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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, 2004 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 3,370,455 shares
- ------------------------------------ ----------------
(Title of class) (Outstanding at July 29, 2004)
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, 2004 and September 30, 2003.........................3
Consolidated Condensed Statements of Income for the three
and nine months ended June 30, 2004 and 2003.......................4
Consolidated Condensed Statements of Cash Flows for the
nine months ended June 30, 2004 and 2003...........................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, 2004 September 30,
(Unaudited) 2003
ASSETS
Cash and due from financial institutions $ 7,581,701 $ 8,467,367
Short-term interest-bearing deposits 4,246,998 26,694,454
------------- -------------
Total cash and cash equivalents 11,828,699 35,161,821
Interest-bearing time deposits 3,171,066 3,270,106
Securities available for sale 94,440,136 85,504,604
Securities held to maturity
(approximate market value $1,282,081 and $2,218,264) 1,264,563 2,116,827
Loans:
Loans 363,867,781 359,064,307
Less: Allowance for loan losses 2,027,978 2,110,946
------------- -------------
Net loans 361,839,803 356,953,361
Loans held for sale 405,990 -
Premises and equipment 6,418,808 6,322,532
Federal Home Loan Bank of Indianapolis stock, at cost 4,684,300 4,518,700
Goodwill 2,330,198 2,330,198
Other intangible assets 505,437 608,822
Other assets 6,606,649 6,133,035
------------- -------------
Total assets $493,495,649 $502,920,006
============= =============
LIABILITIES
NOW and savings deposits $165,925,946 $163,510,816
Certificates of deposit 206,407,513 216,605,068
------------- -------------
Total deposits 372,333,459 380,115,884
Reverse repurchase agreements 2,540,187 2,649,653
Federal Home Loan Bank advances 53,100,000 54,100,000
Other liabilities 2,087,943 2,129,615
------------- -------------
Total liabilities 430,061,589 438,995,152
------------- -------------
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--3,371,205 and
3,421,895 shares 3,371,205 3,421,895
Additional paid-in capital 6,080,044 7,370,513
Retained earnings 55,105,038 53,302,385
Accumulated other comprehensive loss (1,122,227) (168,417)
Unearned RRP shares - (1,522)
------------- -------------
Total stockholders' equity 63,434,060 63,924,854
------------- -------------
Total liabilities and stockholders' equity $493,495,649 $502,920,006
============= =============
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,
2004 2003 2004 2003
---------- ---------- ----------- -----------
Interest Income:
Loans $5,703,010 $6,478,684 $17,512,249 $20,251,678
Securities 778,015 573,452 2,268,316 1,893,976
Other interest and dividend income 111,843 188,844 370,427 613,503
---------- ---------- ----------- -----------
6,592,868 7,240,980 20,150,992 22,759,157
---------- ---------- ----------- -----------
Interest Expense:
NOWand savings deposits 300,393 302,878 907,593 1,066,677
Certificates of deposit 1,483,065 1,765,106 4,576,356 5,831,427
Short-term borrowings 9,658 15,882 30,534 48,405
Federal Home Loan Bank advances 749,170 790,498 2,268,724 2,445,148
---------- ---------- ----------- -----------
2,542,286 2,874,364 7,783,207 9,391,657
---------- ---------- ----------- -----------
Net Interest Income 4,050,582 4,366,616 12,367,785 13,367,500
Provision for losses on loans 21,121 71,973 104,118 457,179
---------- ---------- ----------- -----------
Net Interest Income After Provision
for Losses on Loans 4,029,461 4,294,643 12,263,667 12,910,321
---------- ---------- ----------- -----------
Other Income:
Trust income 75,470 57,726 276,552 179,364
Loan servicing 57,615 55,990 166,484 160,793
Net gains on sale of loans 52,026 235,406 77,662 610,537
Gains on sale of securities - 4,324 4,202 38,212
Fees and service charges 292,665 244,014 806,680 721,190
Other income 80,705 131,367 294,690 356,256
---------- ---------- ----------- -----------
558,481 728,827 1,626,270 2,066,352
---------- ---------- ----------- -----------
Other Expense:
Salaries and employee benefits 1,571,013 1,535,910 4,750,807 4,473,390
Net occupancy expenses 205,801 199,781 615,802 599,002
Equipment expenses 217,818 209,543 646,837 671,833
Data processing expense 260,757 205,444 725,720 677,153
Deposit insurance expense 14,451 15,195 43,272 46,991
Other expenses 595,613 545,379 1,726,138 1,711,840
---------- ---------- ----------- -----------
2,865,453 2,711,252 8,508,576 8,180,209
---------- ---------- ----------- -----------
Income Before Income Tax 1,722,489 2,312,218 5,381,361 6,796,464
Income tax expense 586,685 809,250 1,860,285 2,402,300
---------- ---------- ----------- -----------
Net Income $1,135,804 $1,502,968 $ 3,521,076 $ 4,394,164
========== ========== =========== ===========
Basic Income Per Common Share $0.34 $0.44 $1.04 $1.28
Diluted Income Per Common Share $0.33 $0.43 $1.03 $1.27
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: 2004 2003
- --------------------- ------------ ------------
Net income $ 3,521,076 $ 4,394,164
Items not requiring (providing) cash
Provision for loan losses 104,118 457,179
Investment securities amortization net 319,307 630,369
Loans originated for sale (8,056,585) (28,774,710)
Proceeds from sale of loans held for sale 7,728,257 29,479,397
Gain on sale of loans (77,662) (610,537)
Amortization of net loan origination fees (395,596) (560,409)
Depreciation and amortization 599,933 594,877
Change in
Interest receivable 235,923 25,536
Interest payable (24,511) (7,774)
Other adjustments (411,261) (2,562,103)
------------- ------------
Net cash provided by operating activities 3,542,999 3,065,989
------------- ------------
Investing Activities:
- ---------------------
Net change in interest bearing deposits 99,040 549,961
Purchases of securities available for sale (38,642,358) (53,193,333)
Proceeds from sales of securities available for sale 5,069,518 1,211,805
Proceeds from maturities of securities
available for sale 22,777,891 31,724,657
Purchases of securities held to maturity - (1,374,930)
Proceeds from sales of securities held to maturity 862,568 5,317,926
Net changes in loans (5,524,062) 19,365,560
Purchase of premises and equipment (696,209) (539,130)
Other investing activities 1,137,795 716,787
------------- ------------
Net cash provided by (used in ) investing activities (14,915,817) 3,779,303
------------- ------------
Financing Activities:
Net change in
Noninterest bearing, interest bearing demand,
money market and saving deposits 2,415,130 961,600
Certificates of deposit (10,197,555) (4,569,291)
Short-term borrowings (109,466) 988,405
Proceeds from FHLB advances - 3,000,000
Repayment of FHLB advances (1,000,000) (7,000,000)
Cash dividends (1,727,254) (1,652,657)
Purchase of common stock (1,614,435) (396,766)
Exercise of stock options 273,276 -
------------- ------------
Net cash (used in) financing activities (11,960,304) (8,668,709)
------------- ------------
Net change in Cash and Cash Equivalents (23,333,122) (1,823,417)
Cash and Cash Equivalents, Beginning of Year 35,161,821 35,577,921
------------- ------------
Cash and Cash Equivalents, End of Year $11,828,699 $33,754,504
============= ============
Interest paid $ 7,807,718 $ 9,399,431
Income tax paid 1,842,767 2,730,553
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, 2003 filed
with the Securities and Exchange Commission. The consolidated condensed balance
sheet of the Company as of September 30, 2003 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, 2004, are not necessarily indicative of those expected for
the remainder of the year.
2. CASH DIVIDEND
A cash dividend of $0.17 per common share was declared on May 18, 2004 payable
on July 22, 2004, to stockholders of record as of July 1, 2004.
3. EARNINGS PER COMMON SHARE
Earnings per share were computed as follows:
Three Months Ended June 30,
2004 2003
------------------------------ ------------------------------
Weighted Weighted
Average Per-Share Average Per-Share
Income Shares Amount Income Shares Amount
---------- --------- --------- ---------- --------- ---------
Basic Earnings Per Share
Income available to common stockholders $1,135,804 3,371,266 $0.34 $1,502,968 3,428,544 $0.44
Effect of Dilutive Securities
Stock options 33,047 28,531
Diluted Earnings Per Share
Income available to common stockholders
---------- --------- --------- ---------- --------- ---------
and assumed conversions $1,135,804 3,404,313 $0.33 $1,502,968 3,457,075 $0.43
========== ========= ========= ========== ========= =========
6
PEOPLES BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
Nine Months Ended June 30,
2004 2003
-------------------------------------------------------------
Weighted Weighted
Average Per-Share Average Per-Share
Income Shares Amount Income Shares Amount
---------- --------- --------- ---------- --------- ---------
Basic Earnings Per share
Income available to common stockholders $3,521,076 3,386,496 $1.04 $4,394,164 3,439,471 $1.28
Effect of Dilutive Securities
Stock options 34,691 25,449
Diluted Earnings Per Share
Income available to common stockholders
---------- --------- --------- ---------- --------- ----------
and assumed conversions $3,521,076 3,421,187 $1.03 $4,394,164 3,464,920 $1.27
========== ========= ========= ========== ========= ==========
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, 2003
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.
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net Income
As Reported $1,135,804 $1,502,968 $3,521,076 $4,394,164
Less: Total stock-based employee
compensation cost determined
under the fair value based
method, net of income taxes - 16,091 11,560 48,273
---------- ---------- ---------- ----------
Pro forma net income $1,135,804 $1,486,877 $3,509,516 $4,345,891
========== ========== -========= ==========
Earnings per share:
Basic - as reported $ 0.34 $ 0.44 $ 1.04 $ 1.28
Basic - pro forma $ 0.34 $ 0.43 $ 1.04 $ 1.26
Diluted - as reported $ 0.33 $ 0.43 $ 1.03 $ 1.27
Diluted - pro forma $ 0.33 $ 0.43 $ 1.03 $ 1.25
7
PEOPLES BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
5. TEMPORARILY IMPAIRED INVESTMENT SECURITIES
The Company's temporarily impaired investment securities at June 30, 2004 are
shown below. Unrealized losses on federal agency, state and municipal, and
mortgage-backed securities are caused by interest rate fluctuations in the
market. Only eleven securities within these classifications have been in a loss
position for more than one year. Management has the ability to hold these
securities until final maturity, at which time the full face value will be
realized.
The marketable equity security has been in a loss position for three years.
Management believes this has been in correlation to the downturn in the general
economy and stock market. This security has recovered in excess of $300,000 in
value during the nine months ended June 30, 2004, and management believes based
on the advice of the broker, and current economic trends, the value will
continue to recover.
Less than 12 Months 12 Months or Longer Total
---------------------- --------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ---------- ---------- ---------- ----------- ----------
Federal agencies $55,013,640 $ 888,835 $ 962,882 $ 43,845 $55,976,522 $ 932,680
State and municipal 4,508,164 152,229 885,537 93,361 5,393,701 245,590
Mortgage backed securities 8,088,171 266,894 3,210,702 65,544 11,298,873 332,438
Marketable equity securities - - 4,001,056 452,131 4,001,056 452,131
----------- ---------- ---------- ---------- ----------- ----------
Total temporarily impaired $67,609,975 $1,307,958 $9,060,177 $654,881 $76,670,152 $1,962,839
=========== ========== ========== ========== =========== ==========
6. STOCK REPURCHASES
The following table details common stock repurchases made by the Company during
the nine months ended June 30, 2004 pursuant to a repurchase plan approved by
the board of directors in December, 2002 whereby the Company may repurchase up
to 300,000 shares of its common stock during the two years ending December,
2004. To date, a total of 92,754 shares have been repurchased under the plan.
8
PEOPLES BANCORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
STOCK REPURCHASES
9 MONTHS ENDED JUNE 30, 2004
SHARES
DATE REPURCHASED PRICE AMOUNT
- -------- ----------- ------ -------------
10/09/03 10,902 $22.86 $ 249,219.72
10/09/03 5,000 23.20 116,000.00
10/20/03 150 22.55 3,382.50
10/28/03 125 23.75 2,968.75
10/28/03 1,806 23.75 42,892.50
10/29/03 200 23.68 4,736.00
11/07/03 119 24.85 2,957.15
11/07/03 308 24.50 7,546.00
11/13/03 1,000 24.01 24,010.00
12/02/03 2,920 24.30 70,956.00
12/08/03 50 24.05 1,202.50
12/09/03 4,098 24.05 98,556.90
12/11/03 124 24.00 2,976.00
12/11/03 500 24.00 12,000.00
12/16/03 40 23.57 942.80
12/19/03 15 24.00 360.00
01/06/04 150 24.00 3,600.00
01/14/04 355 23.70 8,413.50
01/15/04 363 23.71 8,607.94
01/17/04 600 23.82 14,292.00
01/23/04 9,266 24.56 227,572.96
01/26/04 712 24.10 17,159.20
01/28/04 300 26.00 7,800.00
01/30/04 733 26.01 19,065.67
02/12/04 891 24.61 21,927.51
02/17/04 3,000 24.56 73,680.00
02/23/04 400 24.75 9,900.00
02/27/04 12,947 24.94 322,897.81
03/02/04 800 24.63 19,704.00
03/05/04 5,000 24.54 122,700.00
03/08/04 200 25.00 5,000.00
03/18/04 65 24.52 1,593.80
03/19/04 1,000 24.60 24,600.00
03/30/04 39 24.60 959.40
4/19/04 153 25.02 3,828.06
4/20/04 1,000 25.00 25,000.00
4/27/04 259 25.00 6,475.00
4/27/04 300 25.00 7,500.00
5/4/04 800 24.57 19,656.00
6/18/04 75 24.27 1,820.25
---------- -------------
66,765 $1,550,180.61
========= =============
9
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 18-20 of the annual
report for fiscal year 2003. 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, doubtful or loss. Credits with
delinquency levels of less than 60 days and risk ratings of satisfactory/monitor
or better are reviewed in the aggregate. Percentage factors applied to
10
PEOPLES BANCORP
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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. The impairment testing involves
estimating the implied fair value of goodwill and comparing it to the carrying
value. If the implied fair value of goodwill is lower than its carrying amount,
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, 2004 were $493,495,649, a decrease of $9,424,357 from
September 30, 2003. Significant variations in the composition of assets during
that period consisted of the following items:
o Total loans increased by $4,886,442. The increase was due primarily to the
slow-down of mortgage loan refinancing due to the slight upturn in interest
rates. Loan sales have slowed considerably as illustrated by the decrease
on gains on sale of loans from $610,537 to $77,662 for the nine-month
periods ended June 30, 2004 and 2003.
11
PEOPLES BANCORP
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
o Investment securities increased by $8,083,268. This increase was primarily
funded from a decrease in short-term interest-bearing deposits. Management
shifted funds from overnight deposits, primarily to callable agency bonds
in an effort to maintain liquidity while increasing yield until the funds
are needed to fund future loan growth.
Total liabilities were $430,061,589 at June 30, 2004 down from $438,995,152 at
September 30, 2003, due primarily to a decrease in Certificates of Deposit,
partially offset by an increase in NOW and Savings deposits.
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, 2004, and September 30, 2003, cash and
short-term interest-bearing deposits totaled $11.8 million and $35.2 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 regulatory
capital position as a dollar amount and as a percentage of assets as of June 30,
2004.
12
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
At June 30, 2004
------------------------------------------------
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) $45,454 22.0% $16,557 8.0% $20,699 10.0%
Tier 1 risk-based capital (1)
(to risk-weighted assets) $43,989 21.2% $ 8,279 4.0% $12,418 6.0%
Core Capital (1)
(to adjusted tangible assets) $43,989 11.9% $14,844 4.0% $18,556 5.0%
Core Capital (1)
(to adjusted total assets) $43,989 11.9% $ 7,422 2.0% N/A N/A
Tangible Capital (1)
(to adjusted total assets) $43,989 11.9% $ 5,567 1.5% N/A N/A
(1) as defined by regulatory agencies
The following table presents First Savings Bank's current regulatory capital
position as a dollar amount and as a percentage of assets as of June 30, 2004.
At June 30, 2004
------------------------------------------------
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) $13,405 21.6% $4,963 8.0% $6,203 10.0%
Tier 1 risk-based capital (1)
(to risk-weighted assets) $12,857 20.7% $2,481 4.0% $3,722 6.0%
Core Capital (1)
(to adjusted tangible assets) $12,857 11.0% $4,668 4.0% $5,835 5.0%
Core Capital (1)
(to adjusted total assets) $12,857 11.0% $2,334 2.0% N/A N/A
Tangible Capital (1)
(to adjusted total assets) $12,857 11.0% $1,750 1.5% N/A N/A
(1) as defined by regulatory agencies
13
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 $1,135,804 or $0.34 per share for the three months
and $3,521,076 or $1.04 per share for the nine months ended June 30, 2004 as
compared to $1,502,968 or $0.44 per share and $4,394,164 or $1.28 per share for
the same periods in 2003. The decrease for the three and nine-month periods is
due to a combination of lower net interest income partially offset by lower
provision for loan losses due to a large allowance established last year for a
significant loss discovered on a commercial loan. This decrease is combined with
lower non-interest income, primarily due to lower gains on sales of loans.
NET INTEREST INCOME
Net interest income was $4,050,582 for the three months, and $12,367,785 for the
nine months ended June 30, 2004 as compared to $4,366,616 and $13,367,500 for
the same periods in 2003. Interest income decreased $648,112, and $2,608,165, to
$6,592,868, and $20,150,992, for the three and nine months ended June 30, 2004
as compared to the same periods in 2003. The decreases were due to a combination
of lower rates earned and lower volumes of loans. While interest rates earned on
investments were lower than last year, volumes were higher causing this segment
of interest income to increase over last year. Interest expense decreased
$332,078 to $2,542,286 for the three months ended June 30, 2004 and $1,608,450
to $7,783,207 for the nine months ended June 30, 2004 due to lower rates and
volumes of deposits and borrowings.
Provision for loan loss decreased $50,852 to $21,121 and $353,061 to $104,118
for the three and nine months ended June 30, 2004 as compared to the same
periods the prior year due to a significant loss being incurred on an
outstanding commercial loan during this period last year.
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, 2004 and 2003 (dollars in thousands).
14
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
2004 2003
----------------------------- ---------------------------
Average Effective Average Effective
Balance Interest Rate Balance Interest Rate
-------- -------- --------- -------- -------- ---------
Loans $362,176 $17,512 6.45% $375,516 $20,252 7.19%
Securities 96,311 2,268 3.14% 64,353 1,894 3.92%
Other 15,242 371 3.25% 32,375 613 2.52%
-------- -------- -------- --------
Combined 473,729 20,151 5.67% 472,244 22,759 6.43%
-------- -------- -------- --------
NOW and savings
deposits 167,066 908 0.72% 159,542 1,067 0.89%
Certificates of deposit 210,465 4,576 2.90% 219,324 5,831 3.54%
Borrowings 56,720 2,299 5.40% 61,859 2,494 5.38%
-------- -------- -------- --------
Combined $434,251 7,783 2.39% $440,725 9,392 2.84%
-------- -------- -------- --------
Net interest income/
interest rate spread $12,368 3.28% $13,367 3.59%
======== ====== ======== ========
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, 2004 (in
thousands).
Rate Volume Total
------------ ----------- -----------
Loans $(2,037) $(703) $(2,740)
Securities (250) 624 374
Other 291 (533) (242)
------------ ----------- -----------
Total (1,996) (612) (2,608)
------------ ----------- -----------
NOW and savings deposits (211) 52 (159)
Certificates of deposit (1,026) (229) (1,255)
Borrowings 9 (204) (195)
------------ ----------- -----------
Total (1,228) (381) (1,609)
----------- ----------- -----------
Net interest income $ (768) $(231) $ (999)
============ =========== ===========
15
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,
2004 and September 30, 2003 (in thousands):
June 30, 2004 September 30, 2003
---------------- -------------------
TYPE OF LOAN AMOUNT % AMOUNT %
-------- ------- ------- ---------
Residential: (Dollars in thousands)
Single family units $290,838 78.8% $301,265 82.7%
2-4 family units 1,836 0.5% 1,797 0.5%
Over 4 family units 2,459 0.7% 2,593 0.7%
Home Equity Lines of Credit 22,179 6.0%
Commercial real estate 21,689 5.9% 14,750 4.1%
Land acquisition and
development 1,667 0.5% 1,480 0.4%
Consumer and other loans 27,381 7.4% 41,748 11.5%
Loans on deposits 886 0.2% 521 0.1%
-------- ------- -------- -------
368,935 100.0% 364,154 100.0%
Less:
Undisbursed portion
of loans 3,131 3,467
Deferred loan fees and
discounts 1,936 1,623
-------- --------
5,067 5,090
-------- --------
Total loans receivable 363,868 359,064
Allowance for losses
on loans 2,028 2,111
-------- --------
Net loans $361,840 $356,953
======== ========
Non-performing assets at June 30, 2004 and September 30, 2003 are as follows (in
thousands):
June 30, 2004 September 30, 2003
Non-accruing loans $ 610 $1,127
Loans contractually past due 90 days
or more other than nonaccruing 98 90
Real estate owned (REO) 1,299 854
Restructured loans 880 1,912
------------ ------------
$2,887 $3,983
============ ============
16
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 the lower of cost or the net
realizable value less estimated costs to sell. 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. Net charge-offs for the nine months ended June 30, 2004 were $123,000
and were incurred primarily due to a charge-off related to non-residential REO
during the previous quarter.
The allowances for loan and REO 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 processes, 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,
2004, was $558,481 and $1,626,270 as compared to $728,827 and $2,066,352 for the
same periods one year ago. The decrease was attributable to decreases in gains
on sales of loans. As mortgage interest rates have started to increase slightly,
the volume of loan refinancings has declined, and so loan sales has decreased
significantly. Gains on sales of loans decreased $183,380 to $52,026 for the
quarter ended June 30, 2004 as compared to the same period in 2003. The decrease
for the nine- month period ended June 30 2004 as compared to 2003 was $532,875
to $77,662. Management anticipates that the refinancing volume will continue at
a much slower pace this year than last, which may negatively impact non-interest
income. Trust income, however, increased $17,744 and $97,188 to $75,470 and
$276,552 for the three and nine-month periods ended June 30, 2004. This increase
is due to the increased volume of trust assets administered due to the merger of
the trust department of First Federal of Huntington, IN. This increased fee
income should partially offset the loss of loan sales gains.
17
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Peoples Federal Savings Bank has reached an agreement with First Federal Savings
Bank of Huntington, IN, and has started to administer First Savings trust
accounts. Regulatory approval has been received.
NON-INTEREST EXPENSE
Total non-interest expense for the three and nine months ended June 30, 2004 was
$2,865,453 and $8,508,576, as compared to $2,711,252 and $8,180,209 for the same
periods in 2003. Salaries and employee benefits increased $35,103 to $1,571,013
for the quarter ended June 30, 2004, and $277,417 to $4,750,807 for the nine
months ended June 30, 2004 due to regular salary increases.
Equipment and occupancy expense remained virtually unchanged from the prior year
at $1,262,639 for the nine months ended June 30, 2004.
INCOME TAXES
Income tax expense decreased to $1,860,285 from $2,402,300 for the nine months
ended June 30, 2004 and 2003 due to lower pretax income. The effective tax rate
for the nine months ended June 30, 2004 and 2003 were 34.5% and 35.3%
respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The OTS has issued a regulation, that 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 that
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, 2004 schedule CMR are not yet available from the OTS. Therefore, the tables
below present the results of this analysis for Peoples Federal and First Savings
as of March 31, 2004 and 2003. 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
PEOPLES BANCORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued )
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, 2004 and 2003
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 300 and down 100 basis points.
Peoples Federal Savings Bank
Interest Rate Risk As of March 31, 2004
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+300 bp 44,683 (12,270) -22% 12.08% (244)
+200 bp 50,685 (6,268) -11% 13.37% (115)
+100 bp 55,156 (1,797) -3% 14.25% (27)
0 bp 56,953 - - 14.52% -
- -100 bp 56,943 (10) 0% 14.38% (14)
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)
Presented below are the same tables for First Savings:
First Savings Bank
Interest Rate Risk As of March 31, 2004
(dollars in thousands)
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ------------------------------------------------------------------------
+300 bp 15,155 (1,203) -7% 12.76% (43)
+200 bp 16,000 (359) -2% 13.24% 5
+100 bp 16,436 77 0% 13.40% 22
0 bp 16,359 13.18%
- -100 bp 15,904 (455) -3% 12.70% (49)
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, 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 1,587 833 6% 12.59% 78
0 bp 14,754 - - 11.82% -
- -100 bp 13,612 (1,142) -8% 10.83% (99)
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, 2004, 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-Certification of Chief Executive Officer and Chief Financial Officer
pursuant tosection 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
A Form 8-K wasfiled on April 30, 2004 regarding the annual financial results of
Peoples Bancorp for the period ended March 31, 2004.
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 4, 2004 /s/Maurice F. Winkler, III
Chief Executive Officer
Date: August 4, 2004 /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. 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
c. 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 4, 2004 /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. 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
c. 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 4, 2004 /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 4, 2004 /s/Maurice F. Winkler, III
Chief Executive Officer
August 4, 2004 Deborah K. Stanger
Chief Financial Officer
24