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, 2004
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 5, 2004: 10,620,827.
Exhibit Index Appears on Page 35
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
Condensed 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. Results of operation for the three months ended
March 31, 2004, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. The balance sheet at December
31, 2003, 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, 2003 ("2003 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 2003 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 2004 2003
Cash and cash equivalents:
Cash and due from banks $ 30,080 $ 28,349
Interest-bearing deposits in other banks 780 1,077
$
Federal funds sold - 44,000
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Total cash and cash equivalents 30,860 73,426
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $643,602 at March 31, 2004 and $634,801 at December 31, 2003) 657,300 641,464
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Loans, net of deferred fees and costs 910,793 914,998
Allowance for loan losses (14,774) (14,575)
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Net loans 896,019 900,423
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Loans held for sale 2,177 2,847
Business owned life insurance 43,770 23,355
Bank premises and equipment, net 21,764 22,155
Goodwill 41,989 41,407
Other intangible assets 6,928 7,298
Other assets 21,229 23,729
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Total assets $ 1,722,036 $ 1,736,104
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Liabilities
Deposits:
Non-interest-bearing $ 134,284 $ 133,709
Interest-bearing 895,280 894,821
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Total deposits 1,029,564 1,028,530
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Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 15,129 16,468
Federal Home Loan Bank advances 72,200 92,300
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Total short-term borrowings 87,329 108,768
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Long-term borrowings 390,998 388,647
Junior subordinated notes held by subsidiary trusts 29,198 29,177
Accrued expenses and other liabilities 9,547 10,102
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Total liabilities 1,546,636 1,565,224
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Stockholders' Equity
Common stock, no par value, 24,000,000 shares authorized,
10,709,081 shares issued at March 31, 2004 and 10,704,938 shares issued
at December 31, 2003, including shares in treasury 160,617 161,005
Retained earnings 11,247 7,781
Accumulated comprehensive income, net of deferred income taxes 8,930 4,255
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180,794 173,041
Treasury stock, at cost, 208,672 shares at March 31, 2004 and 101,146 shares
at December 31, 2003 (5,394) (2,161)
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Total stockholders' equity 175,400 170,880
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Total liabilities and stockholders' equity $ 1,722,036 $ 1,736,104
==============================================================================================================================
See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) For the Three Months
Ended March 31,
2004 2003
Interest Income:
Interest and fees on loans $ 14,644 $ 15,339
Interest on taxable investment securities 6,171 6,688
Interest on tax-exempt investment securities 711 724
Other interest income 60 26
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Total interest income 21,586 22,777
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Interest Expense:
Interest on deposits 3,800 5,204
Interest on short-term borrowings 277 227
Interest on long-term borrowings 3,378 3,703
Interest on junior subordinated notes held by subsidiary trusts 583 585
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Total interest expense 8,038 9,719
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Net interest income 13,548 13,058
Provision for loan losses 794 831
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Net interest income after provision for loan losses 12,754 12,227
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Other Income:
Service charges on deposit accounts 2,253 1,725
Income from fiduciary activities 774 586
Electronic banking income 523 454
Business owned life insurance 416 365
Investment and insurance commissions 299 442
Mortgage banking income 199 230
Gain on securities transactions 32 2
Other 391 131
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Total other income 4,887 3,935
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Other Expenses:
Salaries and employee benefits 5,389 4,724
Net occupancy and equipment 1,221 1,098
Professional fees 456 464
Data processing and software 472 330
Amortization of other intangible assets 401 201
Bankcard costs 324 305
Franchise tax 341 257
Marketing 108 276
Other 1,578 1,464
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Total other expenses 10,290 9,119
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Income before income taxes 7,351 7,043
Income taxes 1,985 2,029
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Net income $ 5,366 $ 5,014
======================================================================================================================
Earnings per share:
Basic $ 0.51 $ 0.50
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Diluted $ 0.50 $ 0.49
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Weighted-average number of shares outstanding:
Basic 10,560,241 10,056,615
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Diluted 10,808,007 10,255,705
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Cash dividends declared $ 1,900 $ 1,447
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Cash dividends per share $ 0.18 $ 0.14
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See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, except Per Share Data) Accumulated
Common Stock Retained Comprehensive Treasury
Shares Amount Earnings Income Stock Total
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Balance, December 31, 2003 10,704,938 $ 161,005 $ 7,781 $ 4,255 $ (2,161) $ 170,880
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Net income 5,366 5,366
Unrealized gains on available-for-sale
securities,
net of reclassification adjustment 4,675 4,675
Purchase of treasury stock, 142,266 shares (4,146) (4,146)
Distribution of treasury stock for deferred
compensation plan (reissued 8,121 shares) 147 147
Exercise of common stock options (reissued 26,619
treasury shares) (557) 766 209
Tax benefit from exercise of stock options 47 47
Issuance of common stock under dividend
reinvestment plan 4,143 122 122
Cash dividends declared (1,900) (1,900)
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Balance, March 31, 2004 10,709,081 $ 160,617 $ 11,247 $ 8,930 $ (5,394) $ 175,400
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands) For the Three Months
Ended March 31,
2004 2003
Net income $ 5,366 $ 5,014
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale investment securities arising during the period 4,696 1,703
Less: reclassification adjustment for securities gain included in net income, net of 21 1
tax
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Net unrealized gain on available-for-sale arising during the period 4,675 1,702
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Total comprehensive income $ 10,041 $ 6,716
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See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) For the Three Months
Ended March 31,
2004 2003
Net cash provided by operating activities $ 8,053 $ 4,936
Cash flows from investing activities:
Purchases of available-for-sale securities (41,330) (325,112)
Proceeds from sales of available-for-sale securities 2,065 -
Proceeds from maturities of available-for-sale securities 29,859 51,219
Net decrease (increase) in loans 3,530 (9,201)
Net expenditures for premises and equipment (580) (739)
Net expenditures from sales of other real estate owned (74) (783)
Investment in business owned life insurance (20,000) -
Investment in limited partnership and tax credit funds (760) -
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Net cash used in investing activities (27,290) (284,616)
Cash flows from financing activities:
Net increase (decrease) in non-interest-bearing deposits 575 (2,222)
Net increase in interest-bearing deposits 919 16,201
Net (decrease) increase in short-term borrowings (21,439) 15,659
Proceeds from long-term borrowings 5,000 238,750
Payments on long-term borrowings (2,650) (3,250)
Cash dividends paid (1,797) (975)
Purchase of treasury stock (4,146) (905)
Proceeds from issuance of common stock 209 4,926
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Net cash (used in) provided by financing activities (23,329) 268,184
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Net decrease in cash and cash equivalents (42,566) (11,496)
Cash and cash equivalents at beginning of period 73,426 55,550
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Cash and cash equivalents at end of period $ 30,860 $ 44,054
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Supplemental cash flow information:
Interest paid $ 7,982 $ 8,203
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Income taxes paid $ - $ -
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See notes to the consolidated unaudited financial statements
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
Basis of Presentation
- ----------------------
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 the 2004 presentation. All significant intercompany
accounts and transactions have been eliminated.
1. MERGERS AND ACQUISITIONS
At the close of business on April 30, 2004, Peoples completed the
acquisition of Putnam Agency, Inc. ("Putnam Agency"), for initial
consideration of $8.6 million ($6.5 million in cash and $2.1 million in
Peoples' common shares). The agreement also provides for additional
consideration of up to $3 million in cash to be paid by Peoples over the
next three years, contingent on the Putnam Agency achieving certain revenue
growth goals.
The Putnam Agency is a full-service insurance agency that offers a wide
range of insurance products to both commercial and individual clients with
offices in Ashland, Kentucky and Huntington, West Virginia. Peoples operates
the former agency as a division of Peoples Insurance Agency continues using
the "Putnam Agency" name. Peoples has retained all key Putnam Agency
producers and managers, with the exception of one producer who is retiring.
2. STOCK-BASED COMPENSATION:
Peoples accounts for stock-based compensation using the intrinsic value
method. No stock-based employee compensation cost is reflected in net
income, since 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,
2004 2003
Net income, as reported $ 5,366 $ 5,014
Deduct: stock-based compensation expense determined
under fair value based method, net of tax 134 82
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Pro forma net income $ 5,232 $ 4,932
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Basic Earnings Per Share:
As reported $ 0.51 $ 0.50
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Pro forma $ 0.50 $ 0.49
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Diluted Earnings Per Share:
As reported $ 0.50 $ 0.49
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Pro forma $ 0.48 $ 0.48
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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 2004 and 2003:
2004 2003
Risk-free interest rate 3.65% 5.50%
Dividend yield 2.47% 2.51%
Volatility factor of the market price of parent stock 29.8% 30.8%
Weighted-average expected life of options 7 years 7 years
3. EMPLOYEE BENEFIT PLANS:
Components of Net Periodic Benefit Costs
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Peoples sponsors a noncontributory defined benefit pension plan and a
contributory postretirement benefit plan. The following table details the
components of the net periodic benefit cost for both plans:
Pension Benefits Postretirement Benefits
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For the Three Months For the Three Months
Ended March 31, Ended March 31,
(Dollars in Thousands) 2004 2003 2004 2003
Service cost $ 212 $ 163 $ - $ -
Interest cost 185 169 9 10
Expected return on plan assets (227) (201) - -
Amortization of transition asset - - - -
Amortization of prior service cost 1 (1) 3 3
Amortization of net loss 44 17 - 1
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Net periodic benefit cost $ 215 $ 147 $ 12 $ 14
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Employer Contributions
----------------------
Through March 31, 2004, Peoples had not made any contributions to its
defined benefit pension plan for the current year. On April 30, 2004,
Peoples made a contribution of $1.1 million, as recommended by the
Retirement Plan Committee and authorized by the Board of Directors.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 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:
At or For the Three
Months Ended March 31,
SIGNIFICANT RATIOS 2004 2003
Return on average equity 12.50 % 13.00 %
Return on average assets 1.25 % 1.27 %
Net interest margin (a) 3.56 % 3.70 %
Non-interest income leverage ratio (b) 46.67 % 44.12 %
Efficiency ratio (c) 53.24 % 51.24 %
Average stockholders' equity to average assets 9.97 % 9.79 %
Average loans to average deposits 88.54 % 89.44 %
Cash dividends to net income 35.41 % 28.86 %
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ASSET QUALITY RATIOS (end of period)
Nonperforming loans as a percent of total loans (d) 0.76 % 0.55 %
Nonperforming assets as a percent of total assets (e) 0.43 % 0.34 %
Allowance for loan losses to loans net of unearned interest 1.62 % 1.55 %
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CAPITAL RATIOS (end of period)
Tier I capital ratio 13.79 % 15.43 %
Risk-based capital ratio 15.19 % 16.79 %
Leverage ratio 8.80 % 10.56 %
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PER SHARE DATA (f)
Net income per share - basic 0.51 0.50
Net income per share - diluted 0.50 0.49
Cash dividends per share 0.18 0.14
Book value per share (end of period) 16.70 15.61
Tangible book value per share (end of period) (g) 12.05 12.59
Weighted average shares outstanding - Basic 10,560,241 10,056,615
Weighted average shares outstanding - Diluted 10,808,007 10,255,705
Common shares outstanding at end of period 10,500,409 10,030,170
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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).
(c) Non-interest expense (less intangible amortization) as a percentage of
fully-tax equivalent net interest income plus non-interest income.
(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) Adjusted for stock dividends.
(g) Tangible book value per share reflects capital calculated for banking
regulatory requirements and excludes balance sheet impact of intangible
assets acquired through acquisitions accounted for using the purchase
method accounting.
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 condition and results of operations. Peoples' primary 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
49 financial service locations and 32 ATMs in Ohio, West Virginia and Kentucky.
Peoples Bank's internet-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 traditional 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, Inc., 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 better deploy investable funds and provide new investment opportunities,
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, 2003, and
notes thereto, as well as the ratios, statistics and discussions contained
elsewhere in this Form 10-Q. All share and per share information has been
adjusted for stock dividends.
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 On May 9, 2003, Peoples completed its acquisition of Kentucky Bancshares
Incorporated ("Kentucky Bancshares"), the holding company of Kentucky Bank
& Trust. In this transaction, Peoples acquired loans of $75 million,
deposits of $113 million, and trust assets under management of $182
million, as well as three ATMs and five full-service financial service
offices in northeastern Kentucky. In addition, Peoples Bank closed an
office at 404 Ferry Street in Russell, Kentucky, concurrent with this
acquisition. Peoples Bank also closed its Catlettsburg, Kentucky, office
on October 17, 2003, due to the proximity of the acquired Ashland,
Kentucky, office.
o In December 2003, Peoples Bank entered into an agreement to sell its
existing credit card portfolio to InfiCorp Holdings, Inc. ("InfiCorp").
Management expects conversion of the portfolio to be completed in the
second quarter of 2004. Peoples Bank will continue to serve the credit
card needs of its customers through the transition period. In addition to
the sale, Peoples Bank and InfiCorp entered into a joint marketing
agreement to serve the future credit card needs of Peoples' customers and
prospective customers.
o In December 2003, Peoples sold $55 million of mortgage-backed investment
securities due to the high rate of prepayments on those securities and the
corresponding downward pressure on yields from accelerated amortization of
bond premiums. Peoples reinvested the proceeds from the sales into other
mortgage-backed securities that are anticipated to produce a higher yield
with estimated lives similar to those of the securities that were sold
(collectively, the "Investment Portfolio Restructuring"). Approximately
$27 million of the reinvestment settled in late December 2003 and the
remaining reinvestment of approximately $26 million settled in late
January 2004.
o On December 16, 2003, Peoples prepaid $63 million of long-term,
convertible rate borrowings from the Federal Home Loan Bank ("FHLB") and
reborrowed the funds using a short-term, repurchase agreement advance
(collectively, the "Long-Term Debt Restructuring"). Peoples incurred
prepayment penalties totaling $6.8 million as part of this transaction.
The prepaid borrowings had a weighted-average rate of 5.14% and
weighted-average remaining maturity of 5.4 years. The new short-term
advance has a significantly lower initial interest rate, yet has somewhat
similar interest rate sensitivity characteristics in a rising interest
rate environment.
o On December 17, 2003, Peoples announced the authorization to repurchase up
to 425,000, or approximately 4%, of Peoples' outstanding common shares in
2004 from time to time in open market or privately negotiated transactions
("2004 Stock Repurchase Program"). The repurchases are eligible to be used
for projected exercises of stock options granted under Peoples' stock
option plans, projected purchases of common shares for Peoples' deferred
compensation plans, and other general corporate purposes. The timing of
the purchases and the actual number of common shares purchased are
dependent on market conditions and limitations imposed by applicable
federal securities laws. The 2004 Stock Repurchase Program expires
December 31, 2004, and will not exceed an aggregate purchase price of $13
million. Through March 31, 2004, Peoples had repurchased 141,2000 common
shares (or 33% of the total authorized) under the 2004 Stock Repurchase
Program, at an average price of $29.43.
o As discussed in Note 1 of the Notes to the Consolidated Financial
Statements, Peoples' insurance subsidiary, Peoples Insurance Agency, Inc.,
acquired Putnam Agency, Inc. ("Putnam"), a full-service insurance agency
that offers a wide range of insurance products to both commercial and
individual clients with offices in Ashland, Kentucky and Huntington, West
Virginia.
The impact of these transactions, where significant, is discussed in the
applicable sections of this management's discussion and analysis.
Critical Accounting Policies
- ----------------------------
The accounting and reporting policies of Peoples conform to accounting
principles generally accepted in the United States ("US GAAP") and to general
practices within the financial services industry. The preparation of the
financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Management has identified the accounting policies described below as
those that, due to the judgments, estimates and assumptions inherent in those
policies, are critical to an understanding of Peoples' consolidated financial
statements and management's discussion and analysis.
INCOME RECOGNITION
Peoples recognizes interest income by methods conforming to US GAAP that include
general accounting practices within the financial services industry. Interest
income on loans and investment securities is recognized by methods that result
in level rates of return on principal amounts outstanding, including yield
adjustments resulting from the amortization of loan costs and premiums on
investment securities and accretion of loan fees and discounts on investment
securities. Since mortgage-backed securities comprise a sizable portion of
Peoples' investment portfolio, a significant increase in principal payments on
those securities negatively impacts interest income due to the corresponding
acceleration of bond premium amortization.
In the event management believes collection of all or a portion of contractual
interest on a loan has become doubtful, which generally occurs after the loan is
90 days past due, Peoples discontinues the accrual of interest. In addition,
previously accrued interest deemed uncollectible that was recognized in income
in the current year is reversed, while amounts recognized in income in the prior
year are charged against the allowance for loan losses. Interest received on
nonaccrual loans is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status when it is brought
current or has performed in accordance with contractual terms for a reasonable
period of time, and the collectibility of the total contractual principal and
interest is no longer doubtful.
ALLOWANCE FOR LOAN LOSSES
In general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples maintains
an allowance for loan losses to absorb probable losses in the loan portfolio
based on a quarterly analysis of the portfolio. This formal analysis determines
an appropriate level and allocation of the allowance for loan losses among loan
types and resulting provision for loan losses by considering factors affecting
loan losses, including specific losses, levels and trends in impaired and
nonperforming loans, historical loan loss experience, current national and local
economic conditions, volume, growth and composition of the portfolio, regulatory
guidance and other relevant factors. Management continually monitors the loan
portfolio through its Loan Review Department and Loan Loss Committee to evaluate
the adequacy of the allowance. The provision could increase or decrease each
quarter based upon the results of management's formal analysis.
The amount of the allowance for loan losses for the various loan types
represents management's estimate of expected losses from existing loans based
upon specific allocations for individual lending relationships and historical
loss experience for each category of homogeneous loans. The allowance for loan
losses related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans. This evaluation requires management to make
estimates of the amounts and timing of future cash flows on impaired loans,
which consists primarily of nonaccrual and restructured loans. While allocations
are made to specific loans and pools of loans, the allowance is available for
all loan losses.
Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, loan quality ratings, value of
collateral, repayment ability of borrowers, and historical experience factors.
The historical experience factors utilized for individual loan reviews are based
upon past loss experience, known trends in losses and delinquencies, the growth
of loans in particular markets and industries, and known changes in economic
conditions in the particular lending markets. Allowances for homogeneous loans
(such as residential mortgage loans, personal loans, etc.) are evaluated based
upon historical loss experience, trends in losses and delinquencies, growth of
loans in particular markets, and known changes in economic conditions in each
lending market. Consistent with the evaluation of allowances for homogenous
loans, allowances relating to the Overdraft Privilege program are based upon
management's monthly analysis of accounts in the program. This analysis
considers factors that could affect future losses on existing accounts,
including historical loss experience and length of overdraft.
There can be no assurance the allowance for loan losses will be adequate to
cover all losses, but management believes the allowance for loan losses of $14.8
million at March 31, 2004, was adequate to provide for probable losses from
existing loans based on information currently available. While management uses
available information to provide for loan losses, the ultimate collectibility of
a substantial portion of the loan portfolio, and the need for future additions
to the allowance, will be based on changes in economic conditions and other
relevant factors. As such, adverse changes in economic activity could reduce
cash flows for both commercial and individual borrowers, which would likely
cause Peoples to experience increases in problem assets, delinquencies and
losses on loans.
INVESTMENT SECURITIES
Investment securities are initially recorded at cost, which includes premiums
and discounts if purchased at other than par or face value. Peoples amortizes
premiums and accretes discounts as an adjustment to interest income over the
estimated life of the security. The cost of investment securities sold, and any
resulting gain or loss, is based on the specific identification method.
Management determines the appropriate classification of investment securities at
the time of purchase. Held-to-maturity securities are those securities that
Peoples has the positive intent and ability to hold to maturity and are reported
at amortized cost. Available-for-sale securities are those securities that would
be available to be sold in the future in response to Peoples' liquidity needs,
changes in market interest rates, and asset-liability management strategies,
among other considerations. Available-for-sale securities are reported at
estimated fair value, with unrealized holding gains and losses reported in
stockholders' equity as a separate component of other comprehensive income, net
of applicable deferred income taxes.
Presently, Peoples classifies its entire investment portfolio as
available-for-sale. As a result, both the investment and equity sections of
Peoples' balance sheet are more sensitive to changes in the overall market value
of the investment portfolio, due to changes in market interest rates, investor
confidence and other factors affecting market values, than if the investment
portfolio was classified as held-to-maturity.
While temporary changes in the market value of available-for-sale securities are
not recognized in earnings, a decline in fair value below amortized cost deemed
to be other-than-temporary results in an adjustment to the cost basis of the
investment, with a corresponding loss charged against earnings. Management
systematically evaluates Peoples' investment securities for other-than-temporary
declines in estimated fair value on a quarterly basis. This analysis requires
management to consider various factors in order to determine if a decline in
estimated fair value is temporary or other-than-temporary. These factors include
duration and magnitude of the decline in value, the financial condition of the
issuer, and Peoples' ability and intent to continue holding the investment for a
period of time sufficient to allow for any anticipated recovery in market value.
At March 31, 2004, there were no investment securities identified by management
to be other-than-temporarily impaired. If investments decline in fair value due
to adverse changes in the financial markets, charges to income could occur in
future periods.
GOODWILL AND OTHER INTANGIBLE ASSETS
Over the past several years, Peoples has grown through mergers and acquisitions
accounted for under the purchase method of accounting. Under the purchase
method, Peoples' is required to allocate the cost of an acquired company to the
assets acquired, including identified intangible assets, and liabilities assumed
based on their estimated fair values at the date of acquisition. At March 31,
2004, Peoples had $6.3 million of core deposit and trust relationship intangible
assets, subject to amortization, and $42.0 million of goodwill, not subject to
periodic amortization.
The determination of fair value and subsequent allocation of the cost of an
acquired company generally involves management making estimates based on third
party valuations, such as appraisals, or internal valuations based on discounted
cash flow analyses or other valuation techniques. In addition, the valuation and
amortization of intangible assets representing the present value of future net
income to be earned from customers (commonly referred to as "customer
relationship intangibles" or "core deposit intangibles") requires significant
judgment and the use of estimates by management. While management feels the
assumptions and variables used to value recent acquisitions were reasonable, the
use of different, but still reasonable, assumptions could produce materially
different results.
Customer relationship intangibles are required to be amortized over their
expected useful life. The method of amortization should reflect the pattern in
which the economic benefits of the intangible assets are consumed or otherwise
used up. Since Peoples' acquired customer relationships are subject to routine
customer attrition, the relationships are more likely to produce greater
benefits in the near-term than in the long-term, which would typically
necessitate the use of an accelerated method of amortization for the related
intangible assets. Management is required to evaluate the useful life of
customer relationship intangibles to determine if events or circumstances
warrant a change in the estimated life. Should management determine in future
periods the estimated life of any intangible asset is shorter than originally
estimated, Peoples would be required to adjust the amortization of that asset,
which could increase future amortization expense.
Goodwill arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Goodwill recorded
by Peoples in connection with its acquisitions relates to the value inherent in
the banking business and the value is dependent upon Peoples' ability to provide
quality, cost effective services in a competitive market place. As such,
goodwill value is supported ultimately by revenue that is driven by the volume
of business transacted. A decline in earnings as a result of a lack of growth or
the inability to deliver cost effective services over sustained periods can lead
to impairment of goodwill that could adversely impact earnings in future
periods.
Peoples has reviewed its goodwill assets and has concluded the recorded value of
goodwill was not impaired as of March 31, 2004. There are many assumptions and
estimates underlying the determination of impairment and using different, but
still reasonable, assumptions could produce a significantly different result.
Additionally, future events could cause management to conclude that impairment
indicators exist and Peoples' goodwill is impaired, which would result in
Peoples' recording an impairment loss. Any resulting impairment loss could have
a material, adverse impact on Peoples' financial condition and results of
operations.
RESULTS OF OPERATIONS
Overview of the Income Statement
- --------------------------------
For the three months ended March 31, 2004, net income totaled $5,366,000, up 7%
from $5,014,000 a year ago. Diluted earnings per share were $0.50 for the first
quarter of 2004 versus $0.49 for the same quarter last year. Peoples' increased
first quarter earnings were attributable to higher levels of net interest income
and non-interest revenues, primarily the result of the Kentucky Bancshares
acquisition completed in mid-2003 and balance sheet restructuring transactions
in late 2003.
Net interest income was $13,548,000 in the first quarter of 2004 compared to
$13,058,000 a year ago. Net interest margin was 3.56% in the first quarter of
2004 versus 3.70% for 2003's first quarter. The higher level of net interest
income was primarily the result of an increase in earning assets although the
sustained low interest rate environment throughout 2003 continues to compress
net interest margin. Compared to the fourth quarter of 2003, net interest income
was up $663,000 in the first three months of 2004, from $12,885,000, and net
interest margin improved 24 basis points compared to 3.32% in the linked
quarter, due largely to the balance sheet restructuring transactions in the
fourth quarter.
For the quarter ended March 31, 2004, other income was $4,887,000, up 24% from
$3,935,000 for 2003's first quarter and up 14% from $4,269,000 for the fourth
quarter of 2003. Revenues from offices added in the Kentucky Bancshares
acquisition, primarily deposit account service charges and fiduciary income,
coupled with $51,000 of additional business owned life insurance income, were
the main factors contributing to the overall increase from a year ago. Other
income in the fourth quarter was impacted by net losses of $1,880,000 and
$32,000 on securities transactions and asset disposals, respectively, as well as
a gain of $1,423,000 on the sale of Peoples' credit card portfolio.
Other expense was $10,290,000 in the first quarter of 2004, up 13% compared to
$9,119,000 for the same quarter in 2003, with much of the increase attributable
to higher salaries and benefit costs and the Kentucky Bancshares acquisition.
Compared to the fourth quarter of 2003, other expense was down $7,037,000,
largely the result of Peoples incurring prepayment penalties of $6,817,000 as
part of the Long-Term Debt Restructuring.
Interest Income and Expense
- ---------------------------
Peoples earns interest income from loans, investment securities and short-term
investments and incurs interest expense on interest-bearing deposits and
borrowed funds. Net interest income, the amount by which interest income exceeds
interest expense, remains Peoples' largest source of revenue. Management
periodically adjusts the mix of assets and liabilities, as well as the rates
earned or paid on those assets and liabilities, in an attempt to manage and
improve net interest income. However, factors that influence market interest
rates, such as interest rate changes by the Federal Reserve Open Market
Committee and Peoples' competitors, may have a greater impact on net interest
income than adjustments made by management. Consequently, a volatile rate
environment or extended periods of unusually low or high interest rates can make
it extremely difficult to manage net interest margin and income in the
short-term, much less anticipate and position the balance sheet for future
changes.
In the first quarter of 2004, net interest income grew 4% to $13,548,000, from
$13,058,000 for the first quarter of 2003. Interest income totaled $21,586,000
for the three months ended March 31, 2004, down $1,191,000 (or 5%) compared to
the same period last year. This decrease was due mainly to assets repricing
downward in the current rate environment, with the addition of approximately $97
million of earning assets from the Kentucky Bancshares acquisitions partially
offsetting the impact of declining asset yields. Interest expense totaled
$8,038,000 in the first quarter of 2004 versus $9,719,000 in 2003's first
quarter, down 17%, largely attributable to a lower cost of funds resulting from
the Long-Term Debt Restructuring in late 2003.
Compared to the fourth quarter of 2003, net interest income was up $663,000 (or
5%), from $12,885,000. Interest income was down slightly compared to
$21,836,000, while interest expense decreased $913,000 (or 10%) from $8,951,000.
The sale of the credit card portfolio in late 2003 was a key reason for the
lower level of interest income. In addition, fourth quarter's interest income
was negatively impacted by $376,000 of combined additional premium amortization
and reduction in interest income on mortgage-backed securities. The reduction in
interest expense was primarily the result of the Long-Term Debt Restructuring.
Peoples derives a portion of its interest income from loans to and investments
issued by states and political subdivisions. Since these revenues generally are
not subject to income taxes, management believes it is more meaningful to
analyze net interest income on a fully-tax equivalent ("FTE") basis, which
adjusts interest income by converting tax-exempt income to the pre-tax
equivalent of taxable income using an effective tax rate of 35%. The following
table details the calculation of FTE net interest income:
For the Three Months
Ended March 31,
(Dollars in Thousands) 2004 2003
Net interest income, as reported $ 13,548 $ 13,058
Taxable equivalent adjustments to net interest income 414 410
- -------------------------------------------------------------------------------------------
Fully-tax equivalent net interest income 13,962 13,468
- -------------------------------------------------------------------------------------------
For the three months ended March 31, 2004, FTE net interest income was
$13,962,000, up $494,000 from $13,468,000 for the same period in 2003, and up
$655,000 from $13,307,000 for the fourth quarter of 2003. The FTE yield on
Peoples' earning assets was 5.60% for quarter ended March 31, 2004, versus 5.52%
and 6.41% for the fourth quarter of 2003 and first quarter of 2003,
respectively, while the cost of interest-bearing liabilities was 2.28%, 2.46%
and 2.99% for those same periods.
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 2004, net interest margin
was 3.56% versus 3.32% last quarter and 3.70% a year ago. The lower net interest
margin compared to 2003' first quarter is largely the result of high volumes of
prepayments in both the loan and investment portfolios and subsequent
reinvestment of those funds at significantly lower rates due to the current
interest rate environment. The improvement from the prior quarter was largely
attributable to asset yields remaining relatively stable, while Peoples was able
to lower its cost of funds, especially borrowed funds. Additionally, the
$376,000 of premium amortization and interest adjustments on mortgage-backed
securities reduced fourth quarter's net interest margin 9 basis points.
For the quarter ended March 31, 2004, earning assets averaged $1.58 billion, up
$119.9 million compared to $1.46 billion a year ago. Net loans comprise the
largest portion of Peoples' earning assets, averaging $897.2 million in the
first quarter of 2004, up from $837.6 million in the same quarter of 2003 due to
loans acquired in the Kentucky Bancshares acquisition. The FTE yield on net
loans was 6.57% for the three months ended March 31, 2004, versus 6.71% and
7.40% for the fourth and first quarters of 2003, respectively. The combination
of customers refinancing higher rate loans, significant volumes of prime based
commercial loan originations and the sale of the credit card portfolio accounted
for the lower yield. Investment securities averaged $650.7 million in first
quarter of 2004 compared to $608.0 million a year ago, with FTE yields of 4.47%
and 5.13%, respectively. The Investment Growth Strategy implemented during the
first quarter of 2003 accounted for virtually all of the increase in average
balance, while the high rate of prepayments on mortgage-backed securities in
recent periods resulted in accelerated amortization of bond premiums causing
Peoples to reinvest those prepayments in instruments with substantially lower
yields.
Peoples' interest-bearing liabilities averaged $1.41 billion in the first
quarter of 2004, up from $1.30 billion a year ago. Traditional deposits comprise
the majority of Peoples' interest-bearing liabilities, averaging $894.8 million
for the quarter ended March 31, 2004 compared to $843.2 million in 2003's first
quarter. This increase was due largely to deposits acquired as part of the
Kentucky Bancshares acquisition. Through three months of 2004, the cost of funds
from interest-bearing deposits was 1.71%, down from 2.50% a year ago, a result
of market rates remaining at low levels. However, the impact of the low market
rates was partially offset by higher rates paid on longer-term certificates of
deposit throughout 2003 as part of a strategy to shift to longer-term funding.
Peoples also utilizes a variety of borrowings as complementary funding sources
to traditional deposits. For the three months ended March 31, 2004, total
borrowed funds averaged $520.0 million, up 13% from $458.3 million a year ago.
The majority of the increase was attributable to the timing of funds used in the
Investment Growth Strategy. While the increased volume produced additional
interest expense, Peoples overall cost of borrowed funds dropped to 3.25% from
3.94% in the first quarter of 2003, due in part to the Long-Term Debt
Restructuring. Compared to the fourth quarter of 2003, average borrowed funds
dropped $11.6 million, while the average cost decreased 40 basis points.
Peoples' main source of borrowed funds are short- and long-term advances from
the FHLB. Short-term FHLB borrowings averaged $86.5 million in the first quarter
of 2004 compared to $16.1 million a year ago, with an average cost of 1.12% and
1.46% for the same periods, respectively. The increased balance was attributable
to shifting $63 million of long-term advances to short-term. This shift also
resulted in a $70.0 million (or 31%) decline in long-term FHLB borrowings, which
averaged $154.1 million versus $224.1 million and a reduction in the average
cost of long-term FHLB borrowings from 4.69% a year ago, to 4.44% for the first
quarter of 2004. Management intends to continue using a variety of FHLB
borrowings to fund asset growth and manage interest rate sensitivity, as deemed
appropriate. Additional information regarding Peoples' advances from the FHLB
can be found later in this Discussion under the caption "Funding Sources".
In addition to FHLB borrowings, Peoples also accesses national market repurchase
agreements to diversify funding sources. Typically, these repurchase agreements
are for terms of 90 days or less. However, Peoples utilized repurchase
agreements with terms ranging from 2 to 5 years as part of the Investment Growth
Strategy in an effort to match the term of the funding sources with the initial
estimated life of the investments. In the first quarter of 2004, wholesale
market term repurchase agreements averaged $216.3 million at an average cost of
2.86%, compared to $150.5 million and an average cost of 2.96% a year ago, due
to the timing of the Investment Growth Strategy and related funding.
As is the case with many financial institutions, Peoples continues to experience
net interest margin compression as a result of declining asset yields with
limited flexibility for a corresponding decrease in rates paid on
interest-bearing liabilities due in large part to market competition. While the
balance sheet restructuring in the fourth quarter of 2003 has had a positive
impact on net interest income and margin, the possibility of additional margin
compression in the remainder of 2004 remains as long as rates remain at their
current low levels. However, a sustained increase in interest rates in the near
future could cause net interest income to increase modestly based on Peoples'
interest rate risk position and asset-liability simulations at March 31, 2004.
Even though management continues to focus on minimizing the impact of future
rate changes on earnings, Peoples' net interest margin and income remain
difficult to predict, and to manage, since changes in market interest rates and
the timing of these changes remain uncertain.
Provision for Loan Losses
- -------------------------
In the first quarter of 2004, Peoples' provision for loan losses was $794,000,
down from $915,000 in the prior quarter and down from $831,000 a year ago. A
portion of the provision relates to the Overdraft Privilege program, which
totaled $134,000, $255,000 and $81,000 for the same periods, respectively. The
lower overall provision was largely the result of Peoples' asset quality and
lower levels of loan delinquencies.
When expressed as a percentage of average loans, the provision was 0.09% in the
first quarter of 2004 compared to 0.10% in both the fourth and first quarters of
2003. Management believes the provisions were appropriate for the overall
quality, inherent risk and volume concentrations of Peoples' loan portfolio.
Future provisions will continue to be based on management's quarterly procedural
discipline described in the "Critical Accounting Policies" section of this
Discussion.
Non-Interest Income
- -------------------
Peoples generates non-interest income from six primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking ("e-banking"), mortgage banking and business owned life
insurance ("BOLI"). In the first quarter of 2004, non-interest income was
$4,887,000, up $952,000 (or 24%) from $3,935,000 a year ago. Additional deposit
service charge income of $528,000 and fiduciary revenues of $188,000, due in
part to the Kentucky Bancshares acquisition, accounted for most of the increase
in non-interest income. Non-interest income in the first quarter also included a
recovery of $210,000 of costs associated with the sale of other real estate
owned ("OREO") in late 2003.
Compared to the fourth quarter of 2003, non-interest income grew $618,000 (or
14%), primarily the result of a combined net loss of $489,000 on securities
transactions, asset disposals and sale of the credit card in the fourth quarter.
Excluding the impact of these transactions, as well as the OREO cost recovery,
non-interest income would have been down slightly, largely attributable to lower
mortgage banking income.
Peoples' largest source of non-interest revenue remains service charges and
other fees on deposit accounts, which are based on the recovery of costs
associated with services provided. For the quarter ended March 31, 2004, deposit
account service charges totaled $2,253,000, up $528,000 (or 31%) from $1,725,000
for 2003's first quarter. This increase was the result of higher volumes of
overdraft and non-sufficient funds ("NSF") fees, combined with an overall
increase in the number of checking accounts due to acquisitions. Additionally,
Peoples increased certain cost recovery fees, including overdraft and NSF fees,
effective January 1, 2004. Management periodically evaluates its cost recovery
fees to ensure the fees are reasonable based on operational costs, as well as
similar fees charged in Peoples' markets. Deposit account service charges were
up $34,000 in the first quarter versus $2,219,000 for the fourth quarter of
2003, as the increase in cost recovery fees, offset the lower volumes of
overdraft and NSF fees normally experienced in the first quarter, due to the
peak holiday shopping period in the fourth quarter.
Peoples' fiduciary revenues improved to $774,000 in the first quarter of 2004,
compared to $586,000 a year ago, a 32% increase. As part of the Kentucky
Bancshares acquisition, Peoples added trust assets of about $182 million, which
accounted for the largest portion of the increase in revenues. Compared to the
fourth quarter of 2003, fiduciary revenues were virtually unchanged. Since the
relative performance of equity markets is the basis for a significant portion of
fiduciary fees, changes in market value will continue to influence Peoples'
fiduciary revenues.
Peoples offers various e-banking services, including ATM and debit cards, direct
deposit services and Internet banking, as alternative delivery channels to
traditional sales offices, for providing services to clients. Peoples'
electronic banking services generated revenues of $523,000 for the quarter ended
March 31, 2004, an increase of $69,000 (or 15%) compared to $454,000 for the
same quarter in 2003. Peoples' alliance with InfiBank, formed as part of the
credit card sale, generated income of $21,000 based on the net revenue of the
portfolio and servicing income of $48,000, which is intended to partially offset
processing costs that Peoples continues to incur. Once the portfolio conversion
is completed in mid-2004, Peoples will cease to receive the servicing income, as
well as incur the processing costs, which should improve operating efficiency.
Since August 1, 2003, Peoples, as well as other financial services companies,
have experienced a reduction in fees earned on certain debit card transactions
as a result of the VISA and MasterCard litigation settlement. Despite the
reduced fee structure, Peoples' e-banking revenues remained strong in the second
half of 2003 and first quarter of 2004. Management currently does not plan to
implement new fees for customers using its debit cards to offset any decline in
revenues but rather, plans to partially offset the reduced income stream by
continuing to grow core deposits, issuing more debit cards, and encouraging
customers to use their debit cards as a convenient way to do their banking. At
March 31, 2004, Peoples had over 56,000 cards issued, with 47% of all eligible
deposits accounts issued a debit card, compared to nearly 39,000 cards and a 42%
penetration rate a year ago. Through three months in 2004, Peoples' customers
completed $28 million of debit card transactions, up from $19 million in the
first quarter of 2003.
Peoples' mortgage banking involves the origination and selling of long-term,
fixed-rate real estate loans into the secondary market. In first quarter of
2004, mortgage banking produced revenues of $199,000 compared to $230,000 a year
ago and $385,000 in the fourth quarter of 2003. The reduction in mortgage
banking income reflects the decline in real estate loan refinancing activity in
response to higher long-term rates plus seasonality. The following table details
Peoples' mortgage banking activity:
(Dollars in thousands) Mortgage
Banking Mortgage Number of
Income Loans Sold Mortgages Sold
First quarter of 2004 $ 199 $ 10,480 117
Fourth quarter of 2003 385 13,161 159
Third quarter of 2003 400 24,983 305
Second quarter of 2003 337 19,300 211
First quarter of 2003 230 9,999 103
Fourth quarter of 2002 135 6,091 60
While it appears the real estate loan refinancing activity will remain light,
mortgage banking is a key part of Peoples' long-term business strategy. Further
information regarding Peoples' mortgage banking activities can be found later in
this discussion under "Loans."
Insurance and investment commissions totaled $299,000 in first quarter of 2004
versus $442,000 for the same quarter in 2003 and $365,000 for the quarter ended
December 31, 2003. The decline in insurance and investment income from the first
quarter of 2003 is largely attributable to lower volumes of fixed annuity sales
and related commission income. In addition, decreased consumer lending
opportunities continue to impact Peoples' credit life and accident and health
("A&H") insurance commissions. Management expects the Putnam acquisition to
positively impact future insurance commissions. The following table details
Peoples' insurance and investment commissions:
Three Months Ended
March 31, December 31, March 31,
(Dollars in thousands) 2004 2003 2003
Property and casualty insurance $ 108 $ 134 $ 91
Brokerage 101 121 44
Fixed annuities 56 54 217
Life and health insurance 27 32 59
Credit life and A&H insurance 7 24 31
- -------------------------------------------------------------------------------
Total $ 299 $ 365 $ 442
- -------------------------------------------------------------------------------
Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. For the quarter ended March 31, 2004, BOLI income
totaled $416,000 compared to $365,000 a year ago and $343,000 last quarter. In
early 2004, Peoples invested an additional $20 million in BOLI, which was the
key driver of the increased BOLI income. Management believes BOLI should
continue to provide a better vehicle for funding future benefit costs than
alternative investment opportunities with similar or lesser risk
characteristics.
Non-Interest Expense
- --------------------
For the three months ended March 31, 2004, non-interest expense totaled
$10,290,000, up $1,171,000 (or 13%) from $9,119,000 a year ago. The majority of
this increase is attributable to the Kentucky Bancshares acquisition, which
caused Peoples to incur additional operating expenses and intangible
amortization expense. Compared to the fourth quarter of 2003, non-interest
expense was down $7,037,000 (or 41%), from $17,327,000. The non-recurring FHLB
prepayment penalties of $6,817,000 in the fourth quarter of 2003 accounted for
nearly all of the decrease, while lower levels of various operating expenses
offset an increase in salaries and benefit costs.
Salaries and benefits remain Peoples' largest operating expense, which is
inherent in a service-based industry such as financial services. For the first
three months of 2004, salaries and benefits totaled $5,389,000, compared to
$4,724,000 and $5,054,000, for 2003's first and fourth quarters, respectively.
The increase from a year ago was largely the result of adding approximately 30
associates in conjunction with the Kentucky Bancshares acquisition, while annual
salary adjustments necessary to retain key associates accounted for the most of
the increase from the prior quarter. Management continues to explore ways, such
as the BOLI investment, to offset the rising salaries and benefit costs in order
to avoid reducing benefits provided to associates and remain competitive for
talented professionals.
Acquisitions and recent investments in technology have resulted in additional
net occupancy and equipment expenses, in particular depreciation expense. In the
first quarter of 2004, net occupancy and equipment expenses totaled $1,221,000
versus $1,098,000 for the same quarter last year. Net occupancy and equipment
expense was down slightly compared to $1,228,000 for the fourth quarter of 2003.
The continued investment in technology has enhanced Peoples' ability to serve
clients and satisfy their financial needs, while acquisitions have allowed
Peoples to expand its customer base for economies of scale. Management continues
to monitor capital expenditures to ensure the resources deployed either improve
efficiencies or generate additional revenues.
For the three months ended March 31, 2004, data processing and software costs
were $472,000, up 43% from $330,000 a year ago. The higher level of data
processing and software costs was attributable to an increase in software
licensing fees in response to additional office locations and users of key
software packages, as well amortization of Peoples' $1.8 million investment in
Customer Relationship Management ("CRM") and profitability systems, the majority
of which was software related costs. While the CRM/profitability investment will
add future expense, these new systems and processes will be a strategic part of
Peoples' sales and marketing efforts for many years and are consistent with
management's long-term focus to build the best process to grow revenues.
Compared to the fourth quarter of 2003, data processing and software costs were
down 15% in the first quarter, due mainly to the timing of certain software
maintenance fees.
Professional fees, which include fees for accounting, legal and other
professional services, totaled $456,000 for first quarter of 2004, down 2% from
a year ago and down 8% from the fourth quarter of 2003. For the last two years,
Peoples has paid consulting fees to the firm that assisted with the
implementation of the Overdraft Privilege program, which were based on a
percentage of the net improvement in overdraft fee income. These costs totaled
$84,000 in first quarter of 2004 versus $152,000 and $137,000 for the first and
fourth quarters of 2003, respectively, a result of a reduction in the fee
percentage beginning in March 2003. The consulting contract terminated at the
end of the first quarter of 2004, which will reduce future professional fees due
to the elimination of the consulting expense, assuming other fees remain near
their current levels.
Peoples is subject to various state franchise taxes, which are based largely on
Peoples Bank's equity at year-end. For the first quarter of 2004, franchise
taxes totaled $341,000 compared to $313,000 last quarter and $257,000 for 2003's
first quarter. This increase is attributable to additional equity at Peoples
Bank resulting from the Kentucky Bancshares acquisition and a $16 million
capital contribution from Peoples Bancorp in early 2003. Despite the increased
franchise taxes, management believes Peoples Bank's stronger capital level
positions Peoples for strategic growth. In addition, management regularly
evaluates the capital position of Peoples' other direct and indirect
subsidiaries and seeks to maximize Peoples' consolidated capital position
through appropriate capital allocation designed to enhance profitability and
shareholder value.
The non-interest leverage ratio serves as a measurement of Peoples' efficiency
for management and key performance indictor for Peoples' incentive compensation
plan for senior management and certain other associates. The non-interest ratio
is defined as non-interest income as a percentage of operating expenses,
excluding gains and losses on securities transactions, asset disposals, early
debt extinguishment, and sale of the credit card portfolio, as well as
intangible asset amortization. The followings details the components of the
non-interest leverage ratio calculation:
For the Three Months
Ended March 31,
(Dollars in Thousands) 2004 2003
Total other income, as reported $ 4,887 $ 3,935
Add: Loss on asset disposals - 2
Deduct: Gain on securities transactions 32 2
Gain on asset disposal 30 -
Recovery of loss on sale of other real estate owned 210 -
- ------------------------------------------------------------------------------------------------
Adjusted total other income 4,615 3,935
================================================================================================
Total other expense, as reported 10,290 9,119
Deduct: Amortization of other intangible assets 401 201
- ------------------------------------------------------------------------------------------------
Adjusted total other expense 9,889 8,918
================================================================================================
Non-interest leverage ratio 46.7% 44.1%
================================================================================================
For the three months ended March 31, 2004, the non-interest leverage ratio was
46.7% compared to 44.1% a year ago. This improvement reflects Peoples' ability
to increase non-interest revenues without a corresponding increase in operating
expenses. Management's strategic goals include achieving and maintaining a
non-interest leverage ratio greater than 50% as a means of reducing Peoples'
reliance on net interest income.
Return on Equity
- ----------------
In the first quarter of 2004, Peoples' return on equity ("ROE") was 12.50%
versus 13.00% for the same quarter last year. The lower ROE is primarily the
result of an increase in average equity, attributable to equity generated by the
Kentucky Bancshares acquisition and increased earnings. Average equity was
$172.6 million in the first quarter of 2004, up 12% compared to $154.3 million
for the first quarter of 2003. Management uses ROE to evaluate Peoples'
long-term performance. However, management believes earnings per share ("EPS")
serves as a more meaningful measurement of short-term performance due to the
volatility that can occur to equity from changes in the estimated fair values of
Peoples' investment portfolio.
Return on Assets
- ----------------
Return on assets ("ROA") was 1.25% in the first quarter of 2004 compared to
1.27% a year ago, with average assets totaling $1.73 billion and $1.57 billion
for the same periods, respectively. 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 continues to make tax-advantaged investments in order to manage its
effective tax rate and overall tax burden. At March 31, 2004, the amount of
tax-advantaged investments totaled $51.3 million compared to $30.5 million at
December 31, 2003 and $28.8 million at March 31, 2003. The additional benefits
derived from this increase in tax-advantaged investments resulted in a reduction
in Peoples' effective tax rate. For the three months ended March 31, 2004,
Peoples' effective tax rate was 27.0%, down from 28.8% a year ago. Depending on
economic and regulatory conditions, Peoples may make additional investments in
various tax credit pools and other tax-advantaged assets.
FINANCIAL CONDITION
Overview of Balance Sheet
- -------------------------
At March 31, 2004, total assets were $1.72 billion compared to $1.74 billion at
year-end 2003, a decrease of $14.1 million attributable to a lower level of cash
and cash equivalents, which is explained in more detail later in this discussion
under "Cash and Cash Equivalents". In the first quarter of 2004, Peoples
completed the reinvestment of funds in connection with the Investment Portfolio
Restructuring. As a result, investment securities totaled $657.3 million at
March 31, 2004, up $15.8 million since December 31, 2003. Gross loans were
$910.8 million on March 31, 2004, down from $915.0 million at December 31, 2003.
Total liabilities were $1.55 billion at March 31, 2004, compared to $1.57
billion at year-end 2003, a decrease of $18.6 million. At March 31, 2004,
deposits totaled $1.03 billion, unchanged from the prior year-end, while
borrowed funds totaled $507.5 million, down $19.1 million from $526.6 million at
December 31, 2003, due to a reduction in short-term borrowings.
Stockholders' equity totaled $175.4 million at March 31, 2004, versus $170.9
million at December 31, 2003, an increase of $4.5 million. This increase is due
primarily to the combination of Peoples' earnings, net of dividends paid, of
$3.5 million and a $4.7 million increase in the market value of
available-for-sale securities, which was largely offset by the purchase of
treasury stock during the quarter totaling $4.1 million.
Cash and Cash Equivalents
- -------------------------
Peoples considers cash and cash equivalents to consist of Federal funds sold,
cash and balances due from banks, interest-bearing balances in other
institutions and other short-term investments that are readily liquid. The
amount of cash and cash equivalents fluctuates on a daily basis due to customer
activity and Peoples' liquidity needs. At March 31, 2004, cash and cash
equivalents totaled $30.9 million, down $42.6 million (or 58%) from $73.4
million at December 31, 2003. This decrease is attributable to Peoples having no
Federal funds sold at March 31, 2004, versus $44.0 million at year-end 2003. A
portion of the Federal funds sold was consumed by the $20 million BOLI
investment in early 2004, while the remaining funds were used in the Investment
Portfolio Restructuring.
Cash and balances due from banks comprised nearly all of Peoples' cash and cash
equivalents at March 31, 2004, totaling $30.1 million. During the first quarter,
the amount of cash and balances due from banks grew $1.7 million (or 6%), due to
normal daily changes in the amount of items in process of collection and cash on
hand.
Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, will allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments, such as 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, 2004, the amortized cost of Peoples' investment securities totaled
$643.6 million compared to $634.8 million at year-end 2003, while the market
value of the investment portfolio was $657.3 million at March 31, 2004, up from
$641.5 million at December 31, 2003. These increases were primarily the result
of Peoples completing the reinvestment of funds from the Investment Portfolio
Restructuring initiated in December 2003.
The difference in amortized cost and market value at March 31, 2004, resulted in
unrealized appreciation in the investment portfolio of $13.7 million and a
corresponding increase in Peoples' equity of $8.9 million, net of deferred
taxes. In comparison, the difference in amortized cost and market value at
December 31, 2003, resulted in unrealized appreciation of $6.7 million and an
increase in equity of $4.3 million, net of deferred taxes.
The following table details Peoples' investment portfolio, at estimated fair
value:
(Dollars in thousands) March 31, December 31, 2003 March 31,
2004 2003
US Treasury securities and obligations of
US government agencies and corporations $ 63,277 $ 65,441 $ 41,638
Obligations of states and political subdivisions 65,726 66,288 67,088
Mortgage-backed securities 466,858 447,341 522,469
Other securities 61,439 62,394 57,155
- ---------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 657,300 $ 641,464 $ 688,350
=========================================================================================================
Overall, the composition of Peoples' investment portfolio at March 31, 2004, was
very comparable to year-end 2003. Since March 31, 2003, Peoples' investment in
US treasury securities and obligations of US government agencies and
corporations, excluding mortgage-backed securities, grew $21.6 million (or 52%)
as the result of US agency securities in the Kentucky Bancshares acquisition.
Peoples' investment in mortgage-backed securities has decreased $55.6 million
(or 11%) since March 31, 2003, as management has used over 50% of the principal
runoff for other corporate purposes rather than reinvesting those funds into
investment securities.
Management monitors the earnings performance and liquidity of the investment
portfolio on a regular basis through Asset/Liability Committee ("ALCO")
meetings. The ALCO also monitors net interest income, sets deposit pricing and
maturity guidelines, and manages Peoples' interest rate risk. Through active
management of the balance sheet and investment portfolio, Peoples seeks to
maintain sufficient liquidity to satisfy depositor demand, other company
liquidity requirements and various credit needs of its customers.
Loans
- -----
Peoples Bank originates various types of loans, including commercial, financial
and agricultural loans ("commercial loans"), real estate loans and consumer
loans, focusing primarily on lending opportunities in central and southeastern
Ohio, northwestern West Virginia, and northeastern Kentucky markets. At March
31, 2004, gross loans totaled $910.8 million, down $4.2 million since year-end
2003. While Peoples continues to experience strong internal originations of
commercial real estate loans, this growth does not offset volume declines
experienced in other loan categories. The following table details total
outstanding loans:
March 31, December 31, March 31,
(Dollars in thousands) 2004 2003 2003
Commercial, mortgage $ 413,167 $ 380,372 $ 316,115
Commercial, other 102,918 131,697 106,667
Real estate, construction 20,196 21,056 10,523
Real estate, mortgage 299,967 301,726 322,169
Consumer 74,545 79,926 96,857
Credit cards - 221 6,065
-------------------------------------------------------------------------
Total loans $ 910,793 $ 914,998 $ 858,396
=========================================================================
Commercial loan balances, including loans secured by commercial real estate,
totaled $516.1 million at March 31, 2004, up $4.0 million from $512.1 million at
year-end 2003. This increase is the result of lending opportunities within
Peoples' existing markets. Commercial loans continued to represent the largest
portion of Peoples' total loan portfolio, comprising 56.7% and 56.0% of total
loans at March 31, 2004 and December 31, 2003, respectively. Future commercial
lending activities will be dependent on economic and related conditions, such as
general demand for loans in Peoples' primary markets, interest rates offered by
Peoples and normal underwriting requirements. In addition to in-market
opportunities, Peoples will continue to lend selectively to creditworthy
customers outside its primary markets.
While commercial loans comprise the largest portion of Peoples' loan portfolio,
residential real estate loans remain a major focus of Peoples' lending efforts,
whether the loans are ultimately sold into the secondary market or retained on
Peoples' balance sheet, which provides opportunities to sell additional products
and services to these consumers. At March 31, 2004, real estate loans, which
include construction loans but exclude loans secured by commercial real estate,
totaled $320.2 million compared to $322.8 million at December 31, 2003, a
decrease of $2.6 million. This decline is due to fewer lending opportunities in
response to decreased refinancing activity, coupled with continued customer
demand for long-term, fixed-rate loans sold into the secondary market and steady
volume of prepayments. Real estate loans comprised 35.2% of Peoples' total loan
portfolio at March 31, 2004, versus 35.3% at year-end 2003. Included in real
estate loans are home equity credit line balances of $29.6 million at March 31,
2004, up from $28.3 million at December 31, 2003.
Real estate loan balances have declined over the last year in response to
customer demand for long-term, fixed-rate mortgages, which are sold in the
secondary market with servicing rights retained. In the first quarter of 2004,
Peoples originated 87 long-term, fixed-rate mortgage loans, with total loan
amounts of $8 million, compared to 105 loans, with total loan amounts of $9
million, in the fourth quarter of 2003 and 117 loans, with total loan amounts of
$11 million, in the first quarter of 2003. At March 31, 2004, Peoples was
servicing $85 million of real estate loans sold into the secondary market. In
addition, Peoples had $2.2 million of fixed-rate real estate loans held for sale
into the secondary market. Management anticipates selling these loans during the
second quarter.
Consumer loans decreased $5.4 million (or 7%) since year-end 2003, totaling
$74.5 million at March 31, 2004. The indirect lending area represented a
significant portion of Peoples' consumer loans, with balances of $34.0 million
and $38.4 million at March 31, 2004 and December 31, 2003, respectively.
Sluggish economic conditions and strong competition for loans, particularly
automobile loans, have challenged the performance and growth of Peoples'
consumer loan portfolio. Regardless of management's desire to maintain, or even
grow, consumer loan balances, Peoples' commitment to sound underwriting
practices and appropriate loan pricing discipline that produces quality loans
remains the paramount objective.
Loan Concentration
- ------------------
Peoples' largest concentration of commercial loans is credits to lodging and
lodging-related companies, which comprised approximately 12.5% of Peoples'
outstanding commercial loans at quarter-end, compared to 12.7% at December 31,
2003. Loans to assisted living facilities and nursing homes also represented a
significant portion of Peoples' commercial loans, comprising 11.2% of Peoples'
outstanding commercial loans at March 31, 2004, versus 11.3% at year-end 2003.
These lending opportunities have arisen due to the growth of these industries in
markets served by Peoples or contiguous areas, as well as sales associates'
efforts to develop these lending relationships. Management believes Peoples'
loans to lodging and lodging-related companies, as well as loans to assisted
living facilities and nursing homes, do not pose abnormal risk when compared to
risk assumed in other types of lending since these credits have been subjected
to Peoples' normal underwriting standards, which includes an evaluation of the
financial strength, market expertise and experience of the borrowers and
principals in these business relationships. In addition, a sizeable portion of
the loans to lodging and lodging-related companies is spread over various
geographic areas and is guaranteed by principals with substantial net worth.
Allowance for Loan Losses
- -------------------------
Peoples' allowance for loan losses totaled $14.8 million, or 1.62% of total
loans, at March 31, 2004, compared to $14.6 million, or 1.59%, at year-end 2003.
The following table presents changes in Peoples' allowance for loan losses:
For the Three
Months Ended March 31,
(Dollars in thousands) 2004 2003
Balance, beginning of period $ 14,575 $ 13,086
Chargeoffs (1,230) (785)
Recoveries 635 231
- -----------------------------------------------------------------------
Net chargeoffs (595) (554)
Provision for loan losses 794 831
- -----------------------------------------------------------------------
Balance, end of period $ 14,774 $ 13,363
=======================================================================
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,
2004 2003 2003
Commercial $ 11,993 $ 11,232 $ 9,320
Consumer 1,319 1,594 1,964
Real estate 1,079 1,234 1,610
Overdrafts 281 283 170
Credit cards 102 232 299
- --------------------------------------------------------------------------------
Total allowance for loan losses $ 14,774 $ 14,575 $ 13,363
================================================================================
The allowance allocated to commercial loans, which includes loans secured by
commercial real estate, has increased in recent periods, reflecting the higher
credit risk associated with this type of lending and continued growth in this
portfolio. The allowance allocated to the real estate and consumer loan
portfolios is based upon Peoples' allowance methodology for homogeneous pools of
loans, which includes a consideration of changes in total balances in those
portfolios. Management continues to maintain an allowance for loan losses for
credit cards since Peoples sold its business accounts with recourse.
In the first quarter of 2004, net loan chargeoffs were $595,000, up from
$554,000 a year ago but down from $763,000 in the fourth quarter of 2003. Net
chargeoffs in the first quarter of 2004 were impacted by Peoples charging-off
$131,000 of credit card balances as part of the final settlement of the sale of
the portfolio and recovering $281,000 of commercial loan balances, which were
part of a single client relationship, charged-down in early 2002. The following
table details Peoples' net chargeoffs:
Three Months Ended
March 31, December 31, March 31,
(Dollars in thousands) 2004 2003 2003
Consumer $ 275 $ 175 $ 201
Real estate 155 72 7
Overdrafts 135 215 117
Credit card 130 51 43
Commercial (100) 250 186
- -------------------------------------------------------------------------------
Total $ 595 $ 763 $ 554
===============================================================================
As a percent of average loans (a) 0.26% 0.33% 0.28%
===============================================================================
(a) Presented on an annualized basis
Consumer loans comprised the largest portion of net chargeoffs for the three
months ended March 31, 2004 and 2003. Real estate and consumer loan chargeoffs
have increased in recent periods, as sluggish economic conditions have impacted
the ability of borrowers to repay these loans. Management believes Peoples' loan
review processes and collection efforts will continue to identify problems loans
in a timely manner which should help control future losses.
Asset quality remains a key focus, as management continues to stress
underwriting quality loans more than loan growth. Since December 31, 2003,
Peoples' asset quality ratios have remained strong despite a modest increase in
the level of nonperforming loans. The following table details Peoples'
nonperforming assets:
(Dollars in thousands) March 31, December 31, March 31,
2004 2003 2003
Loans 90+ days past due and accruing $ 235 $ 188 $ 337
Renegotiated loans - - 685
Nonaccrual loans 6,656 6,556 3,741
- --------------------------------------------------------------------------------------------------------
Total nonperforming loans 6,891 6,744 4,763
Other real estate owned 470 392 924
- --------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,361 $ 7,136 $ 5,687
========================================================================================================
Nonperforming loans as a percent of total loans 0.76% 0.73% 0.55%
========================================================================================================
Nonperforming assets as a percent of total assets 0.43% 0.41% 0.34%
========================================================================================================
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, 2004, the recorded investment in loans that were considered to be
impaired was $18.6 million, of which $15.3 million were accruing interest, and
$3.3 million were nonaccrual loans. Included in this amount were $8.2 million of
impaired loans for which the related allowance for loan losses was $3.4 million.
The remaining impaired loan balances do not have a related allocation of the
allowance for loan losses because the loans have been previously written-down,
are well secured, or possess characteristics indicative of the ability to repay
the loan. For the three months ended March 31, 2004, Peoples' average recorded
investment in impaired loans was approximately $19.3 million and interest income
of $242,000 was recognized on impaired loans during the period, representing
1.1% of Peoples' total interest income.
Funding Sources
- ---------------
Peoples considers a number of sources when evaluating funding needs, including
but not limited to deposits, short-term borrowings, and long-term borrowings.
Deposits, both interest-bearing and non-interest bearing, continue to be the
most significant source of funds for Peoples, totaling $1.03 billion, or 67% of
total borrowed funds, at March 31, 2004.
Non-interest bearing deposits serve as a core funding source. At March 31, 2004,
non-interest bearing deposit balances totaled $134.3 million, up slightly
compared to the prior year-end. Since customer activity can result in temporary
changes in deposit balances at end of periods, management believes a comparison
of average balances to be a more meaningful reflection of the trend in
non-interest-bearing deposits. In the first quarter of 2004,
non-interest-bearing deposits averaged $135.5 million versus $132.3 in the
fourth quarter of 2003, reflecting Peoples' efforts to increase
non-interest-bearing deposits. Peoples' strategies include continued emphasis on
core deposit growth in products such as non-interest-bearing checking accounts.
Interest-bearing deposits totaled $895.3 million at March 31, 2004 compared to
$894.8 million at December 31, 2003. The following details Peoples'
interest-bearing deposits:
(Dollars in thousands) March 31, December 31, March 31,
2004 2003 2003
Certificates of deposit $ 456,069 $ 461,904 $ 420,817
Savings accounts 173,013 171,488 169,120
Interest-bearing transaction accounts 167,091 157,410 143,656
Money market deposit accounts 99,107 104,019 122,578
-------------------------------------------------------------------------------
Total interest-bearing deposits $ 895,280 $ 894,821 $ 856,171
===============================================================================
Peoples also accesses other funding sources, including short-term and long-term
borrowings, to fund asset growth and satisfy liquidity needs. Peoples'
short-term borrowings include overnight repurchase agreements and FHLB advances,
while long-term borrowings include FHLB advances, a loan from an unrelated
financial institution and term repurchase agreements. At March 31, 2004,
borrowed funds totaled $507.5 million, down $19.1 million (or 4%) from $526.6
million at year-end 2003, as a result of a reduction in short-term borrowings.
Advances from the FHLB comprise a significant portion of Peoples' borrowed
funds. Short-term FHLB advances are typically variable rate cash management
advances used to manage Peoples' daily liquidity needs and may be repaid, in
whole or part, at anytime without a penalty. Peoples also utilizes short-term,
repo advances ranging in terms from overnight to one-year to manage its cost of
funds and temporary cash needs. Peoples' long-term FHLB advances are primarily
convertible rate advances, with the initial rate fixed for periods ranging from
two to four years, depending on the specific advance. After the initial
fixed-rate period, these advances are subject to conversion, at the discretion
of the FHLB, to a LIBOR based, variable rate product. Peoples has the option to
prepay, without penalty, any advance that has been converted or allow the
borrowing to reprice. In addition to these convertible rate advances, Peoples
utilizes fixed-rate, long-term FHLB advances, both amortizing and
non-amortizing, to help manage its interest rate sensitivity and liquidity.
Further information regarding Peoples' management of interest rate sensitivity
can be found later in this discussion under "Interest Rate Sensitivity and
Liquidity."
In addition to FHLB advances, Peoples accesses national market repurchase
agreements to diversify its funding sources. At March 31, 2004, wholesale
repurchase agreements totaled $216.3 million, unchanged from year-end 2003.
Peoples current wholesale repurchase agreements range in original terms of two
to five years. The repurchase agreements may not be repaid prior to maturity and
must remain sufficiently collateralized during the entire term. As a result, a
decline in the market value of the investment securities associated with these
agreements would require Peoples to pledge additional investment securities.
Capital/Stockholders' Equity
- ----------------------------
At March 31, 2004, stockholders' equity was $175.4 million, versus $170.9
million at December 31, 2003, an increase of $4.5 million (or 3%). Peoples'
earnings, net of dividends paid, accounted for $3.5 million, while an
improvement in the market value of Peoples' available-for-sale securities
resulted in a $4.7 million increase to equity. These increases were partially
offset by repurchases of Peoples' common shares in the first quarter of 2004,
which added $4.1 million of treasury stock.
For the three months ended March 31, 2004, Peoples paid dividends of $1.9
million, representing a dividend payout ratio of 35.4% of earnings, compared to
a payout ratio of 28.9% a year ago. While management anticipates Peoples
continuing its 38-year history of consistent dividend growth in future periods,
Peoples Bancorp's ability to pay dividends on its common shares is largely
dependent upon dividends from Peoples Bank. 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. 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 other strategic purposes.
Unrealized holding gains on available-for-sale securities, net of deferred
income taxes, impacts Peoples' total equity. At March 31, 2004, net unrealized
holding gains totaled $8.9 million versus $4.3 million at December 31, 2003.
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, 2004, Peoples had treasury stock totaling $5.4 million, up $3.2
million from year-end 2003. During the first quarter of 2003, Peoples
repurchased 141,200 common shares (or 33% of the total authorized), at an
average price of $29.14 per share, under the 2004 Stock Repurchase Program and
1,066 common shares, at an average price of $29.43, in conjunction with the
deferred compensation plan for directors of Peoples Bancorp and its
subsidiaries. Peoples reissued 26,619 treasury shares due to stock option
exercises during the first three months of 2004. Peoples anticipates
repurchasing additional common shares as authorized in the 2004 Stock Repurchase
Program and permitted by Federal securities laws.
Management uses the tangible equity ratio as one measure of the adequacy of
Peoples' equity. The ratio, defined as tangible equity as a percentage of
tangible assets, excludes the balance sheet impact of intangible assets acquired
through acquisitions accounted for using the purchase method of accounting. At
March 31, 2004, Peoples tangible equity ratio was 7.56% compared to 7.24% at
December 31, 2003 and 7.71% at March 31, 2003. The higher ratio compared to the
prior year end is the result of an increase in equity, while the lower ratio
from a year ago is attributable to an increase in assets due to the Kentucky
Bancshares acquisition.
In addition to monitoring performance through traditional capital measurements
(i.e., dividend payout ratios and ROE), Peoples has also complied with the
capital adequacy standards mandated by the banking industry. Bank regulators
have established "risk-based" capital requirements designed to measure capital
adequacy. Under the risk-based capital framework, a bank's balance sheet assets
and credit equivalent amounts of off-balance sheet items are typically assigned
to one of four broad risk categories: 0% (lowest risk), 20%, 50% or 100%
(highest risk). The sum of the resulting weighted values from each of the four
risk categories is used in calculating key capital ratios. At March 31, 2004,
Peoples' Total Capital, Tier 1 and Leverage ratios were 15.19%, 13.79% and
8.80%, respectively, 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, 2004.
Interest Rate Sensitivity and Liquidity
- ---------------------------------------
While Peoples is exposed to various business risks, the risks relating to
interest rate sensitivity and liquidity are typically the most complex and
dynamic and could materially impact future results of operation and financial
condition. The objective of Peoples' asset/liability management ("ALM") function
is to measure and manage these risks in order to optimize net interest income
within the constraints of prudent capital adequacy, liquidity and safety. This
objective requires Peoples to focus on interest rate risk exposure and adequate
liquidity through management of the mix of assets and liabilities. Ultimately,
the ALM function is intended to guide management in the acquisition and
disposition of earning assets and selection of appropriate funding sources.
INTEREST RATE RISK
Interest rate risk ("IRR") is one of the most significant risks for Peoples, and
the entire financial services industry, primarily arising in the normal course
of business of offering a wide array of financial products to its customers,
including loans and deposits, as well as the diversity of its own investment
portfolio and borrowed funds. IRR is the potential for economic loss due to
future interest rate changes that can impact both the earnings stream as well as
market values of financial assets and liabilities. Peoples' exposure to IRR is
due primarily to differences in the maturity, or repricing, of earning assets
and interest-bearing liabilities. In addition, other factors, such as
prepayments of loans and investment securities or early withdrawal of deposits,
can expose Peoples to IRR and increase interest costs or reduce revenue streams.
Peoples has charged the ALCO with the overall management of Peoples' balance
sheet mix and off-balance sheet commitments and hedging transactions related to
the management of IRR. The ALCO consists of Peoples' Chief Financial, Officer,
Chief Executive Officer and Chief Lending Officer, as well as other members of
senior management. It is the ALCO's responsibility to focus on the future by
evaluating trends and potential future events, researching alternatives, then
recommending and authorizing an appropriate course of action. To this end, the
ALCO has established an IRR management policy that sets the minimum requirements
and guidelines for monitoring and managing the level and amount of IRR. The
objective of the IRR policy is to encourage adherence to sound fundamentals of
banking while allowing sufficient flexibility to exercise the creativity and
innovation necessary to meet the challenges and opportunities of changing
markets. The ultimate goal of these policies is to optimize net interest income
within the constraints of prudent capital adequacy, liquidity and safety.
Peoples' ALCO relies on different methods of assessing IRR, including
simulations, to project future net interest income and to monitor the
sensitivity of the net present market value of equity and the difference, or
"gap", between maturing or repricing of rate-sensitive assets and liabilities
over various time periods. Peoples uses these methods to monitor IRR for both
the short- and long-term. The ALCO places emphasis on simulation modeling as the
most beneficial measurement of IRR because it is a dynamic measure. By employing
a simulation process that estimates the impact of potential changes in interest
rates and balance sheet structures and by establishing limits on these estimated
changes to net income and net market value, the ALCO is better able to evaluate
interest rate risks and their potential impact to earnings and the market value
of equity.
The modeling process starts with a base case simulation using the current
balance sheet and current interest rates held constant for the next twelve
months. At least two alternative interest rate scenarios, one with higher
interest rates and one with lower interest rates, assuming parallel, immediate
and sustained changes are also prepared using the same balance sheet structure
as the base scenario. Comparisons produced from the simulation data, showing the
earnings variance from the base interest rate scenario, illustrate the risks
associated with the current balance sheet structure. Additional simulations,
when deemed appropriate, are prepared using different interest rate scenarios
than those used with the base case simulation and/or possible changes in balance
sheet structure. The additional simulations are used to better evaluate risks
and highlight opportunities inherent in the modeled balance sheet. Comparisons
showing the earnings and equity value variance from the base case are provided
to the ALCO for review and discussion. The results from these model simulations
are evaluated for indications of effectiveness of current IRR management
strategies.
As part of the evaluation of IRR, the ALCO has established limits on changes in
net interest income and the net value of the balance sheet. The ALCO limits the
decrease in net interest income of Peoples Bank to 10% or less from base case
for each 100 basis point shift in interest rates measured over a twelve-month
period assuming a static balance sheet. The ALCO limits the negative impact on
net equity to 40% or less given an immediate and sustained 200 basis points
shift in interest rates, also assuming a static balance sheet. The ALCO also
reviews static gap measures for specific periods focusing on a one-year
cumulative gap. Based on historical trends and performance, the ALCO has
determined the ratio of the one-year cumulative gap should be within +/-15% of
earning assets at the date of measurement. Results that are outside of any of
these limits will prompt a discussion by the ALCO of appropriate actions, if
any, that should be taken.
At March 31, 2004, Peoples' one-year cumulative gap amount was negative 14.3% of
earning assets, which represented $222.8 million more in liabilities than assets
that could reprice or mature during that period. However, management believes a
portion of interest-bearing liabilities are not likely to reprice at their first
opportunity, based on current rates and management's control over the pricing of
most deposits. Excluding those liabilities, Peoples' adjusted one-year
cumulative gap amount at quarter-end was positive 6.3% of earning assets, which
represented $98.2 million more in assets than liabilities that mature or may
reprice during the next twelve months.
The following table is provided to illustrate the estimated earnings at risk and
value at risk positions of Peoples, on a pre-tax basis, at March 31, 2004
(dollars in thousands):
Immediate Estimated Estimated
Interest Rate
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- --------------------------- ----------------------------- --------------------------------
300 $ 27 0.1 % $ (70,266) (31.5) %
200 271 0.5 (46,393) (20.8)
100 344 0.6 (21,713) (9.7)
(50) $ (989) (1.9) % $ 2,636 1.2 %
The interest rate risk illustration shows Peoples is slightly 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, based on the assumptions used. However, the variability of
cash flows from the investment and loan portfolios continue to have a
significant influence on future net interest income and earnings, especially
during periods of changing interest rates. In general, the amount of principal
runoff from these portfolios tends to decrease as interest rates increase due to
fewer prepayments, limiting the amount of funds which can be reinvested at
higher rates, while declining interest rates tend to result in a higher level of
funds that must be reinvested at lower rates, due to an increase in prepayments.
The interest rate table 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
IRR position. Peoples has a hedge position on a $17 million long-term,
fixed-rate borrowing from the FHLB that may convert to a variable rate, at the
FHLB's discretion. In addition, the ALCO may consider additional hedging
options, including, but not limited to, the purchase of other interest rate
hedge positions, as available and appropriate, that would provide net interest
income protection in a rising rate environment.
LIQUIDITY
In addition to IRR management, a primary objective of the ALCO is the
maintenance of a sufficient level of liquidity. The ALCO defines liquidity as
the ability to meet anticipated and unanticipated operating cash needs, loan
demand and deposit withdrawals, without incurring a sustained negative impact on
profitability. The ALCO's liquidity management policy sets limits on the net
liquidity position of Peoples and the concentration of non-core funding sources,
both wholesale funding and brokered deposits.
Typically, the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided from cash generated from earning assets such as maturities,
calls, principal payments and net income from loans and investment securities.
Through three months of 2004, cash used in financing activities totaled $23.3
million compared to cash provided by financing activity of $268.2 million a year
ago. This change is due largely to Peoples using excess cash to reduce the
amount of short-term borrowing, coupled with an increase in long-term borrowings
in the first quarter of 2003 in connection with an investment growth strategy.
Cash used in investing activities totaled $27.3 million versus $284.6 million
last year, primarily due to investment securities purchases in the first quarter
of 2003.
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, 2004, Peoples had available borrowing capacity
of approximately $133 million through these external sources and unpledged
securities in the investment portfolio of approximately $194 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, 2004,
Peoples' net liquidity position was $185.0 million, or 10.7% of total assets,
compared to $260.1 million, or 15.0% of total assets, at December 31, 2003. The
decrease in liquidity position was primarily the result of a lower level of
liquid assets, due in large part to the reduction in Federal funds sold. The
liquidity position as of March 31, 2004, was within Peoples' policy limit of
negative 10% of total assets. At March 31, 2004, total wholesale funding
comprised 26.8% 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 tax
credit investments.
Traditional off-balance sheet credit-related financial instruments are primarily
commitments to extend credit, and standby letters of credit. These activities
could require Peoples to make cash payments to third parties in the event
certain specified future events occur. The contractual amounts represent the
extent of Peoples' exposure in these off-balance sheet activities. However,
since certain off-balance sheet commitments, particularly standby letters of
credit, are expected to expire or be only partially used, the total amount of
commitments does not necessarily represent future cash requirements. These
activities are necessary to meet the financing needs of customers. The following
table details the total contractual amount of loan commitments and standby
letters of credit:
March 31, December 31, March 31,
(Dollars in thousands) 2004 2003 2003
Loan commitments $ 112,779 $ 115,685 $ 114,342
Standby letters of credit 22,478 20,928 7,799
Unused credit card limits - - 22,447
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, 2004, Peoples held interest rate
contracts with notional amounts totaling $27 million and fair values totaling
$256,000. 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, 2004, do not represent the amounts that may ultimately be paid or
received under these contracts.
Peoples also has commitments to make additional capital contributions in
low-income housing tax credit funds, consisting of a pool of low-income housing
projects. As a limited partner in these funds, Peoples receives Federal income
tax benefits, which assists Peoples in managing its overall tax burden. At March
31, 2004, these commitments approximated $8.2 million, with approximately $4.4
million expected to be paid over the next twelve months. Management may make
additional investments in various tax credit funds.
Management does not anticipate Peoples' current off-balance sheet activities
will have a material impact on future results of operations 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. Many 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
- --------------
Peoples' first quarter results provide a positive outlook for the remainder of
2004 and reflect the benefits of the balance sheet restructuring in late 2003.
Management continues to work to position Peoples for long-term earnings growth,
especially once interest rates start to rise. In the meantime, Peoples' strong
capital position, coupled with management's commitment to sound underwriting
discipline and asset quality, serves as a foundation of strength in the current
business environment, which continues to challenge Peoples' operating
performance.
Cost control is a constant theme even as recent acquisitions and investments in
technology have resulted in additional operating expense. Peoples also continues
to incur about $60,000 per quarter of credit card expenses through the
conversion date, scheduled for mid-May. While the acquiring company pays Peoples
a servicing fee during the transition period, this fee does not fully offset the
processing and related costs. Assuming other costs remain stable, the
elimination of these costs, as well as the consulting fees relating to the
Overdraft Privilege Program, should help offset some of the increase in other
operating expenses.
Loan growth remains a key part of management's strategic plans, although
competition for quality loans remains strong. Management continues to evaluate
Peoples' personal lending process to improve the overall performance of the
consumer loan portfolio; however, originating commercial and real estate loans
remain a primary focus of lenders, due in part to strong demand for these loans
in many of Peoples' primary markets. Already in 2004, management has invested in
technology that will allow Peoples' Home Loan Specialists to serve customers
more efficiently and shorten the time between application and closing, as well
as increased the marketing of its one-to-four family mortgage loan products.
Management believes these actions should improve loan originations throughout
the remainder of 2004, whether these loans are retained on Peoples' books or
sold into the secondary market.
Peoples' business strategy also includes a focus on growing core deposits and
adjusting the mix of customer funding sources. In early 2004, Peoples
re-launched its Freedom checking campaign as part of its efforts to grow
non-interest bearing deposits and reduce its reliance on high cost funding, such
as certificates of deposit. Management believes the combination of an expanding
branch network and extended hours in some offices, plus technology, such as
Internet banking and free online billpay, will allow Peoples to successfully
compete for core deposits and enhance future operating results.
Over the last decade, Peoples disciplined growth and expansion strategy has
complemented its sales efforts to serve customers and grow revenues. The recent
acquisition of the Putnam Agency is expected to enhance Peoples' presence in the
Ashland, Kentucky and Huntington, West Virginia markets and further diversify
revenues. Based on preliminary projections, management expects this transaction
to be slightly accretive to Peoples' 2004 EPS, assuming revenue growth targets
are achieved. In addition, some administrative activities may be consolidated
over the next 12 months, which could enhance operating efficiency and produce
additional benefits. Peoples has also retained all key Putnam Agency producers
and managers, with the exception of one producer who is retiring. This allows
sales leadership to remain intact, which is important in a relationship-based
business like insurance. Putnam Agency will operate as a division of Peoples
Insurance Agency, and will continue to use the locally well-known Putnam Agency
name in marketing campaigns. Peoples' management looks forward to establishing
long-term relationships and offering Peoples' other financial products and
services to the newly added customers.
With strong regulatory capital ratios and a comfortable level of tangible equity
to total assets, management believes mergers and acquisitions remain a viable
means of expanding Peoples' operations and customer base. While Peoples has
completed several traditional banking acquisitions in recent years, management's
evaluation of future acquisitions will include insurance agency and professional
investment services firms. Ultimately, the assessment of potential acquisitions
will emphasize opportunities to complement Peoples' core competencies and
strategic intent more than geographic location, size or nature of business.
Peoples remains a service-oriented company with a sales focus that strives to
satisfy clients through a relationship sales process. Through this process,
sales associates work to anticipate, uncover, and solve their clients' every
financial need, from insurance to banking to investment services. In the
remaining nine months of 2004, management expects earnings catalysts to include
possible loan growth, net revenue enhancements from the credit card alliance
formed in fourth quarter 2003, more controlled operating expenses from decreased
professional fees and some EPS contribution from the Putnam Agency acquisition.
Forward-Looking Statements
- --------------------------
Certain 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. Words such as
"expects," "believes", "plans", "will", "would", "should", "could" and similar
expressions are intended to identify these forward-looking statements but are
not the exclusive means of identifying such statements. Forward-looking
statements are subject to risks and uncertainties that may cause actual results
to differ materially. Factors that might cause such a difference include, but
are not limited to: (1) competitive pressures among depository institutions
increase significantly; (2) changes in the interest rate environment that impact
interest margins; (3) prepayment speeds, loan sale volumes, chargeoffs and loan
loss provisions; (4) general economic conditions are less favorable than
expected; (5) political developments, wars or other hostilities may disrupt or
increase volatility in securities markets or other economic conditions; (6)
legislative or regulatory changes or actions adversely affect Peoples' business;
(7) changes and trends in the securities markets; (8) a delayed or incomplete
resolution of regulatory issues that could arise; (9) the impact of reputational
risk created by these developments on such matters as business generation and
retention, funding and liquidity; (10) the outcome of regulatory and legal
proceedings and (11) other risk factors relating to the banking industry or
Peoples as detailed from time to time in Peoples' reports filed with the
Securities and Exchange Commission ("SEC").
All forward-looking statements speak only as of the execution date of this Form
10-Q and are expressly qualified in their entirety by the cautionary statements.
Although management believes the expectations in these forward-looking
statements are based on reasonable assumptions within the bounds of management's
knowledge of Peoples' business and operations, it is possible that actual
results may differ materially from these projections. Additionally, Peoples
undertakes no obligation to release revisions to these forward-looking
statements to reflect events or circumstances after the date of this Form 10-K.
Copies of documents filed with the SEC are available free of charge at the SEC
website at http://www.sec.gov and/or from Peoples' website.
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,
2004 2003
------------------------------------ -----------------------------------
(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Securities:
Taxable $ 585,446 $ 6,171 4.22% $ 541,753 $ 6,688 4.94%
Tax-exempt (1) 65,204 1,094 6.71% 66,224 1,114 6.73%
- -----------------------------------------------------------------------------------------------------------------
Total securities 650,650 7,265 4.47% 607,977 7,802 5.13%
Loans (2):
Commercial (1) 527,864 7,806 5.95% 413,935 6,747 6.52%
Real estate (3) 307,394 5,108 6.57% 330,755 6,051 7.32%
Consumer 76,984 1,761 9.20% 106,277 2,562 9.64%
- -----------------------------------------------------------------------------------------------------------------
Total loans 912,242 14,675 6.43% 850,967 15,360 7.22%
Less: Allowance for loan loss (15,016) (13,395)
- -----------------------------------------------------------------------------------------------------------------
Net loans 897,226 14,675 6.57% 837,572 15,359 7.40%
Interest-bearing deposits with banks 2,553 3 0.46% 1,549 3 0.72%
Federal funds sold 24,697 57 0.91% 8,113 23 1.17%
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 1,575,126 22,000 5.60% 1,455,211 23,188 6.41%
Other assets 156,402 120,462
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,731,528 1,575,673 $
=================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 170,945 233 0.55% 150,168 $ 496 1.32%
Interest-bearing demand deposits 262,864 497 0.76% 270,835 867 1.28%
Time 460,956 3,070 2.68% 422,158 3,841 3.64%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 894,765 3,800 1.71% 843,161 5,204 2.50%
Borrowed funds:
Short-term 103,462 277 1.07% 37,603 227 1.11%
Long-term 416,585 3,961 3.80% 420,655 4,288 4.08%
- -----------------------------------------------------------------------------------------------------------------
Total borrowed funds 520,047 4,238 3.25% 458,258 4,515 3.94%
- -----------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,414,812 8,038 2.28% 1,301,419 9,719 2.99%
Non-interest bearing deposits 135,505 108,315
Other liabilities 8,564 11,637
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,558,881 1,421,371
Stockholders' equity 172,647 154,302
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,731,528 $ $ 1,575,673 $
=================================================================================================================
Interest spread 13,962 3.32% 13,468 3.42%
Interest income to earning assets 5.60% 6.41%
Interest expense to earning assets 2.04% 2.71%
- -----------------------------------------------------------------------------------------------------------------
Net interest margin 3.56% 3.70%
- -----------------------------------------------------------------------------------------------------------------
(1) Interest income and yields are presented on a fully tax-equivalent
basis using a 35% tax rate.
(2) Nonaccrual and impaired loans are included in the average balances.
Related interest income on nonaccrual loans prior to the loan being
placed on nonaccrual is included in loan interest income. Loan fees
included in interest income totaled $120 and $171 for the periods
presented in 2004 and 2003, respectively.
(3) Loans held for sale are included in the average balance listed. Related
interest income on loans originated for sale prior to the loan being
sold is included in loan interest income.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
With the participation of the Chief Executive Officer and the Chief Financial
Officer of Peoples Bancorp Inc. ("Peoples"), Peoples' management has evaluated
the effectiveness of Peoples' disclosure controls and procedures, as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as of the end of the period covered by this Quarterly Report on
Form 10-Q. Based on that evaluation, Peoples' Chief Executive Officer and Chief
Financial Officer have concluded that:
(a) information required to be disclosed by Peoples in this Quarterly
Report on Form 10-Q would be accumulated and communicated to Peoples'
management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure;
(b) information required to be disclosed by Peoples in this Quarterly
Report on Form 10-Q would be recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms; and
(c) Peoples' disclosure controls and procedures are effective as of the
end of the period covered by this Quarterly Report on Form 10-Q to
ensure that material information relating to Peoples and consolidated
subsidiaries is made know to them, particularly during the period in
which Peoples' periodic reports, including this Quarterly Report on
Form 10-Q, are being prepared.
Changes in Internal Controls
- ----------------------------
There were no changes in Peoples' internal controls over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that occurred during Peoples'
fiscal quarter ended March 31, 2004, that have materially affected, or are
reasonably likely to materially affect, Peoples' internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
None.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS.
The following table details Peoples' repurchases and purchases by "affiliated
purchasers" as defined in Rule 10b-18(a)(3) of Peoples' common shares during the
three months ended March 31, 2004:
(d)
(c) Maximum Number
Total Number of of Common Shares
Common Shares that May Be
(a) (b) Purchased as Part of Purchased Under
Total Number of Average price Publicly Announced the Plans or
Period Shares Purchased Paid per Share Plans or Programs (1) Programs (1)(2)
January 1 - 31, 2004 32,678(3) $29.74(3) 31,900 393,100
February 1 - 29, 2004 101,500 $28.98 101,500 291,600
March 1 - 31, 2004 8,088(4) $28.74(4) 7,800 283,800
- ------------------------------------------------------------------------------------------------------------
Total 142,266 $29.14 141,200 283,800
- ------------------------------------------------------------------------------------------------------------
(1) Information reflects solely the 2004 Stock Repurchase Plan announced on
December 17, 2003, which authorized the repurchase of 425,000 common
shares, with an aggregate purchase price of not more than $13.0 million.
The 2004 Stock Repurchase Plan expires on December 31, 2004.
(2) Information reflects maximum number of common shares that may be
purchased at the end of the period indicated.
(3) Includes an aggregate of 778 common shares purchased in open market
transactions at an average price of $29.78 by Peoples Bank under the Rabbi
Trust Agreement establishing a rabbi trust holding assets to provide
payment of the benefits under the Peoples Bancorp Inc. Deferred
Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries
(the "Rabbi Trust").
(4) Includes an aggregate of 288 common shares purchased in open market
transactions at an average price of $28.48 by Peoples Bank under the Rabbi
Trust.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 8, 2004, Peoples Bancorp Inc. held its Annual Meeting of Shareholders
in the Ball Room at the Holiday Inn in Marietta, Ohio, with 85% 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 2007): Robert E. Evans (Chairman of the Board), Robert W.
Price, Paul T. Theisen and Thomas J. Wolf. Other Directors of Peoples Bancorp
who continue to serve after the 2004 Annual Meeting include Carl L. Baker, Jr.,
Mark F. Bradley, George W. Broughton, Frank L. Christy, Wilford D. Dimit,
Theodore P. Sauber and Joseph H. Wesel (Vice Chairman of the Board). The
following is a summary of voting results:
Nominee For Withheld
- --------------------------- ------------- -------------
Robert E. Evans 8,953,650 60,184
Robert W. Price 8,450,351 563,482
Paul T. Theisen 7,832,648 1,181,185
Thomas J. Wolf 8,951,011 62,823
In addition, the shareholders approved a proposal to amend Article THREE of
Peoples Bancorp's Code of Regulations to designate additional officers to be
elected by the directors and clarify and separate the roles of the officers.
Specifically, the approved proposal: (i) deleted current Section 3.01 and
replaced it in its entirety with the a new Section 3.01; (ii) deleted current
Sections 3.03, 3.04 and 3.05 and replace them in their entirety with the new
Sections 3.03, 3.04, 3.05, 3.06, 3.07 and 3.08; (iii) added a new Section 3.11;
and (iv) renumbered existing Sections 3.06, 3.07 and 3.08 as Sections 3.09, 3.10
and 3.12, respectively. This amendment creates the office of chief executive
officer; clarifies the duties of each of the chairman of the board and the
president; allows the directors to elect executive vice presidents, as well as
vice presidents; clarifies the executive vice presidents and the vice presidents
will perform the duties and exercise the powers assigned to them by the Board of
Directors; and permits the Board of Directors to assign certain leadership
responsibilities to a non-executive member of the Board of Directors as a
leadership director. The following is a summary of voting results for this
proposal:
For: 8,851,551 Withheld: 43,972 Against: 118,310 Abstentions: 1,628,739
ITEM 5: OTHER INFORMATION.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- -----------------------------
3(a) Certified Resolutions Regarding Adoption of Amendments Filed herewith
to Article THREE of the Code of Regulations of Peoples
Bancorp Inc. by Shareholders on April 8, 2004.
3(b) Code of Regulations of Peoples Bancorp Inc. Filed herewith
(reflecting amendments through April 8, 2004) [For SEC
reporting compliance purposes only].
11 Computation of Earnings Per Share. Filed herewith
12 Computation of Ratios. Filed herewith
31(a) CEO Certification Pursuant to Rule Filed herewith
13a-14(a)/15d-14(a)
31(b) CFO Certification Pursuant to Rule Filed herewith
13a-14(a)/15d-14(a)
32 Section 1350 Certifications Filed herewith
b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the three months ended March 31, 2004:
1) Filed February 3, 2004 - Reporting, under Item 5, the issuance of a
news release announcing the formation of Peoples Bancorp Foundation,
Inc.
2) Filed February 13, 2004 - Reporting, under Item 5, the issuance of a
news release announcing the declaration of a cash dividend of $0.18 per
share by the Board of Directors of Peoples Bancorp Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORP INC.
Date: May 10, 2004 By: /s/ MARK F. BRADLEY
----------------------------------
Mark F. Bradley
Chief Operating Officer
Date: May 10, 2004 By: /s/ JOHN W. CONLON
----------------------------------
John W. Conlon
Chief Financial Officer
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR PERIOD ENDED MARCH 31, 2004
Exhibit
Number Description Exhibit Location
- ------------ ------------------------------------------------------ ---------------------------------
3(a) Certified Resolutions Regarding Adoption of Amendments Filed herewith
to Article THREE of the Code of Regulations of Peoples
Bancorp Inc. by Shareholders on April 8, 2004.
3(b) Code of Regulations of Peoples Bancorp Inc. Filed herewith
(reflecting amendments through April 8, 2004) [For SEC
reporting compliance purposes only].
11 Computation of Earnings Per Share. Filed herewith
12 Computation of Ratios. Filed herewith
CEO Certification Pursuant to Rule Filed herewith
31(a) 13a-14(a)/15d-14(a)
CFO Certification Pursuant to Rule Filed herewith
31(b) 13a-14(a)/15d-14(a)
32 Section 1350 Certifications Filed herewith