FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, at May 5, 2005: 10,405,462 common shares, without par value.
Exhibit Index Appears on Page 33
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2005 2004
Assets
Cash and cash equivalents:
Cash and due from banks $ 30,556 $ 30,670
Interest-bearing deposits in other banks 1,189 779
Federal funds sold 2,600 -
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Total cash and cash equivalents 34,345 31,449
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $591,313 at March 31, 2005 and $594,457 at December 31, 2004) 592,692 602,364
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Loans, net of deferred fees and costs 1,013,000 1,023,058
Allowance for loan losses (15,202) (14,760)
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Net loans 997,798 1,008,298
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Loans held for sale 1,147 612
Bank premises and equipment, net 22,126 22,640
Business owned life insurance 45,707 45,253
Goodwill 58,886 59,096
Other intangible assets 11,446 12,022
Other assets 27,482 27,352
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Total assets $ 1,791,629 $ 1,809,086
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Liabilities
Deposits:
Non-interest-bearing $ 157,087 $ 152,979
Interest-bearing 946,046 916,442
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Total deposits 1,103,133 1,069,421
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Short-term borrowings 83,724 51,895
Long-term borrowings 386,641 464,864
Junior subordinated notes held by subsidiary trusts 29,285 29,263
Accrued expenses and other liabilities 16,208 18,225
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Total liabilities 1,618,991 1,633,668
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Stockholders' Equity
Common stock, no par value, 24,000,000 shares authorized,
10,855,010 shares issued at March 31, 2005 and 10,850,641 shares issued
at December 31, 2004, including shares in treasury 162,277 162,284
Retained earnings 21,145 18,442
Accumulated comprehensive income, net of deferred income taxes 734 4,958
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184,156 185,684
Treasury stock, at cost, 461,131 shares at March 31, 2005 and 415,539 shares
at December 31, 2004 (11,518) (10,266)
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Total stockholders' equity 172,638 175,418
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Total liabilities and stockholders' equity $ 1,791,629 $ 1,809,086
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See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) For the Three Months
Ended March 31,
2005 2004
Interest Income:
Interest on taxable investment securities 5,659 6,171
Interest on tax-exempt investment securities 676 711
Other interest income 12 60
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Total interest income 22,643 21,586
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Interest Expense:
Interest on deposits 5,105 3,800
Interest on short-term borrowings 546 277
Interest on long-term borrowings 3,682 3,378
Interest on junior subordinated notes held by subsidiary trusts 598 583
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Total interest expense 9,931 8,038
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Net interest income 12,712 13,548
Provision for loan losses 941 794
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Net interest income after provision for loan losses 11,771 12,754
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Other Income:
Investment and insurance commissions 2,654 299
Service charges on deposit accounts 2,274 2,253
Income from fiduciary activities 757 774
Electronic banking income 647 523
Business owned life insurance 454 416
Gain on securities transactions 233 32
Mortgage banking income 117 199
Other 232 391
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Total other income 7,368 4,887
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Other Expenses:
Salaries and employee benefits 6,686 5,389
Net occupancy and equipment 1,289 1,221
Amortization of other intangible assets 688 401
Professional fees 665 456
Data processing and software 461 472
Franchise tax 411 341
Marketing 381 108
Other 2,166 1,902
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Total other expenses 12,747 10,290
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Income before income taxes 6,392 7,351
Income taxes 1,700 1,985
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Net income $ 4,692 $ 5,366
============================================================================================================================
Earnings per share:
Basic $ 0.45 $ 0.51
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Diluted $ 0.44 $ 0.50
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Weighted-average number of shares outstanding:
Basic 10,419,189 10,560,241
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Diluted 10,558,003 10,808,007
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Cash dividends declared $ 1,989 $ 1,900
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Cash dividends declared per share $ 0.19 $ 0.18
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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, 2004 10,850,641 $ 162,284 $ 18,442 $ 4,958 $ (10,266) $ 175,418
===================================================================================================================================
Net income 4,692 4,692
Other comprehensive income, net of tax (4,224) (4,224)
Cash dividends declared of $0.19 per share (1,989) (1,989)
Purchase of treasury stock, 61,404 shares (1,644) (1,644)
Exercise of common stock options (reissued
15,812 treasury shares) (200) 392 192
Tax benefit from exercise of stock options 73 73
Issuance of common stock under dividend
reinvestment plan 4,369 120 120
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Balance, March 31, 2005 10,855,010 $ 162,277 $ 21,145 $ 734 $ (11,518) $ 172,638
===================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) For the Three Months
Ended March 31,
2005 2004
Net income $ 4,692 $ 5,366
Other comprehensive income (loss):
Unrealized (loss) gain on available-for-sale securities arising in the period (6,295) 7,220
Less: reclassification adjustment for net securities gains included in net income 233 32
Unrealized gain on cash flow hedge derivatives arising in the period 30 4
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Total other comprehensive (loss) income (6,498) 7,192
Income tax benefit (expense) 2,274 (2,517)
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Total other comprehensive (loss) income, net of tax (4,224) 4,675
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Total comprehensive income $ 468 $ 10,041
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See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) For the Three Months
Ended March 31,
2005 2004
Net cash provided by operating activities $ 19,372 $ 8,053
Cash flows from investing activities:
Purchases of available-for-sale securities (25,840) (41,330)
Proceeds from sales of available-for-sale securities 593 2,065
Proceeds from maturities of available-for-sale securities 28,281 29,859
Net (increase) decrease in loans (1,980) 3,530
Net expenditures for premises and equipment (550) (580)
Net proceeds (expenditures) from sales of other real estate owned 266 (74)
Investment in business owned life insurance - (20,000)
Investment in limited partnership and tax credit funds (1,519) (760)
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Net cash used in investing activities (749) (27,290)
Cash flows from financing activities:
Net increase in non-interest-bearing deposits 4,108 575
Net decrease in interest-bearing deposits 29,780 919
Net increase (decrease) in short-term borrowings 31,829 (21,439)
Proceeds from long-term borrowings - 5,000
Payments on long-term borrowings (78,222) (2,650)
Cash dividends paid (1,770) (1,797)
Purchase of treasury stock (1,644) (4,146)
Proceeds from issuance of common stock 192 209
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Net cash used in financing activities (15,727) (23,329)
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Net increase (decrease) in cash and cash equivalents 2,896 (42,566)
Cash and cash equivalents at beginning of period 31,449 73,426
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Cash and cash equivalents at end of period $ 34,345 $ 30,860
=====================================================================================================================
Supplemental cash flow information:
Interest paid $ 10,043 $ 7,982
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See notes to the consolidated unaudited financial statements
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
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The accounting and reporting policies of Peoples Bancorp Inc. ("Peoples
Bancorp") and Subsidiaries (collectively, "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 accompanying
unaudited consolidated financial statements of Peoples reflect all
adjustments (which include normal recurring adjustments) necessary to
present fairly such information for the periods and dates indicated. 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. To conform to the 2005
presentation, certain reclassifications have been made to prior period
amounts, which had no impact on net income or stockholders' equity. Results
of operation for the three months ended March 31, 2005, are not necessarily
indicative of the results that may be expected for the year ending December
31, 2005.
Certain information and footnotes typically included in financial statements
prepared in conformity with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The balance sheet at December 31, 2004
contained herein has been derived from the audited balance sheet included in
Peoples Bancorp's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 ("2004 Form 10-K"). These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the 2004 Form 10-K.
The consolidated financial statements include the accounts of Peoples
Bancorp and its consolidated subsidiaries, Peoples Bank, National
Association ("Peoples Bank") and Peoples Investment Company, along with
their wholly-owned subsidiaries. Peoples Bancorp has two statutory business
trusts that are variable interest entities for which Peoples Bancorp is not
the primary beneficiary. As a result, the accounts of these trusts are not
included in Peoples' consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated.
2. New Accounting Pronouncements:
------------------------------
On December 16, 2004, the FASB issued a revision of Statement No. 123,
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires the compensation
cost relating to share-based payment transactions to be recognized in
financial statements based on the fair value of the equity or liability
instruments issued. SFAS 123(R) replaces SFAS 123 and supercedes APB 25.
SFAS 123 (R) was originally effective for public companies that do not file
as small business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. On April 15, 2005, the
Securities and Exchange Commission ("SEC") adopted a new rule that amends
the compliance date for SFAS 123 (R) to allow public companies that do not
file as small business issuers to implement SFAS 123 (R) at the beginning of
their next fiscal year that begins after June 15, 2005. For Peoples, SFAS
123(R) now becomes effective for the year beginning January 1, 2006.
3. Stock-Based Compensation:
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Peoples accounts for stock-based compensation using the intrinsic value
method. Under the provisions of the stock option plans, the option price per
share granted cannot be less than the fair market value of the underlying
common shares on the date of grant. As a result, Peoples does not recognize
any stock-based employee compensation expense in net income. The following
table illustrates the effect on net income and earnings per share had
Peoples applied fair value recognition to stock-based employee compensation,
assuming the estimated fair value of the options as of the grant date is
amortized to expense over the vesting period:
(Dollars in Thousands, except Per Share Data) Three Months Ended
March 31,
2005 2004
Net income, as reported $ 4,692 $ 5,366
Deduct: stock-based compensation expense determined
under fair value based method, net of tax 145 134
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Pro forma net income $ 4,547 $ 5,232
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Basic Earnings Per Share:
As reported $ 0.45 $ 0.51
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Pro forma $ 0.44 $ 0.50
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Diluted Earnings Per Share:
As reported $ 0.44 $ 0.50
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Pro forma $ 0.43 $ 0.48
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The fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
2005 2004
Risk-free interest rate 4.44% 3.65%
Dividend yield 2.75% 2.47%
Volatility factor of the market price of parent stock 27.8% 29.8%
Weighted-average expected life of options 7.4 years 7.0 years
4. Employee Benefit Plans:
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Components of Net Periodic Benefit Costs
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Peoples Bancorp sponsors a noncontributory defined benefit pension plan and
a contributory postretirement benefit plan. The following table details the
components of the net periodic benefit cost for both plans:
Pension Benefits Postretirement Benefits
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Three Months Ended Three Months Ended
March 31, March 31,
(Dollars in Thousands) 2005 2004 2005 2004
Service cost $ 232 $ 212 $ - $ -
Interest cost 207 185 9 9
Expected return on plan assets (279) (227) - -
Amortization of transition asset - - - -
Amortization of prior service cost 1 1 3 3
Amortization of net loss 62 44 3 -
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Net periodic benefit cost $ 223 $ 215 $ 15 $ 12
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Employer Contributions
----------------------
Through March 31, 2005, Peoples Bancorp had not made any contributions to
its defined benefit pension plan for the current year. Peoples anticipates
contributing $1.5 million to its pension plan in 2005; however, actual
contributions are made at the discretion of the Retirement Plan Committee
and Peoples Bancorp's Board of Directors.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited consolidated
financial statements and the management discussion and analysis that follows:
At or For the Three
Months Ended March 31,
SIGNIFICANT RATIOS 2005 2004
Return on average equity 10.85 % 12.50 %
Return on average assets 1.05 % 1.25 %
Net interest margin (a) 3.27 % 3.56 %
Non-interest income leverage ratio (b) 59.10 % 46.67 %
Efficiency ratio (c) 59.60 % 53.24 %
Average stockholders' equity to average assets 9.69 % 9.97 %
Average loans to average deposits 94.34 % 88.54 %
Cash dividends to net income 42.39 % 35.41 %
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ASSET QUALITY RATIOS (end of period)
Nonperforming loans as a percent of total loans (d) 0.72 % 0.76 %
Nonperforming assets as a percent of total assets (e) 0.46 % 0.43 %
Allowance for loan losses to loans net of unearned interest 1.50 % 1.62 %
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CAPITAL RATIOS (end of period)
Tier I capital ratio 11.16 % 13.79 %
Risk-based capital ratio 12.52 % 15.19 %
Leverage ratio 7.60 % 8.80 %
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PER SHARE DATA
Earnings per share - basic 0.45 0.51
Earnings per share - diluted 0.44 0.50
Cash dividends declared per share 0.19 0.18
Book value per share (end of period) 16.61 16.70
Tangible book value per share (end of period) (f) 9.84 12.05
Weighted average shares outstanding - Basic 10,419,189 10,560,241
Weighted average shares outstanding - Diluted 10,558,003 10,808,007
Common shares outstanding at end of period 10,393,879 10,500,409
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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 of accounting.
Introduction
- ------------
The following discussion and analysis of the unaudited 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, 2004, 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 Peoples completed the acquisition of certain assets of, and
assumed certain liabilities from, Putnam Agency, Inc. ("Putnam")
on April 30, 2004 and the acquisition of Barengo Insurance
Agency, Inc. ("Barengo") on May 28, 2004, (collectively, the
"Insurance Agency Acquisitions"). In addition, Peoples Bank
acquired two full-service banking offices in the Ashland,
Kentucky area at the close of business on December 3, 2004 (the
"Ashland Banking Acquisition"). In conjunction with the Ashland
Banking Acquisition, Peoples Bank consolidated two of its
existing offices in the Ashland area market into other Peoples
Bank offices and closed one of the acquired offices.
o On December 10, 2004, Peoples Bancorp announced the
authorization to repurchase up to 525,000, or approximately 5%,
of Peoples Bancorp's outstanding common shares in 2005 from time
to time in open market or privately negotiated transactions (the
"2005 Stock Repurchase Program"). Any repurchased common shares
will be held as treasury shares and are anticipated to be used
for future exercises of stock options granted under Peoples
Bancorp's stock option plans, future issuances of common shares
in connection with Peoples Bancorp's deferred compensation
plans, and other general corporate purposes. Through March 31,
2005, Peoples Bancorp had repurchased a total of 59,700 common
shares (or 11% of the total authorized) under the 2005 Stock
Repurchase Program, at an average price of $26.78 per share.
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 generally accepted
accounting principles 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 materially 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
- ------------------
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 could negatively impact interest income due to the
corresponding acceleration of 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 after appropriate
review by lending and/or loan review personnel indicates 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 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 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 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 $15.2
million at March 31, 2005, 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. Trading securities are those securities
bought and held principally for the purpose of selling in the near term. Trading
securities are reported at fair value, with holding gains and losses recognized
in earnings.
Presently, Peoples classifies its entire investment portfolio as
available-for-sale. As a result, both the investment and equity sections of
Peoples' balance sheet are more sensitive to changes in the overall market value
of the investment portfolio, due to changes in market interest rates, investor
confidence and other factors affecting market values, than if the investment
portfolio was classified as held-to-maturity.
While temporary changes in the market value of available-for-sale securities are
not recognized in earnings, a decline in fair value below amortized cost deemed
to be "other-than-temporary" results in an adjustment to the cost basis of the
investment, with a corresponding loss charged against earnings. Management
systematically evaluates Peoples' investment securities for other-than-temporary
declines in estimated fair value on a quarterly basis. This analysis requires
management to consider various factors in order to determine if a decline in
estimated fair value is temporary or other-than-temporary. These factors include
duration and magnitude of the decline in value, the financial condition of the
issuer, and Peoples' ability and intent to continue holding the investment for a
period of time sufficient to allow for any anticipated recovery in market value.
At March 31, 2005, 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, additional charges to income could
occur in future periods.
Goodwill and Other Intangible Assets
- ------------------------------------
Over the past several years, Peoples has grown through mergers and acquisitions
accounted for under the purchase method of accounting. Under the purchase
method, Peoples is required to allocate the cost of an acquired company to the
assets acquired, including identified intangible assets, and liabilities assumed
based on their estimated fair values at the date of acquisition. At March 31,
2005, Peoples had $10.7 million of identifiable intangible assets acquired in
acquisitions, subject to amortization, and $58.9 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 inherent value in
the businesses acquired and this 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 no indicators of
impairment exist as of March 31, 2005. 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
- --------------------------------
Net income totaled $4,692,000, or $0.44 per diluted share, in the first quarter
of 2005, compared to $5,366,000, or $0.50 per diluted share, a year ago.
Peoples' lower earnings were primarily attributable to reduced levels of net
interest income, which offset increases in net revenues generated by
acquisitions completed during 2004. Additionally, Peoples recorded increased
provision for loan losses of $147,000 in the first quarter of 2005 compared to
the same period in 2004, which contributed to the reduction in net income.
Earnings in the first quarter of 2005 included the impact of some significant
asset transactions, which resulted in a net pre-tax gain of $54,000. Peoples
recognized a net gain on securities transactions and asset disposals of $241,000
($157,000 after-tax), with nearly all of the gain resulting from the sale of an
investment security due to the merger of the issuer with an unrelated company.
This gain was largely offset by a net loss of $187,000 ($122,000 after-tax) on
the sale of $11.6 million of long-term fixed-rated mortgage loans, acquired
during the fourth quarter of 2004 as part of the Ashland Banking Acquisition.
These loans were sold due to their associated interest rate risk in the current
rate environment.
For the quarter ended March 31, 2005, net interest income totaled $12.7 million,
down 6% compared to $13.5 million a year ago and unchanged from $12.7 million
for the fourth quarter of 2004. The decline from 2004's first quarter was
largely attributable to interest-bearing liabilities and their associated rates
increasing more rapidly than earning asset balances and the yields earned on
those assets due in part to conversion of earning assets to fund the purchase of
business owned life insurance in early 2004, increased borrowings to support
other non-earning assets and acquisitions and the impact of the flattening yield
curve on new loan pricing and yields on securities reinvestments. Peoples'
strategy to match fund selected long-term, adjustable rate commercial loans
using borrowings with a similar interest rate risk profile also caused net
interest margin to be less when compared to the first quarter of 2004. The
combined effect of these factors caused net interest margin to compress to 3.27%
in the first quarter of 2005, from 3.29% the prior quarter and 3.56% in the
first quarter of 2004.
Other income was $7.4 million for the first quarter of 2005, up 51% from $4.9
million for the same period a year ago. This increase was primarily the result
of the Insurance Agency Acquisitions, which accounted for $2.3 million of the
increase. For the first three months of 2005, other expense totaled $12.7
million versus $10.3 million in 2004's first quarter, with operating expenses
relating to the acquired insurance agencies accounting for $1.5 million, or 60%,
of the increase. Other increased costs in the first quarter included salaries
and benefits, professional fees and marketing costs. Compared to the fourth
quarter of 2004, non-interest expense was down slightly in the first quarter of
2005.
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 $12,712,000 in the first quarter of 2005, down from
$13,548,000 a year ago. Interest income totaled $22,643,000 for the three months
ended March 31, 2005, up 5% compared to the same period last year primarily as a
result of a modest increase in earning assets and a 16 basis point improvement
in the yield on earning assets. The slight improvement in interest income was
more than offset by increased interest expense during the first three months of
2005. Interest expense totaled $9,931,000 in the first quarter of 2005 versus
$8,038,000 in 2004's first quarter, up 24%, reflecting higher deposit balances
due to the Ashland Banking Acquisition and increased borrowings to support
non-earning assets, coupled with an overall increase in Peoples' cost of funds.
Compared to the fourth quarter of 2004, net interest income was virtually
unchanged from $12,734,000, as increased interest expense was largely offset by
higher levels of interest income.
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:
Three Months Ended
March 31, December 31, March 31,
(Dollars in thousands) 2005 2004 2004
Net interest income, as reported $ 12,712 $ 12,734 $ 13,548
Taxable equivalent adjustments 394 401 414
---------------------------------------------------------------------------------------
Fully-tax equivalent net interest income $ 13,106 $ 13,135 $ 13,962
---------------------------------------------------------------------------------------
Average earning assets $ 1,611,015 $ 1,601,388 $ 1,575,126
---------------------------------------------------------------------------------------
Net interest margin 3.27% 3.29% 3.56%
---------------------------------------------------------------------------------------
In recent periods, short-term interest rates have increased substantially while
longer-term rates have risen only minimally. This flattening of the yield curve,
coupled with intense competition for loans and deposits, has compressed net
interest margin for most financial institutions, including Peoples, due to the
cost of funds rising at a faster pace than the yield on earnings assets. In the
first quarter of 2005, the FTE yield on earning assets was 5.76%, compared to
5.69% in the prior quarter and 5.60% in 2004's first quarter, while Peoples'
cost of funds was 2.75%, 2.66% and 2.28% for the same periods, respectively.
Net loans comprise the largest portion of Peoples' earning assets, averaging
$1.0 billion in the first quarter of 2005, up from $977.8 million in the prior
quarter and $897.2 million in the first quarter of 2004. The FTE yield on net
loans was 6.53% for the three months ended March 31, 2005, versus 6.43% and
6.57% for the fourth and first quarters of 2004, respectively. The Federal
Reserve's action to increase interest rates has allowed loan yields to
stabilize, although competition for commercial loans and prepayments of higher
rate loans, primarily commercial loans, have tempered any improvement in loan
yields due to these rate pressures.
Investment securities averaged $599.5 million in the first quarter of 2005, down
from $619.0 million last quarter and $650.7 million a year ago, with FTE yields
of 4.47%, 4.56% and 4.47%, 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 for other corporate
purposes. Management anticipates maintaining, or slightly growing, the
investment portfolio in the remaining nine months of 2005, depending on loan
growth and other corporate liquidity needs.
Peoples' interest-bearing liabilities averaged $1.46 billion in the first
quarter of 2005 compared to $1.45 billion last quarter and $1.41 billion a year
ago. Traditional deposits comprise the majority of Peoples' interest-bearing
liabilities, averaging $929.7 million for the quarter ended March 31, 2005,
compared to $890.6 million in the fourth quarter of 2004 and $894.8 million in
2004's first quarter. The higher volume of deposits was due primarily to
deposits acquired in the Ashland Banking Acquisition and additional brokered
deposits. For the quarter ended March 31, 2005, the cost of funds from
interest-bearing deposits was 2.23%, up from 2.08% and 1.71% for the prior
quarter and first quarter of 2004, respectively.
Peoples also utilizes a variety of borrowings as complementary funding sources
to traditional deposits. For the three months ended March 31, 2005, total
borrowed funds averaged $531.5 million compared to $557.7 million for the fourth
quarter of 2004 and $520.0 million a year ago. The increase from 2004's first
quarter average was the result of management using various borrowings to fund
asset growth, while the decline from the prior quarter was due to an increase in
funds, primarily from deposit growth, which allowed Peoples to reduce
borrowings. Peoples' overall cost of borrowed funds increased to 3.66% from
3.57% last quarter and 3.25% in the first quarter of 2004.
Peoples' main source of borrowed funds is short- and long-term advances from the
FHLB. Short-term FHLB borrowings averaged $76.5 million in the first quarter of
2005 compared to $86.5 million a year ago, with an average cost of 2.49% and
1.12% for the same periods, respectively. Long-term FHLB borrowings averaged
$208.5 million in the first quarter of 2005, up from $154.1 million a year ago,
with an average cost of 4.10% and 4.44% for the same periods, respectively.
These changes in average balance and cost reflect management's continued use of
FHLB borrowings, as deemed appropriate, to fund asset growth and manage interest
rate sensitivity. Additionally, management in the second half of 2004
match-funded selected three- and five-year adjustable rate commercial loans
using long-term FHLB advances with similar amortization and repricing
characteristics.
Compared to the fourth quarter of 2004, average short-term FHLB borrowings grew
$27.9 million, due in part to Peoples using short-term advances to reduce other
borrowings during the first quarter, while long-term FHLB borrowings increased
$2.5 million. Management intends to use longer-term borrowings, as appropriate,
to lock in rates to hedge against rising interest rates. 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. In the first quarter of 2005, wholesale
market term repurchase agreements averaged $186.5 million compared to $241.0
million for the prior quarter and $216.3 million for the first quarter of 2004.
The decrease in the first quarter of 2005 was attributable to Peoples repaying
matured agreements using short-term FHLB advances, with rates similar to the
matured agreements, rather than extending the terms of the agreements. The
average cost of wholesale repurchase agreements was 3.04% in the first quarter
of 2005, up from 2.87% and 2.86% for the fourth and first quarters of 2004,
respectively.
As is the case with many financial institutions, the flattening yield curve in
the first quarter of 2005 impacted new loan pricing and yields on securities
reinvestments thereby limiting any improvement from the Federal Reserve's
actions to raise interest rates. Management continues its efforts to position
Peoples balance sheet for the expected increases in rates during the remaining
nine months of 2005. Based on Peoples' interest rate risk position and
asset-liability simulations at March 31, 2005, management believes additional
interest rate increases could cause net interest income to increase modestly;
however, certain actions, such as the match-funding of longer-term loan
commitments, could mitigate any projected improvement. 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 and
fierce competition for loans and deposits puts pricing pressure on both sides of
the balance sheet.
Provision for Loan Losses
- -------------------------
In the first quarter of 2005, Peoples' provision for loan losses was $941,000,
up from $531,000 in the prior quarter and $794,000 a year ago. The higher
provision was based on management's quarterly analysis of the adequacy of the
allowance for loan losses and a specific provision of $500,000 for a group of
loans that are part of a single commercial relationship management determined
was impaired.
As Peoples Bancorp reported on its Current Report on Form 8-K filed May 3, 2005,
the specific provision relates to a group of loans, with an aggregate principal
balance of approximately $2.7 million, to two commonly controlled commercial
borrowers. Management believes there is a reasonable likelihood the borrowers
will be unable to meet the repayment terms of the loans, based in part on the
fact the guarantors of the loans recently filed for personal bankruptcy. The
level of the provision made in connection with these loans reflects the amount
necessary to maintain the allowance for loan losses at an adequate level, based
upon management's analysis of projected losses in its loan portfolio, with
respect to loans held at March 31, 2005. Since this impairment was discovered in
late April 2005, management is continuing to evaluate the financial condition of
the borrowers and guarantors and the value of the collateral. Additional
information regarding this relationship and its potential impact on Peoples'
provision for loan losses can be found later in this discussion under the
caption "Future Outlook".
When expressed as a percentage of average loans, the provision was 0.09% in the
first quarter of 2005 compared to 0.05% in the fourth quarter of 2004 and 0.09%
in the first quarter of 2004. Future provisions will continue to be based on
management's quarterly procedural discipline described in the "Critical
Accounting Policies" section of this discussion.
Non-Interest Income
- -------------------
Peoples generates non-interest income from six primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking ("e-banking"), mortgage banking and business owned life
insurance ("BOLI"). In the first quarter of 2005, non-interest income was
$7,368,000, up $2,481,000 (or 51%) from $4,887,000 a year ago. The Putnam and
Barengo divisions generated revenue of $2,322,000 in the first quarter of 2005,
comprising most of the increase. Compared to the fourth quarter of 2004,
non-interest income nearly doubled in the first quarter of 2005, due in large
part to a net loss of $3,211,000 on securities transactions and asset disposals
last quarter versus a net gain of $241,000 for the quarter ended March 31, 2005.
Insurance and investment commissions comprised the largest portion of
non-interest income in the first quarter of 2005, due in part to Peoples'
recognition of annual contingency income. For the three months ended March 31,
2005, insurance and investment commissions totaled $2,654,000, up from
$2,153,000 and $299,000 in 2004's fourth and first quarters, respectively. The
increase from a year ago was the result of the Insurance Agency Acquisitions in
mid-2004, while contingency income accounted for $481,000 of the increase from
the prior quarter. The following table details Peoples' insurance and investment
commissions:
Three Months Ended
March 31, December 31, March 31,
(Dollars in thousands) 2005 2004 2004
Property and casualty insurance $ 2,331 $ 1,769 $ 108
Life and health insurance 141 153 27
Brokerage 94 108 101
Fixed annuities 58 91 56
Credit life and A&H insurance 30 32 7
--------------------------------------------------------------------
Total $ 2,654 $ 2,153 $ 299
--------------------------------------------------------------------
Service charges and other fees on deposit accounts, which are based on the
recovery of costs associated with services provided, remain a significant source
of non-interest revenue. For the quarter ended March 31, 2005, deposit account
service charges totaled $2,274,000, up 1% from $2,253,000 a year ago and down 6%
compared to $2,414,000 for the fourth quarter of 2004. The decrease from the
prior quarter was the result of lower volumes of overdraft and non-sufficient
funds fees due to seasonality. The following table details Peoples' deposit
account service charges:
Three Months Ended
March 31, December 31, March 31,
(Dollars in thousands) 2005 2004 2004
Overdraft fees $ 1,430 $ 1,621 $ 1,380
Non-sufficient funds fees 394 482 396
Other fees and charges 450 311 477
--------------------------------------------------------------------
Total $ 2,274 $ 2,414 $ 2,253
--------------------------------------------------------------------
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 $647,000 for the first quarter
of 2005 compared to $523,000 a year ago, an increase of $124,000 (or 24%).
Peoples' e-banking revenues have remained strong due in large part to an
increase in the number of debit cards issued to customers and higher volumes of
debit card activity. At March 31, 2005, Peoples had 73,922 cards issued, with
48% of all eligible deposit accounts having a debit card, compared to 56,723
cards and a 43% penetration rate a year ago. Peoples' customers used their debit
cards to complete $37 million of transactions in 2004, up 32% from $28 million a
year ago.
Peoples' mortgage banking involves the origination and selling of long-term,
fixed-rate real estate loans into the secondary market. In the first quarter of
2005, mortgage banking produced revenues of $117,000 compared to $222,000 in the
prior quarter and $199,000 in the first quarter of 2004. The decline in mortgage
banking income is attributable to Peoples' selling $11.6 million of fixed-rate
loans, acquired in the Ashland Banking Acquisition, at net loss of $187,000.
While future mortgage banking revenues will be largely dependent on customer
demand for long-term fixed-rate mortgage loans, mortgage banking is a key part
of Peoples' long-term business strategy.
Peoples' fiduciary revenues totaled $757,000 in the first quarter of 2005,
compared to $774,000 a year ago and $897,000 for the fourth quarter of 2004. The
lower fiduciary income in the first quarter of 2005 is attributable to slower
growth in assets under management and the timing recognition of certain fee
income, due in part to a change in the fee structure of certain account types in
2004. Peoples' future fiduciary revenues will be influenced by the relative
performance of equity markets since a significant portion of fiduciary fees is
based on the market value of assets managed.
Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. For the quarter ended March 31, 2005, BOLI income
totaled $454,000 compared to $416,000 a year ago and $483,000 last quarter. 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 March 31, 2005, non-interest expense totaled $12,747,000,
up $2,457,000 (or 24%) from $10,290,000 a year ago. Operating expenses relating
to the Insurance Agency Acquisitions, primarily salaries and benefits expense,
occupancy and equipment costs and intangible amortization, accounted for $1.5
million of the increase in non-interest expense. Other increased costs in the
first quarter included salaries and benefits, professional fees and marketing
costs. Compared to the fourth quarter of 2004, non-interest expense was down
$86,000 in the first quarter of 2005.
Salaries and benefits remain Peoples' largest operating expense, which is
inherent in a service-based industry such as financial services, totaling
$6,686,000 in the first quarter of 2005, compared to $5,389,000 for the three
months ended March 31, 2004. The Insurance Agency Acquisitions accounted for
$935,000 (or 70%) of this increase, with higher incentive accruals based on
Peoples' performance also a significant factor. Compared to the fourth quarter
of 2004, salaries and benefits were virtually unchanged from $6,678,000.
In the first quarter of 2005, net occupancy and equipment expenses were
$1,289,000, up 6% from $1,221,000 for the same period a year ago. This increase
was a result of recent acquisitions, which produced additional occupancy and
equipment expenses, particularly depreciation expense. Net occupancy and
equipment expenses were up slightly in the first quarter compared to $1,274,000
in the fourth quarter of 2004.
Last year's acquisitions also caused an increase in amortization expense of
customer relationship intangible assets. In the first quarter of 2005,
intangible amortization was $688,000 compared to $657,000 last quarter and
$401,000 in the first quarter of 2004. Management expects slight reductions in
intangible amortization in future quarters based on the intangible assets at
March 31, 2005, since Peoples uses an accelerated method of amortization for
these intangibles.
Professional fees, which include fees for accounting, legal and other
professional services, totaled $665,000 for the first quarter of 2005, compared
to $456,000 for the first quarter of 2004, a 46% increase. Higher exam and audit
fees associated with the new regulatory reporting environment under
Sarbanes-Oxley was the primary factor of the increased professional fees.
Compared to the fourth quarter of 2004, professional fees dropped 6% in the
first quarter of 2005, from $711,000, as Peoples' incurred higher costs to
comply with new Sarbanes-Oxley reporting requirements during the fourth quarter
of 2004.
In the first quarter of 2005, marketing costs were $381,000 compared to $303,000
the prior quarter and $108,000 in the first quarter of 2004. Peoples' efforts to
promote new deposit products and increase brand awareness in various markets
during the first quarter of 2005 were a key reason for the higher marketing
costs.
Peoples is subject to various state franchise taxes, which are based largely on
Peoples Bank's equity at year-end. For the first quarter of 2005, franchise
taxes totaled $411,000 compared to $341,000 for 2004's first quarter. These
increases were primarily attributable to additional equity at Peoples Bank
resulting from the Insurance Agency Acquisitions. 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' ability to
offset non-interest expense with non-interest income and is one of the
performance indicators 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
Ended March 31,
(Dollars in Thousands) 2005 2004
Total other income, as reported $ 7,368 $ 4,887
Deduct: Gain on securities transactions 233 32
Gain on asset disposal 8 30
Recovery of loss on sale of other real estate owned - 210
--------------------------------------------------------------------------------------------
Adjusted total other income $ 7,127 $ 4,615
============================================================================================
Total other expense, as reported $ 12,747 $ 10,290
Deduct: Amortization of other intangible assets 688 401
--------------------------------------------------------------------------------------------
Adjusted total other expense $ 12,059 $ 9,889
===========================================================================================
Non-interest leverage ratio 59.1% 46.7%
===========================================================================================
Return on Equity
- ----------------
In the first quarter of 2005, Peoples' return on equity ("ROE") was 10.85%
versus 12.50% for the same quarter last year. The lower ROE was attributable to
a $2.8 million increase in average equity, coupled with lower earnings.
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 1.05% in the first quarter of 2005 compared to
1.25% a year ago, reflecting the $78 million increase in average assets,
primarily from the Ashland Banking Acquisition and loan growth in 2004. In
recent years, Peoples' primary focus has shifted to EPS enhancement and ROE
while reducing the emphasis on ROA as a key performance indicator. However,
management continues to monitor ROA and considers it a measurement of Peoples'
asset utilization.
Income Tax Expense
- ------------------
Peoples continues to make tax-advantaged investments in order to manage its
effective tax rate and overall tax burden. At March 31, 2005, the amount of
tax-advantaged investments totaled $54.9 million compared to $53.4 million at
December 31, 2004 and $51.4 million at March 31, 2004. The additional benefits
derived from this modest increase in tax-advantaged investments resulted in a
reduction in Peoples' effective tax rate. For the three months ended March 31,
2005, Peoples' effective tax rate was 26.6%, down from 27.0% a year ago.
Depending on economic and regulatory conditions, Peoples may make additional
investments in various tax credit pools and other tax-advantaged assets.
FINANCIAL CONDITION
Overview of Balance Sheet
- -------------------------
At March 31, 2005, total assets were $1.79 billion compared to $1.81 billion at
year-end 2004, a decrease of $17.0 million largely the result of lower loan and
investment portfolio balances. Gross loans dropped $10.1 million to $1.01
billion at March 31, 2005, from $1.02 billion at December 31, 2004, as a result
of Peoples selling $11.6 million of fixed-rate loans, acquired in the Ashland
Banking Acquisition, in the first quarter of 2005. Investment securities totaled
$592.7 million at March 31, 2005 versus $602.4 million at year-end 2004.
Total liabilities were $1.62 billion at March 31, 2005, compared to $1.63
billion at year-end 2004, a decrease of $14.7 million. At March 31, 2005,
deposits totaled $1.10 billion, up $33.7 million from the prior year-end, while
borrowed funds declined $46.4 million to $499.6 million, from $546.0 million at
December 31, 2004.
Stockholders' equity totaled $172.6 million at March 31, 2005, down $2.8 million
versus $175.4 million at December 31, 2004. This decrease was the result of a
$4.3 million decline in accumulated comprehensive income and treasury stock
purchases, net of shares reissued, of $1.5 million during the first quarter of
2005, which were partially offset by Peoples' earnings, net of dividends paid,
of $2.7 million.
Cash and Cash Equivalents
- -------------------------
Peoples' cash and cash equivalents are composed of Federal funds sold, cash and
balances due from banks, interest-bearing balances in other institutions and
other short-term investments that are readily liquid. The amount of cash and
cash equivalents fluctuates on a daily basis due to customer activity and
Peoples' liquidity needs. At March 31, 2005, cash and cash equivalents totaled
$34.3 million, up $2.9 million (or 9%) from $31.4 million at December 31, 2004.
This increase was attributable to a $2.6 million increase in Federal funds sold
since year-end 2004. Cash and balances due from banks comprised the largest
portion of Peoples' cash and cash equivalents at March 31, 2005, totaling $30.6
million, virtually unchanged from $30.7 million at December 31, 2004.
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 March 31, 2005, the amortized cost of Peoples' investment securities totaled
$591.3 million compared to $594.5 million at year-end 2004, while the market
value of the investment portfolio was $592.7 million at March 31, 2005, down
from $602.4 million at December 31, 2004. The difference in amortized cost and
market value at March 31, 2005, resulted in unrealized appreciation in the
investment portfolio of $1.4 million and a corresponding increase in Peoples'
equity of $0.9 million, net of deferred taxes. In comparison, the difference in
amortized cost and market value at December 31, 2004, resulted in unrealized
appreciation of $7.9 million and an increase in equity of $5.1 million, net of
deferred taxes.
The following table details Peoples' investment portfolio, at estimated fair
value:
(Dollars in Thousands) March 31, December 31, 2004 March 31,
2005 2004 2004
US Treasury securities and obligations of
US government agencies and corporations $ 69,722 $ 62,770 $ 63,277
Obligations of states and political subdivisions 62,081 62,234 65,726
Mortgage-backed securities 401,872 418,094 466,858
Other securities 59,017 59,266 61,439
---------------------------------------------------------------------------------------------
Total available-for-sale securities $ 592,692 $ 602,364 $ 657,300
=============================================================================================
Overall, the composition of Peoples' investment portfolio at March 31, 2005, was
comparable to recent periods. Since March 31, 2004, Peoples' investment in
mortgage-backed securities has declined due to management using a portion of the
principal runoff to fund loan growth and other corporate purposes, when deemed
appropriate. Management anticipates maintaining, or slightly growing, the
investment portfolio in the remainder of 2005 depending on loan growth and other
corporate liquidity needs.
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 March
31, 2005, gross loans totaled $1.01 billion, down $10.1 million since year-end
2004. This decrease was the result of Peoples selling $11.6 million of
fixed-rate mortgage loans, acquired in the Ashland Banking Acquisition, due to
their associated interest rate risk. The following table details total
outstanding loans:
(Dollars in Thousands) March 31, December 31, March 31,
2005 2004 2004
Commercial, mortgage $ 457,667 $ 450,270 $ 413,167
Commercial, other 128,898 126,473 102,918
Real estate, construction 32,120 35,423 20,196
Real estate, mortgage 334,681 349,965 299,967
Consumer 59,634 60,927 74,545
----------------------------------------------------------------------------------
Total loans $ 1,013,000 $ 1,023,058 $ 910,793
==================================================================================
Commercial loan balances, including loans secured by commercial real estate,
totaled $586.6 million at March 31, 2005, up $9.8 million from $576.7 million at
year-end 2004. 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 57.9% and 56.4% of total
loans at March 31, 2005 and December 31, 2004, 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 March 31, 2005, real estate loans,
which include construction loans but exclude loans secured by commercial real
estate, totaled $366.8 million compared to $385.4 million at December 31, 2004,
a decrease of $18.6 million. Real estate loans comprised 36.2% of Peoples' total
loan portfolio at March 31, 2005, versus 37.7% at year-end 2004. Included in
real estate loans are home equity credit line balances of $45.1 million at March
31, 2005, up 3% from $43.7 million at December 31, 2004.
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 first
quarter of 2005, Peoples originated 110 long-term, fixed-rate mortgage loans,
with total loan amounts of $9 million, compared to 91 loans, with total loan
amounts of $8 million, in the fourth quarter of 2004 and 87 loans, with total
loan amounts of $8 million, in the first quarter of 2004. At March 31, 2005,
Peoples was servicing $124.1 million of real estate loans previously sold to the
secondary market compared to $106.4 million at year-end 2004. In addition,
Peoples had $1.1 million of fixed-rate real estate loans held for sale to the
secondary market at March 31, 2005. Management anticipates selling these loans
during the second quarter.
At March 31, 2005, consumer loan balances were $59.6 million, down $1.3 million
since year-end 2004. The indirect lending area represented a significant portion
of Peoples' consumer loans, with balances of $21.3 million and $23.6 million at
March 31, 2005 and December 31, 2004, 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 10.6% of Peoples'
outstanding commercial loans at quarter-end, compared to 11.4% at December 31,
2004. Loans to assisted living facilities and nursing homes also represented a
significant portion of Peoples' commercial loans, comprising 9.0% of Peoples'
outstanding commercial loans at March 31, 2005, versus 10.2% at year-end 2004.
These lending opportunities have arisen due to the growth of these industries in
markets served by Peoples or in contiguous areas, and also from sales
associates' efforts to develop these lending relationships. Management believes
Peoples' loans to lodging and lodging-related companies, as well as loans to
assisted living facilities and nursing homes, do not pose abnormal risk when
compared to risk assumed in other types of lending since these credits have been
subjected to Peoples' normal underwriting standards, which includes an
evaluation of the financial strength, market expertise and experience of the
borrowers and principals in these business relationships. In addition, a
sizeable portion of the loans to lodging and lodging-related companies is spread
over various geographic areas and is guaranteed by principals with substantial
net worth.
Allowance for Loan Losses
- -------------------------
Peoples' allowance for loan losses totaled $15.2 million, or 1.50% of total
loans, at March 31, 2005, compared to $14.8 million, or 1.62%, at March 31, 2004
and $14.8 million, or 1.44%, at year-end 2004. The following table presents
changes in Peoples' allowance for loan losses:
Three Months Ended
March 31,
(Dollars in Thousands) 2005 2004
Balance, beginning of period $ 14,760 $ 14,575
Chargeoffs (1,068) (1,230)
Recoveries 569 635
--------------------------------------------------------------------------
Net chargeoffs (499) (595)
Provision for loan losses 941 794
--------------------------------------------------------------------------
Balance, end of period $ 15,202 $ 14,774
==========================================================================
The allowance is allocated among the loan categories based upon the consistent,
quarterly procedural discipline described in the "Critical Accounting Policies"
section of this discussion. However, the entire allowance for loan losses is
available to absorb future loan losses in any loan category. The following
details the allocation of the allowance for loan losses:
(Dollars in thousands) March 31, December 31, March 31,
2005 2004 2004
Commercial $ 12,251 $ 11,751 $ 11,993
Consumer 1,386 1,394 1,319
Real estate 1,175 1,175 1,079
Overdrafts 269 327 281
Credit cards 121 113 102
--------------------------------------------------------------------------------
Total allowance for loan losses $ 15,202 $ 14,760 $ 14,774
--------------------------------------------------------------------------------
The allowance for credit cards reflects an estimate of the loss from the
retained recourse on the business cards included in the credit card portfolio
sale. This credit card recourse expires in the second quarter of 2005. While
allocations are made to specific loans and pools of loans, the allowance is
available for all loan losses.
In the first quarter of 2005, net loan chargeoffs were $499,000, down 16% from
$595,000 a year ago and 14% from $577,000 in the fourth quarter of 2004. Real
estate loans comprised the largest portion of net chargeoffs in 2005's first
quarter, totaling $315,000 versus $155,000 a year ago, while consumer loans
accounted for $61,000 of 2005's first quarter net chargeoffs, compared to
$275,000 in the first quarter of 2004. The following table details Peoples' net
chargeoffs:
Three Months Ended
March 31, December 31, March 31,
(Dollars in Thousands) 2005 2004 2004
Real estate $ 315 $ 183 $ 155
Overdrafts 88 232 135
Consumer 61 107 275
Commercial 43 57 (100)
Credit card (8) (2) 130
-------------------------------------------------------------------------------------
Total $ 499 $ 577 $ 595
-------------------------------------------------------------------------------------
As a percent of average loans (a) 0.20% 0.23% 0.26%
-------------------------------------------------------------------------------------
(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, 2004, the level
of nonperforming loans has risen slightly due to additional nonaccrual loans.
Even with this increase, management believes Peoples' asset quality remains
good. In the second quarter of 2005, Peoples' nonperforming loans could increase
modestly due to the recently identified impaired commercial loan relationship,
with principal balances totaling $2.7 million. Peoples' collection efforts and
continued focus on loan quality and other factors affecting loan delinquencies
could mitigate the impact of this impairment. The following table details
Peoples' nonperforming assets:
(Dollars in Thousands) March 31, December 31, March 31,
2005 2004 2004
Loans 90+ days past due and accruing $ 84 $ 285 $ 235
Renegotiated loans 1,116 1,128 -
Nonaccrual loans 6,105 5,130 6,656
-----------------------------------------------------------------------------------------------------------
Total nonperforming loans 7,305 6,543 6,891
Other real estate owned 873 1,163 470
-----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 8,178 $ 7,706 $ 7,361
===========================================================================================================
Nonperforming loans as a percent of total loans 0.72% 0.64% 0.76%
===========================================================================================================
Nonperforming assets as a percent of total assets 0.46% 0.43% 0.43%
===========================================================================================================
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 March 31, 2005, the recorded investment in loans that were considered to be
impaired was $13.0 million, of which $9.8 million were accruing interest and
$3.2 million were nonaccrual loans. Included in this amount were $6.9 million of
impaired loans for which the related allowance for loan losses was $2.2 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 three months ended March 31, 2005, Peoples'
average recorded investment in impaired loans was approximately $10.4 million
and interest income of $115,000 was recognized on impaired loans during the
period, representing 0.5% of Peoples' total interest income.
Funding Sources
- ---------------
Peoples considers a number of sources when evaluating funding needs, including
but not limited to deposits, short-term borrowings, and long-term borrowings.
Deposits, both interest-bearing and non-interest-bearing, continue to be the
most significant source of funds for Peoples, totaling $1.10 billion at March
31, 2005, compared to $1.07 billion at December 31, 2004.
Non-interest-bearing deposits serve as a core funding source. At March 31, 2005,
non-interest-bearing deposit balances totaled $157.1 million, up $4.1 million
(or 3%) compared to the prior year-end. Since customer activity can result in
temporary changes in deposit balances at end of periods, management believes a
comparison of average balances to be a more meaningful reflection of the trend
in non-interest-bearing deposits. In the first quarter of 2005,
non-interest-bearing deposits averaged $155.6 million versus $153.3 in the
fourth quarter of 2004 and $135.5 million in the first quarter of 2004,
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 $946.0 million at March 31, 2005 compared to
$916.4 million at December 31, 2004. This increase is largely the result of a
seasonal increase in public fund balances of $21.8 million and additional
brokered deposits of $14.9 million. The following details Peoples'
interest-bearing deposits:
(Dollars in Thousands) March 31, December 31, March 31,
2005 2004 2004
Retail certificates of deposit $ 451,359 $ 456,850 $ 446,179
Interest-bearing transaction accounts 187,034 165,144 167,091
Savings accounts 151,592 157,145 173,013
Money market deposit accounts 111,224 107,394 99,107
Brokered certificates of deposits 44,837 29,909 9,890
------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 946,046 $ 916,442 $ 895,280
------------------------------------------------------------------------------------------------
Peoples continues to experience highly competitive pricing of CDs, which makes
it difficult to maintain these balances. In the first quarter of 2005, Peoples
introduced its new Ultimate Freedom Checking, an interest-bearing checking
product that pays a rate comparable to money market products offered by Peoples'
competitors, which is designed to attract customers with higher balances. As
expected, Peoples experienced a slight decline in savings balances as customers
look for better returns in this rising rate environment.
Peoples also accesses other funding sources, including short-term and long-term
borrowings, to fund asset growth and satisfy liquidity needs. At March 31, 2005,
borrowed funds totaled $499.6 million, down $46.4 million (or 8%) from $546.0
million at year-end 2004, as a result of a decrease in long-term borrowings. The
following details Peoples' short-term and long-term borrowings:
(Dollars in Thousands) March 31, December 31, March 31,
2005 2004 2004
Short-term borrowings:
FHLB advances $ 68,300 $ 37,400 $ 72,200
Retail repurchase agreements 18,424 14,495 15,129
-------------------------------------------------------------------------------------------
Total short-term borrowings $ 83,724 $ 51,895 $ 87,329
Long-term borrowings:
FHLB advances $ 207,241 $ 210,814 $ 157,748
National market repurchase agreements 164,100 238,750 216,250
Term note payable 15,300 15,300 17,000
-------------------------------------------------------------------------------------------
Total long-term borrowings $ 386,641 $ 464,864 $ 390,998
-------------------------------------------------------------------------------------------
Subordinated notes held by subsidiary trusts $ 29,285 $ 29,263 $ 29,198
-------------------------------------------------------------------------------------------
Total borrowed funds $ 499,650 $ 546,022 $ 507,525
-------------------------------------------------------------------------------------------
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 March 31, 2005, wholesale
repurchase agreements totaled $164.1 million, down $74.7 million from $238.8
million at year-end 2004, as management chose to replace maturing repurchase
agreements with short-term FHLB advances and $14.9 million of brokered deposits,
which Peoples occasionally uses as an alternative funding sources to wholesale
repurchase agreements. Peoples' current wholesale repurchase agreements, based
on their original terms, range from 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 March 31, 2005, stockholders' equity was $172.6 million versus $175.4 million
at December 31, 2004, a decrease of $2.8 million (or 1%) as Peoples' earnings,
net of dividends paid, of $2.7 million was offset by treasury stock purchases,
net of treasury shares reissued, of $1.5 million and a decline in accumulated
comprehensive income of $4.3 million.
For the quarter ended March 31, 2005, Peoples Bancorp declared dividends of $2.0
million, representing a dividend payout ratio of 42.4% of earnings, compared to
$1.9 million and payout ratio of 35.4% a year ago. While management anticipates
Peoples continuing its 39-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 which have issued 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.
Included in Peoples' equity is accumulated comprehensive income, net of deferred
taxes, which consists primarily of the adjustment for the net unrealized holding
gains on available-for-sale securities. At March 31, 2005, accumulated
comprehensive income totaled $0.7 million versus $5.0 million at December 31,
2004, a decrease of $4.3 million. Since all the investment securities in
Peoples' portfolio are classified as available-for-sale, both the investment and
equity sections of Peoples' consolidated balance sheet are more sensitive to the
changing market values of investments than if the investment portfolio was
classified as held-to-maturity.
At March 31, 2005, Peoples had treasury stock totaling $11.5 million, up $1.3
million from year-end 2004. During the first quarter of 2005, Peoples Bancorp
repurchased 59,700 common shares (or 11% of the total authorized), at an average
price of $26.78 per share, under the 2005 Stock Repurchase Program and 1,704
common shares, at an average price of $26.81, in conjunction with the deferred
compensation plan for directors of Peoples Bancorp and its subsidiaries. During
the same period, Peoples reissued 15,812 treasury shares due to stock option
exercises. Peoples Bancorp anticipates repurchasing additional common shares as
authorized under the 2005 Stock Repurchase Program and in compliance 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
March 31, 2005, Peoples tangible equity ratio was 5.94% compared to 6.00% at
December 31, 2004 and 7.56% at March 31, 2004. The lower ratio compared to a
year ago was primarily the result of an increase in intangible assets due to
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 March 31, 2005,
Peoples' Total Capital, Tier 1 and Leverage ratios were 12.52%, 11.16% and
7.60%, respectively, exceeding the well-capitalized standards of 10%, 6% and 5%,
respectively. In addition, all three risk-based capital ratios for Peoples Bank
were also well above the minimum standards for a well-capitalized institution at
March 31, 2005.
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 15% or less from base case
for each 200 basis point shift in interest rates measured over a twelve- and
twenty-four-month period. The ALCO limits the negative impact on net equity to
30% or less given an immediate and sustained 200 basis points shift in interest
rates, also assuming a static balance sheet. The difference between rate
sensitive assets and rate sensitive liabilities for specified periods of time is
known as the gap. The ALCO also reviews static gap measures for specific periods
focusing on a one-year cumulative gap. Based on historical trends and
performance, the ALCO has determined the ratio of the one-year cumulative gap
should be within +/-15% of earning assets at the date of measurement. Results
that are outside of any of these limits will prompt a discussion by the ALCO of
appropriate actions, if any, that should be taken.
At March 31, 2005, Peoples' one-year cumulative gap amount was positive 5.1% of
earning assets, which represented $81.3 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 13.6% of earning assets, which
represented $218.6 million more in assets than liabilities that mature or may
reprice during the next twelve months.
The following table is provided to illustrate the estimated earnings at risk and
value at risk positions of Peoples, on a pre-tax basis, at March 31, 2005
(dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in Increase (Decrease) Decrease in
Basis Points In Net Interest Income Economic Value of Equity
- --------------------------- ----------------------------- --------------------------------
300 $ 3,250 6.3 % $ (14,562) (6.5) %
200 2,598 5.0 (8,482) (3.8)
100 1,443 2.8 (2,987) (1.3)
(100) $ (3,045) (5.9) % $ (7,731) (3.5) %
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 three months of 2005, cash used in financing activities totaled $15.7
million compared to $23.3 million a year ago. This decrease is largely
attributable to an increase in deposit balances in the first quarter of 2005.
Cash used in investing activities totaled $0.7 million through three months of
2005 versus $27.3 million last year, primarily due to the additional $20 million
BOLI investment in the first quarter of 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 March 31, 2005, Peoples had available borrowing capacity
of approximately $146 million through these external sources and unpledged
securities in the investment portfolio of approximately $171 million that can be
utilized as an additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting volatile
funds from liquid assets. Peoples' volatile funds consist primarily of
short-term growth in deposits, while liquid assets includes short-term
investments and unpledged available-for-sale securities. At March 31, 2005,
Peoples' net liquidity position was $143.8 million, or 8.0% of total assets,
compared to $141.4 million, or 7.8% of total assets, at December 31, 2004. The
liquidity position as of March 31, 2005, 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:
March 31, December 31, March 31,
(Dollars in Thousands) 2005 2004 2004
Loan commitments $ 148,276 $ 139,731 $ 112,779
Standby letters of credit 32,483 31,612 22,478
Peoples also enters into interest rate contracts where Peoples is required to
either receive cash from or pay cash to counter parties depending on changes in
interest rates. Peoples utilizes interest rate contracts to help manage the risk
of changing interest rates. At March 31, 2005, Peoples held interest rate
contracts with notional amounts totaling $17 million and fair values totaling
$142,000. Interest rate contracts are carried at fair value on the consolidated
balance sheet, with the fair value representing the net present value of
expected future cash receipts or payments based on market interest rates as of
the balance sheet date. As a result, the amounts recorded on the balance sheet
at March 31, 2005, do not represent the amounts that may ultimately be paid or
received under these contracts.
Peoples also has commitments to make additional capital contributions in
low-income housing tax credit funds, consisting of a pool of low-income housing
projects. As a limited partner in these funds, Peoples receives Federal income
tax benefits, which assists Peoples in managing its overall tax burden. At March
31, 2005, these commitments approximated $4.7 million, with approximately $2.0
million expected to be paid over the next twelve months. Management may make
additional investments in various tax credit funds.
Management does not anticipate Peoples' current off-balance sheet activities
will have a material impact on future results of operations and financial
condition.
Peoples continues to lease certain banking facilities and equipment under
noncancelable operating leases with terms providing for fixed monthly payments
over periods ranging from two to fifteen years. Many of Peoples' leased banking
facilities are inside retail shopping centers and, as a result, are not
available for purchase. Management believes these leased facilities increase
Peoples' visibility within its markets and afford sales associates additional
access to current and potential clients.
Effects of Inflation on Financial Statements
- --------------------------------------------
Substantially all of Peoples' assets relate to banking and are monetary in
nature. As a result, inflation does not impact Peoples to the same degree as
companies in capital-intensive industries in a replacement cost environment.
During a period of rising prices, a net monetary asset position results in a
loss in purchasing power and conversely a net monetary liability position
results in an increase in purchasing power. The opposite would be true during a
period of decreasing prices. In the banking industry, typically monetary assets
exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation
has had little impact on Peoples' net assets.
Future Outlook
- --------------
Peoples' first quarter results reflect the positive impact of revenue
diversification and good production from the Insurance Agency Acquisitions.
While prospects for loan growth remain good and a full-year's impact of
acquisitions could enhance earnings, the flattening yield curve continues to
cause some concern and emphasizes the need to enhance non-interest income
through increased cross-sales. 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 a rising interest rate environment, which
will pose additional challenges as competition for loans and deposits
intensifies.
Cost control remains a key to improving Peoples' earnings, especially during
recent periods of net interest margin compression. The cost and effort required
to produce financial statements in the Sarbanes-Oxley reporting environment
remains higher than prior years even though the first quarter's professional fee
expense was below the 2004 fourth quarter total due to the implementation of new
requirements in 2004. A full-year's impact of acquisitions completed in 2004
will also cause an increase in certain operating expenses. However, management
will continue to monitor expenses and explore opportunities to enhance Peoples'
operating efficiency by limiting the overall increase in expenses.
In the second half of 2005, Peoples' earnings will benefit from the recent
action by the SEC to defer implementation of new accounting rules requiring
companies to expense stock options. As a result of this deferral, Peoples will
not record the $400,000 to $500,000 of expense, or approximately $0.03 per
diluted share after-tax, management projected at year-end 2004. Alternatively,
Peoples will implement the new rules beginning January 1, 2006, as required,
which should result in Peoples recording stock option expense similar to the pro
forma costs estimated in Note 3 of the Notes to the Consolidated Unaudited
Financial Statements.
Loan growth is a key factor in achieving Peoples' 2005 operating goals, even
though the sale of the acquired fixed-rate loans reduced overall loan balances
in the first quarter. In the second quarter of 2005, management anticipates loan
growth of $10 to $15 million, assuming no significant loan payoffs occur, which
is difficult to predict. The recent addition of a loan production office in
Westerville, Ohio, has already produced good loan originations, and Peoples'
commercial lenders continue to focus on penetrating the central Ohio and the
Ashland, Kentucky/Huntington, West Virginia, market areas. Peoples has also
increased its marketing of its mortgage loan products, which should improve
originations, whether the loans are retained or sold in the secondary market.
As Peoples works to grow loans, management continues its efforts to attract core
deposits and adjust the mix of funding sources as a way to manage Peoples'
overall cost of funds and improve profitability. The flattening yield curve,
coupled with intense competition for interest-bearing deposits in this rising
rate environment, challenges deposit growth. Public funds were a significant
driver of the deposit growth in the first quarter of 2005. Management expects
these balances to drop in the second quarter, as the municipalities use these
funds for summer projects and other normal operating purposes.
In the first quarter of 2005, Peoples' provision for loan losses included a
specific provision of $500,000 due to an impairment of a $2.7 million commercial
loan relationship. During the second quarter of 2005, management will continue
to gather information and analyze the relationship's ability to repay the loan
amount. Currently, management expects to place the loans on nonaccrual status,
although the business is still a going concern, the loans are current and
performing to original terms and the guarantors are working with Peoples to
resolve the situation.
In the early part of the second quarter of 2005, Peoples has experienced better
than normal loan loss recoveries, with recoveries exceeding chargeoffs, and,
therefore, the provision for loan losses may be lower in the second quarter of
2005 compared to the first quarter of 2005. However, future provisions will
continue to be based on management's quarterly procedural discipline described
in the "Critical Accounting Policies" section of this Discussion.
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
remainder of 2005, management expects earnings catalysts to include loan growth,
a full-year's impact of recent acquisitions, controlled operating expenses and
possible improvement in net interest revenue due to interest 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 reduce interest margins;
(3) prepayment speeds, loan originations and 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 and Ashland
Banking Acquisition 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 Bancorp's 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 March 31,
2005 2004
------------------------------------ -----------------------------------
(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Securities:
Taxable $ 537,014 $ 5,659 4.27% $ 585,446 $ 6,171 4.22%
Tax-exempt (1) 62,453 1,039 6.75% 65,204 1,094 6.71%
- -----------------------------------------------------------------------------------------------------------------
Total securities 599,467 6,698 4.47% 650,650 7,265 4.47%
Loans (2):
Commercial (1) 611,085 9,587 6.36% 527,864 7,806 5.95%
Real estate (3) 353,769 5,435 6.23% 307,394 5,108 6.57%
Consumer 58,971 1,305 8.97% 76,984 1,761 9.20%
- -----------------------------------------------------------------------------------------------------------------
Total loans 1,023,825 16,327 6.47% 912,242 14,675 6.43%
Less: Allowance for loan loss (14,850) (15,016)
- -----------------------------------------------------------------------------------------------------------------
Net loans 1,008,975 16,327 6.53% 897,226 14,675 6.57%
Interest-bearing deposits with banks 2,311 10 1.74% 2,553 3 0.46%
Federal funds sold 256 2 2.38% 24,697 57 0.91%
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 1,611,019 $ 23,037 5.76% 1,575,126 22,000 5.60%
Other assets 198,360 156,402
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,809,369 $ 1,731,528 $
=================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 154,344 $ 290 0.76% $ 170,945 $ 233 0.55%
Interest-bearing demand deposits 279,319 1,007 1.46% 262,864 497 0.76%
Time 495,992 3,808 3.11% 460,956 3,070 2.68%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 929,655 5,105 2.23% 894,765 3,800 1.71%
Borrowed funds:
Short-term 91,945 546 2.41% 103,462 277 1.07%
Long-term 439,523 4,280 3.90% 416,585 3,961 3.80%
- -----------------------------------------------------------------------------------------------------------------
Total borrowed funds 531,468 4,826 3.66% 520,047 4,238 3.25%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,461,123 $ 9,931 2.75% 1,414,812 8,038 2.28%
Non-interest-bearing deposits 155,607 135,505
Other liabilities 17,235 8,564
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,633,965 1,558,881
Stockholders' equity 175,404 172,647
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,809,369 $ 1,731,528 $
=================================================================================================================
Interest spread $ 13,106 3.01% $ 13,962 3.32%
Interest income to earning assets 5.76% 5.60%
Interest expense to earning assets 2.49% 2.04%
- -----------------------------------------------------------------------------------------------------------------
Net interest margin 3.27% 3.56%
- -----------------------------------------------------------------------------------------------------------------
(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 $124 and $120 for the periods
presented in 2005 and 2004, 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 March 31, 2005, 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.
- ---------------------------
There are no pending legal proceedings to which Peoples or any of its
subsidiaries is a party or to which any of their property is subject other than
ordinary routine litigation to which Peoples' subsidiaries are parties
incidental to their respective businesses. Peoples considers none of such
proceedings to be material.
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds.
- ---------------------------------------------------------------------
The following table details repurchases by Peoples Bancorp and purchases by
"affiliated purchasers" as defined in Rule 10b-18(a)(3) of Peoples Bancorp's
common shares during the three months ended March 31, 2005:
(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)
January 1 - 31, 2005 5,821 (3) $26.19(3) 4,700 520,300
February 1 - 28, 2005 49,100 $26.93 49,100 471,200
March 1 - 31, 2005 6,483 (4) $26.20(4) 5,900 465,300
- --------------------------------------------------------------------------------------------------------------------
Total 61,404 $26.79 59,700 465,300
====================================================================================================================
(1) Information reflects solely the 2005 Stock Repurchase Program originally
announced on December 10, 2004, which authorized the repurchase of 525,000
common shares, with an aggregate purchase price of not more than $17.0
million. The 2005 Stock Repurchase Program expires on December 31, 2005.
(2) Information reflects maximum number of common shares that may be purchased
at the end of the period indicated.
(3) Includes an aggregate of 1,121 common shares purchased in open market
transactions at an average price of $27.00 by Peoples Bank under the Rabbi
Trust Agreement establishing a rabbi trust holding assets to provide payment
of the benefits under the Peoples Bancorp Inc. Deferred Compensation Plan
for Directors of Peoples Bancorp Inc. and Subsidiaries (the "Rabbi Trust").
(4) Includes an aggregate of 583 common shares purchased in open market
transactions at an average price of $26.45 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.
- -------------------------------------------------------------
On April 14, 2005, Peoples Bancorp Inc. held its Annual Meeting of Shareholders
in the Ball Room at the Holiday Inn in Marietta, Ohio, with 86% of the
outstanding common shares represented by proxy. No votes were placed in person.
Four Directors of Peoples Bancorp were re-elected to serve terms of three years
each (expiring in 2008): Mark F. Bradley, Frank L. Christy, Theodore P. Sauber
and Joseph H. Wesel (Vice Chairman and Leadership Director). Other Directors of
Peoples Bancorp who continue to serve after the 2005 Annual Meeting include Carl
L. Baker, Jr., George W. Broughton, Wilford D. Dimit, Robert E. Evans (Chairman
of the Board), Richard Ferguson, Robert W. Price, Paul T. Theisen and Thomas J.
Wolf. The following is a summary of voting results:
Abstentions
and Broker
Nominee For Withheld Non-Votes
- --------------------------- -------------- -------------- --------------
Mark F. Bradley 9,013,106 46,615 n/a
Frank L. Christy 9,035,089 24,632 n/a
Theodore P. Sauber 8,989,008 70,713 n/a
Joseph H. Wesel 9,035,018 24,703 n/a
ITEM 5: Other Information.
- ---------------------------
None.
ITEM 6: Exhibits.
- ------------------
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- -----------------
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: May 9, 2005 By:/s/ ROBERT E. EVANS
-------------------------------------------------
Robert E. Evans
Chairman of the Board and Chief Executive Officer
Date: May 9, 2005 By:/s/ JOHN W. CONLON
-------------------------------------------------
John W. Conlon
Chief Financial Officer and Treasurer
Date: May 9, 2005 By:/s/ MARK F. BRADLEY
-------------------------------------------------
Mark F. Bradley
President and Chief Operating Officer
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED MARCH 31, 2005
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- -----------------
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