FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio
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(Address of principal executive offices)
45750
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(Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Indicate by check mark whether the registrant (1) has filed all reports required
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
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Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, at August 1, 2002: 7,889,518.
Page 1 of 28 Pages
Exhibit Index Appears on Page 27
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
The following Condensed Consolidated Balance Sheets, Consolidated Statements of
Income, Consolidated Statements of Stockholders' Equity, and Consolidated
Statements of Cash Flows of Peoples Bancorp Inc. and subsidiaries ("Peoples"),
reflect all adjustments (which include normal recurring accruals) necessary to
present fairly such information for the periods and dates indicated. Since the
following condensed unaudited financial statements have been prepared in
accordance with instructions to Form 10-Q, they do not contain all information
and footnotes necessary for a fair presentation of financial position in
conformity with accounting principles generally accepted in the United States.
Operating results for the six months ended June 30, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. The balance sheet at December 31, 2001, contained herein has been derived
from the audited balance sheet included in Peoples' Annual Report on Form 10-K
for the year ended December 31, 2001 ("2001 Form 10-K"). Complete audited
consolidated financial statements with footnotes thereto are included in
Peoples' 2001 Form 10-K.
The consolidated financial statements include the accounts of Peoples and its
wholly-owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 30, December 31,
ASSETS 2002 2001
Cash and cash equivalents:
Cash and due from banks $ 27,569 $ 31,642
Interest-bearing deposits in other banks 2,248 346
Federal funds sold - 850
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Total cash and cash equivalents 29,817 32,838
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $361,083 and $329,081 at June 30, 2002, and
December 31, 2001, respectively) 367,406 330,364
Loans, net of unearned interest 862,377 772,856
Allowance for loan losses (12,423) (12,357)
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Net loans 849,954 760,499
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Bank premises and equipment, net 20,337 16,369
Goodwill and other intangible assets 28,259 17,010
Other assets 43,125 36,886
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Total assets $ 1,338,898 $ 1,193,966
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LIABILITIES
Deposits:
Non-interest bearing $ 109,088 $ 96,533
Interest bearing 825,735 717,835
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Total deposits 934,823 814,368
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Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 35,003 23,752
Federal Home Loan Bank term advances 11,500 32,300
Other short-term borrowings 17,000 -
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Total short-term borrowings 63,503 56,052
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Long-term borrowings 197,213 192,448
Accrued expenses and other liabilities 9,533 8,188
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Total liabilities 1,205,072 1,071,056
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Guaranteed preferred beneficial interests in junior subordinated debentures 29,046 29,056
STOCKHOLDERS' EQUITY
Common stock, no par value, 12,000,000 shares authorized - 7,966,071 shares
issued at June 30, 2002, and 7,289,266 issued
at December 31, 2001, including shares in treasury 96,819 78,664
Accumulated comprehensive income, net of deferred income taxes 4,116 834
Retained earnings 5,390 17,735
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106,325 97,233
Treasury stock, at cost, 87,889 shares at June 30, 2002, and
178,344 shares at December 31, 2001 (1,545) (3,379)
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Total stockholders' equity 104,780 93,854
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Total liabilities, beneficial interests and stockholders' $ 1,338,898 $ 1,193,966
equity
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data) Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Interest income $ 20,312 $ 21,992 $ 40,627 $ 44,112
Interest expense 7,801 11,196 15,957 23,005
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Net interest income 12,511 10,796 24,670 21,107
Provision for loan losses 980 675 1,841 1,350
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Net interest income after provision for loan losses 11,531 10,121 22,829 19,757
Other income:
Service charges on deposits 1,675 889 3,041 1,696
Fiduciary revenues 640 628 1,256 1,242
Insurance and investment commissions 462 329 986 709
Electronic banking revenues 414 354 782 676
Business owned life insurance 376 - 701 -
(Loss) gain on securities transactions - (1) 51 1
(Loss) gain on asset disposals (7) 5 (14) 25
Net mark-to-market adjustment on interest rate caps - 42 - (131)
Other non-interest income 66 70 150 148
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Total other income 3,626 2,316 6,953 4,366
Other expenses:
Salaries and benefits 4,346 3,642 8,830 7,227
Occupancy and equipment 940 962 1,866 1,907
Trust Preferred Securities expense 623 659 1,184 1,311
Professional fees 582 249 883 523
Data processing and software 294 231 617 478
Amortization of goodwill 274 457 547 897
Marketing 150 157 536 276
Amortization of other intangible assets 112 125 223 251
Other non-interest expense 1,502 1,686 3,088 3,249
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Total other expenses 8,823 8,168 17,774 16,119
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Income before income taxes and extraordinary gain 6,334 4,269 12,008 8,004
Income taxes 1,749 1,264 3,318 2,403
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Income before extraordinary gains 4,585 3,005 8,690 5,601
Extraordinary gain on early debt extinguishment, net of
tax expense of $221 - - 410 -
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Net income $ 4,585 $ 3,005 $ 9,100 $ 5,601
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Basic earnings per share:
Income before extraordinary gains $ 0.58 $ 0.38 $ 1.11 $ 0.71
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Extraordinary gain $ - $ - $ 0.05 $ -
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Net income $ 0.58 $ 0.38 $ 1.16 $ 0.71
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Diluted earnings per share:
Income before extraordinary gains $ 0.57 $ 0.37 $ 1.08 $ 0.70
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Extraordinary gain $ - $ - $ 0.05 $ -
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Net income $ 0.57 $ 0.37 $ 1.13 $ 0.70
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Weighted average shares outstanding (basic) 7,873,795 7,951,378 7,857,062 7,927,673
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Weighted average shares outstanding (diluted) 8,102,047 8,068,643 8,045,609 8,039,474
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Cash dividends declared $ 1,201 $ 991 $ 2,279 $ 1,918
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Cash dividend per share $ 0.15 $ 0.12 $ 0.29 $ 0.24
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share amounts)
Accumulated
Other
Common Stock Retained Treasury Comprehensive
Shares Earnings Stock Income (Loss) Total
Amount
Balance, December 31, 2001 7,289,266 $ 78,664 $ 17,735 $ (3,379) $ 834 $ 93,854
Comprehensive income:
Net income 9,100 9,100
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
securities, net of reclassification 3,282 3,282
adjustment
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Total comprehensive income 12,382
Exercise of common stock options
(reissued 50,120 treasury shares) (163) 890 727
Tax benefit from exercise of stock options 87 87
Distribution of treasury stock for deferred
compensation plan (reissued 267 treasury 5 5
shares)
10% stock dividend 668,228 18,053 (19,166) 1,113
Cash dividends declared (2,279) (2,279)
Common stock issued under dividend
reinvestment plan 8,577 178 178
Purchase of treasury stock, 7,241 shares (174) (174)
Balance, June 30, 2002 7,966,071 $ 96,819 $ 5,390 $ (1,545) $ 4,116 $ 104,780
Comprehensive Income:
Net unrealized appreciation arising during period, net of tax 3,315
Less: reclassification adjustment for securities gains included in net income, net 33
of tax
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Net unrealized appreciation on investment securities 3,282
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net income $ 9,100 $ 5,601
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,841 1,350
Gain on securities transactions (51) (1)
Extraordinary gain on early debt extinguishment (631) -
Depreciation, amortization, and accretion 1,946 2,303
(Increase) decrease in interest receivable (646) 509
Increase (decrease) in interest payable 138 (316)
Deferred income tax expense (benefit) 131 (178)
Deferral of loan origination fees and costs (69) 28
Other, net (2,066) 906
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Net cash provided by operating activities 9,693 10,202
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Cash flows from investing activities:
Purchases of available-for-sale securities (95,659) (8,227)
Proceeds from sales of available-for-sale securities 32,793 108
Proceeds from maturities of available-for-sale securities 37,043 28,038
Net increase in loans (24,557) (703)
Expenditures for premises and equipment (828) (1,353)
Proceeds from sales of other real estate owned 206 87
Acquisitions, net of cash received 12,718 (162)
Purchase of business owned life insurance - (20,000)
Investment in limited partnership and tax credit funds (1,315) (4,400)
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Net cash used in investing activities (39,599) (6,612)
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Cash flows from financing activities:
Net increase (decrease) in non-interest bearing deposits 2,304 (4,348)
Net increase in interest-bearing deposits 20,227 54,424
Net increase (decrease) in short-term borrowings 1,961 (36,329)
Proceeds from long-term debt 7,000 -
Payments on long-term borrowings (4,025) (369)
Cash dividends paid (1,985) (1,612)
Purchase of treasury stock (174) (1,385)
Repurchase of Trust Preferred Securities (6,150) -
Proceeds from issuance of Trust Preferred Securities 7,000 -
Proceeds from issuance of common stock 727 271
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Net cash provided by financing activities 26,885 10,652
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Net (decrease) increase in cash and cash equivalents (3,021) 14,242
Cash and cash equivalents at beginning of period 32,838 28,449
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Cash and cash equivalents at end of period $ 29,817 $ 42,691
====================================================================================================================
Supplemental cash flow information:
Interest paid $ 12,056 $ 17,700
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Income taxes paid $ 2,825 $ 1,187
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NOTES TO FINANCIAL STATEMENTS
Basis of Presentation
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The accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries
("Peoples") conform to accounting principles generally accepted in the United
States and to general practices within the financial services industry. Peoples
considers all of its principal activities to be financial services related. The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States 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, which had no impact on
net income, to conform to 2002 presentation. All share and per share information
have been adjusted for 10% stock dividends issued June 28, 2002 and September
12, 2001. The consolidated financial statements include all accounts of Peoples'
parent company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
1. Mergers and Acquisitions
On May 6, 2002, Peoples announced that Peoples Bank had signed a definitive
agreement to acquire a full-service banking center in Malta, Ohio, from
Century National Bank of Zanesville, Ohio, a subsidiary of Park National
Corporation of Newark, Ohio. At June 30, 2002, the Century National Bank's
Malta banking center had $8 million in loans and $10 million in total
deposits, including about $2 million of core deposits (checking and savings
accounts). Peoples expects to serve the Malta office customers from its
full-service office in neighboring McConnelsville. The proposed transaction
was approved by regulators in late July and is anticipated to be completed
early in the fourth quarter of 2002.
On June 14, 2002, Peoples completed the acquisition of First Colony
Bancshares, Inc. ("First Colony"), the holding company of The Guernsey Bank,
Federal Savings Bank based in Cambridge, Ohio. As part of the transaction,
Peoples acquired full-service offices in Cambridge (two offices), Byesville,
Quaker City in Ohio's Guernsey County and Flushing in Ohio's Belmont County,
involving total loans of approximately $67 million and total deposits of $98
million. Peoples did not acquire the Guernsey Bank's full-service banking
office and loan production office in Worthington, Ohio, which continues to
serve its customers and retained "The Guernsey Bank" name under a new
banking charter.
Peoples accounted for the $18 million cash acquisition of First Colony's
outstanding stock under the purchase method of accounting in accordance with
Statement of Financial Accounting Standards No. 141, "Business Combination"
("SFAS 141"), and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") issued by the Financial
Accounting Standards Board in July 2001. The balances and operations of the
acquisition are included in the Peoples' financial statements from the date
of the acquisition, and not material in relationship to Peoples' financial
statements. While Peoples has not finalized the allocation of the purchase
price as of June 14, 2002, subject to completion of a final audited balance
sheet, an estimation of purchase price allocation was prepared and included
as a part of these financial statements, including approximately $12 million
of goodwill and core deposit intangible assets. Such estimates and
allocations are subject to change when additional information concerning the
audited closing balance sheet, as well as asset and liability valuations, is
finalized in the third quarter 2002.
2. Accounting Pronouncements
On January 1, 2002, Peoples adopted SFAS 142, whereby Peoples is no longer
required to amortize approximately $6.0 million of its goodwill previously
amortized, but rather must perform, at least annually, an assessment for
impairment applying a fair-value based test. Peoples has performed the
transitional impairment tests on its goodwill assets and has concluded that
the recorded value of Peoples' goodwill is not impaired as of June 30, 2002.
Peoples continues to amortize approximately $9.5 million of goodwill
recorded in accordance with Statement of Financial Accounting Standards
Number 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions", and separable intangible assets that are not deemed to have
an indefinite life. As a result, Peoples' goodwill amortization expense
totaled $547,000 for the six months ended June 30, 2002, compared to
$897,000 for the same period in 2001, a decrease of $350,000, or
approximately $0.04 per share. The following pro forma information assumes
SFAS 142 had been in effect for all periods presented:
For the three months For the Six months
Ended June 30, Ended June 30,
(Dollars in thousands, except per share data) 2002 2001 2002 2001
Amortization of goodwill $ 274 $ 274 $ 547 $ 547
Total other expense 8,823 7,985 17,774 15,769
Income before extraordinary gains 4,585 3,188 8,690 5,951
Net income $ 4,585 $ 3,188 $ 9,100 $ 5,951
Basic earnings per share:
Income before extraordinary gains $ 0.58 $ 0.40 $ 1.11 $ 0.75
Net income $ 0.58 $ 0.40 $ 1.16 $ 0.75
Diluted earnings per share:
Income before extraordinary gains $ 0.57 $ 0.40 $ 1.08 $ 0.74
Net income $ 0.57 $ 0.40 $ 1.13 $ 0.74
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited consolidated
financial statements and the management discussion and analysis that follows:
For the Three For the Six
Months Ended June 30, Months Ended June 30,
SIGNIFICANT RATIOS 2002 2001 2002 2001
Return on average equity 18.15 % 13.46 % 18.37 % 12.81 %
Return on average assets 1.48 % 1.03 % 1.49 % 0.97 %
Net interest margin (a) 4.54 % 4.07 % 4.53 % 4.02 %
Non-interest income leverage ratio (b) 43.06 % 29.92 % 40.67 % 29.86 %
Efficiency ratio (c) 50.97 % 56.39 % 52.57 % 57.36 %
Average stockholders' equity to average assets 8.16 % 7.67 % 8.11 % 7.60 %
Average loans to average deposits 93.40 % 92.29 % 94.17 % 94.08 %
Cash dividends to net income 26.19 % 32.98 % 25.04 % 34.24 %
Allowance for loan losses to loans net of unearned interest 1.44 % 1.61 % 1.44 % 1.61 %
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CAPITAL RATIOS
Tier I capital ratio 11.26 % 12.75 % 11.26 % 12.75 %
Risk-based capital ratio 12.61 % 14.08 % 12.61 % 14.08 %
Leverage ratio 8.42 % 8.84 % 8.42 % 8.84 %
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PER SHARE DATA
Net income per share - basic $ 0.58 $ 0.38 $ 1.16 $ 0.71
Net income per share - diluted 0.57 0.37 1.13 0.70
Cash dividends per share 0.15 0.12 0.29 0.24
Book value per share 13.30 11.30 13.30 11.30
Tangible book value per share (d) $ 9.71 $ 9.01 $ 9.71 $ 9.01
Weighted average shares outstanding - Basic 7,873,795 7,951,378 7,857,062 7,927,673
Weighted average shares outstanding - Diluted 8,102,047 8,068,643 8,045,609 8,039,474
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(a) Calculated using fully-tax equivalent net interest income as a percentage
of average earning assets.
(b) Non-interest income (less securities and asset disposal gains) as a
percentage of non-interest expense (less intangible amortization).
(c) Non-interest expense (less intangible amortization) as a percentage of
fully tax equivalent net interest income plus non-interest income.
(d) Excludes balance sheet impact of intangible assets acquired through
purchase accounting for acquisitions.
Introduction
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The following discussion and analysis of the Consolidated Financial Statements
of Peoples is presented to provide insight into management's assessment of the
financial results. Peoples' subsidiaries are Peoples Bank, National Association
("Peoples Bank"), Peoples Investment Company, PEBO Capital Trust I and PEBO
Capital Trust II. Peoples Bank also operates Peoples Insurance Agency, Inc.
("Peoples Insurance"), which offers a full range of life, property, and casualty
insurance products to customers in Peoples' markets, and Peoples Loan Services,
Inc., which invests in certain loans originated in Peoples' markets. Peoples
Investment Company also owns Peoples Capital Corporation.
Peoples Bank is a member of the Federal Reserve System and subject to
regulation, supervision and examination by the Office of the Comptroller of the
Currency. Peoples Bank offers complete financial products and services through
45 financial service locations and 28 ATMs in Ohio, West Virginia and Kentucky.
Peoples Bank's e-banking service, Peoples OnLine Connection, can be found on the
Internet at www.peoplesbancorp.com. Peoples Bank provides an array of financial
products and services to clients that include traditional banking products, such
as deposit accounts, lending products, credit and debit cards, corporate and
personal trust services, and safe deposit rental facilities. Peoples Insurance
makes available investment and insurance products. Peoples provides services
through ordinary walk-in offices and automobile drive-in facilities, automated
teller machines, banking by phone, and the Internet.
Peoples Bank also makes available other financial services through Peoples
Investment Services, a division of Peoples Bank that provides customer-tailored
solutions for fiduciary needs, investment alternatives, financial planning,
retirement plans, and other asset management needs. Brokerage services are
offered exclusively through Raymond James Financial Services, member NASD/SIPC
and an independent broker/dealer, located at Peoples Bank offices.
Peoples Investment Company and Peoples Capital Corporation were formed in 2001
and permit management to deploy investable funds more effectively by providing
additional opportunities to make investments, including but not limited to,
low-income housing tax credit funds, that are either limited or restricted at
the bank level or are more appropriately held in these companies.
This discussion and analysis should be read in conjunction with the prior
year-end audited consolidated financial statements and footnotes thereto and the
ratios, statistics, and discussions contained elsewhere in this Form 10-Q.
References will be found in this Form 10-Q to the following transactions that
have impacted or may impact Peoples' results of operations:
As discussed in Note 1 to the financial statements, Peoples completed the
acquisition of First Colony Bancshares, Inc. ("First Colony"), the holding
company of The Guernsey Bank, Federal Savings Bank based in Cambridge,
Ohio, on June 14, 2002.
On April 10, 2002, Peoples issued $7.0 million of LIBOR based variable rate
trust preferred securities through PEBO Capital Trust II (a newly-formed
subsidiary), which participated in a pooled offering. PEBO Capital Trust II
used the proceeds from the issuance to purchase, from Peoples, Variable
Rate Junior Subordinated Debentures due April 22, 2032 (the "Debentures").
Peoples intends to use the net proceeds from the sale of the Debentures for
general corporate purposes, which may include capital contributions to
Peoples Bank and the financing of future acquisitions.
On November 9, 2001, Peoples announced authorization to repurchase 192,500
(or approximately 2.5% of Peoples' outstanding common shares) from time to
time in open market or privately negotiated transactions (the "2002 Stock
Repurchase Program"). Management may choose to purchase shares, based on
timing and prices it deems appropriate through the expiration of the 2002
Stock Repurchase Program on December 31, 2002.
The impact of these transactions, where significant, is discussed in the
applicable sections of this Management's Discussion and Analysis.
RESULTS OF OPERATIONS
Overview of the Income Statement
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Net income totaled $4,585,000 for the three months ended June 30, 2002, up
$1,580,000 (or 53%) from $3,005,000 for the second quarter of 2001. Diluted
earnings per share were $0.57 for the second quarter of 2002 compared to $0.37 a
year ago, an increase of $0.20 (or 54%). Compared to the first quarter of 2002
(the "linked quarter"), net income increased $70,000 (or 2%) in the second
quarter from $4,515,000, while earnings per diluted share were unchanged.
Peoples' increased earnings compared to last year is due primarily to net
interest income growth of $1,715,000 and higher levels of non-interest revenue,
which grew $1,363,000. Return on average equity was 18.15% in the second quarter
of 2002 versus 18.62% in prior quarter and 13.46% in 2001's second quarter.
On a year-to-date basis through June 30, 2002, net income totaled $9,100,000
versus $5,601,000 a year ago, an increase of $3,499,000 (or 62%). Earnings grew
$0.43 per diluted share through six months of 2002, totaling $1.13 versus $0.70
in the first half of 2001. Return on average equity improved to 18.37% from
12.81% for the six months ended June 30, 2001.
Net interest income totaled $12,511,000 for the second quarter of 2002, up
$1,715,000 (or 16%) compared to $10,796,000 for the second quarter of 2001. For
the quarter ended June 30, 2002, net interest margin was 4.54% versus 4.07% a
year ago. On a year-to-date basis, net interest income grew $3,563,000 (or 17%)
in 2002, totaling $24,670,000, while net interest margin improved to 4.53% from
4.02% a year ago. This improvement in net interest income and margin is the
result of Peoples' cost of funds dropping more than its yield on earning assets.
Non-interest income (excluding non-operating gains and losses) totaled
$3,633,000 in the second quarter of 2002, up $1,363,000 (or 60%) from $2,270,000
a year ago. This improvement is largely attributable to enhanced deposit account
service charges of $786,000 and business owned life insurance ("BOLI") income
totaling $376,000 in the second quarter, while increased insurance and
investment commissions of $133,000 were also a contributing factor. For the six
months ended June 30, 2002, non-interest income increased $2,445,000 (or 55%),
totaling $6,916,000 versus $4,471,000 for the same period in 2001. Non-interest
expense was up $655,000 (or 8%) in the second quarter, from $8,168,000 a year
ago and was up $1,655,000 (or 10%) for the six months ended June 30, 2002,
totaling $17,774,000. Expense growth in 2002 is largely attributable to
additional salaries and benefit expenses of $704,000 and increased professional
fees of $333,000 in the second quarter. Management anticipates operating
expenses will increase modestly in the second half of 2002 due to the addition
of several new associates and offices as part of the First Colony acquisition in
mid-June 2002.
Interest Income and Expense
- ---------------------------
Peoples derives a majority of its interest income from loans and investment
securities and incurs interest expense on interest-bearing deposits and borrowed
funds. Net interest income, the amount by which interest income exceeds interest
expense, remains Peoples' largest source of revenue. Management periodically
adjusts the mix of assets and liabilities in an attempt to manage and improve
net interest income; however, factors that influence market interest rates, such
as interest rate changes by the Federal Reserve Open Market Committee and
Peoples' competitors, may have a greater impact on net interest income than
those adjustments made by management. Consequently, a volatile rate environment
can make it difficult to manage net interest margin and income, let alone
predict future changes.
Peoples' net interest income totaled $12,511,000 in the second quarter of 2002
compared to $10,796,000 in the same quarter last year, an increase of $1,715,000
(or 16%). Compared to the linked quarter, net interest income grew $352,000 (or
3%) from $12,159,000. Interest income totaled $20,312,000 for the three months
ended June 30, 2002, down $1,680,000 (or 8%) compared to the second quarter of
2001 and virtually unchanged versus the linked quarter. Interest expense totaled
$7,801,000, down $3,395,000 (or 30%) versus the second quarter of 2001 and down
$355,000 (or 4%) compared to the first quarter of 2002. For the six months ended
June 30, 2002, net interest income increased $3,563,000 (or 17%) to $24,670,000,
from $21,107,000 for the same period in 2001. Interest income was $40,627,000
compared to $44,112,000 last year, while interest expense totaled $15,957,000
compared to $23,005,000 in the first half of 2001. The improvement in net
interest income is due to the current low interest rate environment, continued
downward pressure on market rates and Peoples' proactive management of funding
costs, as well as a modest increase in earnings assets.
Included in interest income is tax-exempt income derived from loans to and
investments issued by states and political subdivisions. Since these revenues
are not taxed, management believes it is more meaningful to analyze net interest
income on a fully-tax equivalent ("FTE") basis, which adjusts interest income by
converting tax-exempt income to the pre-tax equivalent of taxable income using a
tax rate of 35%. In the second quarter of 2002, interest income was increased by
$408,000 for the impact of the tax-equivalent adjustment, resulting in FTE net
interest income of $12,919,000, up $1,862,000 (or 17%) from $11,057,000 a year
ago and up $409,000 (or 3%) compared to $12,510,000 for the linked quarter. The
FTE yield on Peoples' earning assets was 7.29% for the quarter ended June 30,
2002, versus 7.49% for the first quarter of 2002 and 8.19% for the second
quarter of 2001, while the cost of interest-bearing liabilities was 3.12%, 3.37%
and 4.71% for the same periods, respectively. On a year-to-date basis, FTE net
interest income was $25,430,000 in 2002 compared to $21,630,000 in 2001. The FTE
yield on Peoples' earning assets was 7.39% in the first half of 2002 versus
8.33% last year, while the cost of interest-bearing liabilities was 3.24% and
4.92% for the same periods, respectively.
Net interest margin (calculated by dividing FTE net interest income by average
earning assets) serves as an important measurement of the net revenue stream
generated by the mix and pricing of Peoples' earning assets and interest-bearing
liabilities. In the second quarter of 2002, Peoples' net interest margin
improved to 4.54% from 4.52% in the linked quarter and 4.07% for the second
quarter of 2001. Through six months in 2002, Peoples' net interest margin was
4.53% compared to 4.02% in 2001. The Federal Reserve's 475 basis point reduction
in key interest rates in 2001 was the significant driver of improvement in net
interest margin, which facilitated a lowering of Peoples' costs of funds;
however, the magnitude of this reduction has intensified the pressure for lower
loan rates in Peoples' markets. Management believes net interest income and
margin will continue to benefit from interest rates remaining at their current
low levels; however, an increase in market interest rates would have a modestly
negative impact.
Earning assets averaged $1.14 billion in the second quarter of 2002, up $49.8
million (or 5%) compared to the same period last year. Gross loans account for
the largest portion of earning assets, averaging $796.8 million for the three
months ended June 30, 2002, compared to average gross loans of $752.6 million in
the second quarter of 2001. Volume increases in commercial loans account for a
majority of the loan growth in 2002. Late in 2001, Peoples initiated a plan to
grow the investment portfolio and return it to pre-2000 levels. As a result,
investment securities averaged $351.9 million in the second quarter of 2002
compared to $315.9 million in 2001's second quarter. The FTE yield on loans was
7.63% in the second quarter of 2002 compared to 8.83% a year ago, while the FTE
yield on investments was 6.27% and 6.75% for the same periods, respectively.
Yields on both loans and investment securities have been impacted by lower
market interest rates.
On a year-to-date basis, average earning assets were $1.12 billion in 2002
compared to $1.08 million in 2001. Gross loan balances increased $40.9 million
(or 5%), averaging $787.6 million for the six months ended June 30, 2002, versus
$746.7 million a year ago. Through six months in 2002, the FTE yield on loans
dropped 125 basis points from 8.96% to 7.71%. Average investment securities
totaled $347.4 million in the first half of 2002 versus $322.1 million for the
first six months of 2001, while the FTE yield on investments was 6.34% and 6.80%
for the same periods, respectively.
Peoples' average interest-bearing liabilities increased $50.8 million (or 5%) in
the second quarter of 2002 from $951.5 million for the second quarter of 2001.
Traditional deposits comprise a majority of Peoples' interest bearing
liabilities, averaging $755.5 million in the second quarter of 2002 compared to
$727.4 million a year ago. Cost of funds from interest bearing deposits was
2.74% in the second quarter of 2002 compared to 3.10% and 4.66% in the first
quarter of 2002 and second quarter of 2001, respectively. On a year-to-date
basis, deposits averaged $740.6 million in 2002 versus $707.6 million in 2001,
while the interest cost on deposits were 2.91% and 4.85% for the same periods,
respectively. Peoples lowered rates paid on interest bearing deposit accounts in
response to the Federal Reserve's rate cuts, but changes in deposit mix due to
volume increases in certificates of deposit, as well as competitive rates paid
on these deposits, have tempered the overall drop in average deposit costs. In
the third quarter of 2002, management anticipates deposit costs to remain near
current levels; however, Peoples' deposit costs could increase should the
Federal Reserve raise interest rates.
In addition to traditional deposits, Peoples utilizes a variety of borrowings,
both short-term and long-term, as complementary funding sources. Total borrowed
funds averaged $246.8 million for the three months ended June 30, 2002, up $22.7
million (or 10%) from the prior year's second quarter average, and $251.6
million for the first half of 2002 versus $233.7 million last year. The interest
cost of Peoples' borrowed funds declined 59 basis points in the second quarter
to 4.29% from 4.88% last year and on a year-to-date basis, dropped 94 basis
points to 4.21% from 5.15%. The lower cost of borrowings is primarily due to
Peoples repaying higher cost borrowings in the latter half of 2001 and replacing
them with borrowings at lower rates, while the increased volume reflects
Peoples' planned growth of the investment portfolio. Peoples' main source of
borrowed funds is short and long-term advances from the FHLB. The short-term
FHLB advances are primarily LIBOR based advances while the long-term FHLB
advances consist largely of 10-year borrowings with initial fixed rate periods.
After the initial fixed rate period, the FHLB has the option to convert each
advance to a LIBOR based, variable rate advance; however, Peoples may repay the
advance, without a penalty, if the FHLB exercises its option.
In the second quarter of 2002, Peoples' short-term FHLB borrowings averaged
$12.9 million, at a cost of 1.83%, compared to $32.7 million and an average cost
of 1.81% in the linked quarter and $45.0 million and an average cost of 4.75% in
the second quarter of 2001. Average long-term FHLB borrowings were up $3.2
million (or 2%) compared to the linked quarter and up $57.1 million (or 41%)
versus a year ago, totaling $196.0 million for the quarter ended June 30, 2002,
while the average cost dropped to 4.85% from 4.87% and 5.11% for the first
quarter of 2002 and second quarter of 2001, respectively. For the six months
ended June 30, 2002, long-term FHLB borrowings averaged $194.4 million, at an
average cost of 4.86%, versus $138.1 million and average cost of 5.04% a year
ago. In the second half of 2001, Peoples converted a portion of its short-term
FHLB advances to long-term advances to secure longer-term funding during this
period of low rates. These new long-term advances from the FHLB are fixed rate,
amortizing advances, which lessens Peoples' current liability sensitive
position. Management will continue to use a variety of FHLB borrowings to fund
asset growth and manage interest rate sensitivity, as deemed appropriate.
Peoples' cash management services (offered to a variety of business customers)
also provide short-term funding, primarily in the form of overnight repurchase
agreements. For the three months ended June 30, 2002, overnight repurchase
agreements (excluding balances of wholesale market term repurchase agreements)
averaged $23.8 million, virtually unchanged from last year's average of $24.0
million. On a year-to-date basis through June 30, 2002, overnight repurchase
agreements averaged $23.4 million, down $2.3 million (or 9%) from $25.7 million
a year ago. The decreased volume of repurchase agreements compared to the first
half of 2001 is due largely to a withdrawal of a significant balance in the
second half of 2001 by a client who opted for an alternative investment product.
The average rate paid on overnight repurchase agreements was 1.40% in the second
quarter of 2002, down 247 basis points from the prior year, and was 1.45% versus
4.52% for the six months ended June 30, 2002 and 2001, respectively. These
declines are a result of reductions in the market index tied to the pricing of
these accounts.
Peoples also periodically accesses national market repurchase agreements to
diversify short-term funding sources. In the second quarter of 2002, wholesale
market term repurchase agreements averaged $9.1 million at a rate of 3.69%, down
from $14.3 million and an average rate of 4.84% in 2001's second quarter. For
the six months ended June 30, wholesale repurchase agreements averaged $7.7
million in 2002 compared to 19.2 million in 2001, while the average cost was
3.65% and 5.73% for the same periods, respectively. Peoples has reduced the
amount of wholesale repurchase agreements outstanding due to the availability
and attractiveness of other funding sources. Management may continue to access
such funding in the future, as deemed appropriate.
In the second quarter of 2002, the combination of the low interest rate
environment and Peoples' proactive management of funding costs has resulted in
the costs of funds dropping more than the yield on earning assets. As a result,
Peoples has benefited through improved net interest income and margin. However,
Peoples' current asset-liability simulations indicate that an increase in
interest rates later this year could have a modestly negative impact based on
Peoples' current interest rate risk position. Although management continually
works to mitigate the impact of future rate changes, Peoples' net interest
margin and income remains difficult to predict, and to manage, in volatile
interest rate environments.
Provision for Loan Losses
- -------------------------
Peoples' provision for loan losses totaled $980,000 for the second quarter of
2002, compared to $861,000 for the linked quarter and $675,000 a year ago. On a
year-to-date basis through June 30, 2002, the provision for loan loss was
$1,841,000 versus $1,350,000 in 2001. The increased provision is based upon
management's ongoing evaluation of the adequacy of the allowance for loan losses
and factors affecting probable loan losses, as well as provisions relating to
the Overdraft Privilege program of $230,000 and $161,000 in the second and first
quarters of 2002, respectively. Management believes the current provision is
appropriate for the overall quality, inherent risk and volume concentrations of
Peoples' loan portfolio.
Since the overall quality of Peoples' loan portfolio remains strong, management
anticipates that the provision for the third quarter of 2002 will remain at the
second quarter's level; however, the Overdraft Privilege program and other loan
quality factors could impact future provisions. Ultimately, the provision will
increase or decrease each quarter based upon the results of Peoples' formal
analysis of the allowance for loan losses. Further information can be found
later in this discussion under "Allowance for Loan Losses."
Gains and/or Losses on Securities Transactions
- ----------------------------------------------
For the six months ended June 30, 2002, Peoples recognized net gains on
securities transactions of $51,000 compared to $1,000 for the same period in
2001. The net gains on securities transactions in 2002 is due largely to
securities transaction in the first quarter that were part of management's plan
to balance the overall yield, maturity and duration of the investment portfolio,
while the net gains in 2001 is the result normal portfolio management.
Gains and/or Losses on Asset Disposals
- --------------------------------------
Net losses on asset disposals totaled $7,000 for the quarter ended June 30,
2002, compared to net gains of $5,000 in the same period last year. On a
year-to-date basis, asset disposals resulted in net losses of $14,000 in 2002
and net gains $25,000. The gains and losses in recent periods were the result of
asset disposals in conjunction with normal asset replacement.
Mark-to-Market Adjustment on Interest Rate Caps
- -----------------------------------------------
On January 1, 2001, Peoples adopted Statement of Financial Accounting Standards
Number 133 "Accounting for Derivative Instruments and Hedging Instruments"
("SFAS No. 133"), as required. As a result of this adoption, Peoples recognized
the change in market value of certain interest rate contracts as an increase or
decrease to income. Through six months of 2001, the net mark-to-market
adjustment was $131,000, decreasing net income by $85,000, or $0.01 per share.
Management does not anticipate any additional adjustments related to Peoples'
existing interest rate cap contracts.
Non-Interest Income
- -------------------
Peoples generates non-interest income from five primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking and business owned life insurance income. For the quarter
ended June 30, 2002, non-interest income (excluding all non-operating gains and
losses) totaled $3,633,000 compared to $2,270,000 in 2001, an increase of
$1,363,000 (or 60%). Compared to the linked quarter, non-interest income was up
$350,000 (or 11%) from $3,283,000. Non-interest income grew 55% on a on a
year-to-date basis through June 30, 2002, totaling $6,916,000 versus $4,471,000
a year ago. A majority of the revenue growth in 2002 is the result of increased
deposit account service charges, while BOLI income of $376,000 and $701,000 in
the second quarter and first half of 2002, respectively, was also a key
contributor.
Service charges and other fees on deposit accounts, which are based on the
recovery of costs associated with services provided, remain Peoples' largest
source of non-interest revenues. In the second quarter of 2002, deposit account
service charges totaled $1,675,000, up $786,000 (or 88%) from $889,000 a year
ago and up $309,000 (or 23%) from $1,366,000 in the linked quarter. For the six
months ended June 30, deposit account service charges reached $3,041,000 in 2002
compared to $1,696,000 in 2001, an increase of $1,345,000 (or 79%). These
improvements are attributable to higher volumes of overdraft and non-sufficient
funds fees resulting from Peoples' implementation of the Overdraft Privilege
program and other changes to the assessment of cost recovery fees in late 2001.
Management expects deposit service charges to increase modestly in the remainder
of 2002, due in part to the addition of the new accounts from the First Colony
acquisition.
Peoples' electronic banking services are alternative delivery channels to
traditional sales offices for providing products and services to clients and
include ATM and debit cards, direct deposit services and Internet banking. In
the second quarter of 2002, electronic banking revenues grew $60,000 (or 17%),
totaling $414,000 compared to $354,000 for the same period last year, and up
$46,000 (or 13%) from $368,000 in the linked quarter. On a year-to-date basis,
electronic banking revenues totaled $782,000 in 2002 versus $676,000 in 2001, an
increase of $106,000 (or 16%). Growth of ATM and debit card usage by Peoples'
clients accounts for the higher revenues compared to recent periods. Management
will continue to explore and develop new e-banking capabilities which complement
existing delivery channels, both traditional and non-traditional, as sources of
revenue and expanded product and service opportunities for Peoples' customers.
Insurance and investment commissions were $462,000 in the second quarter of
2002, up $133,000 (or 40%) from $329,000 a year ago. For the first six months of
2002, insurance and investment commissions totaled $986,000 compared to $709,000
for the same period in 2001, an increase of $277,000 (or 39%). Strong annuity
sales in the first half of 2002 accounted for most of the increase, with
additional property and casualty insurance commissions also contributing to the
growth. Insurance and investment commissions were down $62,000 (or 12%) versus
the first quarter's total of $524,000, as Peoples' experienced slightly stronger
annuity sales in the first quarter. The following table details Peoples'
insurance and investment commissions:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2002 2001 2002 2001
Fixed annuities $ 222 $ 93 $ 502 $ 151
Property and casualty insurance 93 70 178 132
Brokerage 61 85 128 198
Credit life and A&H insurance 56 32 95 48
Life and health insurance 30 14 83 102
Reinsurance revenues - 35 - 78
- -------------------------------------------------------------------------------------------------
Total $ 462 $ 329 $ 986 $ 709
=================================================================================================
Peoples' fiduciary fees, which are based in part on the market value of assets
managed, totaled $640,000 for the quarter ended June 30, 2002, versus $616,000
last quarter and $628,000 in 2001's second quarter. Through six months of 2002,
fiduciary fees were $1,256,000 compared to $1,242,000 for the same period a year
ago. Management believes the First Colony acquisition provides additional
opportunities to grow these revenues and continues to pursue new ways to provide
asset and risk management products to Peoples' clients and prospects. Insurance
and investment commissions, as well as fiduciary revenues, should continue to be
a significant contributor to future non-interest income growth.
For the quarter ended June 30, 2002, BOLI produced tax-advantaged income of
$376,000 compared to $325,000 last quarter, an increase of $51,000 (or 16%)
attributable to an adjustment in the mix of investment funds made late in the
first quarter. On a year-to-date basis, BOLI income totaled $701,000. Due to the
timing of Peoples' BOLI purchase in mid-2001, Peoples recognized no income in
either period last year. Management believes BOLI income will remain at second
quarter levels for the remainder of 2002.
Non-Interest Expense
- --------------------
In the second quarter of 2002, non-interest expense grew $655,000 (or 8%),
totaling $8,823,000 compared to $8,168,000 in the second quarter of 2001 but
declined $128,000 (or 1%) when compared to the linked quarter. Compared to last
year, expense growth in the second quarter is largely attributable to additional
salaries and benefit expenses of $704,000 and increased professional fees of
$333,000. For the six months ended June 30, 2002, non-interest expense was $17.8
million versus $16.1 million in 2001, an increase of $1.7 million (or 11%).
Peoples' largest non-interest expense remains salaries and benefits, which is
inherent in a service-based industry such as financial services. In the second
quarter of 2002, salaries and benefits totaled $4,346,000 compared to $3,642,000
for the same period last year, an increase of $704,000 (or 19%). Salaries and
benefits grew 22% in the first half of 2002, totaling $8,830,000 versus
$7,227,000 for the first six months of 2001. Higher incentive and medical plan
expenses, as well as salary increases necessary to retain and recruit key
personnel were significant contributors to this increase. Compared to the linked
quarter, salaries and benefit expenses were down $138,000 (or 3%) from
$4,484,000. At June 30, 2002, Peoples had 447 full-time equivalent associates,
up from 398 last quarter and 401 a year ago, with much of the increase due to
the addition of new associates from the First Colony acquisition. Management
will continue to leverage Peoples' resources, while retaining and recruiting key
associates, to effectively optimize customer service and produce additional
future revenue streams.
For the six months ended June 30, 2002, marketing expense totaled $536,000
versus $276,000 a year ago, an increase of $260,000 (or 94%). Peoples
aggressively advertised its new Free Checking and Overdraft Privilege products
and implemented a new marketing campaign designed to build brand name awareness
in Peoples' markets in the first quarter of 2002 resulting in higher marketing
expenses compared to recent periods. Management believes these initiatives have
helped Peoples attract new clients and expect additional benefits in future
periods. In the second quarter of 2002, marketing expenses were down $7,000 (or
4%) from $157,000 last year and declined $236,000 (or 61%) compared to $386,000
for the linked quarter, as marketing costs returned to more normal levels. In
the third quarter of 2002, marketing expenses could be slightly higher than the
second quarter, as Peoples advertises enhanced Internet billpay capabilities and
other promotional campaigns.
Professional fees were up $333,000 (or 134%) in the second quarter of 2002,
totaling $582,000 compared to $249,000 in 2001's second quarter. On a
year-to-date basis through June 30, 2002, professional fees were $883,000 versus
$523,000 a year ago, an increase of $360,000 (or 69%). Professional fees in 2002
were impacted by costs of $165,000 associated with Peoples' implementation of
"Free Checking" and "Overdraft Privilege" products, while other initiatives,
such as insurance and investment strategic initiatives, account for the
remaining increase. Management anticipates professional fees will remain at
these levels or decrease slightly in the last two quarters of 2002.
Peoples' intangible amortization expense was $386,000 in the second quarter of
2002, down $196,000 (or 34%) from $582,000 last year, and was $770,000 on a
year-to-date basis through June 30, 2002, down $378,000 (or 33%) from $1,148,000
for the same period a year ago. The decreased intangible amortization expense is
due almost entirely to Peoples' adoption of SFAS 142. For the quarter ended June
30, 2002, Peoples' trust preferred costs totaled $623,000 versus $659,000 in
2001's second quarter, while on a year-to-date basis, were $1,184,000 in 2002
compared to $1,311,000 a year ago. The lower costs in 2002 are the result of
Peoples repurchasing $7.0 million of its trust preferred securities in the first
quarter of 2002. As a result of the PEBO Capital Trust II issuance early in the
second quarter, trust preferred cost increased $62,000 (or 11%) in the second
quarter of 2002 from $561,000 in the linked quarter. Data processing and
software costs were up $63,000 (or 27%) in the second quarter of 2002 and up
$139,000 (or 29%) on a year-to-date basis through June 30, 2002, compared to
$231,000 and $478,000 for the same periods last year, respectively, due to
software licensing renewal fees. Peoples' other major non-interest expense
categories were below their levels in recent periods.
Management uses the non-interest income leverage ratio to measure efficiency and
Peoples' performance. The ratio, defined as non-interest income as a percentage
of operating expenses, excludes gains and losses on securities transaction and
asset disposals, as well as intangible asset amortization. Through the first six
months of 2002, the non-interest leverage ratio improved to 40.7% from 29.9% a
year ago, due to strong non-interest revenues coupled with controlled expense
growth reflecting Peoples' ability to enhance revenues without incurring a
proportional increase in operating expenses. In the second half of 2002,
management anticipates operating expenses will increase modestly due to the
addition of new associates and offices acquired in the First Colony transaction.
Peoples' sales associates will strive to optimize revenue opportunities through
a needs-based selling approach in order to achieve the long-term target
non-interest income leverage ratio of 50%.
Return on Equity
- ----------------
Peoples' return on equity ("ROE") was 18.15% in second quarter of 2002 versus
13.46% the prior year and 18.62% in the linked quarter. For the six months ended
June 30, 2002, return on equity improved to 18.37% from 12.81% for the same
period last year. Peoples' higher net income accounts for a majority of the ROE
enhancement in 2002, while the mark-to-market adjustment on available-for-sale
investment portfolio has increased compared to recent periods, thus increasing
equity and negatively impacting ROE. As market interest rates change, both the
investment and equity sections of Peoples' balance sheet are sensitive to the
corresponding change in the overall market value of the investment portfolio.
Since ROE will continue to be impacted by changing market conditions, management
focuses on earnings per share ("EPS") as the most meaningful measurement of
short-term performance.
Return on Assets
- ----------------
Return on assets ("ROA") in the second quarter of 2002 was 1.48%, up from 1.03%
for the second quarter of 2001. On a year-to-date basis, ROA was 1.49% through
June 30, 2002, compared to 0.97% a year ago. The ROA improvement in 2002 is due
to Peoples' strong earnings while average assets have risen by just 6% since
last year.
In recent years, the primary focus of both the investment community and
management has shifted to EPS enhancement and ROE while reducing the emphasis on
ROA as a key performance indicator. However, management continues to monitor ROA
and considers it a measurement of Peoples' asset leverage. Management expects
any further enhancement to ROA in 2002 to be minimal.
Income Tax Expense
- ------------------
Peoples has made several tax advantaged investments in recent periods, including
investments in low-income housing tax credit funds and the purchase of BOLI. For
the six months ended June 30, 2002, the total amount of tax advantaged
investments included in Other Assets averaged $27.7 million compared to $5.1
million a year ago. Due in part to this increased investment, Peoples'
year-to-date effective tax rate fell to 28.0% through June 30, 2002, compared to
30.0% for the same period in 2001. The new accounting rules for goodwill have
also contributed to the decrease. Depending on economic and regulatory
conditions, Peoples may make additional investments in various tax credit pools
over the next several years that could impact Peoples' effective tax rate and
overall tax burden.
FINANCIAL CONDITION
Overview of Balance Sheet
- -------------------------
At June 30, 2002, total assets were $1.34 billion compared to $1.19 billion at
year-end 2001, an increase of $144.9 million (or 12%). Gross loans grew $89.5
million (or 12%) during the first six months of 2002 from $772.9 million at
December 31, 2001, with approximately $67 million attributable to the First
Colony acquisition and solid organic growth in commercial and real estate loan
balances accounting for remaining increase. Peoples planned growth of the
investment portfolio resulted in total investment securities of $367.4 million
at June 30, 2002, up $37.0 million (or 11%) from year-end 2001.
Liabilities totaled $1.21 billion at June 30, 2002 compared to $1.07 billion at
year-end 2001, an increase of $134.0 million (or 13%). At June 30, 2002,
Peoples' total deposits were $934.8 million versus $814.4 million at year-end,
with the majority of the increase the result of the First Colony acquisition.
Interest-bearing balances grew $107.9 million (or 15%) while non-interest
bearing deposits were up $12.6 million (or 13%) since December 31, 2001.
Borrowed funds were up $12.2 million (or 5%) at June 30, 2002, totaling $260.7
million versus $248.5 million at year-end 2001.
The balance of Trust Preferred Securities (net of unamortized costs), presented
on the balance sheet as "Guaranteed preferred beneficial interest in junior
subordinated debentures", was $29.0 million at June 30, 2002, up $6.8 million
(or 30%) since March 31, 2002 but essentially unchanged from year-end 2001. The
change from last quarter is due to the issuance of new securities through PEBO
Capital Trust II, which offset repurchases of securities from PEBO Capital Trust
I in the first quarter of 2002.
Stockholders' equity totaled $104.8 million at June 30, 2002, versus $93.9
million at December 31, 2001, an increase of $10.9 million (or 12%). The higher
level of equity in 2002 is due primarily to increased earnings, net of dividends
paid, while the mark-to-market adjustment on Peoples' investment portfolio
increased equity $3.3 million.
Cash and Cash Equivalents
- -------------------------
Peoples' cash and cash equivalents are Federal funds sold, cash and balances due
from banks, and interest bearing balances in other institutions. The amount of
cash and cash equivalents fluctuates on a daily basis due to client activity and
Peoples' liquidity needs. At June 30, 2002, cash and cash equivalents totaled
$29.8 million, down $3.0 million (or 9%) compared to $32.8 million at December
31, 2001. This decline is due largely to additional items in process of
collection at year-end. At December 31, 2001, Peoples had Federal funds sold of
$850,000 compared to no Federal funds sold at June 30, 2002, which also
contributed to the overall decrease in cash and cash equivalents.
Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, should allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments as they come due.
Management will actively manage the principal runoff from the investment and
loan portfolios and reinvest those funds based on loan demand and investment
opportunities, as appropriate, while monitoring the level of cash and cash
equivalents to ensure funds are appropriately deployed while maintaining
adequate liquidity.
Investment Securities
- ---------------------
At June 30, 2002, the amortized cost of Peoples' investment securities totaled
$361.1 million compared to $329.1 million at year-end 2001, while the market
value of the investment portfolio was up $37.0 million from $330.4 million at
December 31, 2001, to $367.4 million at June 30, 2002. In first half of 2002,
management continued to implement the planned growth of the investment portfolio
initiated in late 2001 that was intended to return the portfolio, as a percent
of earning assets, to pre-2000 levels in anticipation of modest loan growth in
2002. In addition, Peoples acquired investment securities of approximately $6
million, primarily mortgage-backed securities, in conjunction with the First
Colony acquisition.
The difference in amortized cost and market value at June 30, 2002, resulted in
unrealized appreciation in the investment portfolio of $6.3 million and a
corresponding increase in Peoples' equity of $4.1 million, net of deferred
taxes. In comparison, the difference in amortized cost and market value at
December 31, 2001, resulted in unrealized appreciation of $1.3 million and an
increase in equity of $0.8 million, net of deferred taxes.
At June 30, 2002, Peoples' investment in US treasury securities and obligations
of US government agencies and corporations was down $32.8 million (or 49%)
versus year-end 2001, due primarily to the sale of a $31.0 million callable
security late in the first quarter. Management reinvested the proceeds from this
sale in mortgage-backed securities and obligations of states and political
subdivisions, which accounts for a portion of the increase in those security
types. In addition, management has reinvested the principal runoff from the
investment portfolio throughout 2002. The following table details Peoples'
investment portfolio, at estimated fair value:
(Dollars in Thousands) June 30, March 31, December 31, June 30,
2002 2002 2001 2001
US Treasury securities and obligations of
US government agencies and corporations $ 33,528 $ 30,774 $ 66,294 $ 94,178
Obligations of states and political subdivisions 67,281 60,710 49,562 38,435
Mortgage-backed securities 214,748 199,953 166,269 139,313
Other securities 51,849 49,047 48,239 44,256
- -------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 367,406 $ 340,484 $ 330,364 $ 316,182
===================================================================================================================
Management monitors the earnings performance and liquidity of the investment
portfolio on a regular basis through Asset/Liability Committee ("ALCO")
meetings. The ALCO also monitors net interest income, sets deposit pricing and
maturity guidelines, and manages Peoples' interest rate risk. Through active
management of the balance sheet and investment portfolio, Peoples maintains
sufficient liquidity to satisfy depositor demand, other company liquidity
requirements and various credit needs of its customers. Management believes the
risk characteristics inherent in the investment portfolio are acceptable.
Loans
- -----
Peoples Bank primarily focuses on lending opportunities in central and
southeastern Ohio, northern West Virginia, and northeastern Kentucky markets,
especially retail lending, which includes single-family residential mortgages
and other consumer lending. At June 30, 2002, gross loans totaled $862.4
million, an increase of $89.5 million (or 12%) since year-end 2001. In the first
half of 2002, Peoples experienced moderate organic growth in commercial,
financial and agricultural loans ("commercial loans"), as well as real estate
loans; however, consumer loans continued to decline and partially offset the
commercial and real estate loan growth. In addition, Peoples acquired loans of
$66.6 million in the First Colony acquisition. The following table details total
outstanding loans:
(dollars in thousands) June 30, March 31, December 31, June 30,
2002 2002 2001 2001
Commercial, financial, and agricultural $ 379,243 $ 352,531 $ 343,800 $ 313,806
Real estate, construction 15,782 18,135 14,530 20,683
Real estate, mortgage 345,795 296,082 295,944 293,817
Consumer 115,398 107,757 111,912 118,996
Credit cards 6,159 6,205 6,670 6,454
- ---------------------------------------------------------------------------------------------------------------
Total loans $ 862,377 $ 780,710 $ 772,856 $ 753,756
===============================================================================================================
At June 30, 2002, commercial loans were up $35.4 million (or 10%) from year-end
2001's balance of $343.8 million, with a significant portion of the increase
attributable to lending opportunities within Peoples' existing markets. Peoples
also acquired about $5 million in commercial loans through the First Colony
Acquisition and purchased approximately $7 million of multi-family real estate
loans from an unrelated financial institution in the first quarter. Commercial
loans continue to represent the largest portion of Peoples' total loan
portfolio, comprising 44.0% of total loans at June 30, 2002, versus 44.5% at
December 31, 2001. Future commercial lending activities will depend on economic
and related conditions, such as general demand for loans in Peoples' primary
markets and interest rates offered by Peoples. In addition to in-market
opportunities, Peoples will continue to selectively lend to creditworthy
customers outside its primary markets.
Real estate loans (including construction loans) totaled $361.6 million at June
30, 2002, up $51.1 million (or 16%) compared to year-end 2001, with the First
Colony acquisition accounting for $48.2 million of the growth. Real estate loans
comprise 41.9% of Peoples' total loan portfolio at June 30, 2002, versus 40.2%
at the prior year-end. Included in real estate loans are home equity credit line
("Equiline") balances of $29.9 million at June 30, 2002, up 10% from $27.3
million at December 31, 2001, attributable to the First Colony acquisition.
Management believes Equiline loans are a relationship product with an acceptable
return on investment after risk considerations. Residential real estate loans
continue to represent a major focus of Peoples' lending due to the lower risk
factors associated with this type of loan, and the opportunity to provide
additional products and services to these consumers, at reasonable risk-return
ratios to Peoples.
Excluding credit card balances, consumer loans increased $3.5 million (or 3%)
since year-end 2001, totaling $115.4 million at June 30, 2002. Peoples acquired
consumer loans of $13.5 million as part of the First Colony acquisition
accounting for the increase. The indirect lending area represents the majority
of Peoples' consumer loans, with balances of $62.0 million. Since year-end 2001,
indirect loan balances have declined $4.2 million (or 6%) from $66.2 million due
to declining creditworthy indirect sales opportunities, normal runoff of
indirect loans, and automobile manufacturers offering attractive financing
options to car buyers through their captive credit affiliates.
Management is pleased with the performance of Peoples' consumer loan portfolio,
which can be attributed to a commitment to sound lending practices and a strong
customer service orientation. Due to current economic conditions, management
continues to stress loan quality and risk-based pricing more than loan growth.
Lenders use a tiered pricing system that enables Peoples to apply interest rates
based on the corresponding risk associated with the loan. Although consumer debt
delinquency has increased in the financial services industry, management's
actions to reinforce Peoples' pricing system and underwriting criteria have had
a positive impact on consumer loan delinquencies. Management plans to continue
its commitment to the use of this tiered pricing system to improve the
performance of Peoples consumer loan portfolio.
Peoples' credit card balances totaled $6.2 million at June 30, 2002, down $0.5
million (or 7%) since December 31, 2001. Management routinely evaluates new
opportunities to serve credit card customers and grow the credit card balance.
Management does not intend to subject Peoples to additional and/or unnecessary
risk merely to pursue growth and considers Peoples' credit cards to be a
complementary product offering for client relationships.
Loan Concentration
- ------------------
Peoples' largest concentration of commercial loans are credits to assisted
living facilities and nursing homes, which comprised 12.5% of Peoples'
outstanding commercial loans at June 30, 2002, versus 11.9% at year-end 2001.
Loans to lodging and lodging related companies also represent a significant
portion of Peoples' commercial loans accounting for approximately 11.9% of
Peoples' outstanding commercial loans at quarter-end, compared to 12.8% at
December 31, 2001.
These lending opportunities have arisen due to the growth of these industries in
certain markets or contiguous areas, as well as sales associates' efforts to
develop these key relationships. Management believes Peoples' loans to assisted
living facilities and nursing homes, as well as loans to lodging and lodging
related companies, do not pose abnormal risk when compared to risk assumed in
other types of lending. Management is confident Peoples has sufficient knowledge
of these industries to make sound underwriting decisions.
Allowance for Loan Losses
- -------------------------
Management continually monitors the loan portfolio through its Loan Review
Department and Loan Loss Committee to determine the adequacy of the allowance
for loan losses. This formal analysis determines an appropriate level of the
allowance for loan losses, and allocation of the allowance among loan types. The
portion of the allowance allocated among the various loan types represents
management's estimate of expected losses based upon specific allocations for
individual lending relationships and historical loss experience for each
category of homogenous loans. The individual loan reviews are based upon
specific quantitative and qualitative criteria, including the size of the loan
and loan quality ratings. The historical experience factors are based upon
historical loss experience, trends in losses and delinquencies, the growth of
loans in particular markets and industries, and known changes in economic
conditions in the particular lending markets.
Allowances for homogeneous loans (such as residential mortgage loans, credit
cards, personal loans, etc.) are collectively evaluated based upon historical
loss experience, trends in losses and delinquencies, the growth of loans in
particular markets, and known changes in economic conditions in each particular
lending market. 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 when due 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 historical 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.
Peoples recorded a provision for loan losses of $980,000 in the second quarter
2002, $861,000 in the linked quarter and $675,000 in the second quarter of 2001.
For the first six months of 2002, Peoples' provision was $1,841,000 compared to
$1,350,000 for the same period in 2001. These increases are due in large part to
provisions relating to the Overdraft Privilege Program of $230,000 in the second
quarter of 2002 and $161,000 in the linked quarter. Peoples' provision for loan
losses is based upon management's ongoing evaluation of the adequacy of the
allowance for loan losses and factors affecting probable loan losses, including
loss experience, loan balances and continued growth of higher risk commercial
loans. When expressed as a percentage of average loans, the provision was 0.23%
for the six months ended June 30, 2002, compared to 0.18% in 2001, and net
chargeoffs amounted to 0.23% and 0.15% for the same periods, respectively.
At the end of the second quarter of 2002, Peoples' allowance for loan losses
totaled $12.4 million, unchanged since year-end 2001. The allowance as a
percentage of total loans is 1.44% at June 30, 2002 compared to 1.60% at
December 31, 2001, due in part to timing of the First Colony acquisition and the
lack of any adjustment to the allowance for loan losses acquired in the
acquisition. Management continues to evaluate the acquired loans and expects to
make the necessary allowance for loan loss, interest rate and collectability
adjustments, if any, during the third quarter of 2002. The following table
presents changes in Peoples' allowance for loan losses:
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) 2002 2001 2002 2001
Balance, beginning of period $ 12,426 $ 12,029 $ 12,357 $ 10,930
Chargeoffs (1,147) (701) (2,100) (1,343)
Recoveries 164 152 325 251
- -----------------------------------------------------------------------------------------------------
Net chargeoffs (983) (549) (1,775) (1,092)
Provision for loan losses 980 675 1,841 1,350
Allowance for loan losses acquired - - - 967
- -----------------------------------------------------------------------------------------------------
Balance, end of period $ 12,423 $ 12,155 $ 12,423 $ 12,155
- -----------------------------------------------------------------------------------------------------
Net chargeoffs were $983,000 in the second quarter of 2002, up from $549,000 a
year ago, and $1,775,000 through six months of 2002 versus $1,092,000 in 2001.
Commercial and consumer loans continue to account for a significant part of net
chargeoffs. For the quarter ended June 30, 2002, commercial net chargeoffs
totaled $690,000 versus $281,000 last year and through six months, totaled
$1,139,000 in 2002 compared to $557,000 in 2001, due largely to the charge down
of a group of troubled loans, which are part of a single client relationship, to
amounts deemed collectable. Management completed its evaluation of this
relationship during the second quarter and does not anticipate any future loss.
Consumer loan net chargeoffs totaled $215,000 in the second quarter of 2002 and
$485,000 on a year-to-date basis, up from $125,000 and $346,000 for the same
periods last year. This increase is attributable in large part to the Overdraft
Privilege program. Real estate chargeoffs represented a small percentage of
total net chargeoffs in recent periods, reflecting the quality of the real
estate loan portfolio. Management believes chargeoffs in the third quarter of
2002 will be similar to or slightly below net chargeoffs in the second quarter.
Asset quality remains a key focus, as management continues to stress quality
rather than growth in response to the current economic conditions. Peoples'
nonperforming assets (which include loans 90 days or more past due, nonaccrual
loans, renegotiated loans, and other real estate owned) decreased in the second
quarter of 2002, totaling $7.6 million, or 0.57% of total assets, versus $8.0
million, or 0.67%, at March 31, 2002. This change is the result of fewer loans
90 or more days past due at June 30, 2002. Even with this improvement,
nonperforming assets remain above their year-end 2001 level of $5.7 million, or
0.48% of total assets. Total loan delinquencies have declined 37% since year-end
2001, largely attributable to fewer loans that were 30-89 days past due. The
following table details Peoples' nonperforming assets:
(dollars in thousands) June 30, March 31, December 31, June 30,
2002 2002 2001 2001
Loans 90+ days past due and accruing $ 227 $ 971 $ 686 $ 466
Renegotiated loans 2,864 2,864 425 511
Nonaccrual loans 4,425 4,040 4,380 4,085
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming loans 7,516 7,875 5,491 5,062
Other real estate loans 124 167 181 32
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,640 $ 8,042 $ 5,672 $ 5,094
===============================================================================================================
Management continues to review the entire loan portfolio as part of the risk
management process and will deal aggressively with problem loans as they are
identified to minimize the amount of any future loss. Management has confidence
in Peoples' loan review programs and the level of Peoples' allowance for loan
losses, which totaled 165% of nonperforming loans at June 30, 2002, versus 158%
at March 31, 2002, and 225% at December 31, 2001.
At June 30, 2002, the recorded investment in loans that were considered to be
impaired was $8.0 million of which $4.7 million was accruing interest, and $3.3
million were nonaccrual loans. Included in this amount are $3.0 million of
impaired loans for which the related allowance for loan losses is $764,000. The
remaining impaired loan balances do not have a related allocation of the
allowance for loan losses as a result of previous write-downs, being
well-secured, or possessing characteristics indicative of ability to repay the
loan. For the six months ended June 30, 2002, the average recorded investment in
impaired loans was approximately $8.1 million and interest income of $193,000
was recognized on impaired loans during the period, representing 0.5% of
Peoples' total interest income.
Funding Sources
- ---------------
Peoples considers a number of sources when evaluating funding needs, including
but not limited to deposits, short-term borrowings, and long-term borrowings.
Deposits, both interest bearing and non-interest bearing, continue to be the
most significant source of funds for Peoples, totaling $934.8 million, or 78.2%
of total funding sources at June 30, 2002.
Non-interest bearing deposits serve as a core funding source with total balances
of $109.1 million at June 30, 2002, a $12.6 million (or 13%) increase compared
to the prior year-end. Peoples acquired non-interest bearing deposit balances
totaling $10.3 million through the First Colony acquisition. In addition,
Peoples implemented two programs in the first quarter of 2002 aimed at
attracting new clients and core deposits, as well as producing additional
non-interest income opportunities: Overdraft Privilege and Free Checking. These
programs have already had a positive impact by generating many new non-interest
bearing accounts and boosting non-interest revenues. Management will continue to
focus on expanding its base of lower-cost funding sources and enhancing client
relationships by providing incentives for clients to utilize more of Peoples'
products and services.
Interest-bearing deposits totaled $825.7 million at June 30, 2002, an increase
of $107.9 million (or 15%) compared to $717.8 million at December 31, 2001, with
$87.7 million attributable to the First Colony acquisition. Savings balances
have increased $43.8 million (or 55%) since year-end 2001, primarily the result
of a new savings product for states and political subdivisions introduced
earlier this year, while approximately $16 million is attributable to the First
Colony acquisition. Certificates of deposit remain Peoples' largest group of
interest-bearing deposits, totaling $414.5 million at June 30, 2002, up $53.8
million (or 15%) since year-end 2001, with the First Colony acquisition
accounting for over 90% of the increase. Interest-bearing transaction accounts
(primarily Peoples' money market deposit accounts), are also a significant
portion of Peoples' interest-bearing deposits, totaling $287.8 million at June
30, 2002, compared to $277.5 million at year-end 2001, up $10.3 million (or 4%).
Peoples' money market accounts offer variable, competitive rates that allow
clients flexibility and opportunity to better manage their investment yields.
Peoples also accesses other funding sources, including short-term and long-term
advances, to fund asset growth and satisfy liquidity needs. Peoples' short-term
borrowings include repurchase agreements, a short-term loan from an unrelated
financial institution and FHLB advances, while long-term borrowings are
primarily 10-year FHLB advances, with initial fixed rate features for periods of
two, three, or four years, depending on the specific advance. Each 10-year
advance has the opportunity, at the discretion of the FHLB, to reprice after its
initial fixed rate period, and Peoples has the option to prepay any repriced
advance without penalty, or allow the borrowing to reprice to a LIBOR based,
variable rate product. Recent long-term FHLB advances have been fixed rate,
amortizing advances, which helps to reduce Peoples' liability sensitivity.
During the second quarter of 2002, long-term borrowings increased $4.8 million
(or 2%) from $192.4 million at December, 31 2001, as part of Peoples' current
focus to secure longer-term funding and "lock in" costs during this period of
low interest rates. At June 30, 2002, Peoples' short-term borrowings totaled
$63.5 million, up $7.5 million (or 13%) compared to year-end 2001. This increase
is attributable to Peoples obtaining a $17 million short-term loan from an
unrelated financial institution to provide initial funding for the First Colony
acquisition. Management is evaluating various long-term funding alternatives for
this acquisition and anticipates converting this debt to longer term financing
by year-end or early in 2003. Management also continues to evaluate the
appropriate overall capitalization and methodology to fund Peoples' balance
sheet long-term.
Capital/Stockholders' Equity
- ----------------------------
At June 30, 2002, stockholders' equity was $104.8 million, an increase of $10.9
million (or 12%) since December 31, 2001, as increased earnings positively
impacted Peoples' stockholders' equity. Through six months of 2002, Peoples had
net income of $9.1 million and paid dividends of $2.3 million, a dividend payout
ratio of 25.0% of earnings, compared to a ratio of 34.2% a year ago. Management
believes Peoples' recent dividend payments represent an acceptable payout ratio
and anticipates Peoples continuing its 36-year history of consistent dividend
growth, at payout ratios deemed appropriate, in future periods.
The adjustment for the net unrealized holding gains on available-for-sale
securities, net of deferred income taxes, totaled $4.1 million at June 30, 2002
versus unrealized gains of $0.8 million at December 31, 2001, a change of $3.3
million. Since all the investment securities in Peoples' portfolio are
classified as available-for-sale, both the investment and equity sections of
Peoples' balance sheet are more sensitive to the changing market values of
investments. Management believes Peoples' capital continues to provide a strong
base for profitable growth.
Peoples had treasury stock totaling $1.5 million at June 30, 2002, compared to
$3.4 million at year-end 2001. During the first six months of 2002, Peoples
repurchased 7,967 common shares at an average price of $21.94 per share and
reissued approximately 55,100 shares through various stock option plans and
Peoples' deferred compensation plan. In 2002, Peoples may repurchase additional
shares under the 2002 Stock Repurchase Program, based on timing and market
prices management deems appropriate, until its expiration on December 31, 2002.
Peoples has also complied with the standards of capital adequacy mandated by the
banking industry. Bank regulators have established "risk-based" capital
requirements designed to measure capital adequacy. Risk-based capital ratios
reflect the relative risks of various assets banks hold in their portfolios. A
weight category of 0% (lowest risk assets), 20%, 50% or 100% (highest risk
assets) is assigned to each asset on the balance sheet. At June 30, 2002,
Peoples' Total Capital, Tier 1 and Leverage ratios were 12.62%, 11.26% and
8.42%, exceeding the well-capitalized standards of 10%, 6% and 5%, respectively.
In addition, all three risk-based capital ratios for Peoples Bank were also well
above the minimum standards for a well-capitalized institution at June 30, 2002.
Liquidity and Interest Rate Sensitivity
- ---------------------------------------
The objective of Peoples' asset/liability management function is to optimize
while protecting Peoples' net interest income within its policy guidelines.
Management works to accomplish this objective through management of the balance
sheet mix, liquidity and interest rate risk exposure based on changes in
economic conditions, interest rate levels and customer preferences. Interest
Rate Risk One of the most significant risks resulting from Peoples' normal
business of extending loans and accepting deposits is interest rate risk.
Interest rate risk ("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 has charged the ALCO with
the overall management of Peoples' balance sheet and off-balance sheet
transactions related to the management of IRR. The ALCO strives to keep Peoples
focused on the future, anticipating change and evaluating alternatives, rather
than simply reacting to change.
To this end, the ALCO has established an IRR management policy that sets the
minimum requirements and guidelines for monitoring and managing the level and
amount of IRR. The objective of the IRR policy is to encourage management to
adhere to sound fundamentals of banking while allowing sufficient flexibility to
exercise the creativity and innovations necessary to meet the challenges and
opportunities of changing markets. The ultimate goal of these policies is to
optimize net interest income within the constraints of prudent capital adequacy,
liquidity, and safety.
Peoples' ALCO relies on different methods of assessing IRR including simulating
net interest income, monitoring the sensitivity of the net present market value
of equity, and monitoring the difference, or "gap", between maturing or
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 balance sheet
structures and by establishing limits on these estimated changes in net income
and net market value, the ALCO is better able to evaluate interest rate risks
and their potential impact to earnings and market value of equity.
The modeling process starts with a base case simulation using the current
balance sheet. Base case simulation results are prepared under an assumed flat
interest rate scenario and at least two alternative interest rate scenarios, one
rising and one declining, assuming parallel yield curve parameters. Comparisons
produced from the simulation data, showing the earnings variance from the flat
rate forecast, illustrate the risks associated with the current balance sheet
structure. Additional simulations, when deemed appropriate, are prepared using
different interest rate scenarios than used with the base case simulation and/or
possible changes in balance sheet structure. The additional simulations are used
to measure yield curve risk, prepayment risk, basis risk, and index lag risk
inherent in the balance sheet. Comparisons showing the earnings and equity value
variance from the base case are provided to the ALCO for review and discussion.
The results from model simulations are reviewed for indications of effectiveness
of current IRR management strategies.
Peoples monitors IRR for both the short and long-term. Therefore, to effectively
evaluate results from model simulations, limits on changes in net interest
income and the value of the balance sheet have been established. To control the
amount of short-term exposure to IRR, the ALCO limits the decrease in net
interest income of Peoples Bank to 10% or less from base case for each 100 basis
point shift in interest rates measured on an annual basis. To control the
long-term exposure, the ALCO limits the negative impact on net equity value to
40% or less given an immediate and sustained 200 basis points shift in interest
rates. For an assessment of the current interest rate risk position, the ALCO
reviews static gap measures for specific time periods focusing on 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.
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 June 30, 2002
(dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- --------------------------- ----------------------------- --------------------------------
300 $ (5,440) (10.1)% $ (68,926) (37.1)%
200 (3,392) (6.3) (45,839) (24.6)
100 (1,584) (3.0) (22,040) (11.9)
(100) $ 864 1.6 % $ 16,887 9.1 %
The interest risk analysis shows that Peoples is liability sensitive, which
means that decreasing interest rates should favorably impact Peoples' net
interest income while upward moving interest rates should negatively impact net
interest income. As a result, the ALCO may consider various options including,
but not limited to, the purchase of interest rate hedge positions, as available
and appropriate, that would provide net interest income protection in a rising
rate environment. Peoples' liability sensitivity has increased moderately since
year-end 2001, due to an increase in rate sensitive liabilities attributable to
approximately $25 million of long-term FHLB advances nearing the end of the
fixed rate period, as well as the short term funding secured for the First
Colony acquisition. In recent quarters, the ALCO has focused its efforts on
securing long-term funding in the current low interest rate environment. As part
of this process, management has priced Peoples' 3 and 5-year certificates of
deposit to make them more attractive to clients than shorter-term certificates.
Many clients have shifted, and continue to shift, funds to the longer-term
certificates as their existing deposits mature, which will help reduce Peoples'
short-term liability sensitivity. The interest rate analysis also shows Peoples
is within the established IRR policy limits for all simulations and all
scenarios for the current period as well as at all measured points during the
preceding year.
Liquidity
- ---------
In addition to IRR management, a primary objective of the ALCO is the
maintenance of a sufficient level of liquidity. The ALCO defines liquidity as
the ability to meet anticipated and unanticipated operating cash needs, loan
demand, and deposit withdrawals, without incurring a sustained negative impact
on profitability. The ALCO's liquidity management policy sets limits on the net
liquidity position of Peoples and the concentration of non-core funding sources.
The main source of liquidity for Peoples is deposit growth. Liquidity is also
provided from cash generated from earning assets such as maturities, principal
payments and income from loans and investment securities. In the second quarter
of 2002, cash provided by financing activities totaled $26.9 million, due
largely to increases in deposit balances of $22.5 million. Cash used in
investing activity totaled $39.6 million, due to a net increase in loan balances
totaling $24.6 million and investment securities purchases, net of maturities
and sales, of $25.8 million, which was partially offset by net cash of $12.7
million received as part of the First Colony acquisition. When appropriate,
Peoples takes advantage of external sources of funds, such as advances from the
FHLB, national market repurchase agreements, and brokered funds. These external
sources often provide attractive interest rates and flexible maturity dates that
enable Peoples to match funding dates and pricing characteristics with
contractual maturity dates and pricing parameters of earning assets. Securities
in the investment portfolio that are available-for-sale can be utilized as an
additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting volatile
liabilities, short-term growth in deposits and brokered funds, from liquid
assets, short-term investments and unpledged available-for-sale securities. At
June 30, 2002, Peoples' net liquidity position was $148.5 million, or 11.1% of
total assets, in comparison to a net liquidity position of $177.2 million, or
14.9% of total assets, at December 31, 2001. This decrease in liquidity is
attributed to a $24.6 million increase in volatile funds due to a decrease in
what Peoples considers stable funds, as well as Peoples $17 million loan to
finance the First Colony acquisition. The liquidity position as of June 30,
2002, was within Peoples' policy limit of negative 10% of total assets.
Effects of Inflation on Financial Statements
- --------------------------------------------
Substantially all of the Peoples' assets relate to banking and are monetary in
nature. As a result, inflation does not impact Peoples to the same degree as
companies in capital-intensive industries in a replacement cost environment.
During a period of rising prices, a net monetary asset position results in a
loss in purchasing power and conversely a net monetary liability position
results in an increase in purchasing power. The opposite would be true during a
period of decreasing prices. In the banking industry, typically monetary assets
exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation
has had little impact on Peoples' net assets.
Future Outlook
- --------------
Earnings momentum started in the second half of 2001 and has grown stronger
through the first two quarters of 2002. As a result, Peoples successfully
increased earnings for the fifth consecutive quarter despite sluggish economic
conditions. Future success in the financial service industry will revolve around
three issues: earnings growth and quality, asset quality, and capital quality.
Management believes that Peoples is sound in all of these areas. Earnings
reached record levels in the second quarter of 2002, due in part to sound
asset/liability management and diversified revenue streams. Peoples' asset
quality remains good and capital ratios, bolstered by the solid earnings stream,
continue to be at levels that provide a strong foundation to withstand the
impact of adverse economic conditions while still affording growth
opportunities.
E-services remain a focus for management, with future investments in technology
designed to make it easier for clients to complete transactions and conduct
business with Peoples. As part of this process, Peoples plans to introduce an
enhanced Internet billpay service to its clients in August and offer this
service at no cost, at least through the end of 2003 to active users. This
enhanced bill payment service offers innovative technology, including online
bill presentment, or e-bill, as well as improved payment processing. Bills paid
online will be processed by one of the nation's leading provider of bill payment
services. Management believes the combination of electronic billpay and bill
presentment can be a tremendous retention and recruiting tool for Peoples Bank,
and looks forward to adding many customers to the new system. Peoples'
e-Services department recently completed the conversion of existing billpay
clients, and the Marketing Department is finalizing an aggressive marketing
campaign to raise awareness in Peoples' markets.
Management's strategies of continued growth and diversification of non-interest
revenues are intended to lessen the impact of changes in interest rates on
Peoples' earnings. The acquisition of five full-service financial service
centers through the First Colony acquisition provides Peoples' sales associates
the ability to enhance revenues further by capitalizing on opportunities to
serve clients using a needs-based sales process. Since completing this
acquisition, management has already introduced investment and insurance
products, such as fixed annuities, to these new clients, as well as other
non-traditional financial products and services. Even though the acquisition was
completed late in the second quarter, Peoples has already been able to achieve
cost-save targets; thus, management expects the acquisition to be accretive to
short-term earnings. Peoples' sales associates' ability to cross-sell more
non-traditional financial services, as well as increased market penetration,
should produce additional benefits.
Another benefit derived from the First Colony acquisition is Peoples' ability to
enhance its real estate lending offerings by retaining personnel experienced in
secondary mortgage market operations, including originating and selling loans
through Fannie Mae and other relationships. Management is excited by the new
opportunities this addition will give Peoples' sales associates. For many years,
Peoples has either acted as an agent with a national firm for long-term, fixed
rate real estate loans or held onto the loans and extended rates for 10 or 15
years - which can pressure interest rate sensitivity. With the new secondary
mortgage department, Peoples will be able to offer more competitive long-term
loans at fixed rates, which are currently appealing to Peoples' clients and
prospects, while retaining mortgage servicing rights which generate additional
fee income without holding these loans on Peoples' balance sheet (and the
corresponding interest rate risk).
Peoples' capital ratios continue to be comfortably above the well-capitalized
regulatory thresholds, which provide downside earnings protection but also
affords management the opportunity to enhance Peoples' long-term value through
strategic balance sheet growth. Mergers and acquisitions remain a viable
strategic option to expand Peoples' operations and scope of client service even
while management implements new products and services aimed at attracting new
clients and producing additional revenues. In early October, Peoples expects to
complete the acquisition of a small banking center in Malta, Ohio, adding
approximately $8 million of deposits and another $2 million of loans. Management
looks forward to introducing new clients to the benefits of doing business with
Peoples and continues to explore other merger and acquisition prospects in and
around Peoples' current footprint. However, the evaluation of future
acquisitions will focus more on enhancing Peoples' earnings potential rather
than geographic location or proximity to current markets and ultimately will
depend upon opportunities that complement Peoples' core competencies and
strategic intent.
It is Peoples' goal to invest capital across business units, based on projected
risk and return on investments, which have potential for strong growth and
enhancement to Peoples' overall long-term value. As part of this goal, Peoples
has elected, and was approved in early August, to become a financial holding
company, as permitted under the Gramm-Leach-Bliley Act (better known as "GLB" or
the "Financial Services Modernization Act of 1999"). Peoples' status as a
financial holding company permits it to engage in a significantly broader range
of activities deemed financial in nature by the Federal Reserve, including
securities and insurance underwriting, sponsoring mutual funds and investment
companies, and merchant banking. Management believes the status as a financial
holding company gives Peoples the most strategic flexibility going forward.
While there may be evaluation of potential capital investment in the newly
permissible activities in the future, management expects Peoples' primary
business activities will remain confined to community banking in the near term.
Peoples remains a service-oriented company with a sales focus that aims 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 investments. Going forward,
management anticipates strong earnings will continue in the second half of 2002,
due to sustained net interest income levels and marginal non-interest income
improvement and controlled operating expense growth, and will continue to be
stakeholder-focused with four key goals: double-digit EPS growth, ROE
improvement, consistent dividend growth, and revenue diversification.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
- ---------------------------------------------------------------
The statements in this Form 10-Q which are not historical fact are forward
looking statements that involve a number of risks and uncertainties, including,
but not limited to, the interest rate environment, the effect of federal and
state banking and tax regulations, the effect of technological changes, the
effect of economic conditions, the impact of competitive products and pricing,
and other risks detailed in Peoples' Securities and Exchange Commission filings.
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 actual results may
differ materially from these projections.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption "Liquidity
and Interest Rate Sensitivity" under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations in this Form 10-Q, and
is incorporated herein by reference.
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended June 30, For the Six Months Ended June 30,
2002 2001 2002 2001
----------------------- ---------------------- ----------------------- ------------------------
(dollars in thousands) Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate Balance Rate
ASSETS
Securities:
Taxable $ 288,413 6.13% $ 278,778 6.68% $ 288,774 6.21% $ 284,975 6.74%
Tax-exempt 63,526 6.94% 37,097 7.22% 58,622 6.96% 37,149 7.21%
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 351,939 6.27% 315,875 6.75% 347,396 6.34% 322,124 6.80%
Loans:
Commercial 375,911 6.86% 330,012 8.47% 370,579 6.92% 328,948 8.67%
Real estate 306,451 7.66% 298,217 8.44% 301,838 7.75% 294,864 8.45%
Consumer 114,436 10.07% 124,403 10.66% 115,146 10.13% 122,863 10.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 796,798 7.63% 752,632 8.83% 787,563 7.71% 746,675 8.96%
Less: Allowance for loan loss (12,536) (12,331) (12,579) (11,925)
----------- --------- ---------- ----------- --------- ----------- ---------
Net loans 784,262 7.76% 740,301 8.98% 774,984 7.88% 734,750 9.10%
Interest-bearing deposits 2,191 1.37% 3,941 3.85% 2,552 1.44% 2,785 4.50%
Federal funds sold 43 1.86% 28,510 4.25% 26 1.54% 16,345 4.47%
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,138,435 7.29% 1,088,627 8.19% 1,124,958 7.39% 1,076,004 8.33%
Other assets 99,653 76,373 97,088 75,373
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,238,088 $ 1,165,000 $ 1,222,046 $ 1,151,377
====================================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 108,583 1.52% $ 78,417 2.03% $ 96,756 1.44% $ 77,100 2.10%
Interest-bearing demand 273,519 1.62% 274,772 3.47% 275,104 1.62% 270,694 3.85%
deposits
Time 373,394 3.90% 374,186 6.07% 368,702 4.22% 359,814 6.11%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 755,496 2.74% 727,375 4.66% 740,562 2.91% 707,608 4.85%
deposits
Borrowed funds:
Short-term 45,766 2.00% 83,283 4.49% 53,828 1.93% 93,655 5.25%
Long-term 201,044 4.80% 140,827 5.12% 197,752 4.79% 140,079 5.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 246,810 4.29% 224,110 4.88% 251,580 4.21% 233,734 5.15%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing 1,002,306 3.12% 951,485 4.71% 992,142 3.24% 941,342 4.92%
liabilities
Non-interest bearing deposits 97,594 88,119 95,788 86,023
Other liabilities 37,120 36,078 35,064 36,598
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,137,020 1,075,682 1,122,994 1,063,963
Stockholders' equity 101,068 89,318 99,052 87,414
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,238,088 $ 1,165,000 $ 1,222,046 $ 1,151,377
====================================================================================================================================
Interest income to earning 7.29% 8.19% 7.39% 8.33%
assets
Interest expense to earning 2.75% 4.12% 2.86% 4.31%
assets
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.54% 4.07% 4.53% 4.02%
====================================================================================================================================
Interest income and yields presented on a fully tax-equivalent basis using a
35% tax rate.
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities and Use of Proceeds.
None.
ITEM 3: Defaults upon Senior Securities.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None.
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ---------------------------------- -----------------
11 Computation of Earnings Per Share. Page 28
b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the three
months ended June 30, 2002:
1) Filed April 22, 2002 - News release announcing Peoples' earnings for
the first quarter of 2002.
2) Filed May 7, 2002 - News release announcing Peoples Bank signed a
definitive agreement to acquire a full-service banking center in
Malta, Ohio, from Century National Bank of Zanesville, Ohio.
3) Filed May 13, 2002 - News release announcing the declaration of a
10% stock dividend and $0.15 per share dividend by Peoples' Board
of Directors.
4) Filed June 18, 2002 - News release announcing Peoples had completed
the acquisition of First Colony Bancshares, Inc.
SIGNATURES
Pursuant to the requirements 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: August 12, 2002 By: /s/ ROBERT E. EVANS
-------------------------------------
Robert E. Evans
President and Chief Executive Officer
Date: August 12, 2002 By: /s/ JOHN W. CONLON
-------------------------------------
John W. Conlon
Chief Financial Officer
----------------------------
CERTIFICATION PURSUANT TO
TITLE 18, UNITED STATES CODE, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Peoples Bancorp Inc. (the
"Company") on Form 10-Q for the quarterly period ended June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Robert E. Evans, President and Chief Executive Officer, and I, John W.
Conlon, Chief Financial Officer of the Company, certify, pursuant to Title 18,
United States Code, Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 12, 2002 /s/ ROBERT E. EVANS
-------------------------------------
Robert E. Evans
President and Chief Executive Officer
Date: August 12, 2002 /s/ JOHN W. CONLON
------------------------------------
John W. Conlon
Chief Financial Officer
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR PERIOD ENDED JUNE 30, 2002
Exhibit
Number Description Exhibit Location
- ------------ ---------------------------------- ----------------
11 Computation of Earnings Per Share. Page 28