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 September 30, 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 November 4, 2004: 10,423,498 common shares, without par value.
Exhibit Index Appears on Page 40
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Balance Sheets, Condensed
Consolidated Statements of Income, Consolidated Statement of Stockholders'
Equity, Consolidated Statements of Comprehensive Income 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 nine months ended September 30,
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 fiscal 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
unaudited consolidated 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)
September 30, December 31,
Assets 2004 2003
Cash and cash equivalents:
Cash and due from banks $ 32,166 $ 28,349
Interest-bearing deposits in other banks 1,621 1,077
$
Federal funds sold 7,700 44,000
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Total cash and cash equivalents 41,487 73,426
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $638,518 at September 30, 2004 and $634,801 at December 31, 2003) 644,472 641,464
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Loans, net of deferred fees and costs 957,864 914,998
Allowance for loan losses (14,806) (14,575)
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Net loans 943,058 900,423
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Loans held for sale 1,386 2,847
Business owned life insurance 44,770 23,355
Bank premises and equipment, net 22,133 22,155
Goodwill 53,807 41,407
Other intangible assets 10,892 7,298
Other assets 21,644 23,729
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Total assets $ 1,783,649 $ 1,736,104
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Liabilities
Deposits:
Non-interest-bearing $ 143,147 $ 133,709
Interest-bearing 884,595 894,821
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Total deposits 1,027,742 1,028,530
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Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase 14,502 16,468
Federal Home Loan Bank advances 77,300 92,300
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Total short-term borrowings 91,802 108,768
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Long-term borrowings 447,088 388,647
Junior subordinated notes held by subsidiary trusts 29,242 29,177
Accrued expenses and other liabilities 14,543 10,102
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Total liabilities 1,610,417 1,565,224
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Stockholders' Equity
Common stock, no par value, 24,000,000 shares authorized,
10,845,869 shares issued at September 30, 2004 and 10,704,938 shares issued
at December 31, 2003, including shares in treasury 162,240 161,005
Retained earnings 17,613 7,781
Accumulated comprehensive income, net of deferred income taxes 3,721 4,255
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183,574 173,041
Treasury stock, at cost, 419,489 shares at September 30, 2004 and 101,146 shares
at December 31, 2003 (10,342) (2,161)
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Total stockholders' equity 173,232 170,880
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Total liabilities and stockholders' equity $ 1,783,649 $ 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 For the Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
Interest Income:
Interest and fees on loans $ 14,891 $ 15,882 $ 44,138 $ 46,899
Interest on taxable investment securities 6,225 6,881 18,229 20,604
Interest on tax-exempt investment securities 688 710 2,098 2,155
Other interest income 46 77 116 161
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Total interest income 21,850 23,550 64,581 69,819
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Interest Expense:
Interest on deposits 4,371 4,438 12,330 14,545
Interest on short-term borrowings 361 144 829 386
Interest on long-term borrowings 3,641 4,298 10,536 12,414
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Interest on junior subordinated notes held by subsidiary trusts 586 585 1,750 1,754
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Total interest expense 8,959 9,465 25,445 29,099
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Net interest income 12,891 14,085 39,136 40,720
Provision for loan losses 605 920 2,015 2,686
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Net interest income after provision for loan losses 12,286 13,165 37,121 38,034
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Other Income:
Service charges on deposit accounts 2,510 2,196 7,222 5,973
Investment and insurance commissions 2,272 338 3,999 1,100
Income from fiduciary activities 988 1,142 2,574 2,586
Electronic banking income 608 534 1,754 1,517
Business owned life insurance 494 342 1,416 1,060
Mortgage banking income 227 400 709 967
(Loss) gain on securities transactions (7) 2 30 (25)
(Loss) gain on asset disposals (25) 9 22 (229)
Other 149 89 644 320
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Total other income 7,216 5,052 18,370 13,269
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Other Expenses:
Salaries and employee benefits 6,688 5,031 17,896 14,582
Net occupancy and equipment 1,350 1,127 3,860 3,333
Amortization of other intangible assets 635 551 1,562 1,023
Professional fees 452 458 1,319 1,442
Data processing and software 431 385 1,344 1,035
Bankcard costs 404 305 1,106 886
Franchise tax 374 284 1,086 813
Marketing 315 200 825 855
Other 1,895 1,658 5,367 4,606
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Total other expenses 12,544 9,999 34,365 28,575
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Income before income taxes 6,958 8,218 21,126 22,728
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Income taxes 1,820 2,278 5,569 6,334
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Net income $ 5,138 $ 5,940 $ 15,557 $ 16,394
=============================================================================================================================
Earnings per share:
Basic $ 0.49 $ 0.56 $ 1.47 $ 1.58
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Diluted $ 0.48 $ 0.55 $ 1.45 $ 1.55
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Weighted-average number of shares outstanding:
Basic 10,524,304 10,653,999 10,562,547 10,372,617
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Diluted 10,669,798 10,896,461 10,748,064 10,585,655
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Cash dividends declared $ 1,888 $ 1,836 $ 5,725 $ 4,917
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Cash dividends declared per share $ 0.18 $ 0.17 $ 0.54 $ 0.47
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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 15,557 15,557
Unrealized gains on available-for-sale
securities,
net of reclassification adjustment (534) (534)
Purchase of treasury stock, 504,656 shares (13,373) (13,373)
Distribution of treasury stock for deferred
compensation plan (reissued 8,450 shares) 153 153
Exercise of common stock options (reissued
111,281 treasury shares) (2,232) 3,127 895
Tax benefit from exercise of stock options 189 189
Issuance of common stock under dividend
reinvestment plan 13,485 376 376
Cash dividends declared (5,725) (5,725)
Issuance of common stock to purchase Putnam
Agency, Inc. (reissued 66,582 treasury (327) 1,912 1,585
shares)
Issuance of common stock to purchase Barengo
Insurance Agency, Inc. 127,446 3,229 3,229
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Balance, September 30, 2004 10,845,869 $ 162,240 $ 17,613 $ 3,721 $ (10,342) $ 173,232
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
Net income $ 5,138 $ 5,940 $ 15,557 $ 16,394
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale investment securities arising
during the period 5,152 (6,763) (514) (1,703)
Less: reclassification adjustment for securities (loss) gain included in
net income, net of tax (5) 1 20 (16)
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Net unrealized gain (loss) on available-for-sale arising during the 5,157 (6,764) (534) (1,687)
period
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Total comprehensive income (loss) $ 10,295 $ (824) $ 15,023 $ 14,707
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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 Nine Months
Ended September 30,
2004 2003
Net cash provided by operating activities $ 26,838 $ 20,523
Cash flows from investing activities:
Purchases of available-for-sale securities (118,761) (592,770)
Proceeds from sales of available-for-sale securities 2,065 90,409
Proceeds from maturities of available-for-sale securities 111,035 213,136
Net (increase) decrease in loans (45,081) 2,528
Net expenditures for premises and equipment (1,797) (1,468)
Net proceeds (expenditures) from sales of other real estate owned 94 (1,182)
Business acquisitions, net of cash received (6,948) 12,015
Investment in business owned life insurance (20,000) -
Investment in limited partnership and tax credit funds (2,672) (993)
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Net cash used in investing activities (82,065) (278,325)
Cash flows from financing activities:
Net increase (decrease) in non-interest-bearing deposits 9,438 (1,489)
Net decrease in interest-bearing deposits (9,766) (11,746)
Net decrease in short-term borrowings (16,966) (1,306)
Proceeds from long-term borrowings 68,300 259,018
Payments on long-term borrowings (9,859) (11,337)
Cash dividends paid (5,381) (4,002)
Purchase of treasury stock (13,373) (2,327)
Proceeds from issuance of common stock 895 5,265
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Net cash provided by financing activities 23,288 232,076
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Net decrease in cash and cash equivalents (31,939) (25,726)
Cash and cash equivalents at beginning of period 73,426 55,550
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Cash and cash equivalents at end of period $ 41,487 $ 29,824
=====================================================================================================================
Supplemental cash flow information:
Interest paid $ 25,442 $ 25,831
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Income taxes paid $ 115 $ 4,197
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See notes to the consolidated unaudited financial statements
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
Basis of Presentation
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The accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries
("Peoples") conform to accounting principles generally accepted in the United
States and to general practices within the financial services industry. Peoples
considers all of its principal activities to be financial services related. The
consolidated financial statements include all accounts of Peoples Bancorp Inc.
("Peoples Bancorp") 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
On September 10, 2004, Peoples announced its subsidiary, Peoples Bank,
National Association ("Peoples Bank"), had signed a definitive agreement to
acquire two full-service banking offices in the Ashland, Kentucky area from
Advantage Bank, a subsidiary of Camco Financial Corporation. The offices are
located at 1640 Carter Avenue in downtown Ashland (which Peoples Bank does
not plan to operate following completion of the acquisition) and 6601 US
Route 60 just outside Ashland ("Summit Office").
Under the terms of the agreement, Peoples Bank has agreed to pay a 10.21 %
premium, or approximately $6.6 million in cash, in acquiring approximately
$65 million of deposits, the fixed assets of the banking offices and
approximately $45 million of loans at book value. Peoples expects to
complete the acquisition, which is subject to regulatory approval, in early
December 2004. Upon completion of the acquisition, Peoples will operate the
Summit Office as a full-service office of Peoples Bank.
In conjunction with this acquisition and subject to the satisfaction of
applicable banking regulations, Peoples Bank intends to close its offices at
747 Bellefonte Road in Flatwoods, Kentucky, concurrent with the acquisition,
and 1410 Eagle Drive outside Ashland, Kentucky, in late December 2004, due
to their close proximity to existing and to-be-acquired offices, as well as
sales activity at the offices.
At the close of business on May 28, 2004, Peoples completed the acquisition
of Barengo Insurance Agency, Inc., ("Barengo"), based in Marietta, Ohio, for
initial consideration of $6.3 million ($3.1 million in cash and $3.2 million
in Peoples Bancorp's common shares). The agreement also provides for
additional consideration of up to $2.7 million ($1.3 million in cash and
$1.4 million in Peoples Bancorp's common shares) to be paid by Peoples over
the next three years, contingent on Barengo achieving certain revenue growth
goals. Peoples accounted for this transaction under the purchase method of
accounting. As part of the preliminary purchase price allocation, Peoples
recorded goodwill of $4.8 million and customer relationship intangible of
$2.0 million. The preliminary purchase price allocation is subject to
change.
At the close of business on April 30, 2004, Peoples completed the
acquisition of substantially all of the assets of Putnam Agency, Inc.
("Putnam Agency"), with offices in Ashland, Kentucky and Huntington, West
Virginia, for initial consideration of $8.6 million ($7.0 million in cash
and $1.6 million in Peoples Bancorp's 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. Peoples accounted for this
transaction under the purchase method of accounting. As part of the
preliminary purchase price allocation, Peoples recorded goodwill of $6.7
million and customer relationship intangible of $3.2 million. The
preliminary purchase price allocation is subject to change.
Both Barengo and the Putnam Agency are full-service insurance agencies that
offer a wide range of insurance products to both commercial and individual
clients. Peoples operates the former agencies as divisions of Peoples
Insurance Agency, Inc., using the "Barengo Insurance Agency" and "Putnam
Agency" trade names. Peoples has retained all key producers and managers,
with the exception of one producer with the Putnam Agency who has retired.
The balances and operations of the acquisitions are included in Peoples'
consolidated financial statements from the date of the acquisition, and do
not materially impact Peoples' financial position, results of operations or
cash flows for any period presented.
2. NEW ACCOUNTING PRONOUNCEMENTS:
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
Issue No. 03-1 "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments"("EITF 03-1"). EITF 03-1 provides
guidance for determining the meaning of "other-than-temporarily impaired"
and its application to certain debt and equity securities within the scope
of Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115") and
investments accounted for under the cost method. An investment is considered
impaired if the fair value of the investment is less than its cost.
Generally, an impairment is considered other-than-temporary unless: (i) the
investor has the ability and intent to hold an investment for a reasonable
period of time sufficient for an anticipated recovery of fair value up to
(or beyond) the cost of the investment; and (ii) evidence indicating that
the cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. If impairment is determined to be
other-than-temporary, then an impairment loss should be recognized equal to
the difference between the investment's cost and its fair value.
The recognition and measurement provisions of EITF 03-1 were initially
effective for other-than-temporary impairment evaluations in reporting
periods beginning after June 15, 2004. However, on September 30, 2004, the
Financial Accounting Standards Board ("FASB") issued Staff Position (FSP)
03-1-1delaying the effective date for the recognition and measurement
guidance of EITF 03-1 until certain implementation issues are addressed and
a final FSP providing implementation guidance is issued. The final FSP
providing implementation guidance is expected to be issued early in December
2004. Certain disclosure requirements of the EITF 03-1, adopted by Peoples
in 2003,were unaffected by this delay and remain in effect.
3. 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 Peoples' stock-based compensation
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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Net Income, as reported $ 5,138 $ 5,940 $ 15,557 $ 16,394
Deduct: stock-based compensation expense determined
under fair value based method, net of tax 141 139 391 365
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Pro forma net income $ 4,997 $ 5,801 $ 15,166 $ 16,029
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Basic Earnings Per Share:
As reported $ 0.49 $ 0.56 $ 1.47 $ 1.58
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Pro forma $ 0.47 $ 0.54 $ 1.44 $ 1.55
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Diluted Earnings Per Share:
As reported $ 0.48 $ 0.55 $ 1.45 $ 1.55
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Pro forma $ 0.47 $ 0.53 $ 1.41 $ 1.51
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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 3.93% 5.50%
Dividend yield 2.59% 2.51%
Volatility factor of the market price of parent stock 29.4% 30.8%
Weighted-average expected life of options 7 years 7 years
4. EMPLOYEE BENEFIT PLANS:
Components of Net Periodic Benefit Costs
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:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands) 2004 2003 2004 2003
Service cost $ 226 $ 205 $ 677 $ 531
Interest cost 193 179 579 516
Expected return on plan assets (243) (245) (729) (646)
Amortization of transition asset - - - -
Amortization of prior service cost - (2) 2 (4)
Amortization of net loss 52 33 156 67
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Net periodic benefit cost $ 228 $ 170 $ 685 $ 464
========================================================================================
Postretirement Benefits:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands) 2004 2003 2004 2003
Service cost $ - $ - $ - $ -
Interest cost 8 10 26 30
Expected return on plan assets - - - -
Amortization of transition asset - - - -
Amortization of prior service cost 4 4 9 9
Amortization of net loss - 1 - 3
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Net periodic benefit cost $ 12 $ 15 $ 35 $ 42
========================================================================================
Employer Contributions
- ----------------------
Through September 30, 2004, Peoples had made contributions totaling $1.7 million
to its defined benefit pension plan for the current year, as recommended by the
Retirement Plan Committee and authorized by the Board of Directors of Peoples
Bancorp. Peoples plans to make additional contributions totaling $900,000 during
the fourth quarter of 2004, as authorized by the Board of Directors of Peoples
Bancorp.
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 At or For the Nine
Months Ended September 30, Months Ended September 30,
SIGNIFICANT RATIOS 2004 2003 2004 2003
Return on average equity 11.95 % 13.85 % 12.10 % 13.26 %
Return on average assets 1.15 % 1.34 % 1.19 % 1.29 %
Net interest margin (a) 3.34 % 3.57 % 3.44 % 3.59 %
Non-interest income leverage ratio (b) 60.86 % 53.36 % 55.20 % 49.15 %
Efficiency ratio (c) 57.97 % 48.35 % 56.10 % 49.59 %
Average stockholders' equity to average assets 9.59 % 9.66 % 9.82 % 9.71 %
Average loans to average deposits 91.84 % 85.34 % 89.93 % 87.07 %
Cash dividends to net income 36.75 % 30.89 % 36.80 % 29.99 %
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ASSET QUALITY RATIOS (end of period)
Nonperforming loans as a percent of total loans (d) 0.53 % 0.61 % 0.53 % 0.61 %
Nonperforming assets as a percent of total assets (e) 0.30 % 0.39 % 0.30 % 0.39 %
Allowance for loan losses to loans net of unearned interest 1.55 % 1.57 % 1.55 % 1.57 %
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CAPITAL RATIOS (end of period)
Tier I capital ratio 11.97 % 14.54 % 11.97 % 14.54 %
Risk-based capital ratio 13.29 % 15.88 % 13.29 % 15.88 %
Leverage ratio 7.85 % 8.88 % 7.85 % 8.88 %
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PER SHARE DATA
Net income per share - basic 0.49 0.56 $ 1.47 $ 1.58
Net income per share - diluted 0.48 0.55 1.45 1.55
Cash dividends per share 0.18 0.17 0.54 0.47
Book value per share (end of period) 16.61 16.42 16.61 16.42
Tangible book value per share (end of period) (f) 10.41 12.05 $ 10.41 $ 12.05
Weighted average shares outstanding - Basic 10,524,304 10,653,999 10,562,547 10,372,617
Weighted average shares outstanding - Diluted 10,669,798 10,896,461 10,748,064 10,585,655
Common shares outstanding at end of period 10,426,380 10,632,858 10,426,380 10,632,858
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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) 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 Bancorp's 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"), PBNA L.L.C.
and Peoples Loan Services, Inc. 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 financial products and services through 51
financial service locations and 33 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 Bank also offers a full
range of life, health, property and casualty insurance products to customers in
Peoples markets through Peoples Insurance Agency, Inc.
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 are expected to impact Peoples' results of
operations:
o As discussed in Note 1 of Notes to the Consolidated Unaudited Financial
Statements, Peoples completed the acquisition of Putnam Agency, Inc.
("Putnam") on April 30, 2004 and Barengo Insurance Agency, Inc.
("Barengo") on May 28, 2004, (collectively, the "Insurance Agency
Acquisitions"). In addition, Peoples plans to acquire two full-service
banking offices in the Ashland, Kentucky area in early December 2004
(the "Ashland Banking Acquisition"). In conjunction with the Ashland
Banking Acquisition, Peoples plans to close two current banking offices
in Flatwoods, Kentucky, and outside Ashland, Kentucky, and does not
plan to operate one of the acquired offices.
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 the Kentucky Bancshares 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 sold its existing credit card portfolio
to InfiCorp Holdings, Inc. ("InfiCorp"). In addition to the sale,
Peoples Bank and InfiCorp entered into a joint marketing agreement to
serve the credit card needs of Peoples' customers and prospective
customers.
o In December 2003, Peoples sold $55 million of mortgage-backed
investment securities due to the high rate of prepayments on those
securities and the corresponding downward pressure on yields from
accelerated amortization of bond premiums. Peoples reinvested the
proceeds from the sales into other mortgage-backed securities that 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 Bancorp announced the authorization to
repurchase up to 425,000, or approximately 4%, of Peoples Bancorp's
outstanding common shares in 2004 from time to time in open market or
privately negotiated transactions. On August 13, 2004, Peoples Bancorp
announced the authorization to repurchase an additional 200,000 shares,
or approximately 2%, of Peoples Bancorp's outstanding common shares in
2004 from time to time in open market or privately negotiated
transactions (collectively the "2004 Stock Repurchase Program"). 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 Bancorp's 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 $19.5 million.
Through November 1, 2004, Peoples Bancorp had repurchased 503,148
common shares (or 81% of the total authorized) under the 2004 Stock
Repurchase Program, at an average price of $26.51.
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 considered doubtful.
Allowance for Loan Losses
- -------------------------
In general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples maintains
an allowance for loan losses to absorb probable losses 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 September 30, 2004, is adequate to provide for probable losses from
existing loans based on information currently available. While management uses
available information to provide for loan losses, the ultimate collectibility of
a substantial portion of the loan portfolio, and the need for future additions
to the allowance, will be based on changes in economic conditions and other
relevant factors. As such, adverse changes in economic activity could reduce
cash flows for both commercial and individual borrowers, which would likely
cause Peoples to experience increases in problem assets, delinquencies and
losses on loans.
Investment Securities
- ---------------------
Investment securities 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 September 30, 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 September
30, 2004, Peoples had $10.3 million of core deposit and customer relationship
intangible assets acquired in acquisitions, subject to amortization, and $53.8
million of goodwill, not subject to periodic amortization.
The determination of fair value and subsequent allocation of the cost of an
acquired company generally involves management making estimates based on third
party valuations, such as appraisals, or internal valuations based on discounted
cash flow analyses or other valuation techniques. In addition, the valuation and
amortization of intangible assets representing the present value of future net
income to be earned from customers (commonly referred to as "customer
relationship intangibles" or "core deposit intangibles") requires significant
judgment and the use of estimates by management. While management feels the
assumptions and variables used to value recent acquisitions were reasonable, the
use of different, but still reasonable, assumptions could produce materially
different results.
Customer relationship intangibles are required to be amortized over their
estimated useful lives. The method of amortization should reflect the pattern in
which the economic benefits of the intangible assets are consumed or otherwise
used up. Since Peoples' acquired customer relationships are subject to routine
customer attrition, the relationships are more likely to produce greater
benefits in the near-term than in the long-term, which typically supports the
use of an accelerated method of amortization for the related intangible assets.
Management is required to evaluate the useful life of customer relationship
intangibles to determine if events or circumstances warrant a change in the
estimated life. Should management determine in future periods the estimated life
of any intangible asset is shorter than originally estimated, Peoples would
adjust the amortization of that asset, which could increase future amortization
expense.
Goodwill arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Goodwill recorded
by Peoples in connection with its acquisitions relates to the value inherent in
the businesses acquired 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 recorded goodwill and concluded that the recorded value
of goodwill was not impaired as of September 30, 2004. However, future events
could cause management to conclude that impairment indicators exist and
re-evaluate goodwill. If such re-evaluation indicated impairment, Peoples would
recognize the loss, if any. Any resulting impairment loss could have a material,
adverse impact on Peoples' financial condition and results of operations.
RESULTS OF OPERATIONS
Overview of the Income Statement
- --------------------------------
For the quarter ended September 30, 2004, net income totaled $5,138,000, or
$0.48 per diluted share, down from $5,940,000, or $0.55 per diluted share, for
the third quarter of 2003. Net income totaled $15,557,000 for the nine months
ended September 30, 2004, compared to $16,394,000 through nine months of 2003,
and earnings per diluted share were $1.45 versus $1.55 for the same periods,
respectively. Peoples' earnings grew 2% in the third quarter, from $5,053,000,
or $0.47 per diluted share, reported in the second quarter of 2004. While
continued net interest margin compression was the primary reason for the lower
earnings compared to last year, earnings were also negatively impacted by costs
of approximately $100,000 incurred in the third quarter of 2004 to cleanup and
repair damage caused by the significant flooding in the Mid-Ohio Valley in
mid-September brought on by the remnants of Hurricane Ivan.
Net interest income was $12,891,000 in the third quarter of 2004, down 8%
compared to $14,085,000 in 2003's third quarter, but up 2% from $12,697,000 in
the second quarter of 2004. Net interest margin was 3.34% for the third quarter
of 2004, compared to 3.39% for the prior quarter and 3.57% for the third quarter
of 2003. For the nine months ended September 30, 2004, net interest income
totaled $39,136,000 and net interest margin was 3.44%, versus $40,720,000 and
3.59%, respectively, for the same period in 2003. Net interest margin continues
to compress due to declining asset yields as a result of intense competition for
quality loans and the extended period of historically low rates, while a modest
increase in earning assets accounted for the higher level of net interest income
compared to the prior quarter.
For the quarter ended September 30, 2004, other income was $7,216,000, up 43%
from $5,052,000 for the same period a year ago and up 15% from $6,267,000 for
the second quarter of 2004. These increases were primarily the result of the
Insurance Agency Acquisitions. The Putnam and Barengo divisions combined
produced $1.9 million of revenue in the third quarter compared to $1.0 million
in the prior quarter, reflecting a full-quarter's impact of the newly added
divisions. On a year-to-date basis through September 30, 2004, other income
totaled $18,370,000 compared to $13,269,000 for the first nine months of 2003, a
38% increase. In addition to the increased insurance revenues, revenues from the
offices added in the Kentucky Bancshares acquisition, particularly deposit
account service charges, accounted for much of the revenue growth.
Other expense was $12,544,000 in the third quarter of 2004, up 25% compared to
$9,999,000 for the same quarter in 2003, with $1.3 million of the increase
attributable to additional operating expenses, primarily salaries and benefits,
occupancy and equipment costs and intangible amortization, due to the Insurance
Agency Acquisitions. Compared to the second quarter of 2004, non-interest
expense was up 9% in the third quarter, with 64% of the increase attributable to
a full-quarter's impact of the Insurance Agency Acquisitions. For the nine
months ended September 30, 2004, other expense totaled $34,365,000, up 20%
versus $28,575,000 for the same period in 2003. In addition to the $2.0 million
of increased expense due to the Insurance Agency Acquisitions, the combination
of a full-year's impact of the Kentucky Bancshares acquisition and higher
employee benefit costs, especially medical costs, were contributing factors to
the overall increase in expenses.
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.
Net interest income totaled $12,891,000 in the third quarter of 2004, down from
$14,085,000 a year ago. Interest income totaled $21,850,000 for the three months
ended September 30, 2004, down 7% compared to the same period last year. This
decrease was due mainly to assets repricing downward in the low rate
environment, coupled with a modest reduction in earning assets. Interest expense
totaled $8,959,000 in the third quarter of 2004 versus $9,465,000 in 2003's
third quarter, down 5%, reflecting the lower cost of funds.
Compared to the second quarter of 2004, net interest income was up $194,000 (or
2%), from $12,697,000. Interest income increased 3% compared to $21,145,000,
reflecting an increase in earning assets from the second quarter of 2004.
Interest expense increased by 6% from $8,448,000, attributable to management
shifting to longer-term debt to lock in the current low rates and marginally
higher cost of funds due to the recent actions by the Federal Reserve to raise
interest rates.
On a year-to-date basis, net interest income was $39,136,000 through September
30, 2004, compared to $40,720,000 for the first nine months of 2003. Interest
income dropped 8% to $64,581,000 and interest expense was down 13% from
$29,099,000. These declines reflect the impact of the extended period of low
interest rates, which reduced both asset yields and cost of funds. In addition,
asset yields have been negatively impacted by strong competition for loans,
while the Long-Term Debt Restructuring in late 2003 contributed to the overall
reduction in Peoples' cost of funds.
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%. 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. The following table details the calculation of FTE
net interest income and margin:
Third Second Third For the Nine Months
Quarter Quarter Quarter Ended September 30,
(Dollars in Thousands) 2004 2004 2003 2004 2003
Net interest income, as reported $ 12,891 $ 12,697 $ 14,085 $ 39,136 $ 40,720
Taxable equivalent adjustments $ 405 $ 409 413 1,229 1,239
- ------------------------------------------------------------------------------------------------------------------------------
Fully-tax equivalent net interest income $ 13,296 $ 13,106 $ 14,498 $ 40,365 $ 41,959
- ------------------------------------------------------------------------------------------------------------------------------
Average earning assets $ 1,591,511 $ 1,550,370 $ 1,625,721 $ 1,572,405 $ 1,563,048
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.34% 3.39% 3.57% 3.44% 3.59%
- ------------------------------------------------------------------------------------------------------------------------------
The sustained low interest rate environment has challenged Peoples' generation
of net interest income due to declining asset yields with limited opportunities
for similar reduction in Peoples' cost of funds. The FTE yield on earning assets
was 5.57% in the third quarter of 2004, unchanged from the prior quarter and
down compared to 5.88% in 2003's third quarter. Additionally, net interest
margin was impacted by management's efforts to secure longer-term funding at
higher rates.
Net loans comprise the largest portion of Peoples' earning assets, averaging
$929.8 million in the third quarter of 2004, up from $905.7 million in the prior
quarter and $895.0 million in the third quarter of 2003. The FTE yield on net
loans was 6.39% for the three months ended September 30, 2004, versus 6.48% and
7.08% for the second quarter of 2004 and third quarter of 2003, respectively.
The combination of customers refinancing higher rate loans and significant
volumes of prime based commercial loan originations were key factors in the
lower yield, while the sale of the credit card portfolio contributed to the
reduction in yield from a year ago. For the nine months ended September 30,
2004, average loans grew $39.4 million to $911.0 million and the FTE yield
dropped 72 basis points to 6.48% reflecting the impact of the low interest rate
environment and increased market competition for quality loans.
Investment securities averaged $651.1 million in the third quarter of 2004, up
from $639.7 million last quarter but down from $699.2 million a year ago, with
FTE yields of 4.48%, 4.32% and 4.56%, respectively. The decrease in the average
balance from a year ago is largely attributable to management using a portion of
the principal runoff to manage liquidity, fund loan growth and other corporate
purposes. For the nine months ended September 30, 2004, average investment
securities decreased $23.4 million to $647.2 million, while the average FTE
yield was down 34 basis points due to the current rate environment and related
investment of funds at significantly lower rates.
Peoples' interest-bearing liabilities averaged $1.45 billion in the third
quarter of 2004 compared to $1.41 billion last quarter and $1.46 billion a year
ago. Traditional deposits comprise the majority of Peoples' interest-bearing
liabilities, averaging $882.3 million for the quarter ended September 30, 2004
compared to $887.2 million in the second quarter of 2004 and $934.1 million in
2003's third quarter. The lower level of deposits in the third quarter was due
primarily to intense competition for deposits, particularly certificates of
deposit. For the quarter ended September 30, 2004, the cost of funds from
interest-bearing deposits was 1.97%, up from 1.88% for both the prior quarter
and third quarter a year ago. This increase reflects management's strategy to
shift to longer-term funding and the impact of the recent increase in market
rates. Comparing the nine months ended September 30, 2004, to the first nine
months of 2003, interest-bearing liabilities increased $24.2 million, to $1.42
billion, while the average cost dropped to 2.38% from 2.78%.
Peoples also utilizes a variety of borrowings as complementary funding sources
to traditional deposits. For the three months ended September 30, 2004, total
borrowed funds averaged $570.8 million compared to $518.8 million for the second
quarter of 2004 and $528.5 million a year ago. These increases were the result
of management using various borrowings to fund asset growth and offset declines
in interest-bearing deposits. Even with this increase, Peoples' overall cost of
borrowed funds dropped to 3.16% from 3.29% last quarter and 3.77% in the third
quarter of 2003, due in part to the Long-Term Debt Restructuring.
Peoples' main source of borrowed funds is short- and long-term advances from the
FHLB. Short-term FHLB borrowings averaged $82.7 million in the third quarter of
2004 compared to $24.3 million a year ago, with an average cost of 1.50% and
1.56% for the same periods, respectively. Long-term FHLB borrowings averaged
$183.1 million in the third quarter of 2004, down versus $221.6 million a year
ago, with an average cost of 3.76% and 4.62% for the same periods, respectively.
These changes reflect the impact of the Long-Term Debt Restructuring and
management's continued use of FHLB borrowings to fund asset growth and manage
interest rate sensitivity, as deemed appropriate. Compared to the second quarter
of 2004, average short-term FHLB borrowings grew $19.5 million and long-term
FHLB borrowings increased $12.9 million. Management expects to continue shifting
to longer-term borrowings, as appropriate, to lock in rates in anticipation of
rising interest rates in the future. 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 third quarter of 2004, wholesale
market term repurchase agreements averaged $243.6 million compared to $223.5
million for the prior quarter and $216.3 million for the third quarter of 2003.
The average cost of wholesale repurchase agreements was 2.87% in the third
quarter of 2004, virtually unchanged from prior periods.
As is the case with many financial institutions, strong competition for loans
and deposits continued to impact net interest income and margin during the third
quarter of 2004. While the 75 basis point increase in rates by the Federal
Reserve has eased some of the net interest income pressures, management's
efforts to secure long-term, fixed rate funding to lock in rates and match fund
some long-term loans, coupled with the lag in repricing of a sizeable portion of
Peoples' variable rate loans, limits any short-term improvement. Management
believes additional interest rate increases could cause net interest income to
increase modestly based on Peoples' interest rate risk position and
asset-liability simulations at September 30, 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 third quarter of 2004, Peoples' provision for loan losses was $605,000,
down 2% from $616,000 in the prior quarter and down 34% from $920,000 a year
ago. The lower overall provision was the result of Peoples' quarterly analysis
of the adequacy of the allowance for loan losses and is directionally consistent
with Peoples' continued strong asset quality and lower level of loan
delinquencies. For the nine months ended September 30, 2004, Peoples provision
for loan losses totaled $2,015,000, compared to $2,686,000 for the same period
in 2003, representing a 25% reduction. When expressed as a percentage of average
loans, the provision was 0.06% in the third quarter of 2004 compared to 0.07% in
the second quarter of 2004 and 0.10% in the third quarter of 2003. 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 third quarter of 2004, non-interest income was
$7,216,000, up $2,164,000 (or 43%) from $5,052,000 a year ago. Compared to the
second quarter of 2004, non-interest income grew $949,000 (or 15%) in the third
quarter. The Putnam and Barengo divisions generated revenue of $1.9 million in
the third quarter of 2004 versus $1.0 million in the prior quarter, reflecting a
full-quarter's impact of the Insurance Agency Acquisitions. These revenues,
coupled with enhanced deposit account service charges and BOLI income, were the
primary reasons for the increased non-interest income. For the nine months ended
September 30, 2004, non-interest income was $18,370,000, up $5,101,000 (or 38%)
from $13,269,000 for the same period in 2003, with insurance and investment
commissions and deposit account services charges accounting for $2,899,000 and
$1,249,000 of the increase, respectively.
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 September 30, 2004,
deposit account service charges totaled $2,510,000, up 14% from $2,196,000 for
2003's third quarter and up 2% compared to the second quarter of 2004. On a
year-to-date basis, deposit account service charges totaled $7,222,000 in 2004,
versus $5,973,000 in 2003, a 21% increase. These increases from last year were
the result of higher volumes of overdraft and non-sufficient funds ("NSF") fees,
combined with an overall increase in the number of checking accounts primarily
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 to fees charged in Peoples'
markets. The following table details Peoples' deposit account service charges:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 2004 2003 2004 2003
Overdraft fees $ 1,708 $ 1,444 $ 4,745 $ 3,843
Non-sufficient funds fees 484 396 1,362 1,047
Other fees and charges 318 356 1,115 1,083
- ---------------------------------------------------------------------------------------------------
Total $ 2,510 $ 2,196 $ 7,222 $ 5,973
- ---------------------------------------------------------------------------------------------------
Insurance and investment commissions were $2,272,000 in the third quarter of
2004, versus $1,428,000 and $338,000 for the second quarter of 2004 and third
quarter of 2003, respectively. For the nine months ended September 30, 2004,
insurance and investment commissions were $3,999,000, up 264% from a year ago.
These increases were attributable to the Insurance Agency Acquisitions completed
in mid-second quarter 2004. The following table details Peoples' insurance and
investment commissions:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 2004 2003 2004 2003
Property and casualty insurance $ 1,936 $ 115 $ 3,160 $ 318
Life and health insurance 146 19 251 120
Brokerage 78 71 294 165
Fixed annuities 75 96 186 390
Credit life and A&H insurance 37 37 108 107
- ---------------------------------------------------------------------------------------------------
Total $ 2,272 $ 338 $ 3,999 $ 1,100
- ---------------------------------------------------------------------------------------------------
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 $608,000 for third quarter of
2004 compared to $534,000 a year ago, an increase of $74,000 (or 14%). On a
year-to-date basis through September 30, 2004, e-banking income was up 16% to
$1,754,000, from $1,517,000 for the nine months of 2003.
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 have remained strong.
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 September 30, 2004, Peoples had 65,319
cards issued, with 47% of all eligible deposit accounts issued a debit card,
compared to 49,017 cards and a 43% penetration rate a year ago. Peoples'
customers used their debit cards to complete $31 million of transactions in the
third quarter of 2004, up 27% from a year ago and 2% from the second quarter of
2004, and $89 million of transactions through nine months of 2004, up 35% from
$66 million in the first nine months of 2003.
Peoples' mortgage banking involves the origination and selling of long-term,
fixed-rate real estate loans into the secondary market. In the third quarter of
2004, mortgage banking produced revenues of $227,000 compared to $283,000 in the
prior quarter and $400,000 in the third quarter of 2003. For the nine months
ended September 30, 2004, mortgage banking income was $709,000 versus $967,000
for the same period in 2003. The reduction in mortgage banking income from last
year reflects the expected 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 Mortgage Number of
Banking Loans Mortgages
Income Sold Sold
Third quarter of 2004 $ 227 $ 11,671 132
Second quarter of 2004 283 10,978 141
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
While it appears the real estate loan refinancing activity will remain light
compared to 2003 activity, 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."
Peoples' fiduciary revenues totaled $988,000 in the third quarter of 2004,
compared to $1,142,000 a year ago and $812,000 for the second quarter of 2004.
On a year-to-date basis, fiduciary revenues were $2,574,000 through September
30, 2004, nearly identical to $2,586,000 for the same period in 2003. While the
Kentucky Bancshares acquisition added trust assets of about $182 million,
changes in market value continue to influence Peoples' fiduciary revenues since
a significant portion of fiduciary fees is based on the relative performance of
equity markets.
Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. For the quarter ended September 30, 2004, BOLI income
totaled $494,000 compared to $342,000 a year ago and $506,000 last quarter. For
the first nine months of 2004, BOLI income was $1,416,000, up 34% from
$1,060,000 for the first nine months of 2003. In early 2004, Peoples invested an
additional $20 million in BOLI, which was the key driver of the increased BOLI
income from a year ago. Management believes BOLI will continue to provide a
better vehicle for funding future benefit costs than alternative investment
opportunities with similar risk characteristics.
Non-Interest Expense
- --------------------
For the quarter ended September 30, 2004, non-interest expense totaled
$12,544,000, up $2,545,000 (or 25%) from $9,999,000 a year ago. Expenses due to
the Insurance Agency Acquisitions, primarily salaries and benefits expense,
occupancy and equipment costs and intangible amortization, totaled $1.3 million
for the third quarter of 2004 and represented the majority of the increase in
non-interest expense. Compared to the second quarter of 2004, non-interest
expense grew $1,013,000 (or 9%), from $11,531,000, with $649,000 (or 64%) of the
increase due to a full quarter's impact of the Insurance Agency Acquisitions.
Increased salaries and benefit costs, coupled with the $100,000 of flood-related
costs, also accounted for a significant portion of the additional expenses
during the third quarter. Non-interest expense totaled $34,365,000 through nine
months of 2004 versus $28,576,000 a year ago, a 20% increase largely
attributable to recent acquisitions and Peoples' continued investment in
technology designed to improve customer service capabilities.
Salaries and benefits remain Peoples' largest operating expense, which is
inherent in a service-based industry such as financial services. For the three
months ended September 30, 2004, salaries and benefits totaled $6,688,000, up
compared to $5,819,000 last quarter and $5,031,000 for 2003's third quarter.
Nearly half of these increases are attributable to the Insurance Agency
Acquisitions. On a year-to-date basis through September 30, 2004, salaries and
benefits increased $3,314,000, totaling $17,896,000 versus $14,582,000, with the
Insurance Agency Acquisitions accounting for $1.3 million of this increase. In
addition, rising medical costs and higher sales-related compensation, coupled
with annual salary adjustments necessary to retain key associates and additional
personnel in key sales and support positions, were also significant factors for
the overall increase. Management continues to explore ways, such as the BOLI
investment, to offset the rising salaries and benefit costs in order to provide
a reasonable level of benefits to associates and remain competitive in order to
attract and hire talented professionals.
In the third quarter of 2004, net occupancy and equipment expenses were
$1,350,000, up 5% from $1,289,000 the prior quarter and 20% from $1,127,000 for
the third quarter of 2003. Through nine months of 2004, occupancy and equipment
expenses grew 16% compared to a year ago, totaling $3,860,000 versus $3,333,000.
These increases were a result of recent acquisitions and investments in
technology, which produced additional occupancy and equipment expenses,
particularly depreciation expense, as well as costs of approximately $100,000 to
cleanup and repair damage to several of its locations due to flooding in
mid-September 2004. Management believes the continued investment in technology
enhances 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.
Acquisitions also caused an increase in amortization expense of customer
relationship intangible assets. In the third quarter of 2004, intangible
amortization was $635,000 compared to $526,00 last quarter and $551,000 in the
third quarter of 2003. Management believes total intangible amortization could
be slightly higher in the fourth quarter due to Peoples amortizing the customer
relationship intangibles to be acquired in the Ashland Banking Acquisition, with
slight reductions in future quarters since Peoples uses an accelerated method of
amortization for these intangibles. On a year-to-date basis, intangible
amortization totaled $1,562,000 through September 30, 2004, compared to
$1,023,000 for the same period in 2003.
For the three months ended September 30, 2004, data processing and software
costs were $431,000, up 12% from $385,000 a year ago but down 2% from $441,000
last quarter. On a year-to-date basis, data processing and software costs
totaled $1,344,000 through September 30, 2004, compared to $1,035,000 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 as 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 has increased operating expenses, 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 and develop profitable customer
relationships.
Professional fees, which include fees for accounting, legal and other
professional services, totaled $452,000 for the third quarter of 2004, compared
to $411,000 for the second quarter of 2004 and $458,000 for the third quarter of
2003. For the nine months ended September 30, 2004, professional fees were
$1,319,000 compared to $1,442,000 in the same period in 2003, a 9% decrease. 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. The consulting
contract terminated at the end of the first quarter of 2004, which reduced
professional fees due to the elimination of the consulting expense. Management
believes professional fees could increase slightly in the fourth quarter of 2004
as Peoples works to comply with new reporting requirements mandated by the
Sarbanes-Oxley Act, which apply to all public companies.
Peoples' bankcard costs, which consist primarily of debit card and ATM
processing fees, were $404,000 in the third quarter of 2004, up from $305,000 a
year ago and $378,000 last quarter. For the nine months ended September 30,
2004, bankcard costs totaled $1,106,000 compared to $886,000 for the first nine
months of 2003. These increases were largely the result of Peoples' customers
using the ATM and debit cards to complete more of their transactions and
additional cards issued.
Peoples is subject to various state franchise taxes, which are based largely on
Peoples Bank's equity at year-end. For the third quarter of 2004, franchise
taxes totaled $374,000 compared to $284,000 for 2003's third quarter. On a
year-to-date basis, franchise taxes were $1,086,000 through September 30, 2004,
versus $813,000 a year ago. These increases were primarily 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 allocation of capital which is intended to enhance
profitability and shareholder value.
The non-interest leverage ratio serves as a measurement of Peoples' efficiency
for management and is a key performance indicator for Peoples' incentive
compensation plan for senior management and certain other associates. The
non-interest leverage 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 For the Nine Months
Ended September 30, Ended September 30,
(Dollars in Thousands) 2004 2003 2004 2003
Total other income, as reported $ 7,216 $ 5,052 $ 18,370 $ 13,269
Add: Loss on asset disposals 25 - - 229
Loss on securities transactions 7 - - 25
Deduct: Gain on securities transactions - 2 30 -
Gain on asset disposal - 9 22 -
Recovery of loss on sale of other real estate owned - - 210 -
-----------------------------------------------------------------------------------------------------------------------------
Adjusted total other income 7,248 5,041 18,108 13,523
-----------------------------------------------------------------------------------------------------------------------------
Total other expense, as reported 12,544 9,999 34,365 28,575
Deduct: Amortization of other intangible assets 635 551 1,562 1,023
Loss on early debt extinguishment - - - 41
-----------------------------------------------------------------------------------------------------------------------------
Adjusted total other expense 11,909 9,448 32,803 27,511
-----------------------------------------------------------------------------------------------------------------------------
Non-interest leverage ratio 60.9% 53.4% 55.2% 49.2%
-----------------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30, 2004, the non-interest leverage ratio
was 55.2% compared to 49.2% a year ago. Management's strategic goals include
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 third quarter of 2004, Peoples' return on equity ("ROE") was 11.95%
versus 13.85% for the same quarter last year. For the nine months ended
September 30, ROE was 12.10% in 2004 compared to 13.26% a year ago. 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 in equity from
changes in the estimated fair values of Peoples' investment portfolio.
Return on Assets
- ----------------
Return on assets ("ROA") was 1.15% in the third quarter of 2004 compared to
1.34% a year ago, while on a year-to-date basis, ROA was 1.19% and 1.29% in 2004
and 2003, 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 September 30, 2004, the amount of
tax-advantaged investments totaled $53.4 million compared to $30.5 million at
December 31, 2003 and $29.8 million at September 30, 2003. The additional
benefits derived from this increase in tax-advantaged investments resulted in a
reduction in Peoples' effective tax rate. For the nine months ended September
30, 2004, Peoples' effective tax rate was 26.4%, down from 27.9% 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 September 30, 2004, total assets were $1.78 billion compared to $1.74 billion
at year-end 2003, an increase of $47.5 million which is attributable to loan
growth, as well as additional BOLI and intangible assets associated with the
Insurance Agency Acquisitions. Gross loans grew $42.9 million (or 5%) to $957.9
million at September 30, 2004, from $915.0 million at December 31, 2003, with
over half of the increase occurring in the third quarter. Investment securities
totaled $644.5 million at September 30, 2004 versus $641.5 million at year-end
2003.
Total liabilities were $1.61 billion at September 30, 2004, compared to $1.57
billion at year-end 2003, an increase of $45.2 million. At September 30, 2004,
deposits totaled $1.03 billion, unchanged from the prior year-end, while
borrowed funds used to fund asset growth totaled $568.1 million, up $41.5
million from $526.6 million at December 31, 2003.
Stockholders' equity totaled $173.2 million at September 30, 2004, versus $170.9
million at December 31, 2003, an increase of $2.3 million. Peoples' earnings,
net of dividends paid, of $9.8 million was largely offset by treasury stock
purchases, net of shares reissued, of $8.2 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 September 30, 2004, cash and cash
equivalents totaled $41.5 million, down $31.9 million (or 43%) from $73.4
million at December 31, 2003. This decrease is attributable to a $36.3 million
reduction in Federal funds sold since year-end 2003, of which $20 million was
consumed by the BOLI investment in early 2004. Since June 30, 2004, the amount
of cash and cash equivalents declined $13.8 million, primarily attributable to
fewer items in process of collection at September 30, 2004.
Cash and balances due from banks comprised the largest portion of Peoples' cash
and cash equivalents at September 30, 2004, totaling $32.2 million. Since
year-end, the amount of cash and balances due from banks grew $3.8 million (or
13%) but was down $15.4 million (or 32%) since June 30, 2004. These changes are
due to normal daily fluctuations in the amount of items in process of collection
and cash on hand caused by customer activity.
Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, will allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments, such as unfunded
loan commitments, undrawn lines of credit, construction loans and letters of
credit, as they come due. Peoples will actively manage the principal runoff from
the investment and loan portfolios and seek to 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 September 30, 2004, the amortized cost of Peoples' investment securities
totaled $638.5 million compared to $634.8 million at year-end 2003, while the
market value of the investment portfolio was $644.5 million at September 30,
2004, up slightly from $641.5 million at December 31, 2003.The difference in
amortized cost and market value at September 30, 2004, resulted in unrealized
appreciation in the investment portfolio of $6.0 million and a corresponding
increase in Peoples' equity of $3.9 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) September 30, June 30, December 31, 2003 September 30,
2004 2004 2003
US Treasury securities and obligations of
US government agencies and corporations $ 76,173 $ 55,440 $ 65,441 $ 70,043
Obligations of states and political subdivisions 63,976 62,926 66,288 67,316
Mortgage-backed securities 444,884 459,918 447,341 520,930
Other securities 59,439 60,906 62,394 61,464
- ----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 644,472 $ 639,190 $ 641,464 $ 719,753
- ----------------------------------------------------------------------------------------------------------------------------
Overall, the composition of Peoples' investment portfolio at September 30, 2004,
was very comparable to recent periods. Since September 30, 2003, Peoples'
investment in mortgage-backed securities has fluctuated due to the timing of
Peoples reinvesting the principal runoff. In addition, management has used a
portion of the runoff to fund loan growth, the $20 million BOLI investment and
other corporate purposes, when deemed appropriate, which has impacted the
balance of mortgage-backed securities. Peoples' investment in US government
agency obligations grew slightly during the third quarter, as management works
to maintain diversity within the investment portfolio.
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, provides recommendations
for 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
September 30, 2004, gross loans totaled $957.9 million, up $42.9 million since
year-end 2003. Peoples continues to experience strong internal originations of
commercial and residential real estate loans, which has offset volume declines
experienced in consumer loans. The following table details total outstanding
loans:
(Dollars in Thousands) September 30, June 30, December 31, September 30,
2004 2004 2003 2003
Commercial, mortgage $ 430,513 $ 428,580 $ 380,372 $ 357,304
Commercial, other 116,621 110,208 131,697 139,671
Real estate, construction 37,847 22,853 21,056 17,714
Real estate, mortgage 307,648 304,328 301,726 314,303
Consumer 65,235 69,587 79,926 86,108
Credit cards - - 221 6,302
- ----------------------------------------------------------------------------------------------------
Total loans $ 957,864 $ 935,556 $ 914,998 $ 921,402
- ----------------------------------------------------------------------------------------------------
Commercial loan balances, including loans secured by commercial real estate,
totaled $547.1 million at September 30, 2004, up $35.1 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 57.1% and 56.0% of
total loans at September 30, 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 considerations. 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 (whether the loans are ultimately sold into the
secondary market or retained on Peoples' balance sheet) remain a major focus of
Peoples' lending efforts, due in part to the opportunity to sell additional
products and services to these consumers. At September 30, 2004, real estate
loans, which include construction loans but exclude loans secured by commercial
real estate, totaled $345.5 million compared to $322.8 million at December 31,
2003, an increase of $22.7 million. Real estate loans comprised 36.1% of
Peoples' total loan portfolio at September 30, 2004, versus 35.3% at year-end
2003. Included in real estate loans are home equity credit line balances of
$35.6 million at September 30, 2004, up 26% from $28.3 million at December 31,
2003.
Real estate loan balances have declined in recent periods in response to
customer demand for long-term, fixed-rate mortgages, which Peoples generally
sells to the secondary market with servicing rights retained. In the third
quarter of 2004, Peoples originated 149 long-term, fixed-rate mortgage loans,
with total loan amounts of $13 million, compared to 140 loans, with total loan
amounts of $11 million, in the second quarter of 2004 and 248 loans, with total
loan amounts of $20 million, in the third quarter of 2003. At September 30,
2004, Peoples was servicing $101 million of real estate loans previously sold to
the secondary market. In addition, Peoples had $1.4 million of fixed-rate real
estate loans held for sale to the secondary market at September 30, 2004.
Management anticipates selling these loans during the fourth quarter.
At September 30, 2004, consumer loan balances were $65.2 million, down $14.7
million since year-end 2003. The indirect lending area represented a significant
portion of Peoples' consumer loans, with balances of $26.4 million and $38.4
million at September 30, 2004 and December 31, 2003, respectively. Strong
competition for loans, particularly automobile loans, as well as availability of
alternative credit products, such as home equity credit lines, 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 quality loan origination based on sound underwriting practices and
appropriate loan pricing discipline remains the paramount objective.
Loan Concentration
- ------------------
Peoples' largest concentration of commercial loans is credits to lodging and
lodging-related companies, which comprised approximately 12.4% 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 10.8% of Peoples'
outstanding commercial loans at September 30, 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 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 1.55% of total
loans, at September 30, 2004, compared to $14.7 million, or 1.57%, at June 30,
2004 and $14.6 million, or 1.59%, at year-end 2003. The following table presents
changes in Peoples' allowance for loan losses:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 2004 2003 2004 2003
Balance, beginning of period $ 14,693 $ 14,151 $ 14,575 $ 13,086
Chargeoffs (712) (935) (2,921) (2,675)
Recoveries 220 287 1,137 753
- -----------------------------------------------------------------------------------------------------
Net chargeoffs (492) (648) (1,784) (1,922)
Provision for loan losses 605 920 2,015 2,686
Allowance for loan losses acquired - - - 573
- -----------------------------------------------------------------------------------------------------
Balance, end of period $ 14,806 $ 14,423 $ 14,806 $ 14,423
- -----------------------------------------------------------------------------------------------------
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) September 30, December 31, September 30,
2004 2003 2003
Commercial $ 11,751 $ 11,232 $ 10,942
Consumer 1,645 1,594 1,708
Real estate 926 1,234 1,306
Overdrafts 373 283 244
Credit cards 111 232 223
- ----------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 14,806 $ 14,575 $ 14,423
- ----------------------------------------------------------------------------------------------------
The allowance allocated to commercial loans, which includes loans secured by
commercial real estate, has increased in recent periods, reflecting the 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, among other factors, 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 third quarter of 2004, net loan chargeoffs were $492,000, down 24% from
$648,000 a year ago and 29% from $697,000 in the second quarter of 2004.
Overdrafts continue to comprise a significant portion of Peoples' net
chargeoffs, while consumer and real estate loans also accounted for a
significant portion of net chargeoffs in the third quarter of 2004. The
following table details Peoples' net chargeoffs:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 2004 2003 2004 2003
Overdrafts $ 243 $ 222 $ 589 $ 488
Real estate 106 176 309 312
Consumer 106 148 349 538
Commercial 42 39 416 435
Credit card (5) 63 121 149
- -----------------------------------------------------------------------------------------------------
Total $ 492 $ 648 $ 1,784 $ 1,922
- -----------------------------------------------------------------------------------------------------
As a percent of average loans (a) 0.21% 0.29% 0.26% 0.29%
- -----------------------------------------------------------------------------------------------------
(a) Presented on an annualized basis
Asset quality remains a key focus, as management continues to stress loan
underwriting quality more than loan growth. Since December 31, 2003, Peoples'
asset quality ratios have improved slightly due to a modest decrease in the
level of nonperforming loans. The following table details Peoples' nonperforming
assets:
(Dollars in Thousands) September 30, June 30, December 31, September 30,
2004 2004 2003 2003
Loans 90+ days past due and accruing $ 298 $ 374 $ 188 $ 874
Renegotiated loans - - - 684
Nonaccrual loans 4,747 5,465 6,556 4,105
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 5,045 5,839 6,744 5,663
Other real estate owned 301 392 392 1,279
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 5,346 $ 6,231 $ 7,136 $ 6,942
- ------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percent of total loans 0.53% 0.62% 0.73% 0.61%
- ------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets as a percent of total assets 0.30% 0.35% 0.41% 0.39%
- ------------------------------------------------------------------------------------------------------------------------------
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, if any, is
measured based on the fair value of the collateral.
At September 30, 2004, the recorded investment in loans that were considered to
be impaired was $12.8 million, of which $10.5 million were accruing interest and
$2.3 million were nonaccrual loans. Included in this amount were $5.4 million of
impaired loans for which the related allowance for loan losses was $2.1 million.
The remaining impaired loan balances do not have a related allocation of the
allowance for loan losses because the loans have either previously been
written-down, are well secured or possess characteristics indicative of the
ability to repay the loan. For the nine months ended September 30, 2004,
Peoples' average recorded investment in impaired loans was approximately $19.5
million and interest income of $508,000 was recognized on impaired loans during
the period, representing 0.8% of Peoples' total interest income.
Funding Sources
- ---------------
Peoples considers a number of sources when evaluating funding needs, including
but not limited to deposits, short-term borrowings, and long-term borrowings.
Deposits, both interest-bearing and non-interest-bearing, continue to be the
most significant source of funds for Peoples, totaling $1.03 billion at
September 30, 2004 and December 31, 2003. Peoples also accesses other funding
sources, including short-term and long-term borrowings, to fund asset growth and
satisfy liquidity needs. At September 30, 2004, borrowed funds totaled $568.1
million, up $41.5 million (or 8%) from $526.6 million at year-end 2003, as a
result of an increase in long-term borrowings.
Non-interest-bearing deposits serve as a core funding source. At September 30,
2004, non-interest-bearing deposit balances totaled $143.1 million, up $9.4
million (or 7%) 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 third quarter of 2004,
non-interest-bearing deposits averaged $146.5 million versus $142.9 in the
second quarter of 2004 and $131.5 million in the third 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 $884.6 million at September 30, 2004 compared
to $894.8 million at December 31, 2003. This decrease is due in part to
management's strategy to reduce Peoples' reliance on high-costing funds, such as
certificates of deposit ("CDs"), and shifting to lower-costing core deposits. In
addition, Peoples continues to experience highly competitive pricing of CDs,
which has also contributed to the decline in balances. The following details
Peoples' interest-bearing deposits:
(Dollars in Thousands) September 30, June 30, December 31, 2003 September 30,
2004 2004 2003
Certificates of deposit $ 453,157 $ 443,447 $ 461,904 $ 468,997
Savings accounts 168,095 178,651 171,488 179,590
Interest-bearing transaction accounts 166,467 158,025 157,410 162,752
Money market deposit accounts 96,876 95,866 104,019 112,013
-------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 884,595 $ 875,989 $ 894,821 $ 923,352
-------------------------------------------------------------------------------------------------------------------
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. 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 September 30, 2004, wholesale
repurchase agreements totaled $243.2 million, up from $216.3 million at year-end
2003. This increase is due to Peoples using wholesale repurchase agreements to
match fund some investment securities purchases rather than reinvest the runoff
from the investment portfolio, which management used to fund asset growth.
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 allocate additional investment securities to
these repurchase agreements.
Capital/Stockholders' Equity
- ----------------------------
At September 30, 2004, stockholders' equity was $173.2 million versus $170.9
million at December 31, 2003, an increase of $2.4 million (or 1%) attributable
to Peoples' earnings, net of dividends paid, of $9.8 million which was largely
offset by treasury stock purchases, net of shares reissued, of $8.2 million.
For the nine months ended September 30, 2004, Peoples paid dividends of $5.7
million, representing a dividend payout ratio of 36.8% of earnings, compared to
a payout ratio of 30.0% 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 and losses on available-for-sale securities, net of
deferred income taxes, impacts Peoples' total equity. At September 30, 2004, net
unrealized holding gains totaled $3.7 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 September 30, 2004, Peoples had treasury stock totaling $10.3 million, up
$8.2 million from year-end 2003. During the first nine months of 2004, Peoples
Bancorp repurchased 500,535 common shares (or 80% of the total authorized), at
an average price of $26.50 per share, under the 2004 Stock Repurchase Program
and 4,121 common shares, at an average price of $26.32, in conjunction with the
deferred compensation plan for directors of Peoples Bancorp and its
subsidiaries. Peoples reissued 177,863 treasury shares due to stock option
exercises and acquisitions during the first nine months of 2004. Peoples Bancorp
anticipates repurchasing additional common shares as authorized in the 2004
Stock Repurchase Program and in accordance with applicable 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
September 30, 2004, Peoples tangible equity ratio was 6.31% compared to 7.24% at
December 31, 2003 and 7.43% at September 30, 2003. The lower ratio compared to
the prior periods was primarily the result of an increase in intangible assets
due to the Insurance Agency Acquisitions.
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 September 30,
2004, Peoples' Total Capital, Tier 1 and Leverage ratios were 13.29%, 11.97% and
7.85%, 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
September 30, 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, President 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 September 30, 2004, Peoples' one-year cumulative gap amount was positive 2.1%
of earning assets, which represented $33.8 million more in assets than
liabilities that could reprice or mature during that period. Management believes
a portion of interest-bearing liabilities are not likely to reprice at their
first opportunity, based on current rates and management's control over the
pricing of most deposits. Excluding those liabilities, Peoples' adjusted
one-year cumulative gap amount at quarter-end was positive 10.5% of earning
assets, which represented $168.4 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 September 30, 2004
(dollars in thousands):
Immediate Estimated Estimated
Interest Rate
Increase (Decrease) in Increase (Decrease) (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- --------------------------- ----------------------------- --------------------------------
300 $ 62 0.1 % $ (22,844) (11.9) %
200 937 1.9 (14,551) (7.6)
100 1,674 3.4 (6,262) (3.3)
(100) $ (108) (0.2) % $ (8,059) (4.2) %
The interest rate risk analysis shows Peoples is asset sensitive, which means
that increasing interest rates should favorably impact Peoples' net interest
income while downward moving interest rates should negatively impact net
interest income, 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 nine months of 2004, cash provided by financing activities totaled $23.3
million compared to $232.1 million a year ago. This decrease is largely
attributable to 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 $82.1 million through nine months of 2004 versus $278.3
million last year, primarily due to lower level of investment securities
purchases in 2004.
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 September 30, 2004, Peoples had available borrowing
capacity of approximately $84 million through these external sources and
unpledged securities in the investment portfolio of approximately $162 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 September 30, 2004,
Peoples' net liquidity position was $152.6 million, or 8.5% 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 September 30, 2004, was within Peoples' policy limit of
negative 10% of total assets.
Off-Balance Sheet Activities and Contractual Obligations
- --------------------------------------------------------
Peoples routinely engages in activities that involve, to varying degrees,
elements of risk that are not reflected in whole or in part in the consolidated
financial statements. These activities are part of Peoples' normal course of
business and include traditional off-balance sheet credit-related financial
instruments, interest rate contracts, operating leases, long-term debt and
commitments to make additional capital contributions in low-income housing tax
credit investments.
Traditional off-balance sheet credit-related financial instruments are primarily
commitments to extend credit, and standby letters of credit. These activities
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:
September 30, June 30, December 31, September 30,
(Dollars in Thousands) 2004 2004 2003 2003
Loan commitments $ 145,737 $ 140,882 $ 115,685 $ 114,653
Standby letters of credit 21,882 23,274 20,928 9,313
Unused credit card limits - - - 20,765
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 September 30, 2004, Peoples held interest rate
contracts with notional amounts totaling $17 million and fair values totaling
$185,000. 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 September 30, 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
September 30, 2004, these commitments approximated $6.3 million, with
approximately $2.5 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' third quarter results reflect favorable operating earnings momentum,
which is expected to continue in the fourth quarter of 2004. Non-interest
revenue growth remains strong, as management integrates the new insurance
divisions with Peoples' total financial service offering. Peoples' capital
position, coupled with management's commitment to sound underwriting discipline
and Peoples' solid asset quality, serves as a foundation of strength in the
current business environment. Management continues its efforts to position
Peoples for long-term earnings growth in anticipation of higher interest rates,
which will pose additional challenges as competition for loans and deposits
intensifies.
The flooding in mid-September 2004 as a result of Hurricane Ivan had a severe
impact on several of the communities Peoples serves. Even though Peoples was
fortunate to sustain only minor damage to its facilities and quickly reopened
affected offices, many communities are still recovering from the damage to
businesses, homes and infrastructure caused by the fast rising floodwaters.
Peoples' lenders and loan review staff have evaluated the commercial lending
relationships impacted by the flooding. Based on this review, management does
not anticipate any significant loan losses in the fourth quarter from these
relationships. Management is optimistic the long-term economic impact of the
flooding will be minimal.
Asset quality remains a central focus as Peoples works to grow loans in a
disciplined manner. Throughout 2004, asset quality has improved as the level of
nonperforming loans and assets have declined. However, management expects asset
quality to be negatively impacted by the renegotiation of a commercial loan
totaling $1.1 million in the early part of the fourth quarter of 2004. This loan
relationship was meeting its debt requirements but was renegotiated to a lower
payment at the request of the borrower. Management does not expect any loss from
this relationship in the near term due to the collateralization of the loan.
As expected, the Insurance Agency Acquisitions are having a positive impact on
revenues and earnings. In addition to new revenue streams, these divisions
provide additional access to insurance carriers and key producers and managers,
which should allow Peoples to retain much of the customer bases of each
division. As the integration efforts continue for the Insurance Agency
Acquisitions, management is preparing for the addition of several new customers
and consolidation of operations in the Ashland, Kentucky area as part of the
Ashland Banking Acquisition. Management expects the Ashland Banking Acquisition
and related office closures will enhance 2005 earnings per share by 2 to 4
cents, excluding any impact of one-time charges related to the acquisition.
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 and branch acquisitions in recent years,
management's evaluation of future acquisitions will also 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 final
quarter of 2004, management expects earnings catalysts to include loan growth,
enhanced revenues from the Insurance Agency Acquisitions, controlled operating
expenses and possible improvement in net interest margin due to rate increases.
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 are less favorable than expected;
(4) the businesses of Putnam and Barengo may not be successfully
integrated with Peoples Insurance or the integration may take longer
to accomplish than expected;
(5) the expected synergies from the Insurance Agency Acquisitions may make
it difficult to maintain relationships with clients, associates or
suppliers;
(6) general economic conditions may be less favorable than expected;
(7) political developments, wars or other hostilities may disrupt or
increase volatility in securities markets or other economic
conditions;
(8) legislative or regulatory changes or actions may adversely affect
Peoples' business;
(9) changes and trends in the securities markets;
(10) a delayed or incomplete resolution of regulatory issues that could
arise;
(11) the impact of reputational risk created by these developments on such
matters as business generation and retention, funding and liquidity;
(12) the costs and effects of regulatory and legal developments, including
the outcome of regulatory or other governmental inquiries and legal
proceedings and results of regulatory examinations; and
(13) 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-Q.
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 September 30,
2004 2003
------------------------------------ -----------------------------------
(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Securities:
Taxable $ 588,276 $ 6,225 4.20% $ 633,316 $ 6,881 4.31%
Tax-exempt (1) 62,844 1,060 6.69% 65,897 1,092 6.57%
- -----------------------------------------------------------------------------------------------------------------
Total securities 651,120 7,285 4.48% 699,213 7,973 4.56%
Loans (2):
Commercial (1) 565,142 8,396 5.89% 486,675 7,868 6.41%
Real estate (3) 312,116 5,004 6.36% 325,657 5,713 6.96%
Consumer 67,524 1,525 8.96% 97,002 2,332 9.54%
- -----------------------------------------------------------------------------------------------------------------
Total loans 944,782 14,925 6.32% 909,334 15,913 6.94%
Less: Allowance for loan loss (14,939) (14,376)
- -----------------------------------------------------------------------------------------------------------------
Net loans 929,843 14,925 6.39% 894,958 15,913 7.08%
Interest-bearing deposits with banks 2,501 6 0.87% 5,038 11 0.83%
Federal funds sold 8,047 40 1.99% 26,512 66 0.99%
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 1,591,511 22,256 5.57% 1,625,721 $ 23,963 5.88%
Other assets 191,802 150,773
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,783,313 $ 1,776,494
=================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 172,686 321 0.74% 183,508 $ 442 0.96%
Interest-bearing demand deposits 258,608 596 0.91% 276,414 592 0.85%
Time 450,957 3,454 3.04% 474,128 3,404 2.85%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 882,251 4,371 1.97% 934,050 4,438 1.88%
Borrowed funds:
Short-term 99,502 361 1.44% 44,488 144 1.28%
Long-term 471,260 4,227 3.59% 483,980 4,883 4.00%
- -----------------------------------------------------------------------------------------------------------------
Total borrowed funds 570,762 4,588 3.16% 528,468 5,027 3.77%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,453,013 $ 8,959 2.44% 1,462,518 $ 9,465 2.56%
Non-interest-bearing deposits 146,478 131,456
Other liabilities 12,801 10,970
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,612,292 1,604,944
Stockholders' equity 171,021 171,550
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,783,313 1,776,494
=================================================================================================================
Interest spread $ 13,297 3.13% $ 14,498 3.32%
Interest income to earning assets 5.57% 5.88%
Interest expense to earning assets 2.23% 2.31%
- -----------------------------------------------------------------------------------------------------------------
Net interest margin 3.34% 3.57%
=================================================================================================================
(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 $123 and $145 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.
For the Nine Months Ended September 30,
2004 2003
------------------------------------ -----------------------------------
(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Securities:
Taxable $ 583,365 $ 18,229 4.17% $ 604,191 $ 20,604 4.56%
Tax-exempt (1) 63,815 3,227 6.75% 66,408 3,315 6.67%
- -----------------------------------------------------------------------------------------------------------------
Total securities 647,180 21,456 4.42% 670,599 23,919 4.76%
Loans (2):
Commercial (1) 544,970 24,177 5.93% 455,120 21,931 6.44%
Real estate (3) 309,007 15,157 6.55% 328,893 17,697 7.19%
Consumer 72,039 4,903 9.09% 101,480 7,350 9.68%
- -----------------------------------------------------------------------------------------------------------------
Total loans 926,016 44,237 6.37% 885,493 46,978 7.09%
Less: Allowance for loan loss (15,011) (13,916)
- -----------------------------------------------------------------------------------------------------------------
Net loans 911,005 44,237 6.48% 871,577 46,978 7.20%
Interest-bearing deposits with banks 2,503 11 0.59% 3,009 18 0.80%
Federal funds sold 11,717 105 1.20% 17,863 143 1.07%
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 1,572,405 $ 65,809 5.59% 1,563,048 $ 71,058 6.07%
Other assets 176,394 133,938
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,748,799 $ 1,696,986
=================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 174,184 $ 809 0.62% $ 170,000 $ 1,467 1.15%
Interest-bearing demand deposits 259,711 1,588 0.82% 274,744 2,135 1.04%
Time 454,165 9,933 2.92% 450,309 10,943 3.25%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 888,060 12,330 1.85% 895,053 14,545 2.17%
Borrowed funds:
Short-term 94,042 829 1.18% 41,935 386 1.23%
Long-term 442,610 12,286 3.71% 463,565 14,168 4.09%
- -----------------------------------------------------------------------------------------------------------------
Total borrowed funds 536,652 13,115 3.23% 505,500 14,554 3.85%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,424,712 $ 25,445 2.38% 1,400,553 $ 29,099 2.78%
Non-interest-bearing deposits 141,647 121,983
Other liabilities 10,631 9,633
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,576,990 1,532,169
Stockholders' equity 171,809 164,817
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,748,799 $ 1,696,986
=================================================================================================================
Interest spread 40,364 3.21% $ 41,959 3.29%
Interest income to earning assets 5.59% 6.07%
Interest expense to earning assets 2.15% 2.48%
- -----------------------------------------------------------------------------------------------------------------
Net interest margin 3.44% 3.59%
=================================================================================================================
(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 $364 and $523 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 Chairman of the Board and Chief Executive Officer,
the President and Chief Operating Officer and the Chief Financial Officer and
Treasurer 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' Chairman of the Board and Chief
Executive Officer, President and Chief Operating Officer and Chief Financial
Officer and Treasurer have concluded that:
(a) information required to be disclosed by Peoples in this Quarterly
Report on Form 10-Q and the other reports which Peoples files or
submits under the Exchange Act would be accumulated and communicated to
Peoples' management, including its Chairman of the Board and Chief
Executive Officer, President and Chief Operating Officer and Chief
Financial Officer and Treasurer, as appropriate to allow timely
decisions regarding required disclosure;
(b) information required to be disclosed by Peoples in this Quarterly
Report on Form 10-Q and the other reports which Peoples files or
submits under the Exchange Act 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 quarterly period covered by this Quarterly Report on Form 10-Q
to ensure that material information relating to Peoples and its
consolidated subsidiaries is made know to them, particularly during the
period in which this Quarterly Report on Form 10-Q is being prepared.
Changes in Internal Control Over Financial Reporting
- ----------------------------------------------------
There were no changes in Peoples' internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that occurred during Peoples'
fiscal quarter ended September 30, 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: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On April 30, 2004, Peoples Insurance Agency, Inc ("Peoples Insurance"), a
subsidiary of Peoples Bancorp, acquired substantially all of the assets and
assumed specified liabilities of Putnam Agency, Inc. (the "Putnam Agency
Acquisition"). The initial consideration paid in the Putnam Agency Acquisition
was $8,640,000. Of this amount, $6,480,000 was paid in cash and $2,160,000 in
common shares of Peoples Bancorp representing 66,582 common shares based on the
average of the daily closing price of the Peoples Bancorp common shares for the
20 consecutive trading days ending at the close of business on the fifth trading
day before April 30, 2004. The asset purchase agreement, dated April 7, 2004,
related to the Putnam Agency Acquisition also provides for additional "earn out
consideration" to be paid in cash over the next three years, contingent on the
business of the former agency achieving specified revenue growth goals during
the twelve-month periods ending April 30, 2005, April 30, 2006 and April 30,
2007. The Peoples Bancorp common shares were issued in the Putnam Agency
Acquisition in a private placement in reliance upon the exemption from
registration under Section 4(2) of the Securities Act of 1933 (the "Securities
Act") based upon the limited number of persons to whom the common shares were
"sold" (to Putnam Agency, Inc. which distributed the common shares to its
shareholders -- ten persons (the "Putnam Agency Shareholders")) and the
representations from each Putnam Agency Shareholder (a) that such Putnam Agency
Shareholder was either (i) an "accredited investor" as defined in Rule 501
promulgated under the Securities Act or (ii) possessed such experience,
knowledge and sophistication in financial and business matters generally, and
familiarity with the transactions contemplated by the Putnam Agency Acquisition
that, together with such Putnam Agency Shareholder's investment advisors, such
Putnam Agency Shareholder was capable of evaluating the merits and economic
risks of consummating the transactions contemplated by the Putnam Agency
Acquisition; and (b) that such Putnam Agency Shareholder received the common
shares of Peoples Bancorp distributed by Putnam Agency, Inc. for such Putnam
Agency Shareholder's own account, for investment and not with a view to, or for
sale in connection with, any distribution in contravention of the Securities
Act. As part of the Putnam Agency Acquisition, Peoples Bancorp agreed to file a
registration statement with the SEC to register for resale the common shares
issued to the Putnam Agency Shareholders. The Registration Statement on Form S-3
filed by Peoples Bancorp for this purpose (Registration No. 333-116683) became
effective on July 2, 2004.
On May 28, 2004, Peoples Insurance acquired Barengo Insurance Agency, Inc.
("Barengo Insurance Agency") through the merger of Barengo Insurance Agency into
Peoples Insurance (the "Barengo Insurance Agency Merger"). The initial
consideration paid in the Barengo Insurance Agency Merger was $5,991,000. Of
this amount, $2,935,590 was paid in cash and $3,055,410 in common shares of
Peoples Bancorp representing 127,446 common shares based on the average of the
daily closing price of the Peoples Bancorp common shares for the 20 consecutive
trading days ending at the close of business on the fifth trading day before May
28, 2004. The agreement and plan of merger, dated as of May 28, 2004, related to
the Barengo Insurance Agency Merger also provides for additional "earn out
consideration" to be paid in the form of 49% cash and 51% Peoples Bancorp common
shares over the next three years, contingent on the business of the former
agency achieving specified revenue growth goals during the twelve-month periods
ending May 31, 2005, May 31, 2006 and May 31, 2007. The number of Peoples
Bancorp common shares to be issued each year will be based on the average of the
daily closing price of the Peoples Bancorp common shares for the 20 consecutive
trading days ending at the close of business on the fifth trading day before
July 15, 2005, July 15, 2006 and July 15, 2007, as appropriate. As of the date
of this Quarterly Report on Form 10-Q, the issuance of 112,554 additional common
shares had been authorized by the Peoples Bancorp Board of Directors for this
purpose. The Peoples Bancorp common shares were issued in the Barengo Insurance
Agency Merger in a private placement in reliance upon the exemption from
registration under Section 4(2) of the Securities Act based upon the limited
number of persons to whom the common shares were "sold" (two former shareholders
of Barengo Insurance Agency) and the representations from each person (a) that
such person was either (i) an "accredited investor" as defined in Rule 501
promulgated under the Securities Act or (ii) possessed such experience,
knowledge and sophistication in financial and business matters generally, and
familiarity with the transactions contemplated by the Barengo Insurance Agency
Merger that, together with such person's investment advisors, such person was
capable of evaluating the merits and economic risks of consummating the
transactions contemplated by the Barengo Insurance Agency Merger; and (b) that
such person was acquiring the common shares of Peoples Bancorp for such person's
own account, for investment and not with a view to, or for sale in connection
with, any distribution in contravention of the Securities Act. As part of the
Barengo Insurance Agency Merger, Peoples Bancorp agreed to file a registration
statement with the SEC to register for resale the common shares issued to the
Barengo Insurance Agency shareholders on May 28, 2004 as well as any additional
common shares issued to those shareholders as "earn out consideration" in
respect of the Barengo Insurance Agency Merger. The Registration Statement on
Form S-3 filed by Peoples Bancorp for this purpose (Registration No. 333-116683)
became effective on July 2, 2004.
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 September 30, 2004:
(d)
(c) Maximum Number
Total Number of of Common Shares
(a) Common Shares that May Yet Be
Total Number of (b) Purchased as Part of Purchased Under
Common Shares Average Price Publicly Announced the Plans or
Period Purchased Paid Per Share Plans or Programs (1) Programs (1)(2)
July 1 - 31, 2004 27,084(3) $25.47(3) 25,000 111,365
August 1 - 31, 2004 137,265(4) $25.87(4) 136,900 174,465
September 1 - 30, 2004 50,113(5) $25.97(5) 50,000 124,465
- ----------------------------------------------------------------------------------------------------
Total 214,462 $25.84 211,900 124,465
- ----------------------------------------------------------------------------------------------------
(1) Information reflects solely the 2004 Stock Repurchase Program
originally 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. On August 13, 2004, the Board of
Directors of Peoples Bancorp Inc. authorized the repurchase of an
additional 200,000 common shares, with an aggregate purchase price of
not more than $6.5 million, under the 2004 Stock Repurchase Program.
The 2004 Stock Repurchase Program 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) Information reflects, in addition to common shares purchased under the
2004 Stock Repurchase Program, 1,137 common shares purchased in open
market transactions at an average price of $25.65 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") and 947 common shares acquired at
an average price of $26.95 in connection with the exercise of stock
options under Peoples' stock option plans.
(4) Includes, in addition to common shares purchased under the 2004 Stock
Repurchase Program, an aggregate of 365 common shares purchased in
open market transactions at an average price of $26.02 by Peoples Bank
for the Rabbi Trust.
(5) Includes, in addition to common shares purchased under the 2004 Stock
Repurchase Program, an aggregate of 113 common shares purchased in
open market transactions at an average price of $25.45 by Peoples Bank
for the Rabbi Trust.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5: OTHER INFORMATION.
In order to further motivate executives to act in the best interests of the
shareholders and to remain competitive in our executive compensation package,
Peoples offered Change in Control Agreements to executive officers of the
Company and entered into agreements ("Agreement" or "Agreements") with Robert E.
Evans, Mark F. Bradley, David B. Baker, John W. Conlon, Larry E. Holdren and
Carol A. Schneeberger during early August 2004. Each Agreement provides that, if
the executive officer is terminated by Peoples or its successors for any reason
other than cause or by the executive officer for good reason, within six (6)
months prior to or within twenty-four (24) months after a change in control,
Peoples will pay the following benefits:
As to each of Robert E. Evans and Mark F. Bradley, Peoples will (i) pay
in a lump sum within 30 days following the termination date the officer
an amount equal to two and one-half (2.5) times the amount of his base
annual compensation and (ii) provide life, medical and dental insurance
substantially in the form and expense to the executive officer as
received prior to the termination date for a period of one (1) year and
three (3) months from the date of termination of employment; and
As to David B. Baker, John W. Conlon, Larry E. Holdren and Carol A.
Schneeberger, Peoples will (i) pay in a lump sum within 30 days
following the termination date the officer an amount equal to two (2)
times the amount of his or her base annual compensation and (ii)
provide life, medical and dental insurance substantially in the form
and expense to the executive as received prior to the termination for a
period of one (1) year from the date of termination of employment.
An executive officer's base annual compensation for purposes of his or her
Agreement is the average annualized compensation paid by Peoples which was
includible in the executive officer's gross income prior to any deferred
arrangements during the most recent five taxable years ending before the date of
the change in control. Change in control is defined in the Agreements and
includes (i) the acquisition of beneficial ownership of 25% or more of Peoples'
voting securities by a person or entity or group of affiliated persons or
entities; (ii) the acquisition of all or substantially all of the assets of
Peoples by any person or entity or group of affiliated persons or entities;
(iii) execution of an agreement by Peoples to merge, consolidate or combine with
an unaffiliated entity if the Board of Directors of Peoples immediately prior to
the transaction will constitute less than the majority of the Board of Directors
of the surviving, new or combined entity or less than 75% of the outstanding
voting securities of the outstanding voting securities of the surviving, new or
combined entity will be beneficially owned by the shareholders of Peoples
immediately prior to the transaction; or (iv) a change in the majority of the
Directors of Peoples to individuals who were not members of the Board of
Directors in August, 2004 and were not nominated by a vote of the Board of
Directors which included the affirmative vote of a majority of such members or
other individuals so nominated.
An executive officer will be deemed terminated for cause in the event of gross
negligence or neglect of duties; commission of a felony or a gross misdemeanor
involving moral turpitude; fraud, disloyalty, dishonesty or willful violation of
any law or significant policy of Peoples; or issuance of an order by the banking
regulators of Peoples for removal of the executive officer.
An executive officer will be deemed to have terminated his or her employment for
good reason if (i) the executive is assigned material duties or responsibilities
inconsistent with the executive's positions, or the executive's reporting
responsibilities, titles, or offices are reduced other than by reason of
termination for cause or by reason of disability, retirement or death;(ii) the
executive's base salary is reduced; (iii) the executive's benefits under any
benefit plans are reduced; (iv) Peoples failed to obtain the assumption of, or
the agreement to perform, this Agreement by any successor; or, (v) the executive
is reassigned to an office location 50 miles or more form the current office
location of the executive officer; or (vi) the executive consents to any
relocation and Peoples fails to pay for all reasonable moving and to indemnify
the executive against any loss realized on the sale of the executive's principal
residence in connection with any such change of residence.
If the executive receives a change in control benefit as previously described,
he or she is subject to a non-compete agreement as follows.
As to each of Robert E. Evans and Mark F. Bradley, for a period of one
(1) year and three (3) months, the executive is not permitted to engage
in the business of banking, or any other business in which Peoples
directly or indirectly engages during the term of the Agreement in the
geographic market of Peoples on the termination date.
As to David B. Baker, John W. Conlon, Larry E. Holdren and Carol A.
Schneeberger, for a period of one (1) year, the executive is not
permitted to engage in the business of banking, or any other business
in which Peoples directly or indirectly engages during the term of the
Agreement in the geographic market of Peoples on the termination date.
ITEM 6: EXHIBITS.
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- ----------------------------------
10(a) Form of Change in Control Agreement applicable to Filed herewith
Robert E. Evans and Mark F. Bradley
10(b) Form of Change in Control Agreement applicable to Filed herewith
David B. Baker, Larry E. Holdren, Carol A.
Schneeberger and John W. Conlon
11 Computation of Earnings Per Share Filed herewith
12 Computation of Ratios Filed herewith
31(a) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[Chairman of the Board and Chief Executive Officer]
31(b) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[Chief Financial Officer and Treasurer]
31(c) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[President and Chief Operating Officer]
32 Section 1350 Certifications Filed herewith
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: November 8, 2004 By: /s/ ROBERT E. EVANS
----------------------------------
Robert E. Evans
Chairman of the Board and
Chief Executive Officer
Date: November 8, 2004 By: /s/ MARK F. BRADLEY
-------------------------------------
Mark F. Bradley
President and Chief Operating Officer
Date: November 8, 2004 By: /s/ JOHN W. CONLON
-------------------------------------
John W. Conlon
Chief Financial Officer and Treasurer
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- ----------------------------------
10(a) Form of Change in Control Agreement applicable to Filed herewith
Robert E. Evans and Mark F. Bradley
10(b) Form of Change in Control Agreement applicable to Filed herewith
David B. Baker, Larry E. Holdren, Carol A.
Schneeberger and John W. Conlon
11 Computation of Earnings Per Share Filed herewith
12 Computation of Ratios Filed herewith
31(a) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[Chairman of the Board and Chief Executive Officer]
31(b) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[Chief Financial Officer and Treasurer]
31(c) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[President and Chief Operating Officer]
32 Section 1350 Certifications Filed herewith