8
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
March 31, 2003 Commission
File Number 000-18991
PEOPLES BANCORP
212 WEST SEVENTH STREET
AUBURN, IN 46706
Indiana 35-1811284
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
Registrant's telephone number, including area code: (260) 925-2500
--------------
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 ______
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act) Yes _____ No __X____ Indicate the number of
shares outstanding of each of the issuer's classes of common stock as of the
latest practicable date:
Common stock, par value $1 per share 3,426,990 shares
- ------------------------------------ ----------------
(Title of class) (Outstanding at May 12, 2003)
1
PEOPLES BANCORP
AND SUBSIDIARIES
Page
Number
Part I Financial Information:
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets
as of March 31, 2003 and September 30, 2002.....................3
Consolidated Condensed Statements of Income for the three
and six months ended March 31, 2003 and 2002....................4
Consolidated Condensed Statements of Cash Flows for the
six months ended March 31, 2003 and 2002........................5
Notes to Consolidated Condensed Financial Statements..........6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................8-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....17-19
Item 4. Controls and Procedures...........................................19
Part II. Other Information
Item 1. Legal Proceedings................................................20
Item 2. Changes in Securities and Use of Proceeds........................20
Item 3. Defaults Upon Senior Securities..................................20
Item 4. Submission of Matters to a Vote of Security Holders..............20
Item 5. Other Information................................................20
Item 6. Exhibits and Reports on Form 8-K.................................20
Signatures....................................................................21
Officer Certifications.....................................................22-23
2
PART I. FINANCIAL INFORMATION
PEOPLES BANCORP
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 31, September 30,
2003 2002
------------- -------------
(Unaudited)
Cash and due from financial institutions $ 9,043,752 $ 8,402,527
Short-term interest-bearing deposits 29,947,385 27,175,394
------------- -------------
Total cash and cash equivalents 38,991,137 35,577,921
Interest-bearing time deposits 3,270,106 3,820,047
Securities available for sale 67,276,092 54,896,043
Securities held to maturity
(approximate market value $5,640,384 and $7,256,626) 5,555,038 7,142,556
Loans:
Loans 375,487,925 387,137,164
Less: Allowance for loan losses 2,074,407 2,117,400
------------- -------------
Net loans 373,413,518 385,019,764
Loans held for sale 1,453,600 1,298,750
Premises and equipment 6,065,860 6,120,007
Federal Home Loan Bank of Indianapolis stock, at cost 4,405,000 4,405,000
Goodwill 2,330,198 2,330,198
Other intangible assets 677,745 746,668
Other assets 4,691,102 5,103,301
------------- -------------
Total assets $508,129,396 $506,460,255
============= =============
LIABILITIES
NOW and savings deposits $161,503,122 $157,508,695
Certificates of deposit 217,129,688 222,427,776
------------- -------------
Total deposits 378,632,810 379,936,471
Reverse repurchase agreements 5,860,297 3,192,774
Federal Home Loan Bank advances 59,100,000 59,100,000
Other liabilities 2,014,610 3,384,813
------------- -------------
Total liabilities 445,607,717 445,614,058
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $1;
Authorized and unissued -- 5,000,000 shares - -
Common stock, par value $1;
Authorized--7,000,000 shares:
Issued and outstanding--3,440,961 and
3,447,186 shares 3,440,961 3,447,186
Additional paid-in capital 7,748,956 7,860,745
Retained earnings 51,574,304 49,785,154
Accumulated other comprehensive loss (231,886) (227,098)
Unearned RRP shares (10,656) (19,790)
------------- -------------
Total stockholders' equity 62,521,679 60,846,197
------------- -------------
Total liabilities and stockholders' equity $508,129,396 $506,460,255
============= =============
See notes to consolidated condensed financial statements.
3
PEOPLES BANCORP
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
March 31, March 31,
2003 2002 2003 2002
---------- ---------- ----------- -----------
Interest Income:
Loans $6,662,962 $7,631,369 $13,772,994 $15,561,449
Securities 646,665 479,087 1,320,524 974,338
Other interest and dividend income 175,316 220,832 424,659 469,714
--------- ---------- ----------- -----------
7,484,943 8,331,288 15,518,177 17,005,501
---------- ---------- ----------- -----------
Interest Expense:
NOWand savings deposits 338,697 600,676 763,799 1,284,334
Certificates of deposit 1,891,652 2,646,287 4,066,321 5,601,050
Short-term borrowings 13,906 13,221 32,523 37,656
Federal Home Loan Bank advances 849,450 659,398 1,654,650 1,347,317
---------- ---------- ----------- -----------
3,093,705 3,919,582 6,517,293 8,270,357
---------- ---------- ----------- -----------
Net Interest Income 4,391,238 4,411,706 9,000,884 8,735,144
Provision for losses on loans 178,721 59,994 385,206 203,617
---------- ---------- ----------- -----------
Net Interest Income After Provision
for Losses on Loans 4,212,517 4,351,712 8,615,678 8,531,527
---------- ---------- ----------- -----------
Other Income:
Trust income 59,203 42,902 121,638 88,626
Loan servicing 53,857 48,056 104,803 87,043
Net gains on sale of loans 195,319 143,734 375,131 291,976
Net gains on sale of securities - 10,800 33,888 21,449
Fees and service charges 232,830 223,849 477,176 471,489
Other income 109,067 80,972 224,889 171,876
---------- ---------- ----------- -----------
650,276 550,313 1,337,525 1,132,459
---------- ---------- ----------- -----------
Other Expense:
Salaries and employee benefits 1,425,143 1,407,110 2,937,480 2,811,260
Net occupancy expenses 214,154 210,737 399,221 407,904
Equipment expenses 232,427 215,221 462,290 411,593
Data processing expense 238,838 213,366 471,709 395,731
Deposit insurance expense 15,878 16,638 31,796 33,421
Other expenses 604,150 505,621 1,166,461 1,026,588
---------- ---------- ----------- -----------
2,730,590 2,568,693 5,468,957 5,086,497
---------- ---------- ----------- -----------
Income Before Income Tax 2,132,203 2,333,332 4,484,246 4,577,489
Income tax expense 744,800 884,040 1,593,050 1,730,090
---------- ---------- ----------- -----------
Net Income $1,387,403 $1,449,292 $ 2,891,196 $ 2,847,399
========== ========== =========== -==========
Basic Income Per Common Share $ 0.40 $ 0.42 $ 0.84 $ 0.82
Diluted Income Per Common Share $ 0.40 $ 0.42 $ 0.83 $ 0.82
See notes to consolidated condensed financial statements.
4
PEOPLES BANCORP
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
------------------------------
2003 2002
------------ -------------
Operating Activities:
Net income $ 2,891,196 $ 2,847,399
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 385,206 203,617
Depreciation and amortization 396,333 66,412
Amortization of premiums and discounts on
investment securities 408,376 55,784
Amortization of deferred loan fees (375,488) (392,544)
Loans originated for sale (17,959,270) (13,775,339)
Proceeds from sales of loans 18,179,551 13,442,165
Net (gain) loss on sales of loans (375,131) (291,975)
Change in:
Deferred income tax 257,681 58,138
Interest receivable 248,309 268,099
Interest payable (40,003) (92,106)
Other adjustments (2,274,622) (2,136,744)
------------ -------------
Net cash provided by operating activities 2,387,045 252,906
------------ -------------
Investing Activities:
Net change in interest-bearing time deposits 549,941 (364,250)
Purchases of investment securities
held to maturity (1,374,930) -
Purchases of investment securities
avilable for sale (32,060,088) (12,954,043)
Proceeds from maturities of investment
securities held to maturity 2,764,293 1,824,968
Proceeds from maturities of securities
available for sale 19,469,182 4,753,558
Proceeds from sale of securities
available for sale 661,805 2,236,488
Net change in mutual funds 82,269 (113,444)
Net change in loans 11,730,461 13,400,951
Purchases of premises and equipment (344,769) (812,326)
Proceeds from sales of real estate owned 201,498 80,030
------------ -------------
Net cash used by investing activities 1,034,755 8,051,932
------------ -------------
Financing Activities:
Net change in:
NOW and savings accounts 3,970,760 13,623,155
Certificates of deposit (5,298,088) (4,544,816)
Short-term borrowings 2,667,523 (1,947,344)
Advances by borrowers for taxes and insurance (128,662) (149,552)
Proceeds from advances from FHLB 3,000,000 2,000,000
Payments on advances from FHLB (3,000,000) (2,000,000)
Cash dividends (1,102,103) (1,049,881)
Repurchase of common stock (118,014) (356,088)
------------ -------------
Net cash provided by financing activities (8,584) 5,575,474
------------ -------------
Net Change in Cash and Cash Equivalents 3,413,216 13,880,312
Cash and Cash Equivalents, Beginning of Period 35,577,921 18,482,607
------------ -------------
Cash and Cash Equivalents, End of Period $38,991,137 $32,362,919
============ =============
Additional Cash Flows and Supplementary Information:
Interest paid $ 8,342,206 $ 8,362,463
Income tax paid 2,027,828 2,486,965
See notes to consolidated condensed financial statements.
5
PEOPLES BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION The significant accounting policies followed by Peoples
Bancorp (the Company) and its wholly owned subsidiaries, Peoples Federal Savings
Bank of DeKalb County and First Savings Bank (the Banks), for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. Certain information and note disclosures normally included
in the Company's annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted. The consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Form 10-K annual report for September
30, 2002 filed with the Securities and Exchange Commission. The consolidated
condensed balance sheet of the Company as of September 30, 2002 has been derived
from the audited consolidated balance sheet of the Company as of that date. All
adjustments, which are in the opinion of management necessary for a fair
presentation of the results for the periods reported, consisting only of normal
recurring adjustments, have been included in the accompanying unaudited
consolidated condensed financial statements. The results of operations for the
three and six months ended March 31, 2003, are not necessarily indicative of
those expected for the remainder of the year.
2. CASH DIVIDEND A cash dividend of $.16 per common share was declared on
February 18, 2003 payable on April 17, 2003, to stockholders of record as of
April 1, 2003.
3. EARNINGS PER COMMON SHARE
Earnings per share were computed as follows:
Three Months Ended March 31,
2003 2002
------------------------------- ------------------------------
Weighted Weighted
Average Per-Share Average Per-Share
Income Shares Amount Income Shares Amount
----------- --------- --------- ---------- --------- ----------
Basic Earnings Per Share
Income available to common stockholders $1,387,403 3,441,328 $ 0.40 $1,449,292 3,456,382 $ 0.42
Effect of Dilutive Securities
Stock options 24,064 17,822
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions ----------- --------- --------- ---------- --------- ----------
$1,387,403 3,465,392 $ 0.40 $1,449,292 3,474,204 $ 0.42
=========== ========= ========= ========== ========= ==========
6
PEOPLES BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
Six Months Ended March 31,
2003 2002
------------------------------- ------------------------------
Weighted Weighted
Average Per-Share Average Per-Share
Income Shares Amount Income Shares Amount
----------- --------- --------- ---------- --------- ---------
Basic Earnings Per share
Income available to common stockholders $2,891,198 3,441,358 $ 0.84 $2,847,399 3,461,520 $ 0.82
Effect of Dilutive Securities
Stock options 23,630 17,428
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions ----------- --------- --------- ---------- --------- ---------
$2,891,198 3,464,988 $ 0.83 $2,847,399 3,478,948 $ 0.82
=========== ========= ========= ========== ========= =========
4. STOCK OPTIONS
The Company has a stock-based employee compensation plan, which is described
more fully in Notes to Financial Statements included in the September 30, 2002
Annual Report to shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Six Months Ended Six Months Ended Three months Ended Three months Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2003
---------------- ----------------- ------------------- --------------------
Net income, as reported $2,891,196 $2,847,399 $1,387,403 $1,449,292
Less: Total stock-based employee
compensation cost determined
under the fair value based
method, net of income taxes 32,181 38,937 16,091 19,466
---------------- ----------------- ------------------- --------------------
Pro forma net income $2,859,015 $2,808,462 $1,371,312 $1,429,826
================ ================= =================== ====================
Earnings per share:
Basic - as reported $ .84 $ .82 $ .40 $ .42
Basic - pro forma $ .83 $ .81 $ .40 $ .41
Diluted - as reported $ .83 $ .82 $ .40 $ .42
Diluted - pro forma $ .83 $ .81 $ .40 $ .41
7
PEOPLES BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
5. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") adopted Statement of Financial
Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation.
Under the provisions of SFAS No. 123, companies that adopted the fair value
based method were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the first few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 also improves the clarity and prominence of disclosures about the
proforma effects of using the fair value based method of accounting for
stock-based compensation for all companies - regardless of the accounting method
used - by requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
SFAS No. 148 improves the timeliness of those disclosures by requiring that this
information be included in interim as well as annual financial statements. In
the past, companies were required to make proforma disclosures only in annual
financial statements.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002.
The FASB has stated it intends to issue a new statement on accounting for
stock-based compensation and will require companies to expense stock options
using a fair value based method at date of grant. The implementation for this
proposed state statement is not known.
8
PEOPLES BANCORP
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements that
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company, its directors or its officers
primarily with respect to future events and the future financial performance of
the Company. Readers of this Form 10-Q are cautioned that any such forward
looking statements are not guarantees of future events or performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-Q identifies important
factors that could cause such differences. These factors include changes in
interest rates, loss of deposits and loan demand to other financial
institutions, substantial changes in financial markets, changes in real estate
values and the real estate market, regulatory changes, unanticipated conversion
expenses, increases in compensation and employee expenses, or unanticipated
results in pending legal proceedings.
CRITICAL ACCOUNTING POLICIES
The notes to the consolidated financial statements contain a summary of the
Company's significant accounting policies presented on pages 17-18 of the annual
report for fiscal year 2002. Certain of these policies are important to the
portrayal of the Company's financial condition, since they require management to
make difficult, complex or subjective judgments, some of which may relate to
matters that are inherently uncertain. Management believes that it's critical
accounting policies include determining the allowance for loan losses, ("ALL")
and accounting for goodwill.
ALLOWANCE FOR LOAN LOSSES
The ALL is a significant estimate that can and does change based on management's
assumptions about specific borrowers and applicable economic and environmental
conditions, among other factors. Management reviews the adequacy of the ALL on a
monthly basis. This review is based on specific identified risks or anticipated
losses in individual loans, a percentage factor based on the classification of
certain loans, and managements' analysis of overall economic conditions such as
employment, bankruptcy trends, property value changes and changes in delinquency
levels.
Credits are evaluated individually based on degree of delinquency and/or
identified risk ratings of special mention or worse. Credits with delinquency
levels of less than 60 days and risk
9
PEOPLES BANCORP
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
ratings of satisfactory/monitor or better are reviewed in the aggregate.
Percentage factors applied to individual credits are based on risk rating, the
type of credit and estimated potential losses in the event liquidation becomes
necessary. Percentage factors applied to loans reviewed in the aggregate are
based solely on the type of credit. Anticipated losses on other real estate
owned are recognized immediately upon recording the asset.
The ALL also includes a component based on management's assumptions of changes
in risk in non-quantifiable areas such as market conditions, property values,
employment conditions and perceived changes in overall portfolio quality due to
changes in concentration, underwriting changes and both national and regional
trends.
External factors such as increases in unemployment, regional softness in
property values, increasing national numbers in bankruptcy, unsecured
delinquency and charge offs and internal factors such as the continuing increase
in the commercial loan portfolio may result in larger losses in current economic
conditions. Changes in loan concentration, delinquency and portfolio are
addressed through the variation in percentages used in calculating the reserve
for various types of credit as well as individual review of "high risk" credits
and large loans.
GOODWILL
Goodwill is annually tested for impairment. If the implied fair value of
goodwill is lower than its carrying amount, a goodwill impairment is
indicated and goodwill is written down to its implied fair value.
Subsequent increases in goodwill value are not recognized in the financial
statements.
FINANCIAL CONDITION
Total assets at March 31, 2003 were $508,129,396, an increase of $1,669,141 from
September 30, 2002. Significant variations in the composition of assets
consisted of the following items:
o Total loans decreased by $11,606,246. This decrease has been due primarily
to the amount of refinancing activity in connection with the general
decline in interest rates. Management's philosophy from an interest rate
risk perspective is not to originate and keep the long-term lower rate
mortgage loans. Consequently, the Company has refinanced and sold loans in
the secondary market and gains on sales of loans have increased by $83,155
over the same period in 2002. Additionally, many customers have elected to
refinance their mortgage loans utilizing the services of various
competitors of the Company.
o Investment securities have increased by $10,792,531. This increase was
primarily funded from the inflow of cash related to the previously
mentioned decline in loans. Management
10
PEOPLES BANCORP
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
o has invested the funds that have come in primarily in callable agency bonds
in an effort to maintain liquidity to fund future loan growth.
Total liabilities were $445,607,717 at March 31, 2003 substantially unchanged
from September 30, 2002.
LIQUIDITY
The Company's most liquid assets are cash and interest-bearing deposits. The
levels of these assets are dependent on the Company's operating, financing, and
investing activities. At March 31, 2003, and September 30, 2002, cash and
short-term interest-bearing deposits totaled $42.3 million and $39.4 million,
respectively.
The Company's primary sources of funds are deposits, borrowings and the proceeds
from principal and interest payments on loans. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by interest rates, economic
conditions and competition.
If the Company requires funds beyond its ability to generate them internally, it
has the ability to borrow funds from the FHLB of Indianapolis. While there are
regulatory and internal limits to the amount that may be borrowed from the FHLB,
the Company feels its current borrowing capacity will be sufficient to cover any
liquidity shortfalls it may encounter.
CAPITAL RESOURCES
The following table presents Peoples Federal Savings Bank's current estimates of
its regulatory capital position as a dollar amount and as a percentage of assets
as of March 31, 2003.
11
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
At March 31, 2003
-------------------------------------------------
Required for To Be Well
Actual Adequate Capital(1)Capitalized (1)
Amount % Amount % Amount %
-------- ------- -------- ------- -------- ------
(dollars in thousands)
Total risk-based capital (1)
(to risk-weighted assets) $44,080 21.4% $16,494 8.0% $20,618 10.0%
Tier 1 risk-based capital (1)
(to risk-weighted assets) $42,635 20.7% $ 8,247 4.0% $12,371 6.0%
Core Capital (1)
(to adjusted tangible assets) $42,635 11.1% $15,339 4.0% $19,174 5.0%
Core Capital (1)
(to adjusted total assets) $42,635 11.1% $ 7,670 2.0% N/A N/A
Tangible Capital (1)
(to adjusted total assets) $42,635 11.1% $ 5,752 1.5% N/A N/A
(1) as defined by regulatory agencies
The following table presents First Savings Bank's current estimates of its
regulatory capital position as a dollar amount and as a percentage of assets as
of March 31, 2003.
At March 31, 2003
-------------------------------------------------
Required for To Be Well
Actual Adequate Capital(1)Capitalized (1)
Amount % Amount % Amount %
-------- ------- -------- ------ -------- -------
(dollars in thousands)
Total risk-based capital (1)
(to risk-weighted assets) $12,301 19.9% $ 4,945 8.0% $ 6,181 10.0%
Tier 1 risk-based capital (1)
(to risk-weighted assets) $11,697 18.9% $ 2,472 4.0% $ 3,709 6.0%
Core Capital (1)
(to adjusted tangible assets) $11,697 9.9% $ 4,710 4.0% $ 5,887 5.0%
Core Capital (1)
(to adjusted total assets) $11,697 9.9% $ 2,355 2.0% N/A N/A
Tangible Capital (1)
(to adjusted total assets) $11,697 9.9% $ 1,766 1.5% N/A N/A
(1) as defined by regulatory agencies
12
PEOPLES BANCORP
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
SUMMARY OF RESULTS OF OPERATIONS
The Company had net income of $1,387,403 or $0.40 per share for the three months
and $2,891,196 or $.84 per share for the six months ended March 31, 2003 as
compared to $1,449,292 or $0.42 per share and $2,847,399 or $.82 per share for
the same period in 2002. The increase for the six months was due primarily to
higher net interest income due to the rates being paid on interest bearing
liabilities declining at a faster pace than the rates being earned on interest
bearing assets. This increase in net interest income was partially offset by
higher provision for loan losses due to higher delinquency and non-performing
loans levels, and current economic factors.
NET INTEREST INCOME
Net interest income was $4,391,238 for the three months and $9,000,884 for the
six months ended March 31, 2003 as compared to $4,411,706 and $8,735,144 for the
same periods ended 2002. Interest income decreased $1,487,324 to $15,518,177 for
the six-month period, due to lower rates earned on loans and investments.
Interest expense decreased $1,753,064 to $6,517,293 due again to lower rates.
Volumes of both interest-earning assets and interest-bearing liabilities fell
during the period. However, since rates on deposits and borrowings fell at a
faster rate than rates on loans and investments, interest expense decreased more
than interest income, causing higher net interest income. As loan volumes have
fallen at a faster pace than deposits, interest income has started to decline
more rapidly than interest expense. If this trend continues, it could have a
negative impact on future earnings.
Provision for loan loss increased $181,589 to $385,206 for the six months ended
March 31, 2003 due to higher delinquency and non-performing loan levels, and
current economic conditions, as well as a significant loss being incurred on an
outstanding commercial loan.
The following table presents average balances and associated rates earned and
paid for all interest-earning assets and interest-bearing liabilities for the
six months ended March 31, 2003 and 2002 (dollars in thousands).
13
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
2003 2002
--------------------------- ----------------------------
Average Effective Average Effective
Balance Interest Rate Balance Interest Rate
-------- -------- --------- -------- -------- ---------
Loans $370,145 $13,773 7.44% $400,784 $15,561 7.77%
Securities 60,494 1,320 4.36% 33,373 974 5.84%
Other 36,043 425 2.36% 23,502 470 4.00%
-------- -------- -------- --------
Combined 466,682 15,518 6.65% 457,659 17,005 7.43%
-------- -------- -------- --------
NOW and savings
deposits 159,991 764 0.96% 153,806 1,284 1.67%
Certificates of deposit 220,357 4,066 3.69% 224,581 5,601 4.99%
Borrowings 62,418 1,687 5.41% 48,396 1,385 5.72%
-------- -------- -------- --------
Combined $442,766 6,517 2.94% $426,783 8,270 3.88%
-------- -------- -------- --------
Net interest income/
interest rate spread $ 9,001 3.71% $ 8,735 3.55%
======== ======= ======== =======
The following table illustrates the change in net interest income due to changes
in rates and average volumes for the six months ended March 31, 2003 (in
thousands).
Rate Volume Total
------------ ----------- -----------
Loans $ (639) $ (1,149) $ (1,788)
Securities (157) 503 346
Other (195) 150 (45)
------------ ----------- -----------
Total (991) (496) (1,487)
------------ ----------- -----------
NOW and savings deposits (575) 55 (520)
Certificates of deposit (1,432) (103) (1,535)
Borrowings (69) 371 302
------------ ----------- -----------
Total (2,076) 323 # (1,753)
------------ ----------- -----------
Net interest income $ 1,085 $ (819) # $ 266
============ =========== ===========
14
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
LOANS, NON-PERFORMING ASSETS AND SUMMARY OF LOAN LOSS EXPERIENCE
The following table presents the composition of the loan portfolio at March 31,
2003 and September 30, 2002 (in thousands):
March 31, 2003 September 30, 2002
-------------------- -------------------
TYPE OF LOAN AMOUNT % AMOUNT %
---------- -------- --------- --------
Residential: (Dollars in thousands)
Single family units $297,268 78.3% $313,908 80.0%
2-4 family units 2,545 0.7% 2,554 0.7%
Over 4 family units 2,986 0.8% 3,473 0.9%
Commercial real estate 19,806 5.2% 20,366 5.2%
Land acquisition and
development 1,477 0.4% 1,513 0.4%
Consumer and other loans 54,788 14.4% 49,756 12.7%
Loans on deposits 828 0.2% 1,041 0.3%
---------- -------- --------- --------
379,698 100.0% 392,611 100.0%
---------- -------- --------- --------
Less:
Undisbursed portion
of loans 2,564 3,821
Deferred loan fees and
discounts 1,646 1,653
---------- ---------
4,210 5,474
---------- ---------
Total loans receivable 375,488 387,137
Allowance for losses
on loans 2,074 2,117
---------- ---------
Net loans $373,414 $385,020
========== =========
Non-performing assets at March 31, 2003 and September 30, 2002 are as follows
(in thousands):
March 31, 2003 September 30, 2002
Non-accruing loans $ 1,566 $ 676
Loans contractually past due 90 days
or more other than nonaccruing 248 52
Real estate owned (REO) 455 117
Restructured loans 1,089 517
------------ ------------
$ 3,358 $ 1,362
============ ============
15
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
It is the Company's policy to carry REO at net realizable value. After
repossession, appraised value is reduced for estimated repair and selling costs,
and the net amount is the carrying value of the property. Any changes in
estimated realizable value after the initial repossession, are charged to a
specific loss reserve account for REO. The increase in non-accrual loans since
September 30, 2002, is primarily due to increase in the 1 to 4 family portion of
the loan portfolio, and management believes the increase has been appropriately
considered in determining the adequacy of the allowance for loan and REO losses
at March 31, 2003. Management believes this increase is generally attributable
to current economic conditions. Net charge-offs for the six months ended March
31, 2003 are $428,200 and were incurred primarily due to the commercial loan
loss mentioned earlier in this report 10-Q.
The allowances for loan and real estate owned losses represent amounts available
to absorb losses inherent in the portfolio. Such allowances are based on
management's continuing review of the portfolios, historical charge-offs,
current economic conditions, and such other factors, which in management's
judgment deserve recognition in estimating losses. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses. Such agencies may require
additions to the allowances based on their judgment about the information
available to them at the time of their examination. Provisions for losses are
charged to earnings to bring the allowances to levels considered necessary by
management. Losses are charged to the allowances when considered probable, or in
the case of REO, at the time of repossession. Management believes that the
allowances are adequate to absorb known and inherent losses in the portfolio. No
assurance can be given, however, that economic conditions which may adversely
affect the Company's markets or other circumstances will not result in future
losses in the portfolio.
NON-INTEREST INCOME
The Company's non-interest income for the six months ended March 31, 2003, was
$1,337,525 as compared to $1,132,459 for the same period one year ago. The
increase was attributable to increases in gains on sales of loans and loan
servicing fees. The current low interest rate environment has encouraged
mortgage loan refinancing, increasing the volume of loans being sold. Trust
income also increased due to a one-time fee charged for conversion of an
account, as well as trust fee increases effective December 2002. These factors
have impacted income for both the three and six month periods ended March 31,
2003 approximately equally.
NON-INTEREST EXPENSE
Total non-interest expense for the six months ended March 31, 2003 was
$5,468,957 as compared to $5,086,497 for the same period in 2002. Salaries and
employee benefits increased
16
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
$126,220 to $2,937,480 due to higher pension funding requirements this year, the
addition of a ninth branch office of Peoples Federal in February 2002, and
regular salary increases.
Equipment expense and data processing expense increased to $462,290 and $471,709
respectively from $411,593 and $395,731 due to additions and updates to
processing systems.These have been ongoing projects over the entire six month
period, and have affected both the three and six month period numbers.
INCOME TAXES
Income tax expense decreased to $1,593,050 from $1,730,090 due to lower pretax
income and a lower effective rate in Indiana due to the addition of the Michigan
subsidiary. The effective tax rate for the six months ended March 31, 2003 and
2002 was 35.5% and 37.8%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The OTS has issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of thrift institutions. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Thrift
institutions with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes. Institutions which
do not meet either of the filing requirements are not required to file OTS
Schedule CMR, but may do so voluntarily. Both Peoples Federal Savings Bank and
First Savings Bank file Schedule CMR. However, results calculated from the March
31, 2003 schedule CMR are not yet available from the OTS. Therefore, the tables
presented below present the results of this analysis for Peoples Federal and
First Savings as of December 31, 2002 and 2001. Under the regulation,
institutions that must file are required to take a deduction (the interest rate
risk capital component) from their total capital available to calculate their
risk-based capital requirement if their interest rate exposure is greater than
"normal". The amount of that deduction is one-half of the difference between (a)
the institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets. Presented below as of December 31, 2002 and 2001 is an analysis
performed by the OTS of Peoples Federal's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve in 100 basis point increments, up and down 100 basis points.
17
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Peoples Federal Savings Bank
Interest Rate Risk As of December 31, 2002
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+200 bp 50,592 (4,901) -9% 13.00% (83)
+100 bp 54,253 (1,240) -2% 13.69% (14)
0 bp 55,493 - - 13.83% -
- -100 bp 54,401 (1,092) -2% 13.46% (36)
Peoples Federal Savings Bank
Interest Rate Risk As of December 31, 2001
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+200 bp 40,165 (12,780) -24% 10.51% (274)
+100 bp 46,793 (6,153) -12% 11.97% (128)
0 bp 52,945 - - 13.25% -
- -100 bp 55,614 2,669 5% 13.74% 49
Presented below are the same tables for First Savings:
First Savings Bank
Interest Rate Risk As of December 31, 2002
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+200 bp 14,776 428 5% 12.02% 83
+100 bp 14,732 684 5% 11.83% 65
0 bp 14,048 - - 11.18% -
- -100 bp 13,123 (926) -7% 10.37% (81)
18
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
First Savings Bank
Interest Rate Risk As of December 31, 2001
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+200 bp 15,000 (9) 0% 13.77% 34
+100 bp 14,704 (306) -2% 13.31% (12)
0 bp 15,010 - - 13.43% -
- -100 bp 15,831 (178) -1% 13.16% (27)
In evaluating Peoples Federal's and First Savings' exposure to interest rate
risk, certain shortcomings, inherent in the method of analysis presented in the
foregoing tables must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, prepayments and early withdrawal levels could deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase. As
a result, the actual effect of changing interest rates may differ from that
presented in the foregoing tables.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our President and Chief Executive Officer and
our Secretary and Treasurer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d- 14(c) under the
Securities Exchange Act of 1934). Based on their evaluation, our President and
Chief Executive Officer and our Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, our President Chief Executive Officer and our Chief Financial
Officer have concluded that there were no significant changes in the Company's
internal controls or in other factors that could significantly affect its
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
19
PART II. OTHER INFORMATION
PEOPLES BANCORP
AND SUBSIDIARIES
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On January 8, 2003 the Company held its annual meeting of shareholders. A total
of 2,645,255 shares were represented in person or by proxy at the meeting. Erica
D. Dekko was elected to the Board of Directors for a three-year term expiring in
2006. 2,576,124 shares were voted in favor of the election of the nominee and
there were 69,131 votes withheld. Douglas D. Marsh was elected to the board of
Directors for a three-year term expiring in 2006. 2,571,836 shares were voted in
favor of the election of the nominee and there were 73,419 votes withheld.
Maurice F. Winkler, III was elected to the board of Directors for a three-year
term expiring in 2006. 2,572,148 shares were voted in favor of the election of
the nominee and there were 73,107 votes withheld. BKD LLP was approved as the
auditor of Peoples Bancorp for the fiscal year ending September 30, 2003.
2,520,872 shares were voted in favor of approval, with 67,510 votes withheld.
Item 5. Other information
None
Item 6. Exhibits
Exhibit 99.1 Certification of Chief Executive Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification of Chief Financial Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March
31, 2003.
20
PEOPLES BANCORP
AND SUBSIDIARIES
SIGNATURES
Under 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.
Date: May 12, 2003 /s/Maurice F. Winkler, III
---------------------------
Chief Executive Officer
Date: May 12, 2003 /s/Deborah K. Stanger
---------------------
Principal Financial and
Accounting Officer
21
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER DISCLOSURE PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Maurice F. Winkler, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors: a) all significant deficiencies in the
design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses in
internal controls; and b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/Maurice F. Winkler, III May 12, 2003
- ------------------------------------
President and Chief Executive Officer
22
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER DISCLOSURE PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Deborah K. Stanger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors: a) all significant deficiencies in the
design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses in
internal controls; and b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/Deborah K. Stanger May 12, 2003
-----------------------------------
Vice President-Chief Financial Officer
23
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Peoples Bancorp (the "Company") on
Form 10-Q for the period ending March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report), I, Maurice F. Winkler,
III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Maurice F. Winkler, III
Chief Executive Officer
May 12, 2003
24
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Peoples Bancorp (the "Company") on
Form 10-Q for the period ending March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report), I, Deborah K. Stanger,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Deborah K. Stanger
Chief Financial Officer
May 12, 2003