20 0 6 An n u a l Re port Our Mission To be the primary financial resource for our target customers. We grow these relationships by delivering trusted advice, extraordinary personal service, and a seamless, integrated suite of services that meets all their needs. Our target customers are businesses and consumers who value us as true financial partners. Our success depends on empowering our skilled and dedicated personnel to meet and exceed our customers’ needs. We win by serving customers, supporting those who serve customers, and delivering a competitive return to our shareholders. We are a team and we are good teammates. We take care of our customers and we take care of each other. Our Core Values Clients as a Focus Business with Integrity Continuous Will to Win Commitment to Communities Trust Among Clients, Communities and Associates Development of Associate Skills F i n a n c i a l H i g h l i g h t s (Dollars in Thousands, except Per Share Data) Dollars in Thousands, except Per Share Data 2006 2005 2004 Earnings and Dividends Net income Total Revenues (1) Dividends declared $ 21,558 $ $ 83,596 8,859 Dividend payout ratio 41.09 % $ $ $ $ $ $ $ $ $ 20,499 80,776 8,201 40.01 % 1.96 1.94 0.78 17.40 10.82 28.53 1.12 % 11.52 % 3.32 % 59.05 % $ $ $ $ $ $ $ $ $ 18,275 77,237 7,614 41.66 % 1.74 1.71 0.72 16.81 10.00 27.43 1.04 % 10.60 % 3.39 % 57.18 % $ $ $ $ $ $ 2.03 2.01 0.83 18.51 12.05 29.70 1.15 % 11.33 % 3.29 % 57.51 % Per Share Data Earnings per share - Basic Earnings per share - Diluted Cash dividends Book value at end of period Tangible book value at end of period (2) Closing stock price Performance Ratios Return on average assets Return on average stockholders’ equity Net interest margin Efficiency ratio (3) At year end: Total assets Gross loans Total deposits Stockholders’ equity Market capitization $ 1,875,255 $ 1,855,277 $ 1,809,086 Total investment securities $ 548,733 $ 589,313 $ 602,364 $ 1,132,394 $ 1,071,876 $ 1,023,058 $ 1,233,529 $ 1,089,286 $ 1,069,421 T o t a l R e v e n u e s $ $ 197,169 316,364 $ $ 183,077 300,106 $ $ 175,418 286,235 Trust and brokerage assets under management $ 840,562 $ 753,415 $ 737,135 (1) Net interest income and non-interest income. (2) Tangible book value per share reflects capital calculated for banking regulatory requirements and excludes balance sheet impact of intangible assets acquired through purchase accounting for acquisitions. (3) Non-interest expense (less intangible amortization) as a percentage of fully-tax equivalent net interest income plus non-interest income. 8 5 5 1 2 $ , , 9 9 4 0 2 $ 5 7 2 8 1 $ , ‘04 ‘05 ‘06 $ 000 N e t I n c o m e 6 9 5 3 8 $ , , 6 7 7 0 8 $ 7 3 2 7, 7 $ ‘04 ‘05 ‘06 $ 000 L e t t e r t o o u r S h a r e h o l d e r s Working Together We’re Better. From investments to banking to insurance, working as a team enables us to deliver smart, universal financial solutions to our clients. When done correctly, it should also lead to revenue growth and increased shareholder value. We are pleased to report another year of earnings growth for our company. Despite a tough interest rate environment, higher loan loss expense, and slower economic growth conditions in many of our markets, total revenues at Peoples Bancorp topped $83 million and net income grew over $1 million to $21.5 million. M a r k F . B r a d l e y In 2006, earnings per share reached $2.01, a 4% increase over 2005. We are also President and proud to report that dividends per share increased for the 41st consecutive year, Chief Executive Officer from $0.78 in 2005 to $0.83 in 2006, a 6% increase. Our goals in 2006 included to work together as financial professionals to serve our clients; to continue realigning our balance sheet with more loans and less investment securities; to expand in better growth markets and to reduce our investment in slower growth areas. Along those lines, we sold our South Shore, Kentucky and Chesterhill, Ohio banking offices in 2006, generating gains of over $450,000. More importantly, we expanded in Lancaster, Ohio by opening a new office in May 2006. Later in the 2 We’re Better. year, Peoples Bank acquired a banking office in Carroll along State Route 33, the main highway connecting Lancaster to Columbus, Ohio. Through our expanded presence, we now serve customers in 4 locations in central Ohio’s Fairfield County. Our bankers grew loans at a brisk pace, with total loans reaching $1.13 billion, up $60 million or 6% over the previous year, with most of our growth occurring in commercial loans. Our central Ohio offices, in particular our loan production office in Westerville, had a strong year. Our central Ohio operations now account for more than $300 million of total loans, as we continue to serve more customers in that economically active area. In 2006, personal loans also grew $10 million, or 15%, as we successfully served many individual consumers and added new consumer loans through our indirect lending processes. Loan quality was a challenge in 2006, as net loan chargeoffs were $3.8 million compared to $2.1 million in 2005. Commercial loan chargeoffs accounted for most of the increase, as a chargeoff of a single commercial loan relationship in the fourth quarter of 2006 pushed chargeoffs and loan loss provision higher. However, it is also important to note that although net loan chargeoffs increased to 0.35% of average loans, our chargeoff ratio is similar to historical results over the last 10 years. Nonperforming loans are higher at year-end 2006 compared to previous periods, but our ratios remain comparable to peers and loan delinquencies are at low levels. Our lenders and loan review staff continue to focus on quality loan growth and manage risk with a long-term focus. Non-interest income grew $1.9 million in 2006, an increase of 7% to over $30 million. Peoples Financial Advisors, our wealth management unit, had a very successful year. Revenue growth from fiduciary and brokerage activities grew 10% to $4.2 million, and assets under management now total over $800 million. We continue to look for ways to add value to customer relationships D i v i d e n d s p e r S h a r e and in 2007 and we plan to make investments in technology that will enhance our ability to serve our wealth management clients. E a r n i n g s p e r S h a r e Peoples Insurance Agency, including our Putnam and Barengo insurance divisions, also had strong growth, with revenues exceeding $9.6 million, up 9% over the L e t t e r t o o u r S h a r e h o l d e r s previous year. Commercial property and casualty insurance accounted for most of our insurance income, and health insurance revenues also increased in 2006. Peoples’ investment and insurance operations add diversity to our revenue streams, which is important in difficult interest rate environments experienced in 2006 and expected to continue into 2007. The yield curve is “flat,” which means short and long-term rates are basically equal, making it a challenge to generate net interest income without taking significant risk. Due to the interest rate environment and competitive pressure on loan and deposit pricing, net interest margin declined to 3.29% in 2006 compared to 3.32% in 2005. We also expect net interest income and margin to be challenged in 2007, as shor t-term interest rates are expected to remain stable in the near term. In 2006, we also made several enhancements to our online banking services at www.peoplesbancorp.com and introduced new security features. The website now offers enhanced ease of navigation and new, more efficient internet banking service that allows clients to customize their online experience with specialized reporting tools. New technology we will offer to our business clients in 2007 includes “remote deposit capture,” which allows clients to make deposits electronically from their business locations using scanners and electronic data transmission. We are currently testing the software and processes with a handful of clients, and early results indicate good success. Over time, this new technology will save our business customers time and money, and is another example of how we make banking easier for our customers. We are excited to be able to introduce enhancements to our client base and view remote capture technology as a way to strengthen relationships and grow deposits. A commitment to technology is one part of a successful company. You also need quality products. But most importantly, you need great people. And our people recently earned some exceptional recognition. I am pleased to report that Peoples Bank earned an “Outstanding” rating, the highest possible, for activities governed under the Community Reinvestment Act (CRA), which was established to ensure that federally insured banks are meeting the credit and other financial needs of low to moderate income groups. Not only The “volunteer spirit” is vibrant at our company, as evidenced by the over 25,000 hours that Peoples associates gave to help local charities and community events during 2006. 4 do we offer expanded banking services and financial support to local economic development groups, our associates also provide support through charitable donations and thousands of hours of community service. The “volunteer spirit” is vibrant at our company, as evidenced by the over 25,000 hours that Peoples associates gave to help local charities and community events during 2006. Simply put, our people are the biggest reason we are successful in serving our communities’ financial needs. Looking forward to 2007 and beyond, our strategy is to provide sustainable, long-term growth of earnings and dividends to our shareholders. Our core values and personal approach include involvement in our communities and supporting the vitality of our markets. Personalized delivery of service and attention to detail, combined with our universal offering of financial services, creates our competitive advantage. We intend to continue our efforts to gain more business in our markets, especially from our current customer base, and make additional investments in communities where stronger growth prospects appear more promising. We have already announced plans to expand in Huntington, West Virginia, a good economic area with a great deal of potential for our company. Our new office will be at the corner of First Street and Fifth Avenue in downtown Huntington. The full-service office, which will include an ATM and motor banking facilities, should be completed in September 2007. The new location will add convenience for our existing customers, and also give us the opportunity to reach many new clients with our full-service offering of banking, insurance, investment, and wealth management services. The office will offer customers the ability to satisfy all their financial needs in one place. In addition to expansion by building new offices, we will also consider acquisitions of banking, investment and insurance firms if such additions align with our strategies. Our goal is to expand in communities with economic growth potential, and where opportunities exist to serve clients that desire our relationship-based sales and service model. Also in 2007, we will renew our commitment to great customer service. We have already taken steps to ensure quality service is being provided in person, on the phone, and through peoplesbancorp.com, but there is always room for improvement. We actively measure our levels of service and will continue Personalized delivery of service and attention to detail, combined with our universal offering of financial services, creates our competitive advantage. 5 Performance with integrity and a commitment to our communities, customers, and shareholders are at the core of who we are and what we do every day. L e t t e r t o o u r S h a r e h o l d e r s to work hard to create an environment in which our associates can quickly and professionally serve our clients in a pleasing manner. In the last few months we also welcomed a new director to our board. The Peoples Bancorp Board of Directors unanimously approved David L. Mead’s appointment at the company’s September 2006 board meeting. Mr. Mead will stand for re-election at our April 2007 shareholders meeting. We are fortunate to be able to add a director with a strong financial background and financial services experience. Previously Mr. Mead served as Chief Financial Officer for two Ohio-based bank holding companies and has over 30 years experience in accounting and finance. He is a CPA who also serves on our Peoples Bank subsidiary Board of Directors. As I shared before, we are blessed at Peoples Bancorp to have a great team of hard-working associates dedicated to serving our customers and each other. To quote legendary Ohio State head football coach Woody Hayes, “You win with people.” His talented teams worked hard and were prepared to win. He won 5 national championships and 13 conference titles while leading the Buckeye football team, and he was never more right than when he described the key to his success: people. With the same ingredients of talent, hard work, and preparation, I am confident Peoples Bancorp will continue to add value for our customers as their trusted financial advisors. Our Directors, management team, and many associates are dedicated to serving our customers and delivering value to our shareholders. The better our associates work together, with each other and with our clients, to design financial solutions that fit client needs, the better we become. Our goal is to simply and quickly deliver the right products and services to every customer. We accomplish this goal by combining the best-educated and energized people with powerful technology that is designed to enhance the customer experience. As we embark on a new year, we want to thank our customers, shareholders, and our team of over 600 associates who have supported the Peoples Bancorp family of companies. Performance with integrity and a commitment to our communities, customers, and shareholders are at the core of who we are and what we do every day. We look forward to continuing to the positive long-term growth trends of the last several years. 6 Mark F. Bradley President and Chief Executive Officer Our Family of Companies Our companies offer diversified financial products and services through a complete line of banking, investment and insurance solutions. We pride ourselves on a long-established reputation as a customer focused financial institution with an entrepreneurial spirit. This customer focus guides us to identify and cultivate opportunities in the markets we serve, allowing us to offer more to our clients. The Putnam Agency Outst t an d ng in our Field Giving back to our communities and meeting the needs of our neighbors are a huge part of who we are. Our philosophy of volunteering and giving can be felt in every area of our organization. We believe in investing our assets in people and projects that support and build our communities. We are proud that Peoples Bank recently received an “Outstanding” rating from a Community Reinvestment Act Performance Evaluation in all areas of the review; lending, investments and service. A key aspect of this outstanding rating is the “volunteer spirit” that is exhibited by our associates. We care about our communities and are willing to roll up our sleeves to make a difference. Peoples Bancorp and our associates provide thousands of volunteer hours to many local, regional and national charities, including America’s Promise, the March of Dimes, the American Heart Association, the American Cancer Society, Habitat for Humanity and the United Way. We do this because it is a key component of our core values. And, because it is the right thing to do. We recognize that it is important to financially support our communities so we established the Peoples Bancorp Foundation. Charitable giving is focused in four major areas: community investment and economic development; youth and education; human services programs that meet social needs for low to moderate-income communities and individuals; and the arts and culture. Through our Foundation, we accomplish great things, such as the Robert E. Evans Education Fund, which awarded scholarships to 9 college bound high school students this year. Giving back to our communities will continue to guide us, not only in our charitable endeavors, but also in every decision we make. After all, the communities we serve aren’t just where we do business. They are our homes, too. Being outstanding in our field helps our communities grow and be successful. D i r e c t o r s a n d O f f i c e r s Peoples Bancorp Inc. Directors Peoples Bancorp Officers Peoples Bank Directors Mark F. Bradley President and Chief Executive Officer Larry E. Holdren Executive Vice President Donald J. Landers, Jr. Chief Financial Officer and Treasurer Carol A. Schneeberger Executive Vice President Operations David T. Wesel Executive Vice President Joseph S. Yazombek Executive Vice President Chief Lending Officer Charles R. Hunsaker General Counsel Jeffrey A. Baran Controller Karen V. Clark Auditor Rhonda L. Mears Corporate Secretary Amy Myers Auch Assistant Corporate Secretary Karen L. Mills Assistant Corporate Secretary Carl L. Baker, Jr. President and Chief Executive Officer B & N Coal, Inc. Mark F. Bradley President and Chief Executive Officer Peoples Bancorp Inc. and Peoples Bank George W. Broughton Owner & President Broughton Commercial Properties, LLC GWB Specialty Foods, LLC George Broughton Family, LLC Frank L. Christy President Christy & Associates, Inc. Wilford D. Dimit Owner First Settlement, Inc. David L. Mead Vice President of Business Affairs Otterbein College Richard Ferguson Owner Ferguson Consulting, LLC Robert W. Price General Manager, Findlay District Shelly Materials, Inc. T. Pat Sauber Vice President T.C.K.S., Inc. Paul T. Theisen, Vice Chairman/Leadership Director Attorney-At-Law Of Counsel to TheisenBrock Joseph H. Wesel, Chairman of the Board President W.D.A., Inc. Thomas J. Wolf Owner McDonald’s Restaurants Peoples Bancorp Inc. Directors Emeritus Jewell Baker Barton S. Holl Fred R. Price Norman J. Murray Thomas C. Vadakin 0 Dave M. Archer President Pioneer Pipe, Inc. Larry J. Armstrong Retired Armstrong and Smith, C.P.A. Mark F. Bradley President and Chief Executive Officer Peoples Bancorp Inc. and Peoples Bank George W. Broughton Owner & President Broughton Commercial Properties, LLC GWB Specialty Foods, LLC George Broughton Family, LLC Wilford D. Dimit, Vice Chairman Owner First Settlement, Inc. Brenda F. Jones, M.D. Medical Director Marietta Ophthalmology Associates, Inc. David L. Mead Vice President of Business Affairs Otterbein College T. Pat Sauber Vice President T.C.K.S., Inc. Paul T. Theisen, Chairman of the Board Attorney-At-Law Of Counsel to TheisenBrock Joseph H. Wesel President W.D.A., Inc. Peoples Bank Director Emeritus Harold D. Laughlin Peoples Bank Executive Officers Mark F. Bradley President and Chief Executive Officer Larry E. Holdren President, Retail and Banking Division Donald J. Landers Chief Financial Officer and Treasurer Carol A. Schneeberger Executive Vice President of Operations and Cashier David T. Wesel President, Peoples Financial Advisors Joseph S. Yazombek Executive Vice President and Chief Lending Officer Peoples Bank Officers (continued) Karen V. Clark Senior Vice President Auditor Joseph P. Flinn Vice President Personal Loan Manager John E. Dakesian Senior Vice President Director of Human Resources J. Richard Lentz Vice President Commercial Lending Sandra A. Delong Assistant Vice President Business Services K. Michele Enoch Assistant Vice President Home Loan Specialist Matthew C. Evans Senior Vice President Director of Risk Management Pamela K. McCauley Vice President Secondary Mortgage Lending Julie L. Giffin Assistant Vice President Deposit Operations Thomas R. Greathouse Senior Vice President Commercial Lending Michael W. Hobbs Senior Vice President Kentucky Market John G. Hock Senior Vice President Commercial Lending Charles R. Hunsaker Senior Vice President General Counsel Patrick L. Arnold Vice President Commercial Lending Jason K. Baker Vice President Commercial Lending Jeffrey A. Baran Vice President Controller Thomas E. Betz Vice President Regional Sales Manager Patrick W. Bryan Vice President Commercial Lending Neal S. Clark Vice President Commercial Lending Lance E. McComis Vice President Peoples Financial Advisors Rose C. Nardi Vice President Senior Investment Officer Peoples Financial Advisors Stephen L. Nulter Vice President Director of Information Technology Deborah L. Roberts Vice President Commercial Lending George K. Smalley Vice President Real Estate Loan Manager Denise D. Terrell Vice President Regional Sales Manager Jeffrey D. Welch Vice President Business Services David B. Baker Senior Financial Advisor Peoples Financial Advisors Mark J. Augenstein Assistant Vice President Operations David L. Batten Assistant Vice President Ronald L. Close Vice President Peoples Financial Advisors R. Dan Coffill Assistant Vice President Peoples Financial Advisors Laura J. Cox Vice President Marketing Eric E. Erb Vice President Peoples Financial Advisors Barbara J. Conlon Assistant Vice President Purchasing Manager Susan L. Corcoran Assistant Vice President CRM Manager V. Scott Harris Assistant Vice President Peoples Financial Advisors Jeffrey D. Howell Assistant Vice President Commercial Lending Cathleen S. Knox Assistant Vice President Office Manager Katie B. Matthews Assistant Vice President Commercial Lending Larry B. Miller Assistant Vice President Office Manager Karen L. Mills Secretary of the Board Mary Ann Mitchell Assistant Vice President Human Resources Catherine R. Ogle Assistant Vice President Home Loan Specialist Deborah A. Rhoades Assistant Vice President Peoples Financial Advisors Robyn A. Stevens Assistant Vice President Loan Review Jason A. Suman Assistant Vice President Business Services Tina M. Weckbacher Assistant Vice President Peoples Financial Advisors Sondra K. Wenzel Assistant Vice President Personal Lending Michael J. Yanico Assistant Vice President Commercial Lending Douglas G. Ankrom Manager of External Reporting Amy Myers Auch Assistant Secretary of the Board Stacie B. Johnson Accounting Manager Cathy M. Lawrence Education and Training Officer Rhonda L. Mears Associate Counsel Mark T. O’Connor Investment Officer Peoples Financial Advisors Teresa A. Pyles Security Officer Carl A. Stanley Office Manager Peoples Insurance Agency Officers Mark F. Bradley President James H. Barengo Senior Vice President Randall T. Barengo Senior Vice President Thomas G. Chaffin Senior Vice President Dana N. Conley Vice President Clarence “Jack” Massey Vice President David L. Mitchem Vice President Thomas C. Phipps Vice President Laura V. Covault Assistant Vice President Donald J. Landers, Jr. Treasurer Charles R. Hunsaker Secretary O f f i c e L o c a t i o n s OH WV KY Westerville Columbus Carroll Baltimore Lancaster O H I O 33 Nelsonville The Plains 32 77 Cambridge 70 Byesville Flushing 70 Quaker City Caldwell McConnelsville Lowell Marietta Athens Belpre Vienna Lower Salem Reno Parkersburg 77 Steelton New Martinsville FAYETTE TAYLOR BARBOUR Rutland Pomeroy Middleport Gallipolis Point Pleasant W E S T V I R G I N I A 79 RANDOLPH SHELBY MIAMI LOGAN CHAMPAIGN CLARK GREENE Dayton WARREN CLINTON CLERMONT BROWN PENDLETON BRACKEN MASON Greenup Russell K E N T U C K Y Ashland 64 NICHOLAS FLEMING 64 Summit Grayson Huntington Charleston 77 POCAHONTAS BOURBON BATH OHIO Athens County Athens Nelsonville The Plains Belmont County Flushing Fairfield County Baltimore Carroll Lancaster Franklin County Westerville Gallia County Gallipolis Guernsey County Byesville Cambridge Quaker City Meigs County Middleport Pomeroy Rutland Morgan County McConnelsville Noble County Caldwell Washington County Belpre Lowell Lower Salem Marietta Reno WEST VIRGINIA Cabell County Huntington Mason County Point Pleasant Wetzel County New Martinsville Steelton Wood County Parkersburg Vienna KENTuCKy Boyd County Ashland Summit Carter County Grayson Greenup County Greenup Russell 2