------- ----------- ------- ------------ --------- --------
Non-interest-bearing
demand deposits 124,574 100,740 87,503
Other liabilities 8,223 9,863 8,758
------------- ----------- ------------
Total liabilities 1,543,402 1,182,296 1,072,185
Stockholders' 166,640 106,025 90,689
equity
------------- ----------- ------------
Total liabilities
and stockholders'
equity $ 1,710,042 $ 1,288,321 $ 1,162,874
============= =========== ============
Interest rate spread $ 55,267 3.24% $ 49,263 3.87% $ 41,635 3.44%
========== ------- ========== ------- =========== --------
Interest income/earning assets 5.93% 7.16% 8.10%
Interest expense/earning assets 2.41% 2.99% 4.23%
-------- ------- --------
Net yield on earning assets
(net interest margin) 3.52% 4.17% 3.87%
======== ======= ========
<FN>
(1) Average balances of investment securities based on carrying value.
(2) Computed on a fully-tax equivalent basis using a tax rate of 35%. Interest
income was increased by $1,662; $1,612 and $1,087 for 2003; 2002 and 2001,
respectively, for the impact of the tax equivalent adjustment.
(3) Nonaccrual and impaired loans are included in the average balances listed.
Related interest income on nonaccrual loans prior to the loan being put on
nonaccrual is included in loan interest income.
(4) Loan fees included in interest income for 2003; 2002 and 2001 were $698;
$711 and $706, respectively. (5) Loans held for sale are included in the
average balances listed. Related interest income on loans originated
for sale prior to the loan being sold is included in real estate loan
interest income.
</FN>
RATE VOLUME ANALYSIS:
(Dollars in Thousands)
Change from 2002 to 2003 (1) Change from 2001 to 2002 (1)
Increase (decrease) in: Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
Investment income: (2)
Taxable $ 14,450 $ (5,636) $ 8,814 $ 1,225 $ (2,136) $ (911)
Nontaxable 249 (165) 84 1,607 (58) 1,549
- ---------------------------------------------------------------------------------------------------------------------------
Total 14,699 (5,801) 8,898 2,832 (2,194) 638
- ---------------------------------------------------------------------------------------------------------------------------
Loan Income:
Commercial 5,460 (2,294) 3,166 3,998 (4,905) (907)
Real estate 161 (1,556) (1,395) 2,045 (2,393) (348)
Consumer (1,633) (380) (2,013) (774) (693) (1,467)
- ---------------------------------------------------------------------------------------------------------------------------
Total 3,988 (4,230) (242) 5,269 (7,991) (2,722)
- ---------------------------------------------------------------------------------------------------------------------------
Short-term investments 118 (36) 82 (241) (291) (532)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 18,805 (10,067) 8,738 7,860 (10,476) (2,616)
===========================================================================================================================
Interest expense:
Savings deposits 668 (666) 2 618 (319) 299
Interest-bearing demand
deposits (104) (1,710) (1,814) 128 (4,415) (4,287)
Time deposits 2,201 (3,975) (1,774) 1,286 (7,222) (5,936)
Short-term borrowings 143 (219) (76) (905) (1,467) (2,372)
Long-term borrowings 9,508 (3,112) 6,396 2,936 (884) 2,052
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 12,416 (9,682) 2,734 4,063 (14,307) (10,244)
==========================================================================================================================
Net interest income $ 6,389 $ (385) $ 6,004 $ 3,797 $ 3,831 $ 7,628
==========================================================================================================================
<FN>
(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.
</FN>
MATURITIES OF CERTIFICATES OF DEPOSIT $100,000 OR MORE AT DECEMBER 31:
(Dollars in Thousands) 2003 2002 2001 2000 1999
Under 3 months $ 10,316 $ 11,559 $ 15,478 $ 17,430 $ 12,261
3 to 6 months 18,964 23,793 25,279 6,871 8,275
6 to 12 months 40,701 9,277 7,515 16,639 23,174
Over 12 months 49,765 50,181 28,270 24,209 11,872
- --------------------------------------------------------------------------------
Total $ 119,746 $ 94,810 $ 76,542 $ 65,149 $ 55,582
================================================================================
ITEM 2. PROPERTIES
- -------------------
Peoples' sole banking subsidiary, Peoples Bank, generally owns its offices,
related facilities and unimproved real property. Peoples Bank operates offices
in Marietta (4 offices), Belpre (2 offices), Lowell, Lower Salem, Reno,
Nelsonville (2 offices), Athens (3 offices), The Plains, Middleport, Rutland,
Pomeroy (2 offices), Gallipolis, Cambridge (2 offices), Byesville, Quaker City,
Flushing, Caldwell, Chesterhill, McConnelsville, Baltimore, Lancaster, Delaware
and Granville, Ohio. In West Virginia, Peoples operates offices in Huntington,
Parkersburg (3 offices), Vienna, Point Pleasant (2 offices), New Martinsville (2
offices) and Steelton. Office locations in Kentucky include Greenup, Flatwoods,
South Shore, Grayson, Ashland (2 offices) and Russell.
Of the 49 banking offices, 12 are leased and the rest are owned. Rent expense on
the leased properties totaled $349,000 in 2003. The following are the only
properties that have a lease expiring on or before June 2005:
Location Address Lease Expiration Date
- ---------------------- ------------------------------- ---------------------
Kroger Office Washington Square March 2004 (a)
Marietta, Ohio
New Martinsville 1142 South Bridge Street March 2004 (a)
Wal-Mart Office New Martinsville, West Virginia
Parkersburg Office 2107 Pike Street April 2004 (a)
Parkersburg, West Virginia
South Shore Office 4718 James Hannah Drive August 2004
South Shore, Kentucky
(a) Date represents the ending date of the current lease period. However,
Peoples has the option to renew the lease for another five-year period under the
terms of the lease agreement.
Additional information concerning the property and equipment owned or leased by
Peoples and its subsidiaries is incorporated herein by reference from Note 5 of
the Notes to the Consolidated Financial Statements included in Item 8 of this
Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
There are no pending legal proceedings to which Peoples or any of its
subsidiaries is a party or to which any of their property is subject other than
ordinary routine litigation to which Peoples' subsidiaries are parties
incidental to their respective businesses. Peoples considers none of such
proceedings to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------
Pursuant to General Instruction G of Form 10-K and Instruction 3 to Item 401(b)
of Regulation S-K, the following information regarding Peoples' executive
officers is included as an unnumbered item in Part I of this Form 10-K in lieu
of being included in the Peoples' definitive Proxy Statement relating to
Peoples' Annual Meeting of Shareholders to be held April 8, 2004 ("Peoples' 2004
Definitive Proxy Statement").
In addition to Robert E. Evans, Chairman of the Board, President and Chief
Executive Officer, and Mark F. Bradley, Chief Operating Officer, whose Item
401(b) information is included in Peoples' 2004 Definitive Proxy Statement under
"Election of Directors," the executive officers of Peoples are as follows as of
February 16, 2004:
Name Age Position
- --------------------- --- ----------------------------------------------
David B. Baker 57 Executive Vice President
John (Jack) W. Conlon 58 Chief Financial Officer and Treasurer
Larry E. Holdren 56 Executive Vice President
Carol A. Schneeberger 47 Executive Vice President/Operations
Joseph S. Yazombek 50 Executive Vice President/Chief Lending Officer
Mr. Baker became Executive Vice President of Peoples in February 1999. In
February 2000, Mr. Baker was appointed President of Peoples Bank's Investment
and Insurance Services (now known as Peoples Financial Advisors). Mr. Baker
previously served as President of Peoples Bank's Investment and Business
Division, beginning January 1998, and President of the Investment and Trust
Division of Peoples Bank, a position he held between 1991 and 1998. Mr. Baker
has held various positions in the Investment and Trust Division for Peoples Bank
since 1974.
Mr. Conlon has been Chief Financial Officer of Peoples since April 1991. He
became Treasurer of Peoples in April 1999. He has also served as Peoples Bank's
Chief Financial Officer since 1991 and Treasurer since 1985. Between 1982 and
1985, Mr. Conlon served as Controller of Peoples Bank.
Mr. Holdren became Executive Vice President of Peoples in February 1999. He has
also been President of the Retail and Banking Division for Peoples Bank since
January 1998. Between 1987 and 1998, Mr. Holdren served as Executive Vice
President/Director of Human Resources for Peoples Bank.
Ms. Schneeberger became Executive Vice President/Operations of Peoples in April
1999. Since February 2000, Ms. Schneeberger has also been Executive Vice
President/Operations of Peoples Bank. Prior thereto, she was Vice
President/Operations of Peoples since October 1988. Prior thereto, she was
Auditor of Peoples from August 1987 to October 1988 and Auditor of Peoples Bank
from January 1986 to October 1988.
Mr. Yazombek was appointed Executive Vice President/Chief Lending Officer of
Peoples in January 2000. Mr. Yazombek has also held the position of Executive
Vice President and Chief Lending Officer of Peoples Bank since October 1998. He
was an Executive Vice President of Peoples Bank's Consumer and Mortgage Lending
areas from May 1996 to October 1998, where he also directly managed Peoples
Bank's collections efforts. Mr. Yazombek joined Peoples Bank in 1983 and served
as a real estate lender until May 1996.
Each executive officer of Peoples details above is appointed by the Board of
Directors and serves at the pleasure of the Board.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
- ---------------------------------------------------------------------
Peoples' common shares are traded on The NASDAQ National Market under the symbol
PEBO. At December 31, 2003, Peoples had 1,330 stockholders of record. The table
presented below provides the high and low bids for Peoples' common shares and
the cash dividends per share declared for the indicated periods. Bid information
has been obtained directly from The NASDAQ National Market. All per share
information has been retroactively adjusted for a 5% stock dividend issued
August 29, 2003.
Dividends
High Bid Low Bid Declared
2003
Fourth Quarter $ 30.17 $ 26.92 $ 0.180
Third Quarter 28.45 23.53 0.170
Second Quarter 24.99 21.10 0.152
First Quarter 25.24 19.45 0.143
-------------------------------------------------------------
2002
Fourth Quarter $ 28.57 $ 21.77 $ 0.143
Third Quarter 30.12 21.90 0.143
Second Quarter 28.57 20.87 0.143
First Quarter 21.34 15.80 0.130
-------------------------------------------------------------
Peoples plans to continue to pay quarterly cash dividends, subject to certain
regulatory restrictions described in Note 13 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Form 10-K, as well as the
"Limits on Dividends" section under Item 1 of this Form 10-K.
The following table details Peoples' repurchases and purchases by "affiliated
purchasers" as defined in Rule 10b-18(a)(3) of Peoples' common shares during the
three months ended December 31, 2003:
Period (a) (b) (c) (d)
Total Number of Maximum Number of
Common Shares Common Shares that
Purchased as Part of May Yet Be Purchased
Total Number of Average Price Paid Publicly Announced Under the Plans or
Shares Purchased per Share Plans or Programs (1) Programs (1)(2)
October 1 - 31, 2003 12,439(3) $27.83(3) 11,100 197,460
November 1 - 30, 2003 50,200 $27.98 50,200 158,360
December 1 - 31, 2003 474(4) $29.09(4) - -(5)
- --------------------------------------------------------------------------------------------------------------
Total 63,113 $27.96 61,300 -
==============================================================================================================
<FN>
(1) Information reflects solely the 2003 Stock Repurchase Plan announced
on March 13, 2003, which authorized the repurchase of 315,000 common
shares. The 2003 Stock Repurchase Plan expired on December 31, 2003.
(2) Information reflects maximum number of common shares that may be
purchased at the end of the period indicated.
(3) Includes an aggregate of 1,339 common shares purchased in open market
transactions at an average price of $27.52 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 reflects solely common shares purchased by Peoples Bank
for the Rabbi Trust.
(5) The 2003 Stock Repurchase Plan expired on December 31, 2003, and as
such, no additional common shares could be purchased under that plan
at the end of the period. However, Peoples is authorized to repurchase
up to 425,000 of its common shares, with an aggregate purchase price
of not more than $13.0 million, in 2004 under the 2004 Stock
Repurchase Plan announced December 17, 2003, which expires December
31, 2004.
</FN>
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The information below has been derived from Peoples' Consolidated Financial Statements.
(Dollars in Thousands, except Per Share Data) 2003 2002 2001 2000 1999
Operating Data For the year ended:
Total interest income 91,655 $ 82,968 $ 86,107 $ 85,129 $ 72,346
Total interest expense 38,050 35,316 45,560 47,427 36,063
Net interest income 53,605 47,652 40,547 37,702 36,283
Provision for loan losses 3,601 4,067 2,659 2,322 1,878
Net (loss) gains on securities transactions (1,905) 216 29 10 (104)
Other income exclusive of securities transactions 19,443 15,020 10,621 8,900 7,478
Goodwill and other intangible asset amortization 1,493 646 2,347 2,284 2,639
Other expense 44,410 32,975 28,479 26,172 23,598
Net income 16,254 $ 18,752 $ 12,335 $ 11,126 $ 10,718
- ---------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
At year end:
Total assets 1,736,104 $ 1,394,361 $ 1,193,966 $ 1,135,834 $ 1,075,450
Total intangible assets 48,705 30,738 17,010 17,848 20,154
Investment securities 641,464 412,100 330,364 330,521 328,306
Net loans 900,423 836,697 760,499 726,035 649,569
Total deposits 1,028,530 955,877 814,368 757,621 728,207
Short-term borrowings 108,768 39,083 56,052 119,915 87,439
Long-term borrowings 388,647 212,929 192,448 138,511 150,338
Junior subordinated notes 29,177 29,090 29,056 29,021 28,986
Stockholders' equity 170,880 147,183 93,854 83,194 72,874
Tangible assets (1) 1,687,399 1,363,623 1,176,956 1,117,986 1,055,296
Tangible equity (2) 122,175 $ 116,445 $ 76,844 $ 65,346 $ 52,720
- ---------------------------------------------------------------------------------------------------------------------------------
Significant Ratios
Return on average assets 0.95 % 1.46 % 1.06 % 1.02 % 1.09 %
Return on average stockholders' equity 9.75 17.69 13.60 14.92 13.27
Net interest margin 3.52 4.17 3.87 3.82 4.15
Non-interest income leverage ratio (3) 48.68 45.77 37.29 34.01 31.69
Efficiency ratio (4) 51.06 51.24 54.50 54.94 52.41
Average stockholders' equity to average assets 9.74 8.23 7.80 6.84 8.20
Average loans to average deposits 87.42 92.63 92.93 94.37 85.12
Allowance for loan losses to total loans 1.59 1.54 1.60 1.48 1.56
Risk-based capital ratio 15.43 16.79 14.21 14.21 14.30
Dividend payout ratio 42.06 % 24.91 % 33.08 % 33.06 % 31.78 %
- ---------------------------------------------------------------------------------------------------------------------------------
Per Share Data(5)
Net income per share - Basic 1.56 $ 2.25 $ 1.49 $ 1.34 $ 1.23
Net income per share - Diluted 1.52 2.19 1.47 1.33 1.20
Cash dividends paid 0.65 0.56 0.49 0.44 0.39
Book value at end of period 16.11 14.97 11.43 10.09 8.71
Tangible book value at end of period (6) 11.76 $ 11.85 $ 9.36 $ 7.93 $ 6.30
Weighted-average shares outstanding:
Basic 10,433,708 8,329,109 8,277,035 8,288,498 8,697,933
Diluted 10,660,083 8,557,591 8,403,773 8,385,504 8,923,891
Common shares outstanding at end of period: 10,603,792 9,829,965 8,213,115 8,245,127 8,369,714
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Total assets less goodwill and other intangible assets.
(2) Total stockholders' equity less goodwill and other intangible assets.
(3) Non-interest income (less securities and asset disposal gains) as a
percentage of non-interest expense (less intangible amortization).
(4) Non-interest expense (less intangible amortization) as a percentage of
fully-tax equivalent net interest income plus non-interest income.
(5) Adjusted for all stock dividends and splits.
(6) Tangible book value per share reflects capital calculated for banking
regulatory requirements and excludes balance sheet impact of
intangible assets acquired through purchase accounting for
acquisitions.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
- ------------------------------------------------------------------------
INTRODUCTION
The following discussion and analysis of the Consolidated Financial Statements
of Peoples is presented to provide insight into management's assessment of the
financial results. Peoples' subsidiaries are Peoples Bank, National Association
("Peoples Bank"), Peoples Investment Company, PEBO Capital Trust I and PEBO
Capital Trust II. Peoples Bank also operates Peoples Insurance Agency, Inc.
("Peoples Insurance"), which offers a full range of life, health, property, and
casualty insurance products to customers in Peoples' markets, and Peoples Loan
Services, Inc., which invests in certain loans originated in Peoples' markets.
Peoples Investment Company also owns Peoples Capital Corporation.
Peoples Bank is a member of the Federal Reserve System and subject to
regulation, supervision, and examination by the Office of the Comptroller of the
Currency. Peoples Bank offers complete financial products and services through
49 financial service locations and 32 ATMs in Ohio, West Virginia and Kentucky.
Peoples Bank's e-banking service, Peoples OnLine Connection, can be found on the
Internet at www.peoplesbancorp.com (this uniform resource located, or URL, is an
inactive textual reference only and is not intended to incorporate Peoples'
website into this Form 10-K). Peoples Bank provides an array of financial
products and services to customers that include traditional banking products
such as deposit accounts, lending products, credit and debit cards, corporate
and personal trust services, and safe deposit rental facilities. Peoples
Insurance offers investment and insurance products. Peoples provides services
through ordinary walk-in offices and automobile drive-in facilities, automated
teller machines, banking by phone, and the Internet.
Peoples Bank also makes available other financial services through Peoples
Financial Advisors, which provides customer-tailored solutions for fiduciary
needs, investment alternatives, financial planning, retirement plans, and other
asset management needs. Brokerage services are offered exclusively through
Raymond James Financial Services, Inc., member National Association of
Securities Dealers/Securities Investor Protection Corporation and an independent
broker/dealer, located at Peoples Bank offices.
Peoples Investment Company and Peoples Capital Corporation were formed in 2001
to allow management to better deploy investable funds and provide new
opportunities to make investments that are either limited or restricted at the
bank level, including, but not limited to, low-income housing tax credit funds.
This discussion and analysis should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto, as well as the ratios and
statistics, contained elsewhere in this Form 10-K.
References will be found in this Form 10-K to the following transactions that
have impacted or will impact Peoples' results of operations:
o As discussed in Note 15 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K, Peoples completed its
acquisition of Kentucky Bancshares Incorporated ("Kentucky
Bancshares"), the holding company of Kentucky Bank & Trust, on May 9,
2003. In addition, Peoples Bank closed an office at 404 Ferry Street
in Russell, Kentucky, concurrent with this acquisition. Peoples Bank
also closed its Catlettsburg, Kentucky, office on October 17, 2003,
due to the proximity of the acquired Ashland, Kentucky, office.
Peoples also completed the acquisition of a banking center in Malta,
Ohio, on October 4, 2002, and First Colony Bancshares, Inc. ("First
Colony"), the holding company of The Guernsey Bank, f.s.b., on June
14, 2002.
o In December 2003, Peoples Bank entered into an agreement to sell its
existing credit card portfolio to InfiCorp Holdings, Inc.
("InfiCorp"). Preliminary settlement of the sale occurred on December
31, 2003, which resulted in Peoples recognizing a pre-tax gain, net of
expenses, of $1.2 million, or $0.08 per diluted share after-tax. Final
settlement of the sale occurred in the first quarter of 2004, with
conversion of the portfolio expected to be completed in the second
quarter of 2004. Peoples Bank will continue to serve the credit card
needs of its customers through the transition period. In addition to
the sale, Peoples Bank and InfiCorp entered into a joint marketing
agreement to serve the future credit card needs of Peoples' customers
and prospective customers.
o In December 2003, Peoples sold $55 million of mortgage-backed
investment securities due to the high rate of prepayments on those
securities and the corresponding downward pressure on yields from
accelerated amortization of bond premiums. Peoples reinvested the
proceeds from the sales into other mortgage-backed securities that are
anticipated to produce a higher yield with estimated lives similar to
those of the securities that were sold (collectively, the "Investment
Portfolio Restructuring"). As a result of the sales, Peoples
recognized a pre-tax loss of $1.9 million, or $0.12 per share
after-tax. Approximately $27 million of the reinvestment settled in
late December 2003, with the remaining reinvestment of approximately
$26 million settling in late January 2004.
o On December 17, 2003, Peoples announced the authorization to
repurchase up to 425,000, or approximately 4%, of Peoples' outstanding
common shares in 2004 from time to time in open market or privately
negotiated transactions ("2004 Stock Repurchase Program"). The
repurchases are eligible to be used for projected exercises of stock
options granted under Peoples' stock option plans, projected purchases
of common shares for Peoples' deferred compensation plans, and other
general corporate purposes. The timing of the purchases and the actual
number of common shares purchased are dependent on market conditions
and limitations imposed by applicable federal securities laws. The
2004 Stock Repurchase Program expires December 31, 2004, and will not
exceed an aggregate purchase price of $13 million.
o On December 16, 2003, Peoples prepaid $63 million of long-term,
convertible rate borrowings from the Federal Home Loan Bank ("FHLB")
and reborrowed the funds using a short-term, repurchase agreement
advance (collectively, the "Long-Term Debt Restructuring"). The early
repayment of the long-term borrowings resulted in Peoples incurring a
pre-tax charge of $6.8 million for prepayment penalties, or $0.46
cents per share after-tax. The prepaid borrowings had a
weighted-average rate of 5.14% and weighted-average remaining maturity
of 5.4 years. The new short-term advance has a significantly lower
initial interest rate, yet has somewhat similar interest rate
sensitivity characteristics in a rising interest rate environment.
o On March 13, 2003, Peoples announced the authorization to repurchase
up to 315,000, or approximately 3%, of Peoples' then outstanding
common shares from time to time in open market or privately negotiated
transactions ("2003 Stock Repurchase Program"). The common shares
repurchased have been, and will be, used for projected exercises of
stock options granted under Peoples' stock option plans, a portion of
the consideration to be paid in acquisitions, and other general
corporate purposes. During 2003, Peoples repurchased 156,640 common
shares under the 2003 Stock Repurchase Program, which expired on
December 31, 2003.
o On December 19, 2002, Peoples Bancorp Inc. completed the sale of
1,512,000 common shares through a firm commitment underwritten
offering and on January 3, 2003, sold an additional 226,800 common
shares in conjunction with the option granted to the underwriters to
cover over-allotments (collectively, the "Common Stock Offering"). The
Common Stock Offering generated new capital totaling $36.9 million
after offering expenses. In January 2003, Peoples Bancorp used $16
million of the net proceeds to increase Peoples Bank's capital
position. The remaining net proceeds were used for general corporate
purposes and management of corporate liquidity.
o In December 2002, Peoples initiated an investment growth strategy to
offset the dilutive impact of the Common Stock Offering; thereby
leveraging Peoples' increased capital levels ("Investment Growth
Strategy"). As a result of this Investment Growth Strategy, total
earning assets, particularly mortgage-backed investment securities,
increased by $260 million in January 2003 compared to the year-end
2002 balance. Peoples funded the investment purchases with $187
million of wholesale market repurchase agreements at an average cost
of 2.92%, $58 million of FHLB advances at an average cost of 2.15% and
$15 million from the Common Stock Offering. In March 2003, Peoples
purchased an additional $20 million of mortgage-backed investment
securities as part of this strategy. This purchase was primarily
funded by an $18.6 million wholesale market repurchase agreement at a
rate of 2.09%, with the remainder from available corporate funds.
The impact of these transactions, where significant, is discussed in the
applicable sections of this Management's Discussion and Analysis.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of Peoples conform to accounting
principles generally accepted in the United States ("US GAAP") and to general
practices within the financial services industry. The preparation of the
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Management has identified the accounting policies described below as
those that, due to the judgments, estimates and assumptions inherent in those
policies, are critical to an understanding of Peoples' consolidated financial
statements and management's discussion and analysis.
Income Recognition
- ------------------
Peoples recognizes interest income by methods conforming to US GAAP that include
general accounting practices within the financial services industry. Interest
income on loans and investment securities is recognized by methods that result
in level rates of return on principal amounts outstanding, including yield
adjustments resulting from the amortization of loan costs and premiums on
investment securities and accretion of loan fees and discounts on investment
securities. Since mortgage-backed securities comprise a sizable portion of
Peoples' investment portfolio, a significant increase in principal payments on
those securities negatively impacts interest income due to the corresponding
acceleration of bond premium amortization.
In the event management believes collection of all or a portion of contractual
interest on a loan has become doubtful, which generally occurs after the loan is
90 days past due, Peoples discontinues the accrual of interest. In addition,
previously accrued interest deemed uncollectible that was recognized in income
in the current year is reversed, while amounts recognized in income in the prior
year are charged against the allowance for loan losses. Interest received on
nonaccrual loans is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status when it is brought
current or has performed in accordance with contractual terms for a reasonable
period of time, and the collectibility of the total contractual principal and
interest is no longer doubtful.
Allowance for Loan Losses
- -------------------------
In general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples maintains
an allowance for loan losses to absorb probable losses in the loan portfolio
based on a quarterly analysis of the portfolio. This formal analysis determines
an appropriate level and allocation of the allowance for loan losses among loan
types and resulting provision for loan losses by considering factors affecting
loan losses, including specific losses, levels and trends in impaired and
nonperforming loans, historical loan loss experience, current national and local
economic conditions, volume, growth and composition of the portfolio, regulatory
guidance and other relevant factors. Management continually monitors the loan
portfolio through its Loan Review Department and Loan Loss Committee to evaluate
the adequacy of the allowance. The provision expense could increase or decrease
each quarter based upon the results of management's formal analysis.
The amount of the allowance for loan losses for the various loan types
represents management's estimate of expected losses from existing loans based
upon specific allocations for individual lending relationships and historical
loss experience for each category of homogeneous loans. The allowance for loan
losses related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans. This evaluation requires management to make
estimates of the amounts and timing of future cash flows on impaired loans,
which consists primarily of nonaccrual and restructured loans. While allocations
are made to specific loans and pools of loans, the allowance is available for
all loan losses.
Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, loan quality ratings, value of
collateral, repayment ability of borrowers, and historical experience factors.
The historical experience factors utilized for individual loan reviews are based
upon past loss experience, known trends in losses and delinquencies, the growth
of loans in particular markets and industries, and known changes in economic
conditions in the particular lending markets. Allowances for homogeneous loans
(such as residential mortgage loans, credit cards, personal loans, etc.) are
evaluated based upon historical loss experience, trends in losses and
delinquencies, growth of loans in particular markets, and known changes in
economic conditions in each lending market. Consistent with the evaluation of
allowances for homogenous loans, allowances relating to the Overdraft Privilege
program are based upon management's monthly analysis of accounts in the program.
This analysis considers factors that could affect future losses on existing
accounts, including historical loss experience and length of overdraft.
There can be no assurance that the allowance for loan losses will be adequate to
cover all losses, but management believes the allowance for loan losses of $14.6
million at December 31, 2003, 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
- ---------------------
Investment securities are initially recorded at cost, which includes premiums
and discounts if purchased at other than par or face value. Peoples amortizes
premiums and accretes discounts as an adjustment to interest income over the
estimated life of the security. The cost of investment securities sold, and any
resulting gain or loss, is based on the specific identification method.
Management determines the appropriate classification of investment securities at
the time of purchase. Held-to-maturity securities are those securities that
Peoples has the positive intent and ability to hold to maturity and are reported
at amortized cost. Available-for-sale securities are those securities that would
be available to be sold in the future in response to Peoples' liquidity needs,
changes in market interest rates, and asset-liability management strategies,
among other considerations. Available-for-sale securities are reported at
estimated fair value, with unrealized holding gains and losses reported in
stockholders' equity as a separate component of other comprehensive income, net
of applicable deferred income taxes.
Presently, Peoples classifies its entire investment portfolio as
available-for-sale. As a result, both the investment and equity sections of
Peoples' balance sheet are more sensitive to changes in the overall market value
of the investment portfolio, due to changes in market interest rates, investor
confidence and other factors affecting market values, than if the investment
portfolio was classified as held-to-maturity.
While temporary changes in the market value of available-for-sale securities are
not recognized in earnings, a decline in fair value below amortized cost deemed
to be other-than-temporary results in an adjustment to the cost basis of the
investment, with a corresponding loss charged against earnings. Management
systematically evaluates Peoples' investment securities for other-than-temporary
declines in estimated fair value on a quarterly basis. This analysis requires
management to consider various factors in order to determine if a decline in
estimated fair value is temporary or other-than-temporary. These factors include
duration and magnitude of the decline in value, the financial condition of the
issuer, and Peoples' ability and intent to continue holding the investment for a
period of time sufficient to allow for any anticipated recovery in market value.
For the year ended December 31, 2003, there were no investment securities
identified by management to be other-than-temporarily impaired. If investments
decline in fair value due to adverse changes in the financial markets, 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. Effective June
30, 2002, all future acquisitions must be accounted for under the purchase
method of accounting as a result of Statement of Financial Accounting Standards
No. 141, "Business Combinations."
The determination of fair value and subsequent allocation of the cost of an
acquired company generally involves management making estimates based on third
party valuations, such as appraisals, or internal valuations based on discounted
cash flow analyses or other valuation techniques. In addition, the valuation and
amortization of intangible assets representing the present value of future net
income to be earned from customers (commonly referred to as "customer
relationship intangibles" or "core deposit intangibles") requires significant
judgment and the use of estimates by management. While management feels the
assumptions and variables used to value recent acquisitions were reasonable, the
use of different, but still reasonable, assumptions could produce materially
different results.
Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill
and Other Intangible Assets" ("SFAS 142"), establishes standards for the
amortization of acquired intangible assets and the non-amortization and
impairment assessment of goodwill. In addition, Statement of Financial
Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions"
("SFAS 147"), establishes standards for unidentifiable intangible assets
acquired specifically in branch purchases that qualify as business combinations.
At December 31, 2003, Peoples had $6.7 million of core deposit and trust
relation intangible assets, subject to amortization, and $41.4 million of
goodwill, not subject to periodic amortization.
Customer relationship intangibles are required to be amortized over their
expected useful life. The method of amortization should reflect the pattern in
which the economic benefits of the intangible assets are consumed or otherwise
used up. Since Peoples' acquired customer relationships are subject to routine
customer attrition, the relationships are more likely to produce greater
benefits in the near-term than in the long-term, which would typically
necessitate the use of an accelerated method of amortization for the related
intangible assets. Management is required to evaluate the useful life of
customer relationship intangibles to determine if events or circumstances
warrant a change in the estimated life. Should management determine in future
periods the estimated life of any intangible asset is shorter than originally
estimated, Peoples would be required to 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 value inherent in
the banking business and the value is dependent upon Peoples' ability to provide
quality, cost effective services in a competitive market place. As such,
goodwill value is supported ultimately by revenue that is driven by the volume
of business transacted. A decline in earnings as a result of a lack of growth or
the inability to deliver cost effective services over sustained periods can lead
to impairment of goodwill that could adversely impact earnings in future
periods.
Under US GAAP in effect through December 31, 2001, Peoples amortized goodwill on
a straight-line basis over periods ranging from ten to fifteen years. Effective
January 1, 2002, Peoples was no longer required to amortize previously recorded
goodwill but must perform an annual assessment for impairment as a result of
adopting SFAS 142 and SFAS 147.
Peoples has reviewed its goodwill assets and has concluded the recorded value of
goodwill was not impaired as of December 31, 2003. There are many assumptions
and estimates underlying the determination of impairment and using different,
but still reasonable, assumptions could produce a significantly different
result. Additionally, future events could cause management to conclude that
impairment indicators exist and Peoples' goodwill is impaired, which would
result in Peoples' recording an impairment loss. Any resulting impairment loss
could have a material, adverse impact on Peoples' financial condition and
results of operations.
RESULTS OF OPERATION
OVERVIEW OF THE INCOME STATEMENT
- --------------------------------
In 2003, Peoples' net income was $16,254,000, or $1.52 per diluted share, down
from $18,752,000, or $2.19 per diluted share, a year ago. Earnings in 2003 were
reduced by $5,648,000, or $0.53 per diluted share, of after-tax net charges
resulting from balance sheet restructuring in December 2003, which included the
Long-Term Debt Restructuring, Investment Portfolio Restructuring and sale of the
credit portfolio, and merger costs incurred in the first half of 2003. Peoples'
lower earnings per share in 2003 were attributable to continued net interest
margin compression resulting from assets repricing downward, coupled with
additional common shares outstanding. Alternatively, net income in 2002 was
positively impacted by Peoples' repurchase of $7.0 million of trust preferred
securities issued by PEBO Capital Trust I, at a significant discount, resulting
in an after-tax gain of $410,000, or $0.04 per diluted share.
For the year ended December 31, 2003, net interest income totaled $53,605,000
and net interest margin was 3.52% compared to $47,652,000 and 4.17% for the same
period in 2002. Recent acquisitions, coupled with the Investment Growth Strategy
in the first quarter of 2003, increased earning assets and produced higher
levels of net interest income in 2003. Net interest margin compression was the
result of declining yields on earning assets and limited opportunities for
Peoples to lower its costs of funds in this low interest rate environment.
Other income grew 15% in 2003 compared to the prior year, totaling $17,538,000.
This increase was attributable to higher deposit service charge income and
mortgage banking revenues, while revenues from Peoples' e-banking services and
fiduciary activities were also significant contributors. Other income was
impacted by securities transactions and asset disposals, which resulted in a net
loss of $2,166,000 in 2003 versus a net gain of $144,000 in 2002, as well as the
gain of $1,423,000 on the sale of the credit card portfolio.
Non-interest expense was $45.9 million in 2003, up from $33.0 million for the
year ended December 31, 2002. A significant portion of this increase is the
result of prepayment penalties of $6.9 million in conjunction with the Long-Term
Debt Restructuring and increased intangible asset amortization of $0.8 million.
The remaining increased from the prior year was largely attributable to
additional salaries and benefit costs and other operating expenses incurred as a
result of the Kentucky Bancshares acquisition and a full-year impact of the
First Colony acquisition completed in mid-2002.
INTEREST INCOME AND EXPENSE
- ---------------------------
Peoples derives a majority of its interest income from loans and investment
securities and incurs interest expense on interest-bearing deposits and borrowed
funds. Net interest income, the amount by which interest income exceeds interest
expense, remains Peoples' largest source of revenue. Management periodically
adjusts the mix of assets and liabilities, as well as the rates earned or paid
on those assets and liabilities, in an attempt to manage and improve net
interest income. However, factors that influence market interest rates, such as
interest rate changes by the Federal Reserve Open Market Committee and Peoples'
competitors, may have a greater impact on net interest income than adjustments
made by management. Consequently, a volatile rate environment or extended
periods of unusually low or high interest rates can make it extremely difficult
to manage net interest margin and income in the short-term, much less anticipate
and position the balance sheet for future changes.
On December 31, 2003, Peoples adopted the Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
as required. The adoption of FIN 46 caused Peoples to deconsolidate its
subsidiary grantor trusts, which issued mandatorily redeemable preferred
securities to third parties. As a result, Peoples now recognizes the junior
subordinated debentures owned by the grantor trusts as liabilities on the
balance sheet and the related expense as interest expense versus non-interest
expense as it had been classified in the past. Peoples elected to apply the
requirements of FIN 46 retroactively, as permitted, which resulted in the
restatement of prior periods and certain financial ratios, including net
interest margin. The adoption of FIN 46, and subsequent restatement, did not
have any impact on Peoples' net income or stockholders' equity. Further
information regarding Peoples' adoption of FIN 46 can be found in Note 1 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K under the caption "New Accounting Pronouncements."
In 2003, net interest income grew 12% to $53,605,000, from $47,652,000 for 2002,
largely attributable to enhanced interest income due to acquisitions and the
Investment Growth Strategy. Interest income totaled $91,655,000 for the year
ended December 31, 2003, up $8,687,000 (or 10%) compared to last year as a
result of additional earning assets. This improvement was partially offset by
increased interest expense, which totaled $38,050,000 in 2003 versus $35,316,000
in 2002, due mainly to borrowings used in the Investment Growth Strategy and
interest-bearing deposits acquired through acquisitions.
Peoples earns a portion of its interest income from loans to, and investments
issued by, states and political subdivisions. Since these revenues generally are
not subject to income taxes, management believes it is more meaningful to
analyze net interest income on a fully-tax equivalent ("FTE") basis, which
adjusts interest income by converting tax-exempt income to the pre-tax
equivalent of taxable income using an effective tax rate of 35%. In 2003,
interest income was increased by $1,662,000 for the impact of the tax equivalent
adjustment, resulting in FTE net interest income of $55,267,000, up $6,004,000
(or 12%) from $49,263,000 in 2002. The FTE yield on Peoples' earning assets was
5.93% and 7.16% in 2003 and 2002, respectively, while the cost of
interest-bearing liabilities was 2.69% and 3.29% for the same periods,
respectively. The lower asset yields and costs of funds reflect the impact of
the sustained low interest rate environment.
Net interest margin serves as an important measurement of the net revenue stream
generated by the mix and pricing of Peoples' earning assets and interest-bearing
liabilities. Calculated by dividing FTE net interest income by average
interest-earning assets, net interest margin was 3.52% in 2003 versus 4.17% in
2002. Peoples' net interest margin compressed throughout 2003 resulting from
high volumes of prepayments in both the loan and investment portfolios and
subsequent reinvestment of those funds at significantly lower rates, coupled
with limited opportunities for management to lower Peoples' costs of funds, due
to the current low rate environment. In the fourth quarter of 2003, net interest
margin was 3.32%, down from 3.58% the prior quarter and 3.87% a year ago. The
lower net interest margin in the fourth quarter was attributed to a combination
of additional premium amortization on mortgage-backed securities and decreased
interest income on prime based loans.
For the year ended December 31, 2003, earning assets averaged $1.57 billion, up
$393.7 million compared to $1.18 billion last year. Net loans comprise the
largest portion of Peoples' earning assets, averaging $880.3 million in 2003, up
from $812.0 million in 2002 due to loans acquired in acquisitions. The FTE yield
on net loans was 7.07% for the year ended December 31, 2003, versus 7.70% for
the prior year, in response to customers refinancing higher rate loans and
significant volumes of prime based commercial loan originations. Investment
securities averaged $675.7 million in 2003 compared to $361.4 million in the
prior year, with FTE yields of 4.57% and 6.08%, respectively. The Investment
Growth Strategy implemented during the first quarter of 2003 accounted for
virtually all of the increase in average balance and much of the decline in
yield, due to the low interest rate environment. In addition, the high rate of
prepayments on mortgage-backed securities through 2003 resulted in accelerated
amortization of bond premiums and has caused Peoples to reinvest those
prepayments in instruments with substantially lower yields.
Peoples' interest-bearing liabilities averaged $1.41 billion in 2003, up from
$1.07 billion a year ago. Traditional deposits comprise the majority of Peoples'
interest-bearing liabilities, averaging $898.5 million for the year ended
December 31, 2003, compared to $789.6 million in 2002. This increase was due
largely to deposits acquired as part of acquisitions. In 2003, the cost of funds
from interest-bearing deposits was 2.07%, down from 2.81% in 2002 as a result of
market rates remaining at low levels. However, the impact of the low market
rates was partially offset by higher rates paid on longer-term certificates of
deposit throughout 2003 as part of a strategy to shift to longer-term funding.
Peoples also utilizes a variety of borrowings as complementary funding sources
to traditional deposits. In 2003, total borrowed funds averaged $512.1 million,
up 82% from $282.1 million a year ago. The majority of the increase was
attributable to borrowed funds used in the Investment Growth Strategy. While the
increased volume produced additional interest expense in 2003, Peoples overall
cost of borrowed funds dropped to 3.78% in 2003, from 4.65% last year, due to
the low interest rate environment.
Peoples' main source of borrowed funds are short- and long-term advances from
the FHLB. Short-term FHLB borrowings averaged $26.9 million in 2003 compared to
$12.6 million a year ago, with an average cost of 1.47% and 1.82% for the same
periods, respectively. The increased balance was attributable to short-term
advances used in the Investment Growth Strategy. Average long-term FHLB
borrowings were up $20.9 million (or 11%) compared to the prior year, totaling
$219.2 million for the year ended December 31, 2003, while the average cost
dropped to 4.64% from 4.83%. The increase in long-term FHLB advances was mainly
due to management's efforts to secure longer-term funding in late 2002 and early
2003 in response to this period of low rates. The Long-Term Debt Restructuring
in mid-December 2003 resulted in a lower balance of long-term FHLB advances at
year-end 2003. Management intends to continue using a variety of FHLB borrowings
to fund asset growth and manage interest rate sensitivity, as deemed
appropriate. Additional information regarding Peoples' advances from the FHLB
can be found later in this Discussion under the caption "Funding Sources" and in
Notes 7 and 8 of the Notes to the Consolidated Financial Statements included in
Item 8 of this Form 10-K.
In addition to FHLB borrowings, Peoples also accesses national market repurchase
agreements to diversify funding sources. Typically, these repurchase agreements
are for terms of 90 days or less. However, Peoples utilized repurchase
agreements with terms ranging from 2 to 5 years as part of the Investment Growth
Strategy in an effort to match the term of the funding sources with the initial
estimated life of the investments. In 2003, wholesale market term repurchase
agreements averaged $200.0 million at an average cost of 2.91%, up from $8.4
million and an average cost of 3.70% a year ago, due mainly to the Investment
Growth Strategy.
As is the case with most financial institutions, Peoples continues to experience
net interest margin compression as a result of declining asset yields with
limited flexibility for a corresponding decrease in rates paid on
interest-bearing liabilities due in large part to market competition. While the
balance sheet restructuring in the fourth quarter of 2003 is expected to have a
positive impact on future net interest income and margin, the possibility of
additional margin compression remains as long as rates remain at their current
low levels. However, a sustained increase in interest rates in the near future
could cause net interest income to increase modestly based on Peoples' interest
rate risk position and asset-liability simulations at December 31, 2003. Even
though management continues to focus on minimizing the impact of future rate
changes on earnings, Peoples' net interest margin and income remain difficult to
predict, and to manage, since changes in market interest rates and the timing of
these changes remain uncertain.
PROVISION FOR LOAN LOSSES
- -------------------------
Peoples' provision for loan losses was $3,601,000 in 2003, down 11% from
$4,067,000 in the prior year. This decrease is due largely to Peoples' good
asset quality and lower loan delinquencies. A portion of the provision relates
to the Overdraft Privilege program, which totaled $781,000 and $877,000 in 2003
and 2002, respectively.
When expressed as a percentage of average loans, the provision was 0.40% in 2003
compared to 0.49% in 2002. Management believes the provisions were appropriate
for the overall quality, inherent risk and volume concentrations of Peoples'
loan portfolio. While the sale of the credit card portfolio in late 2003 could
modestly lower Peoples' provision for loan losses, future provisions will
continue to be based on management's quarterly procedural discipline described
in the "Critical Accounting Policies" section of this Discussion.
GAINS AND/OR LOSSES ON SECURITIES TRANSACTIONS
- ----------------------------------------------
In 2003, Peoples recognized a net loss of $1,905,000 on the sale of investment
securities compared to a net gain of $216,000 a year ago. The net loss in 2003
is largely the result of the Investment Portfolio Restructuring in the fourth
quarter of 2003, while the net gain in 2002 was primarily the result of normal
portfolio activity.
NON-INTEREST INCOME
- -------------------
Peoples generates non-interest income from six primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking ("e-banking"), mortgage banking and business owned life
insurance ("BOLI"). In 2003, non-interest income was $17,538,000, up $2,302,000
(or 15%) from $15,236,000 a year ago. Peoples' enhanced non-interest income was
primarily the result of higher deposit service charge income and mortgage
banking revenues, with e-banking services and fiduciary activities also
contributing to the increase. Excluding gains and losses on securities
transactions, asset disposals and sale of the credit card portfolio,
non-interest income grew 21% in 2003, totaling $18,281,000 compared to
$15,092,000 in 2002.
Peoples' largest source of non-interest revenue remains service charges and
other fees on deposit accounts, which are based on the recovery of costs
associated with services provided. In 2003, deposit account service charges
totaled $8,192,000, up $1,216,000 (or 17%) from $6,976,000 in 2002. This
increase was the result of higher volumes of overdraft and non-sufficient funds
("NSF") fees, combined with increased volumes in transaction accounts for which
fees are charged and an overall increase in the number of checking accounts due
to acquisitions. The increased activity caused overdraft and NSF fees to be up
$857,000 (or 19%) and $377,000 (or 34%), respectively, in 2003 compared to a
year ago. Management periodically evaluates its cost recovery fees to ensure the
fees are reasonable based on operational costs, as well as similar fees charged
in Peoples' markets. Due to greater costs and inherent risks associated with
deposit account operations, Peoples has increased certain cost recovery fees
effective January 1, 2004, which should add to deposit account service charge
income in 2004, assuming volumes remain stable.
Peoples' fiduciary revenues improved $884,000 (or 36%) in 2003, totaling
$3,363,000 versus $2,479,000 a year ago. These increases are largely
attributable to a one-time trust fee of $341,000 earned in the third quarter
from accounts entitled to a large, special dividend, as well as an increase in
trust assets under management due to the Kentucky Bancshares acquisition. The
relative performance of equity markets, upon which a significant portion of
fiduciary fees is based, will continue to influence Peoples' fiduciary revenues.
Late in 2002, Peoples began selling long-term, fixed rate real estate loans into
the secondary market and expanded its mortgage banking activities throughout
2003. In 2003, mortgage banking produced revenues of $1,352,000 compared to
$157,000 a year ago. A combination of Peoples' expanded focus and consumers'
increased demand for fixed rate, long-term interest rate mortgage products
increased lending opportunities, as customers financed home purchases and
refinanced existing loans. Non-interest revenues benefited from this
combination. The following table details Peoples' mortgage banking activity:
Mortgage
Banking Mortgage Number of
(Dollars in thousands) Income Loans Sold Mortgages Sold
Fourth quarter of 2003 $ 385 $ 13,161 159
Third quarter of 2003 400 24,983 305
Second quarter of 2003 337 19,300 211
First quarter of 2003 230 9,999 103
Fourth quarter of 2002 135 6,091 60
Third quarter of 2002 22 1,110 13
Although it appears the real estate loan refinancing boom may have peaked,
mortgage banking is a key part of Peoples' loan-term business strategy. Further
information regarding Peoples' mortgage banking activities can be found later in
this discussion under "Loans."
Peoples offers various e-banking services, including ATM and debit cards, direct
deposit services and Internet banking, as alternative delivery channels to
traditional sales offices for providing services to clients. Peoples' electronic
banking services generated revenues of $2,055,000, an increase of $326,000 (or
19%) compared to $1,729,000 in 2002. This increased revenue was the result of
Peoples' customers utilizing debit cards to complete more of their payment
transactions. In 2003, Peoples' customers completed over $92 million of debit
card transactions, up from $67 million in 2002.
Effective August 1, 2003, Peoples, as well as other financial services
companies, experienced a reduction in fees earned on certain debit card
transactions as a result of the VISA and MasterCard litigation settlement.
Despite the reduced fee structure, Peoples' e-banking revenues remained strong
in the second half of 2003, totaling $538,000 and $534,000 in the fourth and
third quarters of 2003, compared to $483,000 and $464,000 for the same periods
in 2002, respectively. Management currently does not plan to implement new fees
for customers using its debit cards to offset any decline in revenues but
rather, plans to partially offset the reduced income stream by continuing to
grow core deposits, issuing more debit cards, and encouraging customers to use
their debit cards as a convenient way to do their banking.
Insurance and investment commissions totaled $1,465,000 in 2003 versus
$1,966,000 in 2002. The decline in insurance and investment income is largely
attributable to lower volumes of fixed annuity sales and related commission
income. In addition, decreased consumer lending opportunities in 2003 impacted
Peoples' credit life and accident and health ("A&H") insurance commissions. The
following table details Peoples' insurance and investment commissions:
(Dollars in thousands) 2003 2002 2001
Property and casualty insurance $ 452 $ 376 $ 282
Fixed annuities 444 1,023 438
Brokerage 286 208 315
Life and health insurance 152 180 221
Credit life and A&H insurance 131 179 160
Reinsurance revenues - - 88
- -----------------------------------------------------------------------------
Total $ 1,465 $ 1,966 $ 1,504
=============================================================================
Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. In 2003, BOLI income totaled $1,403,000 compared to
$1,471,000 in 2002. Management believes the BOLI yields should continue to
provide a better return for funding future benefit costs than alternative
investment opportunities with similar or lesser risk characteristics.
NON-INTEREST EXPENSE
- --------------------
In 2003, non-interest expense totaled $45,903,000, up $12,913,000 (or 39%) from
$32,990,000 a year ago. The FHLB prepayment penalties accounted for over half of
this increase, while $847,000 of additional intangible asset amortization due to
recent acquisitions also significantly contributed to the increase. Excluding
the impact of early debt extinguishment and intangible amortization,
non-interest expense rose 14% in 2003 compared to the prior year largely
attributable to additional expenses incurred as a result of the Kentucky
Bancshares acquisition and a full-year impact of the First Colony acquisition
completed in mid-2002.
Salaries and benefits remain Peoples' largest operating expense, which is
inherent in a service-based industry such as financial services. For the year
ended December 31, 2003, salaries and benefits grew $1,536,000 (or 8%) to
$19,636,000, from $18,100,000 in 2002. Most of the increase was due to the
addition of approximately 70 new associates in conjunction with acquisitions. At
December 31, 2003, Peoples had 511 full-time equivalent associates, up from 462
at year-end 2002. Management will continue to leverage Peoples' resources in an
effort to optimize customer service and produce additional future revenue
streams.
Recent investments in technology and acquisitions have produced additional net
occupancy and equipment expenses, in particular depreciation expense. In 2003,
net occupancy and equipment expenses totaled $4,561,000 versus $3,915,000 last
year. The continued investment in technology has enhanced Peoples' ability to
serve clients and satisfy their financial needs, while acquisitions have allowed
Peoples to expand its customer base for economies of scale.
Data processing and software costs totaled $1,596,000 in 2003, up 32% from a
year ago. The higher level of data processing and software costs is attributable
to an increase in software licensing fees in response to additional office
locations and users of key software packages. Beginning in the third quarter of
2003, Peoples began amortizing its $1.8 million investment in Customer
Relationship Management ("CRM") and profitability systems, the majority of which
was software related costs. The total investment is estimated to be amortizable
over a 7-year period. While this investment will add future expense, these new
systems and processes will be a strategic part of Peoples' sales and marketing
efforts for many years and is consistent with management's long-term focus to
build the best process to grow revenues.
Professional fees, which include fees for accounting, legal and other
professional services, totaled $1,938,000 in 2003, down $49,000 (or 2%) compared
to $1,987,000 a year ago. Included in Peoples' professional fees are consulting
fees paid for the implementation of the Overdraft Privilege program in December
2001. These costs, which are based on the net improvement in overdraft fee
income, totaled $523,000 in 2003 versus $489,000 for the 9 months that the fee
was paid in 2002. In the fourth quarter of 2003, these consulting fees were
$137,000 versus $154,000 a year ago, as the fee percentage was reduced beginning
in March 2003 and will terminate at the end of the first quarter of 2004.
Peoples is subject to state franchise taxes, which are based largely on Peoples
Bank's equity. In 2003, franchise taxes totaled $1,126,000, a 51% increase over
last year's total of $745,000. This increase is attributable to additional
equity at Peoples Bank, which was due largely to equity added by the Kentucky
Bancshares and First Colony acquisitions and the $16 million capital
contribution from Peoples. Despite the increased franchise taxes, management
believes Peoples Bank's stronger capital level positions Peoples for strategic
growth. In addition, management regularly evaluates the capital position of
Peoples' other direct and indirect subsidiaries and seeks to maximize Peoples'
consolidated capital position through appropriate capital allocation designed to
enhance profitability and shareholder value.
Management uses the non-interest leverage ratio as a measurement of non-interest
expense leverage. For the year ended December 31, 2003, the non-interest
leverage ratio was 48.7% compared to 45.8% a year ago. This improvement in the
non-interest leverage ratio reflects Peoples' ability to increase revenues
without a corresponding increase in operating expenses. Management's strategic
goals include achieving and maintaining a non-interest leverage ratio greater
than 50%.
The non-interest ratio is defined as non-interest income as a percentage of
operating expenses, which excludes gains and losses on securities transactions,
asset disposals, early debt extinguishment, and sale of the credit card
portfolio, as well as intangible asset amortization. The followings details the
components of the non-interest leverage ratio calculation for the year ended
December 31:
(Dollars in Thousands) 2003 2002
Total other income, as reported $ 17,538 $ 15,236
Add: Loss on asset disposals 261 72
Loss on securities transactions 1,905 -
Deduct: Gain on securities transactions - 216
Gain on sale of credit card portfolio 1,423 -
- -------------------------------------------------------------------------------
Adjusted total other income 18,281 15,092
===============================================================================
Total other expense, as reported 45,903 32,990
Add: Gain on early debt extinguishment - 631
Deduct: Loss on early debt extinguishment 6,858 -
Amortization of other intangible assets 1,493 646
- -------------------------------------------------------------------------------
Adjusted total other expense 37,552 32,975
===============================================================================
RETURN ON EQUITY
- ----------------
In 2003, Peoples' return on equity ("ROE") was 9.75% versus 17.69% a year ago.
The lower ROE is primarily the result of decreased earnings from balance sheet
restructuring charges in the fourth quarter, coupled with higher average equity
generated by the Common Stock Offering, and the Kentucky Bancshares acquisition.
Average equity was $166.6 million for 2003, a $60.6 million (or 57%) increase
over the $106.0 average equity for 2002. Management uses ROE to evaluate
Peoples' long-term performance. However, management believes earnings per share
("EPS") serves as a more meaningful measurement of short-term performance due to
the volatility that can occur to equity from changes in the estimated fair
values of Peoples' investment portfolio.
RETURN ON ASSETS
- ----------------
Return on assets ("ROA") was 0.95% in 2003 compared to 1.46% in 2002. The
reduction in ROA is primarily due to Peoples' lower earnings and an increase in
total average assets from the Investment Growth Strategy and Kentucky Bancshares
acquisition. Average assets were $1.71 billion in 2003 compared to 2002's
average balance of $1.29 million, a 33% increase. In recent years, Peoples'
primary focus has shifted to EPS enhancement and ROE while reducing the emphasis
on ROA as a key performance indicator. However, management continues to monitor
ROA and considers it a measurement of Peoples' asset utilization.
INCOME TAX EXPENSE
- ------------------
Peoples' effective tax rate was 24.9% for the year ended December 31, 2003,
compared to 27.4% a year ago. This decline resulted from tax-exempt interest
income comprising a larger percentage of Peoples' income before taxes. Peoples
also makes tax-advantaged investments in order to manage its effective tax rate
and overall tax burden. At December 31, 2003, the amount of tax-advantaged
investments included in Other Assets totaled $30.5 million compared to $28.7
million at December 31, 2002. This increase in tax-advantaged investments
produced additional tax benefits, which also contributed to the reduction in
Peoples' effective tax rate. Depending on economic and regulatory conditions,
Peoples may make additional investments in various tax credit pools and other
tax-advantaged assets.
FINANCIAL CONDITION
OVERVIEW OF BALANCE SHEET
- -------------------------
At December 31, 2003, total assets were $1.74 billion compared to $1.39 billion
at year-end 2002, due to an increase in investments and loans. The Investment
Growth Strategy resulted in investment securities totaling $641.5 million at
December 31, 2003, up $229.4 million (or 56%) since December 31, 2002. Gross
loans were $915.0 million year-end 2003, up $65.2 million (or 8%) since December
31, 2002, largely attributable to the Kentucky Bancshares acquisition. Goodwill
and unamortized other intangible assets were $18.0 million higher at year-end
2003 compared to December 31, 2002, as a result of the Kentucky Bancshares
acquisition.
Total liabilities were $1.57 billion at December 31, 2003, compared to $1.25
billion at year-end 2002, an increase of $318.0 million (or 26%). At December
31, 2003, deposits totaled $1.03 billion versus $955.9 million at year-end 2002,
an increase of $72.7 million (or 8%). This increase was primarily the result of
deposits acquired in the Kentucky Bancshares acquisition. Borrowed funds totaled
$526.6 million at December 31, 2003, up from $281.1 million at December 31,
2002, due to borrowings used, for the most part, to fund the Investment Growth
Strategy.
Stockholders' equity totaled $170.9 million at December 31, 2003, versus $147.2
million at December 31, 2002, an increase of $23.7 million (or 16%). The
majority of this increase is due to common shares issued in conjunction with the
Kentucky Bancshares acquisition and Common Stock Offering, which increased
equity by $19.1 million.
CASH AND CASH EQUIVALENTS
- -------------------------
Peoples considers cash and cash equivalents to consist of Federal funds sold,
cash and balances due from banks, interest-bearing balances in other
institutions and other short-term investments that are readily liquid. The
amount of cash and cash equivalents fluctuates on a daily basis due to customer
activity and Peoples' liquidity needs. At December 31, 2003, cash and cash
equivalents totaled $73.4 million, up 32% compared to $55.6 million at December
31, 2002. This increase was attributable to a higher level of Federal funds
sold. At December 31, 2003, Peoples had $44.0 million of Federal funds sold
compared to $20.5 million at year-end 2002. This increase is attributable to
Peoples placing accumulated funds from the investment portfolio and customer
activity into Federal funds sold.
Cash and balances due from banks comprised a significant portion of Peoples'
cash and cash equivalents. At December 31, 2003, cash and balances due from
banks totaled $28.3 million, down from $34.0 million at year-end 2002. This
decline was the result of fewer items in the process of collection at December
31, 2003.
Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, will allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments, specifically
undrawn lines of credit, construction loans and letters of credit, as they come
due. Peoples will actively manage the principal runoff from the investment and
loan portfolios and seek to reinvest those funds appropriately, based on loan
demand and investment opportunities, while maintaining adequate liquidity.
Further information regarding Peoples' liquidity can be found later in this
discussion under "Interest Rate Sensitivity and Liquidity."
INVESTMENT SECURITIES
- ---------------------
At December 31, 2003, the amortized cost of Peoples' investment securities
totaled $634.8 million compared to $402.0 million at year-end 2002, while the
market value of the investment portfolio was $641.5 million at December 31,
2003, up from $412.1 million at December 31, 2002. These increases were
primarily the result of the Investment Growth Strategy initiated in December
2002 and implemented in the first quarter of 2003.
The difference in amortized cost and market value at December 31, 2003, resulted
in unrealized appreciation in the investment portfolio of $6.7 million and a
corresponding increase in Peoples' equity of $4.3 million, net of deferred
taxes. In comparison, the difference in amortized cost and market value at
December 31, 2002, resulted in unrealized appreciation of $10.1 million and an
increase in equity of $6.4 million, net of deferred taxes.
Since December 31, 2002, Peoples' investment in US treasury securities and
obligations of US government agencies and corporations, excluding
mortgage-backed securities, has grown $36.8 million (or 128%). This increase is
the result of management reallocating a portion of the runoff from the
investment portfolio into US agency securities to maintain diversity within the
portfolio, as well as Peoples acquiring approximately $21 million of US agency
securities in the Kentucky Bancshares acquisition. Peoples' investment in
mortgage-backed securities has grown significantly compared to year-end 2002 due
to the Investment Growth Strategy.
In 2003, management took various actions to improve the performance of Peoples'
investment securities portfolio in response to the high rate of prepayments on
mortgage-backed securities and the corresponding downward pressure on yields due
to accelerated amortization of bond premiums. Specifically, Peoples sold lower
yielding mortgage-backed securities, due to increased prepayment speeds, in
mid-2003 and late in the fourth quarter of 2003 and reinvested the proceeds into
higher yielding instruments. Management expects the repositioning to improve
both the yields and the timing of cash flows from the investment portfolio.
Further information regarding Peoples' investment securities can be found in
Note 3 to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
Management monitors the earnings performance and liquidity of the investment
portfolio on a regular basis through Asset/Liability Committee ("ALCO")
meetings. The ALCO also monitors net interest income, sets deposit pricing and
maturity guidelines, and manages Peoples' interest rate risk. Through active
management of the balance sheet and investment portfolio, Peoples seeks to
maintain sufficient liquidity to satisfy depositor demand, other company
liquidity requirements and various credit needs of its customers.
LOANS
- -----
Peoples Bank originates various types of loans, including commercial, financial
and agricultural loans ("commercial loans"), real estate loans and consumer
loans, focusing primarily on lending opportunities in central and southeastern
Ohio, northwestern West Virginia, and northeastern Kentucky markets. At December
31, 2003, gross loans totaled $915.0 million, up $65.2 million since year-end
2002. While this increase was primarily attributable to loans acquired in the
Kentucky Bancshares acquisition, Peoples has also experienced internally
generated commercial loan growth throughout 2003, which partially offset
declines in real estate and consumer loan balances.
Commercial loan balances, including loans secured by commercial real estate,
totaled $512.1 million at December 31, 2003, up $119.5 million (or 30%) from
$392.5 million at year-end 2002. A significant portion of this increase in
commercial loans is attributable to acquiring $49 million of commercial loans in
the Kentucky Bancshares acquisition. Peoples also experienced internally
generated growth from lending opportunities within Peoples' existing markets.
Commercial loans continued to represent the largest portion of Peoples' total
loan portfolio, comprising 56.0% and 46.1% of total loans at December 31, 2003
and December 31, 2002, respectively. The portion of commercial loan balances
secured by commercial real estate, excluding construction loans, was $380.4
million at December 31, 2003, up from $289.6 million at December 31, 2002.
Future commercial lending activities will be dependent on economic and related
conditions, such as general demand for loans in Peoples' primary markets,
interest rates offered by Peoples and normal underwriting requirements. In
addition to in-market opportunities, Peoples will continue to lend selectively
to creditworthy customers outside its primary markets.
While commercial loans comprise the largest portion of Peoples' loan portfolio,
generating residential real estate loans remains a major focus of Peoples'
lending efforts, whether the loans are ultimately sold into the secondary market
or retained on Peoples' balance sheet. At December 31, 2003, real estate loans,
which include construction loans but exclude loans secured by commercial real
estate, totaled $322.8 million compared to $347.1 million at December 31, 2002,
a decrease of $24.3 million (or 7%). This decline is due mainly to Peoples'
increased secondary market activity, which was partially offset by Peoples
acquiring $21 million of real estate loans in the Kentucky Bancshares
acquisition. Real estate loans comprised 35.3% of Peoples' total loan portfolio
at December 31, 2003, versus 40.9% at year-end 2002. Included in real estate
loans are home equity credit line balances of $28.3 million at December 31,
2003, virtually unchanged from $28.5 million at December 31, 2002.
Throughout 2003, real estate loan balances declined in response to customer
preference for long-term, fixed rate mortgages, which Peoples predominately
designates for sale in the secondary market with servicing rights retained. In
2003, Peoples originated 783 long-term, fixed rate mortgage loans, with total
loan amounts of $68 million, for sale into the secondary market, compared to 97
loans, with total loan amounts of $10 million, in 2002. At December 31, 2003,
Peoples was servicing $76 million of real estate loans previously sold into the
secondary market. In addition, Peoples had $2.8 million of fixed rate real
estate loans that could be sold into the secondary market. Management
anticipates Peoples' selling these loans during the first quarter of 2004.
Consumer loans decreased $23.7 million (or 23%) since year-end 2002, totaling
$79.9 million at December 31, 2003. As part of the Kentucky Bancshares
acquisition, Peoples acquired consumer loan balances of $4.7 million. The
indirect lending area represented a significant portion of Peoples' consumer
loans, with balances of $38.4 million and $56.2 million at December 31, 2003 and
December 31, 2002, respectively. Slower economic conditions and strong
competition for loans, particularly automobile loans, have challenged the
performance and growth of Peoples' consumer loan portfolio, Even so, management
remains committed to sound lending practices and continues to emphasize
appropriate discipline in loan pricing and loan underwriting practices more than
loan growth.
LOAN CONCENTRATION
- ------------------
Peoples' largest concentration of commercial loans are credits to lodging and
lodging-related companies, which comprised approximately 12.7% of Peoples'
outstanding commercial loans at year-end 2003, compared to 11.2% at December 31,
2002. Loans to assisted living facilities and nursing homes also represented a
significant portion of Peoples' commercial loans, comprising 11.3% of Peoples'
outstanding commercial loans at December 31, 2003, versus 13.4% at year-end
2002.
These lending opportunities have arisen due to the growth of these industries in
markets served by Peoples or contiguous areas, as well as sales associates'
efforts to develop these lending relationships. Management believes Peoples'
loans to lodging and lodging-related companies, as well as loans to assisted
living facilities and nursing homes, do not pose abnormal risk when compared to
risk assumed in other types of lending since these credits have been subjected
to Peoples' normal underwriting standards, which includes an evaluation of the
market expertise and experience of the borrowers and principals in these
business relationships. In addition, a sizeable portion of the loans to lodging
and lodging-related companies are spread over various geographic areas and are
guaranteed by principals with substantial net worth.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Peoples' allowance for loan losses totaled $14.6 million, or 1.59% of total
loans, at December 31, 2003, compared to $13.1 million, or 1.54%, at year-end
2002. Over one-third of the increase in the allowance was the result of the
allowance for loan losses acquired in the Kentucky Bancshares acquisition.
The allowance is allocated among the loan categories based upon the consistent,
quarterly procedural discipline described in the "Critical Accounting Policies"
section of this discussion. However, the entire allowance for loan losses is
available to absorb future loan losses in any loan category. The following
schedule details the allocation of the allowance for loan losses at December 31:
2003 2002 2001
------------------------------ ------------------------------ ---------------------------
(Dollars in thousands) Percent Percent Percent
Allocation of Loans Allocation of Loans Allocation of Loans
of in Each of in Each of in Each
Allowance Category Allowance Category Allowance Category
for Loan to Total for Loan to Total for Loan to Total
Losses Loans Losses Loans Losses Loans
Commercial $ 11,232 56.0 % $ 8,846 46.1 % $ 7,950 44.5 %
Consumer 1,594 8.5 2,075 12.1 2,447 14.4
Real estate 1,234 35.3 1,617 40.9 1,602 40.2
Overdrafts 283 0.2 206 0.1 - 0.1
Credit card 232 - 342 0.8 358 0.8
- ------------------------------------------------------------------------------------------------------------------------
Total $ 14,575 100.0 % $ 13,086 100.0 % $ 12,357 100.0 %
========================================================================================================================
The allowance allocated to commercial loans has increased in recent periods,
reflecting the higher credit risk associated with this type of lending and
continued growth in this portfolio. The allowance allocated to the real estate
and consumer loan portfolios is based upon Peoples' allowance methodology for
homogeneous pools of loans, which includes a consideration of changes in total
balances in those portfolios.
In 2003, net chargeoffs were down 26% compared to 2002, totaling $2,685,000
versus $3,642,000. Consumer loans comprise the largest portion of net
chargeoffs, totaling $714,000 in 2003 versus $667,000 a year ago. Net chargeoffs
relating to the Overdraft Privilege Program were $704,000 and $705,000 in 2003
and 2002, respectively. While commercial loans remain a significant portion of
net chargeoffs, commercial loan chargeoffs were down in 2003 due largely to
Peoples charging down $1.0 million of loans from a single client relationship
during the first half of 2002. Real estate loans comprised $383,000 of net
chargeoffs in 2003, up from $210,000 a year ago.
Asset quality remains a key focus, as management continues to stress quality
rather than growth. Since December 31, 2002, Peoples' asset quality ratios have
improved due to the combination of a lower level of nonperforming loans and an
increase in assets. In 2003, the balance of nonperforming loans decreased due to
a large commercial loan, which comprised the entire amount of renegotiated loans
at December 31, 2002, moving to performing status. Nonperforming assets comprise
a smaller percentage of total assets at December 31, 2003, as a result of an
increase in assets largely attributable to the completion of the Investment
Growth Strategy and the Kentucky Bancshares acquisition. Nonperforming loans
increased in 2003 due to additional loans, primarily commercial and real estate
loans, being placed on nonaccrual status, as slow economic conditions have
negatively impacted customers' ability to meet their loan repayment obligations.
A loan is considered impaired when, based on current information and events, it
is probable that Peoples will be unable to collect the scheduled payments of
principal or interest according to the contractual terms of the loan agreement.
The measurement of potential impaired loan losses is generally based on the
present value of expected future cash flows discounted at the loan's contractual
effective interest rate, or the fair value of the collateral if the loan is
collateral dependent. If foreclosure is probable, impairment loss is measured
based on the fair value of the collateral.
At December 31, 2003, the recorded investment in loans considered to be impaired
was $20.0 million, of which $16.9 million were accruing interest and $3.1
million were nonaccrual loans. Included in this amount were $8.4 million of
impaired loans for which the related allowance for loan losses was $3.8 million.
The remaining impaired loan balances do not have a related allocation of the
allowance for loan losses because the loans have been previously written-down,
are well secured, or possess characteristics indicative of the ability to repay
the loan. For the year ended December 31, 2003, Peoples' average recorded
investment in impaired loans was approximately $13.7 million and interest income
of $1.1 million was recognized on impaired loans during the period, representing
1.2% of Peoples' total interest income.
FUNDING SOURCES
- ---------------
Peoples considers a number of sources when evaluating funding needs, including
but not limited to deposits, short-term borrowings, and long-term borrowings.
Deposits, both interest-bearing and non-interest-bearing, continue to be the
most significant source of funds for Peoples, totaling $1.03 billion, or 66% of
total funding sources, at December 31, 2003.
Non-interest-bearing deposits serve as a core funding source. At December 31,
2003, non-interest-bearing deposit balances totaled $133.7 million, up $17.8
million (or 15%) compared to the prior year-end, with the Kentucky Bancshares
acquisition accounting for substantially all of the increase. In addition,
non-interest-bearing deposit balances at year-end 2002 included $9.3 million of
trust funds, which were not invested at year-end at the customer's request.
These funds were invested in a market-based product in early January 2003. Since
customer activity can result in temporary changes in deposit balances at end of
periods, management believes a comparison of average balances to be a more
meaningful reflection of the trend in non-interest-bearing deposits. In 2003,
non-interest-bearing deposits averaged $124.6 million versus $100.7 in 2002,
reflecting Peoples' efforts to increase non-interest-bearing deposits. Peoples'
strategies include continued emphasis on core deposit growth in products such as
non-interest-bearing checking accounts.
Interest-bearing deposits totaled $894.8 million at December 31, 2003, an
increase of $54.9 million (or 7%) compared to $840.0 million at December 31,
2002, all of which was attributable to the Kentucky Bancshares acquisition. The
following details Peoples' interest-bearing deposits at December 31:
(Dollars in thousands) 2003 2002 2001
Certificates of deposit $ 461,904 $ 422,715 $ 360,698
Savings accounts 171,488 143,594 79,640
Interest-bearing transaction accounts 157,410 139,609 120,140
Money market deposit accounts 104,019 134,052 157,357
- -------------------------------------------------------------------------------
Total interest-bearing deposits $ 894,821 $ 839,970 $ 717,835
===============================================================================
Peoples also accesses other funding sources, including short-term and long-term
borrowings, to fund asset growth and satisfy liquidity needs. Peoples'
short-term borrowings include overnight repurchase agreements and FHLB advances,
while long-term borrowings include FHLB advances, a loan from an unrelated
financial institution and term repurchase agreements. At December 31, 2003,
borrowed funds totaled $526.6 million, up $245.5 million (or 87%) from $281.1
million at year-end 2002, as a result of the Investment Growth Strategy. As part
of the Long-Term Debt Restructuring in December 2003, Peoples converted a $63
million long-term borrowings to a short-term borrowing. This increase in
short-term borrowings was partially offset by Peoples converting the short-term
loan utilized to fund the First Colony acquisition in 2002 to a long-term loan
with the same unaffiliated financial institution. Total long-term borrowings
were up 73% in 2003 due to the Investment Growth Strategy.
Advances from the FHLB comprise a significant portion of Peoples' borrowed
funds. Short-term FHLB advances are typically variable rate cash management
advances used to manage Peoples' daily liquidity needs and may be repaid, in
whole or part, at anytime without a penalty. Peoples also utilizes short-term,
repo advances ranging in terms from overnight to one-year to manage its cost of
funds and temporary cash needs. Peoples' long-term FHLB advances are primarily
convertible rate advances, with the initial rate fixed for periods ranging from
two to four years, depending on the specific advance. After the initial fixed
rate period, these advances are subject to conversion, at the discretion of the
FHLB, to a LIBOR based, variable rate product. Peoples has the option to prepay,
without penalty, any advance that has been converted or allow the borrowing to
reprice. In addition to these convertible rate advances, Peoples utilizes fixed
rate, long-term FHLB advances, both amortizing and non-amortizing, to help
manage its interest rate sensitivity and liquidity. Further information
regarding Peoples' management of interest rate sensitivity can be found later in
this discussion under "Interest Rate Sensitivity and Liquidity."
In addition to FHLB advances, Peoples accesses national market repurchase
agreements to diversify its funding sources. At December 31, 2003, wholesale
repurchase agreements totaled $216.3 million versus $9.1 million at year-end
2002, due to repurchase agreements used to fund the Investment Growth Strategy.
Peoples current wholesale repurchase agreements range in original terms of two
to five years. The repurchase agreements may not be repaid prior to maturity and
must remain sufficiently collateralized during the entire term. As a result, a
decline in the market value of the investment securities associated with these
agreements would require Peoples to pledge additional investment securities.
CAPITAL/STOCKHOLDERS' EQUITY
- ----------------------------
At December 31, 2003, stockholders' equity was $170.9 million, versus $147.2
million at December 31, 2002, an increase of $23.7 million (or 16%). The
majority of this increase is due to common shares issued in conjunction with the
Kentucky Bancshares acquisition and the Common Stock Offering, which accounted
for $14.3 million and $4.8 million of the increase, respectively.
For the year ended December 31, 2003, Peoples paid dividends of $6.8 million,
representing a dividend payout ratio of 42.1% of earnings, compared to a ratio
of 24.9% a year ago. While management anticipates Peoples continuing its 38-year
history of consistent dividend growth in future periods, Peoples Bancorp's
ability to pay dividends on its common shares is largely dependent upon
dividends from Peoples Bank. In addition, other restrictions and limitations may
prohibit Peoples from paying dividends even when sufficient cash is available.
Further discussion regarding restrictions on Peoples' ability to pay future
dividends can be found in Note 13 of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K, as well as the "Limits on
Dividends" section under Item 1 of this Form 10-K.
The adjustment for the net unrealized holding gains on available-for-sale
securities, net of deferred income taxes, impacts Peoples' total equity. At
December 31, 2003, net unrealized holding gains totaled $4.3 million versus $6.4
million at December 31, 2002, a change of $2.1 million. Since all the investment
securities in Peoples' portfolio are classified as available-for-sale, both the
investment and equity sections of Peoples' consolidated balance sheet are more
sensitive to the changing market values of investments than if the investment
portfolio was classified as held-to-maturity.
At December 31, 2003, Peoples had treasury stock totaling $2.2 million, nearly
double the amount at year-end 2002. During 2003, Peoples repurchased 156,640
common shares (or 50% of the total authorized), at an average price of $25.27
per share, under the 2003 Stock Repurchase Program, and 5,268 common shares, at
an average price of $25.36, in conjunction with the deferred compensation plan
for directors of Peoples and subsidiaries. During the same period, Peoples
reissued 117,889 of the shares purchased under the 2003 Stock Repurchase Program
as part of the Kentucky Bancshares acquisition, stock option exercises and 5%
stock dividend. In 2004, Peoples has repurchased 141,200 shares (or 33% of the
total authorized), at an average price of $29.14 per share, through February 26,
2004, under the 2004 Stock Repurchase Program. Peoples anticipates repurchasing
additional common shares as authorized in the 2004 Stock Repurchase Program.
Management uses the tangible capital ratio as one measure of the adequacy of
Peoples' equity. The ratio, defined as tangible equity as a percentage of
tangible assets, excludes the balance sheet impact of intangible assets acquired
through acquisitions accounted for using the purchase method accounting. At
December 31, 2003, Peoples tangible capital ratio was 7.24% compared to 7.43% at
September 30, 2003 and 8.54% at December 31, 2002. The lower ratio compared to
the prior year end is the result of an increase in assets due to the Investment
Growth Strategy and intangible assets acquired in the Kentucky Bancshares
acquisition.
In addition to monitoring performance through traditional capital measurements
(i.e., dividend payout ratios and ROE), Peoples has also complied with the
capital adequacy standards mandated by the banking industry. Peoples and Peoples
Bank were categorized as well-capitalized institutions at December 31, 2003,
based on the most recent regulatory notification. Further information regarding
Peoples' risk-based capital ratios can be found in Note 13 of the Notes to
Consolidated Financial Statements included in Item 8 of this Form 10-K.
INTEREST RATE SENSITIVITY AND LIQUIDITY
- ---------------------------------------
While Peoples is exposed to various business risks, the risks relating to
interest rate sensitivity and liquidity could materially impact future results
of operation and financial condition. The objective of Peoples' asset/liability
management ("ALM") function is to measure and manage these risks in order to
optimize net interest income within the constraints of prudent capital adequacy,
liquidity and safety. This objective requires Peoples to focus on interest rate
risk exposure and adequate liquidity through management of the mix of assets and
liabilities. Ultimately, the ALM function is intended to guide management in the
acquisition of earning assets and selection of the appropriate funding sources.
Interest Rate Risk
- ------------------
Interest rate risk ("IRR") is one of the most significant risks for Peoples, and
the entire financial services industry, primarily arising in the normal course
of business of offering a wide array of financial products to its customers,
including loans and deposits, as well as the diversity of its own investment
portfolio and borrowed funds. IRR is the potential for economic loss due to
future interest rate changes that can impact both the earnings stream as well as
market values of financial assets and liabilities. Peoples' exposure to IRR is
due primarily to differences in the maturity, or repricing, of earning assets
and interest-bearing liabilities. In addition, other factors, such as
prepayments of loans and investment securities or early withdrawal of deposits,
can expose Peoples to IRR and increase interest costs or reduce revenue streams.
Peoples has charged the ALCO with the overall management of Peoples' balance
sheet mix and off-balance sheet hedging transactions related to the management
of IRR. The ALCO consists of Peoples' Chief Financial, Officer, Chief Executive
Officer and Chief Lending Officer, as well as other members of senior
management. It is the ALCO's responsibility to focus on the future by evaluating
trends and potential future events, researching alternatives, then recommending
and authorizing an appropriate course of action. To this end, the ALCO has
established an IRR management policy that sets the minimum requirements and
guidelines for monitoring and managing the level and amount of IRR. The
objective of the IRR policy is to encourage adherence to sound fundamentals of
banking while allowing sufficient flexibility to exercise the creativity and
innovation necessary to meet the challenges and opportunities of changing
markets. The ultimate goal of these policies is to optimize net interest income
within the constraints of prudent capital adequacy, liquidity, and safety.
Peoples' ALCO relies on different methods of assessing IRR, including
simulations to project future net interest income and to monitor the sensitivity
of the net present market value of equity and the difference, or "gap", between
maturing or repricing of rate-sensitive assets and liabilities over various time
periods. Peoples uses these methods to monitor IRR for both the short- and
long-term. The ALCO places emphasis on simulation modeling as the most
beneficial measurement of IRR because it is a dynamic measure. By employing a
simulation process that estimates the impact of potential changes in interest
rates and balance sheet structures and by establishing limits on these estimated
changes to net income and net market value, the ALCO is better able to evaluate
interest rate risks and their potential impact to earnings and the market value
of equity.
The modeling process starts with a base case simulation using the current
balance sheet and current interest rates held constant for the next twelve
months. At least two alternative interest rate scenarios, one with higher
interest rates and one with lower interest rates, assuming parallel, immediate
and sustained changes are also prepared using the same balance sheet structure
as the base scenario. Comparisons produced from the simulation data, showing the
earnings variance from the base interest rate scenario, illustrate the risks
associated with the current balance sheet structure. Additional simulations,
when deemed appropriate, are prepared using different interest rate scenarios
than those used with the base case simulation and/or possible changes in balance
sheet structure. The additional simulations are used to better evaluate risks
and highlight opportunities inherent in the modeled balance sheet. Comparisons
showing the earnings and equity value variance from the base case are provided
to the ALCO for review and discussion. The results from these model simulations
are evaluated for indications of effectiveness of current IRR management
strategies.
As part of the evaluation of IRR, the ALCO has established limits on changes in
net interest income and the net value of the balance sheet. The ALCO limits the
decrease in net interest income of Peoples Bank to 10% or less from base case
for each 100 basis point shift in interest rates measured over a twelve-month
period assuming a static balance sheet. The ALCO limits the negative impact on
net equity to 40% or less given an immediate and sustained 200 basis points
shift in interest rates, also assuming a static balance sheet. The ALCO also
reviews static gap measures for specific time periods focusing on a one-year
cumulative gap. At December 31, 2003, Peoples' one-year cumulative gap amount
was positive 5.5% of earning assets, which represented $85.4 million more in
assets than liabilities that may reprice or mature during that period. Based on
historical trends and performance, the ALCO has determined the ratio of the
one-year cumulative gap should be within +/-15% of earning assets at the date of
measurement. Results that are outside of any of these limits will prompt a
discussion by the ALCO of appropriate actions, if any, that should be taken.
The following table is provided to illustrate the estimated earnings at risk and
value at risk positions of Peoples, on a pre-tax basis, at December 31, 2003
(dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- ----------------------- ---------------------- ------------------------
300 $ (272) (0.5) % $ (74,721) (31.7) %
200 826 1.5 (49,959) (21.2)
100 457 0.8 (23,702) (10.1)
(50) $ (970) (1.8) % $ 2,187 0.9 %
The interest rate risk analysis shows that Peoples is asset sensitive, which
means that increasing interest rates should favorably impact Peoples' net
interest income while downward moving interest rates should negatively impact
net interest income. Peoples asset sensitivity increased slightly during 2003 as
efforts were made by management to increase the amount of assets that reprice in
relation to repricing liabilities.
The ALCO has also implemented hedge positions to help protect Peoples' net
interest income streams in the event of rising rates which will complement the
current slightly asset sensitive position. Peoples has a hedge position on a $17
million long-term, fixed rate borrowing from the FHLB that may convert to a
variable rate, at the FHLB's discretion. In addition, the ALCO may consider
additional hedging options, including, but not limited to, the purchase of other
interest rate hedge positions, as available and appropriate, that would provide
net interest income protection in a rising rate environment.
Liquidity
- ---------
In addition to IRR management, a primary objective of the ALCO is the
maintenance of a sufficient level of liquidity. The ALCO defines liquidity as
the ability to meet anticipated and unanticipated operating cash needs, loan
demand, and deposit withdrawals, without incurring a sustained negative impact
on profitability. The ALCO's liquidity management policy sets limits on the net
liquidity position of Peoples and the concentration of non-core funding sources,
both total wholesale funding and reliance on brokered deposits.
Typically, the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided from cash generated from earning assets such as maturities,
calls, principal payments and income from loans and investment securities. In
2003, cash provided by financing activities totaled $190.7 million compared to
$63.6 million a year ago, due largely to increased long-term borrowings used for
the Investment Growth Strategy. Cash used in investing activities totaled $201.1
million versus $65.0 million last year, primarily due to increased investment
securities purchases, net of maturities and sales.
When appropriate, Peoples takes advantage of external sources of funds, such as
advances from the FHLB, national market repurchase agreements, and brokered
funds. These external sources often provide attractive interest rates and
flexible maturity dates that better enable Peoples to match funding dates and
pricing characteristics with contractual maturity dates and pricing parameters
of earning assets. At December 31, 2003, Peoples had available borrowing
capacity of approximately $87 million through these external sources and
unpledged securities in the investment portfolio of approximately $225 million
that can be utilized as an additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting volatile
funds from liquid assets. Peoples' volatile funds consist primarily of
short-term growth in deposits, while liquid assets includes short-term
investments and unpledged available-for-sale securities. At December 31, 2003,
Peoples' net liquidity position was $260.1 million, or 15.0% of total assets,
compared to $189.7 million, or 13.6% of total assets, at December 31, 2002. The
increase in liquidity position as a percent of total assets was primarily the
result of a decrease in volatile funds. The liquidity position as of December
31, 2003, was within Peoples' policy limit of negative 10% of total assets. At
December 31, 2003, total wholesale funding comprised 27.0% of total assets and
brokered funds were 0.6% of total assets, which was within Peoples' policy
limits of 30% and 10%, respectively.
OFF-BALANCE SHEET ACTIVITIES AND CONTRACTUAL OBLIGATIONS
- --------------------------------------------------------
Peoples routinely engages in activities that involve, to varying degrees,
elements of risk that are not reflected, in whole or in part, in the
consolidated financial statements. These activities are part of Peoples' normal
course of business and include traditional off-balance sheet credit-related
financial instruments, interest rate contracts, operating leases, long-term debt
and commitments to make additional capital contributions in low-income housing
project investments.
Traditional off-balance sheet credit-related financial instruments are primarily
commitments to extend credit, and standby letters of credit. These activities
could require Peoples to make cash payments to third parties in the event
certain specified future events occur. The contractual amounts represent the
extent of Peoples' exposure in these off-balance sheet activities. However,
since certain off-balance sheet commitments, particularly standby letters of
credit, are expected to expire or be only partially used, the total amount of
commitments does not necessarily represent future cash requirements. These
activities are necessary to meet the financing needs of customers.
Peoples also enters into interest rate contracts where Peoples is required to
either receive cash from or pay cash to counter parties depending on changes in
interest rates. Peoples utilizes interest rate contracts to help manage the risk
of changing interest rates. Interest rate contracts are carried at fair value on
the consolidated balance sheet, with the fair value representing the net present
value of expected future cash receipts or payments based on market interest
rates as of the balance sheet date. As a result, the amounts recorded on the
balance sheet at December 31, 2003, do not represent the amounts that may
ultimately be paid or received under these contracts.
Peoples also has commitments to make additional capital contributions in
low-income housing tax credit funds, consisting of a pool of low-income housing
projects. As a limited partner in these funds, Peoples receives federal income
tax benefits, which assist Peoples in managing its overall tax burden. Since the
future contributions are conditioned on certain future events occurring, the
total amount of delayed equity contributions is not reflected on the
consolidated balance sheet at December 31, 2003. Further information regarding
Peoples' delayed equity contributions can be found in Note 12 of the Notes to
the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Management does not anticipate Peoples' current off-balance sheet activities
will have a material impact on future results of operations and financial
condition. Further information regarding Peoples' financial instruments with
off-balance sheet risk can be found in Note 12 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Form 10-K.
Peoples continues to lease certain banking facilities and equipment under
noncancelable operating leases with terms providing for fixed monthly payments
over periods ranging from two to fifteen years. Many of Peoples' leased banking
facilities are located within retail shopping centers and, as a result, are not
available for purchase. Management believes these leased facilities increase
Peoples' visibility within its markets and afford sales associates additional
access to current and potential clients.
The following table details Peoples' future contractual obligations under
certain contractual obligations:
Payments due by period
----------------------------------------------
(Dollars in thousands) Less
than 1 1-3 3-5 More than
Total year Years Years 5 years
Long-term debt (1) $ 388,647 $ 21,910 $ 143,564 $ 114,522 $ 108,651
Operating leases 3,592 379 729 526 1,958
Time deposits 443,766 211,252 146,428 85,926 160
- -------------------------------------------------------------------------------
Total $ 836,005 $ 233,541 $ 290,721 $ 200,974 $ 110,769
===============================================================================
(1) Amounts reflect the minimum principal payments required under Peoples'
long-term debt agreements.
EFFECTS OF INFLATION ON FINANCIAL STATEMENTS
- --------------------------------------------
Substantially all of Peoples' assets relate to banking and are monetary in
nature. As a result, inflation does not impact Peoples to the same degree as
companies in capital-intensive industries in a replacement cost environment.
During a period of rising prices, a net monetary asset position results in a
loss in purchasing power and conversely a net monetary liability position
results in an increase in purchasing power. The opposite would be true during a
period of decreasing prices. In the banking industry, typically monetary assets
exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation
has had little impact on Peoples' net assets.
FUTURE OUTLOOK
- --------------
In 2003, Peoples' results reflect the difficulty of building upon the success of
2002, especially considering the challenging economic and interest rate
conditions in the markets served. Although these adverse conditions challenged
2003 earnings, management continues to focus on creating long-term value for
stakeholders. Consistent with this long-term focus, management believes the
series of transactions to restructure Peoples' balance sheet, while negatively
impacting 2003 earnings, better positions Peoples for long-term earnings growth.
In the meantime, Peoples strong capital position, coupled with management's
commitment to sound underwriting discipline and asset quality, provides a solid
foundation to withstand significant negative impact of the current business
environment.
Much of Peoples' success in recent years is a reflection of the dedication and
efforts of Peoples' professional, community-minded associate base. Management
understands future success requires Peoples to fairly compensate its associates
through salaries, incentives and other benefits. As with virtually every
company, rising employee benefit expense, particularly medical insurance costs,
have caused management to explore ways, such as the purchase of Business Owned
Life Insurance (or "BOLI"), to offset the increased costs in order to avoid
reducing benefits provided to associates, and to remain competitive for talented
professionals. In mid-February 2004, Peoples purchased an additional $20 million
of BOLI to add to the $23 million of BOLI on Peoples' balance sheet at December
31, 2003. The additional BOLI is expected to produce about $1 million of
additional tax-advantaged non-interest income in 2004 thereby enhancing
operating efficiency.
Controlling operating expenses remains a strategic focus, particularly in this
low interest rate environment. In addition, the rationalization of Peoples'
delivery channels, particularly sales offices, is a constant theme. In 2003,
management decided to sell one office building, consolidate offices in Kentucky
and expanded another in central Ohio. These actions should produce benefits in
2004 and beyond. Assuming other fees remain stable, professional fees should
decrease at the end of the first quarter of 2004, as the relationship with the
consulting firm that assisted Peoples in its implementation of the Overdraft
Privilege program will expire. These expected cost reductions in 2004 should
offset some of the increased expense associated with the CRM/profitability
project, as well as the full-year impact of the Kentucky Bancshares acquisition
and possible increases in state franchise taxes. Management continues to monitor
costs to ensure resources are allocated wisely to projects that produce
long-term benefits.
Since 1968, Peoples Bank has successfully underwritten credit cards and managed
the process internally, which has produced a stable net revenue stream. In
recent years, competition for credit cards has intensified due largely to the
dominance of several larger financial companies and has limited Peoples' ability
to grow its credit card portfolio and net revenue. As a result, Peoples marketed
its credit card as a complementary product offering for client relationships
rather than incur additional and/or unnecessary risk merely for such growth.
However, customers have demanded product enhancements, such as rewards programs,
which forced management to reevaluate how Peoples made available credit card
services. This evaluation resulted in a decision to sell Peoples' credit card
portfolio in late 2003 and form an affiliation with an unaffiliated financial
institution. Earnings in 2004 should benefit from the sale considering the
investment of sale proceeds, cost savings in operations and collections, and the
revenue sharing opportunities Peoples has under the new alliance.
Loan growth is an integral part of Peoples' strategic goals in 2004, as lenders
work to further penetrate stronger markets in central Ohio and western West
Virginia. Management anticipates a portion of loan growth will result from
Peoples retaining a larger percentage of its residential mortgage loans rather
than selling them into the secondary markets. With the credit card portfolio
sale, commercial loans now comprise over half of Peoples' loan portfolio and
consumer loans represent less than 10%. Management expects to evaluate Peoples'
personal lending processes in 2004 to analyze the relative profitability of
underwriting activities in areas such as indirect lending, where volumes have
dropped dramatically due to fierce competition. Meanwhile, Peoples will continue
to aggressively solicit commercial, real estate and home equity credit lines as
a way to further penetrate its markets.
Mergers and acquisitions have been an integral part of Peoples' efforts to
expand its operations and customer base, thereby continuing to provide
opportunities to build client relationships and sell new products and services
in order to enhance Peoples' earnings potential. Peoples' strong regulatory
capital ratios afford management additional growth opportunities through mergers
and acquisitions and market expansion. With a higher level of tangible equity to
total assets, management believes Peoples is positioned to continue its
disciplined acquisition strategy of the past decade and has dedicated more
resources to develop and realize acquisition opportunities in and around
Peoples' markets. While Peoples has completed several traditional banking
acquisitions in recent years, management's evaluation of future acquisitions
will include insurance agency and professional investment services firms.
Ultimately, the assessment of potential acquisitions will emphasize
opportunities to complement Peoples' core competencies and strategic intent.
Peoples remains a service-oriented company with a sales focus that strives to
satisfy clients through a relationship sales process. Through this process,
sales associates work to anticipate, uncover, and solve their clients' every
financial need, from insurance to banking to investment services. In 2004,
management expects earnings catalysts to include continued loan growth, revenue
enhancements from the credit card alliance formed in fourth quarter 2003 and
balance sheet repositioning, BOLI purchases, and some lower operating expenses
from decreased professional fees. Management remains stakeholder-focused with
four key long-term objectives best achieved in more normal economic conditions
and interest rate environments: 7% to 10% operating EPS growth per year, ROE of
15% to 16%, consistent dividend growth and a non-interest leverage ratio better
than 50%.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements in this Form 10-K which are not historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. Words such as
"expects," "believes", "plans", "will", "would", "should", "could" and similar
expressions are intended to identify these forward-looking statements but are
not the exclusive means of identifying such statements. Forward-looking
statements are subject to risks and uncertainties that may cause actual results
to differ materially. Factors that might cause such a difference include, but
are not limited to: (1) competitive pressures among depository institutions
increase significantly; (2) changes in the interest rate environment that impact
interest margins; (3) prepayment speeds, loan sale volumes, chargeoffs and loan
loss provisions; (4) general economic conditions are less favorable than
expected; (5) political developments, wars or other hostilities may disrupt or
increase volatility in securities markets or other economic conditions; (6)
legislative or regulatory changes or actions adversely affect Peoples' business;
(7) changes and trends in the securities markets; (8) a delayed or incomplete
resolution of regulatory issues that could arise; (9) the impact of reputational
risk created by these developments on such matters as business generation and
retention, funding and liquidity; (10) the outcome of regulatory and legal
proceedings and (11) other risk factors relating to the banking industry or
Peoples as detailed from time to time in Peoples' reports filed with the
Securities and Exchange Commission ("SEC").
All forward-looking statements speak only as of the execution date of this Form
10-K and are expressly qualified in their entirety by the cautionary statements.
Although management believes the expectations in these forward-looking
statements are based on reasonable assumptions within the bounds of management's
knowledge of Peoples' business and operations, it is possible that actual
results may differ materially from these projections. Additionally, Peoples
undertakes no obligation to release revisions to these forward-looking
statements to reflect events or circumstances after the date of this Form 10-K.
Copies of documents filed with the SEC are available free of charge at the SEC
website at http://www.sec.gov and/or from Peoples' website.
COMPARISON OF 2002 TO 2001
- --------------------------
Peoples reported net income of $18.8 million in 2002, up 52% from $12.3 million
in 2001. Diluted earnings per share were $2.19 for the year ended December 31,
2002, compared to $1.47 in 2001. In 2002, Peoples' improved earnings resulted
from net interest income growth of $7.1 million, as well as increased
non-interest revenues of $4.6 million. Earnings in 2002 were also positively
impacted by new accounting rules for goodwill, which allowed Peoples to cease
amortization of goodwill effective January 1, 2002, and the repurchase of $7.0
million of trust preferred securities issued by PEBO Capital Trust I at a gain
of $0.6 million. Excluding goodwill amortization, diluted earnings per share
would have been $1.72 in 2001.
Return on average assets was 1.46% in 2002, compared to 1.06% in 2001, while
return on stockholders' equity was 17.69% and 13.60%, for the same periods
respectively. Peoples' enhanced return on equity and return on assets was
largely the result of increased earnings.
Net interest income totaled $47.7 million in 2002, up 18% compared to the prior
year, as total interest income decreased 4% to $83.0 million and interest
expense declined 22% to $35.3 million. Net interest margin was 4.17% in 2002
versus 3.87% in 2001. Peoples' improved net interest margin in 2002 resulted
from lower costs of funds in response to rates dropping throughout 2002 and
remaining at very low levels. The yield on earning assets decreased to 7.16% for
the year ended December 31, 2002, compared to 8.10% for the prior year, while
the cost of interest-bearing liabilities dropped 138 basis points to 3.29%
during the same period.
Peoples' provision for loan losses totaled $4.1 million in 2002, up 52% from
2001's expense of $2.7 million. This increase was largely due to provisions
relating to the first full year's impact of the Overdraft Privilege Program,
which totaled $877,000 in 2002 versus $34,000 the prior year. In addition, the
combination of increased loan volume, less favorable loss experience, and
sluggish economic conditions resulted in the increased provision in 2002. At
December 31, 2002, Peoples' allowance for loan losses as a percentage of total
loans was 1.54%, compared to a year-end 2001 ratio of 1.60%.
Non-interest income totaled $15.3 million in 2002, an increase of 43% compared
to 2001 attributed to higher deposit account service charge income. In 2002,
deposit account service charge income increased $3.4 million (or 93%), to $7.0
million, as a result of higher volumes of overdraft and non-sufficient fund
fees. Peoples' implementation of the Overdraft Privilege Program and other
changes to the assessment of cost recovery fees in late 2001 accounted for the
higher fees in 2002. Another major contributor was a full-year's impact of
revenue from Peoples' BOLI, as income grew to $1.5 million in 2002 from $0.5
million in 2001. Insurance and investment commissions grew 31% to $2.0 million
in 2002 in response to strong fixed annuity sales and additional property and
casualty insurance commissions. Electronic banking revenues, primarily ATM and
debit card fees, increased 22% to $1.7 million. Fiduciary revenues of $2.5
million in 2002 were unchanged compared to 2001.
For the year ended December 31, 2002, non-interest expense totaled $33.0
million, up 7% compared to $30.8 million in 2001. Increased salaries and
benefits and professional fees accounted for the majority of the expense growth
in 2002. Salaries and benefits were $18.1 million versus $15.6 million the prior
year. The addition of several new associates in the First Colony acquisition in
mid-2002 produced higher salaries and benefits. Professional fees grew $0.9
million (or 92%) to $1.9 million and marketing expense grew $0.4 million in 2002
to $1.0 million. These increases were due to costs associated with Peoples Free
Checking and Overdraft Privilege Program. The increase in operating expenses was
partially offset by substantially lower intangible amortization expense as a
result of new accounting rules for goodwill. In 2002, Peoples had no goodwill
amortization versus $1.8 million in 2001. Peoples also experienced modest
increases in occupancy and equipment expense and data processing and software
costs, due in part to acquisitions.
The combination of strong revenues and controlled expense growth enhanced
Peoples' non-interest leverage ratio. In 2002, the non-interest leverage ratio
improved to 45.8% compared to 37.3% in 2001.
Total assets reached $1.39 billion at December 31, 2002, versus $1.19 billion at
year-end 2001. Gross loans remained the largest component of Peoples' earning
assets, totaling $849.8 million at year-end 2002, up $76.9 million from December
31, 2001, with loans of $67 million acquired as part of acquisitions accounting
for most of the growth. Investment securities, Peoples' other significant
earning assets, totaled $412.1 million at year-end 2002, up from $330.4 million
at the prior year-end.
Liabilities totaled $1.25 billion at year-end 2002 compared to $1.10 billion a
year ago, an increase of $147.1 million. Deposits remained Peoples' largest
source of funds and the largest component of total liabilities. During 2002,
deposits grew $141.5 million from $814.4 million at December 31, 2001, as
interest-bearing balances were up $122.2 million to $840.0 million and
non-interest-bearing deposits increased $19.4 million to $115.9 million.
Borrowed funds increased slightly in 2002, totaling $281.1 million at December
31, 2002, versus $277.6 million at year-end 2001.
Stockholders' equity totaled $147.2 million at December 31, 2002, versus $93.9
million at December 31, 2001, an increase of $53.3 million (or 57%). The Common
Stock Offering generated capital of $32.1 million, after offering expenses,
accounting for the majority of this increase. Peoples increased earnings, net of
dividends paid, was also a significant contributor to the higher level of equity
at year-end 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ------------------------------------------------------------------------
Please refer to the section captioned "Interest Rate Sensitivity and Liquidity"
on pages 34 through 36 under Item 7 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The Consolidated Financial Statements and accompanying notes, and the report of
independent auditors, are set forth immediately following Item 9A 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.
- ---------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
- ------------------------------------------------
With the participation of the Chief Executive Officer and the Chief Financial
Officer of Peoples Bancorp Inc. ("Peoples"), Peoples' management has evaluated
the effectiveness of Peoples' disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as of the end of the period covered by this Annual Report on
Form 10-K. Based on that evaluation, Peoples' Chief Executive Officer and Chief
Financial Officer have concluded that:
(a) information required to be disclosed by Peoples in this Annual Report
on Form 10-K would be accumulated and communicated to Peoples'
management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure;
(b) information required to be disclosed by Peoples in this Annual Report
on Form 10-K would be recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms; and
(c) Peoples' disclosure controls and procedures are effective as of the
end of the period covered by this Annual Report on Form 10-K to ensure
that material information relating to Peoples and consolidated
subsidiaries is made know to them, particularly during the period in
which Peoples' periodic reports, including this Annual Report on Form
10-K, are being prepared.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
- ----------------------------------------------------
There were no changes in Peoples' internal controls over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
occurred during Peoples' fiscal quarter ended December 31, 2003, that have
materially affected, or are reasonably likely to materially affect,
Peoples' internal control over financial reporting.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
Assets 2003 2002
Cash and cash equivalents:
Cash and due from banks $ 28,349 $ 34,034
Interest-bearing deposits in other banks 1,077 1,016
$
Federal funds sold 44,000 20,500
- ------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 73,426 55,550
- ------------------------------------------------------------------------------------------------------------------------------
Available-for-sale investment securities, at estimated fair value (amortized
cost of $634,801 in 2003 and $402,048 in 2002) 641,464 412,100
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees and costs 914,998 849,783
Allowance for loan losses (14,575) (13,086)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans 900,423 836,697
- ------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 2,847 1,108
Bank premises and equipment, net 22,155 18,058
Goodwill 41,407 25,504
Other intangible assets 7,298 5,234
Other assets 47,084 40,110
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,736,104 $ 1,394,361
==============================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 133,709 $ 115,907
Interest-bearing 894,821 839,970
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,028,530 955,877
- ------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 16,468 22,083
Federal Home Loan Bank advances 92,300 -
Other short-term borrowings - 17,000
- ------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 108,768 39,083
- ------------------------------------------------------------------------------------------------------------------------------
Long-term borrowings 388,647 212,929
Junior subordinated notes held by subsidiary trusts 29,177 29,090
Accrued expenses and other liabilities 10,102 10,199
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,565,224 1,247,178
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, no par value, 24,000,000 shares authorized, 10,704,938 shares
issued in 2003 and 9,421,222 shares issued in 2002,
including shares in treasury 161,005 129,173
Retained earnings 7,781 12,650
Accumulated comprehensive income, net of deferred income taxes 4,255 6,446
- ------------------------------------------------------------------------------------------------------------------------------
173,041 148,269
Treasury stock, at cost, 101,146 shares in 2003 and 59,351 shares in 2002 (2,161) (1,086)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 170,880 147,183
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,736,104 $ 1,394,361
==============================================================================================================================
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data) Year ended December 31,
2003 2002 2001
Interest Income:
Interest and fees on loans $ 62,159 $ 62,423 $ 65,126
Interest on taxable investment securities 26,429 17,615 18,526
Interest on tax-exempt investment securities 2,882 2,827 1,820
Other interest income 185 103 635
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 91,655 82,968 86,107
- ------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 18,571 22,157 32,081
Interest on short-term borrowings 793 869 3,242
Interest on long-term borrowings 16,344 9,944 7,651
Interest on junior subordinated notes held by subsidiary trusts 2,342 2,346 2,586
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 38,050 35,316 45,560
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 53,605 47,652 40,547
Provision for loan losses 3,601 4,067 2,659
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 50,004 43,585 37,888
- ------------------------------------------------------------------------------------------------------------------------------
Other Income:
Service charges on deposit accounts 8,192 6,976 3,608
Income from fiduciary activities 3,363 2,479 2,508
Electronic banking income 2,055 1,729 1,422
Investment and insurance commissions 1,465 1,966 1,504
Gain on sale of credit card portfolio 1,423 - -
Business owned life insurance 1,403 1,471 481
Mortgage banking income 1,352 157 -
(Loss) gain on securities transactions (1,905) 216 29
Other 190 242 1,098
- ------------------------------------------------------------------------------------------------------------------------------
Total other income 17,538 15,236 10,650
- ------------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Salaries and employee benefits 19,636 18,100 15,590
Loss (gain) on early debt extinguishment 6,858 (631) 128
Net occupancy and equipment 4,561 3,915 3,695
Professional fees 1,938 1,987 1,031
Data processing and software 1,596 1,208 1,107
Amortization of other intangible assets 1,493 646 501
Bankcard costs 1,160 974 1,009
Franchise tax 1,126 745 888
Marketing 1,053 1,006 608
Amortization of goodwill - - 1,846
Other 6,482 5,040 4,423
- ------------------------------------------------------------------------------------------------------------------------------
Total other expenses 45,903 32,990 30,826
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 21,639 25,831 17,712
- ------------------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 4,055 6,190 5,246
Deferred 1,330 889 131
- ------------------------------------------------------------------------------------------------------------------------------
Total income taxes 5,385 7,079 5,377
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 16,254 $ 18,752 $ 12,335
==============================================================================================================================
Earnings per share:
Basic $ 1.56 $ 2.25 $ 1.49
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.52 $ 2.19 $ 1.47
- ------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares outstanding:
Basic 10,433,708 8,329,109 8,277,035
- ------------------------------------------------------------------------------------------------------------------------------
Diluted 10,660,083 8,557,591 8,403,773
- ------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, except Per Share Data) Accumulated
Common Stock Retained Comprehensive Treasury
Shares Amount Earnings (Loss) Income Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 6,679,028 $ 66,364 $ 23,381 (2,983) $ (3,568) $ 83,194
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 12,335 12,335
Unrealized gains on available-for-sale
securities,
net of reclassification adjustment 3,817 3,817
Purchase of treasury stock, 71,057 shares (3,804) (3,804)
Distribution of treasury stock for deferred
compensation plan (reissued 237 treasury 5 5
shares)
10% stock dividend 583,686 12,358 (13,900) 1,542
Exercise of common stock options
(reissued 19,026 treasury shares) (689) 1,166 477
Tax benefit from exercise of stock options 82 82
Issuance of common stock under dividend
reinvestment plan 18,769 329 329
Cash dividends declared of $0.49 per share (4,081) (4,081)
Issuance of common stock to purchase Lower
Salem Commercial Bank 7,783 220 1,280 1,500
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 7,289,266 $ 78,664 $ 17,735 834 $ (3,379) $ 93,854
====================================================================================================================================
Net income 18,752 18,752
Unrealized gains on available-for-sale
securities,
net of reclassification adjustment 5,612 5,612
Purchase of treasury stock, 9,806 shares (244) (244)
Distribution of treasury stock for deferred
compensation plan (reissued 267 treasury 5 5
shares)
10% stock dividend 668,228 18,053 (19,166) 1,113
Exercise of common stock options (issued
88,928
shares - reissued 80,956 treasury shares) 7,972 (257) 1.419 1,162
Tax benefit from exercise of stock options 274 274
Issuance of common stock under dividend
reinvestment plan 15,756 371 371
Issuance of common stock 1,440,000 32,068 32,068
Cash dividends declared of $0.56 per share (4,671) (4,671)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 9,421,222 $ 129,173 $ 12,650 6,446 $ (1,086) $ 147,183
====================================================================================================================================
Net income 16,254 16,254
Unrealized gains on available-for-sale
securities,
net of reclassification adjustment (2,191) (2,191)
Purchase of treasury stock, 157,222 shares (4,092) (4,092)
Distribution of treasury stock for deferred
compensation plan (reissued 304 treasury 6 6
shares)
5% stock dividend 466,127 13,128 (14,286) 1,158
Exercise of common stock options (issued
68,505
shares - reissued 46,274 treasury shares) 22,231 (406) 1,194 788
Tax benefit from exercise of stock options 257 257
Issuance of common stock under dividend
reinvestment plan 16,403 411 411
Issuance of common stock 216,000 4,794 4,794
Issuance of common stock to purchase Kentucky
Bancshares Incorporated (issued 592,648
shares -
reissued 29,693 treasury shares) 562,955 13,648 659 14,307
Cash dividends declared of $0.65 per share (6,837) (6,837)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 10,704,938 $ 161,005 $ 7,781 4,255 $ (2,161) $ 170,880
====================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands) 2003 2002 2001
Net income $ 16,254 $ 18,752 $ 12,335
Other comprehensive income, net of tax:
Unrealized (loss) gain on available-for-sale securities arising in the period, net of (3,429) 5,752 3,836
tax
Less: reclassification adjustment for net securities (losses) gains included in net
income, net of tax (1,238) 140 19
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized (loss) gain on available-for-sale securities arising in the period (2,191) 5,612 3,817
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 14,063 $ 24,364 $ 16,152
==================================================================================================================================
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year ended December 31,
Cash flows from operating activities:
Net income $ 16,254 $ 18,752 $ 12,335
Adjustments to reconcile net income to net cash provided:
Depreciation, amortization, and accretion, net 6,610 3,468 4,551
Provision for loan losses 3,601 4,067 2,659
Business owned life insurance income (1,403) (1,471) (481)
Loss (gain) on securities transactions 1,905 (216) (29)
Loss (gain) on early debt extinguishment 6,858 (631) 128
(Increase) decrease in interest receivable (243) (261) 1,103
Increase (decrease) in interest payable 925 117 (925)
Loans originated for sale (69,182) (8,309) -
Proceeds from sales of loans 68,274 7,288 -
Gain on sale of loans (1,349) (157) -
Deferred income tax expense 1,330 889 131
Deferral of loan origination fees and costs 284 199 150
(Decrease) increase in accrued expenses (2,102) 1,350 977
Other, net (3,534) (929) 2,125
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 28,228 24,156 22,724
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities (622,808) (220,156) (76,904)
Proceeds from sales of available-for-sale securities 153,333 42,258 136
Proceeds from maturities of available-for-sale securities 254,650 111,115 85,696
Net decrease (increase) in loans 6,997 (13,978) (20,936)
Net expenditures for premises and equipment (2,996) (1,813) (2,750)
Net (expenditures) proceeds from sales of other real estate owned (502) 223 153
Acquisitions, net of cash received 12,015 18,648 (162)
Investment in business owned life insurance - - (20,000)
Investment in limited partnership and tax credit funds (1,752) (1,315) (4,400)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (201,063) (65,018) (39,167)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in non-interest-bearing deposits (757) 8,346 10,187
Net (decrease) increase in interest-bearing deposits (39,805) 29,333 29,142
Net increase (decrease) in short-term borrowings 69,685 (22,459) (62,863)
Proceeds from long-term borrowings 249,958 26,100 54,282
Payments on long-term borrowings (84,156) (7,405) (2,996)
Cash dividends paid (5,704) (4,177) (3,593)
Purchase of treasury stock (4,092) (244) (3,804)
Proceeds from issuance of common stock 5,582 33,230 477
Repurchase of Trust Preferred Securities - (6,150) -
Proceeds from issuance of Trust Preferred Securities - 7,000 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 190,711 63,574 20,832
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 17,876 22,712 4,389
Cash and cash equivalents at beginning of year 55,550 32,838 28,449
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 73,426 $ 55,550 $ 32,838
===================================================================================================================================
Supplemental cash flow information:
Interest paid $ 36,054 $ 32,791 $ 38,249
- -----------------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 6,492 $ 5,779 $ 2,985
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Peoples Bancorp Inc. ("Peoples
Bancorp") and Subsidiaries (collectively, "Peoples") conform to accounting
principles generally accepted in the United States ("US GAAP") and to
general practices within the banking industry. Peoples considers all of
its principal activities to be banking related. The preparation of the
financial statements in conformity with US GAAP requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates. Certain reclassifications have been made to prior
period amounts to conform to the 2003 presentation. Such reclassifications
had no impact on net income. All share and per share information has been
adjusted for a 5% stock dividend issued August 29, 2003.
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of Peoples Bancorp Inc. and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash and
due from banks, interest-bearing deposits in other banks, federal funds
sold and other short-term investments, all with original maturities of
ninety days or less.
INVESTMENT SECURITIES: Investment securities are recorded initially at
cost, which includes premiums and discounts if purchased at other than
par or face value. Peoples amortizes premiums and accretes discounts as
an adjustment to interest income over the estimated life of the
security. The cost of investment securities sold, and any resulting
gain or loss, is based on the specific identification method.
Management determines the appropriate classification of investment
securities at the time of purchase. Held-to-maturity securities are
those securities that Peoples has the positive intent and ability to
hold to maturity and are recorded at amortized cost. Available-for-sale
securities are those securities that would be available to be sold in
the future in response to Peoples' liquidity needs, changes in market
interest rates, and asset-liability management strategies, among other
considerations. Available-for-sale securities are reported at fair
value, with unrealized holding gains and losses reported in
stockholders' equity as a separate component of other comprehensive
income, net of applicable deferred income taxes. Presently, Peoples
classifies its entire investment portfolio as available-for-sale.
LOANS: Loans originated that Peoples has the positive intent and
ability to hold to maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an
allowance for loan losses. Net unearned loan fees were $850,000 and
$576,000 at December 31, 2003 and 2002, respectively.
LOANS HELD FOR SALE: Loans originated and intended to be sold in the
secondary market, generally one-to-four family residential loans, are
carried at the lower of cost or fair value determined on an aggregate
basis. Gains and losses on sales of loans held for sale are included in
mortgage banking income.
Peoples enters into interest rate lock commitments with borrowers and
best efforts commitments with investors on loans originated for sale
into the secondary markets. Peoples uses these commitments to manage
the inherent interest rate and pricing risk associated with selling
loans in the secondary market. The interest rate lock commitments
generally terminate once the loan is funded, the lock period expires or
the borrower decides not to contract for the loan. The best efforts
commitments generally terminate once the loan is sold, the commitment
period expires or the borrower decides not to contract for the loan.
These commitments are considered derivatives which are generally
accounted for by recognizing their estimated fair value on the balance
sheet as either a freestanding asset or liability. However, Peoples
does not currently record these derivatives on its balance sheet.
Management has determined these derivatives do not have a material
effect on Peoples' financial position, results of operations or cash
flows.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for management's estimate of the probable credit losses
inherent in the loan portfolio. Management's evaluation of the adequacy
of the allowance for loan loss and the appropriate provision for loan
losses is based upon a quarterly evaluation of the portfolio. This
formal analysis is inherently subjective and requires management to
make significant estimates of factors affecting loan losses, including
specific losses, levels and trends in impaired and nonperforming loans,
historical loan loss experience, current national and local economic
conditions, volume, growth and composition of the portfolio, regulatory
guidance and other relevant factors. Loans deemed to be uncollectible
are charged against the allowance for loan losses, while recoveries of
previously charged-off amounts are credited to the allowance for loan
losses.
The amount of the allowance for the various loan types represents
management's estimate of expected losses from existing loans based upon
specific allocations for individual lending relationships and
historical loss experience for each category of homogeneous loans. The
allowance for loan losses related to impaired loans is based on
discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent
loans. This evaluation requires management to make estimates of the
amounts and timing of future cash flows on impaired loans, which
consists primarily of nonaccrual and restructured loans. While
allocations are made to specific loans and pools of loans, the
allowance is available for all loan losses.
BANK PREMISES AND EQUIPMENT: Bank premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed on the
straight-line method over the estimated useful lives of the related
assets.
OTHER REAL ESTATE OWNED: Other real estate owned, included in other
assets on the consolidated balance sheet, represents properties
acquired by Peoples Bancorp's subsidiary bank, Peoples Bank, National
Association ("Peoples Bank"), in satisfaction of a loan. Real estate is
recorded at the lower of cost or fair value based on appraised value at
the date actually or constructively received, less estimated costs to
sell the property.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of
the cost of an acquisition over the fair value of the net assets
acquired in business combinations. Effective January 1, 2002, Peoples
adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets", ("SFAS 142") and Statement of Financial
Accounting Standards No. 147, "Acquisitions of Certain Financial
Institutions" ("SFAS 147").
Under SFAS 142 and 147, Peoples no longer amortizes goodwill but must
perform an annual assessment for impairment. Peoples' performed the
required goodwill impairment tests and concluded the recorded value of
goodwill was not impaired as of December 31, 2003, based upon the fair
value of the reporting unit. Future events could result in management
determining Peoples' goodwill is impaired, which would result in
Peoples' recording an impairment loss. Any resulting impairment loss
could have a material, adverse impact on Peoples' financial condition
and results of operations.
Prior to January 1, 2002, Peoples amortized goodwill on a straight-line
basis over periods ranging from 10 to 15 years. The following pro forma
information assumes SFAS 142 and SFAS 147 had been in effect for all
periods presented:
(Dollars in Thousands, except Per Share Data) 2003 2002 2001
Reported net income $ 16,254 $ 18,752 $ 12,335
Add back: goodwill amortization, net of tax - - 1,451
- --------------------------------------------------------------------------------
Adjusted net income 16,254 18,752 13,786
================================================================================
Basic earnings per share:
- Reported 1.56 2.25 1.49
- --------------------------------------------------------------------------------
- Adjusted 1.56 2.25 1.67
- --------------------------------------------------------------------------------
Diluted earnings per share:
- Reported 1.52 2.19 1.47
- --------------------------------------------------------------------------------
- Adjusted $ 1.52 $ 2.19 $ 1.64
- --------------------------------------------------------------------------------
Core deposit intangible assets represent the present value of future
net income to be earned from deposits and are amortized over their
estimated lives ranging from 7 to 10 years. Core deposit intangibles,
net of accumulated amortization, totaled $6.7 million and $5.1 million
at December 31, 2003 and 2002, respectively. The estimated aggregate
amortization expense related to core deposit intangible assets for the
each of the next five years is as follows: $1,562,000 in 2004;
$1,336,000 in 2005; $1,078,000 in 2006; $854,000 in 2007; and $684,000
in 2008.
MORTGAGE SERVICING ASSETS: Mortgage servicing assets are recognized for
loan originations when there is a definitive plan to sell the
underlying loan and retain the servicing. Mortgage servicing assets are
reported in other intangible assets and are amortized into mortgage
banking income in proportion to, and over the period of, the estimated
future net servicing income of the underlying mortgage loans. Mortgage
servicing assets are evaluated for impairment based on the fair value
of those rights and recorded at the lower of cost or fair value, with
write-downs reflected in a valuation reserve and recognized through
mortgage banking income. Mortgage servicing assets totaled $549,000 and
$132,000 at December 31, 2003 and 2002, respectively.
INCOME RECOGNITION: Income is recognized by methods that conform to US
GAAP that include general accounting practices within the financial
services industry. 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.
INCOME TAXES: Deferred income taxes (included in other assets) are
provided for temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements at the
statutory tax rate. The components of other comprehensive income
included in the Consolidated Statements of Stockholders' Equity have
been computed based upon a 35% effective tax rate.
EARNINGS PER SHARE: Basic earnings per share are determined by dividing
net income by the weighted-average number of common shares outstanding.
Diluted earnings per share is determined by dividing net income by the
weighted-average number of common shares outstanding increased by the
number of common shares that would be issued assuming the exercise of
stock options. The dilutive effect of stock options approximated
226,375; 228,482 and 126,738 in 2003; 2002 and 2001, respectively.
OPERATING SEGMENTS: Peoples' business activities are currently confined
to one segment which is community banking. As a community banking
entity, Peoples offers its customers a full range of products through
various delivery channels.
DERIVATIVE FINANCIAL INSTRUMENTS: Peoples enters into derivative
transactions principally to protect against the risk of adverse
interest rate movements. As required by Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), as amended, Peoples carries all
derivative financial instruments at fair value on the balance sheet.
SFAS 133 provides special hedge accounting provisions, which permit the
change in the fair value of the hedged item related to the risk being
hedged to be recognized in earnings in the same period and in the same
income statement line as the change in fair value of the derivative.
Derivative financial instruments designated in a hedge relationship to
mitigate exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow
hedges. Cash flow hedges are accounted for by recording the fair value
of the derivative financial instrument on the balance sheet as either a
freestanding asset or liability, with a corresponding offset recorded
in other comprehensive income within stockholders' equity, net of
deferred tax. Amounts are reclassified from other comprehensive income
to the income statement in the period or periods the hedged forecasted
transaction affects earnings.
Derivative gains and losses not effective in hedging the expected cash
flows of the hedged item are recognized immediately in the income
statement. At the hedge's inception and at least quarterly thereafter,
a formal assessment is performed to determine whether changes in cash
flows of the derivative financial instruments have been highly
effective in offsetting changes in cash flows of the hedged items and
whether they are expected to be highly effective in the future. If it
is determined a derivative financial instrument has not been or will
not continue to be highly effective as a hedge, hedge accounting is
discontinued prospectively. SFAS 133 basis adjustments recorded on
hedged assets and liabilities are amortized over the remaining life of
the hedged item no later than when hedge accounting ceases.
GUARANTEES: In November 2002, the Financial Accounting Standards Board
("FASB") issued Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others" ("FIN 45"). FIN 45 expands the disclosures
to be made by a guarantor about its obligations under certain
guarantees and requires the guarantor to recognize a liability for the
obligation assumed under a guarantee. Certain guarantee contracts are
excluded from both the disclosure and recognition requirements of this
interpretation, including, among others, guarantees relating to
employee compensation, residual value guarantees under capital lease
arrangements, commercial letters of credit, loan commitments, and
guarantees of a company's own future performance. Other guarantees are
subject to the disclosure requirements of FIN 45 but not to the
recognition provisions and include, among others, a guarantee accounted
for as a derivative instrument under SFAS 133, a parent's guarantee of
debt owed to a third party by its subsidiary or vice versa, and a
guarantee which is based on performance not price. The disclosure
requirements of FIN 45 were effective for Peoples as of December 31,
2002. Significant guarantees that have been entered into by Peoples are
disclosed in Notes 12. The recognition requirements of FIN 45, which
are applicable to guarantees issued or modified after December 31,
2002, did not have a material impact on Peoples' financial condition or
the results of operations.
STOCK-BASED COMPENSATION: Peoples has various stock option plans, which
are detailed in Note 16. Peoples accounts for stock-based compensation
using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion 25, "Accounting for Stock Issued to
Employees" and has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 148, "Accounting for Stock Based
Compensation".
Under the provisions of the stock option plans, the option price per
share cannot be less than the fair market value of the underlying
common shares on the date of grant. As a result, Peoples does not
recognize any stock-based employee compensation expense in net income.
The following table illustrates the effect on net income and earnings
per share had Peoples applied the fair value recognition provisions of
FASB Statement No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation, assuming the estimated fair value of
the options is amortized to expense over the vesting period:
(Dollars in Thousands, except Per Share Data) 2003 2002 2001
Net Income, as reported $ 16,254 18,752 $ 12,335
Deduct: stock-based compensation expense determined
under fair value based method, net of tax 474 357 240
- --------------------------------------------------------------------------------
Pro forma net income 15,780 18,395 12,095
================================================================================
Basic Earnings Per Share:
- As Reported $ 1.56 2.25 $ 1.49
- --------------------------------------------------------------------------------
- Pro forma 1.51 2.21 1.46
- --------------------------------------------------------------------------------
Diluted Earnings Per Share:
- As Reported $ 1.52 2.19 $ 1.47
- --------------------------------------------------------------------------------
- Pro forma 1.48 2.15 1.44
- --------------------------------------------------------------------------------
The fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
2003 2002 2001
Risk-free interest rate 3.65% 5.50% 3.50%
Dividend yield 2.47% 2.51% 3.16%
Volatility factor of the market price of
parent stock 29.8% 30.8% 26.9%
Weighted average expected life of options 7 years 7 years 6 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Peoples' employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NEW ACCOUNTING PRONOUNCEMENTS: On January 1, 2003, Peoples adopted
Statement of Financial Accounting Standards No. 145, "Rescission of
Statements No. 4, 44 and 64, Amendment of Statement No. 13, and
Technical Corrections" which rescinded Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt." As a result of this
adoption, Peoples reclassified a $631,000 gain on extinguishment of
debt that was classified as an extraordinary item in the first quarter
of 2002 to Other Expense.
Statement of Financial Accounting Standards No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146")
addresses the accounting and reporting for one-time employee
termination benefits, certain contract termination costs, and other
costs associated with exit or disposal activities such as facility
closings or consolidations and employee relocations. The standard is
effective for exit or disposal activities initiated after December 31,
2002. Peoples' adoption of SFAS 146 had no material effect on Peoples'
financial position or results of operations.
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). The objective
of FIN 46 is to provide guidance on how to identify a variable interest
entity and determine when assets, liabilities, non-controlling
interests and results of operations of a variable interest entity need
to be included in a company's consolidated financial statements. FIN 46
applies immediately to variable interest entities created or acquired
after January 31, 2003; otherwise, the requirements of FIN 46 are
effective at the end of the periods ending after December 15, 2003. The
interpretation may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year
restated.
The adoption of FIN 46 did not have a material impact on Peoples'
results of operations, financial position or cash flows with respect to
Peoples' low-income housing tax credit investments. However, the
adoption of FIN 46 caused Peoples to deconsolidate its subsidiary
grantor trusts. As a result, the junior subordinated debentures owned
by the grantor trusts as recorded as liabilities on the balance sheet
and the related expense as interest expense versus non-interest expense
as it had been classified in the past. Peoples adopted the provisions
of FIN 46 on December 31, 2003, as required. Peoples elected to apply
the requirements of FIN 46 retroactively, as permitted, which resulted
in the restatement of prior periods and certain financial ratios,
including net interest margin, efficiency and non-interest leverage
ratios, as follows:
(Dollars in Thousands) First Second Third
Quarter Quarter Quarter
2003 2003 2003
Interest expense, as reported $ 9,134 $ 9,331 $ 8,880
Add: Trust Preferred Costs 585 584 585
- --------------------------------------------------------------------------------
Adjusted interest expense 9,719 9,915 9,465
- --------------------------------------------------------------------------------
Total other expense, as reported 9,704 10,042 10,584
Deduct: Trust Preferred Costs 585 584 585
- --------------------------------------------------------------------------------
Adjusted total other expense 9,119 9,458 9,999
- --------------------------------------------------------------------------------
Net interest margin (fully-tax equivalent):
- Reported 3.87% 3.64% 3.72%
- Adjusted 3.70% 3.48% 3.57%
- --------------------------------------------------------------------------------
Non-interest leverage ratio:
- Reported 41.41% 46.54% 50.24%
- Adjusted 44.12% 49.49% 53.36%
- --------------------------------------------------------------------------------
Efficiency ratio:
- Reported 52.83% 51.10% 49.85%
- Adjusted 51.24% 49.55% 48.35%
(Dollars in Thousands) First Second Third Fourth
Quarter Quarter Quarter Quarter
2002 2002 2002 2002
Interest expense, as reported $ 8,156 $ 7,801 $ 8,545 $ 8,468
Add: Trust Preferred Costs 553 601 621 571
- ----------------------------------------------------------------------------------------
Adjusted interest expense 8,709 8,402 9,166 9,039
- ----------------------------------------------------------------------------------------
Total other expense, as reported 8,677 8,549 9,479 9,261
Deduct: Trust Preferred Costs 553 601 621 571
- ----------------------------------------------------------------------------------------
Adjusted total other expense 8,124 7,948 8,858 8,690
- ----------------------------------------------------------------------------------------
Net interest margin (fully-tax equivalent):
- Reported 4.52% 4.54% 4.42% 4.05%
- ----------------------------------------------------------------------------------------
- Adjusted 4.30% 4.33% 4.22% 3.87%
- ----------------------------------------------------------------------------------------
Non-interest leverage ratio:
- Reported 38.33% 43.06% 43.62% 45.43%
- ----------------------------------------------------------------------------------------
- Adjusted 40.97% 46.36% 47.01% 48.50%
- ----------------------------------------------------------------------------------------
Efficiency ratio:
- Reported 54.24% 50.97% 52.61% 54.13%
- ----------------------------------------------------------------------------------------
- Adjusted 52.58% 49.12% 50.82% 52.50%
- ----------------------------------------------------------------------------------------
Year Ended
December 31,
(Dollars in Thousands) 2002 2001
Interest expense, as reported $ 32,970 $ 42,974
Add: Trust Preferred Costs 2,346 2,586
- --------------------------------------------------------------------------
Adjusted interest expense 35,316 45,560
- --------------------------------------------------------------------------
Total other expense, as reported 35,967 33,412
Deduct: Trust Preferred Costs 2,346 2,586
- --------------------------------------------------------------------------
Adjusted total other expense 33,621 30,826
- --------------------------------------------------------------------------
Net interest margin (fully-tax equivalent):
- Reported 4.37% 4.11%
- Adjusted 4.17% 3.87%
- --------------------------------------------------------------------------
Non-interest leverage ratio:
- Reported 42.73% 34.53%
- Adjusted 45.77% 37.29%
- --------------------------------------------------------------------------
Efficiency ratio:
- Reported 52.95% 56.53%
- Adjusted 51.24% 54.50%
On April 30, 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of FASB Statement No. 133 on Derivative
and Hedging Transactions" ("SFAS 149"). SFAS 49 clarifies provisions of
SFAS 133 and amends certain other existing pronouncements with the
objective of establishing more consistent reporting of contracts that
are derivatives in their entirety or that contain embedded derivatives
that warrant separate accounting. SFAS 149 was effective for contracts
entered into or modified after June 30, 2003, except for provisions
that have been effective for fiscal quarters that began prior to June
15, 2003. Management has evaluated the impact of this statement and has
determined that there is no material effect on Peoples' financial
position or results of operations.
On May 15, 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 modifies the accounting
for certain financial instruments that issuers could classify as
equity. Under SFAS 150, those instruments with characteristics of both
liabilities and equity must be classified as liabilities in statements
of financial position, with the corresponding payments to holders of
the instruments recognized as interest expense.
Initially, SFAS 150 was effective immediately for financial instruments
entered into or modified after May 31, 2003, and at the beginning of
the first interim period beginning after June 15, 2003, for any
pre-existing financial instruments still outstanding. However, the FASB
made significant changes with regard to the effective date and
transition provisions on November 7, 2003, pursuant to Staff Position
No. 150-3, including the indefinite deferral of the application of the
measurement and recognition guidance in SFAS 150 for certain mandatory
redeemable non-controlling interests. Management has evaluated the
impact of this statement, including the subsequent deferral, and has
determined that there is no material effect on Peoples' financial
position or results of operations due to the adoption of FIN 46.
On December 23, 2003, the FASB issued a revision of Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132
improves the financial statement disclosures for defined benefit plans
by requiring companies to provide more details about their plan assets,
benefit obligations, cash flows, benefit costs and other relevant
information. In addition to the expanded annual disclosures, SFAS 132
requires companies to disclose the various elements of pension and
other postretirement benefit costs on a quarterly basis in interim
financial statements. The annual disclosure requirements are effective
for fiscal years ending after December 15, 2003. The interim disclosure
requirements are effective for interim periods beginning after December
15, 2003. Peoples has adopted the reporting requirements SFAS 132 for
the year ended December 31, 2003.
In December 2003, the FASB cleared for issuance Accounting Standards
Executive Committee Statement of Position 03-3, Accounting for Certain
Loans or Debt Securities Acquired in a Transfer ("SOP 03-3"). SOP 03-3
is effective for loans acquired in fiscal years beginning after
December 15, 2004, with early adoption encouraged. SOP 03-3 addresses
accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in
loans or debt securities ("loans") acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It
includes loans acquired in business combinations and would preclude the
carryover of an acquired entities allowance for loan loss. SOP 03-3
does not apply to loans originated by the entity.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Peoples used the following methods and assumptions in estimating its fair
value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance
sheet for these captions approximate their fair values.
INVESTMENT SECURITIES: Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices of
comparable securities.
LOANS: The fair value of performing variable rate loans that reprice
frequently and performing demand loans, with no significant change in
credit risk, is based on carrying value. The fair value of performing
loans is estimated using discounted cash flow analyses and interest
rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
The fair value of significant nonperforming loans is based on either
the estimated fair value of underlying collateral or estimated cash
flows, discounted at a rate commensurate with the risk. Assumptions
regarding credit risk, cash flows, and discount rates are determined
using available market information and specific borrower information.
DEPOSITS: The carrying amounts of demand deposits, savings accounts and
certain money market deposits approximate their fair values. The fair
value of fixed maturity certificates of deposit is estimated using a
discounted cash flow calculation based on current rates offered for
deposits of similar remaining maturities.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
Federal Home Loan Bank advances, and securities sold overnight under
repurchase agreements approximate their fair values. The fair value of
term national market repurchase agreements is estimated using a
discounted cash flow calculation based on rates currently available to
Peoples for repurchase agreements with similar terms.
LONG-TERM BORROWINGS: The fair value of long-term borrowings is
estimated using discounted cash flow analysis based on rates currently
available to Peoples for borrowings with similar terms.
JUNIOR SUBORDINATED NOTES: The fair value of the junior subordinated
notes is estimated using discounted cash flow analysis based on current
market rates of securities with similar risk and remaining maturity.
INTEREST RATE CONTRACTS: Fair values for interest rate contracts are
based on quoted market prices.
FINANCIAL INSTRUMENTS: The fair value of loan commitments and standby
letters of credit is estimated using the fees currently charged to
enter into similar agreements considering the remaining terms of the
agreements and the counter parties' credit standing. The estimated fair
value of these commitments approximates their carrying value.
The estimated fair values of Peoples' financial instruments at December
31 are as follows:
2003 2002
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 73,426 $ 73,426 $ 55,550 $ 55,550
Investment securities 641,464 641,464 412,100 412,100
Loans 900,423 917,113 837,805 867,463
Financial liabilities:
Deposits $ 1,028,530 $ 1,023,612 $ 955,877 $ 970,833
Short-term borrowings 108,768 108,764 48,183 48,397
Long-term borrowings 388,647 400,125 203,829 209,326
Junior subordinated notes 29,177 33,813 29,090 28,678
Other financial instruments:
Interest rate contracts $ 403 $ 403 $ 485 $ 485
Bank premises and equipment, customer relationships, deposit base,
banking center networks, and other information required to compute
Peoples' aggregate fair value are not included in the above
information. Accordingly, the above fair values are not intended to
represent the aggregate fair value of Peoples.
3. INVESTMENT SECURITIES:
The following tables present the amortized costs, gross unrealized gains
and losses and estimated fair value of securities available-for-sale at
December 31. The portfolio contains no single issue (excluding U.S.
government and U.S. agency securities) that exceeds 10% of stockholders'
equity.
Gross Gross
(Dollars in Thousands) Amortized Unrealized Unrealized Estimated
2003 Cost Gains Losses Fair Value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 65,968 519 $ (1,046) $ 65,441
Obligations of states and political subdivisions 62,625 3,663 - 66,288
Mortgage-backed securities 447,897 2,796 (3,352) 447,341
Other securities 58,311 4,994 (911) 62,394
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 634,801 $ 11,972 $ (5,309) $ 641,464
- -------------------------------------------------------------------------------------------------------------
2002
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 28,005 731 $ (89) $ 28,647
Obligations of states and political subdivisions 64,707 3,100 (1) 67,806
Mortgage-backed securities 254,854 5,098 (141) 259,811
Other securities 54,482 2,615 (1,261) 55,836
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 402,048 $ 11,544 $ (1,492) $ 412,100
- -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Gross Gross
Amortized Unrealized Unrealized Estimated
2001 Cost Gains Losses Fair Value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 65,023 1,299 $ (28) $ 66,294
Obligations of states and political subdivisions 49,547 483 (468) 49,562
Mortgage-backed securities 164,557 2,171 (459) 166,269
Other securities 49,954 1,953 (3,668) 48,239
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 329,081 $ 5,906 $ (4,623) $ 330,364
=============================================================================================================
In 2003, 2002 and 2001, gross gains of $580,000, $328,000 and $30,000 and
gross losses of $2,485,000, $112,000 and $1,000 were realized,
respectively. At December 31, 2003 and 2002, investment securities having
a carrying value of $437,080,000 and $171,118,000, respectively, were
pledged to secure public and trust department deposits and repurchase
agreements in accordance with federal and state requirements.
The following table presents a summary of available-for-sale investment
securities which had an unrealized loss at December 31, 2003:
Obligations of Obligations
U.S. Treasury of states
and and Mortgage-
government political backed Other
(Dollars in Thousands) agencies subdivisions securities securities Total
Less than 12 months
Estimated fair value $ 27,925 $ 111 $ 198,194 $ 4,530 $ 230,760
Unrealized loss 770 - 3,343 471 4,584
12 months or more
Estimated fair value $ 1,828 $ - $ 1,095 $ 6,831 $ 9,754
Unrealized loss 276 - 9 440 725
Total
Estimated fair value $ 29,753 $ 111 $ 199,289 $ 11,361 $ 240,514
Unrealized loss 1,046 - 3,352 911 5,309
The unrealized losses reported for mortgage-backed securities relate to
securities issued by U.S. government sponsored entities and private
institutions, while the unrealized losses reported for other securities
relate primarily to trust preferred securities issued by commercial banks.
In both cases, the unrealized losses were largely attributable to the
sustained low interest rate environment. Management systematically
evaluates investment securities for other-than-temporary declines in fair
value on a quarterly basis. This analysis requires management to consider
various factors, which include duration and magnitude of the decline in
value, the financial condition of the issuer, and Peoples' ability and
intent to continue holding the investment for a period of time sufficient
to allow for any anticipated recovery in market value. Since Peoples has
the both the intent and ability to hold the securities contained in the
above table for a time necessary to recover the amortized cost, management
does not believe any individual unrealized loss at December 31, 2003,
represents an other-than-temporary impairment.
The following table presents the amortized costs, fair value and weighted
average yield of securities by maturity at December 31, 2003. The
estimated maturities presented in the tables below may differ from the
contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties. Rates are
calculated on a taxable equivalent basis using a 35% federal income tax
rate.
Obligations
Obligations of of states Total
U.S. Treasury and Mortgage- available-
and government political backed Other for-sale
(Dollars in Thousands) agencies subdivisions securities securities securities
Within one year
Amortized cost $ 14,267 $ 2,814 $ 84 $ - $ 17,165
Fair value 14,288 2,862 86 - 17,236
Average yield 4.19 % 5.67 % 7.00 % - % 4.45 %
1 to 5 years
Amortized cost $ 19,396 $ 29,555 $ 672 $ 18,458 $ 68,081
Fair value 19,674 31,243 706 19,331 70,954
Average yield 3.76 % 4.80 % 7.52 % 6.48 % 4.99 %
5 to 10 years
Amortized cost $ 172 $ 28,461 $ 14,870 $ 8,828 $ 52,331
Fair value 174 30,272 15,166 9,009 54,621
Average yield 3.56 % 4.70 % 6.42 % 9.08 % 5.93 %
Over 10 years
Amortized cost $ 32,133 $ 1,795 $ 432,271 $ 31,025 $ 497,224
Fair value 31,305 1,911 431,383 34,054 498,653
Average yield 2.60 % 5.70 % 4.54 % 5.73 % 4.49 %
-----------------------------------------------------------------------------------------------------------------
Total amortized cost $ 65,968 $ 62,625 $ 447,897 $ 58,311 $ 634,801
Total fair value $ 65,441 $ 66,288 $ 447,341 $ 62,394 $ 641,464
Total average yield 3.29 % 4.82 % 4.61 % 6.47 % 4.66 %
=================================================================================================================
4. LOANS:
Peoples Bank originates various types of loans, including commercial,
financial and agricultural loans ("commercial loans"), real estate loans
and consumer loans, focusing primarily on lending opportunities in central
and southeastern Ohio, northwestern West Virginia, and northeastern
Kentucky markets. Loans are comprised of the following at December 31:
(Dollars in Thousands) 2003 2002
Commercial, mortgage $ 380,372 $ 289,597
Commercial, other 131,697 102,931
Real estate, construction 21,056 16,231
Real estate, mortgage 301,726 330,840
Consumer 79,926 103,635
Credit card 221 6,549
-----------------------------------------------------------------------
Total loans $ 914,998 $ 849,783
=======================================================================
Excluded from the loan balances above are $2.8 million and $1.1 million of
real estate loans originated and held for sale in the secondary market at
December 31, 2003 and 2002, respectively. Peoples Bank has pledged certain
loans secured by 1-4 family residential mortgages and multifamily
residential mortgages under a blanket collateral agreement to secure
borrowings from the Federal Home Loan Bank as discussed in Note 8. At
December 31, 2003, the amount of such pledged loans totaled $277.6 million.
In December 2003, Peoples entered into an agreement to sell its existing
credit card portfolio. Preliminary settlement of the sale occurred on
December 31, 2003, which resulted in Peoples recognizing a pre-tax gain of
$1.2 million, net of expenses. The credit card loan balances at December
31, 2003, represent nonqualifying balances not included in the preliminary
settlement of the sale and are subject to final settlement. Final
settlement of the sale was completed in the first quarter of 2004.
Peoples' loans consist of credits to borrowers spread over broad range of
industrial classifications, with no loans to foreign entities. Peoples'
largest concentration of commercial loans consist of credits to lodging and
lodging related companies, which totaled $65,268,000 and $43,889,000 at
December 31, 2003 and 2002, respectively. Loans to assisted living
facilities and nursing homes also represent a significant portion of
Peoples' commercial loans, totaling $57,692,000 and $52,660,000 at December
31, 2003 and 2002, respectively. These credits were subjected to Peoples'
normal commercial underwriting standards and did not present more than the
normal amount of risk assumed in other lending areas. Peoples does not
extend credit to any single borrower or group of related borrowers in
excess of the legal lending limit of its subsidiary bank.
In the normal course of its business, Peoples Bank has granted loans to
executive officers and directors of Peoples and to their affliliates.
Related party loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable loans with unrelated persons and did not involve more than
normal risk of collectibility. The following is an analysis of activity of
related party loans for the year ended December 31, 2003:
(Dollars in Thousands)
Balance, January 1, 2003 $ 24,347
New loans and disbursements 3,822
Repayments (3,255)
No longer executive officer or director (5,461)
Other changes 37
----------------------------------------------------------------
Balance, December 31, 2003 $ 19,490
================================================================
Changes in the allowance for loan losses for each of the three years in
the period ended December 31, 2003, were as follows:
(Dollars in Thousands) 2003 2002 2001
Balance, beginning of year $ 13,086 $ 12,357 $ 10,930
Charge-offs (3,786) (4,328) (2,638)
Recoveries 1,101 686 439
- ---------------------------------------------------------------------------
Net charge-offs (2,685) (3,642) (2,199)
Provision for loan losses 3,601 4,067 2,659
Allowance for loan losses acquired 573 304 967
- ---------------------------------------------------------------------------
Balance, end of year $ 14,575 $ 13,086 $ 12,357
===========================================================================
At December 31, 2003, impaired loans totaled $20,025,000, including
$8,427,000 of impaired loans for which the related allowance for loan
losses was $3,787,000. Impaired loans totaled $9,642,000 at December 31,
2002, including $1,719,000 of impaired loans for which the related
allowance for loan losses was $493,000. Peoples' average investment in
impaired loans was $13,686,000 and $8,732,000 in 2003 and 2002,
respectively.
5. BANK PREMISES AND EQUIPMENT:
The major categories of bank premises and equipment and accumulated
depreciation are summarized as follows at December 31:
(Dollars in Thousands) 2003 2002
Land $ 4,930 $ 3,643
Building and premises 23,609 20,922
Furniture, fixtures and equipment 13,846 12,415
- -----------------------------------------------------------------------
42,385 36,980
Accumulated depreciation (20,230) (18,922)
- -----------------------------------------------------------------------
Net book value $ 22,155 $ 18,058
=======================================================================
Peoples depreciates its building and premises and furniture, fixtures and
equipment over estimated useful lives ranging from 5 to 40 years and 2 to
10 years, respectively. Depreciation expense was $2,240,000, $2,025,000
and $1,943,000, in 2003, 2002 and 2001, respectively.
Peoples leases certain banking facilities and equipment under various
agreements with original terms providing for fixed monthly payments over
periods ranging from two to ten years. The future minimum payments under
noncancelable operating leases with initial terms of one year or more
consisted of the following at December 31, 2003:
(Dollars in Thousands)
2004 $ 379
2005 382
2006 347
2007 286
2008 240
Thereafter 1,958
------------------------------------------
Total $ 3,592
==========================================
Rent expense was $349,000, $286,000 and $288,000 in 2003, 2002 and 2001,
respectively.
6. DEPOSITS:
Included in interest-bearing deposits are various time deposit products.
The maturities of time deposits for each of the next five years and
thereafter are as follows: $211,252,000 in 2004; $128,604,000 in 2005;
$17,824,000 in 2006; $68,217,000 in 2007; $17,709,000 in 2008; and
$160,000 thereafter.
Deposits from related parties approximated $11.4 million and $14.8 million
at December 31, 2003 and 2002, respectively.
7. SHORT-TERM BORROWINGS:
Peoples utilizes various short-term borrowings as sources of funds,
including Federal Home Loan Bank ("FHLB") advances and national market
repurchase agreements. The FHLB advances are collateralized by residential
mortgage loans and investment securities. Peoples' national market
repurchase agreements are with high quality, financially secure financial
service companies. Other short-term borrowings represent a short-term loan
from an unrelated financial institution to fund an acquisition. Short-term
borrowings are summarized as follows:
(Dollars in Thousands) National
Federal Retail Market Other
Funds Repurchase Repurchase FHLB Short-Term
Purchased Agreements Agreements Advances Borrowings
2003
Ending balance $ - $ 16,468 $ - $ 92,300 $ -
Average balance 1 20,151 - 26,900 7,545
Highest month end balance - 24,342 - 92,300 17,000
Interest expense - YTD - 175 - 400 218
Weighted-average interest rate:
-------------------------------
End of year - % 0.53 % - % 1.23 % - %
During the year 1.20 0.87 - 1.49 2.89
2002
Ending balance $ - $ 22,083 $ - $ - $ 17,000
Average balance 28 23,351 - 12,626 9,408
Highest month end balance - 26,693 - 49,000 17,000
Interest expense - YTD 1 318 - 234 316
Weighted-average interest rate:
-------------------------------
End of year - % 0.93 % - % - % 2.91 %
During the year 3.57 1.36 - 1.85 3.36
2001
Ending balance $ - $ 23,752 $ - $ 32,300 $ -
Average balance 16 25,630 12,612 33,247 -
Highest month end balance 10 28,950 25,800 56,586 -
Interest expense - YTD 1 911 666 1,665 -
Weighted-average interest rate:
-------------------------------
End of year - % 1.95 % - % 2.05 % - %
During the year 6.25 3.55 5.28 5.01 -
8. LONG-TERM BORROWINGS:
Long-term borrowings consisted of the following at December 31:
(Dollars in Thousands) 2003 2002
Term note payable, at LIBOR (parent company) $ 17,000 $ 1,500
National market repurchase agreements, bearing interest
at rates ranging from 2.09% to 3.65% 216,250 9,100
Federal Home Loan Bank convertible rate advances, bearing
interest at rates ranging from 3.20% to 5.63% 107,000 170,000
Federal Home Loan Bank non-amortizing, fixed rate advances,
bearing interest at 4.48% 5,000 5,000
Federal Home Loan Bank amortizing, fixed rate advances,
bearing interest at rates ranging from 2.01% to 5.00% 43,397 27,329
- -----------------------------------------------------------------------------------------
Total long-term borrowings $ 388,647 $ 212,929
=========================================================================================
Peoples' national market repurchase agreements consist of agreements with
high quality, financially secure financial service companies and
maturities ranging from 2 to 5 years.
The FHLB advances consist of various borrowings with maturities ranging
from 10 to 20 years and generally may not be repaid prior to maturity
without a penalty. The rate on the convertible rate advances are fixed
from initial periods ranging from one to four years, depending on the
specific advance. After the initial fixed rate period, the FHLB has the
option to convert each advance to a LIBOR based, variable rate advance. If
the FHLB exercises its option, Peoples may repay the advance in whole or
in part on the conversion date or any subsequent repricing date without a
prepayment fee. At all other times, early repayment of any convertible
rate advance would result in Peoples incurring a prepayment penalty.
All FHLB advances, including short-term advances, are collateralized by
Peoples Bank's real estate mortgage portfolio and other bank assets.
Peoples' borrowing capacity with the FHLB is based on the amount of FHLB
common stock owned by Peoples Bank and the amount of collateral pledged.
The most restrictive requirement of the debt agreement requires Peoples to
provide real estate mortgage loans as collateral in an amount not less
than 125% of advances outstanding.
On December 16, 2003, Peoples prepaid $63 million of FHLB convertible rate
advances, with a weighted-average rate of 5.14% and weighted-average
remaining maturity of 5.4 years, at a pre-tax loss of $6.8 million, or
$0.46 cents per share after-tax, for prepayment penalties. Peoples
reborrowed the funds using a short-term, FHLB repurchase agreement
advance.
The aggregate minimum annual retirements of long-term borrowings in the
next five years and thereafter are as follows:
(Dollars in Thousands)
2004 $ 21,910
2005 87,711
2006 55,853
2007 57,999
2008 56,523
Thereafter 108,651
--------------------------------------------
Total $ 388,647
============================================
9. JUNIOR SUBORDINATED NOTES HELD BY SUBSIDIARY TRUSTS:
Peoples Bancorp has two statutory business trusts (the "Trusts") that were
formed for the purpose of issuing or participating in pools of
corporation-obligated mandatorily redeemable capital securities (the
"Capital Securities" or "Trust Preferred Securities"), with 100% of the
common equity in the Trusts owned by Peoples Bancorp. The proceeds from
the Capital Securities and common equity were invested in junior
subordinated debt securities of Peoples Bancorp (the "Debentures").
The Debentures held by the trusts are the sole assets of those trusts.
Distributions on the Capital Securities are payable semiannually at a rate
per annum equal to the interest rate being earned by the Trusts on the
Debentures and are recorded as interest expense by Peoples. Since the
Trusts are variable interest entities and Peoples Bancorp is not deemed to
be the primary beneficiary, the Trusts are not included in Peoples'
consolidated financial statements. As a result, Peoples includes the
Debentures as a separate category of long-term debt on the Consolidated
Balance Sheets entitled "Junior Subordinated Notes Held by Subsidiary
Trusts" and the related expense as interest expense on the Consolidated
Statements of Income.
Under the provisions of the subordinated debt, Peoples Bancorp has the
right to defer payment of interest on the subordinated debt at any time,
or from time to time, for periods not exceeding five years. If interest
payments on the subordinated debt are deferred, the dividends on the
Capital Securities are also deferred. Interest on the subordinated debt is
cumulative. Peoples Bancorp has entered into agreements which, taken
collectively, fully and unconditionally guarantee the Capital Securities
subject to the terms of each of the guarantees.
The Capital Securities are subject to mandatory redemption, in whole or in
part, upon repayment of the debentures. The Debentures held by PEBO
Capital Trust I are first redeemable, in whole or in part, by Peoples
Bancorp on May 1, 2009. The Debentures held by PEBO Capital Trust II are
first redeemable, in whole or in part, by Peoples Bancorp on April 22,
2007. The Capital Securities issued by the Trusts are summarized as
follows at December 31:
(Dollars in thousands) 2003 2002
Capital securities of PEBO Capital Trust I, 8.62%, due May 1, 2029,
net of unamortized issuance costs $ 22,345 $ 22,310
Capital securities of PEBO Capital Trust II, 3-month LIBOR + 3.70%,
due April 22, 2032, 6,832 6,780
- ----------------------------------------------------------------------------------------------------
Total capital securities 29,177 29,090
====================================================================================================
Total capital securities qualifying for Tier 1 capital 29,177 29,090
====================================================================================================
The Trust Preferred Securities currently qualify as Tier 1 capital for
regulatory capital purposes. In July 2003, the Board of Governors of the
Federal Reserve System (the "Federal Reserve") issued a supervisory letter
instructing bank holding companies to continue to include the Trust
Preferred Securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve
intends to review the regulatory implications of any accounting treatment
changes and, if necessary or warranted, provide further appropriate
guidance. At December 31, 2003, the banking regulatory agencies had not
issued any guidance changing the treatment of Trust Preferred Securities
for regulatory capital purposes due to FIN 46. However, there can be no
assurance the Federal Reserve and other banking regulatory agencies will
continue to allow institutions to include trust preferred securities in
Tier 1 capital for regulatory purposes.
10. EMPLOYEE BENEFIT PLANS:
Peoples sponsors a noncontributory defined benefit pension plan which
covers substantially all employees. The plan provides benefits based on an
employee's years of service and compensation. Peoples also has a
contributory benefit postretirement plan for former employees who were
retired as of December 31, 1992. The plan provides health and life
insurance benefits. Peoples' policy is to fund the cost of the benefits as
they are incurred.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period
ending December 31, 2003, and a statement of the funded status as of
December 31, 2003 and 2002:
Pension Postretirement
Benefits Benefits
(Dollars in Thousands) 2003 2002 2003 2002
Change in benefit obligation:
Obligation at January 1 $ 10,106 $ 8,262 $ 685 $ 696
Service cost 708 551 - -
Interest cost 688 606 40 48
Plan participants' contributions - - 117 114
Actuarial loss (gain) 1,206 1,010 (80) 1
Benefit payments (711) (377) (146) (174)
Acquisition 13 - - -
Increase due to plan changes - 54 - -
- ---------------------------------------------------------------------------------------------------------------
Obligation at December 31 12,010 10,106 616 685
- ---------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation at December 31 9,062 7,539 - -
- ---------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 7,765 7,614 - -
Actual return on plan assets 1,753 (472) - -
Employer contributions 1,500 1,000 29 60
Plan participants' contributions - - 117 114
Benefit payments (711) (377) (146) (174)
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 10,307 7,765 - -
- ---------------------------------------------------------------------------------------------------------------
Funded status:
Funded status at December 31 (1,702) (2,341) (616) (685)
Unrecognized transition obligation - - - -
Unrecognized prior-service cost 44 38 22 33
Unrecognized net gain 4,004 3,767 73 156
- ---------------------------------------------------------------------------------------------------------------
Net amount recognized 2,346 1,464 (521) (496)
- ---------------------------------------------------------------------------------------------------------------
Amounts recognized in Consolidated Balance Sheets:
Prepaid benefit costs 2,346 1,464 - -
Accrued benefit liability - - (521) (496)
- ---------------------------------------------------------------------------------------------------------------
Net amount recognized $ 2,346 $ 1,464 $ (521) $ (496)
- ---------------------------------------------------------------------------------------------------------------
The assumptions used in the measurement of Peoples' benefit obligation at
December 31 are shown in the following table:
Pension Postretirement
Benefits Benefits
2003 2002 2003 2002
Discount rate 6.25 % 6.75 % 6.25 % 6.75 %
Expected return on plan assets 8.50 8.50 n/a n/a
Rate of compensation increase 4.00 4.00 n/a n/a
The following table provides the components of net periodic benefit cost
for the plans:
Pension Benefits Postretirement Benefits
(Dollars in Thousands) 2003 2002 2001 2003 2002 2001
Service cost $ 708 $ 550 $ 464 $ - $ - $ -
Interest cost 688 606 553 40 48 57
Expected return on plan assets (861) (769) (689) - - -
Amortization of transition asset - (8) (8) - - -
Amortization of prior service cost (6) (9) (9) 11 - -
Amortization of net loss 89 - - 4 17 16
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 618 $ 370 $ 311 $ 55 $ 65 $ 73
- -----------------------------------------------------------------------------------------------------------
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed
for 2002, grading down 1% per year to an ultimate rate of 5%. The health
care trend rate assumption does not have a significant effect on the
contributory defined benefit postretirement plan; therefore, a one
percentage point change in the trend rate is not material in the
determination of the accumulated postretirement benefit obligation or the
ongoing expense.
Plan Assets: Peoples' pension plan actual weighted-average asset
allocations by asset category at December 31 are as follows:
2003 2002
Equity securities 70 % 58 %
Debt securities 25 38
Other 5 4
-------------------------------------------------------
Total 100 % 100 %
=======================================================
Peoples' investment strategy, as established by the Retirement Plan
Committee, is to invest assets per the following target allocations:
Equity securities of 60-75%; Debt securities of 24-39%; and Other of 1%.
The assets will be reallocated periodically to meet the above target
allocations. The investment policy will be reviewed periodically, under
the advisement of a certified investment advisor, to determine if the
policy should be changed.
CASH FLOWS: Peoples anticipates contributing $700,000 to its pension plan
in 2004; however, actual contributions are made at the discretion of the
Retirement Plan Committee and Peoples' Board of Directors. Estimated
future benefit payments, which reflect expected future service, for the
years ending December 31 are as follows: $242,000 in 2004; $340,000 in
2005; $351,000 in 2006; $375,000 in 2007; $425,000 in 2008 and $3,825,000
in 2009 through 2013.
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 $480,000, $413,000 and $356,000 for
the years ended December 31, 2003, 2002 and 2001, respectively.
11. FEDERAL INCOME TAXES:
The effective federal income tax rate in the Consolidated Statement of
Income is less than the statutory corporate tax rate due to the following:
Year ended December 31
2003 2002 2001
Statutory corporate tax rate 35.0 % 35.0 % 35.0 %
Differences in rate resulting from:
Interest on obligations of state and political (4.5) (3.6) (3.4)
subdivisions
Investments in low-income housing tax credit funds (3.4) (2.2) (3.0)
Business owned life insurance (2.3) (2.0) (1.0)
Other, net 0.1 0.2 2.8
- -------------------------------------------------------------------------------------------------------
Effective federal income tax rate 24.9 % 27.4 % 30.4 %
=======================================================================================================
The significant components of Peoples' deferred tax assets and liabilities
consisted of the following at December 31:
(Dollars in Thousands) 2003 2002
Deferred tax assets:
Allowance for loan losses $ 5,667 $ 4,987
Accrued employee benefits 101 318
Deferred loan fees and costs 308 222
Other 330 216
- ---------------------------------------------------------------------
Total deferred tax assets 6,406 5,743
- ---------------------------------------------------------------------
Deferred tax liabilities:
Bank premises and equipment 770 (24)
Deferred Income 2,886 1,502
Investments 2,129 1,910
Available-for-sale securities 2,260 3,470
Other 154 88
- ---------------------------------------------------------------------
Total deferred tax liabilities 8,199 6,946
- ---------------------------------------------------------------------
Net deferred tax liability $ (1,793) $ (1,203)
=====================================================================
The related federal income tax (benefit) expense on securities
transactions approximated $(667,000) in 2003, $77,000 in 2002 and $10,000
in 2001.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the normal course of business, Peoples is party to financial
instruments with off-balance sheet risk necessary to meet the financing
needs of customers and to manage its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, standby letters of credit, and interest rate caps. The instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the Consolidated Balance Sheets. The
contract or notional amounts of these instruments express the extent of
involvement Peoples has in these financial instruments.
LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT: Loan commitments are made
to accommodate the financial needs of Peoples' customers. Standby letters
of credit are instruments issued by Peoples Bank guaranteeing the
beneficiary payment by the bank in the event of default by Peoples Bank's
customer in the non-performance of an obligation or service. Historically,
most loan commitments and standby letters of credit expire unused.
Peoples' exposure to credit loss in the event of nonperformance by the
counter-party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amount of those
instruments. Peoples uses the same underwriting standards in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained is based on management's
credit evaluation of the customer. Collateral held varies, but may include
accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
The total amounts of loan commitments and standby letters of credit are
summarized as follows at December 31:
Contractual Amount
(Dollars in Thousands) 2003 2002
Loan commitments $ 115,685 $ 103,462
Standby letters of credit 20,928 7,632
Unused credit card limits - 21,216
INTEREST RATE CONTRACTS: Peoples has entered into interest rate contracts
with unaffiliated financial institutions as a means of managing the risk
of changing interest rates. These interest rate contracts subject Peoples
to the risk that the counter-parties may fail to perform. In order to
minimize such risk, Peoples deals only with high-quality, financially
secure financial institutions.
At December 31, 2002, Peoples held an option to initiate an interest rate
swap beginning on October 19, 2002, and continuing on a quarterly basis
until its expiration in July 2009. Under the terms of the interest rate
swap, Peoples would receive LIBOR based variable rate payments and pay
fixed rate payments to a counter-party, computed on a notional amount of
$17 million. Peoples entered into this interest rate contract to hedge a
$17 million long-term, fixed rate FHLB advance, which could convert to a
variable rate at the FHLB's discretion. At December 31, 2003, Peoples had
not exercised its option under this interest rate contract since the
advance remained a fixed rate advance.
At December 31, 2003, Peoples also had in place an interest rate cap
contract with a notional amount of $10 million. Under this interest rate
cap contract, Peoples is entitled to receive cash from counter-parties for
interest rate differentials between an index rate and a specified rate,
computed on the notional amount. The contract expires in September 2004.
OTHER: Peoples also has commitments to make additional capital
contributions in low income housing projects. Such commitments
approximated $8.9 million at December 31, 2003, and $5.7 million at
December 31, 2002. The maximum aggregate amounts Peoples could be required
to make for each of the next five years are as follows: $4.1 million in
2004; $1.0 million in 2005; $0.7 million in 2006 and 2007; $0.6 million in
2008.
At December 31, 2003, Peoples had provided credit recourse on
approximately $0.9 million of business credit card loans sold its credit
card portfolio to an unrelated third party during the fourth quarter of
2003. As a result, Peoples is required to reimburse the third party in the
event of any customer default, pursuant to the credit recourse provided.
The maximum amount of credit risk in the event of nonperformance by the
underlying borrowers is equivalent to the total loan amount of $4.0
million.
13. REGULATORY MATTERS:
The following is a summary of certain regulatory matters affecting Peoples
Bancorp and its subsidiaries:
LIMITS ON DIVIDENDS: The primary source of funds for the dividends paid by
Peoples Bancorp is dividends received from Peoples Bank. The payment of
dividends by Peoples Bank is subject to various banking regulations. The
most restrictive provision requires regulatory approval if dividends
declared in any calendar year exceed the total net profits of that year
plus the retained net profits of the preceding two years. At December 31,
2003, Peoples Bank's retained net profits available for distribution to
Peoples Bancorp as dividends without regulatory approval were
approximately $90,000. During 2004, approximately $9.9 million of Peoples
Bank's retained net profits will be available for distribution to Peoples
Bancorp as dividends without regulatory approval in addition to the total
retained net profits of 2004 through the dividend date.
CAPITAL REQUIREMENTS: Peoples and Peoples Bank are subject to various
regulatory capital requirements administered by the banking regulatory
agencies. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Peoples and its banking subsidiary must meet
specific capital guidelines that involve quantitative measures of each
entity's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Peoples' and Peoples
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Peoples and Peoples Bank to maintain minimum amounts and ratios of
total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to average assets
(as defined). Peoples and Peoples Bank met all capital adequacy
requirements at December 31, 2003.
As of December 31, 2003, the most recent notifications from the banking
regulatory agencies categorized Peoples and Peoples Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, Peoples and Peoples Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table below. There are no conditions or events
since these notifications that management believes have changed Peoples'
or its banking subsidiary's category.
Peoples' and Peoples Bank's, actual capital amounts and ratios as of
December 31 are also presented in the following table:
(Dollars in Thousands) Actual For Capital Adequacy To Be Well Capitalized
2003 Amount Ratio Amount Ratio Amount Ratio
Total Capital (1)
Peoples $ 161,780 15.4 % $ 83,864 8.0 % $ 104,830 10.0 %
Peoples Bank 151,782 14.6 83,023 8.0 103,779 10.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 (2)
Peoples 147,591 14.1 41,932 4.0 62,898 6.0
Peoples Bank 138,790 13.4 41,512 4.0 62,267 6.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 Leverage (3)
Peoples 147,591 8.7 68,021 4.0 85,027 5.0
Peoples Bank 138,790 8.2 67,548 4.0 84,435 5.0
------------------------------------------------------------------------------------------------------------------------
2002
Total Capital (1)
Peoples $ 151,454 16.8 % $ 72,165 8.0 % $ 90,206 10.0 %
Peoples Bank 122,380 13.7 71,561 8.0 89,451 10.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 (2)
Peoples 139,208 15.4 36,082 4.0 54,124 6.0
Peoples Bank 111,135 12.4 35,780 4.0 53,671 6.0
------------------------------------------------------------------------------------------------------------------------
Tier 1 Leverage (3)
Peoples 139,208 10.6 52,710 4.0 65,887 5.0
Peoples Bank 111,135 8.3 53,420 4.0 66,775 5.0
------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Ratio represents total capital to net risk-weighted assets.
(2) Ratio represents Tier 1 capital to net risk-weighted assets.
(3) Ratio represents Tier 1 capital to average assets.
</FN>
14. FEDERAL RESERVE REQUIREMENTS:
Peoples Bank is required to maintain a certain level of reserves
consisting of non-interest-bearing balances with the Federal Reserve Bank
and cash on hand. The reserve requirement is calculated on a percentage of
total deposit liabilities and averaged $10.8 million for the year ended
December 31, 2003.
15. ACQUISITIONS:
On May 9, 2003, Peoples Bancorp completed the acquisition of Kentucky
Bancshares Incorporated ("Kentucky Bancshares"), the holding company of
Kentucky Bank & Trust, for total consideration of $29.1 million ($14.8
million in cash and $14.3 million in Peoples Bancorp's common shares).
This acquisition was accounted for under the purchase method of
accounting. As part of the purchase price allocation, Peoples recorded
goodwill of $13.6 million, core deposit intangible of $3.5 million and
trust relationship intangible of $1.0 million.
The acquisition of Kentucky Bancshares included the merger of Kentucky
Bank & Trust into Peoples Bank. As a result, the five former Kentucky Bank
& Trust offices in the northeastern Kentucky communities of Ashland,
Russell, Flatwoods, Greenup and South Shore now operate as full-service
financial service offices of Peoples Bank. In this transaction, Peoples
acquired loans of $75 million, deposits of $113 million, and trust assets
under management of $182 million, as well as three ATMs.
On October 4, 2002, Peoples Bank completed the acquisition of a banking
center in Malta, Ohio, from Century National Bank of Zanesville, Ohio, a
subsidiary of Park National Corporation of Newark, Ohio. As part of the
transaction, Peoples Bank acquired deposits of $6.3 million and loans of
$1.6 million. Effective October 4, Peoples discontinued banking operations
at the Malta office located at 50 West Third Street, with the Malta office
customers being served by Peoples Bank's full-service office in
neighboring McConnelsville.
On June 14, 2002, Peoples completed the acquisition of First Colony
Bancshares, Inc. ("First Colony"), the holding company of The Guernsey
Bank, f.s.b, a federal savings bank based in Cambridge, Ohio. As part of
the transaction, Peoples acquired full-service offices in Cambridge (two
offices), Byesville, and Quaker City in Ohio's Guernsey County and
Flushing in Ohio's Belmont County, involving total loans of $65 million,
total deposits of $98 million and total retail overnight repurchase
agreements of $6 million. Peoples did not acquire Guernsey Bank's
full-service banking office or loan production office in Worthington,
Ohio, which continue to serve its customers and retained "The Guernsey
Bank" name under a new banking charter.
The balances and operations of the acquired businesses are included in
Peoples' financial statements from the date of acquisition and do not
materially impact Peoples' financial position, results of operations or
cash flows for any period presented. In addition, Peoples made several
other acquisitions in prior years accounted for under the purchase method
of accounting. The purchase prices of these acquisitions were allocated to
the identifiable tangible and intangible assets acquired based upon their
fair value at the acquisition date.
16. STOCK OPTIONS:
Peoples' stock option plans provide for the granting of both incentive
stock options and non-qualified stock options covering up to 1,614,339
common shares. Under the provisions of the plans, the option price per
share shall not be less than the fair market value of the common shares on
the date of grant of an option; therefore, no compensation expense is
recognized. Recent options granted to employees vest over periods ranging
from three to six years. Options granted to directors of Peoples Bancorp
and Peoples Bank vest in one year. All granted options to both employees
and directors expire ten years from the date of grant.
The following summarizes Peoples' stock options as of December 31, 2003,
2002 and 2001, and the changes for the years then ended:
2003 2002 2001
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price Of Shares Price of Shares Price
--------------------------- --------------------------- ---------------------------
Outstanding at January 1 622,978 $ 15.09 640,144 $ 13.48 750,097 $ 12.92
Granted 120,103 22.57 86,389 23.52 7,392 15.13
Exercised 72,957 11.82 102,528 12.15 86,176 7.69
Canceled 8,896 17.20 1,027 13.86 31,169 16.16
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 661,228 16.78 622,978 15.09 640,144 13.48
======================================================================================================================
Exercisable at December 31 346,426 14.20 356,757 13.20 392,433 12.30
======================================================================================================================
Weighted average estimated fair value of
options granted during the year $ 7.01 $ 7.57 $ 3.31
======================================================================================================================
The following summarizes information concerning Peoples' stock options
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Options Remaining Average Average
Range of Shares Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------------------------------------------- -------------------------------
$ 7.89 to $13.48 155,632 1.6 years $ 9.52 155,632 $ 9.52
$13.58 to $15.86 172,640 5.8 years 14.38 57,695 14.63
$16.10 to $22.06 149,960 4.7 years 19.20 120,969 19.01
$22.32 to $28.57 182,996 8.8 years 23.22 12,130 24.31
17. PARENT COMPANY ONLY FINANCIAL INFORMATION:
Condensed Balance Sheets December 31,
(Dollars in Thousands) 2003 2002
Assets:
Cash $ 50 $ 50
Interest-bearing deposits in subsidiary bank 13,898 40,618
Receivable from subsidiary bank 421 209
Investment securities: Available-for-sale (amortized cost of $1,858 and
$1,981 at December 31, 2003 and 2002, respectively) 5,086 4,034
Investments in subsidiaries:
Bank 160,150 132,729
Non-bank 39,662 19,784
Other assets 4,840 1,535
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 224,107 $ 198,959
===============================================================================================================
Liabilities:
Accrued expenses and other liabilities $ 5,131 $ 2,990
Dividends payable 1,919 1,196
Short-term borrowings - 17,000
Long-term borrowings 17,000 1,500
Junior subordinated debentures held by subsidiary trusts 29,177 29,090
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 53,227 51,776
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity 170,880 147,183
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 224,107 $ 198,959
===============================================================================================================
Consolidated Statements of Income Year ended December 31,
(Dollars in Thousands) 2003 2002 2001
Income:
Dividends from subsidiary bank $ 17,750 $ 10,200 $ 29,125
Interest 221 389 182
Dividends from other subsidiaries - - 80
Rental income from subsidiaries 55 55 55
Other 41 831 911
- --------------------------------------------------------------------------------------------------------------------------
Total income 18,067 11,475 30,353
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Interest expense on junior subordinated notes held by subsidiary trusts 2,429 2,420 2,621
Intercompany management fees 576 520 536
Interest 474 361 101
Other 677 458 633
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 4,156 3,759 3,891
- --------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and equity in undistributed earnings of
(excess dividends from) subsidiaries 13,911 7,716 26,462
Applicable income tax benefit (1,285) (700) (509)
Equity in undistributed earnings of (excess dividends from) subsidiaries 1,058 10,336 (14,636)
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 16,254 $ 18,752 $ 12,335
==========================================================================================================================
Statements of Cash Flows Year ended December 31,
(Dollars in Thousands) 2003 2002 2001
Cash flows from operating activities:
Net income $ 16,254 $ 18,752 $ 12,335
Adjustment to reconcile net income to cash provided by operations:
Amortization and depreciation 35 48 206
(Equity in undistributed earnings of) excess dividends from subsidiaries (1,058) (10,336) 14,636
Other, net (1,264) 920 478
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,967 9,384 27,655
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Purchases of) proceeds from sales of investment securities (1,603) 1,102 (2,000)
Net (expenditures for) proceeds from sale of premises and equipment - (18) 13
Investment in subsidiaries (17,475) (21,521) (14,634)
Acquisitions of financial institutions (15,683) - -
Investment in tax credit funds - (1,315) (400)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (34,761) (21,752) (17,021)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of Trust Preferred Securities - 7,000 -
Repurchase of Trust Preferred Securities - (6,150) -
(Payments on) proceeds from short-term borrowings (17,000) 17,000 -
Net proceeds from (payments on) long-term borrowings 15,500 (300) (300)
Purchase of treasury stock (4,092) (244) (3,804)
Change in receivable from subsidiary (212) 1,570 (468)
Proceeds from issuance of common stock 5,582 33,230 477
Cash dividends paid (5,704) (4,177) (3,593)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (5,926) 47,929 (7,688)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (26,720) 35,561 2,946
Cash and cash equivalents at the beginning of the year 40,668 5,107 2,161
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 13,948 $ 40,668 $ 5,107
==========================================================================================================================
Supplemental cash flow information:
Interest paid $ 486 $ 331 $ 97
- --------------------------------------------------------------------------------------------------------------------------
18. SUMMARIZED QUARTERLY INFORMATION (UNAUDITED):
A summary of selected quarterly financial information for 2003 and 2002 follows:
(Dollars in Thousands, except Per Share Data) 2003
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $ 22,777 $ 23,492 $ 23,550 $ 21,836
Interest expense 9,719 9,915 9,465 8,951
Net interest income 13,058 13,577 14,085 12,885
Provision for possible loan losses 831 935 920 915
Net gain (loss) on securities transactions 2 (29) 2 (1,880)
Net (loss) gain on asset disposals (2) (236) 9 (32)
Gain on sale of credit card portfolio - - - 1,423
Mortgage banking income 230 337 400 385
Other income 3,705 4,210 4,641 4,373
Intangible asset amortization 201 271 551 470
Long-term debt prepayment penalties - 41 - 6,817
Other expenses 8,918 9,146 9,448 10,040
Income tax expense (benefit) 2,029 2,027 2,278 (949)
Net income 5,014 5,439 5,940 (139)
Earnings per share:
Basic 0.50 0.52 0.56 (0.01)
Diluted $ 0.49 $ 0.51 $ 0.55 $ (0.01)
Weighted average shares outstanding:
Basic 10,056,615 10,400,673 10,653,999 10,614,989
Diluted 10,255,705 10,598,820 10,896,461 10,874,876
2002
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $ 20,315 $ 20,312 $ 21,683 $ 20,658
Interest expense 8,709 8,402 9,166 9,039
Net interest income 11,606 11,910 12,517 11,619
Provision for possible loan losses 861 980 1,182 1,044
Net gain on securities transactions 51 - 51 114
Net loss on asset disposals (7) (7) - (58)
Gain on early debt extinguishment 631 - - -
Gain on sale of loans - - 22 135
Other income 3,283 3,633 4,044 3,975
Intangible asset amortization 111 112 208 215
Other expenses 8,013 7,836 8,650 8,475
Income tax expense 1,886 1,845 1,798 1,551
Net income 4,693 4,763 4,796 4,500
Earnings per share:
Basic 0.57 0.58 0.58 0.53
Diluted $ 0.56 $ 0.56 $ 0.56 $ 0.51
Weighted average shares outstanding:
Basic 8,233,685 8,267,485 8,291,465 8,522,526
Diluted 8,378,434 8,507,149 8,557,503 8,762,246
Report of Independent Auditors
To the Stockholders and Board of Directors:
We have audited the accompanying consolidated balance sheets of Peoples
Bancorp Inc. and Subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of Peoples' management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Peoples Bancorp Inc. and Subsidiaries at December 31, 2003 and
2002, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003,
in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 1 to the consolidated financial statements, in 2002
Peoples changed its method of accounting for goodwill.
/s/ ERNST & YOUNG LLP
Charleston, West Virginia
February 19, 2004
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
The information concerning directors of Peoples Bancorp Inc. ("Peoples")
required by Item 401 of Regulation S-K is included in the section captioned
"ELECTION OF DIRECTORS" on pages 6 through 8 of the definitive Proxy Statement
of Peoples Bancorp Inc. relating to the Annual Meeting of Shareholders to be
held April 8, 2004 ("Peoples' Definitive Proxy Statement"), which section is
incorporated herein by reference.
The information regarding Peoples' executive officers required by Item 401 is
included under Part I of this Form 10-K in the section captioned "Executive
Officers Of The Registrant".
The information required by Item 405 of Regulation S-K is included under the
caption "SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on pages 5 and
6 of Peoples' Definitive Proxy Statement, which section is incorporated herein
by reference.
The Board of Directors of Peoples has adopted charters for each of the Audit
Committee, the Compensation Committee and the Governance and Nominating
Committee.
In accordance with the requirements of Rule 4350(n) of The NASDAQ Stock Market,
Inc. Corporate Governance Rules, the Board of Directors of Peoples has adopted a
Code of Ethics covering the directors, officers and employees of Peoples and its
affiliates, including, without limitation, the principal executive officer, the
principal financial officer and the controller (principal accounting officer) of
Peoples. Peoples intends to disclose the following on the "Corporate Governance
and Code of Ethics and Ethics Hotline" page of its Internet website within five
business days following their occurrence:
(A) the nature of any amendment to a provision of its Code of Ethics that
(i) applies to the principal executive officer, principal financial
officer, principal accounting officer or controller of Peoples
Bancorp Inc., or persons performing similar functions,
(ii) relates to any element of the code of ethics definition set forth
in Item 406(b) of SEC Regulation S-K, and
(iii)is not a technical, administrative or other non-substantive
amendment; and
(B) a description (including the nature of the waiver, the name of the
person to whom the waiver was granted and the date of the waiver) of
any waiver, including an implicit waiver, from a provision of the Code
of Ethics to the principal executive officer, principal financial
officer, principal accounting officer or controller of Peoples Bancorp
Inc., or persons performing similar functions, that relates to one or
more of the items set forth in Item 406(b) of SEC Regulation S-K.
Each of the Code of Ethics, the Audit Committee Charter, the Governance and
Nominating Committee Charter and the Compensation Committee Charter is posted on
the "Corporate Governance and Code of Ethics and Ethics Hotline" page of Peoples
Bancorp Inc.'s 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 section captioned
"Compensation of Executive Officers and Directors" on pages 15 through 18 of
Peoples' Definitive Proxy Statement, which section is 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 is included in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" on pages 2
through 5 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, 2003, with respect to compensation plans
under which common shares of Peoples are authorized for issuance to directors,
officers or employees in exchange for consideration in the form of goods or
services. These compensation plans include:
(i) the Peoples Bancorp Inc. Amended and Restated 1993 Stock Option
Plan (the "1993 Plan");
(ii) the Peoples Bancorp Inc. 1995 Stock Option Plan (the "1995
Plan");
(iii)the Peoples Bancorp Inc. 1998 Stock Option Plan (the "1998
Plan");
(iv) the Peoples Bancorp Inc. 2002 Stock Option Plan (the "2002
Plan"); and
(v) the Peoples Bancorp Inc. Deferred Compensation Plan for Directors
of Peoples Bancorp Inc. and Subsidiaries (the "Deferred
Compensation Plan").
All of these compensation plans were approved by the shareholders of Peoples.
(c)
(a) Number of common
Number of shares remaining
common shares (b) available for future
to be issued upon Weighted- issuance under equity
exercise of average exercise compensation plans
outstanding price of (excluding common
options, warrants outstanding shares reflected
Plan Category and rights options in column (a))
Equity compensation plans approved by
shareholders 728,954(1) $16.78(2) 404,590(3)
Equity compensations plans not approved
by shareholders - - -
- --------------------------------------------------------------------------------------------------------
Total 728,954 $16.78 404,590
========================================================================================================
<FN>
(1) Includes an aggregate of 661,228 common shares issuable upon exercise
of options granted under the 1993 Plan, the 1995 Plan, the 1998 Plan
and the 2002 Plan and 67,726 common shares credited to participants'
accounts under the Deferred Compensation Plan.
(2) Represents weighted-average exercise price of outstanding options
under the 1993 Plan, the 1995 Plan, the 1998 Plan and the 2002 Plan.
(3) Includes 34,016 common shares, 22,807 common shares, 309,414 common
shares and 38,353 common shares remaining available for issuance under
the 1995 Plan, the 1998 Plan, the 2002 Plan and the Deferred
Compensation Plan, respectively, at December 31, 2003. No common
shares were available for issuance under the 1993 Plan at December 31,
2003.
</FN>
Additional information regarding Peoples' stock option plans can be found in
Note 16 of the Notes to the Consolidated Financial Statements included in Item 8
of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The information required by this Item 13 is included in the section captioned
"Transactions Involving Management" on page 6 of Peoples' Definitive Proxy
Statement, which section is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -------------------------------------------------
The information required by this Item 14 is included in the section captioned
"AUDIT COMMITTEE MATTERS" on pages 22 through 25 of Peoples' Definitive Proxy
Statement, which section is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
(a)(1) Financial Statements:
---------------------
The following consolidated financial statements of Peoples Bancorp
Inc. and subsidiaries are included in Item 8:
Page
Report of Independent Auditors (Ernst & Young LLP) 69
Consolidated Balance Sheets as of December 31, 2003 and 2002 42
Consolidated Statements of Income for each of the three years ended December 31, 2003 43
Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 2003 44
Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2003 44
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2003 45
Notes to the Consolidated Financial Statements 46
Peoples Bancorp Inc. (Parent Company Only Financial Information are included in Note 17 of the
Notes to the Consolidated Financial Statements) 66
(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. For a list of such exhibits, see "Exhibit Index" beginning
at page 74. 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) Reports on Form 8-K:
--------------------
Peoples filed the following reports on Form 8-K during the fiscal
quarter ended December 31, 2003:
1) Filed October 16, 2003 - News release announcing Peoples'
earnings for the third quarter of 2003.
2) Filed November 14, 2003 - Reporting a change in
classification of Peoples' trust preferred securities.
3) Filed November 17, 2003 - News release announcing the
declaration of a $0.18 per share quarterly dividend by
Peoples' Board of Directors.
4) Filed December 12, 2003 - Reporting a change in independent
auditors for the Peoples Bancorp Inc. Retirement Savings
Plan.
5) Filed December 15, 2003 - News release announcing Peoples
had committed to prepay select long-term advances from the
Federal Home Loan Bank.
6) Filed December 17, 2003 - News release announcing the
adoption of a resolution by Peoples' Board of Directors
authorizing the repurchase of 425,000 common shares in 2004.
7) Filed December 29, 2003, as amended - News release
announcing the recent restructuring of Peoples' investment
portfolio.
8) Filed December 31, 2003 - News release announcing the sale
of Peoples' credit card portfolio and the signing of a joint
marketing alliance agreement.
(c) Exhibits
--------
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Exhibit Index" beginning
at page 74.
(d) Financial Statement Schedules
-----------------------------
None.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEOPLES BANCORP INC.
Date: February 26, 2004 By: /s/ ROBERT E. EVANS
------------------------------
Robert E. Evans, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ ROBERT E. EVANS Chairman of the Board, President, February 26, 2004
- -------------------------------- Chief Executive Officer and Director --------------------
Robert E. Evans
/s/ CARL L. BAKER, JR. Director February 26, 2004
- -------------------------------- --------------------
Carl L. Baker, Jr.
/s/ MARK F. BRADLEY Chief Operating Officer and Director February 26, 2004
- -------------------------------- --------------------
Mark F. Bradley
/s/ GEORGE W. BROUGHTON Director February 26, 2004
- -------------------------------- --------------------
George W. Broughton
/s/ FRANK L. CHRISTY Director February 26, 2004
- -------------------------------- --------------------
Frank L. Christy
/s/ WILFORD D. DIMIT Director February 26, 2004
- -------------------------------- --------------------
Wilford D. Dimit
/s/ ROBERT W. PRICE Director February 26, 2004
- -------------------------------- --------------------
Robert W. Price
/s/ THEODORE P. SAUBER Director February 26, 2004
- -------------------------------- --------------------
Theodore P. Sauber
/s/ PAUL T. THEISEN Director February 26, 2004
- -------------------------------- --------------------
Paul T. Theisen
/s/ THOMAS C. VADAKIN Director February 26, 2004
- -------------------------------- --------------------
Thomas C. Vadakin
/s/ JOSEPH H. WESEL Vice Chairman of the Board and Director February 26, 2004
- -------------------------------- --------------------
Joseph H. Wesel
/s/ THOMAS J. WOLF Director February 26, 2004
- -------------------------------- --------------------
Thomas J. Wolf
/s/ JOHN W. CONLON Chief Financial Officer and Treasurer February 26, 2004
- -------------------------------- (Principal Financial Officer) --------------------
John W. Conlon
/s/ DONALD J. LANDERS, JR. Controller and Chief Accounting Officer February 26, 2004
- -------------------------------- (Principal Accounting Officer) --------------------
Donald J. Landers, Jr.
EXHIBIT INDEX
PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2003
Exhibit
Number Description Exhibit Location
- ----------- ------------------------------------------------------- -----------------------------------------------------
2(a) Agreement and Plan of Merger, dated as of November 29, Incorporated herein by reference to Exhibit 2.1 to
2002, by and between Peoples Bancorp Inc. ("Peoples") Pre-Effective Amendment No. 1 to Peoples' Registration
and Kentucky Bancshares Incorporated, as amended March Statement on Form S-4 (Registration No. 333-103670)
6, 2003 (excluding schedules). filed March 27, 2003.
2(b) Plan of Merger, dated as of March 24, 2003, by and Incorporated herein by reference to Exhibit 2.2 to
between Peoples and Kentucky Bancshares Incorporated. Pre-Effective Amendment No. 1 to Peoples'
Registration Statement on Form S-4 (Registration
No. 333-103670) filed March 27, 2003.
3(a)(1) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit 3(a)
Inc. (as filed with the Ohio Secretary of State on to Peoples' Registration Statement on Form 8-B
May 3, 1993). filed July 20, 1993 (File No. 0-16772).
3(a)(2) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit
Incorporation of Peoples Bancorp Inc. (as filed with 3(a)(2) to Peoples' Annual Report on Form 10-K
the Ohio Secretary of State on April 22, 1994). for fiscal year ended December 31, 1997 (File No.
0-16772)(the "1997 Form 10-K").
3(a)(3) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit
Incorporation of Peoples Bancorp Inc. (as filed with 3(a)(3) to Peoples' 1997 Form 10-K.
the Ohio Secretary of State on April 9, 1996).
3(a)(4) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a)
Incorporation of Peoples Bancorp Inc. (as filed with to Peoples' Quarterly Report on Form 10-Q for the
the Ohio Secretary of State on April 23, 2003). quarterly period ended March 31, 2003 (File No.
0-16772)("Peoples' March 31, 2003 Form 10-Q")
3(a)(5) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit
Inc. (reflecting amendments through April 9, 1996) 3(a)(4) to Peoples' 1997 Form 10-K.
[For SEC reporting compliance purposes only - not
filed with Ohio Secretary of State].
3(b)(1) Code of Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b)
to Peoples' Registration Statement on Form 8-B
filed July 20, 1993 (File No. 0-16772).
3(b)(2) Certified Resolutions Regarding Adoption of Incorporated herein by reference to Exhibit 3(c)
Amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, to Peoples' March 31, 2003 Form 10-Q.
1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code
of Regulations of Peoples Bancorp Inc. by shareholders
on April 10, 2003
3(b)(3) Code of Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(d)
(reflecting amendments through April 10, 2003) [For to Peoples' March 31, 2003 Form 10-Q.
SEC reporting compliance purposes only.]
4(a) Agreement to furnish instruments and agreements Filed herewith.
for defining rights of holders of long-term debt.
4(b) Indenture, dated as of April 20, 1999, between Incorporated herein by reference to Exhibit 4.1 to
Peoples Bancorp Inc. and Wilmington Trust Company, the Registration Statement on Form S-4
as Debenture Trustee, relating to Junior (Registration No. 333-81251) filed on June 22,
Subordinated Deferrable Interest Debentures. 1999 by Peoples Bancorp Inc. and PEBO Capital
Trust I (the "1999 Form S-4").
4(c) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.5 to
Capital Trust I, dated as of April 20, 1999. the 1999 Form S-4.
4(d) Series B Capital Securities Guarantee Agreement, Incorporated herein by reference to Exhibit 4 (i)
dated as of September 23, 1999, between Peoples of Peoples' Annual Report on Form 10-K for the
Bancorp Inc. and Wilmington Trust Company, as fiscal year ended December 31, 1999. (File No.
Guarantee Trustee, relating to Series B 8.62% 0-16772).
Capital Securities.
4(e) Indenture, dated as of April 10, 2002, between Incorporated herein by reference to Exhibit 4.1 to
Peoples Bancorp Inc. and Wilmington Trust Company, Peoples' Quarterly Report on Form 10-Q for the
as Trustee, relating to Floating Rate Junior quarterly period ended September 30, 2002, filed
Subordinated Debt Securities due 2032. November 7, 2002 (File No. 0-16772) ("Peoples'
September 30, 2002 Form 10-Q").
4(f) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.2 to
Capital Trust II, dated as of April 10, 2002. Peoples' September 30, 2002 Form 10-Q.
4(g) Guarantee Agreement, dated as of April 10, 2002, by Incorporated herein by reference to Exhibit 4.3 to
and between Peoples Bancorp Inc. and Wilmington Peoples' September 30, 2002 Form 10-Q.
Trust Company, as Guarantee Trustee, relating to
Floating Rate MMCaps(SM) Capital Securities.
10(a) Deferred Compensation Agreement, dated November 16, Incorporated herein by reference to Exhibit 6(g)
1976, between Robert E. Evans and The Peoples to Registration Statement No. 2-68524 on Form S-14
Banking and Trust Company (now known as Peoples of Peoples Bancorp Inc., a Delaware corporation,
Bank, National Association), as amended March 13, Peoples' predecessor.
1979.*
10(b)(1) Peoples Bancorp Inc. Deferred Compensation Plan for Incorporated herein by reference to Exhibit 10(a)
Directors of Peoples Bancorp Inc. and Subsidiaries of Peoples' Registration Statement on Form S-8
(Amended and Restated Effective January 2, 1998.)* filed December 31, 1997 (Registration No.
333-43629).
10(b)(2) Amendment No. 1 to Peoples Bancorp Inc. Deferred Incorporated herein by reference to Exhibit 10(b)
Compensation Plan for Directors of Peoples Bancorp of Peoples' Post-Effective Amendment No. 1 to Form Inc.
and Subsidiaries effective January 2, 1998.* S-8 filed September 4, 1998 (Registration No.
333-43629).
10(c) Summary of the Performance Compensation Plan for Filed herewith.
Peoples Bancorp Inc. effective for calendar years
beginning on or after January 1, 2002.*
10(d) Peoples Bancorp Inc. Amended and Restated 1993 Stock Incorporated herein by reference to Exhibit 4 of
Option Plan.* Peoples' Registration Statement on Form S-8 filed
August 25, 1993 (Registration Statement No.
33-67878).
10(e) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(g)
with grant of non-qualified stock options under of Peoples' Annual Report on Form 10-K for fiscal
Peoples Bancorp Inc. Amended and Restated 1993 Stock year ended December 31, 1995 (File No. 0-16772)
Option Plan.* ("Peoples' 1995 Form 10-K").
10(f) Form of Stock Option Agreement, dated May 20, 1993, Incorporated herein by reference to Exhibit 10(h)
used in connection with grant of incentive stock of Peoples' 1995 Form 10-K.
options under Peoples Bancorp Inc. Amended and
Restated 1993 Stock Option Plan.*
10(g) Form of Stock Option Agreement dated November 10, Incorporated herein by reference to Exhibit 10(i)
1994, used in connection with grant of incentive of Peoples' 1995 Form 10-K.
stock options under Peoples Bancorp Inc. Amended and
Restated 1993 Stock Option Plan.*
10(h) Peoples Bancorp Inc. 1995 Stock Option Plan.* Incorporated herein by reference to Exhibit 4 of
Peoples' Form S-8 filed May 24, 1995 (Registration
Statement No. 33-59569).
10(i) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(k)
with grant of non-qualified stock options to of Peoples' 1995 Form 10-K.
non-employee directors of Peoples under Peoples
Bancorp Inc. 1995 Stock Option Plan.*
10(j) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(l)
with grant of non-qualified stock options to of Peoples' 1995 Form 10-K.
non-employee directors of Peoples' subsidiaries
under Peoples Bancorp Inc. 1995 Stock Option Plan.*
10(k) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(m)
with grant of incentive stock options under Peoples of Peoples' Annual Report on Form 10-K for fiscal
Bancorp Inc. 1995 Stock Option Plan.* year ended December 31, 1998 (File No. 0-16772)
("Peoples' 1998 Form 10-K").
10(l) Peoples Bancorp Inc. 1998 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of
Peoples' Form S-8 filed September 4, 1998
(Registration Statement No. 333-62935).
10(m) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o)
with grant of non-qualified stock options to of Peoples' 1998 Form 10-K.
non-employee directors of Peoples under Peoples
Bancorp Inc. 1998 Stock Option Plan.*
10(n) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(p)
with grant of non-qualified stock options to of Peoples' 1998 Form 10-K.
consultants/advisors of Peoples under Peoples
Bancorp Inc. 1998 Stock Option Plan.*
10(o) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o)
with grant of incentive stock options under Peoples of Peoples' Annual Report on Form 10-K for the
Bancorp Inc. 1998 Stock Option Plan.* fiscal year ended December 31, 1999(File No.0-16772).
10(p) Peoples Bancorp Inc. 2002 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of
Peoples' Form S-8 filed April 15, 2002
(Registration Statement No. 333-86246).
10(q) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(r)
with grant of non-qualified stock options to to Peoples' 2002 Form 10-K.
directors of Peoples under Peoples Bancorp Inc. 2002
Stock Option Plan.*
10(r) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(s)
with grant of non-qualified stock options to to Peoples' 2002 Form 10-K.
subsidiary directors of Peoples under Peoples
Bancorp Inc. 2002 Stock Option Plan.*
10(s) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(t)
with grant of non-qualified stock options to to Peoples' Annual Report on Form 10-K for the
employees of Peoples under Peoples Bancorp Inc. 2002 fiscal year ended December 31, 2003 ("Peoples'
Stock Option Plan.* 2002 Form 10-K").
10(t) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(u)
with grant of incentive stock options under Peoples to Peoples' 2002 Form 10-K.
Bancorp Inc. 2002 Stock Option Plan.*
10(u) Loan Agreement dated as of June 12, 2003, by and Incorporated herein by reference to Exhibit 10(a)
between Peoples Bancorp Inc. and First Tennessee to Peoples' Quarterly Report on Form 10-Q for the
Bank National Association. quarterly period ended June 30, 2003, filed August
11, 2003 (File No. 0-16772) (the "June 30, 2003
Form 10-Q").
10(v) Promissory note executed by Peoples Bancorp Inc., as Incorporated herein by reference to Exhibit 10(b)
Maker in the principal amount of $17,000,000 dated to Peoples' June 30, 2003 Form 10-Q.
June 12, 2003.
10(w) Commercial Pledge Agreement dated as of June 12, Incorporated herein by reference to Exhibit 10(c)
2003, by and between Peoples Bancorp Inc. and First to Peoples' June 30, 2003 Form 10-Q.
Tennessee Bank National Association.
12 Statements of Computation of Ratios. Filed herewith.
21 Subsidiaries of Peoples Bancorp Inc. Filed herewith.
23 Consent of Independent Auditors - Ernst & Young LLP. Filed herewith.
31(a) CEO Certification Pursuant to Rule Filed herewith.
13a-14(a)/15d-14(a)
31(b) CFO Certification Pursuant to Rule Filed herewith.
13a-14(a)/15d-14(a)
32 Section 1350 Certifications Filed herewith.
- --------------------------------------------------------------------------------------------------------------------------
*Management Compensation Plan