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, 2005 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, PO 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 ---------------- Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] As of June 30, 2005, the aggregate market value of the Registrant's Common Shares (the only common equity of the Registrant) held by non-affiliates was $251,891,000 based upon the closing price as reported on The NASDAQ National Market. For this purpose, executive officers and directors of the Registrant are considered affiliates. Indicate the number of shares outstanding of each of the issuer's classes of common stock, at March 10, 2006: 10,534,768 common shares, without par value. Document Incorporated by Reference: Portions of Registrant's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held April 13, 2006, are incorporated by reference into Part III of this Annual Report on Form 10-K.
<TABLE> <CAPTION> TABLE OF CONTENTS PART I Page - ------ <S> <C> <C> Item 1. Business 3 Item 1A. Risk Factors 16 Item 1B. Unresolved Staff Comments 18 Item 2. Properties 18 Item 3. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Executive Officers of the Registrant 19 PART II - ------- Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 21 Item 6. Selected Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 42 Item 8. Financial Statements and Supplementary Data 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42 Item 9A. Controls and Procedures 42 Item 9B. Other Information 43 PART III - -------- Item 10. Directors and Executive Officers of the Registrant 73 Item 11. Executive Compensation 73 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 74 Item 13. Certain Relationships and Related Transactions 74 Item 14. Principal Accountant Fees and Services 75 PART IV - ------- Item 15. Exhibits and Financial Statement Schedules 76 Signatures 77 Exhibit Index 78 </TABLE>
PART I ITEM 1. BUSINESS. - ------------------- General - ------- Peoples Bancorp Inc. ("Peoples") is a financial holding company organized in 1980. Peoples' wholly-owned subsidiaries include 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 Bank was first charted as an Ohio banking corporation under the name "The Peoples Banking and Trust Company" in Marietta, Ohio, in 1902. In March 2000, Peoples Bank was reorganized as a national banking association under its current name. 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 locator, or URL, is an inactive textual reference only and is not intended to incorporate Peoples' website into this Form 10-K). Peoples' primary business activities currently are confined to the financial services industry, which are conducted through Peoples Bank, its principal operating subsidiary. Peoples Bank is a full service community bank that makes available an array of financial products and services to its customers, which include the following: o various interest-bearing and non-interest-bearing demand deposit accounts o savings and money market accounts o certificates of deposit o commercial, installment, and real estate mortgage loans (both commercial and residential) o credit and debit cards o corporate and personal trust services o safe deposit rental facilities Peoples also sells travelers checks, money orders and cashier's checks. Services are provided through Peoples Bank's 48 financial service locations and 34 automated teller machines ("ATMs") in Ohio, West Virginia and Kentucky, as well as banking by telephone, and internet-based banking. Peoples Bank offers a full range of life, health, property and casualty insurance products through its subsidiary Peoples Insurance Agency, Inc. ("Peoples Insurance Agency") and makes available custom-tailored solutions for asset management needs through its Peoples Financial Advisors division, including investment products offered through an unaffiliated registered broker-dealer. Peoples Investment Company and its subsidiary, Peoples Capital Corporation, were formed in 2001 to optimize Peoples' consolidated capital position and improve profitability by providing new investment opportunities that are either limited or restricted at the bank level. These investments include, but are not limited to, low-income housing tax credit funds or projects, venture capital, and other higher risk investments. Presently, the operations of both companies do not represent a significant part of Peoples overall business activities. At December 31, 2005, Peoples and its subsidiaries had 531 full-time equivalent employees, total assets of $1.86 billion, total loans of $1.07 billion, total deposits of $1.09 billion, and total stockholders' equity of $183.1 million. Peoples Bank held trust assets with an approximate market value of $659 million at December 31, 2005. For the year ended December 31, 2005, Peoples' return on average assets was 1.12% and return on average stockholders' equity was 11.52%. For the five-year period ended December 31, 2005, Peoples' assets grew at a 10.3% compound annual growth rate, while stockholders' equity grew at a compound annual growth rate of 17.1%. Peoples also has a history of earnings and dividend growth, as earnings and dividends per share grew at compound rates of 7.8% and 12.1%, respectively, for the five-year period ended December 31, 2005. Over that same period, Peoples' annual return on average assets and annual return on average stockholders' equity averaged 1.13% and 12.63%, 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 one de novo banking office and two loan production offices in its market area and has completed two branch acquisitions, three bank acquisitions and two insurance agency acquisitions. Since year-end 2000, Peoples has acquired $388 million of assets, which included $202 million of loans, $301 million of deposits, and 14 financial service offices. These acquisitions produced benefits, including the expansion of Peoples' customer base, and provided opportunities to integrate non-traditional products and services, such as insurance and investments, with the traditional banking products currently offered to clients in Peoples' markets. These acquisitions also enabled Peoples to expand into new markets. Peoples routinely explores opportunities for additional growth and expansion of its core financial service businesses, including the acquisition of companies engaged in similar activities. Management also focuses on internal growth as a method for reaching performance goals and reviews key performance indicators on a regular basis to measure Peoples' success. There can be no assurance, however, that Peoples will be able to grow, or if it does, that any such growth or expansion will result in an increase in Peoples' earnings, dividends, book value or the market value of its common shares. Recent Acquisitions and Expansion - --------------------------------- In April 2005, Peoples Bank expanded its activities in Central Ohio with the opening of a new loan production office in Westerville, Ohio. The focus of this new office is the commercial lending needs of customers in the greater Columbus, Ohio area. At the close of business on December 3, 2004, Peoples Bank completed the acquisition of two full-service offices in the Ashland, Kentucky area from an unaffiliated financial institution. In the acquisition, Peoples acquired approximately $65 million in deposits and $43 million of loans. Concurrent with the acquisition, Peoples Bank consolidated some of its Ashland, Kentucky area banking offices. The Flatwoods, Kentucky, office and the acquired office in downtown Ashland were consolidated into nearby Peoples Bank offices at the close of business on December 3, 2004. Also, the Peoples Bank Cedar Knoll office ceased operations at the close of business on December 27, 2004, with clients redirected to Peoples Bank's newly-acquired office in nearby Summit, Kentucky. In mid-2004, Peoples expanded its insurance activities with the acquisition of Barengo Insurance Agency, Inc. ("Barengo"), based in Marietta, Ohio, and substantially all of the assets of Putnam Agency, Inc. (the "Putnam Agency"), with offices in Ashland, Kentucky and Huntington, West Virginia. Both Barengo and the Putnam Agency were full-service insurance agencies that offered a wide range of insurance products to both commercial and individual clients. Peoples operates the former agencies as divisions of Peoples Insurance Agency, using the "Barengo Insurance Agency" and "Putnam Agency" trade names. For further discussion regarding these acquisitions, see Note 15 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. 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 18 counties in southeastern Ohio and neighboring areas of Kentucky and West Virginia, focusing on mostly non-major urban areas. The primary market area possesses a diverse economic base, with no single dominant industry or employer. Principal industries in the market area include health care, education and other social services; plastics and petrochemical manufacturing; oil, gas and coal production; and tourism, and other service-related industries. Consequently, Peoples is not dependent upon any single industry segment for its business opportunities, and management believes Peoples' market area is somewhat insulated from some of the fluctuations of national economic cycles as a result of the diverse economic base. Peoples Bank originates various types of loans, including commercial and commercial real estate loans, residential real estate loans, home equity lines of credit, real estate construction loans, and consumer loans (including loans to individuals and indirect loans). In general, Peoples Bank retains the majority of loans it originates; however, certain fixed-rate mortgage loan originations, primarily one-to-four family residential mortgages, are sold into the secondary market. In prior years, Peoples Bank also originated various credit card loans. In late 2003, Peoples Bank sold its existing credit card portfolio and entered into a joint marketing alliance to serve the credit card needs of its customers and prospects, which reduces Peoples Bank's risks since it does not own the loans. Loans are spread over a broad range of industrial classifications. Management believes Peoples Bank 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, 2005, Peoples Bank's legal lending limit was approximately $22.5 million. In 2005, Peoples Bank did not extend credit to any one borrower in excess of its legal lending limit. Commercial Loans - ---------------- At December 31, 2005, Peoples Bank had $641.3 million in commercial, financial and agricultural loans ("commercial loans"), including loans secured by commercial real estate outstanding, representing approximately 59.8% of the total aggregate loan portfolio. Loans secured by commercial real estate, excluding construction loans, totaled $504.9 million at December 31, 2005. 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 secured by real estate in excess of $3.0 million and loans secured by all other assets in excess of $1.5 million; however, approval of the Board of Directors is required for all loans, regardless of amount, to borrowers whose aggregate debt to Peoples Bank, including the principal amount of the proposed loan, exceeds $4.0 million. Peoples Bank periodically evaluates all new commercial loan relationships greater than $250,000 and, on an annual basis, all loan relationships greater than $500,000. If deterioration of the loan has occurred, Peoples Bank takes effective and prompt action designed to assure repayment of the loan. Upon detection of the reduced ability of a borrower to meet cash flow obligations, the loan is considered an impaired loan and reviewed for possible downgrading or placement on non-accrual status. Consumer Loans - -------------- At December 31, 2005, Peoples Bank had outstanding consumer loans (including indirect loans but excluding real estate loans and overdrafts) in an aggregate amount of $62.7 million, or 5.9% 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 charge-off loans that do not meet its standards, and to adhere strictly to all laws and regulations governing consumer lending. A qualified compliance officer is responsible for monitoring regulatory compliance performance and for advising and updating loan personnel. Peoples Bank makes credit life insurance and accident and health insurance available to all qualified borrowers, thus reducing risk of loss when a borrower's income is terminated or interrupted due to accident, disability or death. Real Estate Loans - ----------------- At December 31, 2005, Peoples Bank had $366.8 million of real estate loans outstanding (including home equity and construction loans), representing 34.2% of total loans outstanding. Home equity lines of credit and construction mortgages totaled $46.6 million and $50.7 million, respectively. Peoples also had approximately $1.1 million of real estate loans (primary one-to-four family residential mortgages) held for sale into the secondary market at December 31, 2005. Peoples was servicing $144.3 million of real estate loans (primary one-to-four family residential mortgages) previously sold into the secondary market at December 31, 2005. LENDING PRACTICES. Peoples Bank requires residential real estate loan amounts to be no more than 90% of the purchase price or the appraised value of the real estate securing the loan, unless private mortgage insurance is obtained by the borrower for the percentage exceeding 90%. On occasion, Peoples Bank may lend up to 100% of the appraised value of the real estate. The risk conditions of these loans are considered during underwriting for the purposes of establishing an interest rate compatible with the risks inherent in mortgage lending and remaining equity of the home, if any. Peoples Bank originates both fixed rate and one-to-five year adjustable rate, fully amortizing real estate loans. Typically, the fixed rate real estate loans are sold in the secondary market, with Peoples Bank retaining servicing rights on those loans. In select cases, Peoples Bank may retain certain fixed rate real estate loans. Real estate loans are typically secured by first mortgages with evidence of title in favor of Peoples Bank in the form of an attorney's opinion of the title or a title insurance policy. Peoples Bank also requires proof of hazard insurance, with Peoples Bank named as the mortgagee and as the loss payee. Licensed appraisals are required for loans in excess of $250,000. HOME EQUITY LOANS. Home equity lines of credit, or Equilines, are generally made as second mortgages by Peoples Bank. The maximum amount of a home equity line of credit is generally limited to 80% of the appraised value of the property less the balance of the first mortgage. Peoples Bank will lend up to 100% of the appraised value of the property at higher interest rates that are considered compatible with the additional risk assumed in these types of equilines. The home equity lines of credit are written with ten-year terms, but are subject to review upon request for renewal. Peoples Bank offers home equity loans with a fixed rate for the first five years and converting to a variable interest rate for the remaining five years. Peoples Bank also offers a home equity line of credit with a variable rate for the entire term of the loan. CONSTRUCTION LOANS. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, Peoples Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. Overdraft Privilege - ------------------- Since 2001, Peoples Bank has granted Overdraft Privilege to qualified customers. Overdraft Privilege is a service that provides virtually automatic overdraft protection to retail customers by establishing an Overdraft Privilege amount. After a 30-day waiting period to verify deposit ability, each new checking account usually receives an Overdraft Privilege amount of either $400 or $700, based on the type of account and other parameters. Once established, customers are permitted to overdraw their checking account, up to their Overdraft Privilege limit, with each item being charged Peoples' regular overdraft fee. Customers repay the overdraft with their next deposit. Overdraft Privilege is designed to allow Peoples to fill the void between traditional overdraft protection, such as a line of credit, and "check cashing stores". While Overdraft Privilege generates fee income, Peoples maintains an allowance for losses from checking accounts with overdrafts deemed uncollectible. This allowance, along with the related provision and net charge-offs, is included in Peoples' allowance for loan losses. Website Access to Peoples' Securities and Exchange Commission Filings - --------------------------------------------------------------------- Peoples makes available free of charge on or through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the 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 have instituted a series of actions to enhance Peoples' already strong corporate governance practices. Included in those actions was adoption of a Code of Ethics, a revision of the charter of the Audit Committee and the formation two new committees: the Disclosure Committee for Financial Reporting and the Governance and Nominating Committee. The current charters of these committees and the Compensation Committee can be found on Peoples' website under the "Corporate Governance & Ethics" section. Additionally, Peoples Bank has maintained a conflict of interest policy applicable to its officers and employees for over 30 years. Code of Ethics - -------------- In 2003, Peoples' Board of Directors adopted a formal Code of Ethics applicable to all directors, officers and employees of Peoples and its affiliates. The Board of Directors adopted Peoples' Code of Ethics to demonstrate to the public and Peoples' shareholders the importance the Board and management place on ethical conduct, and to continue to set forth Peoples' expectations for the conduct of ethical business practices. Peoples' Code of Ethics is available, free of charge, to the public on Peoples' website on the "Corporate Governance & Ethics" page. Please also see Item 10 of 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 support staff from the Legal Department, Risk Management group and Controller. The Disclosure Committee complements Peoples' longstanding committee structure and process, which has consistently provided an invaluable tool for communication of disclosure information. The Disclosure Committee has the responsibility to: o ensure that Peoples' Chief Executive Officer and Chief Financial Officer can evaluate the effectiveness of Peoples' disclosure controls and procedures, for the purpose of improving these controls and procedures as necessary and disclosing the results of the evaluation in the reports Peoples files with the SEC. o ensure management has timely access to all information which is necessary or desirable to disclose in Peoples' reports for the purpose of discharging Peoples' responsibilities in providing accurate and complete information to shareholders, including, but not limited to, a fair presentation of Peoples' financial condition, results of operations and cash flows. o facilitate determinations regarding the appropriate disclosure of the results of Peoples' disclosure controls and procedures in Peoples' reports, including the determination of the materiality of risks or events for the purposes of disclosure in reports. o provide a process on which Peoples' Chief Executive Officer and Chief Financial Officer can rely in providing the certifications required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 to be filed, or furnished, with each report. Each key element of operation is subject to oversight by a committee to ensure proper administration, risk management and an up-streaming of critical management information and disclosures to finance and control areas, executive management and the Board of Directors. The Disclosure Committee agenda is designed to capture information from all components of Peoples' business. It is believed that the addition of these processes has brought with it a broader and more in-depth analysis to Peoples' already effective and detailed disclosure process, as well as enhanced Peoples' overall disclosure control environment. Governance and Nominating Committee - ----------------------------------- In 2003, the Board of Directors formally developed a Governance and Nominating Committee consisting of at least three independent members of the Board. The purpose of the Governance and Nominating Committee is to identify qualified candidates for election, nomination or appointment to Peoples' Board of Directors and recommend to the Board a slate of director nominees for each annual meeting of the shareholders of Peoples' or as vacancies occur. In addition, the Governance and Nominating Committee oversees matters of corporate governance, including the evaluation of Board performance and processes, and makes recommendations to the Board and the Chairman of the Board regarding assignment and rotation of members and chairs of committees of the Board. The goal of the Governance and Nominating Committee is to assure that the composition, practices and operation of the Board contribute to value creation and to the effective representation of Peoples' shareholders. Competition - ----------- The financial services industry is highly competitive, especially in Peoples' primary markets. Continued deregulation and other dynamic changes in the financial services industry subject 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 rates charged and overall lending services. Competition for deposits comes from other commercial banks, savings associations, money market and mutual funds, credit unions, insurance companies and brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity, convenience of office location, quality of service provided and overall financial condition. Peoples Bank also faces competition for wealth management and insurance products from other commercial banks, brokerage firms and insurance agencies. Peoples believes that its size provides flexibility, which enables Peoples Bank to offer an array of banking products and services. Peoples' financial condition also contributes to a favorable competitive position in the markets Peoples serves. Peoples primarily focuses on smaller metropolitan markets in which to provide a full range of products and services. Management believes Peoples has developed a niche and a certain level of expertise in serving these communities, although Peoples has recently expanded in the more metropolitan area of central Ohio with loan production offices. Peoples historically has operated under a "needs-based" selling approach that management believes has proven successful in serving the financial needs of many customers. Management anticipates Peoples will continue to increase its investment in sales training and education in future periods to assist in the development of Peoples' associates and their identification of customer service opportunities. It is not Peoples' strategy to compete solely on the basis of price. Management believes a focus on customer relationships, speed and quality of the delivery of service and incentives to promote customers' continued use of multiple financial products and services will lead to enhanced revenue opportunities. Management believes the integration of traditional financial products with non-traditional financial products, such as insurance and investment products, will lead to enhanced revenues through complementary product offerings. Supervision and Regulation - -------------------------- 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 - ------- SECURITIES LAWS. Peoples is under the jurisdiction of the SEC and certain state securities commissions in regard to the offering and sale of its securities. Peoples is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Exchange Act, as administered by the SEC. Peoples' common shares are traded on The NASDAQ National Market under the trading symbol "PEBO" and Peoples is subject to the NASDAQ rules for listed companies. BANK HOLDING COMPANY ACT. Peoples is subject to examination and supervision by the Board of Governors of the Federal Reserve System as provided under the Bank Holding Company Act of 1956, as amended, (the "BHC Act"). Peoples is required to file reports with the Federal Reserve Board and such additional information as the Federal Reserve Board may require. Further, the BHC Act requires the prior approval of the Federal Reserve Board for Peoples to acquire or hold, directly or indirectly, more than 5% of the voting shares of any bank that is not already majority-owned by it, acquire all or substantially all of the assets of another bank or bank holding company; or merge or consolidate with any other bank holding company. 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 underwriting and market making; insurance underwriting and agency, sponsoring mutual funds and investment companies, and merchant banking. Financial holding companies are also permitted to acquire, without regulatory approval, a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are deemed financial in nature by the Federal Reserve Board. In order to become a financial holding company, a bank holding company must file a declaration with the Federal Reserve Bank indicating its desire to become a financial holding company. In addition, all subsidiary banks of the bank holding company must be well-capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act. Failure to maintain the "well-capitalized" standard or the other criteria for a financial holding company may result in requirements to correct the deficiency or limit activities to those allowed bank holding companies. In 2002, Peoples elected, and received approval from the Federal Reserve Board, to become a financial holding company. BANKING SUBSIDIARY. Peoples Bank is a national banking association chartered under the National Banking Act and is regulated by the Office of the Comptroller of the Currency ("OCC"). Peoples Bank provides Federal Deposit Insurance Corporation ("FDIC") insurance on its deposits, up to prescribed statutory limits, and is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati. As a national bank, Peoples Bank may engage, subject to limitations on investment and capital requirements, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio management, real estate development and real estate investment, through a financial subsidiary of Peoples Bank, as long 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 or its subsidiaries; purchases or sales of securities or other assets to Peoples or its subsidiaries; and the payment of money or furnishing of services to Peoples and other subsidiaries. Peoples Bank's authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board. Among other things, these loans must be made on terms substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans Peoples Bank may make to these persons is based, in part, on the bank's capital position, and specific approval procedures must be followed in making loans which exceed specified amounts. Peoples Bank and its subsidiaries are subject to examination and supervision by the OCC as well as other federal and state agencies. 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. Peoples' non-banking subsidiaries also are subject to the regulation by the Federal Reserve Board. Federal Deposit Insurance Corporation - ------------------------------------- The FDIC insures the deposits of Peoples Bank up to prescribed statutory limits, 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 insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the bank's regulatory agency. Deposit Insurance Reform Act of 2005 - ------------------------------------ In February 2006, President Bush signed into law the Deposit Insurance Reform Act of 2005 and its companion bill, the Deposit Insurance Reform Conforming Amendments Act of 2005 (collectively, the "Deposit Insurance Reform Acts"), which provide for the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) to be merged into a new Deposit Insurance Fund (DIF). The Deposit Insurance Reform Acts provide for several additional changes to the deposit insurance system, including the following: o Increasing the deposit insurance limit for retirement accounts from $100,000 to $250,000; o Adjusting the deposit insurance limits (currently $100,000 for most accounts) every five years based on an inflation index, with the first adjustment to be effective on January 1, 2011; o Providing pass-through deposit insurance for the deposits of employee benefit plans (but prohibiting undercapitalized depository institutions from accepting employee benefit plan deposits); o Allocating an aggregate of $4.7 billion of one-time credits to offset the premiums of depository institutions based on their assessment bases at the end of 1996; o Establishing rules for awarding cash dividends to depository institutions, based on their relative contributions to the DIF and its predecessor funds, when the DIF reserve ratio reaches certain levels; and o Revising the rules and procedures for risk-based premium assessments. The FDIC is required to adopt rules implementing the various provisions of the Deposit Insurance Reform Acts. The BIF and the SAIF are required to be merged into the DIF by July 1, 2006, while most of the other provisions are required to be implemented by November 5, 2006. Peoples is not yet able to determine the effect the Deposit Insurance Reform Acts will have on Peoples and Peoples Bank. Federal Home Loan Bank - ---------------------- The FHLBs provides credit to their members in the form of collateralized advances. As a member of the FHLB of Cincinnati, Peoples Bank must maintain an investment in the capital stock of that FHLB in an amount equal to the greater of 1% of the aggregate outstanding principal amount of its respective residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. At December 31, 2005, Peoples Bank held 177,647 shares of the FHLB of Cincinnati, which exceeded the required investment of 158,434 shares. Upon the origination or renewal of a loan or advance, each FHLB is required by law to obtain and maintain a security interest in certain types of collateral, primarily one or more of the following categories: fully-disbursed, whole first mortgage loans on improved residential property not more than 90 days delinquent or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the US Government or an agency thereof; deposits in any FHLB or other real estate collateral acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time homebuyers. All long-term advances by each FHLB must be made only to provide funds for residential housing finance. 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 OCC 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 Peoples' 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. Privacy Provisions of Gramm-Leach-Bliley Act Under the Gramm-Leach-Bliley Act, federal banking regulators were required to adopt rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Patriot Act - ----------- In response to terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorist Act of 2001 (the "Patriot Act") was signed into law in October 2001. The Patriot Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity. Peoples Bank has established policies and procedures to comply with the requirements of the Patriot Act. Future Legislation - ------------------ Various legislation affecting financial institutions and the financial services industry is from time to time introduced in Congress. Such legislation may change banking statutes and the operating environment of Peoples and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. Peoples cannot predict whether any of this potential legislation will be enacted, and, if enacted, the effect it, or any implementing regulations, would have on the financial condition or results of operations of Peoples or any of its subsidiaries. Monetary Policy and Economic Conditions - --------------------------------------- The business of financial institutions is affected not only by general economic conditions, but also by the policies of various governmental regulatory agencies, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings, and changes in the reserve requirements against depository institutions' deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, as well as interest rates charged on loans and paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy, the money markets and the activities of monetary and fiscal authorities, Peoples can make no definitive predictions as to future changes in interest rates, credit availability or deposit levels. Effect of Environmental Regulation - ---------------------------------- Peoples' primary exposure to environmental risk is through Peoples Bank's lending activities. When management believes environmental risk potentially exists, Peoples mitigates its environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral. Management reviews residential real estate loans with inherent environmental risk on an individual basis and makes decisions based on the dollar amount of the loan and the materiality of the specific credit. Peoples anticipates no material effect on capital expenditures, earnings or the competitive position of itself or any subsidiary as a result of compliance with federal, state or local environmental protection laws or regulations. Statistical Financial Information Regarding Peoples - --------------------------------------------------- The following listing of statistical financial information provides comparative data for Peoples over the past three and five years, as appropriate. These tables should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, of this Form 10-K and the Consolidated Financial Statements of Peoples and its subsidiaries found at pages 23 through 42 of this Form 10-K. Loan Maturities at December 31, 2005: - ------------------------------------ <TABLE> <CAPTION> Due in (Dollars in Thousands) Due in One Year Due One Year Through After Loan Type Or Less Five Years Five Years Total -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Commercial loans: Fixed $ 25,987 $ 93,724 $ 52,712 $ 172,423 Variable 109,535 64,817 294,479 468,831 ---------------------------------------------------------------------------------------------------------------------- Total commercial loans 135,522 158,541 347,191 641,254 ---------------------------------------------------------------------------------------------------------------------- Construction loans: Fixed 65 2,350 1,846 4,261 Variable 7,519 5,698 33,267 46,484 ---------------------------------------------------------------------------------------------------------------------- Total real estate loans 7,584 8,048 35,113 50,745 ---------------------------------------------------------------------------------------------------------------------- Mortgage real estate loans: Fixed 239 6,601 73,147 79,987 Variable 1,310 9,550 225,234 236,094 ---------------------------------------------------------------------------------------------------------------------- Total real estate loans 1,549 16,151 298,381 316,081 ---------------------------------------------------------------------------------------------------------------------- Consumer loans: Fixed 4,616 46,086 12,272 62,974 Variable 344 146 332 822 ---------------------------------------------------------------------------------------------------------------------- Total consumer loans 4,960 46,232 12,604 63,796 ---------------------------------------------------------------------------------------------------------------------- Total loans $ 149,615 $ 228,972 $ 693,289 $ 1,071,876 ====================================================================================================================== </TABLE> Maturities of Certificates of Deposit $100,000 or More at December 31: - --------------------------------------------------------------------- <TABLE> <CAPTION> (Dollars in Thousands) 2005 2004 2003 2002 2001 ----------- ---------- ---------- ----------- ----------- <C> <C> <C> <C> <C> <C> 3 months or less $ 25,884 $ 17,772 $ 10,316 $ 11,559 $ 15,478 Over 3 to 6 months 25,628 17,923 18,964 23,793 25,279 Over 6 to 12 months 34,207 14,163 40,701 9,277 7,515 Over 12 months 82,174 76,267 49,765 50,181 28,270 - ----------------------------- ----------- ---------- ---------- ----------- ----------- Total $ 167,893 $ 126,125 $ 119,746 $ 94,810 $ 76,542 ============================= =========== ========== ========== =========== =========== </TABLE> Loan Portfolio Analysis: - ----------------------- <TABLE> <CAPTION> (Dollars in Thousands) 2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Year-end loan balances: Commercial, financial and agricultural $ 641,254 $ 576,743 $ 512,069 $ 392,528 $ 343,800 Real estate, mortgage 316,081 349,965 301,726 330,840 295,944 Real estate, construction 50,745 35,423 21,056 16,231 14,530 Consumer 63,796 60,927 79,926 103,635 111,912 Credit card - - 221 6,549 6,670 - ---------------------------------------------------------------------------------------------------------------------------- Total $ 1,071,876 $ 1,023,058 $ 914,998 $ 849,783 $ 772,856 - ---------------------------------------------------------------------------------------------------------------------------- Percent of loans to total loans at December 31: Commercial, financial and agricultural 59.8% 56.3% 56.0% 46.1% 44.5% Real estate, mortgage 29.5 34.2 33.0 39.0 38.3 Real estate, construction 4.7 3.5 2.3 1.9 1.9 Consumer 6.0 6.0 8.7 12.2 14.5 Credit card - - - 0.8 0.8 - ---------------------------------------------------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% - ---------------------------------------------------------------------------------------------------------------------------- Average total loans 1,040,029 942,761 894,419 824,731 753,777 Average allowance for loan losses (14,930) (14,974) (14,093) (12,779) (12,164) - ---------------------------------------------------------------------------------------------------------------------------- Average loans, net of allowance $ 1,025,099 $ 927,787 $ 880,326 $ 811,952 $ 741,613 - ---------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses: Allowance for loan losses, January 1 $ 14,760 $ 14,575 $ 13,086 $ 12,357 $ 10,930 Allowance for loan losses acquired - - 573 304 967 Loans charged off: Commercial, financial and agricultural 1,745 961 1,036 1,935 1,048 Real estate 827 677 449 268 154 Consumer 656 886 1,113 1,054 1,188 Overdrafts 965 1,130 967 880 - Credit card - 133 221 191 248 - ---------------------------------------------------------------------------------------------------------------------------- Total 4,193 3,787 3,786 4,328 2,638 - ---------------------------------------------------------------------------------------------------------------------------- Recoveries: Commercial, financial and agricultural 1,155 487 352 41 124 Real estate 223 186 66 58 5 Consumer 394 431 399 387 286 Overdrafts 327 308 263 175 - Credit card 26 14 21 25 24 - ---------------------------------------------------------------------------------------------------------------------------- Total 2,125 1,426 1,101 686 439 - ---------------------------------------------------------------------------------------------------------------------------- Net charge-offs: Commercial, financial and agricultural 590 474 684 1,894 924 Real estate 604 491 383 210 149 Consumer 262 455 714 667 902 Overdrafts 638 822 704 705 - Credit card (26) 119 200 166 224 - ---------------------------------------------------------------------------------------------------------------------------- Total 2,068 2,361 2,685 3,642 2,199 - ---------------------------------------------------------------------------------------------------------------------------- Provision for loan losses, December 31 2,028 2,546 3,601 4,067 2,659 - ---------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses, December 31 $ 14,720 $ 14,760 $ 14,575 $ 13,086 $ 12,357 - ---------------------------------------------------------------------------------------------------------------------------- Allocation of allowance for loan losses at December 31: Commercial, financial and agricultural $ 11,883 $ 11,751 $ 11,232 $ 8,846 $ 7,950 Real estate 1,400 1,175 1,234 1,617 1,602 Consumer 1,149 1,394 1,594 2,075 2,447 Overdrafts 288 327 283 206 - Credit card - 113 232 342 358 - ---------------------------------------------------------------------------------------------------------------------------- Total $ 14,720 $ 14,760 $ 14,575 $ 13,086 $ 12,357 - ---------------------------------------------------------------------------------------------------------------------------- Ratio of net charge-offs to average loans: Commercial, financial and agricultural 0.06% 0.05% 0.08% 0.23% 0.12% Real estate 0.06 0.05 0.04 0.03 0.02 Consumer 0.03 0.05 0.08 0.08 0.12 Overdrafts 0.06 0.09 0.08 0.09 - Credit card - 0.01 0.02 0.02 0.03 - ---------------------------------------------------------------------------------------------------------------------------- Total 0.21% 0.25% 0.30% 0.45% 0.29% - ---------------------------------------------------------------------------------------------------------------------------- Nonperforming assets: Loans 90+ days past due $ 251 $ 285 $ 188 $ 407 $ 686 Renegotiated loans - 1,128 - 2,439 425 Nonaccrual loans 6,284 5,130 6,556 4,617 4,380 - ---------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 6,535 6,543 6,744 7,463 5,491 Other real estate owned 308 1,163 392 148 181 - ---------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 6,843 $ 7,706 $ 7,136 $ 7,611 $ 5,672 - ------------------------------------------------------------------------------------------------------------------------------ Nonperforming loans as a percent of total loans 0.61% 0.64% 0.73% 0.88% 0.71% - ------------------------------------------------------------------------------------------------------------------------------ Nonperforming assets as a percent of total assets 0.37% 0.43% 0.41% 0.55% 0.48% - ------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses as a percent of total loans 1.37% 1.44% 1.59% 1.54% 1.60% - ------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses as a percent of nonperforming 225.2% 225.6% 216.1% 175.3% 225.0% loans - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> Interest income on nonaccrual and renegotiated loans that would have been recorded under the original terms of the loans for 2005, 2004 and 2003 was $393,000 ($97,000 was actually recorded), $338,000 ($68,000 was actually recorded) and $387,000 ($59,000 was actually recorded), respectively. Peoples discontinues the accrual of interest on loans when management believes collection of all or a portion of contractual interest has become doubtful, which generally occurs when a loan is 90 days past due. A nonaccrual loan is restored to accrual status when it is brought current, has performed in accordance with contractual terms for a reasonable period of time, and the collectibility of the total contractual principal and interest is no longer in doubt. Interest on a nonaccrual loan is recorded on a cash basis and if principal recovery is reasonably assured.
Average Balances and Analysis of Net Interest Income: - ---------------------------------------------------- <TABLE> <CAPTION> (Dollars in Thousands) 2005 2004 2003 ------------------------------------------------------------------- --------------------------------- Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Securities (1): Taxable $ 533,983 $ 23,676 4.43% $ 576,502 $ 24,237 4.20% $ 609,453 $ 26,429 4.34% Nontaxable (2) 66,772 4,367 6.54% 63,589 4,274 6.72% 66,232 4,433 6.69% -------------------------------- ------------ ------------------- ------------ ------------------ Total 600,755 28,043 4.67% 640,091 28,511 4.45% 675,685 30,862 4.57% Loans (3) (4): Commercial 641,651 42,489 6.62% 559,762 33,388 5.96% 471,145 29,786 6.32% Real estate (5) 337,892 21,525 6.37% 313,234 20,303 6.48% 324,778 22,970 7.07% Consumer 60,486 5,294 8.75% 69,765 6,323 9.06% 98,496 9,514 9.66% Valuation reserve (14,930) (14,974) (14,093) -------------------------------- ------------ ------------------- ------------ ------------------ Total 1,025,099 69,308 6.76% 927,787 60,014 6.47% 880,326 62,270 7.07% Short-term Investments: Interest-bearing deposits in other banks 2,260 57 2.56% 2,610 21 0.80% 2,917 21 0.72% Federal funds sold 484 15 3.27% 9,204 114 1.24% 15,453 164 1.06% -------------------------------- ------------ ------------------- ------------ ------------------ Total 2,744 72 2.68% 11,814 135 1.14% 18,370 185 1.01% -------------------------------- ------------ ------------------- ------------ ------------------ Total 1,628,598 97,423 5.98% 1,579,692 88,660 5.61% 1,574,381 93,317 5.93% earning assets Other assets 200,087 180,843 135,661 ------------- ------------ ------------ Total assets $ 1,828,685 $ 1,760,535 $ 1,710,042 ============= ============ ============ Deposits: Savings $ 144,700 $ 1,039 0.72% $ 171,705 $ 1,140 0.66% $ 172,240 $ 1,733 1.01% Interest-bearing demand 297,652 5,426 1.82% 262,206 2,359 0.90% 272,800 2,667 0.98% Time 494,590 16,085 3.25% 454,793 13,498 2.97% 453,488 14,171 3.12% -------------------------------- ------------ ------------------- ------------ ------------------ Total 936,942 22,550 2.41% 888,704 16,997 1.91% 898,528 18,571 2.07% -------------------------------- ------------ ------------------- ------------ ------------------ Borrowed Funds: Short-term 128,313 4,224 3.29% 87,051 1,130 1.30% 54,219 793 1.46% Long-term 410,544 16,695 4.07% 454,898 17,033 3.74% 457,858 18,686 4.08% -------------------------------- ------------ ------------------- ------------ ------------------ Total 538,857 20,919 3.85% 541,949 18,163 3.32% 512,077 19,479 3.78% -------------------------------- ------------ ------------------- ------------ ------------------ Total interest-bearing liabilities 1,475,799 43,469 2.94% 1,430,653 35,160 2.45% 1,410,605 38,050 2.69% -------------------------------- ------------ ------------------- ------------ ------------------ Non-interest-bearing demand deposits 158,693 144,564 124,574 Other liabilities 16,253 12,919 8,223 ------------- ------------ ------------ Total liabilities 1,650,745 1,588,136 1,543,402 Stockholders' equity 177,940 172,399 166,640 ============= ============= ============ Total liabilities and stockholders' equity $ 1,828,685 $ 1,760,535 $ 1,710,042 ============= ============= ============= Interest rate spread $ 53,954 3.04% $ 53,500 3.16% $ 55,267 3.87% =========== ------- =========== ------- =========== ------- Interest income/earning assets 5.98% 5.93% 7.16% Interest expense/earning assets 2.66% 2.41% 2.99% -------- -------- -------- Net yield on earning assets (net interest margin) 3.32% 3.39% 3.52% -------- -------- -------- <FN> (1) Average balances of investment securities are based on carrying value. (2) Computed on a fully-tax equivalent basis using a tax rate of 35%. Interest income was increased by $1,648; $1,630 and $1,662 for 2005; 2004 and 2003, 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 2005; 2004 and 2003 were $475; $482 and $698, 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> </TABLE> Rate Volume Analysis: - -------------------- <TABLE> <CAPTION> (Dollars in Thousands) Change from 2004 to 2005 (1) Change from 2003 to 2004 (1) ----------------------------------------- ----------------------------------------- Increase (decrease) in: Volume Rate Total Volume Rate Total - ---------------------------------- ----------- ---------- ---------- ------------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Investment income: (2) Taxable $ (1,844) $ 1,283 $ (561) $ (1,401) $ (791) $ (2,192) Nontaxable 210 (117) 93 (178) 19 (159) - ---------------------------------- ----------- ---------- ---------- ------------- ---------- ---------- Total (1,634) 1,166 (468) (1,579) (772) (2,351) - ---------------------------------- ----------- ---------- ---------- ------------- ---------- ---------- Loan Income: Commercial 5,191 3,910 9,101 5,359 (1,757) 3,602 Real estate 1,576 (354) 1,222 (796) (1,871) (2,667) Consumer (1,010) (19) (1,029) (2,634) (557) (3,191) - ---------------------------------- ----------- ---------- ---------- ------------- ---------- ---------- Total 5,757 3,537 9,294 1,929 (4,185) (2,256) - ---------------------------------- ----------- ---------- ---------- ------------- ---------- ---------- Short-term investments (154) 91 (63) (72) 22 (50) - ---------------------------------- ----------- ---------- ---------- ------------- ---------- ---------- Total interest income 3,969 4,794 8,763 278 (4,935) (4,657) =========================================================================================================================== Interest expense: Savings deposits (189) 88 (101) (5) (588) (593) Interest-bearing demand deposits 357 2,710 3,067 (101) (207) (308) Time deposits 1,235 1,352 2,587 41 (714) (673) Short-term borrowings 730 2,364 3,094 435 (98) 337 Long-term borrowings (1,737) 1,399 (338) (120) (1,533) (1,653) - ---------------------------------- ----------- ---------- ---------- ------------- ---------- ---------- Total interest expense 396 7,913 8,309 250 (3,140) (2,890) =========================================================================================================================== Net interest income $ 3,573 $ (3,119) $ 454 $ 28 $ (1,795) $ (1,767) =========================================================================================================================== <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> </TABLE> ITEM 1A. RISK FACTORS. - ---------------------- The following are certain risks that management believes are specific to Peoples' business. This should not be viewed as an all inclusive list or in any particular order. o CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT PEOPLES' PROFITABILITY. Peoples' earnings are dependent to a significant degree on net interest income, which is the amount by which interest income exceeds interest expense. Interest rates are highly sensitive to many factors that are beyond Peoples' control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest Peoples receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) Peoples' ability to originate loans and obtain deposits, (ii) the fair value of Peoples' financial assets and liabilities, and (iii) the average duration of Peoples' mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, Peoples' net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Management uses various measures to monitor interest rate risk and believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on Peoples' results of operations. Management also periodically adjusts the mix of assets and liabilities to manage interest rate risk. However, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on Peoples' financial condition and results of operations. See the sections captioned "Interest Income and Expense" and "Interest Rate Risk and Liquidity" in Item 7 of this Form 10-K for further discussion related to Peoples' interest rate risk. o PEOPLES' EXPOSURE TO CREDIT RISK COULD ADVERSELY AFFECT PEOPLES' EARNINGS AND FINANCIAL CONDITION. There are certain risks inherent in making loans. These risks include interest rate changes over the time period in which loans may be repaid, risks resulting from changes in the economy, risks inherent in dealing with borrowers and, in the case of loans secured by collateral, risks resulting from uncertainties about the future value of the collateral. Commercial and commercial real estate loans comprise a significant portion of Peoples' loan portfolio. Commercial loans generally are viewed as having a higher credit risk than residential real estate or consumer loans because they usually involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. Since Peoples' loan portfolio contains a significant number of commercial and commercial real estate loans, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans, and ultimately could have a material adverse effect on Peoples' earnings and financial condition. o PEOPLES' ALLOWANCE FOR LOAN LOSSES MAY BE INSUFFICIENT. Peoples maintains an allowance for loan losses to provide for probable loan losses based on management's quarterly analysis of the loan portfolio. There can be no assurance on the timing or amount of actual loan losses or that charge-offs in future periods will not exceed the allowance for loan losses. In addition, federal and state regulators periodically review Peoples' allowance for loan losses as part of their examination process and may require management to increase the allowance or recognize further loan charge-offs based on judgments different than those of management. Any increase in the provision for loan losses would decrease Peoples' pretax and net income. o ADVERSE ECONOMIC CONDITIONS MAY ADVERSELY IMPACT PEOPLES' RESULTS OF OPERATIONS. Peoples' success depends primarily on the general economic conditions in the specific local markets in which it operates. The local economies of Peoples' market area historically have been less robust than the economy of the nation as a whole and are not subject to the same fluctuations as the national economy. Adverse economic conditions in Peoples' market area, including the loss of certain significant employers, could reduce Peoples' growth rate, affect its borrowers' ability to repay their loans and generally affect Peoples' financial condition and results of operations. Furthermore, a downturn in real estate values in Peoples' market area could cause many of its loans to become inadequately collateralized. o THE FINANCIAL SERVICES INDUSTRY IS VERY COMPETITIVE. Peoples experiences significant competition in originating loans, principally from other commercial banks, savings associations and credit unions. Several of Peoples' competitors have greater resources, larger branch systems and a wider array of banking services. This competition could reduce Peoples' net income by decreasing the number and size of loans that it originates and the interest rates it may charge on these loans. For a more complete discussion of Peoples' competitive environment, see "Business--Competition" in Item 1 of this Form 10-K. If Peoples is unable to compete effectively, Peoples will lose market share and income from deposits, loans and other products may be reduced. o PEOPLES' ABILITY TO PAY DIVIDENDS IS LIMITED. Peoples is a separate and distinct legal entity from its subsidiaries. Peoples receives nearly all of its revenue from dividends from Peoples Bank, which are limited by federal banking laws and regulations. These dividends also serve as the primary source of funds to pay dividends on Peoples' common shares and interest and principal on Peoples' debt. The inability of Peoples Bank to pay sufficient dividends to Peoples could have a material, adverse effect on Peoples' business. Further discussion of Peoples' ability to pay dividends can be found under the caption "Supervision and Regulation-Limits on Dividends" in Item 1 of this Form 10-K and Note 13 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. o GOVERNMENT REGULATION SIGNIFICANTLY AFFECTS OUR BUSINESS. The banking industry is heavily regulated under both federal and state law. Peoples is subject to regulation and supervision by the Federal Reserve Board, and Peoples Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency. These regulations are primarily intended to protect depositors and the federal deposit insurance funds, not Peoples' shareholders. Peoples' non-bank subsidiaries are also subject to the supervision of the Federal Reserve Board, in addition to other regulatory and self-regulatory agencies including the Securities and Exchange Commission and state securities and insurance regulators. Regulations affecting banks and financial services businesses are undergoing continuous change, and management cannot predict the effect of those changes. Regulations and laws may be modified at any time, and new legislation may be enacted that affects Peoples and its subsidiaries. Any modifications or new laws could adversely affect Peoples' business. Further information about government regulation of Peoples' business can be found under the caption "Supervision and Regulation" in Item 1 of this Form 10-K. o PEOPLES AND ITS SUBSIDIARIES ARE SUBJECT TO EXAMINATIONS AND CHALLENGES BY TAX AUTHORITIES. In the normal course of business, Peoples and its subsidiaries are routinely subject to examinations and challenges from federal and state tax authorities regarding positions taken in their tax returns. State tax authorities have become increasingly aggressive in challenging tax positions taken by financial institutions, especially those positions relating to tax compliance and calculation of taxes subject to apportionment. Any challenge or examination by a tax authority may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. While management believes it has taken appropriate positions on the tax returns filed, any examination or challenge made that is not resolved in our favor could have a material adverse effect on Peoples' financial condition and results of operation. Peoples Bank is currently undergoing an examination by the Ohio Department of Taxation of its 2002 Ohio Corporation Franchise Tax Reports. Management has agreed to a one-year extension of the statue of limitations for the 2002 year. However, the administrative process is not yet complete and Peoples Bank has not received a notice of any proposed adjustment. Due to the fact the Ohio Department of Taxation is in the early stages of its administrative process, management cannot accurately make an estimate of potential exposure, if any, although no assurance can be given that the ultimate outcome of this examination will not have a material impact on Peoples' financial condition and results of operation. o ANTI-TAKEOVER PROVISIONS MAY DELAY OR PREVENT AN ACQUISITION OR CHANGE IN CONTROL BY A THIRD PARTY. Provisions in the Ohio General Corporation Law and Peoples' amended articles of incorporation and code of regulations, including a staggered board and a supermajority vote requirement for significant corporate changes, could discourage potential takeover attempts and make attempts by shareholders to remove Peoples' board of directors and management more difficult. These provisions may also have the effect of delaying or preventing a transaction or change in control that might be in the best interests of Peoples' shareholders. ITEM 1B. UNRESOLVED STAFF COMMENTS. - ----------------------------------- None. ITEM 2. PROPERTIES. - -------------------- Peoples' sole banking subsidiary, Peoples Bank, generally owns its offices, related facilities and unimproved real property. In Ohio, Peoples Bank operates offices in Marietta (4 offices), Belpre (2 offices), Lowell, Lower Salem, Reno, Nelsonville (2 offices), Athens (3 offices), The Plains, Middleport, Rutland, Pomeroy (2 offices), Gallipolis, Cambridge (2 offices), Byesville, Quaker City, Flushing, Caldwell, Chesterhill, McConnelsville, Baltimore, Lancaster, Delaware and Westerville. In West Virginia, Peoples Bank operates offices in Huntington, Parkersburg (3 offices), Vienna, Point Pleasant (2 offices), New Martinsville (2 offices) and Steelton. In Kentucky, Peoples Bank's office locations include Greenup, Summit, South Shore, Grayson, Ashland and Russell. Of these 48 offices, 12 are leased and the rest are owned by Peoples Bank. Peoples Insurance Agency rents office space in various Peoples Bank's offices. In addition, Peoples Insurance Agency leases office buildings in Marietta, Ohio; Huntington, West Virginia and Ashland, Kentucky. Rent expense on the leased properties totaled $833,000 in 2005. The following are the only properties that have a lease term expiring on or before June 2007: <TABLE> <CAPTION> Location Address Lease Expiration Date (a) - -------------------------------- -------------------------------- ------------------------- <S> <C> <C> Delaware Loan Production Office 351 West Central Avenue March 2006 Delaware, Ohio Peoples Insurance Agency Huntington Office 1439 6th Avenue March 2006 Huntington, West Virginia Athens Mall Office 801 East State Street June 2007 Athens, Ohio - ------------------------------------------ -------------------------------- ------------------------- <FN> (a) Information represents the ending date of the current lease period. Peoples may have the option to renew the lease beyond this date under the terms of the lease agreement and intends to renew all expiring leases unless otherwise disclosed in this Item 2. Additional information concerning the property and equipment owned or leased by Peoples and its subsidiaries is incorporated herein by reference from Note 5 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. </FN> </TABLE> ITEM 3. LEGAL PROCEEDINGS. - -------------------------- In the ordinary course of business or operations, Peoples and its subsidiaries may be named as plaintiff, defendant, party or to which any of it subsidiaries' property is subject to various pending and threatened legal proceedings. In view of the inherent difficulty of predicting the outcome of such matters, Peoples cannot state what the eventual outcome of any such matters will be; however, based on current knowledge and after consultation with legal counsel, management believes that these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Peoples. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ None. 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 13, 2006 ("Peoples' 2006 Definitive Proxy Statement"). The executive officers of Peoples as of February 13, 2006, are as follows: Name Age Position - ----------------------- ---- -------------------------------------- Mark F. Bradley 36 President and Chief Executive Officer John (Jack) W. Conlon 60 Chief Financial Officer and Treasurer Larry E. Holdren 58 Executive Vice President Carol A. Schneeberger 49 Executive Vice President/Operations David T. Wesel 44 Executive Vice President Joseph S. Yazombek 52 Executive Vice President/Chief Lending Officer Mr. Bradley has been Chief Executive Officer of Peoples since May 2005 and President of Peoples since June 2004. Mr. Bradley also has been Chief Executive Officer of Peoples Bank since May 2005, and President since July 2002. Prior thereto, Mr. Bradley served as of Chief Operating Officer of Peoples from July 2003 to May 2005, and Executive Vice President and Chief Integration Officer from April 2002 to July 2003. He also served as Chief Operating Officer of Peoples Bank from July 2002 to May 2005. Between 1997 and 2001, Mr. Bradley served as Controller of Peoples and Peoples Bank. Mr. Bradley joined Peoples in 1991. In January 2006, Mr. Bradley was appointed President of Peoples Insurance Agency, Inc. Mr. Bradley has been a director of Peoples since 2003 and Peoples Bank since 2002. 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. In July 2005, Mr. Conlon notified Peoples that he would retire and resign his positions as Chief Financial Officer and Treasurer of both Peoples and Peoples Bank effective July 31, 2006. 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. Mr. Holdren joined Peoples Bank in 1982. 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 from October 1988 to April 1999. Prior thereto, she was Auditor of Peoples from August 1987 to October 1988 and Auditor of Peoples Bank from January 1986 to October 1988. Ms. Schneeberger joined Peoples Bank in 1977. Mr. Wesel became Executive Vice President of Peoples in January 2006. Mr. Wesel was also appointed as President of Peoples Bank's Peoples Financial Advisors division in January 2006. Prior thereto, Mr. Wesel served as Sales Manager of Peoples Financial Advisors since joining Peoples in February 2004. Prior to joining Peoples, Mr. Wesel had over 20 years experience in executive management and sales administration, including experience with a regional brokerage firm. Mr. Wesel is the son of Joseph H. Wesel, Chairman of the Board and a Director of Peoples and Director of Peoples Bank. Mr. Yazombek was appointed Executive Vice President/Chief Lending Officer of Peoples in January 2000. Mr. Yazombek has also held the position of Executive Vice President and Chief Lending Officer of Peoples Bank since October 1998. He was an Executive Vice President of Peoples Bank's Consumer and Mortgage Lending areas from May 1996 to October 1998, where he also directly managed Peoples Bank's collections efforts. Mr. Yazombek joined Peoples Bank in 1983 and served as a real estate lender until May 1996. Each executive officer of Peoples is appointed by the Board of Directors and serves at the pleasure of the Board. In August 2004, Peoples offered Change in Control Agreements to the executive officers of Peoples and entered into agreements ("Agreement" or "Agreements") with Robert E. Evans, Mark F. Bradley, David B. Baker, John W. Conlon, Larry E. Holdren and Carol A. Schneeberger. Each Agreement provides that, if the executive officer is terminated by Peoples or its successors for any reason other than cause or by the executive officer for good reason, within six (6) months prior to or within twenty-four (24) months after a defined change in control, Peoples will pay a specified change in control benefit to the executive officer. If the executive officer receives a change in control benefit as previously described, he or she is subject to a non-compete agreement covering the same period of time as the benefit is paid. The Agreement with Mr. Evans was terminated effective May 31, 2005, concurrent with his retirement as Chief Executive Officer. Effective January 1, 2006, David B. Baker assumed a non-executive sales position with Peoples and the Agreement with Mr. Baker was terminated. Mr. Baker previously served as an Executive Vice President of Peoples since February 1999. Also effective January 1, 2006, Peoples entered into an Agreement with David T. Wesel and the terms of his Agreement are the same as those in the Agreements of John W. Conlon, Larry E. Holdren and Carol A. Schneeberger. Additional information required by Item 401(b) of Regulation S-K regarding the Agreements are incorporated herein by reference to the section captioned "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS - Change in Control Arrangements" on pages 29 through 31 of Peoples' 2006 Definitive Proxy Statement and the forms of Change in Control Agreements incorporated by reference in this Annual Report of Form 10-K as Exhibits 10(u) and 10(v).
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, 2005, Peoples had 1,261 shareholders of record. The table presented below provides the high and low bids for Peoples' common shares and the cash dividends per share declared for the indicated periods. Bid information has been obtained directly from The NASDAQ National Market. Dividends High Bid Low Bid Declared ---------- ---------- ------------- 2005 Fourth Quarter $ 30.10 $ 25.40 $ 0.20 Third Quarter 30.53 26.33 0.20 Second Quarter 28.86 24.99 0.20 First Quarter 27.68 25.42 0.19 - ---------------------------------------------------------------------------- 2004 Fourth Quarter $ 32.44 $ 26.21 $ 0.18 Third Quarter 26.67 23.27 0.18 Second Quarter 28.10 27.52 0.18 First Quarter 32.05 26.92 0.18 - ---------------------------------------------------------------------------- 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, 2005: <TABLE> <CAPTION> (c) Total Number of (d) Maximum Number Common Shares of Common Shares (a) Total Number of Purchased as Part of that May Yet Be Common Shares (b) Average Price Publicly Announced Purchased Under the Period Purchased Paid per Share Plans or Programs (1) Plans or Programs (1)(2) ------ --------- -------------- ---------------- ------------------------ <S> <C> <C> <C> <C> October 1 - 31, 2005 593(3) $28.21(3) - 465,300 November 1 - 30, 2005 529(4) $29.28(4) - 465,300 December 1 - 31, 2005 570(3) $28.84(3) - -(5) - ------------------------------------------------------------------------------------------------------------------ Total 1,692 $28.76 - - - ------------------------------------------------------------------------------------------------------------------ <FN> (1) Information reflects solely the 2005 Stock Repurchase Program originally announced on December 10, 2004, which authorized the repurchase of 525,000 common shares, with an aggregate purchase price of not more than $17.0 million. The 2005 Stock Repurchase Program expired on December 31, 2005. (2) Information reflects maximum number of common shares that may be purchased at the end of the period indicated. (3) Information reflects solely common shares purchased in open market transactions by Peoples Bank under the Rabbi Trust Agreement establishing a rabbi trust holding assets to provide payment of the benefits under the Peoples Bancorp Inc. Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries (the "Rabbi Trust"). (4) Information reflects solely common shares acquired in connection with the exercise of stock options under Peoples' stock option plans. (5) The 2005 Stock Repurchase Program expired on December 31, 2005, and as such, no additional common shares could be purchased under that Program at the end of the period. However, Peoples is authorized to repurchase up to 425,000 of its common shares, with an aggregate purchase price of not more than $11.5 million, in 2006 under the 2006 Stock Repurchase Program announced January 17, 2006, which expires December 31, 2006. </FN> </TABLE>
ITEM 6. SELECTED FINANCIAL DATA. - -------------------------------- The information below has been derived from Peoples' Consolidated Financial Statements. <TABLE> <CAPTION> (Dollars in Thousands, except Per Share Data) 2005 2004 2003 2002 2001 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Operating Data For the year ended: Total interest income $ 95,775 $ 87,030 $ 91,655 $ 82,968 $ 86,107 Total interest expense 43,469 35,160 38,050 35,316 45,560 Net interest income 52,306 51,870 53,605 47,652 40,547 Provision for loan losses 2,028 2,546 3,601 4,067 2,659 Net gain (loss) on securities transactions 539 (3,040) (1,905) 216 29 Other income exclusive of securities transactions 28,628 25,248 19,443 15,020 10,621 Goodwill and other intangible asset amortization 2,669 2,219 1,493 646 2,347 Other expense 48,673 44,979 44,410 32,975 28,479 Net income $ 20,499 $ 18,275 $ 16,254 $ 18,752 $ 12,335 - --------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data At year end: Total assets $ 1,855,277 $ 1,809,086 $ 1,736,104 $ 1,394,361 $ 1,193,966 Total intangible assets 69,280 71,118 48,705 30,738 17,010 Investment securities 589,313 602,364 641,464 412,100 330,364 Net loans 1,057,156 1,008,298 900,423 836,697 760,499 Total deposits 1,089,286 1,069,421 1,028,530 955,877 814,368 Short-term borrowings 173,696 51,895 108,768 39,083 56,052 Long-term borrowings 362,466 464,864 388,647 212,929 192,448 Junior subordinated notes 29,350 29,263 29,177 29,090 29,056 Stockholders' equity 183,077 175,418 170,880 147,183 93,854 Tangible assets (1) 1,785,997 1,737,968 1,687,399 1,363,623 1,176,956 Tangible equity (2) 113,797 $ 104,300 $ 122,175 $ 116,445 $ 76,844 - --------------------------------------------------------------------------------------------------------------------------------- Significant Ratios Return on average assets 1.12 % 1.04 % 0.95 % 1.46 % 1.06 % Return on average stockholders' equity 11.52 10.60 9.75 17.69 13.60 Net interest margin 3.32 3.39 3.52 4.17 3.87 Efficiency ratio (3) 59.05 57.18 51.06 51.24 54.50 Average stockholders' equity to average assets 9.73 9.79 9.74 8.23 7.80 Average loans to average deposits 94.92 91.24 87.42 92.63 92.93 Allowance for loan losses to total loans 1.37 1.44 1.59 1.54 1.60 Risk-based capital ratio 12.90 12.30 15.43 16.79 14.21 Dividend payout ratio 40.01 % 41.66 % 42.06 % 24.91 % 33.08 % - --------------------------------------------------------------------------------------------------------------------------------- Per Share Data(4) Earnings per share - Basic 1.96 $ 1.74 $ 1.56 $ 2.25 $ 1.49 Earnings per share - Diluted 1.94 1.71 1.52 2.19 1.47 Cash dividends paid 0.78 0.72 0.65 0.56 0.49 Book value at end of period 17.40 16.81 16.11 14.97 11.43 Tangible book value at end of period (5) 10.82 $ 10.00 $ 11.76 $ 11.85 $ 9.36 Weighted-average shares outstanding: Basic 10,444,854 10,529,332 10,433,708 8,329,109 8,277,035 Diluted 10,581,019 10,710,114 10,660,083 8,557,591 8,403,773 Common shares outstanding at end of period: 10,518,980 10,435,102 10,603,792 9,829,965 8,213,115 - --------------------------------------------------------------------------------------------------------------------------------- <FN> (1) Total assets less goodwill and other intangible assets. (2) Total stockholders' equity less goodwill and other intangible assets. (3) Non-interest expense (less intangible amortization) as a percentage of fully-tax equivalent net interest income plus non-interest income. (4) Adjusted for all stock dividends and splits. (5) Tangible book value per share reflects capital calculated for banking regulatory requirements and excludes the balance sheet impact of intangible assets acquired through purchase accounting for acquisitions. </FN> </TABLE> 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 Bancorp Inc. and Subsidiaries ("Peoples") is presented to provide insight into management's assessment of the financial results. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, as well as the ratios and statistics, contained elsewhere in this Form 10-K. References will be found in this Form 10-K to the following transactions that have impacted or will impact Peoples' results of operations: o As discussed in Note 15 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K, Peop completed the acquisition of Putnam Agency, Inc. ("Putnam") on April 30, 2004 and Barengo Insurance Agency, Inc. ("Bareng on May 28, 2004, (collectively, the "Insurance Agency Acquisitions"). In addition, Peoples Bank acquired two full-servic banking offices in the Ashland, Kentucky area at the close of business on December 3, 2004 (the "Ashland Banking Acquisition"). In conjunction with the Ashland Banking Acquisition, Peoples Bank consolidated two of its existing office the Ashland area market into other Peoples Bank offices and closed one of the acquired offices. In 2003, Peoples acquire Kentucky Bancshares Incorporated ("Kentucky Bancshares"), the holding company of Kentucky Bank & Trust, and closed two of Peoples Bank's existing offices, due to the proximity of the acquired offices. o On December 29, 2005, the Compensation Committee of the Board of Directors of Peoples Bancorp Inc. ("Peoples Bancorp") approved the acceleration of the vesting schedule with regard to all unvested stock options previously granted to employees of Peoples and its subsidiaries, including executive officers of Peoples, and subsidiary directors pursuant to Peoples' various stock option plans (the "Stock Option Acceleration"). No unvested stock options held by directors of Peoples Bancorp were accelerated. As a result, an aggregate of 161,514 options became exercisable as of that date. Peoples recorded a one-time, non-cash compensation expense of $122,000 in 2005 due to the Stock Option Acceleration. o On December 10, 2004, Peoples Bancorp announced the authorization to repurchase up to 525,000, or approximately 5%, of Peoples Bancorp's outstanding common shares in 2005 from time to time in open market or privately negotiated transactions (the "2005 Stock Repurchase Program"). Peoples Bancorp repurchased a total of 59,700 common shares (or 11% of the total authorized) under the 2005 Stock Repurchase Program, at an average price of $26.78 per share. The repurchased common shares are held as treasury shares and are to be used for future exercises of options granted under Peoples Bancorp's stock option plans, future issuances of common shares in connection with Peoples Bancorp's deferred compensation plans and other general corporate purposes. The 2005 Stock Repurchase Program expired on December 31, 2005. o In December 2004, Peoples sold approximately $85 million of fixed-rate securities, consisting primarily of mortgage-backed securities purchased in a historically low interest rate environment, and reinvested the net proceeds in other investment securities, primarily variable rate mortgage-backed securities (the "2004 Investment Portfolio Repositioning"). The securities sold were selected because management wanted to shorten the estimated life of the portfolio and expected those securities selected to underperform in a rising rate environment. While the 2004 Investment Portfolio Repositioning had a minimal impact on short-term yields, the new securities have shorter estimated lives and duration and better cash flow characteristics in a rising rate environment than the securities sold. o In December 2003, Peoples Bank sold its credit card portfolio to InfiCorp Holdings, Inc. ("InfiCorp"). In addition to the sale, Peoples Bank and InfiCorp entered into a joint marketing agreement to serve the credit card needs of Peoples' customers and prospective customers. o In December 2003, Peoples sold $55 million of mortgage-backed investment securities due to the high rate of prepayments on those securities and the corresponding downward pressure on yields from accelerated amortization of bond premiums. Peoples reinvested the proceeds from the sales into other mortgage-backed securities that were anticipated to produce a higher yield with estimated lives similar to those of the securities that were sold (collectively, the "2003 Investment Portfolio Restructuring"). Approximately $27 million of the reinvestment settled in late December 2003 and the remaining reinvestment of approximately $26 million settled in late January 2004. o On December 16, 2003, Peoples prepaid $63 million of long-term, convertible rate borrowings from the Federal Home Loan Bank ("FHLB") and reborrowed the funds using a short-term, repurchase agreement advance (collectively, the "Long-Term Debt Restructuring"). Peoples incurred prepayment penalties totaling $6.8 million as part of this transaction. The prepaid borrowings had a weighted-average rate of 5.14% and weighted-average remaining maturity of 5.4 years. The new short-term advance had a significantly lower initial interest rate, yet had somewhat similar interest rate sensitivity characteristics in a rising interest rate environment. o On December 17, 2003, Peoples Bancorp announced the authorization to repurchase up to 425,000, or approximately 4%, of Peoples Bancorp's outstanding common shares in 2004 from time to time in open market or privately negotiated transactions. On August 13, 2004, Peoples Bancorp announced the authorization to repurchase an additional 200,000 shares, or approximately 2%, of Peoples Bancorp's outstanding common shares in 2004 from time to time in open market or privately negotiated transactions (collectively, the "2004 Stock Repurchase Program"). Peoples Bancorp repurchased 511,348 common shares (or 82% of the total authorized) under the 2004 Stock Repurchase Program, at an average price of $26.53. Peoples Bancorp has reissued 309,221 of the repurchased shares in connection with stock option exercises in 2004 and 2005 and the Insurance Agency Acquisitions. The remaining repurchased shares, which are held as treasury shares, are anticipated to be used for future exercises of stock options granted under Peoples' stock option plans, issuances of common shares for Peoples Bancorp's deferred compensation plans, and other general corporate purposes. The 2004 Stock Repurchase Program expired on December 31, 2004. The impact of these transactions, where significant, is discussed in the applicable sections of this Management's Discussion and Analysis. Critical Accounting Policies - ---------------------------- The accounting and reporting policies of Peoples conform to accounting principles generally accepted in the United States ("US GAAP") and to general practices within the financial services industry. The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management has identified the accounting policies described below as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of Peoples' consolidated financial statements and management's discussion and analysis. Income Recognition - ------------------ Interest income on loans and investment securities is recognized by methods that result in level rates of return on principal amounts outstanding, including yield adjustments resulting from the amortization of loan costs and premiums on investment securities and accretion of loan fees and discounts on investment securities. Since mortgage-backed securities comprise a sizable portion of Peoples' investment portfolio, a significant increase in principal payments on those securities could negatively impact interest income due to the corresponding acceleration of premium amortization. In the event management believes collection of all or a portion of contractual interest on a loan has become doubtful, which generally occurs after the loan is 90 days past due, Peoples discontinues the accrual of interest. In addition, previously accrued interest deemed uncollectible that was recognized in income in the current year is reversed, while amounts recognized in income in the prior year are charged against the allowance for loan losses. Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured. A nonaccrual loan is restored to accrual status after appropriate review by lending and/or loan review personnel indicates the collectibility of the total contractual principal and interest is no longer considered doubtful. Allowance for Loan Losses - ------------------------- In general, determining the amount of the allowance for loan losses requires significant judgment and the use of estimates by management. Peoples maintains an allowance for loan losses to absorb probable losses based on a quarterly analysis of the loan portfolio and estimation of the losses that have been incurred within the loan portfolio. This formal analysis determines an appropriate level and allocation of the allowance for loan losses among loan types and resulting provision for loan losses by considering factors affecting losses, including specific losses, levels and trends in impaired and nonperforming loans, historical loan loss experience, current national and local economic conditions, volume, growth and composition of the portfolio, regulatory guidance and other relevant factors. Management continually monitors the loan portfolio through its Loan Review Department and Loan Loss Committee to evaluate the adequacy of the allowance. The provision could increase or decrease each quarter based upon the results of management's formal analysis. The amount of the allowance for loan losses for the various loan types represents management's estimate of expected losses from existing loans based upon specific allocations for individual lending relationships and historical loss experience for each category of homogeneous loans. The allowance for loan losses related to impaired loans is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation requires management to make estimates of the amounts and timing of future cash flows on impaired loans, which consists primarily of nonaccrual and restructured loans. While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses. Individual loan reviews are based upon specific quantitative and qualitative criteria, including the size of the loan, the loan cash flow characteristics, loan quality ratings, value of collateral, repayment ability of borrowers, and historical experience factors. The historical experience factors utilized for individual loan reviews are based upon past loss experience, known trends in losses and delinquencies, the growth of loans in particular markets and industries, and known changes in economic conditions in particular lending markets. Allowances for homogeneous loans (such as residential mortgage loans, personal loans, etc.) are evaluated based upon historical loss experience, trends in losses and delinquencies, growth of loans in particular markets, and known changes in economic conditions in each lending market. Consistent with the evaluation of allowances for homogenous loans, the allowance relating to the Overdraft Privilege program is based upon management's monthly analysis of accounts in the program. This analysis considers factors that could affect losses on existing accounts, including historical loss experience and length of overdraft. There can be no assurance the allowance for loan losses will be adequate to cover all losses, but management believes the allowance for loan losses of $14.7 million at December 31, 2005, is adequate to provide for probable losses from existing loans based on information currently available. While management uses available information to provide for loan losses, the ultimate collectibility of a substantial portion of the loan portfolio, and the need for future additions to the allowance, will be based on changes in economic conditions and other relevant factors. As such, adverse changes in economic activity could reduce cash flows for both commercial and individual borrowers, which would likely cause Peoples to experience increases in problem assets, delinquencies and losses on loans. Investment Securities - --------------------- Investment securities represent the second largest component of Peoples' assets, accounting for 32% of total assets at December 31, 2005. Presently, Peoples classifies its entire investment portfolio as available-for-sale and records changes in the estimated fair value of the portfolio in stockholders' equity as a component of comprehensive income. As a result, both the investment and equity sections of Peoples' 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 on a quarterly basis to identify potential other-than-temporary losses. This analysis requires management to consider various factors that can involve judgment and estimation, including duration and magnitude of the decline in value, the financial condition of the issuer, and Peoples' ability and intent to continue holding the investment for a period of time sufficient to allow for any anticipated recovery in market value. At December 31, 2005, 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, additional charges to income could occur in future periods. Goodwill and Other Intangible Assets - ------------------------------------ Over the past several years, Peoples has grown through mergers and acquisitions accounted for under the purchase method of accounting. Under the purchase method, Peoples is required to allocate the cost of an acquired company to the assets acquired, including identified intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition. At December 31, 2005, Peoples had $8.7 million of identifiable intangible assets acquired in acquisitions, subject to amortization, and $59.8 million of goodwill, not subject to periodic amortization. The determination of fair value and subsequent allocation of the cost of an acquired company generally involves management making estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. In addition, the valuation and amortization of intangible assets representing the present value of future net income to be earned from customers (commonly referred to as "customer relationship intangibles" or "core deposit intangibles") requires significant judgment and the use of estimates by management. While management feels the assumptions and variables used to value recent acquisitions were reasonable, the use of different, but still reasonable, assumptions could produce materially different results. Customer relationship intangibles are required to be amortized over their estimated useful lives. The method of amortization should reflect the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. Since Peoples' acquired customer relationships are subject to routine customer attrition, the relationships are more likely to produce greater benefits in the near-term than in the long-term, which typically supports the use of an accelerated method of amortization for the related intangible assets. Management is required to evaluate the useful life of customer relationship intangibles to determine if events or circumstances warrant a change in the estimated life. Should management determine in future periods the estimated life of any intangible asset is shorter than originally estimated, Peoples would adjust the amortization of that asset, which could increase future amortization expense. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Goodwill recorded by Peoples in connection with its acquisitions relates to the inherent value in the businesses acquired and this value is dependent upon Peoples' ability to provide quality, cost effective services in a competitive market place. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. Peoples has reviewed its recorded goodwill and concluded that no indicators of impairment existed as of December 31, 2005. However, future events could cause management to conclude that impairment indicators exist and re-evaluate goodwill. If such re-evaluation indicated impairment, Peoples would recognize the loss, if any. Any resulting impairment loss could have a material, adverse impact on Peoples' financial condition and results of operations. Income Taxes - ------------ Income taxes are provided based on the liability method of accounting. The calculation of tax liabilities is complex and requires the use of estimates and judgment since it involves the application of complex tax laws that are subject to different interpretations by Peoples and the various tax authorities. These interpretations are subject to challenge by the tax authorities upon audit or to reinterpretation based on management's ongoing assessment of facts and evolving case law. From time-to-time and in the ordinary course of business, Peoples is involved in inquiries and reviews by tax authorities that normally require management to provide supplemental information to support certain tax positions taken by Peoples in its tax returns. Management believes that it has taken appropriate positions on its tax returns, although the ultimate outcome of any tax review cannot be predicted with certainty. To the extent management determines additional taxes may be due, Peoples recognizes liabilities for such tax exposures when losses associated with the claims are judged to be probable and the loss can be reasonably estimated. On a quarterly basis, management assesses Peoples' tax exposures based on the most recent information available and adjusts the related liability as deemed prudent and necessary. No assurance can be given that the final outcome of these matters will not be different than what is reflected in the current and historical financial statements. RESULTS OF OPERATION Overview of the Income Statement - -------------------------------- In 2005, Peoples' net income was $20,499,000, or $1.94 per diluted share, up from $18,275,000, or $1.71 per diluted share, a year ago. This improvement is due in large part to balance sheet restructuring and other charges of $2,090,000 after-tax (or $0.20 per diluted share) that occurred in 2004. Return on average equity improved to 11.52% in 2005, from 10.60% a year ago, while return on average assets was 1.12% and 1.04% in 2005 and 2004, respectively. In December 2005, Peoples determined that the yearly amount of lump sum payments to participants from Peoples' defined benefit pension plan during 2005 exceeded the allowable threshold of annual service cost plus interest and, accordingly, settlement charges of $578,000 ($421,000 after tax, or $0.04 per diluted share) should have been reflected in the results for the second quarter of 2005. Although Peoples deems the impact of the settlement charge on its financial statements to be immaterial, it has revised second quarter results and reduced second quarter net income per share by $0.04. These amounts are more fully presented in Note 18 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. For the year ended December 31, 2005, net interest income improved to $52.3 million, compared to $51.9 million for the same period in 2004, due to earning asset growth and the related interest income that more than exceeded the increase in interest-bearing liabilities and associated funding costs. Net interest margin dropped seven basis points to 3.32% in 2005 as a result of the flattening yield curve. Other income totaled $29.2 million compared to $22.2 million a year ago and was up 31% due primarily to increased insurance commissions of $3.2 million attributable to the Insurance Agency Acquisitions. Other income was also impacted by securities transactions and asset disposals, which resulted in a net gain of $0.7 million in 2005 versus a net loss of $3.2 million in 2004. In 2005, other expense grew 9% to $51.3 million, from $47.2 million for the year ended December 31, 2004. A full-year's impact of the costs attributable to the Insurance Agency Acquisitions accounted for much of this increase. Interest Income and Expense - --------------------------- Peoples earns interest income on loans and investments and incurs interest expense on interest-bearing deposits and borrowed funds. Net interest income, the amount by which interest income exceeds interest expense, remains Peoples' largest source of revenue. The amount of net interest income earned by Peoples is affected by various factors, including changes in both market interest rates due to the Federal Reserve Board's monetary policy, the level and degree of pricing competition for both in market loans and deposits and the amount and composition of Peoples' earning assets and interest-bearing liabilities. Peoples monitors net interest income performance and manages its balance sheet mix through regular Asset-Liability Committee ("ALCO") meetings. The asset/liability management process employed by the ALCO is intended to minimize the impact of future interest rate changes on Peoples' earnings. However, the frequency and/or magnitude of changes in market interest rates are difficult to predict, much less react to, and may have a greater impact on net interest income than adjustments by management. Further discussion of Peoples' interest rate risk management can be found later in this discussion under the caption "Interest Rate Risk and Liquidity". As part of the analysis of net interest income, management converts tax-exempt income to the pre-tax equivalent of taxable income using an effective tax rate of 35%. Management believes the resulting fully-tax equivalent ("FTE") net interest income allows for a more meaningful comparison of tax-exempt income and yields to their taxable equivalents. Net interest margin, calculated by dividing FTE net interest income by average interest-earning assets, serves as the primary measure used in evaluating the net revenue stream generated by the mix and pricing of Peoples' earning assets and interest-bearing liabilities. The following table details the calculation of FTE net interest income and margin for the years ended December 31: <TABLE> <CAPTION> (Dollars in thousands) 2005 2004 2003 ------------ ------------- ------------- <S> <C> <C> <C> Net interest income, as reported $ 52,306 $ 51,870 $ 53,605 Taxable equivalent adjustments 1,648 1,630 1,662 - -------------------------------------------------------------------------------------------- Fully-tax equivalent net interest income $ 53,954 $ 53,500 $ 55,267 - -------------------------------------------------------------------------------------------- Average earning assets $ 1,628,598 $ 1,579,692 $ 1,574,381 - -------------------------------------------------------------------------------------------- Net interest margin 3.32% 3.39% 3.52% - -------------------------------------------------------------------------------------------- </TABLE> Since mid-2004, the Federal Reserve's Open Market Committee has increased the target Fed funds rate 300 basis points through year-end 2005, causing short-term market interest rates to increase. During the same period, longer-term market interest rates have risen at a much slower pace, compressing the difference between short-term and longer-term interest rates. This flattening of the yield curve, coupled with intense competition for loans and deposits, have been factors in the compression of the net interest margins for many financial institutions in 2005, and Peoples is no exception. For the year ended December 31, 2005, the FTE yield on earning assets of 5.98% was a 37 basis point improvement over 2004's average yield of 5.61%. However, the average interest cost of earning assets increased 25 basis points to 2.66% in 2005, from 2.41% in 2004. In the second half of 2005, Peoples experienced some improvement in asset yields from upward repricing of certain variable rate loans and origination of new loans at current market rates. In the fourth quarter of 2005, Peoples' net interest margin improved 7 basis points, versus the prior quarter and 10 basis points over 2004's fourth quarter. The FTE yield on earning assets was 6.22% for the fourth quarter of 2005, compared to 6.02% and 5.69% for the third quarter of 2005 and the fourth quarter of 2004, respectively, while the average interest cost of earning assets was 2.83%, 2.70% and 2.40%, for the same periods, respectively. Net loans comprise the largest portion of Peoples' earning assets, averaging $1.03 billion in 2005, compared to $927.8 million in 2004. The increased loan volume in 2005 is largely the result of commercial loan originations and loans acquired in the Ashland Banking Acquisition. The FTE yield on net loans was 6.76% in 2005, versus 6.47% a year ago. Loan yields have increased in 2005 due to new loans being originated at higher rates, coupled with repricing of variable rate, prime based loans as a result of the Federal Reserve's action to increase interest rates, although competition for commercial loans and repayment of higher rate loans have tempered these improvements. Investment securities averaged $600.8 million in 2005, down from $640.1 million last year, with FTE yields of 4.67% and 4.45%, respectively. The decrease in average balances from a year ago is largely attributable to management using a portion of the principal runoff to manage liquidity, fund loan growth and for other corporate purposes. Peoples' interest-bearing liabilities averaged $1.48 billion in 2005, at an average cost of 2.94%, up from $1.43 billion and average cost of 2.45% last year. Traditional deposits comprise the majority of Peoples' interest-bearing liabilities, averaging $936.9 million for the year ended December 31, 2005, compared to $888.7 million a year ago. The higher volume of deposits was due primarily to the impact of deposits acquired in the Ashland Banking Acquisition and additional brokered deposits. In 2005, the average cost of interest-bearing deposits was 2.41%, up from 1.91% in 2004. Competition for deposits has both impacted Peoples' ability to retain some deposits and increased the overall cost of interest-bearing deposits. In the fourth quarter of 2005, average interest-bearing deposits dropped to $932.4 million, from $939.1 million, while the average cost increased 15 basis points to 2.59%. Peoples also utilizes a variety of borrowings as complementary funding sources to traditional deposits. In 2005, total borrowed funds averaged $538.9 million compared to $541.9 million in 2004. Peoples' overall cost of borrowed funds increased to 3.85% in 2005, from 3.32% last year, due to higher short-term rates resulting from the Federal Reserve's actions to increase the Federal Funds rate. Advances from the FHLB, both short-term and long-term, remain a key source of funding for asset growth, as well as a means of managing Peoples' interest rate risk. Peoples also accesses wholesale repurchase agreements and other borrowings from unrelated institutions to diversify funding sources. While included in borrowed funds, Peoples' retail repurchase agreements are marketed and managed as a cash management tool for commercial customers that maintain higher balances and have a need for a daily interest-bearing sweep account. Additional information regarding Peoples' borrowed funds can be found later in this discussion under the caption "FINANCIAL CONDITION-Funding Sources". The Following details the average balance and rate of Peoples' borrowed funds: <TABLE> <CAPTION> 2005 2004 2003 -------------------- --------------------- --------------------- (Dollars in thousands) Average Rate Average Average Balance Balance Rate Balance Rate ------------ ------- ------------ ------- ------------- ------- Short-term borrowings: <S> <C> <C> <C> <C> <C> <C> FHLB advances $ 107,184 3.36% $ 70,246 1.35% $ 26,900 1.47% Retail repurchase agreements 21,129 2.67% 16,805 0.95% 19,774 0.87% Other short-term borrowings - - - - 7,545 2.89% - -------------------------------------------------------------------------------------------------------------- Total short-term borrowings $ 128,313 3.29% $ 87,051 1.30% $ 54,219 1.46% - -------------------------------------------------------------------------------------------------------------- Long-term borrowings: FHLB advances $ 200,820 4.11% $ 178,475 4.21% $ 219,233 4.64% Wholesale repurchase agreements 166,058 3.12% 231,137 2.89% 200,032 2.91% Other long-term borrowings 43,666 7.19% 45,286 6.18% 38,593 6.73% - -------------------------------------------------------------------------------------------------------------- Total long-term borrowings $ 410,544 4.07% $ 454,898 3.74% $ 457,858 4.08% - -------------------------------------------------------------------------------------------------------------- </TABLE> The higher level of short-term FHLB advances compared to prior years was partially attributable to Peoples replacing other longer-term borrowings with short-term advances. Management, at times, will use longer term FHLB borrowings to match-fund selected three- and five-year adjustable rate commercial loans with advances that have similar amortization and repricing characteristics. The average cost of Peoples' borrowed funds has steadily increased since mid-2004 in response to the Federal Reserve's action to increase rates. Management may make adjustments to the mix of borrowed funds in the future, as deemed desirable, to manage liquidity and position the balance sheet for potential changes in interest rates. Even with the challenges of the current interest rate environment and intense competition for loans and deposits, Peoples experienced some improvement in asset yields in the latter half of 2005 due to repricing of variable rate loans and reinvestments of investment portfolio cash flows into higher yielding securities. However, management believes net interest margin compression could occur in the first half of 2006 due to various factors, including the current slope of the yield curve and an increase in rates in the first half of 2006 for funding to replace certain maturing liabilities. Still, management is taking steps to adjust the mix of Peoples' balance sheet with the goal of minimizing the impact of future interest rate changes on net interest income. At December 31, 2005, Peoples' interest rate risk position and asset-liability simulations indicate that an immediate and sustained increase in both short-term and long-term interest rates would reduce net interest income. Management does not believe such shifts are representative of actual changes that occur in the yield curve. Consequently, Peoples' net interest margin and income remain difficult to predict and manage. Provision for Loan Losses - ------------------------- Peoples' provision for loan losses was $2,028,000 in 2005, down from $2,546,000 in the prior year. The lower overall provision was the based on management's quarterly evaluation of the loan portfolio and estimation of losses incurred and is directionally consistent with Peoples' loan quality and recent loss experience net of recoveries of previously charged-off loans. A portion of the provision relates to the Overdraft Privilege program, which totaled $599,000 in 2005, compared to $866,000 in 2004. When expressed as a percentage of average loans, the provision was 0.19% in 2005 compared to 0.27% in 2004. Management believes the provisions were appropriate for the overall quality, inherent risk and volume concentrations of Peoples' loan portfolio. Future provisions will continue to be based on management's quarterly procedural discipline described in the "Critical Accounting Policies" section of this discussion. Gains and/or Losses on Securities Transactions - ---------------------------------------------- In 2005, Peoples recognized a net gain of $539,000 on investment securities transactions compared to a net loss of $3,040,000 a year ago. The net gain in 2005 was largely attributable to the sale of two separate equity investments in unaffiliated companies due to changes in their corporate structure. The net loss in 2004 was largely the result of the 2004 Investment Portfolio Repositioning during the fourth quarter, coupled with the $490,000 other-than-temporary impairment charge on Fannie Mae preferred stock. 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 recent years, Peoples has focused on reducing its reliance on net interest income by growing non-interest income, especially fee-based revenues not affected by interest rate changes. Non-interest income, which excludes gains and losses on securities transactions and asset disposals, grew 12% in 2005 and accounted for 35% of total revenues, compared to 33% in 2004 and 25% in 2003. Non-interest income growth also occurred in 2005 as a result of increased insurance revenues of $3.2 million attributable to the Insurance Agency Acquisitions. Service charges and other fees on deposit accounts, which are based on the recovery of costs associated with services provided, are Peoples' largest source of non-interest income. For the year ended December 31, 2005, deposit account service charges totaled $9,801,000 compared to $9,636,000 in 2004. Management periodically evaluates its cost recovery fees to ensure they are reasonable based on operational costs, as well as similar to fees charged in Peoples' markets by competitors. The following table details Peoples' deposit account service charges: (Dollars in Thousands) 2005 2004 2003 --------- --------- --------- Overdraft fees $ 6,595 $ 6,366 $ 5,292 Non-sufficient funds fees 1,895 1,844 1,481 Other fees and charges 1,311 1,426 1,419 - ----------------------------------------------------------------------------- Total $ 9,801 $ 9,636 $ 8,192 - ----------------------------------------------------------------------------- Insurance and investment commissions are also a significant component of Peoples' non-interest income, totaling $9,243,000 in 2005 versus $6,152,000 in 2004. This increase was the result of higher insurance commissions, primarily from sales of property and casualty insurance, due to a full-year's impact of the Insurance Agency Acquisitions completed in mid-2004. The following table details Peoples' insurance and investment commissions: (Dollars in Thousands) 2005 2004 2003 --------- --------- --------- Property and casualty insurance $ 7,908 $ 4,929 $ 452 Life and health insurance 547 404 152 Brokerage 439 402 286 Fixed annuities 207 277 444 Credit life and A&H insurance 142 140 131 - ------------------------------------------------------------------------------- Total $ 9,243 $ 6,152 $ 1,465 - ------------------------------------------------------------------------------- Peoples' e-banking services include ATM and debit cards, direct deposit services and Internet banking and serve as alternative delivery channels to traditional sales offices for providing services to clients. For the year ended December 31, 2005, Peoples' e-banking income was up 17% over the prior year total. Peoples' e-banking revenues have remained strong due in large part to an increase in the number of debit cards issued to customers and higher volumes of debit card activity. At December 31, 2005, Peoples had 87,183 cards issued, with 49% of all eligible deposit accounts having a debit card, compared to 69,733 cards and a 45% penetration rate a year ago. Peoples' customers used their debit cards to complete $162 million of transactions in 2005, up 29% from $126 million a year ago. Peoples' mortgage banking involves the origination and selling of long-term, fixed-rate real estate loans into the secondary market. The amount of associated revenue recognized is dependent largely on customer demand for long-term fixed-rate mortgage loans. In 2005, mortgage banking produced revenues of $826,000 compared to $931,000 in the prior year. The reduction in mortgage banking income is attributable to Peoples' sale of $11.6 million in fixed-rate loans, acquired in the Ashland Banking Acquisition in the first quarter of 2005. The sale, which was due to the loans' associated interest rate risk, resulted in a net loss of $187,000. Peoples' BOLI investment enhances operating efficiency by offsetting rising employee benefit costs. In 2005, BOLI produced modestly lower income due to the impact of a flatter yield curve on the associated investment funds. Still, management believes BOLI continues to provide a better long-term vehicle for funding future benefit costs, and offsetting the related expense, than alternative investment opportunities with similar risk characteristics. Non-Interest Expense - -------------------- In 2005, non-interest expense totaled $51,342,000, up 9% from $47,198,000 a year ago. A full-year's impact of costs associated with the Insurance Agency Acquisitions accounted for $2.5 million of additional expense in 2005, primarily salaries and benefits expense, occupancy and equipment costs and intangible amortization. Salaries and benefits remain Peoples' largest non-interest expense, which is inherent in a service-based industry such as financial services, totaling $26,591,000 and $24,574,000 in 2005 and 2004, respectively. A full-year's impact of the Insurance Agency Acquisitions comprised $1.4 million, or 67% of the overall increase. Peoples also incurred higher sales-related compensation of $0.6 million, while costs related to Peoples' defined benefit pension plan and performance-based incentive plan each grew $0.5 million. In the fourth quarter of 2005, salaries and benefits were down compared to the third quarter of 2005 and fourth quarter of 2004, decreasing 9% and 8%, respectively. Lower medical insurance costs were the key driver of the reduction in fourth quarter salaries and benefits. Fourth quarter 2005 salaries and benefits also included non-cash compensation expense of $122,000 relating to the acceleration of certain stock options on December 29, 2005. Management expects salaries and benefits to be modestly higher in 2006, as medical insurance costs return to more historic levels and normal annual salary adjustments are made. For the year ended December 31, 2005, net occupancy and equipment expense totaled $5,311,000 versus $5,134,000 a year ago. This increase was largely attributable to higher utility, maintenance and lease costs of $389,000, which were partially offset by lower depreciation expense of $187,000. The decline in depreciation expense was attributable to existing assets becoming fully depreciated, coupled with fewer shorter-lived assets, such as computers and other office equipment, being placed in service. Intangible asset amortization expense grew 20% in 2005, due to a full-year's amortization of the customer relationship intangibles acquired in the Insurance Agency Acquisitions and core deposit intangibles from the Ashland Banking Acquisition. Since Peoples uses an accelerated method of amortization for its customer-related intangibles, amortization expense will be lower in subsequent years based on the intangible assets included on Peoples' consolidated balance sheet at December 31, 2005. Professional fees, which include accounting, legal and other professional expenses, were up 12% in 2005, totaling $2,276,000 versus $2,030,000 in 2004. Higher audit fees associated with the new regulatory reporting environment under Sarbanes-Oxley was the primary factor driving the increased professional fees. Marketing expense, which includes the cost of advertising, public relations and charitable contributions, increased 38% in 2005. Nearly half of this increase is attributable to additional contributions of $200,000 to Peoples Bancorp Foundation, Inc., an independent non-profit entity formed in 2004 to make charitable distributions to organizations in Peoples' primary market areas. In addition, Peoples' efforts to promote new deposit products and increase brand awareness in various markets during 2005 were contributing reasons for the higher marketing costs. In 2005, Peoples' bankcard costs, which consist primarily of debit card and ATM processing fees, decreased 19% from the prior year. Even though ATM and debit card activity produced modest growth, the expected corresponding increase in costs was offset by a reduction in various transaction-based charges beginning in early 2005 due to a new processing contract with the existing provider of Peoples' ATM and debit card services. In the fourth quarter of 2005, bankcard costs totaled $317,000, which was down from $355,000 for 2004's fourth quarter, but up from $284,000 for the third quarter of 2005, due to increased customer activity. Management believes bankcard costs will approximate 2005's fourth quarter expense throughout 2006, based on current customer activity levels. Peoples is subject to franchise taxes, which are based largely on Peoples Bank's equity at year-end, in the states where it has a physical presence. In 2005, state franchise taxes totaled $1,793,000, up 23% from $1,458,000 in 2004. This increase was primarily attributable to additional equity at Peoples Bank resulting from the Insurance Agency Acquisitions. Management believes that the stronger capital level at Peoples Bank positions the company for strategic growth opportunities even though there is a negative impact to franchise taxes. Peoples' management and Board of Directors regularly evaluates the capital position of Peoples' direct and indirect subsidiaries from both a cost and leverage perspective. Ultimately, management seeks to optimize Peoples' consolidated capital position through allocation of capital, which is intended to enhance profitability and shareholder value. Return on Equity - ---------------- In 2005, Peoples' return on average equity ("ROE") was 11.52% versus 10.60% in 2004. Management uses ROE to evaluate Peoples' long-term performance, but management believes earnings per share ("EPS") serves as a more meaningful measurement of short-term performance due to the volatility that can occur in equity from changes in the estimated fair values of Peoples' investment portfolio. Return on Assets - ---------------- Return on average assets ("ROA") was 1.12% in 2005 compared to 1.04% a year ago. In recent years, Peoples' primary focus has shifted to EPS enhancement and ROE while reducing the emphasis on ROA as a key performance indicator. However, management continues to monitor ROA and considers it a measurement of the effectiveness of Peoples' asset utilization. Income Tax Expense - ------------------ In 2005, Peoples' effective income tax rate was 27.1%, up from 24.9% a year ago. Peoples' higher effective tax rate in 2005 is primarily attributable to higher pre-tax income. A reconciliation of the effective tax rate to the statutory tax rate can be found in Note 11 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Peoples continues to make tax-advantaged investments in order to manage its effective tax rate and overall tax burden. At December 31, 2005, the amount of tax-advantaged investments totaled $56.7 million compared to $53.4 million at December 31, 2004. 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, 2005, total assets were $1.86 billion, up $46.2 million from $1.81 billion at year-end 2004. This increase was the result of internal loan growth of $48.8 million in 2005, with gross loans totaling $1.07 billion at December 31, 2005 versus $1.02 billion at December 31, 2004. Investment securities totaled $589.3 million at December 31, 2005 versus $602.4 million at year-end 2004. Total liabilities were $1.67 billion at December 31, 2005, compared to $1.63 billion at year-end 2004. At December 31, 2005, deposit balances totaled $1.09 billion, up $19.9 million from the prior year-end, while borrowed funds totaled $565.5 million, up $19.5 million from $546.0 million at December 31, 2004. Stockholders' equity totaled $183.1 million at December 31, 2005, versus $175.4 million at December 31, 2004, an increase of $7.7 million. This increase is due to Peoples' earnings, net of dividends paid, and change in accumulated comprehensive income. 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, 2005, cash and cash equivalents totaled $39.6 million, up $8.2 million from $31.4 million at December 31, 2004. Cash and balances due from banks comprised the largest portion of Peoples' cash and cash equivalents, totaling $35.6 million at year-end 2005 versus $30.7 million a year ago. This increase was due to normal daily fluctuations in the amount of items in process of collection and cash on hand caused by customer activity. Peoples also had Federal Funds sold of $3.0 million at December 31, 2005, compared to no funds sold at year-end 2004. Management believes the current balance of cash and cash equivalents, along with the availability of other funding sources, will allow Peoples to meet cash obligations, special needs and off-balance sheet commitments, such as unfunded loan commitments, undrawn lines of credit, construction loans and letters of credit, as they come due. Peoples will actively manage the principal runoff from the investment and loan portfolios and seek to use those funds productively, based on loan demand and investment opportunities, while maintaining adequate liquidity and acceptable level of borrowings. Further information regarding Peoples' liquidity can be found later in this discussion under "Interest Rate Sensitivity and Liquidity." Investment Securities - --------------------- At December 31, 2005, the amortized cost of Peoples' investment securities totaled $591.0 million compared to $594.5 million at year-end 2004, while the fair market value of the investment portfolio was $589.3 million and $602.4 million, respectively. The difference in amortized cost and market value at December 31, 2005, resulted in unrealized depreciation of $1.7 million and a corresponding decrease in Peoples' equity of $1.1 million, net of deferred taxes. In comparison, the difference in amortized cost and market value at December 31, 2004, resulted in unrealized appreciation of $7.9 million and a corresponding increase in Peoples' equity of $5.1 million, net of deferred taxes. The following table details Peoples' investment portfolio, at estimated fair value, at December 31: <TABLE> <CAPTION> (Dollars in Thousands) 2005 2004 2003 -------------- -------------- -------------- <S> <C> <C> <C> U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 110,373 $ 62,770 $ 65,441 Obligations of states and political subdivisions 69,482 62,234 66,288 Mortgage-backed securities 353,084 418,094 447,341 Other securities 56,374 59,266 62,394 - -------------------------------------------------------------------------------------------------- Total available-for-sale securities $ 589,313 $ 602,364 $ 641,464 - -------------------------------------------------------------------------------------------------- </TABLE> Overall, the composition of Peoples' investment portfolio at December 31, 2005, was comparable to recent year-end portfolios. Peoples' investment in mortgage-backed securities has declined from the prior year-end amount due to management using a portion of the principal runoff to fund loan growth and for other corporate purposes. Management has also reinvested some of the cash flows from mortgage-backed securities into U.S. agency and municipal securities to improve the diversification and overall performance of the investment portfolio in a changing rate environment. Additional information regarding the composition of the investment portfolio can be found in Note 3 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Management regularly evaluates the performance and liquidity of the investment portfolio. In 2006, management plans to utilize a portion of the cash flows from the investment portfolio to fund loan growth or reduce borrowed funds, as deemed appropriate from a net earnings perspective. While Peoples' investment portfolio is used to prudently leverage excess capital, it serves, first and foremost, as a means of maintaining liquidity to satisfy cash flow requirements and managing interest rate risk by adjusting the timing of cash flows and repricing of Peoples' earning assets to mitigate similar changes to Peoples' interest-bearing liabilities. 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, 2005, gross loans totaled $1.07 billion, up $48.8 million compared to year-end 2004 due to internal loan originations. Commercial real estate loans were the key driver of loan growth in 2005. Commercial loans, including loans secured by commercial real estate, represent the largest portion of Peoples' total loan portfolio. At December 31, 2005, commercial loan balances were $641.3 million, or 59.8% of total loans, up $64.5 million from $576.7 million, or 56.4% of total loans, at year-end 2004. The portion of commercial loan balances secured by commercial real estate, excluding construction loans, totaled $504.9 million, or 47.1% of total loans, at December 31, 2005, versus $450.3 million, or 44.0% of total loans, at December 31, 2004. 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, 2005, real estate loans, which include construction loans but exclude loans secured by commercial real estate, totaled $366.8 million compared to $385.4 million at December 31, 2004, a decrease of $18.6 million. Real estate loans comprised 34.2% of Peoples' total loan portfolio at December 31, 2005, versus 37.7% at year-end 2004. Included in real estate loans are home equity credit line balances of $46.6 million at December 31, 2005, versus $43.7 million at December 31, 2004. A shift in client preference for home equity loans over more traditional consumer loans, due in part to Peoples' marketing and sales efforts, was a driving factor in the higher balance of home equity loans. Growth of real estate loan balances in recent periods has been impacted by customer demand for long-term, fixed-rate mortgages, which Peoples generally sells to the secondary market with servicing rights retained. In 2005, Peoples originated 501 long-term, fixed-rate mortgage loans, with total loan amounts of $42 million, versus 467 loans, with total loan amounts of $37 million, in 2004. At December 31, 2005, Peoples was servicing $144.3 million of real estate loans previously sold to the secondary market compared to $106.4 million at year-end 2004. In addition, Peoples had $1.1 million of fixed-rate real estate loans held for sale to the secondary market at December 31, 2005. In 2005, consumer loan balances, including overdrafts, grew $2.8 million, totaling $63.8 million at December 31, 2005. Excluding overdrafts, consumer loans grew $3.1 million during 2005 to $62.7 million, from $59.6 million at year-end 2004. Peoples' indirect lending area contributed a significant portion of Peoples' consumer loans and 2005 growth, with balances of $28.2 million and $23.6 million at December 31, 2005 and 2004, respectively. Peoples' ability to maintain, or even grow, consumer loans in future quarters continues to be impacted by strong competition for various types of consumer loans, especially automobile loans, as well as availability of alternative credit products, such as home equity credit lines. Additionally, Peoples' commitment to originate quality loans based on sound underwriting practices and appropriate loan pricing discipline remains the paramount objective and could limit any future growth Loan Concentration - ------------------ Peoples' largest concentration of commercial loans are credits to assisted living facilities and nursing homes, which comprised approximately 8.9% of Peoples' outstanding commercial loans at year-end 2005, compared to 10.2% at December 31, 2004. Loans to lodging and lodging-related companies also represented a significant portion of Peoples' commercial loans, comprising 8.8% of Peoples' outstanding commercial loans at December 31, 2005, versus 11.4% at year-end 2004. These lending opportunities typically have arisen due to the growth of these industries in markets served by Peoples or in contiguous areas, and also from 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 financial strength, market expertise and experience of the borrowers and principals in these business relationships. In addition, a sizeable portion of the loans to lodging and lodging-related companies is spread over various geographic areas and is guaranteed by principals with substantial net worth. Allowance for Loan Losses - ------------------------- Peoples' allowance for loan losses totaled $14.7 million at December 31, 2005, down slightly compared to $14.8 million at year-end 2004. When expressed as a percentage of total loans, the allowance was 1.37% at year-end 2005, down from 1.44% at December 31, 2004, a result of loan growth and overall improved asset quality and credit risk profile of the loan portfolio. In 2005, net charge-offs were down 12% compared to 2004, totaling $2,068,000 versus $2,361,000. This decline was attributable to increased recoveries that offset higher charge-offs. Net charge-offs relating to the Overdraft Privilege Program comprised the largest portion of Peoples' net charge-offs, totaling $639,000 in 2005 versus $822,000 in 2004. Net charge-offs of commercial and real estate loans also comprised a significant portion of net charge-offs. 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: <TABLE> <CAPTION> 2005 2004 2003 ------------------------------ ------------------------------ ------------------------------ (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 ------------ ----------- ------------ ----------- ------------- ----------- <S> <C> <C> <C> <C> <C> <C> Commercial $ 11,883 59.8 % $ 11,751 56.3 % $ 11,232 56.0 % Real estate 1,400 34.2 1,175 37.7 1,234 35.3 Consumer 1,149 5.9 1,394 5.9 1,594 8.5 Overdrafts 288 0.1 327 0.1 283 0.2 Credit card - - 113 - 232 - - -------------------------------------------------------------------------------------------------------------------------- Total $ 14,720 100.0 % $ 14,760 100.0 % $ 14,575 100.0 % - -------------------------------------------------------------------------------------------------------------------------- </TABLE> 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 prior periods, Peoples had maintained an allowance for credit cards that reflected an estimate of the loss from the retained recourse on the business cards included in the credit card portfolio sale. This recourse arrangement expired during the second quarter of 2005, eliminating the need for an allocation for credit cards. While allocations are made to specific loans and pools of loans, the entire allowance is available for all loan losses existing as of December 31, 2005. Asset quality remains a key focus, as management continues to stress quality rather than growth. At December 31, 2005, nonperforming assets totaled $6,843,000, or 0.37% of total assets, versus $7,706,000, or 0.43% of total assets, at year-end 2004. This decrease was largely the result of Peoples selling other real estate owned ("OREO") of $752,000, representing the banking offices closed as part of the Ashland Banking Acquisition and transferred to OREO in late 2004. 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, 2005, the recorded investment in loans that were considered impaired was $11.8 million, of which $9.3 million were accruing interest and $2.5 million were nonaccrual loans. Included in this amount were $4.8 million of impaired loans for which the related allowance for loan losses was $1.9 million. The remaining impaired loan balances do not have a related allocation of the allowance for loan losses because the loans have previously been written-down, are well secured or possess characteristics indicative of the ability to repay the loan. In 2005, Peoples' average recorded investment in impaired loans was approximately $10.8 million and interest income of $668,000 was recognized on impaired loans during the period, representing 0.7% of Peoples' total interest income. This compares to average impaired loans of approximately $17.7 million and interest income of $513,000, or 0.6% of Peoples' total interest income, in 2004. 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 $1.09 billion at December 31, 2005 versus $1.07 billion at year-end 2004. Non-interest-bearing deposits serve as a core funding source. At December 31, 2005, non-interest-bearing deposit balances totaled $162.7 million, up $9.8 million compared to the prior year-end. The majority of this increase is attributable to Peoples' efforts to grow non-interest-bearing deposits and reduce its reliance on high cost funding. In addition, Peoples implemented a marketing strategy in the fourth quarter of 2005 designed to attract new customers and increase non-interest-bearing deposits. In November and December 2005, Peoples experienced an overall 27% increase in checking account sales over the same periods in 2004, which exceeds the targets set for this program for that period. Since customer activity can result in significant temporary changes in deposit balances at end of periods, management believes a comparison of average balances to be a more meaningful reflection of the trend in non-interest-bearing deposits. In 2005, non-interest-bearing deposits averaged $158.7 million versus $144.6 million in 2004, 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 $926.6 million at December 31, 2005, compared to $916.4 million at December 31, 2004, with additional brokered deposits of $14.9 million accounting for this increase. Intense competition for deposits, particularly certificates of deposits and other high-cost deposit funds during this period of rising interest rates, has challenged Peoples' ability to grow interest-bearing deposit balances. The following details Peoples' interest-bearing deposits at December 31: <TABLE> <CAPTION> (Dollars in thousands) 2005 2004 2003 ------------ ------------ ------------- <S> <C> <C> <C> Retail certificates of deposit $ 465,148 $ 456,850 $ 451,923 Interest-bearing transaction accounts 178,030 165,144 157,410 Savings accounts 131,221 157,145 171,488 Money market deposit accounts 110,372 107,394 104,019 Brokered certificates of deposit 41,786 29,909 9,981 - ---------------------------------------------------------------------------------------------- Total interest-bearing deposits $ 926,557 $ 916,442 $ 894,821 - ---------------------------------------------------------------------------------------------- </TABLE> Peoples also accesses other funding sources, including short-term and long-term borrowings, to fund asset growth and satisfy liquidity needs. Advances from the FHLB comprise a sizeable portion of Peoples' borrowed funds. Typically, short-term FHLB advances, consisting of overnight repo advances or variable cash management advances, are used to manage Peoples' daily liquidity needs since they may be repaid, in whole or part, at anytime without a penalty. Peoples also utilizes a combination of long-term FHLB advances to help manage its interest rate sensitivity and liquidity. In most cases, the early repayment of long-term FHLB advances requires Peoples to incur a prepayment penalty. In addition to FHLB advances, Peoples accesses national market repurchase agreements to diversify its funding sources. 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 allocate additional investment securities to these repurchase agreements. Further information regarding Peoples' management of interest rate sensitivity can be found later in this discussion under "Interest Rate Sensitivity and Liquidity." At December 31, 2005, borrowed funds totaled $565.5 million, up from $546.0 million at year-end 2004. FHLB advances represented the largest component of borrowed funds, totaling $328.8 million and $248.2 million at year-end 2005 and 2004, respectively. In 2005, the amount of wholesale repurchase agreements decreased $80.9 million, as Peoples repaid maturing advances using short-term FHLB advances rather than extending the agreements at current market rates. Capital/Stockholders' Equity - ---------------------------- At December 31, 2005, stockholders' equity was $183.1 million, versus $175.4 million at December 31, 2004, an increase of $7.7 million, attributable to Peoples' earnings, net of dividends paid, of $12.3 million and a reduction in comprehensive income of $6.1 million. For the year ended December 31, 2005, Peoples declared dividends of $8.2 million, representing a dividend payout ratio of 40.0% of earnings, compared to $7.6 million, and a payout ratio of 41.7%, a year ago. While management anticipates Peoples continuing its 40-year history of consistent dividend growth in future periods, Peoples Bancorp's ability to pay dividends on its common shares is largely dependent upon dividends from Peoples Bank. In addition, other restrictions and limitations may prohibit Peoples from paying dividends even when sufficient cash is available. Further discussion regarding restrictions on Peoples' ability to pay future dividends can be found in Note 13 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K, as well as the "Limits on Dividends" section under Item 1 of this Form 10-K. Included in Peoples' equity is accumulated comprehensive income, net of deferred taxes, which consists of the adjustment for the net unrealized holding gains or loss on available-for-sale securities. At December 31, 2005, accumulated comprehensive loss totaled $1.1 million versus income of $5.0 million at December 31, 2004, a change of $6.1 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, 2005, Peoples had treasury stock totaling $8.8 million compared to $10.3 million at year-end 2004. During 2005, Peoples repurchased 59,700 common shares (or 11% of the total authorized), at an average price of $26.78 per share, under the 2005 Stock Repurchase Program, and 5,625 common shares, at an average price of $27.65, in conjunction with the deferred compensation plan for directors of Peoples and subsidiaries. During the same period, Peoples reissued 115,329 treasury shares in connection with the Insurance Agency Acquisitions and stock option exercises. Peoples may repurchase additional common shares in 2006 as authorized under the 2006 Stock Repurchase Program and deemed appropriate by management. Management uses the tangible capital ratio as one measure of the adequacy of Peoples' equity. The ratio, defined as tangible equity as a percentage of tangible assets, excludes the balance sheet impact of intangible assets acquired through acquisitions. At December 31, 2005, Peoples' tangible capital ratio was 6.37% compared to 6.00% at December 31, 2004. The higher ratio compared to the prior year-end is the result of a 9% increase in tangible equity that exceeded the 3% increase in tangible assets. 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 regulators. Peoples and Peoples Bank were categorized as well-capitalized institutions at December 31, 2005, based on the most recent regulatory notification. Further information regarding Peoples and Peoples Bank's risk-based capital ratios can be found in Note 13 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. Interest Rate Sensitivity and Liquidity - --------------------------------------- While Peoples is exposed to various business risks, the risks relating to interest rate sensitivity and liquidity are typically the most complex and dynamic risks that can materially impact future results of operations and financial condition. The objective of Peoples' asset/liability management ("ALM") function is to measure and manage these risks in order to optimize net interest income within the constraints of prudent capital adequacy, liquidity and safety. This objective requires Peoples to focus on interest rate risk exposure and adequate liquidity through its management of the mix of assets and liabilities, their related cash flows and the rates earned and paid on those assets and liabilities. Ultimately, the ALM function is intended to guide management in the acquisition and disposition of earning assets and selection of appropriate funding sources. Interest Rate Risk - ------------------ Interest rate risk ("IRR") is one of the most significant risks for Peoples, 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 IRR. To this end, the ALCO has established an IRR management policy that sets minimum requirements and guidelines for monitoring and managing the level and amount of IRR. The objective of the IRR policy is to encourage adherence to sound fundamentals of banking while allowing sufficient flexibility to meet the challenges and opportunities of changing markets. Peoples' ALCO relies on different methods of assessing IRR, including simulations, to project future net interest income streams and to monitor the sensitivity of the net present estimated fair value of equity and the difference, or "gap", between maturing or repricing rate-sensitive assets and liabilities over various time periods. 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 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 projected fair value of equity. The modeling process starts with a base case simulation using the current balance sheet and current interest rates held constant for the next twelve months. Alternate scenarios are prepared which illustrate the impact of increasing and decreasing market interest rates. Comparisons produced from the simulation data, showing the changes in net interest income from the base interest rate scenario, illustrate the risks associated with the current balance sheet structure. Additional simulations, when deemed appropriate or necessary, are prepared using different interest rate scenarios than those used with the base case simulation and/or possible changes in balance sheet composition. Comparisons showing the earnings and equity value variance from the base case are provided to the ALCO for review and discussion. As part of the evaluation of IRR, the ALCO has established limits on changes in net interest income and the economic value of equity. The ALCO limits the decrease in net interest income to 15% or less from base case for each 200 basis point shift in interest rates measured over a twelve- and twenty-four-month period. The ALCO limits the negative impact on net equity to 30% or less given an immediate and sustained 200 basis points shift in interest rates. The difference between rate sensitive assets and rate sensitive liabilities for specified time periods is known as the gap. The ALCO also reviews static gap measures for specific periods focusing on a one-year cumulative gap. Based on historical trends and performance, the ALCO has determined the ratio of the one-year cumulative gap should be within +/-15% of earning assets at the date of measurement. Results that are outside of any of these limits will prompt a discussion by the ALCO of appropriate actions, if any, which should be taken. At December 31, 2005, Peoples' one-year cumulative gap amount was negative 6.1% of earning assets, which represented $101.9 million more in liabilities than assets that are contractually scheduled to reprice or mature during that period. Management believes a portion of interest-bearing liabilities are not likely to reprice at their first opportunity, based on current rates and management's control over the pricing of most deposits. Excluding those liabilities, Peoples' adjusted one-year cumulative gap amount at quarter-end was negative 5.8% of earning assets, which represented $96.4 million more in liabilities than assets that mature or may reprice during the next twelve months. 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, 2005 (dollars in thousands):
<TABLE> <CAPTION> Immediate Interest Rate Estimated Estimated Increase (Decrease) in Increase (Decrease) Decrease in Economic Value of Basis Points In Net Interest Income Equity - --------------------------- ----------------------------- -------------------------------- <S> <C> <C> <C> <C> <C> 200 $ (5,217) (10.1) % $ (26,538) (10.2) % 100 (1,811) (3.5) (13,528) (5.2) (100) 448 0.9 3,217 1.2 (200) $ (1,481) (2.9) % $ (2,921) (1.1) % </TABLE> Peoples is within the established IRR policy limits for all simulations and all scenarios shown in the above table. The interest rate risk analysis shows that Peoples is liability sensitive, which means that increasing interest rates should negatively impact Peoples' net interest income while decreasing interest rates should positively impact net interest income, based on the assumptions used. However, the variability of cash flows from the investment and loan portfolios continues to have a significant influence on future net interest income and earnings, especially during periods of changing interest rates. In addition, many variable rate loans contain features limiting the amount of annual and lifetime changes in interest rates that can mitigate the impact of changes in interest rates. Liquidity - --------- In addition to IRR management, a primary objective of the ALCO is to maintain a sufficient level of liquidity. The ALCO defines liquidity as the ability to meet anticipated and unanticipated operating cash needs, loan demand and deposit withdrawals, without incurring a sustained negative impact on profitability. The ALCO's liquidity management policy sets limits on the net liquidity position of Peoples and the concentration of non-core funding sources, both wholesale funding and brokered deposits. Typically, the main source of liquidity for Peoples is deposit growth. Liquidity is also provided by cash generated from earning assets such as maturities, calls, principal payments and net income from loans and investment securities. In 2005, cash provided by financing activities totaled $32.4 million, due primarily to deposit growth of $20.5 million. In comparison, in 2004, cash used in financing activities was $23.3 million as deposits declined $23.0 million in 2004. Cash used in investing activities totaled $56.1 million in 2005 versus $51.4 million last year, primarily due to lower net cash flows from the investment portfolio. When appropriate, Peoples takes advantage of external sources of funds, such as advances from the FHLB, national market repurchase agreements and brokered deposits. These external sources often provide attractive interest rates and flexible maturity dates that enable Peoples to match-fund the payment, amortization and pricing characteristics of corresponding earning assets. At December 31, 2005, Peoples had available borrowing capacity of approximately $133 million through these external sources, along with unpledged investment securities of approximately $134 million that can be utilized as an additional source of liquidity. The net liquidity position of Peoples is calculated by subtracting volatile funds from liquid assets. Peoples' volatile funds consist of deposits that are considered short-term in nature along with a variable-rate loan from an unrelated institution. Liquid assets include short-term investments and unpledged available-for-sale securities. At December 31, 2005, Peoples' net liquidity position was $104.3 million, or 5.6% of total assets, compared to $141.4 million, or 7.8% of total assets, at December 31, 2004. The liquidity position as of December 31, 2005, was within Peoples' policy limit of negative 10% of total assets. Off-Balance Sheet Activities and Contractual Obligations - -------------------------------------------------------- Peoples routinely engages in activities that involve, to varying degrees, elements of risk that are not reflected in whole or in part in the consolidated financial statements. These activities are part of Peoples' normal course of business and include traditional off-balance sheet credit-related financial instruments, interest rate contracts, operating leases, long-term debt and commitments to make additional capital contributions in low-income housing tax credit investments. Traditional off-balance sheet credit-related financial instruments are primarily commitments to extend credit, and standby letters of credit. These activities are necessary to meet the financing needs of customers and could require Peoples to make cash payments to third parties in the event certain specified future events occur. The contractual amounts represent the extent of Peoples' exposure in these off-balance sheet activities. However, since certain off-balance sheet commitments, particularly standby letters of credit, are expected to expire or only partially be used, the total amount of commitments does not necessarily represent future cash requirements. Peoples also enters into interest rate contracts where cash will either be paid to or received from 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, 2005, 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, 2005. 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 based on past experience. Further information regarding Peoples' financial instruments with off-balance sheet risk can be found in Note 12 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Peoples continues to lease certain facilities and equipment under noncancelable operating leases with terms providing for fixed monthly payments over periods ranging from two to ten years. Many of Peoples' leased facilities are inside retail shopping centers and, as a result, are not available for purchase. Management believes these leased facilities increase Peoples' visibility within its markets and afford sales associates additional access to current and potential clients. The following table details the aggregate amount of future payments Peoples is required to make under certain contractual obligations as of December 31, 2005: <TABLE> <CAPTION> Payments due by period ----------------------------------------------------------- (Dollars in thousands) More Less than than 5 Total 1 year 1-3 years 3-5 years years ----------- ----------- ----------- ---------- ---------- <S> <C> <C> <C> <C> <C> Long-term debt (1) $ 362,466 $ 94,550 $ 154,033 $ 81,336 $ 32,547 Operating leases 5,908 631 1,241 1,100 2,936 Time deposits 502,934 223,551 249,596 29,764 23 - ----------------------------------------------------------------------------------------------------------- Total $ 871,308 $ 318,732 $ 404,870 $ 112,200 $ 35,506 - ----------------------------------------------------------------------------------------------------------- <FN> (1) Amounts reflect the minimum principal payments required under Peoples' long-term debt agreements. </FN> </TABLE> Effects of Inflation on Financial Statements - -------------------------------------------- Substantially all of Peoples' assets relate to banking and are monetary in nature. As a result, inflation does not impact Peoples to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in a loss in purchasing power and conversely a net monetary liability position results in an increase in purchasing power. The opposite would be true during a period of decreasing prices. In the banking industry, monetary assets typically exceed monetary liabilities. The current monetary policy targeting low levels of inflation has resulted in relatively stable price levels. Therefore, inflation has had little impact on Peoples' net assets. Future Outlook - -------------- Peoples' 2005 results reflect continued growth and positive trends in key areas, including strong loan production, modest improvement in net interest income and stable levels of non-interest expense. Management expects interest rate challenges will persist in 2006, due to continued competition for both loans and deposits and the flatter slope of the yield curve. To offset some of the expected compression in net interest margin, Peoples is taking steps to adjust the balance sheet mix by funding loan growth using cash flows from, and gradually reducing the level of, the investment portfolio. Another key focus of Peoples in 2006 is growth of core deposit funding sources in order to reduce the reliance on higher-costing wholesale funding. Initial results from the deposit growth marketing campaign established in early fourth quarter 2005 are encouraging. While sales efforts have exceeded the program's target for November and December, the challenge in 2006 will be to build on this success by developing long-term relationships and uncovering other financial needs of these new customers. Peoples' sales associates are also focused on expanding relationships with existing customers, working to deliver the right financial products and services to Peoples' growing customer base. Loan growth remains a key component of Peoples' long-term strategic goals. Management believes some lending opportunities exist in Peoples' markets, although some significant commercial loan payoffs are expected to occur in first half of 2006, as customers move loans to the capital markets or directly to investors, such as insurance companies, for long term, fixed rate pricing. Consequently, loan growth will be challenged in the early parts of the year, and management expects loan growth to be, at best, flat in the early part of 2006, as lenders diligently work to originate quality loans in sufficient volume to offset this expected runoff. In recent years, Peoples has been successful at growing its business and revenues through strategic acquisitions and expansion. Economic conditions in several markets served by Peoples remain vibrant, and, consequently management believes attractive opportunities for above average growth potential exist in these markets. In 2006, management will continue to evaluate possible opportunities to expand Peoples' presence in focus markets, such as Lancaster, Ohio and Huntington, West Virginia, and open new full-service banking offices. Ultimately, any future expansion will be driven by growth opportunities in both deposits and loans. Peoples' capital position remains at levels management believes will support balance sheet growth opportunities. While the need to generate short-term results is understood, management believes its disciplined, long-term approach to improving earnings through diversification of the revenue base will allow Peoples' to build the greatest value for shareholders. Peoples remains a service-oriented company with a 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. 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 which may increase significantly; (2) changes in the interest rate environment which may adversely impact interest margins; (3) prepayment speeds, loan originations and sale volumes, charge-offs and loan loss provisions may be less favorable than expected; (4) general economic conditions may be 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 may 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 costs and effects of regulatory and legal developments, including the outcome of regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations; and (11) other risk factors relating to the banking industry or Peoples as detailed from time to time in 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 2004 to 2003 Results of Operation - ----------------------------------------------- In 2004, Peoples' net income totaled $18.3 million, or $1.71 per diluted share, up from $16.3 million, or $1.52 per diluted share, in 2003. The increase was the result of higher non-interest revenues of $4.7 million, which more than offset the $1.3 million increase in non-interest expense and $1.7 million decrease in net interest income. Return on average equity improved to 10.60% in 2004, from 9.75% in 2003, while return on average assets was 1.04% and 0.95% for the same periods, respectively. Balance sheet restructuring and other charges reduced earnings in both 2004 and 2003. In December 2004, Peoples recorded a loss on sale of securities totaling $2,596,000 (or $1,688,000 after-tax) relating to the repositioning of a portion the investment portfolio; a write down of $128,000 ($83,000 after-tax) on real estate values of banking offices consolidated in conjunction with the Ashland Banking Acquisition and an other-than-temporary impairment charge of $490,000 (or $319,000 after-tax) on an investment in Fannie Mae ("FNMA") preferred stock. The aggregate impact of these transactions resulted in a charge to income of $3,214,000 (or $2,090,000 after-tax) in 2004. Comparatively, Peoples recorded a net charge of $7,462,000 (or $5,372,000, after-tax) in 2003 relating to the 2003 Investment Portfolio Restructuring and Long-Term Debt Restructuring. Net interest income totaled $51.9 million in 2004 and net interest margin was 3.39% compared to $53.6 million and 3.52% in 2003. Both net interest income and margin were negatively impacted by very competitive pricing for loans and deposits, as well as Peoples' management of its interest rate risk position, which included extending the maturities of funding liabilities resulted in increased interest expense. In 2004, Peoples' non-interest revenues benefited from acquisitions, especially the Insurance Agency Acquisitions. Other income grew 27% to $22.2 million in 2004, from $17.5 million last year, due largely to increased insurance and investment commissions of $4.7 million and deposit account service charges of $1.4 million. Net losses on securities transactions reduced other income by $3.2 million and $2.2 million in 2004 and 2003, respectively, while other income in 2003 also benefited from a $1.4 million gain from the sale of Peoples' credit card portfolio. Deposit account service charges grew 18% in 2004 due to higher volumes of overdraft and non-sufficient funds fees and an increase in the number of checking accounts, as well as an increase in the per item amount of certain cost recovery fees. In 2004, insurance and investment commissions totaled $6.2 million compared to $1.5 million the previous year, reflecting the revenues generated by the acquired insurance agencies. E-banking revenues remained strong in 2004, growing 16% to $2.4 million, due to additional debit cards issued to customers and higher volumes of transactions completed using Peoples' debit cards. Other expense totaled $47.2 million in 2004 versus $45.9 the previous year, an increase of $1.3 million. Salaries and benefits were up $4.9 million in 2004, with over half of this increase attributable to the Insurance Agency Acquisitions and full-year's impact of the Kentucky Bancshares acquisition. Net occupancy and equipment costs totaled $5.1 million in 2004 versus $4.6 million, while intangible amortization was $2.2 million in 2004 versus $1.5 million in 2003. Both increases reflect additional costs associated with acquisitions completed in 2003 and 2004. Bankcard costs increased 26% in 2004, largely the result of Peoples' increased customer base and additional cards issued, coupled with increased customer activity. These 2004 expense increases were offset by the decline in expense that occurred as a result of the Federal Home Loan Bank advance prepayment fees of $6.8 million incurred in late 2003 as the Long-Term Debt Restructuring. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - ----------------------------------------------------------------------- Please refer to the section captioned "Interest Rate Sensitivity and Liquidity" on pages 37 through 39 under Item 7 of this Form 10-K, which section is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ---------------------------------------------------- The Consolidated Financial Statements and accompanying notes, and the report of independent registered public accounting firm, are set forth immediately following Item 9B of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - -------------------------------------------------------------------------- No response required. ITEM 9A. CONTROLS AND PROCEDURES. - -------------------------------- Disclosure Controls and Procedures - ---------------------------------- Peoples' management, with the participation of Peoples' President and Chief Executive Officer and Peoples' Chief Financial Officer and Treasurer has evaluated the effectiveness of Peoples' disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2005. Based upon that evaluation, Peoples' President and Chief Executive Officer and Peoples' Chief Financial Officer and Treasurer have concluded that: (a) information required to be disclosed by Peoples in this Annual Report on Form 10-K and other reports Peoples files or submits under the Exchange Act would be accumulated and communicated to Peoples' management, including its President and Chief Executive Officer and Chief Financial Officer and Treasurer, as appropriate, to allow timely decisions regarding required disclosure; (b) information required to be disclosed by Peoples in this Annual Report on Form 10-K and other reports Peoples files or submits under the Exchange Act would be recorded, processed, summarized and reported within the timeframe specified in the SEC's rules and forms; and (c) Peoples' disclosure controls and procedures are effective as of the end of the fiscal year covered by this Annual Report on Form 10-K to ensure that material information relating to Peoples and its consolidated subsidiaries is made known to them, particularly during the period in which Peoples' periodic reports, including this Annual Report on Form 10-K, are being prepared. Management's Annual Report on Internal Control Over Financial Reporting - ----------------------------------------------------------------------- The "Report of Management's Assessment of Internal Control Over Financial Reporting" required by Item 308(a) of SEC Regulation S-K is included on page 44 of this Annual Report on Form 10-K. Attestation Report of Independent Registered Public Accounting Firm - ------------------------------------------------------------------- The "Report of Independent Registered Public Accounting Firm on Effectiveness of Internal Control Over Financial Reporting" required by Item 308(b) of SEC Regulation S-K is included on page 45 of this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting - ---------------------------------------------------- During the fourth quarter of Peoples' fiscal year ended December 31, 2005, no significant changes were made in Peoples' internal control over financial reporting in connection with the above evaluation that has materially effected, or is reasonably likely to materially effect, Peoples' internal control over financial reporting. ITEM 9B. OTHER INFORMATION. - --------------------------- No response required.
Report of Management's Assessment of Internal Control Over Financial Reporting - ------------------------------------------------------------------------------ Peoples' management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Peoples' internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation, integrity, and fair presentation of Peoples' consolidated financial statements for external reporting purposes in accordance with United States generally accepted accounting principles. With the supervision and participation of Peoples' President and Chief Executive Officer and Peoples' Chief Financial Officer, management evaluated the effectiveness of Peoples' internal control over financial reporting as of December 31, 2005, using the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. No matter how well designed, internal control over financial reporting may not prevent or detect all misstatements. Projection of the evaluation of effectiveness to future periods is subject to risks, including but not limited to (a) controls may become inadequate due to changes in conditions; (b) a deterioration in the degree of compliance with policies or procedures; and (c) the possibility of control circumvention or override, any of which may lead to misstatements due to undetected error or fraud. Effective internal control over financial reporting can provide only a reasonable assurance with respect to financial statement preparation and reporting. Management assessed the effectiveness of Peoples' internal control over financial reporting as of December 31, 2005, and, based on this assessment, has concluded Peoples' internal control over financial reporting is effective as of that date. Peoples' independent registered public accounting firm, Ernst & Young LLP has audited the consolidated financial statements included in this Annual Report and has issued an audit report on management's assessment of Peoples' internal control over financial reporting. /s/ MARK F. BRADLEY ------------------------------------- Mark F. Bradley President and Chief Executive Officer /s/ JOHN W. CONLON -------------------------------------- John W. Conlon Chief Financial Officer and Treasurer
Report of Independent Registered Public Accounting Firm on Effectiveness of Internal Control Over Financial Reporting - --------------------------------------------------------------------------- The Board of Directors and Shareholders of Peoples Bancorp Inc. We have audited management's assessment, included in the accompanying Report of Management's Assessment of Internal Control Over Financial Reporting, that Peoples Bancorp Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Peoples Bancorp Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Peoples Bancorp Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Peoples Bancorp Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Peoples Bancorp Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005 of Peoples Bancorp Inc., and our report dated March 10, 2006 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Charleston, West Virginia March 10, 2006
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements - ----------------------------------------------------------------------- The Board of Directors and Shareholders of Peoples Bancorp Inc. We have audited the accompanying consolidated balance sheets of Peoples Bancorp Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of Peoples Bancorp Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peoples Bancorp Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Peoples Bancorp Inc.'s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2006, expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Charleston, West Virginia March 10, 2006
<TABLE> <CAPTION> PEOPLES BANCORP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) December 31, --------------------------------------- 2005 2004 ---------------- ----------------- <S> <C> <C> ASSETS Cash and cash equivalents: Cash and due from banks $ 35,564 $ 30,670 Interest-bearing deposits in other banks 1,084 779 Federal funds sold 3,000 - - ------------------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 39,648 31,449 - ------------------------------------------------------------------------------------------------------------------------------ Available-for-sale investment securities, at estimated fair value (amortized cost of $591,022 and $594,457 at December 31, 2005 and 2004, respectively) 589,313 602,364 - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of deferred fees and costs 1,071,876 1,023,058 Allowance for loan losses (14,720) (14,760) - ------------------------------------------------------------------------------------------------------------------------------ Net loans 1,057,156 1,008,298 - ------------------------------------------------------------------------------------------------------------------------------ Loans held for sale 1,103 612 Bank premises and equipment, net 23,486 22,640 Business owned life insurance 46,993 45,253 Goodwill 59,767 59,096 Other intangible assets 9,513 12,022 Other assets 28,298 27,352 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 1,855,277 $ 1,809,086 ============================================================================================================================== LIABILITIES Deposits: Non-interest-bearing $ 162,729 $ 152,979 Interest-bearing 926,557 916,442 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 1,089,286 1,069,421 - ------------------------------------------------------------------------------------------------------------------------------ Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 35,896 14,495 Federal Home Loan Bank advances 137,800 37,400 - ------------------------------------------------------------------------------------------------------------------------------ Total short-term borrowings 173,696 51,895 - ------------------------------------------------------------------------------------------------------------------------------ Long-term borrowings 362,466 464,864 Junior subordinated notes held by subsidiary trusts 29,350 29,263 Accrued expenses and other liabilities 17,402 18,225 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,672,200 1,633,668 - ------------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common stock, no par value, 24,000,000 shares authorized, 10,869,655 shares issued and 10,850,641 shares issued at December 31, 2005 and 2004, respectively, including shares in treasury 162,231 162,284 Retained earnings 30,740 18,442 Accumulated comprehensive (loss) income, net of deferred income taxes (1,116) 4,958 Treasury stock, at cost, 350,675 shares and 415,539 shares at December 31, 2005 and 2004, respectively (8,778) (10,266) - ------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 183,077 175,418 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 1,855,277 $ 1,809,086 ============================================================================================================================== See Notes to Consolidated Financial Statements. </TABLE>
<TABLE> <CAPTION> PEOPLES BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, except Per Share Data) Year ended December 31, ---------------------------------------------------------- 2005 2004 2003 ------------- ------------ ------------- <S> <C> <C> <C> Interest Income: Interest and fees on loans $ 69,188 $ 59,880 $ 62,159 Interest on taxable investment securities 23,676 24,237 26,429 Interest on tax-exempt investment securities 2,839 2,778 2,882 Other interest income 72 135 185 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 95,775 87,030 91,655 - ------------------------------------------------------------------------------------------------------------------------------ Interest Expense: Interest on deposits 22,550 16,997 18,571 Interest on short-term borrowings 4,224 1,130 793 Interest on long-term borrowings 14,217 14,678 16,344 Interest on junior subordinated notes held by subsidiary trusts 2,478 2,355 2,342 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 43,469 35,160 38,050 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 52,306 51,870 53,605 Provision for loan losses 2,028 2,546 3,601 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 50,278 49,324 50,004 - ------------------------------------------------------------------------------------------------------------------------------ Other Income: Service charges on deposit accounts 9,801 9,636 8,192 Investment and insurance commissions 9,243 6,152 1,465 Income from fiduciary activities 3,366 3,471 3,363 Electronic banking income 2,790 2,390 2,055 Business owned life insurance 1,740 1,899 1,403 Mortgage banking income 826 931 1,352 Gain (loss) on securities transactions 539 (3,040) (1,905) Gain on sale of credit card portfolio - - 1,423 Other 862 769 190 - ------------------------------------------------------------------------------------------------------------------------------ Total other income 29,167 22,208 17,538 - ------------------------------------------------------------------------------------------------------------------------------ Other Expenses: Salaries and employee benefits 26,591 24,574 19,636 Net occupancy and equipment 5,311 5,134 4,561 Amortization of other intangible assets 2,669 2,219 1,493 Professional fees 2,276 2,030 1,938 Data processing and software 1,924 1,849 1,596 Franchise tax 1,793 1,458 1,126 Marketing 1,554 1,128 1,053 Bankcard costs 1,188 1,461 1,160 Communications 1,148 1,116 993 Loss on early debt extinguishment - - 6,858 Other 6,888 6,229 5,489 - ------------------------------------------------------------------------------------------------------------------------------ Total other expenses 51,342 47,198 45,903 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 28,103 24,334 21,639 - ------------------------------------------------------------------------------------------------------------------------------ Income taxes: Current 8,539 4,483 4,055 Deferred (935) 1,576 1,330 - ------------------------------------------------------------------------------------------------------------------------------ Total income taxes 7,604 6,059 5,385 - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 20,499 $ 18,275 $ 16,254 ============================================================================================================================== Earnings per share: Basic $ 1.96 $ 1.74 $ 1.56 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 1.94 $ 1.71 $ 1.52 - ------------------------------------------------------------------------------------------------------------------------------ Weighted-average number of shares outstanding: Basic 10,444,854 10,529,332 10,433,708 - ------------------------------------------------------------------------------------------------------------------------------ Diluted 10,581,019 10,710,114 10,660,083 - ------------------------------------------------------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. </TABLE>
<TABLE> <CAPTION> PEOPLES BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in Thousands, except Per Share Data) Accumulated Common Stock Retained Comprehensive Treasury Shares Amount Earnings Income (Loss) Stock Total - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 2002 9,421,222 $ 129,173 $ 12,650 $ 6,446 $ (1,086) $ 147,183 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 16,254 16,254 Other comprehensive loss, net of tax (2,191) (2,191) Cash dividends declared of $0.65 per share (6,837) (6,837) 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) 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 Common stock issued under dividend reinvestment 16,403 411 411 plan 5% stock dividend 466,127 13,128 (14,286) 1,158 - 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 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2003 10,704,938 $ 161,005 $ 7,781 $ 4,255 $ (2,161) $ 170,880 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 18,275 18,275 Other comprehensive income, net of tax 703 703 Cash dividends declared of $0.72 per share (7,614) (7,614) Purchase of treasury stock, 516,735 shares (13,709) (13,709) Distribution of treasury stock for deferred compensation plan (reissued 8,450 treasury 153 153 shares) Exercise of common stock options (reissued 127,310 treasury shares) (2,421) 3,539 1,118 Tax benefit from exercise of stock options 300 300 Common stock issued under dividend reinvestment 18,257 498 498 plan Issuance of common stock to purchase Putnam Agency, Inc. (reissued 66,582 treasury shares) (327) 1,912 1,585 Issuance of common stock to purchase Barengo Insurance Agency, Inc. 127,446 3,229 3,229 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2004 10,850,641 $ 162,284 $ 18,442 $ 4,958 $ (10,266) $ 175,418 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 20,499 20,499 Other comprehensive loss, net of tax (6,074) (6,074) Cash dividends declared of $0.78 per share (8,201) (8,201) Purchase of treasury stock, 65,325 shares (1,754) (1,754) Distribution of treasury stock for deferred compensation plan (reissued 14,860 treasury 284 284 shares) Exercise of common stock options (reissued 106,989 treasury shares) (1,003) 2,750 1,747 Stock-based compensation expense 122 122 Tax benefit from exercise of stock options 305 305 Common stock issued under dividend reinvestment 19,014 513 513 plan Issuance of common stock related to acquisitions: Putnam Agency, Inc. (reissued 4,662 treasury shares) 3 116 119 Barengo Insurance Agency, Inc. (reissued 3,678 treasury shares) 7 92 99 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2005 10,869,655 $ 162,231 $ 30,740 $ (1,116) $ (8,778) $ 183,077 =================================================================================================================================== </TABLE> <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands) 2005 2004 2003 <S> <C> <C> <C> Net income $ 20,499 $ 18,275 $ 16,254 Other comprehensive income: Unrealized loss on available-for-sale securities arising in the period (9,078) (1,852) (5,300) Less: reclassification adjustment for net securities gains (losses) included in net income 539 (3,040) (1,905) Unrealized gain (loss) on cash flow hedge derivatives arising in the period 22 (106) 24 Less: reclassification adjustment for derivative losses included in net income (250) - - - ---------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive (loss) income (9,345) 1,082 (3,371) Income tax expense (benefit) 3,271 379 (1,180) - ---------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive (loss) income, net of tax (6,074) 703 (2,191) - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 14,425 $ 18,978 $ 14,063 ================================================================================================================================== See Notes to Consolidated Financial Statements. </TABLE>
<TABLE> <CAPTION> PEOPLES BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Year ended December 31, ---------------------------------------------------------- 2005 2004 2003 --------------- --------------- -------------- Cash flows from operating activities: <S> <C> <C> <C> Net income $ 20,499 $ 18,275 $ 16,254 Adjustments to reconcile net income to net cash provided: Depreciation, amortization, and accretion, net 9,672 7,735 6,610 Provision for loan losses 2,028 2,546 3,601 Business owned life insurance income (1,740) (1,899) (1,403) Net (Gain) loss on securities transactions (539) 3,040 1,905 Loss on early debt extinguishment - - 6,858 Loans originated for sale (42,201) (39,415) (69,182) Proceeds from sales of loans 42,058 42,245 68,274 Net gain on sale of loans (757) (882) (1,349) Deferred income tax (benefit) expense (935) 1,576 1,330 Increase (decrease) in accrued expenses 654 630 (2,102) Other, net 3,185 (996) (2,568) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 31,924 32,855 28,228 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of available-for-sale securities (110,521) (200,507) (622,808) Proceeds from sales of available-for-sale securities 995 83,026 153,333 Proceeds from maturities, calls and prepayments of available-for- sale securities 111,971 152,366 254,650 Proceeds from sales of portfolio loans 11,415 - - Net (increase) decrease in loans (64,766) (67,528) 6,997 Net expenditures for premises and equipment (3,642) (2,110) (2,996) Net proceeds (expenditures) from sales of other real estate owned 3,490 (38) (502) Acquisitions, net of cash received (1,157) 6,074 12,015 Investment in business owned life insurance - (20,000) - Investment in limited partnership and tax credit funds (3,919) (2,672) (1,752) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (56,134) (51,389) (201,063) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in non-interest-bearing deposits 9,750 17,259 (757) Net increase (decrease) in interest-bearing deposits 10,726 (40,308) (39,805) Net increase (decrease) in short-term borrowings 121,801 (56,873) 69,685 Proceeds from long-term borrowings - 89,275 249,958 Payments on long-term borrowings (102,398) (13,059) (84,156) Cash dividends paid (7,463) (7,146) (5,704) Purchase of treasury stock (1,754) (13,709) (4,092) Proceeds from issuance of common stock 1,747 1,118 5,582 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 32,409 (23,443) 190,711 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 8,199 (41,977) 17,876 Cash and cash equivalents at beginning of year 31,449 73,426 55,550 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 39,648 $ 31,449 $ 73,426 =================================================================================================================================== Supplemental cash flow information: Interest paid $ 42,475 $ 34,561 $ 36,054 - ----------------------------------------------------------------------------------------------------------------------------------- Income taxes paid 3,248 2,108 6,492 - ----------------------------------------------------------------------------------------------------------------------------------- Value of shares issued for acquisitions $ 218 $ 4,814 $ 14,307 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Peoples Bancorp Inc. ("Peoples Bancorp") is a financial holding company that offers a full range of financial services and products, including commercial and retail banking, insurance, brokerage and trust services, through its principal operating subsidiary, Peoples Bank, National Association ("Peoples Bank"). Services are provided through Peoples Bank's 48 offices and 34 automated teller machines in Ohio, West Virginia and Kentucky, as well internet based banking. 1. Summary of Significant Accounting Policies: ------------------------------------------ The accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries (collectively, "Peoples") conform to accounting principles generally accepted in the United States ("US GAAP") and to general practices within the banking industry. The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts to conform to the 2005 presentation. Such reclassifications had no impact on net income. The following is a summary of significant accounting policies followed in the preparation of the financial statements: CONSOLIDATION: Accounting Research Bulletin No. 51 ("ARB 51") requires a company's consolidated financial statements to include subsidiaries in which the company has a controlling financial interest, principally defined as owning a voting interest greater than 50%. This requirement usually has been applied to subsidiaries in which a company has a majority voting interest. The voting interest approach of ARB 51 is not applicable to entities not controlled by voting interests or in which the equity investors do not bear the residual economic risks. For such entities, the Financial Accounting Standards Board ("FASB") Financial Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46") provides guidance on how to identify a variable interest entity and determine when assets, liabilities, non-controlling interests and results of operations of a variable interest entity need to be included in a company's consolidated financial statements. The consolidated financial statements include the accounts of Peoples Bancorp and its consolidated subsidiaries, Peoples Bank and Peoples Investment Company, along with their wholly-owned subsidiaries. Peoples Bancorp has two statutory business trusts described in Note 9 that are variable interest entities under FIN 46 for which Peoples Bancorp is not the primary beneficiary. As a result, the accounts of these trusts are not included in Peoples' consolidated financial statements. All significant intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks, federal funds sold and other short-term investments, all with original maturities of ninety days or less. INVESTMENT SECURITIES: Investment securities are recorded initially at cost, which includes premiums and discounts if purchased at other than par or face value. Peoples amortizes premiums and accretes discounts as an adjustment to interest income over the estimated life of the security. The cost of investment securities sold, and any resulting gain or loss, is based on the specific identification method. Management determines the appropriate classification of investment securities at the time of purchase. Held-to-maturity securities are those securities that Peoples has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to Peoples' liquidity needs, changes in market interest rates, and asset-liability management strategies, among other considerations. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses reported in stockholders' equity as a separate component of other comprehensive income, net of applicable deferred income taxes. Trading securities are those securities bought and held principally for the purpose of selling in the near term. Trading securities are reported at fair value, with holding gains and losses recognized in earnings. Presently, Peoples classifies its entire investment portfolio as available-for-sale. Certain restricted equity securities, such as stock of the Federal Home Loan Bank ("FHLB") of Cincinnati, are included in investment securities and carried at cost. Securities Sold Under Agreements to Repurchase: Peoples enters into sales of securities under agreements to repurchase ("Repurchase Agreements") with customers and other financial service companies, which are treated as financings. The obligations to repurchase securities sold are recorded as a liability on the Consolidated Balance Sheets and disclosed in Notes 7 and 8. Securities pledged as collateral under Repurchase Agreements are included in investment securities on the Consolidated Balance Sheets. The fair value of the collateral pledged to a third party is continually monitored and additional collateral is pledged or returned, as deemed appropriate. Loans: Loans originated that Peoples has the positive intent and ability to hold to maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. Net unearned loan fees were $1,056,000 and $1,368,000 at December 31, 2005 and 2004, 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 estimated fair value determined on an aggregate basis. Gains and losses on sales of loans held for sale are included in mortgage banking income. Peoples enters into interest rate lock commitments with borrowers and best efforts commitments with investors on loans originated for sale into the secondary markets. Peoples uses these commitments to manage the inherent interest rate and pricing risk associated with selling loans in the secondary market. The interest rate lock commitments generally terminate once the loan is funded, the lock period expires or the borrower decides not to contract for the loan. The best efforts commitments generally terminate once the loan is sold, the commitment period expires or the borrower decides not to contract for the loan. These commitments are considered derivatives which are generally accounted for by recognizing their estimated fair value on the balance sheet as either a freestanding asset or liability. The valuation of such commitments does not consider expected cash flows related to the servicing of the future loan. Management has determined these derivatives do not have a material effect on Peoples' financial position, results of operations or cash flows. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation allowance for management's estimate of the probable credit losses inherent in the loan portfolio. Management's evaluation of the adequacy of the allowance for loan loss and the appropriate provision for loan losses is based upon a quarterly evaluation of the portfolio. This formal analysis is inherently subjective and requires management to make significant estimates of factors affecting loan losses, including specific losses, levels and trends in impaired and nonperforming loans, historical loan loss experience, current national and local economic conditions, volume, growth and composition of the portfolio, regulatory guidance and other relevant factors. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses. The amount of the allowance for the various loan types represents management's estimate of expected losses from existing loans based upon specific allocations for individual lending relationships and historical loss experience for each category of homogeneous loans. The allowance for loan losses related to impaired loans is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation requires management to make estimates of the amounts and timing of future cash flows on impaired loans, which consists primarily of nonaccrual and restructured loans. While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses. BANK PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets owned. Major improvements to leased facilities are capitalized and included in bank premises at cost less accumulated depreciation, which is calculated on the straight-line method over the lesser of the remaining term of the leased facility or the estimated economic life of the improvement. BUSINESS OWNED LIFE INSURANCE: Business owned life insurance ("BOLI") represents life insurance on the lives of certain employees who have provided positive consent allowing Peoples Bank to be the beneficiary of such policies. These policies are recorded at their cash surrender value, or the amount that can be realized. Income from these policies and changes in the cash surrender value are recorded in other income. OTHER REAL ESTATE OWNED: Other real estate owned ("OREO"), included in other assets on the Consolidated Balance Sheet, is comprised primarily of commercial and residential real estate properties acquired by Peoples Bank in satisfaction of a loan. OREO also includes bank premises qualifying as held for sale under Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." OREO obtained in satisfaction of a loan is recorded at the lower of cost or estimated fair value based on appraised value at the date actually or constructively received, less estimated costs to sell the property. Bank premises are transferred at the lower of carrying value or estimated fair value, less estimated costs to sell the property. Goodwill and Other Intangible Assets: Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually. Currently, Peoples' goodwill is confined to a single reporting unit for impairment testing. Peoples performed the required goodwill impairment tests and concluded the recorded value of goodwill was not impaired as of December 31, 2005, based upon the estimated fair value of the reporting unit. Other Intangible Assets consist of customer relationship intangible assets, primarily core deposit intangibles, representing the present value of future net income to be earned from acquired customer relationships and are amortized over their estimated lives ranging from 7 to 10 years. Customer relationship intangible assets totaled $19.3 million, net of accumulated amortization of $10.6 million and $7.9 million, at December 31, 2005 and 2004, respectively. The estimated aggregate amortization expense related to customer relationship intangible assets for the each of the next five years is estimated as follows: $2.2 million in 2006; $1.9 million in 2007; $1.5 million in 2008; $1.2 million in 2009; and $0.9 million in 2010. MORTGAGE SERVICING ASSETS: Mortgage servicing assets are recognized for loan originations when there is a definitive plan to sell the underlying loan and retain the servicing. Mortgage servicing assets are reported in other intangible assets and are amortized into mortgage banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans. Mortgage servicing assets are evaluated for impairment based on the fair value of those rights and recorded at the lower of cost or fair value, with write-downs reflected in a valuation reserve and recognized through mortgage banking income. The fair value of the mortgage servicing rights is determined by using a discounted cash flow model, which estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, expected prepayment speeds and discount rates. Mortgage servicing assets totaled $813,000 and $653,000 at December 31, 2005 and 2004, respectively. TRUST ASSETS UNDER MANAGEMENT: Peoples Bank manages certain assets held by the bank in a fiduciary or agency capacity for customers. These assets under management, other than cash on deposit at Peoples Bank, are not included in the Consolidated Balance Sheets since they are not assets of Peoples Bank. INTEREST INCOME RECOGNITION: Interest income on loans and investment securities is recognized by methods that result in level rates of return on principal amounts outstanding. Amortization of premiums has been deducted from, and accretion of discounts has been added to, the related interest income. Nonrefundable loan fees and direct loan costs are deferred and recognized over the life of the loan as an adjustment of the yield. Peoples discontinues the accrual of interest on loans when management believes collection of all or a portion of contractual interest has become doubtful, which generally occurs when a contractual payment on a loan is 90 days past due. When interest is deemed uncollectible, amounts accrued in the current year are reversed and amounts accrued in prior years are charged against the allowance for loan losses. Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured. A nonaccrual loan is restored to accrual status when it is brought current, has performed in accordance with contractual terms for a reasonable period of time, and the collectibility of the total contractual principal and interest is no longer in doubt. OTHER INCOME RECOGNITION: Service charges on deposits include cost recovery fees associated with services provided, such as overdraft and non-sufficient funds. Income from fiduciary activities includes fees for services such as asset management, record keeping, retirement services and estate management. Income from these activities is recognized at the time the related services are performed. Insurance and investment income includes commissions and fees relating to the sales of policies and investments as well as fees for related insurance services. Insurance commission income is recognized as of the effective date of the insurance policy, net of adjustments, including policy cancellations. Such adjustments are recorded when the amount can be reasonably estimated, which is generally in the period in which they occur. Contingent performance-based commissions from insurance companies are recognized when earned and no contingencies remain. INCOME TAXES: Deferred income tax assets and liabilities are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rate. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. The components of other comprehensive income 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 136,165; 180,782 and 226,375 in 2005, 2004 and 2003, respectively. OPERATING SEGMENTS: Peoples' business activities are currently confined to one reportable segment which is community banking. As a community banking entity, Peoples offers its customers a full range of products through various delivery channels. Peoples aggregated its operating segments due to similar economic characteristics, products and services, production processes, type of customer, distribution channels and regulatory environment. DERIVATIVE FINANCIAL INSTRUMENTS: Peoples enters into derivative transactions principally to protect against the risk of adverse interest rate movements. Peoples carries all derivative financial instruments at fair value on the Consolidated Balance Sheets as a component of other assets. Peoples' derivative financial instruments did not have a material effect on Peoples' financial position at December 31, 2005 or 2004, and results of operations or cash flows in 2005, 2004 and 2003. US GAAP provides special hedge accounting provisions, which permit the change in the fair value of the hedged item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in fair value of the derivative. Derivative financial instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative financial instrument on the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in other comprehensive income within stockholders' equity, net of deferred tax. Amounts are reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Derivative gains and losses not effective in hedging the expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge's inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in cash flows of the derivative financial instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative financial instrument has not been or will not continue to be highly effective as a hedge, hedge accounting is discontinued prospectively. Basis adjustments recorded on hedged assets and liabilities are amortized over the remaining life of the hedged item no later than when hedge accounting ceases. Peoples considers its derivative financial instruments to be immaterial and recognizes changes in estimated fair value in earnings. 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. Under the provisions of the stock option plans, the option price per share cannot be less than the fair market value of the underlying common shares on the date of grant. As a result, Peoples does not recognize any stock-based employee compensation expense in net income. The following table illustrates the effect on net income and earnings per share had Peoples applied fair value recognition to stock-based employee compensation, assuming the estimated fair value of the options is amortized to expense over the vesting period: <TABLE> <CAPTION> (Dollars in Thousands, except Per Share Data) 2005 2004 2003 --------- -------- -------- <S> <C> <C> <C> Net Income, as reported $ 20,499 $ 18,275 $ 16,254 Addback: stock-based compensation expense included in net income, net of tax 79 - - Deduct: stock-based compensation expense determined under fair value based method, net of tax 733 527 474 - -------------------------------------------------------------------------------------------------- Pro forma net income $ 19,845 $ 17,748 $ 15,780 - -------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> (Dollars in Thousands, except Per Share Data) 2005 2004 2003 --------- -------- -------- <S> <C> <C> <C> Basic Earnings Per Share: - As Reported $ 1.96 $ 1.74 $ 1.56 - -------------------------------------------------------------------------------------------------- - Pro forma 1.90 1.69 1.51 - -------------------------------------------------------------------------------------------------- Diluted Earnings Per Share: - As Reported $ 1.94 $ 1.71 $ 1.52 - -------------------------------------------------------------------------------------------------- - Pro forma 1.88 1.66 1.48 - -------------------------------------------------------------------------------------------------- </TABLE> The fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: <TABLE> <CAPTION> 2005 2004 2003 ----------- ---------- ---------- <S> <C> <C> <C> Risk-free interest rate 4.37% 4.14% 3.65% Dividend yield 2.61% 2.62% 2.47% Volatility factor of the market price of parent stock 26.0% 27.8% 29.8% Weighted average expected life of options 6.5 years 7.0 years 7.0 years </TABLE> 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 February 16, 2006, the FASB issued Statement of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS 155"). SFAS 155 amends FASB Statements No. 133, "Accounting for Derivative Instruments and Hedging Activities", and No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" and resolves issues addressed in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 is not expected to have a material impact on Peoples' financial condition, results of operations or cash flows. In November 2005, the FASB issued FASB Staff Position 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP 115-1"). FSP 115-1 provides additional guidance on when an investment in a debt or equity security should be considered impaired and when that impairment should be considered other-than-temporary and recognized as a loss in earnings. Specifically, the guidance clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. FSP 115-1 also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Management applied the guidance in FSP 115-1 in 2005. On June 1, 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 replaces APB Opinion No. 20, "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements", and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principle, as well as changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made in fiscal years beginning after June 1, 2005. The adoption of this standard is not expected to have a material impact on Peoples' financial condition, results of operations or cash flows. On December 16, 2004, the FASB issued a revision of Statement No. 123, "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires the compensation cost relating to share-based payment transactions to be recognized in financial statements based on the fair value of the equity or liability instruments issued. SFAS 123(R) replaces SFAS 123 and supercedes APB 25. SFAS 123 (R) was originally effective for public companies that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. On April 15, 2005, the SEC adopted a new rule that amends the compliance date for SFAS 123 (R) to allow public companies that do not file as small business issuers to implement SFAS 123 (R) at the beginning of their next fiscal year that begins after June 15, 2005. For Peoples, SFAS 123(R) now becomes effective for the fiscal year beginning January 1, 2006. The impact of adopting Statement 123(R) on Peoples' financial statements will depend on the method of adoption, the level of stock-based compensation awards and the valuation method selected by management. In December 2004, the FASB issued Statement No. 153 "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." This statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard is not expected to have a material impact on financial condition, results of operations or liquidity. 2. Fair Values of Financial Instruments: ------------------------------------ Peoples used the following methods and assumptions in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for these captions approximate their fair values. INVESTMENT SECURITIES: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices of comparable securities. LOANS: The fair value of performing variable rate loans that reprice frequently and performing demand loans, with no significant change in credit risk, is based on carrying value. The fair value of performing loans is estimated using discounted cash flow analyses and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value of significant nonperforming loans is based on either the estimated fair value of underlying collateral or estimated cash flows, discounted at a rate commensurate with the risk. Assumptions regarding credit risk, cash flows, and discount rates are determined using available market information and specific borrower information. DEPOSITS: The carrying amounts of demand deposits, savings accounts and certain money market deposits approximate their fair values. The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation based on current rates offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased, FHLB advances, and securities sold overnight under repurchase agreements approximate their fair values. The fair value of term national market repurchase agreements is estimated using a discounted cash flow calculation based on rates currently available to Peoples for repurchase agreements with similar terms. LONG-TERM BORROWINGS: The fair value of long-term borrowings is estimated using discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms. JUNIOR SUBORDINATED NOTES: The fair value of the junior subordinated notes is estimated using discounted cash flow analysis based on current market rates of securities with similar risk and remaining maturity. INTEREST RATE CONTRACTS: Fair values for interest rate contracts are based on quoted market prices. FINANCIAL INSTRUMENTS: The fair value of loan commitments and standby letters of credit is estimated using the fees currently charged to enter into similar agreements considering the remaining terms of the agreements and the counter parties' credit standing. The estimated fair value of these commitments approximates their carrying value. The estimated fair values of Peoples' financial instruments at December 31 are as follows:
<TABLE> <CAPTION> 2005 2004 ------------------------------ ------------------------------ Carrying Fair Carrying Fair (Dollars in Thousands) Amount Value Amount Value ------------ ---------- ------------ ----------- <S> <C> <C> <C> <C> Financial assets: Cash and cash equivalents $ 39,648 $ 39,648 $ 31,449 $ 31,449 Investment securities 589,313 589,313 602,364 602,364 Loans 1,057,156 1,055,134 1,008,298 1,010,378 Financial liabilities: Deposits $ 1,089,286 $ 1084,130 $ 1,069,421 $ 1,072,906 Short-term borrowings 173,696 173,696 51,895 51,895 Long-term borrowings 362,466 361,417 464,864 469,000 Junior subordinated notes 29,350 27,553 29,263 31,945 Other financial instruments: Interest rate contracts $ 97 $ 97 $ 133 $ 133 </TABLE> 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. <TABLE> <CAPTION> Gross Gross (Dollars in Thousands) Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value -------------- -------------- --------------- ------------- <S> <C> <C> <C> <C> 2005 - ---- U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 112,305 $ 327 $ (2,259) $ 110,373 Obligations of states and political subdivisions 67,693 1,901 (112) 69,482 Mortgage-backed securities 359,330 328 (6,574) 353,084 Other securities 51,694 4,926 (246) 56,374 - ------------------------------------------------------------------------------------------------------------- Total available-for-sale securities $ 591,022 $ 7,482 $ (9,191) $ 589,313 - ------------------------------------------------------------------------------------------------------------- 2004 - ---- U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 63,817 $ 163 $ (1,210) $ 62,770 Obligations of states and political subdivisions 59,134 3,103 (3) 62,234 Mortgage-backed securities 417,040 2,391 (1,337) 418,094 Other securities 54,466 5,087 (287) 59,266 - ------------------------------------------------------------------------------------------------------------- Total available-for-sale securities $ 594,457 $ 10,744 $ (2,837) $ 602,364 - ------------------------------------------------------------------------------------------------------------- </TABLE> At December 31, 2005, Peoples held investment securities issued by Chase Mortgage Finance Corporation with an aggregate book value of $20,166,000 and estimated fair value of $19,847,000, which was the only single issue (excluding U.S. government and U.S. agency securities) that exceeded 10% of stockholders' equity. In 2005, 2004 and 2003, gross gains of $539,000, $62,000 and $580,000 and gross losses of $0, $3,102,000 and $2,485,000 were realized, respectively. At December 31, 2005 and 2004, investment securities having a carrying value of $455,206,000 and $449,162,000, respectively, were pledged to secure public and trust department deposits and repurchase agreements in accordance with federal and state requirements. Declines in estimated fair value of investment securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer, and (3) Peoples' ability and intent to continue holding the investment for a period of time sufficient to allow for any anticipated recovery in market value. The following table presents a summary of available-for-sale investment securities that had an unrealized loss at December 31: <TABLE> <CAPTION> (Dollars in Thousands) Obligations of Obligations U.S. Treasury and of states and Mortgage- government political backed Other agencies subdivisions securities securities Total ------------------- --------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> <C> 2005 ---- Less than 12 months Estimated fair value $ 87,693 $ 10,926 $ 278,712 $ 1,540 $ 378,871 Unrealized loss 1,928 104 5,075 120 7,227 12 months or more Estimated fair value $ 16,290 $ 492 $ 53,034 $ 3,100 $ 72,916 Unrealized loss 331 8 1,499 126 1,964 ---------------------------------------------------------------------------------------------------------------------- Total Estimated fair value $ 103,983 $ 11,418 $ 331,746 $ 4,640 $ 451,787 Unrealized loss 2,259 112 6,574 246 9,191 ---------------------------------------------------------------------------------------------------------------------- 2004 ---- Less than 12 months Estimated fair value $ 26,556 $ 685 $ 134,498 $ - $ 161,739 Unrealized loss 1,178 3 1,007 - 2,188 12 months or more Estimated fair value $ 4,128 $ - $ 30,855 $ 7,700 $ 42,683 Unrealized loss 32 - 330 287 649 ---------------------------------------------------------------------------------------------------------------------- Total Estimated fair value $ 30,684 $ 685 $ 165,353 $ 7,700 $ 204,422 Unrealized loss 1,210 3 1,337 287 2,837 ---------------------------------------------------------------------------------------------------------------------- </TABLE> The majority of the unrealized losses at both December 31, 2005 and 2004, related to securities, including mortgage-backed securities, issued by U.S. agencies and corporations and U.S. government sponsored entities. These losses were attributable to changes in market interest rates since the securities were purchased given the negligible inherent credit risk for these securities. Management does not believe any individual unrealized loss at December 31, 2005, represents an other-than-temporary impairment since Peoples has the ability and intent to hold those securities for a period of time sufficient to recover the amortized cost. The following table presents the amortized costs, fair value and weighted average yield of securities by contractual maturity at December 31, 2005. In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date. Rates are calculated on a fully-tax equivalent basis using a 35% federal income tax rate. <TABLE> <CAPTION> (Dollars in Thousands) Obligations of Obligations Total U.S. Treasury of states Mortgage- available- and government and political backed Other for-sale agencies subdivisions securities securities securities ------------------ --------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Within one year Amortized cost $ 45,154 $ 6,778 $ 14 $ 1,537 $ 53,483 Fair value 44,574 6,832 15 1,569 52,990 Average yield 4.37 % 7.13 % 6.74 % 7.44 % 4.81 % 1 to 5 years Amortized cost $ 28,185 $ 44,538 $ 2,815 $ 17,546 $ 93,084 Fair value 28,088 45,657 2,805 18,276 94,826 Average yield 4.53 % 6.59 % 4.95 % 8.04 % 6.19 % 5 to 10 years Amortized cost $ 13,446 $ 16,167 $ 31,105 $ - $ 60,718 Fair value 13,270 16,783 30,830 - 60,883 Average yield 4.06 % 6.70 % 4.69 % - % 5.09 % Over 10 years Amortized cost $ 25,520 $ 210 $ 325,396 $ 32,611 $ 383,737 Fair value 24,441 210 319,434 36,529 380,614 Average yield 5.29 % 6.91 % 4.28 % 6.38 % 4.53 % ----------------------------------------------------------------------------------------------------------------- Total amortized cost $ 112,305 $ 67,693 $ 359,330 $ 51,694 $ 591,022 Total fair value $ 110,373 $ 69,482 $ 353,084 $ 56,374 $ 589,313 Total average yield 4.58 % 6.67 % 4.32 % 6.97 % 4.87 % ----------------------------------------------------------------------------------------------------------------- </TABLE> 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) 2005 2004 ------------ ------------ Commercial, mortgage $ 504,923 $ 450,270 Commercial, other 136,331 126,473 Real estate, construction 50,745 35,423 Real estate, mortgage 316,081 349,965 Consumer 63,796 60,927 ------------------------------------------------------------------------ Total loans $ 1,071,876 $ 1,023,058 ------------------------------------------------------------------------ Excluded from the loan balances above are $1.1 million and $0.6 million of real estate loans originated and held for sale in the secondary market at December 31, 2005 and 2004, respectively. Peoples Bank has pledged certain loans secured by 1-4 family and multifamily residential mortgages and commercial mortgages under a blanket collateral agreement to secure borrowings from the FHLB as discussed in Note 8. At December 31, 2005, the amount of such pledged loans totaled $508.5 million. Peoples Bank has also pledged certain commercial loans totaling $8.9 million at December 31, 2005, to the Federal Reserve Bank of Cleveland to secure advances from the discount window. NONACCRUAL/PAST DUE LOANS: Nonaccrual loans totaled $6,284,000 and $5,130,000 at December 31, 2005 and 2004, respectively. Accruing loans past due 90 or more days totaled $251,000 and $285,000 at December 31, 2005 and 2004, respectively. Impaired Loans: At December 31, 2005, impaired loans totaled $11,849,000, including $4,849,000 of impaired loans for which the related allowance for loan losses was $1,898,000. Impaired loans totaled $10,467,000 at December 31, 2004, including $4,901,000 of impaired loans for which the related allowance for loan losses was $1,965,000. The remaining impaired loan balances do not have a related allocation of the allowance for loan losses. Peoples' average investment in impaired loans was $10,751,000, $17,681,000 and $13,686,000 and interest income recognized on impaired loans was $668,000, $513,000 and $1,097,000 in 2005, 2004 and 2003, respectively. Interest received on impaired loans is included in income if principal recovery is reasonably assured. LOAN CONCENTRATIONS: Peoples' loans consist of credits to borrowers spread over a broad range of industrial classifications, with no loans to foreign entities. Peoples' largest concentration of commercial loans consist of credits to assisted living facilities and nursing homes, which totaled $57,343,000 and $58,793,000 at December 31, 2005 and 2004, respectively. Loans to lodging and lodging related companies also represent a significant portion of Peoples' commercial loans, totaling $56,174,000 and $65,752,000 at December 31, 2005 and 2004, 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. RELATED PARTY LOANS: 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, 2005: (Dollars in Thousands) Balance, January 1, 2005 $ 20,667 New loans and disbursements 23,358 Repayments (21,153) Other changes 1,509 ---------------------------------------------------------------- Balance, December 31, 2005 $ 24,381 ---------------------------------------------------------------- Allowance for Loan Losses: Changes in the allowance for loan losses for each of the three years in the period ended December 31, 2005, were as follows: (Dollars in Thousands) 2005 2004 2003 ---------- ---------- ----------- Balance, beginning of year $ 14,760 $ 14,575 $ 13,086 Charge-offs (4,193) (3,787) (3,786) Recoveries 2,125 1,426 1,101 ------------------------------------------------------------------------- Net charge-offs (2,068) (2,361) (2,685) Provision for loan losses 2,028 2,546 3,601 Allowance for loan losses acquired - - 573 ------------------------------------------------------------------------- Balance, end of year $ 14,720 $ 14,760 $ 14,575 ------------------------------------------------------------------------- Included in the allowance for loan losses was an allocation for credit cards of $113,000 and $232,000 at December 31, 2004 and 2003, respectively, relating to the credit card recourse disclosed in Note 12. There was no allocation at December 31, 2005, due to the expiration of the recourse during 2005. 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) 2005 2004 ----------- ----------- Land $ 4,577 $ 4,610 Building and premises 27,020 24,778 Furniture, fixtures and equipment 15,616 15,448 ------------------------------------------------------------------ 47,213 44,836 Accumulated depreciation (23,727) (22,196) ------------------------------------------------------------------ Net book value $ 23,486 $ 22,640 ------------------------------------------------------------------ Peoples depreciates its building and premises and furniture, fixtures and equipment over estimated useful lives generally ranging from 5 to 40 years and 2 to 10 years, respectively. Depreciation expense was $2,264,000, $2,451,000 and $2,240,000, in 2005, 2004 and 2003, respectively. LEASES: 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. Certain leases contain renewal options and rent escalation clauses calling for rent increases over the term of the lease. All leases which contain a rent escalation clause are accounted for on a straight-line basis. Rent expense was $854,000, $550,000 and $349,000 in 2005, 2004 and 2003, respectively. Peoples leases certain properties from related parties. Payments related to these leases totaled $153,000, $71,000 and $0 for 2005, 2004 and 2003, respectively. The terms of these leases are substantially the same as those offered for comparable transactions with non-related parties at the time the lease transactions were consummated. The future minimum payments under noncancelable operating leases with initial terms of one year or more consisted of the following at December 31, 2005: (Dollars in Thousands) 2006 $ 631 2007 625 2008 616 2009 573 2010 527 Thereafter 2,936 ----------------------------------------------- Total $ 5,908 ----------------------------------------------- 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: $227,551,000 in 2006; $162,767,000 in 2007; $86,829,000 in 2008; $17,988,000 in 2009; $11,776,000 in 2010 and $23,000 thereafter. Deposits from related parties approximated $10.2 million and $9.0 million at December 31, 2005 and 2004, respectively. 7. Short-term Borrowings: --------------------- Peoples utilizes various short-term borrowings as sources of funds, including FHLB advances and retail Repurchase Agreements with customers. The FHLB advances are collateralized by residential and non-residential mortgage loans and investment securities. Other short-term borrowings represented a short-term loan from an unrelated financial institution to fund an acquisition. Short-term borrowings are summarized as follows: <TABLE> <CAPTION> (Dollars in Thousands) Retail Other Federal Funds Repurchase FHLB Short-Term Purchased Agreements Advances Borrowings -------------- ---------------- ------------ --------------- <S> <C> <C> <C> <C> 2005 - ---- Ending balance $ - $ 35,896 $ 137,800 $ - Average balance - 21,129 107,184 - Highest month end balance - 35,896 167,000 - Interest expense - 572 3,652 - Weighted-average interest rate: End of year - % 3.57 % 4.12 % - % During the year - 2.71 3.36 - 2004 - ---- Ending balance $ - $ 14,495 $ 37,400 $ - Average balance 420 16,385 70,246 - Highest month end balance 6,500 18,788 99,700 - Interest expense 8 155 967 - Weighted-average interest rate: End of year - % 1.52 % 2.23 % - % During the year 1.82 0.95 1.38 - 2003 - ---- Ending balance $ - $ 16,468 $ 92,300 $ - Average balance 1 20,151 26,900 7,545 Highest month end balance - 24,342 92,300 17,000 Interest expense - 175 400 218 Weighted-average interest rate: End of year - % 0.53 % 1.23 % - % During the year 1.20 0.87 1.49 2.89 </TABLE> 8. Long-term Borrowings: -------------------- Long-term borrowings consisted of the following at December 31: <TABLE> <CAPTION> (Dollars in Thousands) 2005 2004 ------------- ------------- <S> <C> <C> Term note payable, at LIBOR (parent company) $ 13,600 $ 15,300 National market repurchase agreements, bearing interest at rates ranging from 2.09% to 4.08% 157,850 238,750 FHLB convertible rate advances, bearing interest at rates ranging from 4.36% to 5.63% 102,000 107,000 FHLB non-amortizing, fixed rate advances, bearing interest at rates ranging from 1.94% to 4.48% 41,000 43,500 FHLB amortizing, fixed rate advances, bearing interest at rates ranging from 2.01% to 5.00% 48,016 60,314 - ----------------------------------------------------------------------------------------------------- Total long-term borrowings $ 362,466 $ 464,864 - ----------------------------------------------------------------------------------------------------- </TABLE> Peoples' national market Repurchase Agreements consist of agreements with high quality, financially secure financial service companies and have original maturities ranging from 2 to 5 years. The FHLB advances consist of various borrowings with original maturities ranging from 10 to 20 years and generally may not be repaid prior to maturity without a penalty. The rate on the convertible rate advances are fixed from initial periods ranging from one to four years, depending on the specific advance. After the initial fixed rate period, the FHLB has the option to convert each advance to a LIBOR based, variable rate advance. If the FHLB exercises its option, Peoples may repay the advance in whole or in part on the conversion date or any subsequent repricing date without a prepayment fee. At all other times, early repayment of any convertible rate advance would result in Peoples incurring a prepayment penalty. All FHLB advances, including short-term advances, are collateralized by Peoples Bank's real estate mortgage portfolio and other bank assets. Peoples' borrowing capacity with the FHLB is based on the amount of FHLB common stock owned by Peoples Bank and the amount of collateral pledged. The most restrictive requirement of the debt agreement requires Peoples to provide commercial real estate mortgage loans as collateral in an amount not less than 300% of advances outstanding. The aggregate minimum annual retirements of long-term borrowings in the next five years and thereafter are as follows: (Dollars in Thousands) 2005 $ 94,550 2006 83,729 2007 70,304 2008 81,308 2009 28 Thereafter 32,547 -------------------------------------------- Total $ 362,466 -------------------------------------------- 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: <TABLE> <CAPTION> (Dollars in thousands) 2005 2004 ------------ ------------ <S> <C> <C> Capital securities of PEBO Capital Trust I, 8.62%, due May 1, 2029, net $ 22,415 $ 22,380 of unamortized issuance costs Capital securities of PEBO Capital Trust II, 6-month LIBOR + 3.70%, due April 22, 2032, net of unamortized issuance costs 6,935 6,883 - --------------------------------------------------------------------------------------------------------- Total capital securities 29,350 29,263 - --------------------------------------------------------------------------------------------------------- Total capital securities qualifying for Tier 1 capital 29,350 29,263 - --------------------------------------------------------------------------------------------------------- </TABLE> The Trust Preferred Securities currently qualify as Tier 1 capital for regulatory capital purposes, subject to certain quantitative limits and qualitative standards. On March 1, 2005, the Board of Governors of the Federal Reserve System (the "Federal Reserve") adopted final rules amending its risk-based capital standards for bank holding companies regarding the continued inclusion of trust preferred securities in the Tier 1 capital of bank holding companies. The new rules, which include a five-year transition period, limit the aggregate amount of trust preferred securities and certain other capital elements to 25% of core capital elements, net of goodwill. The excess amount of trust preferred securities not qualifying for Tier 1 capital may be included in Tier 2 capital. Additionally, trust preferred securities no longer qualify for Tier 1 capital within five years of their maturity. The Capital Securities will continue to qualify as Tier 1 capital under the new rules until they are within five years of maturity. 10. Employee Benefit Plans: ---------------------- Peoples sponsors a noncontributory defined benefit pension plan that covers substantially all employees hired before January 1, 2003, and noncontributory defined contribution plan that covers substantially all employees hired on or after January 1, 2003. These plans provide retirement 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, 2005, and a statement of the funded status as of December 31, 2005 and 2004: <TABLE> <CAPTION> Pension Benefits Postretirement Benefits -------------------------- ------------------------ (Dollars in Thousands) 2005 2004 2005 2004 ----------------------------------------------------- <S> <C> <C> <C> <C> Change in plan assets: - --------------------- Fair value of plan assets at January 1 13,358 10,307 - - Actual return on plan assets 867 1,183 - - Employer contributions 1,500 2,600 97 75 Plan participants' contributions - - 125 119 Benefit payments (175) (732) (222) (194) Settlements (1,944) - - - - --------------------------------------------------------------------------------------------------------------- Fair value of plan assets at December 31 13,606 13,358 - - - --------------------------------------------------------------------------------------------------------------- Change in benefit obligation: - ---------------------------- Obligation at January 1 $ 13,526 $ 12,010 $ 584 $ 616 Service cost 867 903 - - Interest cost 717 772 32 35 Plan participants' contributions - - 125 119 Actuarial loss (gain) 370 544 (4) 8 Benefit payments (175) (732) (222) (194) Acquisition - 29 - - Settlements (1,944) - - - - --------------------------------------------------------------------------------------------------------------- Obligation at December 31 13,361 13,526 515 584 - --------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation at December 31 10,611 10,495 - - - --------------------------------------------------------------------------------------------------------------- Funded status: - ------------- Funded status at December 31 246 (168) (515) (584) Unrecognized prior-service cost 39 41 - 11 Unrecognized net loss 3,883 4,159 75 80 - --------------------------------------------------------------------------------------------------------------- Net amount recognized 4,168 4,032 (440) (493) - --------------------------------------------------------------------------------------------------------------- Amounts recognized in Consolidated Balance Sheets: - ------------------------------------------------- Prepaid benefit costs 4,168 4,032 - - Accrued benefit liability - - (440) (493) - --------------------------------------------------------------------------------------------------------------- Net amount recognized $ 4,168 $ 4,032 $ (440) $ (493) - --------------------------------------------------------------------------------------------------------------- </TABLE> The assumptions used in the measurement of Peoples' benefit obligation at December 31 are shown in the following table: Pension Postretirement Benefits Benefits -------------------- -------------------- 2005 2004 2005 2004 Discount rate 6.00 % 6.00 % 5.75 % 6.00 % Expected return on plan assets 8.50 8.50 n/a n/a Rate of compensation increase 3.50 3.50 n/a n/a DETERMINATION OF EXPECTED LONG-TERM RATE OF RETURN: The expected long-term rate of return on the plans' total assets is based on the expected return of each category of the plan's assets. Management considers the long-term historical returns of the assets within the portfolio and adjusts the rate, as necessary, for expected future returns on the assets in the plans in determining the rate. NET PERIODIC BENEFIT COST: The following table provides the components of net periodic benefit cost for the plans: <TABLE> <CAPTION> Pension Benefits Postretirement Benefits --------------------------------------- --------------------------------- (Dollars in Thousands) 2005 2004 2003 2005 2004 2003 --------------------------------------- --------------------------------- <S> <C> <C> <C> <C> <C> <C> Service cost $ 867 $ 903 $ 708 $ - $ - $ - Interest cost 717 772 688 32 35 40 Expected return on plan assets (1,127) (972) (861) - - - Amortization of prior service cost 2 2 (6) 11 11 11 Amortization of net loss 226 208 89 1 - 4 Settlements 679 - - - - - - ---------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 1,364 $ 913 $ 618 $ 44 $ 46 $ 55 - ---------------------------------------------------------------------------------------------------------------- </TABLE> 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 2005, grading down 1% per year to an ultimate rate of 5%. The health care trend rate assumption does not have a significant effect on the contributory defined benefit postretirement plan; therefore, a one percentage point increase or decrease in the trend rate is not material in the determination of the accumulated postretirement benefit obligation or the ongoing expense. PLAN ASSETS: Peoples' investment strategy, as established by the Retirement Plan Committee, is to invest assets per established target allocations. The assets are reallocated periodically to meet the above target allocations. The investment policy is reviewed periodically, under the advisement of a certified investment advisor, to determine if the policy should be changed. Peoples' pension plan target and actual weighted-average asset allocations by asset category at December 31 are as follows: Target 2005 2004 ---------- ---------- ---------- Equity securities 60 - 75% 64 % 69 % Debt securities 24 - 39% 30 26 Real estate - 3 - Other 1% 3 5 - --------------------------------------------------------------------------- Total 100% 100 % 100 % - --------------------------------------------------------------------------- Equity securities of Peoples' pension plan did not include any securities of Peoples Bancorp or related parties in 2005 or 2004. CASH FLOWS: Peoples anticipates contributing $1.2 million to its pension plan in 2006; however, actual contributions are made at the discretion of the Retirement Plan Committee and Peoples' Board of Directors. Estimated future benefit payments, which reflect benefits attributable to estimated future service, for the years ending December 31 are as follows: (Dollars in Thousands) 2006 $ 772 2007 995 2008 849 2009 1,209 2010 1,755 2011 to 2015 7,548 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 $628,000, $601,000 and $480,000 for the years ended December 31, 2005, 2004 and 2003, 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:
<TABLE> <CAPTION> Year ended December 31 ---------------------------------------- 2005 2004 2003 ---------- ---------- ---------- <S> <C> <C> <C> Statutory corporate tax rate 35.0 % 35.0 % 35.0 % Differences in rate resulting from: Interest on obligations of state and political (3.4) (4.0) (4.5) subdivisions Investments in low-income housing tax credit funds (2.8) (3.6) (3.4) Business owned life insurance (2.2) (2.7) (2.3) Other, net 0.5 0.2 0.1 - ------------------------------------------------------------------------------------------------------- Effective federal income tax rate 27.1 % 24.9 % 24.9 % - ------------------------------------------------------------------------------------------------------- </TABLE> The significant components of Peoples' deferred tax assets and liabilities consisted of the following at December 31:
(Dollars in Thousands) 2005 2004 ---------- --------- Deferred tax assets: Allowance for loan losses $ 6,033 $ 5,741 Accrued employee benefits (593) (490) Deferred loan fees and costs 375 487 Available-for-sale securities 601 - Tax credit carryforward 1,741 - Other 455 357 - --------------------------------------------------------------------- Total deferred tax assets 8,612 6,095 - --------------------------------------------------------------------- Deferred tax liabilities: Bank premises and equipment 1,173 975 Deferred income 4,408 4,057 Investments 2,668 2,367 Available-for-sale securities - 2,670 Other 647 516 - --------------------------------------------------------------------- Total deferred tax liabilities 8,896 10,585 - --------------------------------------------------------------------- Net deferred tax liability $ (284) $ (4,490) - --------------------------------------------------------------------- No valuation allowance for deferred tax assets was required at December 31, 2005 and 2004 as it is more likely than not that all of the deferred tax assets will be realized because they of recoverable taxes paid in prior years. The related federal income tax expense (benefit) on securities transactions approximated $189,000 in 2005, $(1,064,000) in 2004 and $(667,000) in 2003. 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) 2005 2004 ---------- ---------- Loan commitments $ 162,065 $ 139,731 Standby letters of credit 29,803 31,612 INTEREST RATE CONTRACTS: At December 31, 2005, 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, 2005, Peoples had not exercised its option under this interest rate contract since the advance remained a fixed rate advance. Changes in estimated fair value of this interest rate contract are recorded in earnings. OTHER: Peoples also has commitments to make additional capital contributions in low-income housing projects. Such commitments approximated $2.5 million at December 31, 2005, and $6.3 million at December 31, 2004. The maximum aggregate amounts Peoples could be required to make for each of the next five years are as follows: $0.7 million in 2006; $0.6 million in 2007 and 2008; and $0.2 million in 2009 and 2010. In the fourth quarter of 2003, Peoples provided credit recourse on the approximately $0.9 million of business credit card loans sold to an unrelated third party in connection with the sale of the entire credit card portfolio. This recourse expired in the second quarter of 2005. Prior to expiration, Peoples was required to reimburse the third party in the event of customer default, pursuant to the recourse provided on the business credit cards. No loss was incurred by Peoples in 2005 or 2004 as a result of this credit card recourse. 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, 2005, Peoples Bank's had no retained net profits available for distribution to Peoples Bancorp as dividends without regulatory approval. During 2006, only Peoples Bank's retained net profits of 2006 through the dividend date will be available for distribution to Peoples Bancorp as dividends without regulatory approval. CAPITAL REQUIREMENTS: Peoples and Peoples Bank are subject to various regulatory capital requirements administered by the banking regulatory agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Peoples and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of each entity's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Peoples' and Peoples Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require Peoples and Peoples Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Peoples and Peoples Bank met all capital adequacy requirements at December 31, 2005. As of December 31, 2005, 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: <TABLE> <CAPTION> For Capital To Be Well (Dollars in Thousands) Actual Adequacy Capitalized ----------------------------- ------------------------------ ------------------------------ 2005 Amount Ratio Amount Ratio Amount Ratio ------------ -------- ------------- --------- ------------ --------- <S> <C> <C> <C> <C> <C> <C> Total Capital (1) Peoples $ 161,226 12.9 % $ 99,950 8.0 % $ 124,938 10.0 % Peoples Bank 150,430 12.1 99,196 8.0 123,994 10.0 ------------------------------------------------------------------------------------------------------------------------ Tier 1 (2) Peoples 144,994 11.6 49,975 4.0 74,963 6.0 Peoples Bank 135,709 10.9 49,598 4.0 74,397 6.0 ------------------------------------------------------------------------------------------------------------------------ Tier 1 Leverage (3) Peoples 144,994 8.1 71,614 4.0 89,518 5.0 Peoples Bank 135,709 7.7 70,828 4.0 88,535 5.0 ------------------------------------------------------------------------------------------------------------------------ 2004 Total Capital (1) Peoples $ 145,135 12.3 % $ 94,386 8.0 % $ 117,983 10.0 % Peoples Bank 142,222 12.2 93,287 8.0 116,609 10.0 ------------------------------------------------------------------------------------------------------------------------ Tier 1 (2) Peoples 129,194 11.0 47,193 4.0 70,790 6.0 Peoples Bank 127,643 11.0 46,643 4.0 69,965 6.0 ------------------------------------------------------------------------------------------------------------------------ Tier 1 Leverage (3) Peoples 129,194 7.6 68,468 4.0 85,585 5.0 Peoples Bank 127,643 7.5 68,034 4.0 85,042 5.0 ------------------------------------------------------------------------------------------------------------------------ <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> </TABLE> 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 $6.2 million for the year ended December 31, 2005. 15. Acquisitions: ------------ At the close of business on December 3, 2004, Peoples Bank completed the acquisition of two full-service offices in the Ashland, Kentucky area from an unaffiliated institution. In the acquisition, Peoples acquired $65 million in deposits and $43 million of loans. As part of the initial purchase price allocation, Peoples recorded goodwill of $6.6 million and core deposit intangible of $1.7 million. Concurrent with the acquisition, Peoples Bank consolidated some of its Ashland, Kentucky area banking offices. The Flatwoods office and the acquired office in downtown Ashland were consolidated into nearby Peoples Bank offices at the close of business on December 3, 2004. Also, the Peoples Bank Cedar Knoll office ceased operations at the close of business on December 27, 2004, with clients redirected to Peoples Bank's newly acquired office in Summit, Kentucky. At the close of business on May 28, 2004, Peoples completed the acquisition of Barengo Insurance Agency, Inc., ("Barengo"), based in Marietta, Ohio, for initial consideration of $6.2 million ($3.0 million in cash and $3.2 million in Peoples Bancorp's common shares). The agreement also provides for additional consideration of up to $2.7 million ($1.3 million in cash and $1.4 million in Peoples Bancorp's common shares) to be paid by Peoples over the next three years, contingent on Barengo achieving certain revenue growth goals. As part of the initial purchase price allocation, Peoples recorded goodwill of $4.8 million and customer relationship intangible of $2.0 million. In 2005, contingent consideration of $194,000 was earned and paid by Peoples, of which 51% was paid in Peoples Bancorp's common shares and 49% in cash. At the close of business on April 30, 2004, Peoples completed the acquisition of substantially all of the assets of Putnam Agency, Inc. ("Putnam Agency"), with offices in Ashland, Kentucky and Huntington, West Virginia, for initial consideration of $8.6 million ($6.6 million in cash and $2.0 million in Peoples Bancorp's common shares), of which $1.5 million is being paid out in three annual installments beginning April 2005. The agreement also provides for additional consideration of up to $4.4 million in cash to be paid by Peoples over the next three years, contingent on the Putnam Agency achieving certain revenue growth goals. Peoples accounted for this transaction under the purchase method of accounting. As part of the initial purchase price allocation, Peoples recorded goodwill of $5.5 million and customer relationship intangible of $3.2 million. In 2005, contingent consideration of $668,000 was earned and paid by Peoples, of which all was paid in cash. Both Barengo and the Putnam Agency were full-service insurance agencies that offered a wide range of insurance products to both commercial and individual clients. Peoples operates the former agencies as divisions of Peoples Insurance Agency, Inc., using the "Barengo Insurance Agency" and "Putnam Agency" trade names. Peoples has retained all key producers and managers, with the exception of one producer with the Putnam Agency who has retired. The balances and operations of the acquired businesses are included in Peoples' financial statements from the date of acquisition and do not materially impact Peoples' financial position, results of operations or cash flows for any period presented. In addition, Peoples made several other acquisitions in prior years accounted for under the purchase method of accounting. The purchase prices of these acquisitions were allocated to the identifiable tangible and intangible assets acquired based upon their fair value at the acquisition date. The changes in the carrying amount of goodwill for the years ended December 31, were as follows: <TABLE> <CAPTION> (Dollars in Thousands) 2005 2004 ----------- ----------- <S> <C> <C> Balance at January 1 $ 59,096 $ 41,407 Goodwill acquired - 16,759 Contingent consideration earned 862 - (Reductions) additions resulting from valuation adjustments in final purchase price allocations (191) 930 - ----------------------------------------------------------------------------------------- Balance at December 31 $ 59,767 $ 59,096 - ----------------------------------------------------------------------------------------- </TABLE> 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. On December 29, 2005, Peoples accelerated the vesting schedule with regard to all unvested stock options previously granted to employees of Peoples and its subsidiaries, including executive officers of Peoples, and subsidiary directors pursuant to Peoples' various stock option plans. No unvested stock options held by directors of Peoples Bancorp were accelerated. As a result, an aggregate of 161,514 options became exercisable on that date. These options were originally scheduled to vest over a period of six years, with a significant portion due to vest in 2006. Peoples recognized non-cash compensation expense of $122,000 in 2005 as a result of this acceleration. The following summarizes Peoples' stock options as of December 31, 2005, 2004 and 2003, and the changes for the years then ended:
<TABLE> <CAPTION> 2005 2004 2003 --------------------------- --------------------------- --------------------------- Number Weighted Number Weighted Number Weighted Average Average Average Exercise Exercise Exercise of Shares Price Of Shares Price of Shares Price --------------------------- --------------------------- --------------------------- <S> <C> <C> <C> <C> <C> <C> Outstanding at January 1 545,882 $ 19.11 661,228 $ 16.78 622,978 $ 15.09 Granted 45,371 27.11 40,275 27.85 120,103 22.57 Exercised 92,940 16.71 139,776 10.36 72,957 11.82 Canceled 22,481 17.65 15,845 21.24 8,896 17.20 ---------------------------------------------------------------------------------------------------------------------- Outstanding at December 31 475,832 20.41 545,882 19.11 661,228 16.78 ---------------------------------------------------------------------------------------------------------------------- Exercisable at December 31 464,282 20.27 269,145 16.67 346,426 14.20 ---------------------------------------------------------------------------------------------------------------------- Weighted average estimated fair value of options granted during the year $ 7.28 $ 8.15 $ 7.01 ---------------------------------------------------------------------------------------------------------------------- </TABLE> The following summarizes information concerning Peoples' stock options outstanding at December 31, 2005:
<TABLE> <CAPTION> Options Outstanding Options Exercisable --------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Option Remaining Average Average Range of Shares Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------------------------------------------- ------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> $11.87 to $13.59 79,968 3.6 years $ 13.41 79,968 $ 13.41 $13.59 to $18.98 133,478 2.8 years 16.88 133,478 16.88 $18.98 to $22.32 110,773 5.8 years 22.17 110,773 22.17 $22.33 to $27.74 123,181 7.0 years 25.28 111,631 25.20 $27.74 to $29.48 28,432 8.2 years 28.66 28,432 28.66 </TABLE> 17. Parent Company Only Financial Information: ----------------------------------------- CONDENSED BALANCE SHEETS <TABLE> <CAPTION> December 31, ----------------------------- (Dollars in Thousands) 2005 2004 ----------- ------------ <S> <C> <C> Assets: Cash $ 50 $ 50 Interest-bearing deposits in subsidiary bank 15,381 5,021 Receivable from subsidiary bank 302 630 Available-for-sale investment securities, at estimated fair value (amortized cost of $1,393 and $1,768 at December 31, 2005 and 2004, respectively) 4,751 5,543 Investments in subsidiaries: Bank 186,635 187,733 Non-bank 28,828 27,370 Other assets 884 1,085 - --------------------------------------------------------------------------------------------------------------- Total assets $ 236,831 $ 227,432 =============================================================================================================== Liabilities: Accrued expenses and other liabilities $ 8,690 $ 5,562 Dividends payable 2,114 1,889 Long-term borrowings 13,600 15,300 Junior subordinated debentures held by subsidiary trusts 29,350 29,263 - --------------------------------------------------------------------------------------------------------------- Total liabilities 53,754 52,014 - --------------------------------------------------------------------------------------------------------------- Stockholders' equity 183,077 175,418 - --------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 236,831 $ 227,432 =============================================================================================================== </TABLE>
CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Year ended December 31, ------------------------------------------- (Dollars in Thousands) 2005 2004 2003 ---------- ----------- ----------- <S> <C> <C> <C> Income: Dividends from subsidiary bank $ 18,300 $ 24,500 $ 17,750 Interest 270 166 221 Rental income from subsidiaries 32 55 55 Other income 528 34 41 - -------------------------------------------------------------------------------------------------------------------------- Total income 19,130 24,755 18,067 - -------------------------------------------------------------------------------------------------------------------------- Expenses: Interest expense on junior subordinated notes held by subsidiary trusts 2,564 2,441 2,429 Intercompany management fees 744 685 576 Interest 696 483 474 Other expense 1,070 836 677 - -------------------------------------------------------------------------------------------------------------------------- Total expenses 5,074 4,445 4,156 - -------------------------------------------------------------------------------------------------------------------------- Income before federal income taxes and equity in undistributed earnings of (excess dividends from) subsidiaries 14,056 20,310 13,911 Applicable income tax benefit (1,178) (1,322) (1,285) Equity in undistributed earnings of (excess dividends from) subsidiaries 5,265 (3,357) 1,058 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 20,499 $ 18,275 $ 16,254 ========================================================================================================================== </TABLE>
STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Year ended December 31, ------------------------------------------- (Dollars in Thousands) 2005 2004 2003 ---------- ---------- ----------- <S> <C> <C> <C> Cash flows from operating activities: Net income $ 20,499 $ 18,275 $ 16,254 Adjustment to reconcile net income to cash provided by operations: Amortization and depreciation 33 32 35 (Equity in undistributed earnings of) excess dividends from subsidiaries (5,265) 3,357 (1,058) Other, net 4,003 2,058 (1,264) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 19,270 23,722 13,967 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Net proceeds from sales and maturity (purchases) investment securities 907 90 (1,603) Net proceeds from sale of premises and equipment 182 - - Investment in subsidiaries - (4,095) (17,475) Acquisitions, net of cash received (1,157) (6,948) (15,683) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (68) (10,953) (34,761) - -------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Payments on short-term borrowings - - (17,000) Net (payments on) proceeds from long-term borrowings (1,700) (1,700) 15,500 Purchase of treasury stock (1,754) (13,709) (4,092) Change in receivable from subsidiary 328 (209) (212) Proceeds from issuance of common stock 1,747 1,118 5,582 Cash dividends paid (7,463) (7,146) (5,704) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (8,842) (21,646) (5,926) - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 10,360 (8,877) (26,720) Cash and cash equivalents at the beginning of the year 5,071 13,948 40,668 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of the year $ 15,431 $ 5,071 $ 13,948 ========================================================================================================================== Supplemental cash flow information: Interest paid $ 684 $ 478 $ 486 - -------------------------------------------------------------------------------------------------------------------------- </TABLE>
18. Summarized Quarterly Information (Unaudited): -------------------------------------------- A summary of selected quarterly financial information for 2005 and 2004 follows: <TABLE> <CAPTION> (Dollars in Thousands, except Per Share 2005 Data) -------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------- ------------- ------------- ------------ <S> <C> <C> <C> <C> Interest income $ 22,643 $ 23,397 $ 24,355 $ 25,380 Interest expense 9,931 10,481 11,205 11,852 Net interest income 12,712 12,916 13,150 13,528 Provision for loan losses 941 40 485 562 Net gain on securities transactions 233 3 - 303 Net gain (loss) on asset disposals 8 113 46 (9) Other income 7,127 7,202 7,127 7,014 Intangible asset amortization 688 674 661 646 Other expenses 12,059 12,766 11,875 11,973 Income tax expense 1,700 1,876 1,979 2,049 Net income 4,692 4,878 5,268 5,661 Earnings per share - Basic 0.45 0.47 0.54 0.50 Earnings per share - Diluted $ 0.44 $ 0.46 $ $ 0.53 0.50 Weighted-average shares outstanding: Basic 10,419,189 10,405,989 10,451,578 10,501,679 Diluted 10,558,003 10,541,774 10,591,470 10,631,310 </TABLE> In December, Peoples determined that the yearly amount of lump sum payments to participants from Peoples' defined benefit pension plan during 2005 exceeded the allowable threshold of annual service cost plus interest and, accordingly, settlement charges of $578,000 ($421,000 after taxes, or $0.04 per diluted share) should have been reflected in the results for the second quarter of 2005. The following are the revised Consolidated Statements of Income reflecting the pension settlement charges in the second quarter of 2005: <TABLE> <CAPTION> (Dollars in Thousands, except Three Months Ended Six Months Ended Nine Months Ended Per Share Data) June 30, 2005 June 30, 2005 September 30, 2005 ----------------------------- ---------------------------- --------------------------- Previously Corrected Previously Corrected Previously Corrected Reported Reported Reported -------------- ------------- ------------- ------------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Net income $ 5,299 $ 4,878 $ 9,991 $ 9,570 $ 15,259 $ 14,838 Earnings per share - Basic 0.51 0.47 0.96 0.92 1.46 1.42 Earnings per share - Diluted $ 0.50 $ 0.46 $ 0.95 $ 0.91 $ 1.44 $ 1.40 </TABLE> <TABLE> <CAPTION> (Dollars in Thousands, except Per Share Data) 2004 -------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------- ------------- ------------- ------------ <S> <C> <C> <C> <C> Interest income $ 21,586 $ 21,145 $ 21,850 $ 22,449 Interest expense 8,038 8,448 8,959 9,715 Net interest income 13,548 12,697 12,891 12,734 Provision for loan losses 794 616 605 531 Net gain (loss) on securities transactions 32 5 (7) (3,070) Net gain (loss) on asset disposals 30 17 (25) (141) Other income 4,825 6,245 7,248 7,049 Intangible asset amortization 401 526 635 657 Other expenses 9,889 11,005 11,909 12,176 Income tax expense 1,985 1,764 1,820 490 Net income 5,366 5,053 5,138 2,718 Earnings per share - Basic 0.51 0.48 0.49 0.26 Earnings per share - Diluted $ 0.50 $ 0.47 $ 0.48 $ 0.26 Weighted-average shares outstanding: Basic 10,560,241 10,603,510 10,524,304 10,430,408 Diluted 10,808,007 10,766,289 10,669,798 10,595,211 </TABLE>
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------ The information concerning (a) directors of Peoples Bancorp Inc. ("Peoples"), (b) the Board of Directors' determination that Peoples has an "audit committee financial expert" serving on its Audit Committee, (c) the Audit Committee of Peoples' Board of Directors and (d) the procedures by which shareholders of Peoples may recommend nominees to Peoples' Board of Directors required by Item 401 of Regulation S-K is included in the section captioned "ELECTION OF DIRECTORS" on pages 8 through 11 of the definitive Proxy Statement of Peoples Bancorp Inc. relating to the Annual Meeting of Shareholders to be held April 13, 2006 ("Peoples' Definitive Proxy Statement"), which section is incorporated herein by reference. The information regarding Peoples' executive officers required by Item 401 is included under Part I of this Form 10-K in the section captioned "Executive Officers Of The Registrant". The information required by Item 405 of Regulation S-K is included under the caption "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 7 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 principal accounting officer of Peoples. Peoples intends to disclose the following on the "Corporate Governance and Code of Ethics and Ethics Hotline" page of its Internet website within four business days following their occurrence: (A) the date and nature of any amendment to a provision of its Code of Ethics that (i) applies to the principal executive officer, principal financial officer, principal accounting officer or controller of Peoples, or persons performing similar functions, (ii) relates to any element of the code of ethics definition set forth in Item 406(b) of SEC Regulation S-K, and (iii) is not a technical, administrative or other non-substantive amendment; and (B) a description (including the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver) of any waiver, including an implicit waiver, from a provision of the Code of Ethics to the principal executive officer, principal financial officer, principal accounting officer or controller of Peoples, or persons performing similar functions, that relates to one or more of the elements of the code of ethics definition set forth in Item 406(b) of SEC Regulation S-K. Each of the Code of Ethics, the Audit Committee Charter, the Governance and Nominating Committee Charter and the Compensation Committee Charter is posted on the "Corporate Governance and Code of Ethics and Ethics Hotline" page of Peoples' Internet website at www.peoplesbancorp.com. Interested persons may also obtain copies of the Code of Ethics without charge by writing to Peoples Bancorp Inc., Attention: Corporate Secretary, 138 Putnam Street, P.O. Box 738, Marietta, Ohio 45750-0738. ITEM 11. EXECUTIVE COMPENSATION. - -------------------------------- The information required by this Item 11 is included in the section captioned "Compensation Committee Interlocks and Insider Participation" on pages 22 and 23 of Peoples' Definitive Proxy Statement and the section captioned "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" on pages 24 through 31 of Peoples' Definitive Proxy Statement, which sections are incorporated herein by reference. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of SEC Regulation S-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. - --------------------------------------------------------------------------- The information required by this Item 12 regarding the security ownership of certain beneficial owners and management is included in the section captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 4 through 7 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, 2005, 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. <TABLE> <CAPTION> (c) Number of common shares remaining available (a) for future Number of common (b) issuance under shares to be issued Weighted-average equity compensation upon exercise of exercise price of plans (excluding common outstanding options, outstanding options, shares reflected in Plan Category warrants and rights warrants and rights column (a)) - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Equity compensation plans approved by shareholders 531,144(1) $20.41(2) 311,731(3) Equity compensations plans not approved by shareholders - - - - ----------------------------------------------------------------------------------------------------------------- Total 531,144 $20.41 311,731 - ------------------------------------------------------------------------------------------------------------------ <FN> (1) Includes an aggregate of 475,832 common shares issuable upon exercise of options granted under the 1993 Plan, the 1995 Plan, the 1998 Plan and the 2002 Plan and 55,312 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 33,423 common shares, 250,851 common shares and 27,457 common shares remaining available for issuance under the 1998 Plan, the 2002 Plan and the Deferred Compensation Plan, respectively, at December 31, 2005. No common shares were available for issuance under the 1993 Plan and 1995 Plan at December 31, 2005. </FN> </TABLE> Additional information regarding Peoples' stock option plans can be found in Note 16 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- The information required by this Item 13 is included in the section captioned "TRANSACTIONS INVOLVING MANAGEMENT" on pages 7 and 8 of Peoples' Definitive Proxy Statement, the section captioned "ELECTION OF DIRECTORS" on pages 8 through 11 of Peoples' Definitive Proxy Statement and the section captioned "Compensation Committee Interlocks and Insider Participation" on pages 22 and 23 of Peoples' Definitive Proxy Statement, which sections are incorporated by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. - ------------------------------------------------ The information required by this Item 14 is included in the section captioned "AUDIT COMMITTEE MATTERS-Pre-Approval Policy" and "AUDIT COMMITTEE MATTERS-Services of the Independent Registered Public Accounting Firm" on pages 50 and 51 of Peoples' Definitive Proxy Statement, which sections are incorporated herein by reference.
PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. - ---------------------------------------------------- <TABLE> <CAPTION> (a)(1)Financial Statements: -------------------- The following consolidated financial statements of Peoples Bancorp Inc. and subsidiaries are included in Item 8: <S> <C> <C> Page Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) on Consolidated Financials Statements 46 Consolidated Balance Sheets as of December 31, 2005 and 2004 47 Consolidated Statements of Income for each of the three years ended December 31, 2005 48 Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 2005 49 Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2005 49 Consolidated Statements of Cash Flows for each of the three years ended December 31, 2005 50 Notes to the Consolidated Financial Statements 51 Peoples Bancorp Inc. (Parent Company Only Financial Information is included in Note 17 of the Notes to the Consolidated Financial Statements) 70 </TABLE> (a)(2)Financial Statement Schedules ----------------------------- All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a)(3)Exhibits -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto or incorporated herein by reference. For a list of such exhibits, see "Exhibit Index" beginning at page 78. The Exhibit Index specifically identifies each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. (b) Exhibits -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto or incorporated herein by reference. For a list of such exhibits, see "Exhibit Index" beginning at page 78. (c) Financial Statement Schedules ----------------------------- None.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PEOPLES BANCORP INC. Date: March 7, 2006 By: /s/ MARK F. BRADLEY ------------------------------ Mark F. Bradley, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signatures Title Date ---------- ----- ---- <S> <C> <C> /s/ MARK F. BRADLEY President, Chief Executive Officer and March 7, 2006 - ------------------------------------------- Director -------------------- Mark F. Bradley /s/ JOHN W. CONLON Chief Financial Officer and Treasurer March 11, 2006 - ------------------------------------------- (Principal Financial Officer -------------------- John W. Conlon /s/ DONALD J. LANDERS, JR. Director of Finance and Chief Accounting March 7, 2006 - ------------------------------------------- Officer (Principal Accounting Officer) -------------------- Donald J. Landers, Jr. /S/ CARL L. BAKER, JR. Director March 7, 200 - ------------------------------------------- -------------------- Carl L. Baker, Jr. /s/ GEORGE W. BROUGHTON Director March 7, 2006 - ------------------------------------------- -------------------- George W. Broughton /s/ FRANK L. CHRISTY Director March 7, 2006 - ------------------------------------------- -------------------- Frank L. Christy /s/ WILFORD D. DIMIT Director March 7, 2006 - ------------------------------------------- -------------------- Wilford D. Dimit /s/ RICHARD FERGUSON Director March 7, 2006 - ------------------------------------------- -------------------- Richard Ferguson Director - ------------------------------------------- -------------------- Robert W. Price /s/ THEODORE P. SAUBER Director March 7, 2006 - ------------------------------------------- -------------------- Theodore P. Sauber Vice Chairman of the Board and Leadership - ------------------------------------------- Director -------------------- Paul T. Theisen /s/ JOSEPH H. WESEL Chairman of the Board and Director March 7, 2006 - ------------------------------------------- -------------------- Joseph H. Wesel /s/ THOMAS J. WOLF Director March 7, 2006 - ------------------------------------------- -------------------- Thomas J. Wolf </TABLE>
EXHIBIT INDEX PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2005 <TABLE> <CAPTION> Exhibit Number Description Exhibit Location - ----------- ------------------------------------------------------- -------------------------------------------------- <S> <C> <C> 3(a)(1) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit 3(a) to Inc. (as filed with the Ohio Secretary of State on Peoples' Registration Statement on Form 8-B filed May 3, 1993). July 20, 1993 (File No. 0-16772). 3(a)(2) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a)(2) Incorporation of Peoples Bancorp Inc. (as filed with to Peoples' Annual Report on Form 10-K for the the Ohio Secretary of State on April 22, 1994). fiscal year ended December 31, 1997 (File No. 0-16772) ( "Peoples' 1997 Form 10-K"). 3(a)(3) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a)(3) Incorporation of Peoples Bancorp Inc. (as filed with to Peoples' 1997 Form 10-K. the Ohio Secretary of State on April 9, 1996). 3(a)(4) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit 3(a) to Incorporation of Peoples Bancorp Inc. (as filed with Peoples' Quarterly Report on Form 10-Q for the the Ohio Secretary of State on April 23, 2003). quarterly period ended March 31, 2003 (File No. 0-16772)("Peoples' March 31, 2003 Form 10-Q"). 3(a)(5) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit 3(b) to Inc. (reflecting amendments through April 23, 2005) Peoples' March 31, 2003 Form 10-Q. [For SEC reporting compliance purposes only not filed with Ohio Secretary of State]. 3(b)(1) Code of Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b) to Peoples' Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772). 3(b)(2) Certified Resolutions Regarding Adoption of Incorporated herein by reference to Exhibit 3(c) to Amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, Peoples' March 31, 2003 Form 10-Q. 1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 10, 2003. 3(b)(3) Certified Resolutions Regarding Adoption of Incorporated herein by reference to Exhibit 3(a) to Amendments to Article THREE of the Code of Peoples' Quarterly Report on Form 10-Q for the Regulations of Peoples Bancorp Inc. by Shareholders quarterly period ended March 31, 2004, filed on May on April 8, 2004. 10, 2004 (File No. 0-16772)("Peoples' March 31, 2004 Form 10-Q"). 3(b)(4) Code of Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b) to (reflecting amendments through April 8, 2004) [For Peoples' March 31, 2004 Form 10-Q. SEC reporting compliance purposes only]. 4(a) Agreement to furnish instruments and agreements Filed herewith. defining rights of holders of long-term debt. 4(b) Indenture, dated as of April 20, 1999, between Incorporated herein by reference to Exhibit 4.1 to Peoples Bancorp Inc. and Wilmington Trust Company, the Registration Statement on Form S-4 (Registration as Debenture Trustee, relating to Junior No. 333-81251) filed on June 22, 1999 by Peoples Subordinated Deferrable Interest Debentures. Bancorp Inc. and PEBO Capital Trust I ("Peoples' 1999 Form S-4"). 4(c) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.5 to Capital Trust I, dated as of April 20, 1999. Peoples' 1999 Form S-4. 4(d) Series B Capital Securities Guarantee Agreement, Incorporated herein by reference to Exhibit 4 (i) of dated as of September 23, 1999, between Peoples Peoples' Annual Report on Form 10-K for the fiscal Bancorp Inc. and Wilmington Trust Company, as year ended December 31, 1999. (File No. 0-16772) Guarantee Trustee, relating to Series B 8.62% Capital Securities. 4(e) Indenture, dated as of April 10, 2002, between Incorporated herein by reference to Exhibit 4.1 to Peoples Bancorp Inc. and Wilmington Trust Company, Peoples' Quarterly Report on Form 10-Q for the as Trustee, relating to Floating Rate Junior quarterly period ended September 30, 2002(File No. Subordinated Debt Securities due 2032. 0-16772) ("Peoples' September 30, 2002 Form 10-Q"). 4(f) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.2 to Capital Trust II, dated as of April 10, 2002. Peoples' September 30, 2002 Form 10-Q. 4(g) Guarantee Agreement, dated as of April 10, 2002, by Incorporated herein by reference to Exhibit 4.3 to and between Peoples Bancorp Inc. and Wilmington Peoples' September 30, 2002 Form 10-Q. Trust Company, as Guarantee Trustee, relating to Floating Rate MMCaps(SM) Capital Securities. 4(h) Loan Agreement dated as of June 12, 2003, by and Incorporated herein by reference to Exhibit 10(a) to between Peoples Bancorp Inc. and First Tennessee Peoples' Quarterly Report on Form 10-Q for the Bank National Association. quarterly period ended June 30, 2003 (File No. 0-16772) (the "June 30, 2003 Form 10-Q"). 4(i) Promissory note executed by Peoples Bancorp Inc., as Incorporated herein by reference to Exhibit 10(b) to Maker in the principal amount of $17,000,000 dated Peoples' June 30, 2003 Form 10-Q. June 12, 2003. 4(j) Commercial Pledge Agreement dated as of June 12, Incorporated herein by reference to Exhibit 10(c) to 2003, by and between Peoples Bancorp Inc. and First Peoples' June 30, 2003 Form 10-Q. Tennessee Bank National Association. 4(k) Registration Rights Agreement, dated as of April 30, Incorporated herein by reference to Exhibit 4.1 to 2004, among Putnam Agency, Inc.; Thomas G. Chaffin, Peoples' Registration Statement on Form S-3 Dana N. Conley, Charles R. Lowe, Clarence C. Massey, (Registration No. 333-116683) filed on June 21, 2004 Laura A. Morris, Thomas E. Phipps, Donald H. Putnam, ("People' 2004 Form S-3"). Jr. and Donald H. Putnam, Jr. Trustee U/A DTD May 7, 1993, FBO Donald H. Putnam, Jr. Revocable Trust and Erland P. Stevens, Jr., the shareholders of Putnam Agency, Inc.; and Peoples Bancorp Inc. 4(l) Registration Rights Agreement, dated as of May 28, Incorporated herein by reference to Exhibit 4.2 to 2004, among James Barengo, Randall T. Barengo and Peoples' 2004 Form S-3. Peoples Bancorp Inc. 10(a) Deferred Compensation Agreement, dated November 18, Incorporated herein by reference to Exhibit 6(g) to 1976, between Robert E. Evans and The Peoples Registration Statement No. 2-68524 on Form S-14 of Banking and Trust Company (now known as Peoples Peoples Bancorp Inc., a Delaware corporation, Bank, National Association), as amended December 26, Peoples' predecessor. 1978 and March 22, 1979.* 10(b)(1) Peoples Bancorp Inc. Deferred Compensation Plan for Incorporated herein by reference to Exhibit 10(a) of Directors of Peoples Bancorp Inc. and Subsidiaries Peoples' Registration Statement on Form S-8 filed (Amended and Restated Effective January 2, 1998.)* December 31, 1997 (Registration No. 333-43629). 10(b)(2) Amendment No. 1 to Peoples Bancorp Inc. Deferred Incorporated herein by reference to Exhibit 10(b) of Compensation Plan for Directors of Peoples Bancorp Peoples' Post-Effective Amendment No. 1 to Form S-8 Inc. and Subsidiaries effective January 2, 1998.* filed September 4, 1998 (Registration No. 333-43629). 10(c) Summary of the Performance Compensation Program for Incorporated herein by reference to Exhibit 10(c) of Peoples Bancorp Inc. effective for calendar years Peoples' Annual Report on Form 10-K for the fiscal beginning on or after January 1, 2002.* year ended December 31, 2003 (File No. 0-16772). 10(d) Amended and Restated Peoples Bancorp Inc. 1993 Stock Incorporated herein by reference to Exhibit 4 of Option Plan.* Peoples' Registration Statement on Form S-8 filed August 25, 1993 (Registration Statement No. 33-67878). 10(e) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(g) of with grant of non-qualified stock options under Peoples' Annual Report on Form 10-K for the fiscal Amended and Restated Peoples Bancorp Inc. 1993 Stock year ended December 31, 1995 (File No. 0-16772) Option Plan.* ("Peoples' 1995 Form 10-K"). 10(f) Form of Stock Option Agreement, dated May 20, 1993, Incorporated herein by reference to Exhibit 10(h) of used in connection with grant of incentive stock Peoples' 1995 Form 10-K. options under Amended and Restated Peoples Bancorp Inc. 1993 Stock Option Plan.* 10(g) Form of Stock Option Agreement dated November 10, Incorporated herein by reference to Exhibit 10(i) of 1994, used in connection with grant of incentive Peoples' 1995 Form 10-K. stock options under Peoples Bancorp Inc. Amended and Restated 1993 Stock Option Plan.* 10(h) Peoples Bancorp Inc. 1995 Stock Option Plan.* Incorporated herein by reference to Exhibit 4 of Peoples' Form S-8 filed May 24, 1995 (Registration Statement No. 33-59569). 10(i) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(k) of with grant of non-qualified stock options to Peoples' 1995 Form 10-K. non-employee directors of Peoples under Peoples Bancorp Inc. 1995 Stock Option Plan.* 10(j) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(l) of with grant of non-qualified stock options to Peoples' 1995 Form 10-K. non-employee directors of Peoples' subsidiaries under Peoples Bancorp Inc. 1995 Stock Option Plan.* 10(k) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(m) of with grant of incentive stock options under Peoples Peoples' Annual Report on Form 10-K for the fiscal Bancorp Inc. 1995 Stock Option Plan.* year ended December 31, 1998 (File No. 0-16772) ("Peoples' 1998 Form 10-K"). 10(l) Peoples Bancorp Inc. 1998 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of Peoples' Form S-8 filed September 4, 1998 (Registration Statement No. 333-62935). 10(m) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o) of with grant of non-qualified stock options to Peoples' 1998 Form 10-K. non-employee directors of Peoples under Peoples Bancorp Inc. 1998 Stock Option Plan.* 10(n) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(p) of with grant of non-qualified stock options to Peoples' 1998 Form 10-K. consultants/advisors of Peoples under Peoples Bancorp Inc. 1998 Stock Option Plan.* 10(o) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o) of with grant of incentive stock options under Peoples Peoples' Annual Report on Form 10-K for the fiscal Bancorp Inc. 1998 Stock Option Plan.* year ended December 31, 1999(File No. 0-16772). 10(p) Peoples Bancorp Inc. 2002 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of Peoples' Form S-8 filed April 15, 2002 (Registration Statement No. 333-86246). 10(q) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(r) to with grant of non-qualified stock options to Annual Report on Form 10-K for the fiscal year ended directors of Peoples under Peoples Bancorp Inc. 2002 December 31, 2003 (File No. 0-16772)("Peoples' 2002 Stock Option Plan.* Form 10-K'). 10(r) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(s) to with grant of non-qualified stock options to Peoples' 2002 Form 10-K. subsidiary directors of Peoples under Peoples Bancorp Inc. 2002 Stock Option Plan.* 10(s) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(t) to with grant of non-qualified stock options to Peoples' 2002 Form 10-K. employees of Peoples under Peoples Bancorp Inc. 2002 Stock Option Plan.* 10(t) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(u) to with grant of incentive stock options under Peoples Peoples' 2002 Form 10-K. Bancorp Inc. 2002 Stock Option Plan.* 10(u) Form of Change in Control Agreement applicable to Incorporated herein by reference to Exhibit 10(a) to Robert E. Evans and Mark F. Bradley* Peoples' Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, filed November 8, 2004 (File No. 0-16772) (the "September 30, 2004 Form 10-Q"). 10(v) Form of Change in Control Agreement applicable to Incorporated herein by reference to Exhibit 10(b) to David B. Baker, Larry E. Holdren, Carol A. Peoples' September 30, 2004 Form 10-Q. Schneeberger and John W. Conlon* 10(w) Summary of Perquisites for Executive Officers of Incorporated herein by reference to Exhibit 10(w) of Peoples Bancorp Inc. Peoples' Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 0-16772). 10(x) Summary of Base Salaries for Executive Officers of Filed herewith. Peoples Bancorp Inc. 10(y) Summary of Cash Compensation for Directors of Incorporated herein by reference to Exhibit 10.1 to Peoples Bancorp Inc. Peoples' Current Report of Form 8-K filed April 19, 2005. 12 Statements of Computation of Ratios. Filed herewith. 21 Subsidiaries of Peoples Bancorp Inc. Filed herewith. 23 Consent of Independent Registered Public Accounting Filed herewith. Firm - Ernst & Young LLP. 31(a) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith. [President and Chief Executive Officer] 31(b) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith. [Chief Financial Officer and Treasurer] 32 Section 1350 Certifications Filed herewith. </TABLE> *Management Compensation Plan