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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
June 30, 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 3,425,920 shares
- ------------------------------------ ----------------
(Title of class) (Outstanding at August 8, 2003)
1
PEOPLES BANCORP
AND SUBSIDIARIES
Page
Number
Part I Financial Information:
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets
as of June 30, 2003 and September 30, 2002........................3
Consolidated Condensed Statements of Income for the three
and nine months ended June 30, 2003 and 2002......................4
Consolidated Condensed Statements of Cash Flows for the
nine months ended June 30, 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.....................................................22-25
2
PART I. FINANCIAL INFORMATION
PEOPLES BANCORP
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30,2003 Sept. 30,2002
(Unaudited)
ASSETS
Cash and due from financial institutions $ 7,115,014 $ 8,402,527
Short-term interest-bearing deposits 26,639,490 27,175,394
------------- -------------
Total cash and cash equivalents 33,754,504 35,577,921
Interest-bearing time deposits 3,270,086 3,820,047
Securities available for sale 75,214,124 54,896,043
Securities held to maturity
(approximate market value $3,542,494 and $7,256,626) 2,931,085 7,142,556
Loans:
Loans 368,184,829 387,137,164
Less: Allowance for loan losses 2,114,478 2,117,400
------------- -------------
Net loans 366,070,351 385,019,764
Loans held for sale 1,204,600 1,298,750
Premises and equipment 6,063,385 6,120,007
Federal Home Loan Bank of Indianapolis stock, at cost 4,463,300 4,405,000
Goodwill 2,330,198 2,330,198
Other intangible assets 643,283 746,668
Other assets 5,239,013 5,103,301
------------- -------------
Total assets $501,183,929 $506,460,255
============= =============
LIABILITIES
NOW and savings deposits $158,440,295 $157,508,695
Certificates of deposit 217,858,485 222,427,776
------------- -------------
Total deposits 376,298,780 379,936,471
Reverse repurchase agreements 4,181,179 3,192,774
Federal Home Loan Bank advances 55,100,000 59,100,000
Other liabilities 2,132,678 3,384,813
------------- -------------
Total liabilities 437,712,637 445,614,058
------------- -------------
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--3,426,990 and
3,447,186 shares 3,426,990 3,447,186
Additional paid-in capital 7,484,175 7,860,745
Retained earnings 52,528,951 49,785,154
Accumulated other comprehensive income (loss) 37,265 (227,098)
Unearned RRP shares (6,089) (19,790)
------------- -------------
Total stockholders' equity 63,471,292 60,846,197
------------- -------------
Total liabilities and stockholders' equity $501,183,929 $506,460,255
============= =============
See notes to consolidated condensed financial statements.
3
PEOPLES BANCORP
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
2003 2002 2003 2002
---------- ---------- ----------- -----------
Interest Income:
Loans $6,478,684 $7,380,660 $20,251,678 $22,942,109
Securities 573,452 586,621 1,893,976 1,560,959
Other interest and dividend income 188,844 210,245 613,503 679,959
---------- ---------- ----------- -----------
7,240,980 8,177,526 22,759,157 25,183,027
---------- ---------- ----------- -----------
Interest Expense:
NOWand savings deposits 302,878 599,060 1,066,677 1,883,394
Certificates of deposit 1,765,106 2,467,086 5,831,427 8,068,136
Short-term borrowings 15,882 12,064 48,405 49,720
Federal Home Loan Bank advances 790,498 665,868 2,445,148 2,013,185
---------- ---------- ----------- -----------
2,874,364 3,744,078 9,391,657 12,014,435
---------- ---------- ----------- -----------
Net Interest Income 4,366,616 4,433,448 13,367,500 13,168,592
Provision for losses on loans 71,973 55,473 457,179 259,090
---------- ---------- ----------- -----------
Net Interest Income After Provision
for Losses on Loans 4,294,643 4,377,975 12,910,321 12,909,502
---------- ---------- ----------- -----------
Other Income:
Trust income 57,726 44,099 179,364 132,725
Loan servicing 55,990 45,368 160,793 132,411
Net gains on sale of loans 235,406 77,928 610,537 369,904
Net gains on sale of securities 4,324 - 38,212 21,449
Fees and service charges 244,014 223,671 721,190 695,160
Other income 131,367 88,571 356,256 260,447
---------- ---------- ----------- -----------
728,827 479,637 2,066,352 1,612,096
---------- ---------- ----------- -----------
Other Expense:
Salaries and employee benefits 1,535,910 1,555,554 4,473,390 4,366,814
Net occupancy expenses 199,781 207,168 599,002 615,072
Equipment expenses 209,543 215,945 671,833 627,538
Data processing expense 205,444 224,399 677,153 620,130
Deposit insurance expense 15,195 16,628 46,991 50,049
Other expenses 545,379 496,780 1,711,840 1,523,368
---------- ---------- ----------- -----------
2,711,252 2,716,474 8,180,209 7,802,971
---------- ---------- ----------- -----------
Income Before Income Tax 2,312,218 2,141,138 6,796,464 6,718,627
Income tax expense 809,250 887,835 2,402,300 2,617,925
---------- ---------- ----------- -----------
Net Income $1,502,968 $1,253,303 $ 4,394,164 $ 4,100,702
========== ========== =========== ===========
Basic Income Per Common Share $ 0.44 $ 0.36 $ 1.28 $ 1.19
Diluted Income Per Common Share $ 0.43 $ 0.36 $ 1.27 $ 1.18
See notes to consolidated condensed financial statements.
4
PEOPLES BANCORP
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
------------------------
Operating Activities: 2003 2002
------------ -----------
Net income $ 4,394,164 $ 4,100,702
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 457,179 259,090
Depreciation and amortization 594,877 566,612
Amortization of premiums and discounts
on investment securities 630,369 117,987
Amortization of deferred loan fees (560,409) (534,345)
Loans originated for sale (28,774,710) (17,312,864)
Proceeds from sales of loans 29,479,397 17,499,168
Net gain on sales of loans (610,537) (369,904)
Change in:
Interest receivable 25,536 (69,553)
Interest payable (7,774) (114,155)
Other adjustments (2,562,103) (600,645)
------------ -----------
Net cash provided by operating activities 3,065,989 3,542,093
------------ -----------
Investing Activities:
Net change in interest-bearing time deposits 549,961 (364,250)
Purchases of investment securities held to maturity (1,374,930) -
Purchases of investment securities available for sale(53,193,333) (32,401,843)
Proceeds from maturities of investment
securities held to maturity 5,317,926 2,346,925
Proceeds from maturities of securities
available for sale 31,724,657 8,407,910
Proceeds from sale of securities available for sale 1,211,805 2,236,488
Net change in mutual funds 323,017 (227,784)
Net change in loans 19,365,560 14,220,154
Purchases of premises and equipment (539,130) (961,258)
Proceeds from sales of real estate owned 394,398 80,030
Purchase of FHLB stock 22,000 (13,500)
------------ -----------
Net cash provided by (used in) investing activities 3,801,931 (6,677,128)
------------ -----------
Financing Activities:
Net change in:
NOW and savings accounts 961,600 12,132,003
Certificates of deposit (4,569,291) (4,038,418)
Short-term borrowings 988,405 (490,280)
Advances by borrowers for taxes and insurance (22,628) (46,986)
Proceeds from advances from FHLB 3,000,000 2,000,000
Payments on advances from FHLB (7,000,000) (2,000,000)
Cash dividends (1,652,657) (1,572,510)
Repurchase of common stock (396,766) (484,872)
------------ -----------
Net cash provided by (used in) financing activities (8,691,337) 5,498,937
------------ -----------
Net Change in Cash and Cash Equivalents (1,823,417) 2,363,902
Cash and Cash Equivalents, Beginning of Period 35,577,921 18,482,607
------------ -----------
Cash and Cash Equivalents, End of Period $33,754,504 $20,846,509
============ ===========
Additional Cash Flows and Supplementary Information:
Interest paid $ 9,399,431 $12,128,590
Income tax paid 2,730,553 3,171,965
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 nine
months ended June 30, 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 May 20, 2003 payable on
July 24, 2003, to stockholders of record as of July 1, 2003.
3. EARNINGS PER COMMON SHARE
Earnings per share were computed as follows:
Three Months Ended June 30,
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 $1,502,968 3,428,544 $ 0.44 $1,253,303 3,452,806 $0.36
Effect of Dilutive Securities
Stock options 28,531 22,189
Diluted Earnings Per Share
Income available to common stockholders
---------------------------------- ------------------------------------
and assumed conversions $1,502,968 3,457,075 $ 0.43 $1,253,303 3,474,995 $0.36
================================== ====================================
6
PEOPLES BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
Nine Months Ended June 30,
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 $4,394,164 3,439,471 $1.28 $4,100,702 3,458,779 $1.19
Effect of Dilutive Securities
Stock options 25,449 22,189
Diluted Earnings Per Share
Income available to common stockholders
----------------------------------- -------------------------------------
and assumed conversions $4,394,164 3,464,920 $1.27 $4,100,702 3,480,968 $1.18
=================================== =====================================
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.
Nine Months Nine Months Three months Three months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2003 2002 2003 2002
--------------------------------------------------------------
Net income, as reported $4,394,164 $4,100,702 $1,502,968 $1,253,303
Less: Total stock-based employee
compensation cost determined
under the fair value based
method, net of income taxes 48,273 58,398 16,091 19,466
--------------------------------------------------------------
Pro forma net income $4,345,891 $4,042,304 $1,486,877 $1,233,837
==============================================================
Earnings per share:
Basic - as reported $1.28 $1.19 $.44 $.36
Basic - pro forma $1.26 $1.17 $.43 $.36
Diluted - as reported $1.27 $1.18 $.43 $.36
Diluted - pro forma $1.25 $1.17 $.43 $.36
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 June 30, 2003 were $501,183,929, a decrease of $5,276,326 from
September 30, 2002. Significant variations in the composition of assets
consisted of the following items:
o Total loans decreased by $18,949,413. 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 $240,633
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 $16,106,610. 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 $437,712,637 at June 30, 2003 down from $445,614,058 at
September 30, 2002, due primarily to payoffs of Federal Home Loan Bank advances.
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 June 30, 2003, and September 30, 2002, cash and
short-term interest-bearing deposits totaled $37.0 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 June 30, 2003.
11
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
At June 30, 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) $41,271 20.3% $16,276 8.0% $20,346 10.0%
Tier 1 risk-based capital (1)
(to risk-weighted assets) $39,826 19.6% $ 8,138 4.0% $12,207 6.0%
Core Capital (1)
(to adjusted tangible assets) $39,826 10.6% $15,092 4.0% $18,865 5.0%
Core Capital (1)
(to adjusted total assets) $39,826 10.6% $ 7,546 2.0% N/A N/A
Tangible Capital (1)
(to adjusted total assets) $39,826 10.6% $ 5,659 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 June 30, 2003.
At June 30, 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) $12,669 20.5% $4,938 8.0% $6,172 10.0%
Tier 1 risk-based capital (1)
(to risk-weighted assets) $12,037 19.5% $2,469 4.0% $3,703 6.0%
Core Capital (1)
(to adjusted tangible assets) $12,037 10.4% $4,651 4.0% $5,813 5.0%
Core Capital (1)
(to adjusted total assets) $12,037 10.4% $2,325 2.0% N/A N/A
Tangible Capital (1)
(to adjusted total assets) $12,037 10.4% $1,744 1.5% N/A N/A
(1) as defined by regulatory agencies
12
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
SUMMARY OF RESULTS OF OPERATIONS
The Company had net income of $1,502,968 or $0.44 per share for the three months
and $4,394,164 or $1.28 per share for the nine months ended June 30, 2003 as
compared to $1,253,303 or $0.36 per share and $4,100,702 or $1.19 per share for
the same period in 2002. The increase for the nine-month period is due to a
combination of slightly higher net interest income partially offset by higher
provision for loan losses due to higher delinquency rates and current economic
factors. This slight increase is combined with higher non-interest income,
primarily from gains on sales of loans, partially offset by higher non-interest
expense.
NET INTEREST INCOME
Net interest income was $4,366,616 for the three months and $13,367,500 for the
nine months ended June 30, 2003 as compared to $4,433,448 and $13,168,592 for
the same periods ended 2002. Interest income decreased $936,546 to $7,240,980
for the three months and $2,423,870 to $22,759,157 for the nine-month period,
due to lower rates earned on loans and investments. Interest expense decreased
$869,714 to $2,874,364 for the three months and $2,622,778 to $9,391,657 for the
nine-month period 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 has decreased more than interest income for the
nine-month period, causing higher net interest income. However, as loan volumes
have fallen at a faster pace than deposits, interest income has started to
decline more rapidly than interest expense, causing lower net interest income
for the three-month period. If this trend continues, it could have a negative
impact on future earnings.
Provision for loan loss increased $198,089 to $457,179 for the nine months ended
June 30, 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
nine months ended June 30, 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 $375,516 $20,252 7.19% $397,027 $22,942 7.70%
Securities 64,353 1,894 3.92% 43,193 1,561 4.82%
Other 32,375 613 2.52% 21,413 680 4.23%
-------- -------- -------- --------
Combined 472,244 22,759 6.43% 461,633 25,183 7.27%
-------- -------- -------- --------
NOW and savings
deposits 159,542 1,067 0.89% 154,890 1,883 1.62%
Certificates of deposit 219,324 5,831 3.54% 222,862 8,068 4.83%
Borrowings 61,859 2,494 5.38% 48,017 2,063 5.73%
-------- -------- -------- --------
Combined $440,725 9,392 2.84% $425,769 12,014 3.76%
-------- -------- -------- --------
Net interest income/
interest rate spread $13,367 3.59% $13,169 3.51%
======== ======= ========= =======
The following table illustrates the change in net interest income due to changes
in rates and average volumes for the nine months ended June 30, 2003 (in
thousands).
Rate Volume Total
------------ ----------- -----------
Loans $ (1,480) $ (1,210) $ (2,690)
Securities (206) 539 333
Other (280) 213 (67)
------------ ----------- -----------
Total (1,966) (458) (2,424)
------------ ----------- -----------
NOW and savings deposits (875) 59 (816)
Certificates of deposit (2,112) (125) (2,237)
Borrowings (116) 547 431
------------ ----------- -----------
Total (3,103) 481 # (2,622)
------------ ----------- -----------
Net interest income $ 1,137 $ (939) # $ 198
============ =========== ===========
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 June 30,
2003 and September 30, 2002 (in thousands):
June 30, 2003 September 30, 2002
-------------------- ---------------------
TYPE OF LOAN AMOUNT % AMOUNT %
--------- ---------- --------- -----------
Residential: (Dollars in thousands)
Single family units 292,210 78.2% 313,908 80.0%
2-4 family units 1,946 0.5% 2,554 0.7%
Over 4 family units 2,750 0.7% 3,473 0.9%
Commercial real estate 21,354 5.7% 20,366 5.2%
Land acquisition and
development 1,384 0.4% 1,513 0.4%
Consumer and other loans 53,428 14.3% 49,756 12.7%
Loans on deposits 722 0.2% 1,041 0.3%
--------- ---------- --------- -----------
373,794 100.0% 392,611 100.0%
--------- ---------- --------- -----------
Less:
Undisbursed portion
of loans 3,340 3,821
Deferred loan fees and
discounts 2,270 1,653
--------- -------
5,610 5,474
--------- --------
Total loans receivable 368,184 387,137
Allowance for losses
on loans 2,114 2,117
--------- ---------
Net loans $366,070 $385,020
========= =========
Non-performing assets at June 30, 2003 and September 30, 2002 are as follows (in
thousands):
June 30, 2003 September 30, 2002
Non-accruing loans $ 1,100 $ 676
Loans contractually past due 90 days
or more other than nonaccruing 459 52
Real estate owned (REO) 684 117
Restructured loans 1,277 517
------------ ------------
$ 3,520 $ 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 June 30, 2003. Management believes this increase is generally attributable to
current economic conditions. Net charge-offs for the nine months ended June 30,
2003 are $520,101 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 three and nine months ended June 30,
2003, was $728,827 and $2,066,352 as compared to $479,637 and $1,612,096 for the
same periods 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 nine-month
periods ended June 30, 2003.
16
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Peoples Federal Savings Bank has reached a tentative agreement with First
Federal Savings Bank of Huntington, IN to take over the trust accounts of First
Federal through a revenue sharing agreement. Regulatory approval will need to be
obtained before the agreement is finalized.
NON-INTEREST EXPENSE
Total non-interest expense for the three and nine months ended June 30, 2003 was
$2,711,252 and $8,180,209, as compared to $2,716,474 and $7,802,971 for the same
periods in 2002. Salaries and employee benefits increased $106,576 to $4,473,390
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 $671,833 and $677,153
respectively from $627,538 and $620,130 for the nine months ended June 30, 2003
due to additions and updates to processing systems. These have been ongoing
projects over the entire nine-month period, and have affected both the three and
nine month period numbers.
INCOME TAXES
Income tax expense decreased to $2,402,300 from $2,617,925 due to a lower
effective rate in Indiana due to the addition of the Michigan subsidiary. The
effective tax rate for the nine months ended June 30, 2003 and 2002 was 35.3%
and 39.0%.
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 June
30, 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 March 31, 2003 and 2002. Under the regulation, institutions
that must file are required to take a
17
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued )
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 March 31, 2003
and 2002 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.
Peoples Federal Savings Bank
Interest Rate Risk As of March 31, 2003
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+200 bp 54,912 (2,986) -5% 13.87% (36)
+100 bp 57,412 (486) -1% 14.28% 4
0 bp 57,897 - - 14.24% -
- -100 bp 56,239 (1,659) -3% 13.74% (49)
Peoples Federal Savings Bank
Interest Rate Risk As of March 31, 2002
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+200 bp 44,165 (12,039) -21% 11.81% (157)
+100 bp 50,454 (5,751) -10% 13.18% (120)
0 bp 56,205 - - 14.38% -
- -100 bp 58,979 2,775 5% 14.89% 51
Presented below are the same tables for First Savings:
First Savings Bank
Interest Rate Risk As of March 31, 2003
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+200 bp 16,078 1,321 9% 13.12% 130
+100 bp 15,587 833 6% 12.59% 78
0 bp 14,754 - - 11.82% -
- -100 bp 13,612 (1,142) -8% 10.83% (99)
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 March 31, 2002
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+200 bp 14,434 (1,348) -9% 12.78% (84)
+100 bp 15,317 (464) -3% 13.37% (25)
0 bp 15,781 - - 13.62% -
- -100 bp 15,709 (72) 0% 13.45% (17)
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
As of June 30, 2003, 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
None
Item 5. Other information
None
Item 6. Exhibits
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
A Form 8-K was filed on May 5, 2003 regarding the quarterly financial
results of Peoples Bancorp for the period 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: August 8, 2003 /s/Maurice F. Winkler, III
Chief Executive Officer
Date: August 8, 2003 /s/Deborah K. Stanger
Principal Financial and
Accounting Officer
21
Exhibit 31.1
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
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e))[and internal controls and procedures
for financial reporting (as defined n Exchange Act Rules 13a-15(f) and
15d-15(f))] for the registrant, and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being
prepared.
b. Designed such internal controls and procedures for financial reporting, or
caused such internal controls and procedures for financial reporting to be
designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and;
d. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
August 8, 2003 /s/Maurice F. Winkler, III
President and Chief Executive Officer
22
Exhibit 31.2
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
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e))[and internal controls and procedures
for financial reporting (as defined n Exchange Act Rules 13a-15(f) and
15d-15(f))] for the registrant, and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being
prepared.
b. Designed such internal controls and procedures for financial reporting, or
caused such internal controls and procedures for financial reporting to be
designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and;
d. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
August 8, 2003 /s/Deborah K. Stanger
Vice President-Chief Financial Officer
23
Exhibit32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of
Chapter 63 of Title 18 of the United States Code), each of the undersigned
officers of Peoples Bancorp, (the "Company") does hereby certify with respect to
the Quarterly Report of the Company on form 10=Q for the period ended June 30,
2003 (the "Report") that:
1. The Report fully complies with the requirements of Sections 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 results of operations
of the Company.
August 8, 2003 /s/Maurice F. Winkler, III
Chief Executive Officer
24
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of
Chapter 63 of Title 18 of the United States Code), each of the undersigned
officers of Peoples Bancorp, (the "Company") does hereby certify with respect to
the Quarterly Report of the Company on form 10=Q for the period ended June 30,
2003 (the "Report") that:
1. The Report fully complies with the requirements of Sections 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 results of operations
of the Company.
August 8, 2003 /s/Deborah K. Stanger
Chief Financial Officer
25