FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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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 45750
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, at May 1, 2003: 9,557,343.
Exhibit Index Appears on Page 36
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
The following Condensed Consolidated Balance Sheets, Condensed 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 three months ended March 31, 2003, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. The balance sheet at December 31, 2002, contained
herein has been derived from the audited balance sheet included in Peoples
Bancorp Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002
("2002 Form 10-K"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the 2002 Form 10-K.
The consolidated financial statements include the accounts of Peoples Bancorp
Inc. and its wholly-owned subsidiaries. Material intercompany accounts and
transactions have been eliminated.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
ASSETS 2003 2002
Cash and cash equivalents:
Cash and due from banks $ 34,149 $ 34,034
Interest-bearing deposits in other banks 405 1,016
Federal funds sold 9,500 20,500
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Total cash and cash equivalents 44,054 55,550
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $675,677 and $402,048 at March 31, 2003, and
December 31, 2002, respectively) 688,350 412,100
Loans, net of unearned interest 861,104 850,891
Allowance for loan losses (13,363) (13,086)
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Net loans 847,741 837,805
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Bank premises and equipment, net 17,752 18,058
Goodwill 25,147 25,504
Other intangible assets 5,118 5,234
Other assets 40,521 40,110
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Total assets $ 1,668,683 $ 1,394,361
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LIABILITIES
Deposits:
Non-interest bearing $ 113,685 $ 115,907
Interest bearing 856,171 839,970
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Total deposits 969,856 955,877
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Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 24,342 31,183
Federal Home Loan Bank term advances 22,500 -
Other short-term borrowings 17,000 17,000
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Total short-term borrowings 63,842 48,183
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Long-term borrowings 439,329 203,829
Accrued expenses and other liabilities 9,974 10,199
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Total liabilities 1,483,001 1,218,088
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Guaranteed preferred beneficial interests in junior subordinated debentures 29,111 29,090
STOCKHOLDERS' EQUITY
Common stock, no par value, 12,000,000 shares authorized - 9,651,538 shares
issued at March 31, 2003, and 9,421,222 issued
at December 31, 2002, including shares in treasury 134,168 129,173
Accumulated comprehensive income, net of deferred income taxes 8,148 6,446
Retained earnings 16,217 12,650
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158,533 148,269
Treasury stock, at cost, 98,995 shares at March 31, 2003, and
59,351 shares at December 31, 2002 (1,962) (1,086)
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Total stockholders' equity 156,571 147,183
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Total liabilities, beneficial interests and stockholders'equity $ 1,668,683 $ 1,394,361
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Three Months Ended
March 31,
2003 2002
Interest income $ 22,777 $ 20,315
Interest expense 9,134 8,156
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Net interest income 13,643 12,159
Provision for loan losses 831 861
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Net interest income after provision for loan losses 12,812 11,298
Other income:
Service charges on deposits 1,725 1,366
Fiduciary revenues 586 616
Electronic banking revenues 454 368
Insurance and investment commissions 442 524
Business owned life insurance 365 325
Mortgage banking income 230 -
Gain on securities transactions 2 51
Loss on asset disposals (2) (7)
Gain on early debt extinguishment - 631
Other non-interest income 133 84
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Total other income 3,935 3,958
Other expenses:
Salaries and benefits 4,724 4,484
Occupancy and equipment 1,098 926
Trust Preferred Securities expense 607 561
Professional fees 442 301
Data processing and software 330 323
Marketing 276 386
Franchise taxes 257 182
Amortization of intangible assets 201 111
Other non-interest expense 1,769 1,403
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Total other expenses 9,704 8,677
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Income before income taxes 7,043 6,579
Income taxes 2,029 1,886
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Net income $ 5,014 $ 4,693
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Earnings per share:
Basic $ 0.52 $ 0.60
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Diluted $ 0.51 $ 0.59
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Weighted average common shares outstanding (basic) 9,577,729 7,841,605
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Weighted average common shares outstanding (diluted) 9,767,338 7,979,461
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Cash dividends declared $ 1,447 $ 1,077
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Cash dividend per share $ 0.15 $ 0.14
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share and per share amounts)
Accumulated
Other
Common Stock Retained Treasury Comprehensive
Shares Amount Earnings Stock Income Total
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Balance, December 31, 2002 9,421,222 $ 129,173 $ 12,650 $ (1,086) $ 6,446 $ 147,183
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Net income 5,014 5,014
Unrealized gain on available-for-sale
securities, net of reclassification 1,702 1,702
adjustment
Exercise of common stock options
(reissued 1,330 treasury shares) 10,362 99 29 128
Issuance of common shares 216,000 4,798 4,798
Cash dividends declared (1,447) (1,447)
Common stock issued under dividend
reinvestment plan 3,954 98 98
Purchase of treasury shares, 40,974 shares (905) (905)
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Balance, March 31, 2003 9,651,538 $ 134,168 $ 16,217 $ (1,962) $ 8,148 $ 156,571
===================================================================================================================================
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands) Three Months Ended
March 31,
2003 2002
Net income $ 5,014 $ 4,693
Other comprehensive income, net of tax:
Unrealized gain (loss) on available-for-sale arising during the period 1,703 (1,336)
Less: reclassification adjustment for securities gains included in net income, 1 33
net of tax
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Net unrealized gain (loss) on available-for-sale arising during the period 1,702 (1,369)
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Total comprehensive income $ 6,716 $ 3,324
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Three Months Ended
March 31,
2003 2002
Cash flows from operating activities:
Net income $ 5,014 $ 4,693
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization, and accretion 1,208 692
Provision for loan losses 831 861
Business owned life insurance income (365) (325)
Gain on securities transactions (2) (51)
Gain on early debt extinguishment - (631)
(Increase) decrease in interest receivable (1,060) 32
Increase (decrease) in interest payable 918 (23)
Deferred income tax expense 889 131
Deferral of loan origination fees and costs 45 (54)
Other, net (942) (351)
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Net cash provided by operating activities 6,536 4,974
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Cash flows from investing activities:
Purchases of available-for-sale securities (325,112) (67,988)
Proceeds from sales of available-for-sale securities - 32,793
Proceeds from maturities of available-for-sale securities 51,219 22,599
Net increase in loans (10,801) (8,565)
Expenditures for premises and equipment (739) (133)
Proceeds from sale of other real estate owned 107 75
Expenditures for other real estate owned (890) -
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Net cash used in investing activities (286,216) (21,219)
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Cash flows from financing activities:
Net decrease in non-interest bearing deposits (2,222) (2,710)
Net increase in interest-bearing deposits 16,201 27,564
Net increase (decrease) in short-term borrowings 15,659 (15,206)
Proceeds from long-term debt 238,750 7,000
Payments on long-term borrowings (3,250) (866)
Cash dividends paid (975) (983)
Purchase of treasury shares (905) (34)
Repurchase of Trust Preferred Securities - (6,150)
Proceeds from issuance of common shares 4,926 217
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Net cash provided by financing activities 268,184 8,832
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Net decrease in cash and cash equivalents (11,496) (7,413)
Cash and cash equivalents at beginning of period 55,550 32,838
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Cash and cash equivalents at end of period $ 44,054 $ 25,425
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Supplemental cash flow information:
Interest paid $ 8,203 $ 8,163
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Income taxes paid $ - $ 525
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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
consolidated financial statements include all accounts of Peoples' parent
company and its wholly-owned subsidiaries. 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 or stockholders'
equity, to conform to 2003 presentation. All significant intercompany accounts
and transactions have been eliminated.
1. Mergers and Acquisitions
On December 2, 2002, Peoples Bancorp announced it had signed a definitive
agreement and plan of merger with Kentucky Bancshares Incorporated
("Kentucky Bancshares") providing for the acquisition of Kentucky Bancshares
by Peoples. In the agreement, Peoples proposes to use a combination of cash
and Peoples Bancorp's common shares as consideration for all of the issued
and outstanding shares of Kentucky Bancshares common stock. The aggregate
value of the transaction is not expected to exceed $31.4 million, of which
approximately half would be paid in cash and half in Peoples' common shares,
dependent upon the market price of Peoples Bancorp's common shares.
Kentucky Bancshares' banking subsidiary, Kentucky Bank & Trust, operates
five offices in Kentucky's Boyd and Greenup Counties in the communities of
Ashland, Russell, Flatwoods, Greenup and South Shore. Peoples plans to
operate these offices as full-service banking offices of Peoples Bank,
National Association, upon completion of the merger. At March 31, 2003,
Kentucky Bancshares had total assets of approximately $144 million, total
loans of $79 million, total deposits of $115 million, and trust assets under
management of $197 million. This acquisition is contingent upon approval of
the shareholders of Kentucky Bancshares. Management anticipates completing
this transaction on May 9, 2003. Concurrent with this acquisition, Peoples
Bank will close its existing Russell, Kentucky facility and continue to
serve the market through the new Russell location.
2. Stock-Based Compensation
Peoples accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees". No stock-based employee
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common shares on the date of grant. The following table
illustrates the effect on net income and earnings per share if Peoples had
applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.
(Dollars in Thousands, except Per Share Data) Three Months Ended
March 31,
2003 2002
Net Income, as reported $ 5,014 $ 4,693
Deduct: stock-based compensation expense determined
under fair value based method, net of tax 82 59
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Pro forma net income $ 4,932 $ 4,634
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Basic Earnings Per Share:
As reported $ 0.52 $ 0.60
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Pro forma $ 0.51 $ 0.59
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Diluted Earnings Per Share:
As reported $ 0.51 $ 0.59
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Pro forma $ 0.50 $ 0.58
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The fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for
2003 and 2002:
2003 2002
Risk-free interest rate 5.50% 5.50%
Dividend yield 2.51% 2.51%
Volatility factor of the market price of parent stock 31% 31%
Weighted average expected life of options 7 years 7 years
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF FINANCIAL CONDITION
AND OPERATIONS
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
Months Ended March 31,
SIGNIFICANT RATIOS 2003 2002
Return on average equity .................................. 13.00 % 19.35 %
Return on average assets .................................. 1.27 % 1.56 %
Net interest margin (a) ................................... 3.87 % 4.52 %
Non-interest income leverage ratio (b) .................... 41.41 % 38.33 %
Efficiency ratio (c) ...................................... 52.83 % 54.24 %
Average stockholders' equity to average assets ............ 9.79 % 8.04 %
Cash dividends to net income .............................. 28.86 % 22.95 %
Loans net of unearned interest to deposits (end of period) 88.79 % 93.03 %
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ASSET QUALITY RATIOS (end of period)
Nonperforming loans as a percent of total loans (d) ....... 0.55 % 1.01 %
Nonperforming assets as a percent of total assets (e) ..... 0.34 % 0.67 %
Allowance for loan losses to loans net of unearned interest 1.55 % 1.59 %
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CAPITAL RATIOS (end of period)
Tier I capital ratio ...................................... 15.18 % 12.37 %
Risk-based capital ratio .................................. 16.55 % 13.72 %
Leverage ratio ............................................ 9.62 % 8.63 %
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PER SHARE DATA
Net income per share - basic .............................. $ 0.52 $ 0.60
Net income per share - diluted ............................ 0.51 0.59
Cash dividends per share .................................. 0.15 0.14
Book value per share (end of period) ...................... 16.39 12.26
Tangible book value per share (end of period) (f) ......... $ 13.22 $ 10.14
Weighted average shares outstanding - Basic ............... 9,577,729 7,841,605
Weighted average shares outstanding - Diluted ............. 9,767,338 7,979,461
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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 and/or
losses) as a percentage of non-interest expense (less intangible
amortization). The ratio for the three months ended March 31, 2002,
excludes gain on early debt extinguishment of $631,000.
(c) Non-interest expense (less intangible amortization) as a percentage of
fully tax equivalent net interest income plus non-interest income. The
ratio for the three months ended March 31, 2002, excludes gain on early
debt extinguishment of $631,000.
(d) Nonperforming loans include loans 90 days past due and accruing,
renegotiated loans and nonaccrual loans.
(e) Nonperforming assets include nonperforming loans and other real estate
owned.
(f) Tangible book value per share reflects capital calculated for banking
regulatory requirements and excludes balance sheet impact of intangible
assets acquired through purchase accounting for acquisitions.
INTRODUCTION
The following discussion and analysis of the Consolidated Financial Statements
of Peoples is presented to provide insight into management's assessment of the
financial results. Peoples' subsidiaries are Peoples Bank, National Association
("Peoples Bank"), Peoples Investment Company, PEBO Capital Trust I and PEBO
Capital Trust II. Peoples Bank also operates Peoples Insurance Agency, Inc.
("Peoples Insurance"), which offers a full range of life, 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
46 financial service locations and 30 ATMs in Ohio, West Virginia, and Kentucky.
Peoples Bank's e-banking service, Peoples OnLine Connection, can be found on the
Internet at www.peoplesbancorp.com (this uniform resource locator (URL) is an
inactive, textual reference only). Peoples Bank provides an array of financial
products and services to customers that include traditional banking products
such as deposit accounts, lending products, credit and debit cards, corporate
and personal trust services, and safe deposit rental facilities. Peoples
provides services through ordinary walk-in offices and automobile drive-in
facilities, automated teller machines, banking by phone, and the Internet.
Peoples Bank also makes available other financial services through Peoples
Financial Advisors, which provides customer-tailored services 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
to allow management to better deploy investable funds and provide new
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.
This discussion and analysis should be read in conjunction with the audited
Consolidated Financial Statements for the year ended December 31, 2002, and
notes thereto, as well as the ratios, statistics and discussions contained
elsewhere in this Form 10-Q.
References will be found in this Form 10-Q to the following significant
transactions that have impacted or will impact Peoples' results of operations:
o As discussed in Note 1 of Notes to the Consolidated Financial
Statements, Peoples Bancorp has signed a definitive agreement and plan
of merger with Kentucky Bancshares Incorporated ("Kentucky Bancshares"),
the holding company of Kentucky Bank & Trust, providing for the
acquisition of Kentucky Bancshares by Peoples. In addition, Peoples Bank
plans to close its current Russell, Kentucky Office concurrent with the
expected completion of this acquisition on May 9, 2003.
o On March 13, 2003, Peoples announced the authorization to repurchase up
to 300,000 (or approximately 3%) of Peoples' outstanding common shares
from time to time in open market or privately negotiated transactions
("2003 Stock Repurchase Program"). The common shares repurchased will be
used for projected stock option exercises granted under Peoples' stock
option plans, a portion of the consideration to be paid in the Kentucky
Bancshares acquisition, and other general corporate purposes. The timing
of the purchases and the actual number of common shares purchased will
depend on market conditions and limitations imposed by applicable
federal securities laws. The 2003 Stock Repurchase Program will expire
on December 31, 2003.
o On December 19, 2002, Peoples Bancorp Inc. completed the sale of
1,440,000 common shares through a firm commitment underwritten offering
and on January 3, 2003, sold an additional 216,000 common shares in
conjunction with the option granted to the underwriters to cover
over-allotments (collectively, the "Common Stock Offering"). The Common
Stock Offering generated new capital totaling $36.9 million after
offering expenses. In January 2003, Peoples Bancorp used $16 million of
the net proceeds to increase Peoples Bank's capital position. Peoples
intends to use the remaining net proceeds for general corporate
purposes, which may include the repayment of outstanding indebtedness,
mergers, acquisitions or other strategic investments.
o In December 2002, Peoples initiated an investment growth strategy to
offset the dilutive impact of the Common Stock Offering, thereby
leveraging Peoples' increased capital levels ("Investment Growth
Strategy"). As a result of this Investment Growth Strategy, total
earning assets, particularly mortgage-backed investment securities,
increased by $260 million in January 2003 compared to the year-end 2002
balance. Peoples funded the investment purchases using $187 million of
wholesale market repurchase agreements at an average cost of 2.92%, $58
million of FHLB advances at an average cost of 2.15% and $15 million
from the Common Stock Offering.
o On April 10, 2002, Peoples issued $7.0 million of LIBOR based floating
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
floating rate junior subordinated debt securities due April 22, 2032
(the "Debentures"). Peoples has used the net proceeds from the sale of
the Debentures for general corporate purposes and management of
corporate liquidity.
The impact of these transactions, where significant, is discussed in the
applicable sections of this management's discussion and analysis.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of Peoples conform to accounting
principles generally accepted in the United States ("US GAAP") and to general
practices within the banking industry. The preparation of the financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Management
has identified the accounting policies described below as those that, due to the
judgments, estimates and assumptions inherent in those policies, are critical to
an understanding of Peoples' consolidated financial statements and management's
discussion and analysis.
Income Recognition
- ------------------
Peoples recognizes interest income by methods that conform to US GAAP that
include general accounting practices within the banking industry. In the event
management believes collection of all or a portion of contractual interest on a
loan has become doubtful, which generally occurs after the loan is 90 days past
due, Peoples discontinues the accrual of interest. In addition, previously
accrued interest deemed uncollectible that was recognized in income in the
current year is reversed, while amounts recognized in income in the prior year
are charged against the allowance for loan losses. Interest received on
nonaccrual loans is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status when it is brought
current or has performed in accordance with contractual terms for a reasonable
period of time, and the collectibility of the total contractual principal and
interest is no longer in doubt.
Allowance for Loan Losses
- -------------------------
In general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples maintains
an allowance for loan losses to absorb probable losses in the loan portfolio
based on a quarterly analysis of the portfolio and expected future losses. This
formal analysis determines an appropriate level and allocation of the allowance
for loan losses among loan types by considering factors affecting loan losses,
including specific losses, levels and trends in impaired and nonperforming
loans, historical loan loss experience, current national and local economic
conditions, volume, growth and composition of the portfolio, regulatory guidance
and other relevant factors. Management continually monitors the loan portfolio
through its Loan Review Department and Loan Loss Committee to evaluate the
adequacy of the allowance. Ultimately, Peoples records a provision for loan
losses to maintain the allowance at an adequate level. The provision expense
could increase or decrease each quarter based upon the results of management's
formal analysis.
The amount of the allowance for the various loan types represents management's
estimate of expected losses from existing loans based upon specific allocations
for individual lending relationships and historical loss experience for each
category of homogeneous loans. The allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans. This evaluation requires management to make estimates of the
amounts and timing of future cash flows on impaired loans, which consists
primarily of non-accrual and restructured loans.
Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, loan quality ratings, value of
collateral, repayment ability of borrowers, and historical experience factors.
The historical experience factors utilized are based upon past 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 evaluated based upon historical
loss experience, trends in losses and delinquencies, growth of loans in
particular markets, and known changes in economic conditions in each particular
lending market. Consistent with the evaluation of allowances for homogenous
loans, allowances relating to the Overdraft Privilege program are based upon
management's monthly analysis of accounts in the program. This analysis
considers factors that could affect future losses on existing accounts,
including historical loss experience and length of overdraft.
There can be no assurance that the allowance for loan losses will be adequate to
cover all losses, but management believes the allowance for loan losses was
adequate at March 31, 2003. While management uses available information to
provide for loan losses, the ultimate collectibility of a substantial portion of
the loan portfolio and the need for future additions to the allowance will be
based on changes in economic conditions and other relevant factors. A slowdown
in economic activity could adversely affect cash flows for both commercial and
individual borrowers, as a result of which Peoples could experience increases in
problem assets, delinquencies and losses on loans.
Investment Securities
- ---------------------
Investment securities are recorded at cost, which includes premiums and
discounts if purchased at other than par or face value. Peoples amortizes
premiums and discounts as an adjustment to interest income using the effective
interest method over the estimated life of the security. The cost of investment
securities sold, and any resulting gain or loss, is based on the specific
identification method.
Management determines the appropriate classification of investment securities at
the time of purchase. Held-to-maturity securities are those securities that
Peoples has the positive intent and ability to hold to maturity and are recorded
at amortized cost. Available-for-sale securities are those securities that would
be available to be sold in the future in response to Peoples' liquidity needs,
changes in market interest rates, and asset-liability management strategies,
among others. Available-for-sale securities are reported at fair value, with
unrealized holding gains and losses reported in stockholders' equity as a
separate component of other comprehensive income, net of applicable deferred
income taxes.
Presently, Peoples classifies its entire investment portfolio as
available-for-sale. As a result, both the investment and equity sections of
Peoples' balance sheet are more sensitive to changes in the overall market value
of the investment portfolio, in response to changes in market interest rates,
investor confidence and other factors affecting marketing values, than if the
investment portfolio was classified as held-to-maturity.
Management systematically evaluates investment securities for other than
temporary declines in fair value on a quarterly basis. Declines in fair value of
individual investment securities below their amortized cost that are deemed to
be other than temporary will be written down to current market value and
included in earnings as realized losses. There were no investment securities
which management identified to be other-than-temporarily impaired for the three
months ended March 31, 2003. If the financial markets experience deterioration
and investments decline in fair value, charges to income could occur in future
periods.
Goodwill and Other Intangible Assets
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Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill
and Other Intangible Assets" ("SFAS 142"), establishes standards for the
amortization of acquired intangible assets and the non-amortization and
impairment assessment of goodwill. In addition, Statement of Financial
Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions"
("SFAS 147"), establishes standards for unidentifiable intangible assets
acquired specifically in branch purchases that qualify as business combinations.
At March 31, 2003, Peoples had $4.9 million of core deposit intangible assets,
which is subject to amortization, and $25.1 million in goodwill, which is not
subject to periodic amortization.
Goodwill arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Peoples' goodwill
relates to value inherent in the banking business and the value is dependent
upon Peoples' ability to provide quality, cost effective services in a
competitive market place. As such, goodwill value is supported ultimately by
revenue that is driven by the volume of business transacted. A decline in
earnings as a result of a lack of growth or the inability to deliver cost
effective services over sustained periods can lead to impairment of goodwill
that could adversely impact earnings in future periods.
Under US GAAP in effect through December 31, 2001, Peoples amortized goodwill on
a straight-line basis over periods ranging from ten to fifteen years. Effective
January 1, 2002, Peoples was no longer required to amortize previously recorded
goodwill as a result of adopting SFAS 142 and SFAS 147.
Peoples has reviewed its goodwill assets and has concluded the recorded value of
goodwill was not impaired as of March 31, 2003. There are many assumptions and
estimates underlying the determination of impairment. Another estimate using
different, but still reasonable, assumptions could produce a significantly
different result. Additionally, future events could cause management to conclude
impairment indicators exist and Peoples' goodwill is impaired, which would
result in Peoples' recording an impairment loss. Any resulting impairment loss
could have a material adverse impact on Peoples' financial condition and results
of operations.
OVERVIEW OF THE INCOME STATEMENT
Net income totaled $5,014,000 for the first quarter of 2003, up $321,000 (or 7%)
from $4,693,000 a year ago. Compared to the fourth quarter of 2002, net income
increased $514,000 (or 11%) from $4,500,000. Diluted earnings per share were
$0.51 for the first quarter of 2003 versus $0.59 for the same period last year
and $0.54 for the fourth quarter of 2002. In the first quarter of 2002, Peoples
purchased $7.0 million of trust preferred securities issued by PEBO Capital
Trust I, at a significant discount, resulting in a nonrecurring, after-tax gain
of $410,000, or $0.05 per diluted share (the "Trust Preferred Repurchase").
The increased net income in the first quarter of 2003 is attributable to
additional net interest income resulting from the implementation of the
Investment Growth Strategy. Earnings per share were lower in the first quarter
of 2003 than prior quarters due to the combination of assets continuing to
reprice downward and Peoples' efforts to lock in lower long-term rates on
funding sources, which has reduced net interest margin earned from both the loan
and investment portfolios. While the issuance of 1.7 million of Peoples' common
shares in late 2002 and early 2003 had some impact to first quarter 2003 per
share earnings, the Investment Growth Strategy offset most of the dilutive
effect of the new common shares outstanding.
Net interest income totaled $13,643,000 for the first quarter of 2003 compared
to $12,190,000 last quarter and $12,159,000 for 2002's first quarter. For the
three months ended March 31, 2003, net interest margin was 3.87% versus 4.05%
and 4.52% for the fourth and first quarters of 2002, respectively. The
Investment Growth Strategy accounted for the majority of the increase in net
interest income in 2003 but also contributed to compression of net interest
margin.
For the quarter ended March 31, 2003, non-interest income was $3,935,000, down
1% from $3,958,000 for the same period last year. Excluding the nonrecurring
gain of $631,000 due to the Trust Preferred Repurchase, non-interest income in
the first quarter of 2003 was up 18% from a year ago. This change was primarily
the result of higher deposit service charge income, with revenues from Peoples'
e-banking services, business owned life insurance ("BOLI"), and mortgage banking
income also showing improvement. Non-interest expense was $9,704,000 in the
first quarter of 2003, up 12% compared to $8,677,000 for the first three months
of 2002, as investments in Peoples' associates and technology and recent
acquisitions produced additional expenses in 2003.
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 extremely difficult to manage net interest margin and income in the
short term, let alone anticipate future changes.
In the first quarter of 2003, net interest income totaled $13,643,000, up 12%
compared to $12,159,000 for 2002's first quarter. Interest income increased
$2,462,000 (or 12%) from last year, totaling $22,777,000 in the first quarter of
2003, while interest expense was up $978,000 (or 12%), totaling $9,134,000 for
the three months ended March 31, 2003. Net interest income grew 12% in the first
quarter of 2003, from $12,190,000 for the prior quarter, as interest income was
up 10% and interest expense increased by 8%. These increases are primarily the
result of the Investment Growth Strategy, while acquisitions in 2002 were also
contributors to the increases when compared to the first quarter of 2002.
Peoples derives a portion of its interest income 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%. For the three months ended March 31, 2003, interest income was increased
by $410,000 for the impact of the tax-equivalent adjustment, resulting in FTE
net interest income of $14,053,000, up $1,543,000 (or 12%) from $12,510,000 for
the same period in 2002, and up $1,450,000 (or 12%) from $12,603,000 for the
fourth quarter of 2002. The FTE yield on Peoples' earning assets was 6.41% for
quarter ended March 31, 2003, versus 6.75% and 7.49% for the fourth and first
quarters of 2002, respectively, while the cost of interest-bearing liabilities
was 2.91%, 3.06% and 3.37% for the same periods, respectively.
Net interest margin (calculated by dividing FTE net interest income by average
interest-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 first quarter of 2003, net interest margin
was 3.87% versus 4.05% last quarter and 4.52% a year ago. The lower net interest
margin compared to the fourth quarter of 2002 is largely the result of the
Investment Growth Strategy, while the combination of assets repricing downward
and Peoples' efforts to lock in lower long-term rates on funding sources
continues to reduce net margin earned from both the loan and investment
portfolios. In addition, net interest margin in the fourth quarter of 2002 was
also adversely impacted by one-time adjustments totaling $305,000, compressing
net interest margin by approximately 10 basis points.
Earning assets averaged $1.46 billion in the first quarter of 2003, up $211.7
million (or 17%) compared to $1.24 billion last quarter, and up $343.9 million
(or 31%) from $1.11 billion for the first quarter of 2002. Net loans accounted
for the largest portion of earning assets, averaging $837.6 million for three
months ended March 31, 2003, compared to average net loans of $845.5 million and
$765.6 million for the fourth and first quarters of 2002, respectively. Loans
acquired in acquisitions accounted for a majority of the loan growth from a year
ago. Investment securities averaged $608.0 million for the first quarter of 2003
compared to $380.4 million for the prior quarter and $342.8 for 2002's first
quarter, with the increases largely attributable to the Investment Growth
Strategy. The FTE yield on net loans was 7.40% for the quarter ended March 31,
2003, versus 7.42% for the fourth quarter of 2002 and 7.99% for the first three
months of 2002, while the FTE yield on investments was 5.13%, 5.51% and 6.41%
for the same periods, respectively. Declining yields on both loans and
investment securities are a result of lower market interest rates.
Peoples' average interest-bearing liabilities totaled $1.27 billion in the first
quarter of 2003, up from $1.10 billion in the fourth quarter of 2002 and $0.98
billion a year ago. Traditional deposits comprise the majority of Peoples'
interest-bearing liabilities, averaging $843.2 million for the first three
months of 2003 compared to $843.9 million and $725.5 million for the fourth and
first quarter of 2002, respectively. The increase compared to a year ago is due
in large part to deposits acquired as part of acquisitions in 2002. In the first
quarter of 2003, cost of funds from interest-bearing deposits was 2.50%, down
from 2.68% for the prior quarter and 3.10% for the quarter ended March 31, 2002.
The lower rates paid on interest-bearing deposit accounts were a result of
market rates remaining at low levels; however, management continues to price
Peoples' longer-term certificates of deposit competitively as part of a strategy
to shift to longer-term funding, which tempered the overall drop in average
deposit costs.
While traditional deposits remain the primary source of funds, Peoples routinely
utilizes a variety of borrowings as complementary funding sources. Total
borrowed funds averaged $429.2 million for the three months ended March 31,
2003, up 70% from $253.1 million in the fourth quarter of 2002 and up 67% from
$256.4 million a year ago. The majority of these increases are attributable to
borrowed funds used in the Investment Growth Strategy. The interest cost of
Peoples' borrowed funds was 3.70% in first quarter of 2003, down from 4.32% last
quarter and 4.13% for the same period in 2002.
Peoples' main sources of borrowed funds are short- and long-term advances from
the FHLB. Short-term FHLB advances are primarily variable rate, LIBOR based
advances that are used to balance Peoples' daily liquidity needs and may be
repaid at any time without a penalty. The long-term FHLB advances consist
largely of 10-year borrowings requiring monthly interest payments and principal
is due at maturity. The rate on these advances are fixed for initial periods
ranging from two to four years, depending on the specific advance. After the
initial fixed rate period, the FHLB has the option to convert each advance to a
LIBOR based, variable rate advance; however, Peoples may repay the advance,
without a penalty, if the FHLB exercises its option.
In the first quarter of 2003, Peoples' short-term FHLB borrowings averaged $16.1
million compared to $32.7 million a year ago and the average cost was 1.46% and
1.81% for the same periods, respectively. Average long-term FHLB borrowings were
up $31.3 million (or 16%) compared to the first quarter of 2002, totaling $224.1
million for the three months ended March 31, 2003, while the average cost
dropped to 4.69% from 4.87%. The increase in long-term FHLB advances was mainly
due to management's efforts to secure longer-term funding during this period of
low rates. A portion of the new long-term FHLB advances are fixed rate advances
that require monthly principal and interest payments and may not be repaid prior
to maturity without a penalty. Management intends to continue using a variety of
FHLB borrowings to fund asset growth and manage interest rate sensitivity, as
deemed appropriate.
In addition to FHLB borrowings, Peoples also accesses national market repurchase
agreements to diversify funding sources. Typically, these repurchase agreements
are for terms of 90 days or less. However, Peoples utilized repurchase
agreements with terms ranging from 2 to 5 years as part of the Investment Growth
Strategy in an effort to match the term of the funding sources with the expected
life of the investments. As a result, wholesale market term repurchase
agreements averaged $150.5 million at an average cost of 2.96%, up from $9.1
million and average cost of 3.65% in the prior quarter and $6.4 million and
average cost of 3.60% a year ago.
Peoples offers cash management services to its business customers, which also
provide short-term funding in the form of overnight repurchase agreements.
Through the first three months of 2003, overnight repurchase agreements
(excluding balances of wholesale market term repurchase agreements) averaged
$21.6 million, down from $22.5 million last quarter and $22.9 million a year
ago. The average rate paid on overnight repurchase agreements was 0.86% in
quarter ended March 31, 2003, compared to 1.10% in the prior quarter and 1.51%
in the first quarter of 2002, a result of reductions in the market index tied to
the pricing of these accounts.
As is the case with many financial institutions, Peoples continues to experience
net interest margin compression due to interest rates remaining at historically
low levels. Significant volumes of assets continue to reprice downward with
limited flexibility for a corresponding decrease in rates paid on
interest-bearing liabilities. In addition, a weak economy and other factors are
impacting loan growth. While these conditions challenge Peoples' ability to
enhance net interest income and margin in the short term, current
asset-liability simulations indicate a sustained increase in interest rates
could cause net interest income to increase modestly based on Peoples' interest
rate risk position at March 31, 2003. Even though management continues to focus
on minimizing the impact of future rate changes on Peoples' earnings, Peoples'
net interest margin and income remain difficult to predict, and to manage, since
changes in market interest rates can have a greater impact than adjustments by
management.
PROVISION FOR LOAN LOSSES
In the first quarter of 2003, Peoples' provision for loan losses was $831,000
compared to $861,000 a year ago. Compared to the fourth quarter of 2002, the
provision for loan losses decreased $213,000 in the first quarter, from
$1,044,000. The lower provision is largely due to the overall improvement in the
quality of Peoples' loan portfolio and management's ongoing evaluation of the
adequacy of the allowance for loan losses and factors affecting probable loan
losses. In addition, provisions relating to the Overdraft Privilege program
declined as losses began to stabilize. For the three months ended March 31,
2003, the provision relating to the Overdraft Privilege program totaled $81,000,
versus $161,000 for the same period in 2002 and $204,000 for the fourth quarter
of 2002.
When expressed as a percentage of average loans, the provision was 0.10% in the
first quarter of 2003, 0.12% in the fourth of 2002 and 0.11% in the first
quarter of 2002. Management believes the provisions were appropriate for the
overall quality, inherent risk and volume concentrations of Peoples' loan
portfolio.
GAINS AND/OR LOSSES ON SECURITIES TRANSACTIONS
Peoples recognized net gains on securities transactions of $2,000 for the
quarter ended March 31, 2003, versus $51,000 for same period in 2002. The net
gains on securities transactions in 2003 were the result of normal portfolio
activity, while management's plan to balance the overall yield, maturity and
duration of the investment portfolio accounted for the net gains in 2002.
NON-INTEREST INCOME
Peoples generates non-interest income from six primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking, mortgage banking and business owned life insurance ("BOLI").
Non-interest income was $3,935,000 versus $3,958,000 a year ago, a decrease of
$23,000 (or 1%). This decrease is the result of nonrecurring income of $631,000
due to the Trust Preferred Repurchase in the first quarter of 2002. Compared to
the fourth quarter of 2002, non-interest income declined $231,000 (or 6%) in the
first quarter.
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 first quarter of 2003, deposit account
service charges grew $359,000 (or 26%) to $1,725,000, from $1,366,000 in the
first quarter of 2002. This increase is the result of higher volumes of
overdraft and non-sufficient funds fees, which were up $248,000 (or 30%) and
$103,000 (or 56%), respectively. An increased number of checking accounts
attributable to acquisitions and Peoples' Free Checking campaign also
contributed to the increase. Deposit account services charges were down $252,000
(or 13%) in the first quarter of 2003 compared to the prior quarter, with lower
volumes of overdraft and non-sufficient funds fees accounting for the majority
of the decrease, due to the peak holiday shopping period in the fourth quarter
of 2002.
Peoples' electronic banking services are alternative delivery channels to
traditional sales offices for providing services to clients. These services
include ATM and debit cards, direct deposit services and Internet banking.
Electronic banking revenues totaled $454,000 for the quarter ended March 31,
2003, up $86,000 (or 23%) from $368,000 for 2002's first quarter. This increase
is the result of customers using Peoples' debit cards to complete more of their
payment transactions, exceeding $12 million in first quarter of 2003 versus
nearly $9 million a year ago. In addition, Peoples issued over 12,600 new debit
cards to clients since March 31, 2002, with 20% of these cards issued in
conjunction with acquisitions. Management continues to explore new e-banking
capabilities that complement existing delivery channels, both traditional and
non-traditional, as sources of revenue and to expand product and service
opportunities for Peoples' customers. Further information regarding Peoples'
anticipated future electronic banking revenues can be found later in this
discussion under "Future Outlook."
Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. Through three months in 2003, BOLI income totaled
$365,000 versus $325,000 last year, an increase of $40,000 (or 12%) attributable
to an adjustment in the mix of investment funds in early 2002.
Starting in the second half of 2002, Peoples began selling long-term, fixed rate
real estate loans into the secondary market. As a result, Peoples recognized
mortgage banking income of $230,000 for the three months ended March 31, 2003.
Prior to the third quarter of 2002, Peoples primarily originated one- to
five-year adjustable rate, fully amortizing real estate loans rather than
long-term, fixed rate loans due to the associated interest rate risk and, as a
result, did not recognize any mortgage banking income in the first quarter of
2002.
Insurance and investment commissions totaled $442,000 in the first quarter of
2003 compared to $524,000 a year ago, a decrease of $82,000 (or 16%) largely
attributable to lower revenue from fixed annuity sales. Compared to the fourth
quarter of 2002, insurance and investment commissions were down slightly in the
first quarter. The following table details Peoples' insurance and investment
commissions:
Three Months Ended
March 31, December 31, March 31,
(Dollars in thousands) 2003 2002 2002
Fixed annuities $ 217 $ 210 $ 280
Property and casualty insurance 91 114 85
Life and health insurance 59 52 53
Brokerage 44 34 67
Credit life and A&H insurance 31 38 39
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Total $ 442 $ 448 $ 524
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Peoples' fiduciary fees totaled $586,000 for the three months ended March 31,
2003, compared to $597,000 in the prior quarter and $616,000 for the first
quarter of 2002. The sluggish equity markets, upon which a significant portion
of fiduciary fees are based, continue to challenge Peoples' ability to enhance
these revenues. In early 2003, management combined Peoples' trust, brokerage and
life insurance groups to create Peoples Financial Advisors to improve its
ability to provide asset and risk management products to existing clients and
prospects in a more integrated and client-focused manner through newly formed
service teams. As a result of this initiative and management's ongoing focus,
insurance and investment commissions, as well as fiduciary revenues, should
continue to be significant contributors to future non-interest income growth.
NON-INTEREST EXPENSE
Non-interest expense was $9,704,000 in the first quarter of 2003, up $1,027,000
(or 12%) from $8,677,000 a year ago. Compared to the fourth quarter of 2002,
non-interest expense increased $443,000 (or 5%) in the first quarter, from
$9,261,000. These increases are largely due to acquisitions in 2002 and
strategic investments in technology that produced higher expense levels, as well
as additional salary and benefit costs.
Salaries and benefits remain Peoples' largest non-interest expense, which is
inherent in a service-based industry such as financial services. For the quarter
ended March 31, 2003, salaries and benefits totaled $4,724,000 compared to
$4,484,000 the prior year, an increase of $240,000 (or 5%) primarily due to the
addition of new associates and salary increases necessary to retain and recruit
key personnel. At March 31, 2003, Peoples had 451 full-time equivalent
associates, up from 398 a year ago. Nearly half of this increase in associates
is due to an acquisition in mid-2002, while the remaining increase is the result
of Peoples adding several new sales and support associates. The increased
salaries expense was partially offset by reduced incentive and medical plan
accruals. Management will continue to leverage Peoples' resources to effectively
optimize customer service and produce additional future revenue streams.
In the first quarter of 2003, net occupancy and equipment expenses were up
$172,000 (or 19%), totaling $1,098,000 versus $926,000 last year. Net occupancy
and equipment expense increased $37,000 (or 3%) in the first quarter of 2003,
compared to $1,061,000 in the fourth quarter of 2002. Recent investments in
technology and acquisitions in 2002 produced additional expenses, including
depreciation expense. The continued investment in technology has enhanced
Peoples' ability to serve clients and satisfy their needs, while acquisitions
have allowed Peoples to expand its customer base.
Professional fees, which include fees for accounting, legal and other
professional services, totaled $442,000 through three months of 2003, up
$141,000 (or 47%) compared to last year but down $55,000 (or 11%) from $497,000
last quarter. As part of the development and implementation of the Overdraft
Privilege program, Peoples is obligated to pay professional fees to the
consultant that assisted in the implementation of the process, based on the
improvement in overdraft fees. In the first quarter of 2003, these fees totaled
$152,000 versus $154,000 in the prior quarter and no fees in the first quarter
of 2002. In addition, Peoples implemented various other strategic initiatives
throughout 2002, which resulted in higher levels of professional fees in prior
periods in comparison to the first quarter of 2003. Management believes the
revenues generated from these initiatives have more than offset the associated
professional fees. Further information regarding Peoples' anticipated future
professional fees can be found later in this discussion under "Future Outlook."
Marketing expense was $276,000 for the three months ended March 31, 2003,
compared to $386,000 for the same period in 2002, a decrease of $110,000 (or
28%). In the first half of 2002, Peoples aggressively advertised its new Free
Checking and Overdraft Privilege products and implemented a new branding
campaign designed to enhance Peoples' name awareness in its markets. While these
initiatives resulted in higher marketing expenses, they have helped Peoples
attract many new clients and, as a result, improved top-line revenues. Compared
to the fourth quarter of 2002, marketing expense increased $48,000 (or 21%) in
the first quarter of 2003, as Peoples implemented a marketing campaign for its
newly created Peoples Financial Advisors division.
In the first quarter of 2003, intangible amortization expense was up $90,000 (or
81%) compared to last year, totaling $201,000 versus $111,000, due to
acquisitions in 2002. Intangible amortization expense for the first quarter of
2002 also reflects the adoption of SFAS 147 and restatement of goodwill relating
to qualifying branch acquisitions. Peoples' trust preferred costs totaled
$607,000 for the quarter ended March 31, 2003, up from $561,000 a year ago. The
timing of the Trust Preferred Repurchase in the first quarter of 2002 and the
issuance of trust preferred securities through PEBO Capital Trust II account for
the increased costs in 2003. State franchise taxes increased $75,000 (or 41%) to
$257,000 in the first quarter of 2003, from $182,000 in 2002's first quarter.
Compared to the fourth quarter of 2002, franchise taxes were up $45,000 (or 21%)
in the first quarter of 2003. These increases are due to additional equity at
Peoples Bank, the primary basis for these taxes.
Management uses the non-interest income leverage ratio as a measurement of
non-interest expense leverage. The ratio, defined as non-interest income as a
percentage of operating expenses, excludes gains and losses on securities
transactions and asset disposals, as well as intangible asset amortization. For
the three months ended March 31, the non-interest leverage ratio was 41.4% in
2003 compared to 38.3% a year ago and 45.4% for the fourth quarter of 2002.
Peoples' sales associates will strive to generate new revenues and leverage
operating expenses through a needs-based selling approach in order to achieve
its long-term target non-interest income leverage ratio of 50%.
RETURN ON EQUITY
Peoples' return on equity ("ROE") was 13.00% in the first quarter of 2003 versus
15.25% the prior quarter and 19.35% a year ago. The lower ROE is primarily the
result of additional equity generated by the Common Stock Offering. While ROE
remains a key part of the evaluation of Peoples' long-term performance,
management believes earnings per share ("EPS") serves as a more meaningful
measurement of short-term performance due to the impact of changing market
valuations in the investment portfolio.
RETURN ON ASSETS
Return on assets ("ROA") was 1.27% in the first quarter of 2003 compared to
1.32% last quarter and 1.56% in the first quarter of 2002. The lower ROA is due
to the increase in total assets resulting from the Investment Growth Strategy
and acquisitions. In recent years, Peoples' primary focus has shifted to EPS
enhancement and ROE while reducing the emphasis on ROA as a key performance
indicator. However, management continues to monitor ROA and considers it a
measurement of Peoples' asset utilization.
INCOME TAX EXPENSE
Peoples' effective tax rate was 28.8% for the three months ended March 31, 2003,
compared to 28.7% for the same period in 2002. Peoples continues to implement
tax optimization strategies and make tax-advantaged investments in order to
manage its effective tax rate and overall tax burden. At March 31, 2003, the
amount of tax-advantaged investments included in Other Assets totaled $28.8
million compared to $27.1 million at March 31, 2002. Depending on economic and
regulatory conditions, Peoples may make additional investments in various tax
credit pools and other tax-advantaged assets over the next several years.
FINANCIAL CONDITION
OVERVIEW OF BALANCE SHEET
At March 31, 2003, total assets were $1.67 billion compared to $1.39 billion at
year-end 2002, an increase of $274.3 million (or 20%). Investment securities
totaled $688.4 million at March 31, 2003, up $276.3 million (or 67%) from $412.1
million at December 31, 2002. These increases are primarily the result of the
Investment Growth Strategy initiated in December 2002. During the first quarter
of 2003, gross loans grew $10.2 million (or 1%), totaling $861.1 million at
March 31, 2003.
Total liabilities were $1.48 billion at March 31, 2003, compared to $1.22
billion at year-end 2002, an increase of $264.9 million (or 22%). This increase
is largely attributable to additional borrowing which funded the Investment
Growth Strategy. At March 31, 2003, deposits totaled $969.9 million versus
$955.9 million at year-end, as interest-bearing balances grew $16.2 million (or
2%) and non-interest bearing deposits declined $2.2 million (or 2%) since
December 31, 2002. Borrowed funds totaled $503.2 million at quarter-end, up from
$252.0 million at December 31, 2002.
Stockholders' equity totaled $156.6 million at March 31, 2003, versus $147.2
million at December 31, 2002, an increase of $9.4 million (or 6%). The majority
of this increase is due to common shares sold in 2003 as part of the Common
Stock Offering, which generated capital of $4.8 million, while Peoples earnings,
net of dividends paid, was also a significant contributor.
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 March 31, 2003, cash and cash equivalents totaled
$44.1 million, down $11.5 million (or 21%) compared to $55.6 million at December
31, 2002. The majority of this decrease is attributable to a lower level of
Federal funds sold which is the result of the timing of the Common Stock
Offering in late 2002. At December 31, 2002, Peoples had Federal funds sold of
$20.5 million compared to $9.5 million at March 31, 2003.
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, specifically
undrawn lines of credit, construction loans and letters of credit, as they come
due. Peoples will actively manage the principal runoff from the investment and
loan portfolios and seek to reinvest those funds appropriately, based on loan
demand and investment opportunities, while maintaining adequate liquidity.
Further information regarding Peoples' liquidity can be found later in this
discussion under "Interest Rate Sensitivity and Liquidity."
INVESTMENT SECURITIES
At March 31, 2003, the amortized cost of Peoples' investment securities totaled
$675.7 million compared to $402.0 million at year-end 2002, while the market
value of the investment portfolio was $688.4 million at March 31, 2003, up from
$412.1 million at December 31, 2002. This increase is the result of the
Investment Growth Strategy initiated in December 2002 and implemented in the
first quarter of 2003, as well as reinvestment of the cash flows from the
investment portfolio.
The difference in amortized cost and market value at March 31, 2003, resulted in
unrealized appreciation in the investment portfolio of $12.7 million and a
corresponding increase in Peoples' equity of $8.1 million, net of deferred
taxes. In comparison, the difference in amortized cost and market value at
December 31, 2002, resulted in unrealized appreciation of $10.1 million and an
increase in equity of $6.4 million, net of deferred taxes.
Since December 31, 2002, Peoples' investment in US treasury securities and
obligations of US government agencies and corporations has grown $13.0 million
(or 45%), as management reinvested a portion of the runoff from the investment
portfolio to maintain diversity within the portfolio. In addition, Peoples'
investment in mortgage-backed securities is up significantly compared to
year-end 2002 due to the Investment Growth Strategy. The following table details
Peoples' investment portfolio, at estimated fair value:
(Dollars in thousands) March 31, December 31, March 31,
2003 2002 2002
US Treasury securities and obligations of
US government agencies and corporations $ 41,638 $ 28,647 $ 30,774
Obligations of states and political subdivisions 67,088 67,806 60,710
Mortgage-backed securities 522,469 259,811 199,953
Other securities 57,155 55,836 49,047
- -------------------------------------------------------------------------------------
Total available-for-sale securities $ 688,350 $ 412,100 $ 340,484
=====================================================================================
Management monitors the earnings performance and liquidity of the investment
portfolio on a regular basis through Asset/Liability Committee ("ALCO")
meetings. The ALCO also monitors net interest income, sets deposit pricing and
maturity guidelines, and manages Peoples' interest rate risk. Through active
management of the balance sheet and investment portfolio, Peoples seeks to
maintain sufficient liquidity to satisfy depositor demand, other company
liquidity requirements and various credit needs of its customers.
LOANS
Peoples Bank originates various types of loans, including commercial, financial
and agricultural loans ("commercial loans"), real estate loans (both commercial
and residential) and consumer loans, focusing primarily on lending opportunities
in central and southeastern Ohio, northwestern West Virginia, and northeastern
Kentucky markets. At March 31, 2003, gross loans totaled $861.1 million, up
$10.2 million since year-end 2002. Commercial loan balances grew $30.3 million
during the first quarter of 2003, while real estate and consumer loans declined
$12.8 million and $6.8 million, respectively. The following table details total
outstanding loans:
(Dollars in thousands) March 31, December 31, March 31,
2003 2002 2002
Commercial, financial, and agricultural $ 422,782 $ 392,528 $ 352,531
Real estate, construction 10,523 16,231 18,135
Real estate, mortgage 324,877 331,948 296,082
Consumer 96,857 103,635 107,757
Credit cards 6,065 6,549 6,205
- --------------------------------------------------------------------------------
Total loans $ 861,104 $ 850,891 $ 780,710
================================================================================
Commercial loan balances, including loans secured by commercial real estate,
totaled $422.8 million at March 31, 2003, up $30.3 million (or 8%) from $392.5
million at year-end 2002. The majority of the increase in commercial loans is
attributable to lending opportunities within Peoples' existing markets.
Commercial loans continue to represent the largest portion of Peoples' total
loan portfolio, comprising 49.1% and 46.1% of total loans at March 31, 2003 and
December 31, 2002, respectively. The portion of commercial loan balances secured
by commercial real estate, excluding construction loans, was $316.1 million at
March 31, 2003, up from $289.6 million at December 31, 2002. Future commercial
lending activities will be dependent on economic and related conditions, such as
general demand for loans in Peoples' primary markets, interest rates offered by
Peoples and normal underwriting requirements. In addition to in-market
opportunities, Peoples will continue to selectively lend to creditworthy
customers outside its primary markets.
Real estate loans, which include construction loans but exclude loans secured by
commercial real estate, totaled $335.4 million at the end of the first quarter
of 2003 compared to $348.2 million at December 31, 2002, a decrease of $12.8
million (or 4%). Real estate loan balances have declined in response to customer
demand for long-term, fixed-rate mortgages sold into the secondary market. Real
estate loans comprised 38.9% of Peoples' total loan portfolio at March 31, 2003,
versus 40.9% at year-end 2002. Included in real estate loans are home equity
credit line ("Equiline") balances of $28.1 million at March 31, 2003, down from
$28.5 million at December 31, 2002. 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.
Excluding credit card balances, consumer loans have decreased $6.8 million (or
7%) since year-end 2002, totaling $96.9 million at March 31, 2003. Consumer loan
balances continue to decline as a result of both a decline in demand and
Peoples' focus on loan quality more than loan growth. The indirect lending area
represents the majority of Peoples' consumer loans, with balances of $51.5
million and $56.2 million at March 31, 2003 and December 31, 2002, respectively.
Various factors, including automobile manufacturers offering attractive
financing options to car buyers through their captive credit affiliates,
declining indirect sales opportunities, and normal runoff of indirect loans,
have contributed to the lower indirect loan balances.
While sluggish economic conditions and fierce competition for loans,
particularly automobile loans, have challenged the performance of Peoples'
consumer loan portfolio, management remains committed to sound lending practices
and continues to emphasize loan quality 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
delinquencies remain a major concern of the financial services industry,
management's actions to reinforce Peoples' underwriting discipline in addition
to proactive collection efforts have helped maintain consumer loan delinquencies
at acceptable levels. Management plans to continue its commitment to the use of
this tiered pricing system to improve the performance of Peoples' consumer loan
portfolio.
At March 31, 2003, Peoples' credit card balances totaled $6.1 million, down $0.5
million (or 7%) since December 31, 2002. Peoples' ability to maintain credit
card balances is impacted by fierce competition for customers. Since management
does not intend to subject Peoples to additional and/or unnecessary risk merely
for such growth, Peoples continues to market its credit card as 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 13.5% of Peoples'
outstanding commercial loans at March 31, 2003, versus 13.4% at year-end 2002.
Loans to lodging and lodging related companies also represented a significant
portion of Peoples' commercial loans accounting for approximately 10.3% of
Peoples' outstanding commercial loans at quarter-end, compared to 11.2% at
December 31, 2002.
These lending opportunities have arisen due to the growth of these industries in
markets served by Peoples or contiguous areas, as well as sales associates'
efforts to develop these 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 since these credits have been subjected to
Peoples' normal underwriting standards. In addition, a sizeable portion of the
loans to lodging and lodging related companies are spread over various
geographic areas and are guaranteed by individuals with substantial net worth.
Peoples also requires the owners in these business relationships to possess
market expertise and experience.
ALLOWANCE FOR LOAN LOSSES
Peoples' allowance for loan losses totaled $13.4 million, or 1.55% of total
loans, at March 31, 2003, compared to $13.1 million, or 1.54%, at year-end 2002.
The following table presents changes in Peoples' allowance for loan losses:
Three Months Ended
(Dollars in thousands) March 31,
2003 2002
Balance, beginning of period $ 13,086 $ 12,357
Chargeoffs (785) (953)
Recoveries 231 161
- -----------------------------------------------------------------------------
Net chargeoffs (554) (792)
Provision for loan losses 831 861
- -----------------------------------------------------------------------------
Balance, end of period $ 13,363 $ 12,426
=============================================================================
The allowance is allocated among the loan categories based upon the consistent,
quarterly procedural discipline described in the "Critical Accounting Policies"
section of this discussion. However, the entire allowance for loan losses is
available to absorb future loan losses in any loan category. The following
details the allocation of the allowance for loan losses:
(Dollars in thousands)
March 31, December 31, March 31,
2003 2002 2002
Commercial $ 9,320 $ 8,846 $ 7,767
Consumer 1,964 2,075 2,426
Real estate 1,610 1,617 1,763
Credit cards 299 342 379
Overdrafts 170 206 91
- -----------------------------------------------------------------------------
Total allowance for loan losses $ 13,363 $ 13,086 $ 12,426
=============================================================================
The allowance allocated to commercial loans has increased in recent periods,
reflecting the higher credit risk associated with this type of lending and the
continued growth in this portfolio. The allowance allocated to the real estate
and consumer loan portfolios is based upon Peoples' allowance methodology for
homogeneous loans, which includes a consideration of changes in total balances
in those portfolios.
In the first quarter of 2003, net loan chargeoffs were $554,000 compared to
$792,000 a year ago and $843,000 in the fourth quarter of 2002. Consumer and
commercial loans, as well as chargeoffs relating to the Overdraft Privilege
program, comprised the majority of net chargeoffs. The lower level of commercial
loan chargeoffs in the first quarter of 2003 is attributable to fewer troubled
loans identified with amounts deemed uncollectible. In addition, commercial loan
chargeoffs were impacted by Peoples charging downs loans in two separate client
relationships totaling $341,000 and $354,000 in the first and fourth quarters of
2002, respectively. The following table details Peoples' net chargeoffs:
Three Months Ended
March 31, December 31, March 31,
(Dollars in thousands) 2003 2002 2002
Consumer $ 201 $ 218 $ 167
Commercial 186 381 448
Overdrafts 117 196 104
Credit card 43 37 39
Real estate 7 11 34
- -----------------------------------------------------------------------------
Total $ 554 $ 843 $ 792
=============================================================================
As a percent of average loans 0.07% 0.10% 0.10%
=============================================================================
Asset quality remains a key focus, as management continues to stress quality
rather than growth in response to current economic conditions. Since December
31, 2002, Peoples' asset quality has improved due to the combination of a lower
level of nonperforming loans and an increase in assets. The following table
details Peoples' nonperforming assets:
(Dollars in thousands) March December March
31, 31, 31,
2003 2002 2002
Loans 90+ days past due and accruing $ 337 $ 407 $ 971
Renegotiated loans 685 2,439 2,864
Nonaccrual loans 3,741 4,617 4,040
- ------------------------------------------------------------------------------
Total nonperforming loans 4,763 7,463 7,875
Other real estate loans 924 148 167
- ------------------------------------------------------------------------------
Total nonperforming assets $5,687 $7,611 $8,042
==============================================================================
Nonperforming loans as a percent of total loans 0.55% 0.88% 1.01%
==============================================================================
Nonperforming assets as a percent of total assets 0.34% 0.55% 0.67%
==============================================================================
In the first quarter of 2003, the balance of nonperforming loans declined as a
large commercial loan, comprising the entire amount of renegotiated loans at
December 31, 2002, moved to performing status. In addition, a large commercial
loan on nonaccrual status moved into other real estate owned ("OREO") in the
first quarter of 2003, which also accounted for the majority of the increase in
OREO. Nonperforming assets comprise a smaller percentage of total assets at
March 31, 2003, as a result of a 20% increase in assets largely attributable to
the completion of the Investment Growth Strategy in the first quarter of 2003.
A loan is considered impaired when, based on current information and events, it
is probable that Peoples will be unable to collect the scheduled payments of
principal or interest according to the contractual terms of the loan agreement.
The measurement of potential impaired loan losses is generally based on the
present value of expected future cash flows discounted at the loan's 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.
At March 31, 2003, the recorded investment in loans that were considered to be
impaired was $10.7 million, of which $8.5 million were accruing interest, and
$2.2 million were nonaccrual loans. Included in this amount were $2.2 million of
impaired loans for which the related allowance for loan losses was $715,000. The
remaining impaired loan balances do not have a related allocation of the
allowance for loan losses because the loans have been previously written-down,
are well secured, or possess characteristics indicative of the ability to repay
the loan. For the three months ended March 31, 2003, Peoples' average recorded
investment in impaired loans was approximately $10.2 million and interest income
of $182,000 was recognized on impaired loans during the period, representing
0.8% 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 $969.8 million, or 65.9%
of total funding sources, at March 31, 2003.
Non-interest bearing deposits serve as a core funding source. At March 31, 2003,
non-interest bearing deposit balances totaled $113.7 million, down $2.2 million
(or 2%) compared to the prior year-end attributable to the timing of the
investment of $10 million by a client in a market-based product. Since this
transaction caused a temporary increase in balances at December 31, 2002,
management believes a comparison of average balances to be more meaningful
reflection of the trend in non-interest bearing deposits. In the first quarter
of 2003, non-interest bearing deposits averaged $108.3 million compared to
$105.6 million in the fourth quarter of 2002, an increase of $2.7 million (or
3%). Further information regarding Peoples' efforts to grow non-interest bearing
deposits can be found later in this discussion under "Future Outlook."
Interest-bearing deposits totaled $856.2 million at March 31, 2003, an increase
of $16.2 million (or 2%) compared to $840.0 million at December 31, 2002.
Savings balances increased $25.5 million (or 18%) since year-end 2002, with $9
million attributable to higher balances in public funds and $8 million due to a
new business savings account. Certificates of deposit remain Peoples' largest
group of interest-bearing deposits, totaling $420.8 million at March 31, 2003,
down slightly from $422.7 million at year-end 2002. Interest-bearing transaction
accounts (primarily Peoples' money market deposit accounts), are also a
significant portion of Peoples' interest-bearing deposits, totaling $266.2
million at March 31, 2003, compared to $273.7 million at year-end 2002, a
decline of $7.5 million (or 3%).
Peoples also accesses other funding sources, including short-term and long-term
borrowings, to fund asset growth and satisfy liquidity needs. Peoples'
short-term borrowings include overnight repurchase agreements, a short-term loan
from an unrelated financial institution and FHLB advances, while long-term
borrowings include 10-year FHLB advances and term repurchase agreements. The
majority of the long-term FHLB advances are convertible rate advances, with the
initial rate fixed for periods ranging from two to four years, depending on the
specific advance. After the initial fixed rate period, these advances have the
opportunity, at the discretion of the FHLB, to reprice to a LIBOR based,
variable rate product. Peoples has the option to prepay any repriced advance
without penalty or allow the borrowing to reprice. In addition to these
convertible rate advances, recent long-term FHLB advances have included fixed
rate, amortizing advances, which helps Peoples manage its interest rate
sensitivity.
At March 31, 2003, long-term borrowings totaled $439.3 million, up $235.5
million (or 116%) from $203.8 million at December 31, 2002. This increase is
largely the result of the Investment Growth Strategy. Peoples' short-term
borrowings totaled $63.8 million, up $15.7 million (or 32%) compared to year-end
2002. This increase is due to the short-term funding used in the Investment
Growth Strategy. Management is evaluating various long-term funding alternatives
for the $17 million short-term loan utilized to fund an acquisition in 2003 in
anticipation of converting this short-term loan to longer term financing during
the second quarter of 2003.
CAPITAL/STOCKHOLDERS' EQUITY
At March 31, 2003, stockholders' equity was $156.6 million, an increase of $9.4
million (or 6%) since December 31, 2002, due mostly to common shares sold in
January 2003 as part of the Common Stock Offering, which generated capital of
$4.8 million in the first quarter of 2003. In addition to this new capital,
Peoples' earnings in the first quarter of 2003, net of dividends paid, accounted
for $3.6 million of the increase.
For the three months ended March 31, 2003, Peoples paid dividends of $1.4
million, representing a dividend payout ratio of 28.9% of earnings, compared to
a ratio of 23.0% a year ago. While management anticipates Peoples continuing its
37-year history of consistent dividend growth in future periods, Peoples
Bancorp's ability to pay dividends on its common shares largely depends on
receipt of dividends from Peoples Bank. Peoples Bancorp or Peoples Bank may
decide to limit the payment of dividends, even when the legal ability to pay
them exists, in order to retain earnings for use in Peoples Bank's business.
Additionally, Peoples Bancorp has established two trust subsidiaries to issue
preferred securities. If Peoples Bancorp suspends interest payments relating to
the trust preferred securities issued by either of the two trust subsidiaries,
Peoples will be prohibited from paying dividends on its common shares.
The adjustment for the net unrealized holding gains on available-for-sale
securities, net of deferred income taxes, also increased equity. At March 31,
2003, net unrealized holding gains totaled $8.1 million versus $6.4 million at
December 31, 2002, a change of $1.7 million. Since all the investment securities
in Peoples' portfolio are classified as available-for-sale, both the investment
and equity sections of Peoples' consolidated balance sheet are more sensitive to
the changing market values of investments than if the investment portfolio was
classified as held-to-maturity.
At March 31, 2003, Peoples had treasury stock totaling $2.0 million compared to
$1.1 million at year-end 2002, an increase of $0.9 million (or 81%) largely due
to repurchases through the 2003 Stock Repurchase Program. In the first quarter
of 2003, Peoples repurchased 40,000 common shares (or 13% of the total
authorized), at an average price of $22.04 per share, under the 2003 Stock
Repurchase Program and 974 common shares, at an average price of $23.99, as part
of the deferred compensation plan for directors of Peoples Bancorp and Peoples
Bank. Peoples may repurchase additional common shares under the 2003 Stock
Repurchase Program and for the deferred compensation plan, based on timing and
market prices management deems appropriate.
In addition to monitoring performance through traditional capital measurements
(i.e., dividend payout ratios and ROE), Peoples has also complied with the
capital adequacy standards mandated by the banking industry. 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 March 31, 2003, Peoples' Total Capital, Tier 1 and Leverage ratios
were 16.55%, 15.18% and 9.62%, 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 March 31, 2003.
INTEREST RATE SENSITIVITY AND LIQUIDITY
While Peoples is exposed to various business risks, the risks relating to
interest rate sensitivity and liquidity could materially impact its future
results of operation and financial condition. The objective of Peoples'
asset/liability management ("ALM") function is to measure and manage these risks
in order to optimize net interest income within the constraints of prudent
capital adequacy, liquidity and safety. This objective requires Peoples to focus
on interest rate risk exposure and adequate liquidity as it manages the mix of
assets and liabilities. Ultimately, the ALM function is intended to guide
management in the acquisition of earning assets and selection of the appropriate
funding sources.
Interest Rate Risk
- ------------------
Interest rate risk ("IRR") is one of the most significant risks for Peoples, and
the entire financial services industry, primarily arising in the normal course
of business of offering a wide array of financial products to its customers,
including loans and deposits. IRR is the potential for economic loss due to
future interest rate changes that can impact both earnings stream as well as
market values of financial assets and liabilities. Peoples' exposure to IRR is
primarily due to differences in the maturity, or repricing, of earning assets
and interest-bearing liabilities. In addition, other factors, such as
prepayments of loans and investment securities or early withdrawal of deposits,
can expose Peoples to IRR and increase interest costs or reduce revenue streams.
Peoples has charged the ALCO with the overall management of Peoples' balance
sheet mix and off-balance sheet hedging transactions related to the management
of IRR. It is the ALCO's responsibility to keep Peoples focused on the future by
evaluating trends and potential future events, researching alternatives, then
recommending and authorizing an appropriate course of action. To this end, the
ALCO has established an IRR management policy that sets the minimum requirements
and guidelines for monitoring and managing the level and amount of IRR. The
objective of the IRR policy is to encourage 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
simulations to project future net interest income and to monitor the sensitivity
of the net present market value of equity and the difference, or "gap", between
maturing or rate-sensitive assets and liabilities over various time periods.
Peoples uses these methods to monitor IRR for both the short- and long-term. The
ALCO places emphasis on simulation modeling as the most beneficial measurement
of IRR because it is a dynamic measure. By employing a simulation process that
estimates the impact of potential changes in interest rates and balance sheet
structures and by establishing limits on these estimated changes to net income
and net market value, the ALCO is better able to evaluate interest rate risks
and their potential impact to earnings and market value of equity.
The modeling process starts with a base case simulation using the current
balance sheet and current interest rates held constant for the next twelve
months. At least two alternative interest rate scenarios, one with higher
interest rates and one with lower interest rates, assuming parallel, immediate
and sustained changes are also prepared using the same balance sheet structure
as the base scenario. Comparisons produced from the simulation data, showing the
earnings variance from the base interest rate scenario, illustrate the risks
associated with the current balance sheet structure. Additional simulations,
when deemed appropriate, are prepared using different interest rate scenarios
than those used with the base case simulation and/or possible changes in balance
sheet structure. The additional simulations are used to better evaluate risks
and highlight opportunities inherent in the modeled balance sheet. Comparisons
showing the earnings and equity value variance from the base case are provided
to the ALCO for review and discussion. The results from these model simulations
are evaluated for indications of effectiveness of current IRR management
strategies.
As part of the evaluation of IRR, the ALCO has established limits on changes in
net interest income and the net value of the balance sheet. The ALCO limits the
decrease in net interest income of Peoples Bank to 10% or less from base case
for each 100 basis point shift in interest rates measured over a twelve-month
period assuming a static balance sheet. The ALCO limits the negative impact on
net equity value to 40% or less given an immediate and sustained 200 basis
points shift in interest rates also assuming a static balance sheet. The ALCO
also reviews static gap measures for specific time periods focusing on one-year
cumulative gap. At March 31, 2003, Peoples' one-year cumulative gap amount was
positive 5.8% of earning assets, which represented $90.3 million more in assets
than liabilities that may reprice during that period. Based on historical trends
and performance, the ALCO has determined the ratio of the one-year cumulative
gap should be within +/-15% of earning assets. Results that are greater than any
of these limits will prompt a discussion by the ALCO of appropriate actions, if
any, that should be taken.
The following table is provided to illustrate the estimated earnings at risk and
value at risk positions of Peoples, on a pre-tax basis, at March 31, 2003
(dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- ----------------------- ----------------------- ------------------------
300 $ (209) (0.4) % $ (58,136) (28.9) %
200 605 1.1 (37,520) (18.6)
100 675 1.2 (17,038) (8.5)
(100) $ (1,060) (1.9) % $ 7,249 3.6 %
The interest rate risk analysis shows that Peoples is asset sensitive, which
means that increasing interest rates should favorably impact Peoples' net
interest income while downward moving interest rates should negatively impact
net interest income. There was no significant change in Peoples' asset
sensitivity since the fourth quarter of 2002 and the ALCO believes it is to the
benefit of Peoples to maintain this position. The interest rate analysis also
shows Peoples is within the established IRR policy limits for all simulations
and all scenarios for the current period.
The ALCO has implemented hedge positions to help protect Peoples' net interest
income streams in the event of rising rates which will complement the current
slightly asset sensitive position. Peoples has a hedge position on a $17 million
long-term, fixed-rate borrowing from the FHLB that may convert to a variable
rate, at the FHLB's discretion. In addition, the ALCO may consider additional
hedging options for Peoples' variable rate liabilities, including, but not
limited to, the purchase of other interest rate hedge positions, as available
and appropriate, that would provide net interest income protection in a rising
rate environment.
Liquidity
- ---------
In addition to IRR management, a primary objective of the ALCO is the
maintenance of a sufficient level of liquidity. The ALCO defines liquidity as
the ability to meet anticipated and unanticipated operating cash needs, loan
demand, and deposit withdrawals, without incurring a sustained negative impact
on profitability. The ALCO's liquidity management policy sets limits on the net
liquidity position of Peoples and the concentration of non-core funding sources,
both total wholesale funding and reliance on brokered deposits.
Typically, the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided from cash generated from earning assets such as maturities,
principal payments and income from loans and investment securities. In the first
quarter of 2003, cash provided by financing activities totaled $268.2 million
compared to $8.8 million a year ago, due largely to increased long-term
borrowings used for the Investment Growth Strategy. Cash used in investing
activity totaled $286.2 million versus $21.2 million last year, primarily due to
investment securities purchases, net of maturities and sales, of $273.9 million
and a net increase in loan balances totaling $10.8 million.
When appropriate, Peoples takes advantage of external sources of funds, such as
advances from the FHLB, national market repurchase agreements, and brokered
funds. These external sources often provide attractive interest rates and
flexible maturity dates that better enable Peoples to match funding dates and
pricing characteristics with contractual maturity dates and pricing parameters
of earning assets. At March 31, 2003, Peoples had available borrowing capacity
of approximately $96 million through these external sources and unpledged
securities in the investment portfolio of approximately $291 million that can be
utilized as an additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting volatile
funds from liquid assets. Peoples' volatile funds consist primarily of
short-term growth in deposits, while liquid assets includes short-term
investments and unpledged available-for-sale securities. At March 31, 2003,
Peoples' net liquidity position was $236.7 million, or 14.1% of total assets,
compared to $189.7 million, or 13.6% of total assets, at December 31, 2002. This
increase in liquidity position as a percent of total assets was attributed to a
$35.6 million decrease in volatile funds. The liquidity position as of March 31,
2003, was within Peoples' policy limit of negative 10% of total assets. At March
31, 2003, total wholesale funding comprised 28.4% of total assets and brokered
funds were 0.6% of total assets, which was within Peoples' policy limits of 30%
and 10%, respectively.
OFF-BALANCE SHEET ACTIVITIES AND CONTRACTUAL OBLIGATIONS
Peoples routinely engages in activities that involve, to varying degrees,
elements of risk that are not reflected in whole or in part in the consolidated
financial statements. These activities are part of Peoples' normal course of
business and include traditional off-balance sheet credit-related financial
instruments, interest rate contracts, operating leases, long-term debt and
commitments to make additional capital contributions in low-income housing
project investments.
Traditional off-balance sheet credit-related financial instruments are primarily
commitments to extend credit, and standby letters of credit. These activities
could require Peoples to make cash payments to third parties in the event
certain specified future events occur. The contractual amounts represent the
extent of Peoples' exposure in these off-balance sheet activities. However,
since certain off-balance sheet commitments, particularly standby letters of
credit, are expected to expire or be only partially used, the total amount of
commitments does not necessarily represent future cash requirements. Management
believes these activities are necessary to meet the financing needs of customers
and/or manage Peoples' exposure to fluctuations in interest rates. The following
table details the total contractual amount of loan commitments and standby
letters of credit:
(Dollars in thousands) March 31, December 31, March 31,
2003 2002 2002
Loan commitments $ 114,342 $ 103,462 $ 89,903
Standby letters of credit 7,799 7,632 7,801
Unused credit card limits 22,447 21,216 21,164
Peoples also enters into interest rate contracts where Peoples is required to
either receive cash from or pay cash to counter parties depending on changes in
interest rates. Peoples utilizes interest rate contracts to help manage the risk
of changing interest rates. At March 31, 2003, Peoples held interest rate
contracts with notional amounts totaling $37 million and fair value of $415,000.
Interest rate contracts are carried at fair value on the consolidated balance
sheet, with the fair value representing the net present value of expected future
cash receipts or payments based on market interest rates as of the balance sheet
date. As a result, the amounts recorded on the balance sheet at March 31, 2003,
do not represent the amounts that may ultimately be paid or received under these
contracts.
Management does not anticipate Peoples' current off-balance sheet activities
will have a material impact on future results of operation and financial
condition.
Peoples continues to lease certain banking facilities and equipment under
noncancelable operating leases with terms providing for fixed monthly payments
over periods ranging from two to fifteen years. The majority of Peoples' leased
banking facilities are inside retail shopping centers and, as a result, are not
available for purchase. Management believes these leased facilities increase
Peoples' visibility within its markets and afford sales associates additional
access to current and potential clients.
EFFECTS OF INFLATION ON FINANCIAL STATEMENTS
Substantially all of Peoples' assets relate to banking and are monetary in
nature. As a result, inflation does not impact Peoples to the same degree as
companies in capital-intensive industries in a replacement cost environment.
During a period of rising prices, a net monetary asset position results in a
loss in purchasing power and conversely a net monetary liability position
results in an increase in purchasing power. The opposite would be true during a
period of decreasing prices. In the banking industry, typically monetary assets
exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation
has had little impact on Peoples' net assets.
FUTURE OUTLOOK
In the first quarter of 2003, Peoples' results reflect the challenges facing the
financial services industry, as the sustained low interest rate environment and
uncertain economic conditions provided limited revenue growth opportunities.
Ultimately, management believes future success will revolve around three issues:
growth and quality of earnings, asset quality and a strong capital base. Top
line revenues remain solid as management works to enhance Peoples' ability to
service customers through a needs-based sales approach. Asset quality remains a
key focus for management, as Peoples works to improve performance ratios to the
level of high performing financial services companies. Peoples' capital ratios
remain strongly positioned above well-capitalized minimums, providing a solid
foundation to withstand the impact of adverse economic conditions, as well as
providing opportunities for strategic growth.
Peoples routinely makes strategic investments designed to make it easier for
clients to complete their transactions and conduct business with Peoples, as
well as improve the ability of Peoples' associates to sell customers the
products they need. Management primarily focuses on initiatives and explores
investments that are expected to provide long-term benefits, such as the
investment in Customer Relationship Management ("CRM") and profitability
systems. Management continues to work on the CRM and profitability project with
the goal of having these systems implemented in the third quarter of 2003. Once
completed, this significant investment will allow Peoples' sales associates to
see a comprehensive view of every customer and offer an integrated sales package
to potential customers, as well as enhance the sales cycle. Although this
project will produce additional expenses, management does not anticipate the CRM
and profitability project to have a material impact on short-term earnings, as
the majority of the costs will be amortized over a period of 5 to 7 years.
In 2003, one of Peoples' strategic goals is to increase core deposits,
specifically non-interest bearing demand deposits, to 13% of total customer
funding sources (from year-end 2002's 11%) and ultimately to 15% of total
customer funding sources by year-end 2004. As part of this goal, Peoples
introduced "Freedom Checking", an improved checking account designed to
capitalize on recent investments in services. The new Freedom Checking product
offers customers a broad array of additional services at no additional cost,
including Internet banking and online billpay capabilities, Overdraft Privilege,
debit cards and ATM access. Management believes Freedom Checking will allow
Peoples to add more customers, as well as strengthen existing client
relationships.
Mortgage banking is a key part of Peoples' business strategy, which incorporates
a focus on retail products and services. As a result, management took steps in
the first quarter of 2003 to improve Peoples' ability to serve the real estate
lending needs of customers by refocusing several Peoples Bank lenders. These
lenders, located throughout Peoples' primary market area, now serve as "Home
Loan Specialists" and will be specifically responsible for originating real
estate loans and home equity loans. While the current interest rate environment
provides opportunities for growth, management believes a real estate loan and a
basic checking account are the anchor products to successful long-term financial
relationships with Peoples' customers. As a result, management expects Peoples'
mortgage banking operation to be a valuable part of Peoples' business even when
rates increase.
Another key to Peoples achieving its goals in 2003 is organic loan growth;
although, the combination of slower economic conditions and Peoples' emphasis on
loan quality continues to limit lending opportunities. Commercial lending
remains the main driver of balance sheet loan growth even as management works to
improve Peoples' mortgage banking operations. In the first quarter of 2003,
Peoples established a loan production office in Delaware, Ohio. This new office,
situated in one of the fastest growing counties in Ohio, complements Peoples'
lending offices in neighboring Fairfield and Licking Counties and affords
Peoples greater access to commercial customers in central Ohio, including the
cities of Delaware, Marion and Marysville. Management looks forward to the
opportunity to add loans to Peoples' portfolio through the Delaware office.
While the development and implementation of the Overdraft Privilege program has
positively impacted Peoples' performance, Peoples is obligated to pay
professional fees to the consultant that assisted in the implementation of the
process, based on revenue parameters, with that amount totaling just over
$150,000 in the first quarter of 2003. Additional net revenues from Overdraft
Privilege (i.e. after provision for bad debt) have more than offset the
professional expenses associated with the new product. Beginning in March 2003,
the percentage of revenues paid to the consultant will decrease. Therefore,
management does not expect these professional fees to increase significantly in
2003. In addition, the contract expires in February 2004, which should further
enhance net revenues going forward, assuming Peoples maintains and/or grows
total retail core deposits and volumes remain stable.
Mergers and acquisitions, such as the Kentucky Bancshares acquisition, have been
an integral part of Peoples' efforts to expand its operations and scope of
client services even while management continues to build client relationships
and implements new products and services to enhance Peoples' earnings potential.
Peoples' enhanced regulatory capital ratios, as a result of the Common Stock
Offering, afford management additional growth opportunities through mergers and
acquisitions. With a higher level of tangible equity to total assets, management
believes Peoples is positioned to continue its disciplined acquisition strategy
of the past decade and plans to dedicate more resources to develop and realize
acquisition opportunities in and around Peoples' markets. However, the
evaluation of future acquisitions will focus more on opportunities that
complement Peoples' core competencies and strategic intent rather than
geographic location or proximity to current markets.
Since 1996, Peoples has issued its debit card, the Connect Card, to customers,
with nearly 40,000 cards issued at March 31, 2003. Debit cards provide various
benefits to customers, including increased security, convenience and improved
money management while also generating fee income for Peoples and other banks
based on a percentage of the transactions processed, known as interchange fees.
Recently, MasterCard International and Visa USA reached agreements to settle
claims brought against them by a group of merchants in connection with the card
associations' rules and fees relating to merchant acceptance of their branded
cards. As part of the agreements, both associations are expected to implement
new rules and change business practices that could have a negative impact on
debit card interchange fees. While the exact details and impact are not known
due to the timing of the agreements in late April 2003, management anticipates
diminishing interchange fees on signature-based debit card transactions, which
is likely to impact electronic banking revenues negatively in the second half of
2003 or early 2004.
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. Management will
continue to be stakeholder-focused with four key long-term objectives:
double-digit EPS growth, ROE improvement, consistent dividend growth and revenue
diversification.
FORWARD-LOOKING STATEMENTS
The statements in this Form 10-Q which are not historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. Although
management believes Peoples' plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, Peoples cannot
give any assurance that those plans, intentions or expectations will be
achieved. The forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, the effect of changes in interest
rates, the effect of federal and state banking and tax regulations, the effect
of technological changes, the effect of economic conditions, the effect of
competitive products and pricing, and other risks detailed in Peoples'
Securities and Exchange Commission filings. All forward-looking statements are
expressly qualified in their entirety by the cautionary statements. Although
management believes the expectations in these forward-looking statements are
based on reasonable assumptions within the bounds of management's knowledge of
Peoples' business and operations, it is possible that actual results may differ
materially from these projections.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption "Interest
Rate Sensitivity and Liquidity" 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
March 31,
2003 2002
(dollars in thousands) Average Yield/ Average Yield/
Balance Rate Balance Rate
ASSETS
Securities:
Taxable $ 541,753 4.94% $ 289,138 6.29%
Tax-exempt 66,224 6.73% 53,664 7.00%
- --------------------------------------------------------------------------------------------------------
Total securities 607,977 5.13% 342,802 6.41%
Loans:
Commercial 413,935 6.52% 365,187 6.99%
Real estate 330,755 7.32% 297,172 7.86%
Consumer 106,277 9.64% 115,864 10.27%
- --------------------------------------------------------------------------------------------------------
Total loans 850,967 7.22% 778,223 7.87%
Less: Allowance for loan loss (13,395) (12,622)
- --------------------------------------------------------------------------------------------------------
Net loans 837,572 7.40% 765,601 7.99%
Interest-bearing deposits 1,549 0.72% 2,918 1.51%
Federal funds sold 8,113 1.17% 9 -
- --------------------------------------------------------------------------------------------------------
Total earning assets 1,455,211 6.41% 1,111,330 7.49%
Other assets 120,462 94,880
- --------------------------------------------------------------------------------------------------------
Total assets $ 1,575,673 $ 1,206,210
========================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 150,168 1.32% $ 84,798 1.34%
Interest-bearing demand deposits 270,835 1.28% 276,706 1.61%
Time 422,158 3.64% 363,959 4.55%
- --------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 843,161 2.50% 725,463 3.10%
Borrowed funds:
Short-term 37,603 1.11% 61,979 1.88%
Long-term 391,554 3.91% 194,424 4.78%
- --------------------------------------------------------------------------------------------------------
Total borrowed funds 429,157 3.70% 256,403 4.13%
- --------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,272,318 2.91% 981,866 3.37%
Non-interest bearing deposits 108,315 93,961
Other liabilities 56,791 33,370
- --------------------------------------------------------------------------------------------------------
Total liabilities 1,421,371 1,109,197
Stockholders' equity 154,302 97,013
- --------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,575,673 $ 1,206,210
========================================================================================================
Interest income to earning assets 6.41% 7.49%
Interest expense to earning assets 2.54% 2.97%
- --------------------------------------------------------------------------------------------------------
Net interest margin 3.87% 4.52%
========================================================================================================
Interest income and yields presented on a fully tax-equivalent basis using a 35%
tax rate.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within ninety days prior to the filing date of this Quarterly Report on Form
10-Q, Peoples under the supervision and with the participation of the management
of Peoples Bancorp Inc., including its Chief Executive Officer and Chief
Financial Officer, performed an evaluation of Peoples' disclosure controls and
procedures, in accordance with Rules 13a-14 and 13a-15 of the Securities
Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that:
(a) information required to be disclosed by Peoples Bancorp Inc. in this
Quarterly Report on Form 10-Q would be accumulated and communicated to
the management of Peoples Bancorp Inc., including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure;
(b) information required to be disclosed by Peoples Bancorp Inc. in this
Quarterly Report on Form 10-Q would be recorded, processed and
summarized, and would be reported within the timeframe specified in the
SEC's rules and forms; and
(c) the disclosure controls and procedures of Peoples are effective to
ensure that material information related to Peoples is made known to
them, particularly during the period for which this Quarterly Report of
Form 10-Q has been prepared.
CHANGES IN INTERNAL CONTROLS
No significant changes were made in Peoples' internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation performed pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934, as amended, referred to above.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
None.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS.
The information provided under ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS in respect to amendments to Peoples Bancorp Inc.'s ("Peoples
Bancorp") Amended Articles of Incorporation and Code of Regulations approved by
the shareholders at the 2003 Annual Meeting of Shareholders of Peoples Bancorp
(the "2003 Annual Meeting") and under ITEM 5: OTHER INFORMATION providing an
updated summary of the material attributes of the common shares of Peoples
Bancorp, are incorporated herein by reference.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 10, 2003, Peoples Bancorp Inc. held its Annual Meeting of Shareholders
in the Ball Room at the Holiday Inn in Marietta, Ohio, with 77% of the
outstanding common shares represented by proxy. No votes were placed in person.
Three Directors of Peoples Bancorp were re-elected to serve terms of three years
each (expiring in 2006): Carl Baker, Jr.; George W. Broughton; and Wilford D.
Dimit. In addition, Mark F. Bradley was re-elected to serve a term of two years
(expiring in 2005). Other Directors of Peoples Bancorp who continue to serve
after the 2003 Annual Meeting include Frank L. Christy, Robert E. Evans, Rex E.
Maiden, Robert W. Price, Thomas C. Vadakin, Paul T. Theisen and Joseph H. Wesel
(Chairman of the Board). The following is a summary of voting results:
Nominee For Withheld Against
- --------------------------- ------------- ------------- -------------
Carl Baker, Jr. 7,211,123 259,648 -
George W. Broughton 7,218,634 252,137 -
Wilford D. Dimit 7,219,039 251,732 -
Mark F. Bradley 6,961,257 502,858 6,656
In addition, the shareholders approved an amendment to Peoples Bancorp's
Articles of Incorporation to increase the number of authorized shares to
24,000,000, all of which are common shares, without par value, and amendments to
Sections 1.03, 1.04, 1.05, 1.06, 1.08, 1.10, 2.03(c), 2.07, 2.08 and 6.02 of
Peoples Bancorp's Code of Regulations to permit electronic proxies, notices,
waivers and meetings and Section 2.10 of Peoples Bancorp's Code of Regulations
to provide for Board committees of one or more directors. The following is a
summary of voting results for these amendments:
Broker
Non-Votes
and
Proposal For Withheld Against Abstentions
- -------------------------------------------------------------------- ------------ ------------ ------------- --------------
Amendment to Amended Articles of Incorporation to increase the
number of authorized shares to 24,000,000 6,888,038 379,351 203,382 2,178,114
Amendments to Code of Regulations to permit electronic proxies,
notices, waivers and meetings 6,450,174 976,854 43,743 2,178,114
Amendment to Code of Regulations to provide for Board committees
of one or more members 6,923,859 323,283 223,629 2,178,114
ITEM 5: OTHER INFORMATION.
As discussed above in Item 4: Submission of Matters to a Vote of Security
Holders, at the 2003 Annual Meeting, shareholders approved an amendment to the
Amended Articles of Incorporation to increase the authorized number of common
shares to 24,000,000, amendments to the Code of Regulations to permit electronic
proxies, notices, waivers and meetings and a further amendment to the Code of
Regulations to provide for committees of the Board of Directors of one or more
directors.
The following paragraphs provide an updated summary of the material attributes
of the common shares of Peoples Bancorp. The following statements are brief
summaries of the provisions of the Amended Articles of Incorporation, as amended
(the "Amended Articles"), of Peoples Bancorp and the Code of Regulations, as
amended (the "Regulations"), of Peoples Bancorp, which are filed as exhibits to
this Form 10-Q. The following statements are qualified in their entirety by
reference to the Amended Articles and the Regulations and to applicable Ohio
laws.
GENERALLY
- ---------
The authorized capital stock of Peoples Bancorp consists of 24,000,000 common
shares, each without par value. As of May 1, 2003, there were 9,557,343 common
shares issued and outstanding. The common shares are traded on The Nasdaq
National Market under the symbol "PEBO".
Holders of the common shares are entitled to:
o One vote for each common share held of record on all matters presented
to a vote of shareholders, including the election of directors.
o Receive dividends pro rata on a per share basis if and when declared
by the Board of Directors from funds legally available therefor.
The ability of Peoples Bancorp to pay dividends in respect of the
common shares largely depends on its receipt of dividends from its
subsidiaries, including Peoples Bank, National Association ("Peoples
Bank"). The amount of dividends that Peoples Bank may pay to Peoples
Bancorp is limited by federal banking laws, regulations and policies.
The Federal Reserve Board may require Peoples Bancorp to retain
capital for further investment in Peoples Bank, rather than pay
dividends to common shareholders. Because Peoples Bancorp is a
financial holding company, Peoples Bank is required to maintain
capital sufficient to meet the "well capitalized" standards set by the
regulators. Peoples Bank cannot pay dividends to Peoples Bancorp if
such payment would cause Peoples Bank to fail to meet the required
minimum levels under the risk-based capital guidelines and the minimum
leverage ratio requirements. Peoples Bank must have the approval of
the Office of the Comptroller of the Currency if a dividend in any
calendar year would cause the total dividends for that year to exceed
the sum of the current year's retained net income and the retained net
income for the preceding two years.
Additionally, Peoples Bancorp has established two trust subsidiaries
to issue preferred securities. If interest payments relating to the
trust preferred securities issued by either of Peoples Bancorp's two
trust subsidiaries are suspended, Peoples Bancorp will be prohibited
from paying dividends on the Peoples Bancorp common shares.
o Share ratably in Peoples Bancorp's net assets, legally available to
the shareholders in the event of Peoples Bancorp's liquidation,
dissolution or winding up, after payment in full of all amounts
required to be paid to creditors or provision for such payment.
Holders of Peoples Bancorp's common shares have no preemptive, subscription,
redemption, conversion or cumulative voting rights. The outstanding common
shares of Peoples Bancorp are fully paid and nonassessable.
ANTI-TAKEOVER EFFECTS OF AMENDED ARTICLES, REGULATIONS AND THE OHIO GENERAL
CORPORATION LAW
- ---------------------------------------------------------------------------
There are provisions in the Ohio General Corporation Law and in the Amended
Articles and Regulations of Peoples Bancorp that could discourage potential
takeover attempts and make attempts by shareholders to change Peoples Bancorp's
Board of Directors and management more difficult.
CLASSIFIED BOARD OF DIRECTORS. Peoples Bancorp's Board of Directors is divided
into three classes, with three-year staggered terms. This classification system
increases the difficulty of replacing a majority of the directors at any one
time and may tend to discourage a third-party from making a tender offer or
otherwise attempting to gain control of Peoples Bancorp. It also may maintain
the incumbency of Peoples Bancorp's Board of Directors.
REMOVAL OF DIRECTORS. The Regulations of Peoples Bancorp provide that a director
or directors may be removed from office, only for cause, by the affirmative vote
of the holders of shares entitling them to exercise at least 75% of the voting
power to elect directors in place of those to be removed.
SUPERMAJORITY VOTE REQUIREMENTS. The Amended Articles of Peoples Bancorp provide
that the holders of shares entitling them to exercise at least a majority of the
voting power of Peoples Bancorp must approve the following matters before they
can be implemented: o a proposed amendment to the Amended Articles;
o proposed new regulations or an alteration, amendment or repeal of the
Regulations;
o an agreement of merger or consolidation;
o a proposed combination or majority share acquisition involving the
issuance of shares of Peoples Bancorp and requiring shareholder
approval;
o a proposal to sell, lease, exchange, transfer or otherwise dispose of
all or substantially all of Peoples Bancorp's property and assets;
o a proposed dissolution of Peoples Bancorp; or
o a proposal to fix or change the number of directors by action of the
shareholders of Peoples Bancorp.
However, if any three directors of Peoples Bancorp affirmatively vote against
any of the foregoing matters, the proposal must be approved by the holders of
shares entitling them to exercise at least 75% of the voting power entitled to
vote thereon.
NOMINATION PROCEDURES. The Regulations of Peoples Bancorp provide that a nominee
for election to the Board of Directors, other than those nominated by or at the
direction of the Board of Directors, must be made in writing and delivered or
mailed to the secretary of Peoples Bancorp not less than 14 days nor more than
50 days prior to any meeting of shareholders called for the election of
directors. However, if less than 21 days' notice of the meeting is given to the
shareholders, the nomination must be mailed or delivered to the secretary of
Peoples Bancorp not later than the close of business on the seventh day
following the date on which the notice of the meeting was mailed.
The written notice of a proposed nominee must contain the following information
to the extent known by the notifying shareholder: o the name, age, business
address and residence address of the proposed nominee;
o the principal occupation or employment of the proposed nominee;
o the number of common shares beneficially owned by the proposed nominee
and by the notifying shareholder; and
o any other information required to be disclosed with respect to a
nominee for election as a director pursuant to Section 14(a) of the
Securities Exchange Act of 1934 or any successor provision.
In addition, the notifying shareholder must deliver to Peoples Bancorp the
written consent of the nominee to serve as a director if elected.
CONTROL SHARE ACQUISITION ACT. Section 1701.831 of the Ohio Revised Code, known
as the "Control Share Acquisition Act," provides that certain notice and
informational filings, and special shareholder meeting and voting procedures,
must occur prior to any person's acquisition of an issuer's shares that would
entitle the acquirer to exercise or direct the exercise of the voting power of
the issuer in the election of directors within any of the following ranges:
o one-fifth or more but less than one-third of such voting power;
o one-third or more but less than a majority of such voting power; or
o a majority or more of such voting power.
The Control Share Acquisition Act does not apply to a corporation if its
articles of incorporation or code of regulations so provide. Peoples Bancorp has
not opted out of the application of the Control Share Acquisition Act.
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code, also known as
the "Merger Moratorium Statute," generally addresses a wide range of business
combinations and other transactions (including mergers, consolidations,
combinations, majority share acquisitions, asset sales, loans, disproportionate
distributions of property and disproportionate issuances or transfers of shares
or rights to acquire shares) between an Ohio corporation and an "Interested
Shareholder" who, alone or with others, may exercise or direct the exercise of
at least 10% of the voting power of the corporation in the election of
directors. The Merger Moratorium Statute prohibits these transactions between
the corporation and the Interested Shareholder for a period of three years after
a person becomes an Interested Shareholder, unless, prior to that date, the
directors approved either the business combination or other transaction or
approved the acquisition that caused the person to become an Interested
Shareholder.
Following the three-year moratorium period, if applicable, the corporation may
engage in the covered transaction with the Interested Shareholder only if:
o the transaction receives the approval of the holders of shares
entitling them to exercise at least two-thirds of the voting power of
the corporation in the election of directors and the approval of the
holders of a majority of the voting shares held by persons other than
an Interested Shareholder; or
o the remaining shareholders receive an amount for their shares equal to
the highest of the highest amount paid in the three years immediately
before and including the announcement date of the covered transaction
by the Interested Shareholder for the corporation's shares, the "fair
market value" of the shares on the dates specified in the statute or
the amount that would be due to the shareholders if the corporation
were to dissolve.
The Merger Moratorium Statue does not apply to a corporation if its articles of
incorporation so provide. Peoples Bancorp has not opted out of the application
of the Merger Moratorium Statute.
TRANSFER AGENT
- --------------
Registrar and Transfer Company serves as the transfer agent of Peoples Bancorp's
issued and outstanding common shares.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- ----------------------------------
3(a) Certificate of Amendment to the Amended Articles of Filed herewith
Incorporation of Peoples Bancorp Inc. (as filed with
the Ohio Secretary of State on April 23, 2003)
3(b) Amended Articles of Incorporation of Peoples Bancorp Inc. Filed herewith
(reflecting amendments through April 23, 2003) [For SEC
reporting compliance purposes only - not filed with Ohio
Secretary of State]
3(c) Certified Resolutions Regarding Adoption of Filed herewith
Amendments to Sections 1.03, 1.04, 1.05, 1.06,
1.08, 1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of
the Code of Regulations of Peoples Bancorp Inc. by
Shareholders on April 10, 2003.
3(d) Code of Regulations of Peoples Bancorp Inc. (reflecting Filed herewith
amendments through April 10, 2003) [For SEC reporting
compliance purposes only].
11 Computation of Earnings Per Share. Filed herewith
12 Computation of Ratios. Filed herewith
99 Certification Pursuant To Title 18, United States Filed herewith
Code, Section 1350, As Adopted Pursuant To Section
906 Of The Sarbanes-Oxley Act Of 2002
b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the three months
ended March 31, 2003:
1) Filed January 6, 2003 - News release announcing the sale of 216,000
common shares in connection with underwriter's exercise of
over-allotment option.
2) Filed January 14, 2003 - News release announcing the election of Mark
F. Bradley as a director of Peoples Bancorp Inc.
3) Filed January 21, 2003 - News release announcing earnings for the
quarter and year ended December 31, 2002.
4) Filed February 13, 2003, as amended on February 14, 2003, - News
release announcing the Board of Directors of Peoples Bancorp Inc.
declared a quarterly dividend of $0.15 per share.
5) Filed February 20, 2003 - News release announcing Peoples will make an
investor presentation at the sixth annual Midwest 2003 Super-Community
Bank Conference.
6) Filed March 11, 2003 - News release announcing Peoples Bancorp Inc.'s
first quarter earnings expectations.
7) Filed March 13, 2003 - News release announcing the authorization for
Peoples Bancorp Inc. to repurchase up to 300,000 common shares.
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: May 9, 2003 By: /s/ ROBERT E. EVANS
-------------------------------------
Robert E. Evans
President and Chief Executive Officer
Date: May 9, 2003 By: /s/ JOHN W. CONLON
-------------------------------------
John W. Conlon
Chief Financial Officer
CERTIFICATIONS
I, Robert E. Evans, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 9, 2003 By: /s/ ROBERT E. EVANS
-------------------------------------
Robert E. Evans
President and Chief Executive Officer
I, John W. Conlon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 9, 2003 By: /s/ JOHN W. CONLON
-------------------------------------
John W. Conlon
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- ----------------------------------
3(a) Certificate of Amendment to the Amended Articles of Filed herewith
Incorporation of Peoples Bancorp Inc. (as filed with
the Ohio Secretary of State on April 23, 2003)
3(b) Amended Articles of Incorporation of Peoples Bancorp Inc. Filed herewith
(reflecting amendments through April 23, 2003) [For SEC
reporting compliance purposes only - not filed with Ohio
Secretary of State]
3(c) Certified Resolutions Regarding Adoption of Filed herewith
Amendments to Sections 1.03, 1.04, 1.05, 1.06,
1.08, 1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of
the Code of Regulations of Peoples Bancorp Inc. by
Shareholders on April 10, 2003.
3(d) Code of Regulations of Peoples Bancorp Inc. (reflecting Filed herewith
amendments through April 10, 2003) [For SEC reporting
compliance purposes only].
11 Computation of Earnings Per Share. Filed herewith
12 Computation of Ratios. Filed herewith
99 Certification Pursuant To Title 18, United States Filed herewith
Code, Section 1350, As Adopted Pursuant To Section
906 Of The Sarbanes-Oxley Act Of 2002