FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 000-29949
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PEOPLES COMMUNITY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 31-1686242
- ------------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6100 West Chester Road, West Chester, Ohio 45069
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(Address of principal executive office)
Registrant's telephone number, including area code: (513) 870-3530
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 12, 2002, the latest practicable date, 2,512,638 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 19
Peoples Community Bancorp, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
PART II - OTHER INFORMATION 18
SIGNATURES 19
2
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, September 30,
ASSETS 2002 2001
Cash and due from banks $ 7,878 $ 9,839
Interest-bearing deposits in other financial institutions 8,863 4,756
------- -------
Cash and cash equivalents 16,741 14,595
Investment securities designated as available for sale - at market 1,347 1,364
Mortgage-backed securities designated as available for sale -
at market 22,993 -
Mortgage-backed securities designated as held to maturity -
at cost (approximate market value of $88) 84 -
Loans receivable - net 488,202 377,727
Office premises and equipment - at depreciated cost 10,981 8,662
Real estate acquired through foreclosure 409 -
Federal Home Loan Bank stock - at cost 9,790 7,880
Accrued interest receivable on loans 2,302 1,883
Accrued interest receivable on mortgage-backed securities 98 -
Prepaid expenses and other assets 2,328 396
Goodwill, net of accumulated amortization 4,989 2,957
Deferred federal income taxes 871 506
------- -------
Total assets $561,135 $415,970
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $328,023 $233,063
Advances from the Federal Home Loan Bank and other
borrowings 174,422 140,000
Advances by borrowers for taxes and insurance 173 312
Accrued interest payable 308 78
Other liabilities 3,277 2,959
Accrued federal income taxes 822 780
Guaranteed preferred beneficial interests in junior
subordinated debentures 12,500 -
------- -------
Total liabilities 519,525 377,192
Stockholders' equity
Common stock - 10,000,000 shares of $.01 par value authorized; 2,512,638 and
2,505,663 shares issued, as of June 30, 2002 and
September 30, 2001, respectively 25 25
Additional paid-in capital 23,538 23,139
Retained earnings - restricted 18,513 16,298
Shares acquired by stock benefit plan (524) (666)
Accumulated comprehensive income (loss), unrealized gains (losses)
on securities designated as available for sale, net of related tax effects 58 (18)
------- -------
Total stockholders' equity 41,610 38,778
------- -------
Total liabilities and stockholders' equity $561,135 $415,970
======= =======
3
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Nine months ended Three months ended
June 30, June 30,
2002 2001 2002 2001
Interest income
Loans $23,686 $15,117 $8,508 $6,272
Mortgage-backed securities 228 2,628 12 388
Investment securities 14 202 5 67
Interest-bearing deposits and other 378 530 142 189
------ ------ ----- -----
Total interest income 24,306 18,477 8,667 6,916
Interest expense
Deposits 7,446 6,305 2,490 2,525
Borrowings 3,906 5,376 1,308 1,438
------ ------ ----- -----
Total interest expense 11,352 11,681 3,798 3,963
------ ------ ----- -----
Net interest income 12,954 6,796 4,869 2,953
Provision for losses on loans 3,769 1,382 1,300 1,082
------ ------ ----- -----
Net interest income after provision
for losses on loans 9,185 5,414 3,569 1,871
Other income
Gain on sale of securities - 4,512 - 2,521
Gain on sale of branch premises and deposits 1,820 - 200 -
Other operating 265 515 91 295
------ ------ ----- -----
Total other income 2,085 5,027 291 2,816
General, administrative and other expense
Employee compensation and benefits 2,583 2,938 952 1,210
Occupancy and equipment 1,210 462 511 201
Federal deposit insurance premiums 35 23 15 9
Franchise taxes 370 355 128 147
Data processing 270 277 101 117
Other operating 1,407 1,161 591 243
Goodwill amortization 1,342 1,620 114 1,039
------ ------ ----- -----
Total general, administrative and other expense 7,217 6,836 2,412 2,966
------ ------ ----- -----
Earnings before income taxes 4,053 3,605 1,448 1,721
Federal income taxes
Current 2,374 1,941 530 958
Deferred (536) (24) - -
------ ------ ----- -----
Total federal income taxes 1,838 1,917 530 958
------ ------ ----- -----
NET EARNINGS $ 2,215 $ 1,688 $ 918 $ 763
====== ====== ===== =====
EARNINGS PER SHARE
Basic $.91 $.81 $.38 $.32
=== === === ===
Diluted $.90 $.81 $.37 $.32
=== === === ===
4
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the nine months For the three months
ended June 30, ended June 30,
2002 2001 2002 2001
Net earnings $2,215 $1,688 $918 $ 763
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $39, $923, $(1)
and $(22) for the respective periods 76 1,792 (2) (43)
Reclassification adjustment for realized gains included
in earnings, net of tax of $1,534 and $857
for the respective periods - (2,978) - (1,664)
----- ----- -- -----
Comprehensive income (loss) $2,291 $ 502 $916 $ (944)
===== ===== === =====
Accumulated comprehensive income $ 58 $ 201 $ 58 $ 201
===== ===== === =====
5
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30,
(In thousands)
2002 2001
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 2,215 $ 1,688
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts on investment and
mortgage-backed securities, net 264 (405)
Amortization of deferred loan origination fees (497) (180)
Amortization expense of stock benefit plan 541 143
Amortization and other charges related to goodwill 1,342 1,743
Depreciation and amortization - net 769 230
Provision for losses on loans 3,769 1,382
Federal Home Loan Bank stock dividends (313) (391)
Gain on securities transactions - (4,512)
Gain on sale of branch premises and deposits (1,820) -
Increase (decrease) in cash, net of acquisition of Market Financial Corporation
and Kenwood Bancorp, due to changes in:
Accrued interest receivable on loans (217) 14
Accrued interest receivable on mortgage-backed securities (79) -
Prepaid expenses and other assets (5,622) (1,580)
Accrued interest payable 117 (586)
Other liabilities 216 1,153
Federal income taxes
Current 3,728 1,665
Deferred (536) (24)
------- ------
Net cash provided by operating activities 3,877 340
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities - 7,200
Proceeds from sale of investment securities designated as
available for sale - 3,902
Purchase of mortgage-backed securities (20,264) -
Principal repayments on mortgage-backed securities 815 14,419
Proceeds from sale of mortgage-backed securities designated as
available for sale - 70,858
Proceeds from sale of loan participations 6,460 3,907
Principal repayments on loans 106,245 65,727
Loan disbursements (197,562) (171,234)
Purchase of office premises and equipment (1,778) (3,638)
Proceeds from sale of branch premises and deposits 3,218 -
Purchase of Federal Home Loan Bank stock (970) -
Acquisition of Market Financial Corporation common stock - net - (1,010)
Cash received in acquisition of Kenwood Bancorp - net 2,042 -
------- -------
Net cash used in investing activities (101,794) (9,869)
------- -------
Net cash used in operating and investing activities
(balance carried forward) (97,917) (9,529)
------- -------
6
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended June 30,
(In thousands)
2002 2001
Net cash used in operating and investing activities
(balance brought forward) $(97,917) $(9,529)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 56,494 16,829
Advances by borrowers for taxes and insurance (364) 1
Proceeds from Federal Home Loan Bank advances and other borrowings 77,250 70,500
Repayment of Federal Home Loan Bank advances (45,817) (70,000)
Proceeds from issuance of junior subordinated debentures 12,500 -
------- ------
Net cash provided by financing activities 100,063 17,330
------- ------
Net increase in cash and cash equivalents 2,146 7,801
Cash and cash equivalents at beginning of period 14,595 4,627
------- ------
Cash and cash equivalents at end of period $ 16,741 $12,428
======= ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 2,000 $ 994
======= ======
Interest on deposits and borrowings $ 11,122 $12,149
======= ======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 76 $(1,186)
======= ======
Transfers from loans to real estate acquired through foreclosure $ 523 $ 310
======= ======
Loans disbursed to facilitate sale of real estate acquired through
foreclosure $ 135 $ 412
======= ======
Fair value of assets received in acquisition of:
Market Financial Corporation $ - $56,672
======= ======
Kenwood Bancorp $ 59,990 $ -
======= ======
7
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended June 30, 2002 and 2001
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of consolidated
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.
Accordingly, these financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of Peoples Community
Bancorp, Inc. (the "Company") included in the Annual Report on Form 10-K for the
year ended September 30, 2001. However, in the opinion of management, all
adjustments (consisting of only normal recurring accruals), which are necessary
for a fair presentation of the consolidated financial statements, have been
included. The results of operations for the nine and three month periods ended
June 30, 2002 are not necessarily indicative of the results which may be
expected for the entire fiscal year.
2. Business Combinations
On March 30, 2001, Peoples Community Bancorp, Inc. (the "Company") acquired
Market Financial Corporation ("Market") for consideration of $7.8 million in
cash and 506,000 shares of common stock. Under the terms of the agreement, each
share of Market's common stock was exchanged for a combination of cash and
shares of the Company totaling $13.00 per share. The acquisition was accounted
for using the purchase method of accounting, consequently prior period amounts
were not restated.
On April 26, 2002, the Company completed its acquisition of Kenwood Bancorp,
Inc. ("Kenwood") for consideration of $25.22 per outstanding share, totaling
$7.9 million in cash. The Company acquired $56.6 million in total assets and
initially recorded approximately $3.4 million in goodwill as part of the
transaction.
3. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Peoples Community Bank (the "Bank")
and Peoples Bancorp Capital Trust I. All significant intercompany items have
been eliminated.
4. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average common
shares outstanding during the period less shares in the ESOP that are
unallocated and not committed to be released. Weighted-average common shares
deemed outstanding, which gives effect to 52,360 unallocated ESOP shares,
totaled 2,443,894 and 2,448,825 for the nine and three month periods ended June
30, 2002, respectively. Weighted-average common shares deemed outstanding, which
gives effect to 80,920 unallocated ESOP shares, totaled 2,083,462 and 2,402,813
for each of the nine and three month periods ended June 30, 2001, respectively.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued under the
Company's stock option plan. Weighted-average common shares deemed outstanding
for the purpose of computing diluted earnings per share totaled 2,470,022 and
2,479,185 for the nine and three-month periods ended June 30, 2002. There were
26,128 and 30,360 incremental shares for the nine and three-month periods ended
June 30, 2002, respectively, related to the assumed exercise of stock options
included in the calculation of diluted earnings per share. The Company had no
dilutive or potentially dilutive securities during the periods ended June 30,
2001.
8
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended June 30, 2002 and 2001
5. Effects of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets," which prescribes accounting for all purchased goodwill and
intangible assets. Pursuant to SFAS No. 142, acquired goodwill is not amortized,
but is tested for impairment at the reporting unit level annually and whenever
an impairment indicator arises. All goodwill should be assigned to reporting
units that are expected to benefit from the goodwill. When an entity reorganizes
its reporting structure, goodwill should be reallocated to reporting units based
on the relative fair values of the units. Goodwill impairment should be tested
with a two-step approach. First, the fair value of the reporting unit should be
compared to its carrying value, including goodwill. If the reporting unit's
carrying value exceeds its fair value, then any goodwill impairment should be
measured as the excess of the goodwill's carrying value over its implied fair
value. The implied fair value of goodwill should be calculated in the same
manner as goodwill is calculated for a business combination, using the reporting
units' fair value as the "purchase price." Therefore, the goodwill's implied
fair value will be the excess of the "purchase price" over the amounts allocated
to assets, including unrecognized intangible assets, and liabilities of the
reporting unit. Goodwill impairment losses should be reported in the income
statement as a separate line item within operations, except for such losses
included in the calculation of a gain or loss from discontinued operations.
An acquired intangible asset, other than goodwill, should be amortized over its
useful economic life. The useful life of an intangible asset is indefinite if it
extends beyond the foreseeable horizon. If an asset's life is indefinite, the
asset should not be amortized until the life is determined to be finite.
Intangible assets being amortized should be tested for impairment in accordance
with SFAS No. 144. Intangible assets not being amortized should be tested for
impairment, annually and whenever there are indicators of impairment, by
comparing the asset's fair value to its carrying amount.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001.
Until adoption of SFAS No. 142, existing goodwill continues to be amortized and
tested for impairment under previously existing standards. As of the date SFAS
No. 142 is adopted and based on the company's current reporting structure,
reporting units should be established; net assets should be assigned to
reporting units, unless they do not relate to a reporting unit; and goodwill
should be assigned to one or more reporting units.
Within six months of adopting SFAS No. 142, a company must have completed the
first step of the goodwill transitional impairment test: a comparison, as of the
beginning of the fiscal year, of each reporting unit's fair value with its
carrying value. If the carrying value exceeds fair value, the second step -
calculating the amount of goodwill impairment as of the beginning of the fiscal
year - would be required as soon as possible, but no later than the end of the
fiscal year. Any transitional impairment loss would be reported as a change in
accounting principle in the first interim period financial statements of the
implementation year, regardless of when the loss measurement is completed. After
completion of the first step of the transitional test, a company should disclose
which segments might have to recognize an impairment loss and when the potential
loss would be measured.
If an impairment indicator arises before the completion of the transition
testing, a full impairment test would be required as soon as possible. Any
goodwill impairment resulting from this test should be reported as an impairment
loss, not as a change in accounting principle. The adoption of SFAS No. 142,
which is required for the Company effective October 1, 2002, is expected to
result in the elimination of goodwill amortization approximating $460,000, or
$.19 per share, on an annual basis beginning in fiscal 2003. Management is
unable to predict the effect of any future impairment charges on the Company's
financial position or results of operations.
9
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company's profitability depends primarily on net interest income, which is
the difference between interest and dividend income on interest-earning assets,
principally loans, mortgage-backed securities, investment securities and
interest-earning deposits in other financial institutions, and interest expense
on interest-bearing deposits and borrowings. Net interest income is dependent
upon the level of interest rates and the extent to which such rates are
changing. The Company's profitability also depends, to a lesser extent, on the
level of other income, the provision for losses on loans, general,
administrative and other expenses and federal income taxes.
The Company's operations and profitability are subject to changes in interest
rates, applicable statutes and regulations and general economic conditions, as
well as other factors beyond management's control.
Certain statements are made in this document as to what management expects may
happen in the future. These statements usually contain the words "believe,"
"estimate," "project," "expect," "anticipate," "intend" or similar expressions.
Because these statements look to the future, they are based on management's
current expectations and beliefs. Actual results or events may differ materially
from those reflected in the forward-looking statements. Management's current
expectations and beliefs as to future events are subject to change at any time,
and no assurances can be provided that the future events will actually occur.
Discussion of Financial Condition Changes from September 30, 2001 to June 30,
2002
At June 30, 2002, the Company's assets totaled $561.1 million, an increase of
$145.2 million, or 34.9%, compared to September 30, 2001. The increase in assets
resulted primarily from the acquisition of Kenwood, which increased total assets
by $60.0 million, total deposits by $48.4 million and borrowings by $3.0
million. Additionally, the increase in assets was funded by growth in deposits
of $46.5 million and a $31.4 million increase in borrowings.
Cash and cash equivalents increased by $2.1 million over September 30, 2001
levels, to a total of $16.7 million at June 30, 2002. This increase was due
primarily to the $2.0 million of cash and interest-bearing deposits acquired in
the Kenwood transaction. Mortgage-backed securities totaled $23.1 million at
June 30, 2002, whereas the Company held no mortgage-backed securities at
September 30, 2001. The purchase of $20.3 million in mortgage-backed securities
during the period was funded primarily by the increase in deposits. In addition,
$3.7 million in mortgage-backed securities were acquired in the Kenwood
transaction.
Loans receivable increased by $110.5 million, or 29.2%, during the nine-month
period ended June 30, 2002, to a total of $488.2 million. The Company obtained
$40.3 million in loans through the acquisition of Kenwood, while loan
disbursements for the nine-month period amounted to $197.6 million, which were
partially offset by principal repayments of $106.2 million. Loan originations
during the nine-month period ended June 30, 2002 were comprised of $110.3
million of loans secured by one- to four-family residential real estate, $35.4
million of loans secured by multi-family real estate, $30.4 million of loans
secured by non-residential real estate and land and $21.5 million in commercial
lines of credit and other loans.
The allowance for loan losses totaled $7.7 million at June 30, 2002 compared to
$3.7 million at September 30, 2001. The acquisition of Kenwood contributed
$276,000 to the level of the allowance during the nine month period ended June
30, 2002 and the additional $3.8 million was added through the provision for
losses on loans due to the overall growth in the loan portfolio, a continuing
change in the composition and the relative credit risk of the loan portfolio and
a significant increase in nonperforming loans. The Company has continued to
change its loan portfolio mix, from a preponderance of one- to four-family
residential loans to an increasing amount of loans secured by multi-
10
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from September 30, 2001 to June 30,
2002 (continued)
family, nonresidential and commercial real estate, as well as unsecured loans.
Although such loans typically carry higher interest rates and may have shorter
terms than one- to four-family loans, such loans also generally have a
relatively higher degree of credit risk, as evidenced by the increase in
nonperforming loans set forth below. Nonperforming loans totaled $7.5 million
and $783,000 at June 30, 2002 and September 30, 2001, respectively. The $6.7
million increase in nonperforming loans resulted primarily from a $3.5 million
loan concentration consisting mostly of a series of construction loans to a
financially troubled builder. Management has thoroughly reviewed the Company's
exposure to this builder, its lien position, the status of the relevant
construction projects and other pertinent factors. Based upon such review and
the Company's internal loan review and analysis procedures, the Company provided
an additional $1.0 million to its allowance for loan losses due to this lending
relationship. Presently, management does not anticipate any further unreserved
loss with respect to the lending relationship. Additionally, the increase in
nonperforming loans resulted from a $3.2 million multi-family real estate loan.
Management's review of this loan indicates that this loan is adequately reserved
and no additional loss is anticipated on this loan. It is management's belief
that the remaining $800,000 of nonperforming loans, comprised primarily of one-
to four-family loans, are adequately reserved and no unreserved losses are
presently anticipated on these nonperforming loans.
The allowance represented 1.55% and 0.87% of total loans at June 30, 2002 and
September 30, 2001, respectively. The allowance for loan losses represented
103.5% and 467.7% of nonperforming loans as of June 30, 2002 and September 30,
2001, respectively. Although management believes that its allowance for loan
losses at June 30, 2002 was appropriate based upon the available facts and
circumstances, there can be no assurance that additions to such allowance will
not be necessary in future periods, which would adversely affect the Company's
results of operations.
Deposits totaled $328.0 million at June 30, 2002, an increase of $95.0 million,
or 40.7%, over September 30, 2001 levels. The increase in deposits was primarily
attributable to the addition of $48.4 million in deposits in connection with the
acquisition of Kenwood, as well as management's efforts to maintain deposit
growth through marketing strategies. Proceeds from deposit growth were generally
used to fund new loan originations and the aforementioned purchases of
mortgage-backed securities.
Advances from the FHLB and other borrowings totaled $174.4 million at June 30,
2002, an increase of $34.4 million, or 24.6%, compared to September 30, 2001
totals. Advances of $3.0 million acquired in the Kenwood acquisition and new
advances totaling $77.2 million obtained during the period, were partially
offset by $45.8 million in repayments during the period. Proceeds obtained from
the advances were generally used to fund new loan originations.
In November 2001, a Delaware statutory business trust owned by the Company (the
"Trust"), issued $12.5 million of mandatorily redeemable debt securities. A
portion of the proceeds from the debt securities issued by the Trust is included
in the Bank's regulatory capital, specifically as a component of tangible and
core capital. The subordinated debentures are the sole assets of the Trust, and
the Company owns all of the common securities of the Trust. The net proceeds
received by the Company from the sale of the debt securities were primarily used
to fund new loan originations and to repay FHLB advances.
Stockholders' equity totaled $41.6 million at June 30, 2002, an increase of $2.8
million, or 7.3%, over September 30, 2001 levels. The increase resulted
primarily from net earnings of $2.2 million, amortization of the stock benefit
plans totaling $541,000 and an increase in net unrealized gains on available for
sale securities totaling $76,000 during the period.
The Bank is required to meet minimum capital standards promulgated by the Office
of Thrift Supervision ("OTS"). At June 30, 2002, the Bank's regulatory capital
was well in excess of the minimum capital requirements.
11
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended June 30, 2002
and 2001
General
The inclusion of the accounts of Market and Kenwood, which the Company acquired
in March 2001 and April 2002, respectively, in transactions accounted for using
the purchase method of accounting, significantly contributed to the increases in
the level of income and expense during the nine month period ended June 30, 2002
compared to the nine month period ended June 30, 2001. The consolidated
statement of earnings for the nine month period ended June 30, 2001 was not
restated for the acquisition.
Net earnings amounted to $2.2 million for the nine months ended June 30, 2002,
an increase of $527,000, or 31.2%, compared to the $1.7 million of net earnings
reported for the same period in fiscal 2001. The increase in earnings resulted
primarily from a $6.2 million increase in net interest income, which was
partially offset by a $2.4 million increase in the provision for losses on
loans, a $2.9 million decrease in other income and a $381,000 increase in
general, administrative and other expense.
Net Interest Income
Interest income on loans increased by $8.6 million, or 56.7%, during the
nine-month period ended June 30, 2002, compared to the 2001 period, due
primarily to a $174.1 million, or 68.5%, increase in the average portfolio
balance outstanding, which was partially offset by a 56 basis point decrease in
the weighted-average yield, to 7.37% in the 2002 period. The increase in the
average balance was due to continued strong loan origination volume and the
acquisition of Kenwood, while the decrease in yield reflected a general decrease
in market rates and the corresponding downward repricing of adjustable rate
loans, as well as the downward repricing of new loans relative to loans in the
portfolio. Interest income on investment and mortgage-backed securities and
interest-bearing deposits and other decreased by $2.7 million, or 81.5%, due
primarily to a $45.4 million, or 63.6%, decrease in the average balance of the
related assets and a 309 basis point decrease in the weighted-average yield, to
3.18% for the 2002 period. The proceeds from disposition of these assets were
redeployed to fund new loan originations.
Interest expense on deposits increased by $1.1 million, or 18.1%, due primarily
to an increase of approximately $85.6 million, or 51.8%, in the average balance
of deposits outstanding, which was partially offset by a 112 basis point
decrease in the weighted-average cost of deposits, to 3.96% in the 2002 period.
Interest expense on borrowings decreased by $1.5 million, or 27.3%, due
primarily to a 252 basis point decrease in the average cost of borrowings, to
3.06% in the 2002 period, which was partially offset by a $41.9 million, or
32.6%, increase in the average balance of borrowings outstanding year to year.
The decreases in the average yields on interest-earning assets and the average
cost of interest-bearing liabilities were due primarily to the overall decrease
in interest rates in the economy during 2001. This low interest rate environment
continued through the first six months of 2002.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $6.2 million, or 90.6%, to a total of $13.0
million for the nine months ended June 30, 2002, compared to the same period in
2001. The interest rate spread increased to 3.54% for the nine months ended June
30, 2002, from 2.26% for the 2001 period, while the net interest margin
increased to 3.80% for the nine months ended June 30, 2002, compared to 2.78%
for the same period in 2001. The increase in the interest rate spread was due in
large part to the continued origination of higher yielding loans secured by
multi-family and commercial real estate, as well as unsecured loans, coupled
with the decreased cost of interest-bearing liabilities.
12
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended June 30, 2002
and 2001 (continued)
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical loss experience, the volume and type of lending conducted by the
Bank, the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market area,
and other factors related to the collectibility of the Bank's loan portfolio.
The Company recorded a provision for losses on loans totaling $3.8 million for
the nine-month period ended June 30, 2002, compared to $1.4 million recorded in
the same period in 2001. The provision recorded during the current nine-month
period was due primarily to growth in the loan portfolio, a continuing change in
the composition and the relative credit risk of the loan portfolio and a
significant increase in nonperforming loans. Loans receivable, net increased
$110.5 million, or 29.2%, to $488.2 million at June 30, 2002, compared to $377.7
million at September 30, 2001. In addition, the Company has continued to change
its loan portfolio mix, from a preponderance of one- to four-family residential
loans to an increasing amount of loans secured by multi-family, nonresidential
and commercial real estate, as well as unsecured loans. Loans secured by
multi-family, nonresidential and commercial real estate amounted to an aggregate
balance of approximately $169.0 million and $128.3 million at June 30, 2002 and
September 30, 2001, respectively, while loans secured by one- to four-family
residential real estate totaled $322.1 million and $252.5 million at those
respective dates. Although such loans typically carry higher interest rates and
may have shorter terms than one- to four-family loans, such loans also generally
have a relatively higher degree of credit risk, as evidenced by the increase in
nonperforming loans set forth below. Nonperforming loans totaled $7.5 million
and $783,000 at June 30, 2002 and September 30, 2001, respectively. The $6.7
million increase in nonperforming loans resulted primarily from a $3.5 million
loan concentration consisting mostly of a series of construction loans to a
financially troubled builder. Management has thoroughly reviewed the Company's
exposure to this builder, its lien position, the status of the relevant
construction projects and other pertinent factors. Based upon such review and
the Company's internal loan review and analysis procedures, the Company provided
an additional $1.0 million to its allowance for loan losses due to this lending
relationship. Presently, management does not anticipate any further unreserved
loss with respect to the lending relationship. Additionally, the increase in
nonperforming loans resulted from a $3.2 million multi-family real estate loan.
Management's review of this loan indicates that this loan is adequately
reserved. It is management's belief that the remaining $800,000 of nonperforming
loans, comprised of one to four family loans, are adequately reserved and no
unreserved losses are presently anticipated on nonperforming loans. While
management presently believes the Company's allowance for loan losses is
sufficient to absorb inherent losses in the portfolio, there can be no assurance
that the allowance will be sufficient to cover losses on nonperforming assets in
the future.
Other Income
Other income totaled $2.1 million for the nine months ended June 30, 2002, a
decrease of $2.9 million, or 58.5%, compared to the $5.0 million recorded for
the nine months ended June 30, 2001. The decrease was due to the effects of a
$4.5 million gain on securities transactions recorded during the nine months
ended June 30, 2001, which was partially offset by a $1.8 million gain on the
sales of branch premises and deposits during the 2002 period. No gain on sale of
securities was recognized during the 2002 period.
13
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended June 30, 2002
and 2001 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $7.2 million for the nine
months ended June 30, 2002, an increase of $381,000, or 5.6%, compared to the
nine month period ended June 30, 2001. This increase resulted primarily from a
$748,000, or 161.9%, increase in occupancy and equipment and a $246,000, or
21.2%, increase in other operating expense, which were partially offset by a
$278,000, or 17.2%, decrease in amortization and other charges related to
goodwill and a $355,000, or 12.1%, decrease in employee compensation and
benefits. The increase in occupancy and equipment expense reflects increased
depreciation and maintenance costs associated with the new main office and
additions and improvements made at several branch office locations. These
improvements reflect the continuing effects of the Company's previously
announced commitment to expand its branch office network through the acquisition
and construction of new branch facilities.
The increase in other operating expense was due primarily to increases in legal
and advertising expenses, and pro-rata increases related to the Company's
overall growth year to year. The decrease in amortization and other charges
related to goodwill was a result of the effects of an acceleration of the
goodwill charge during the nine months ended June 30, 2001, due to the sale of
significant amounts of interest-earning assets acquired in the Harvest Home
acquisition in fiscal 2000. The decrease in employee compensation and benefit
expense was primarily due to a $465,000 charge recorded for vested obligations
under a retirement plan during the nine months ended June 30, 2001, which was
partially offset by normal merit increases.
Federal Income Taxes
The provision for federal income taxes totaled $1.8 million for the nine months
ended June 30, 2002, a decrease of $79,000, or 4.1%, compared to the $1.9
million provision recorded in the same period in 2001. This decrease resulted
primarily from the effects of merger expenses from the 2001 nine-month period,
which were nondeductible for federal income tax purposes, partially offset by a
decrease in nondeductible goodwill amortization and an increase in earnings
before taxes of $448,000, or 12.4%. The Company's effective tax rates were 45.3%
and 53.2% for the nine-month periods ended June 30, 2002 and 2001, respectively.
Comparison of Operating Results for the Three-Month Periods Ended June 30, 2002
and 2001
General
The inclusion of the accounts of Kenwood, which the Company acquired in April
2002, in a transaction accounted for using the purchase method of accounting,
significantly contributed to the increases in the level of income and expense
during the three month period ended June 30, 2002 compared to the three month
period ended June 30, 2001. The consolidated statement of earnings for the three
month period ended June 30, 2001 was not restated for the acquisition.
Net earnings amounted to $918,000 for the three months ended June 30, 2002, an
increase of $155,000, or 20.3%, compared to the $763,000 of net earnings
reported for the same period in 2001. The increase in earnings resulted
primarily from a $1.9 million increase in net interest income, a $554,000
decrease in general, administrative and other expense and a $428,000 decrease in
provision for federal income taxes, partially offset by a $2.5 million decrease
in other income and a $218,000 increase in the provision for losses on loans.
14
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended June 30, 2002
and 2001 (continued)
Net Interest Income
Interest income on loans increased by $2.2 million, or 35.7%, during the
three-month period ended June 30, 2002, compared to the 2001 period, due
primarily to a $150.7 million, or 47.4%, increase in the average portfolio
balance outstanding, which was partially offset by a 63 basis point decrease in
the weighted-average yield, to 7.26% for the 2002 period. The increase in the
average balance was due to the acquisition of Kenwood and the continued strong
loan origination volume, while the decrease in yield reflected a general
decrease in market rates and the corresponding downward repricing of adjustable
rate loans, as well as the downward repricing of new loans relative to loans in
the portfolio. Interest income on investment and mortgage-backed securities and
interest-bearing deposits and other decreased by $485,000, or 75.3%, due
primarily to a $14.4 million, or 31.6%, decrease in the average balance of the
related assets and a 360 basis point decrease in the weighted-average yield, to
2.04% in the 2002 period. The proceeds from disposition of these assets were
redeployed to fund new loan originations.
Interest expense on deposits decreased by $35,000, or 1.4%, due primarily to a
150 basis point decrease in the weighted-average cost of deposits, to 3.57% for
the 2002 period, which was partially offset by an increase of approximately
$79.7 million, or 40.0%, in the average balance of deposits outstanding.
Interest expense on borrowings decreased by $130,000, or 9.0%, due primarily to
a 161 basis point decrease in the average cost of borrowings, to 2.76% for the
2002 period, which was partially offset by a $58.2 million, or 44.3%, increase
in the average balance of borrowings outstanding. The proceeds from deposits and
borrowings were generally used to fund new loan originations during the period.
The decreases in the average yield on interest-earning assets and the average
cost of interest-bearing liabilities were due primarily to the overall decrease
in interest rates in the economy during 2001. This low interest rate environment
continued through the first six months of 2002.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $1.9 million, or 64.9%, to a total of $4.9
million for the three months ended June 30, 2002, compared to the same quarter
in 2001. The interest rate spread increased to 3.69% for the three months ended
June 30, 2002, from 2.81% for the 2001 period, while the net interest margin
increased to 3.90% for the three months ended June 30, 2002, compared to 3.25%
for the same period in 2001. The increase in the interest rate spread was due in
large part to the continued origination of higher yielding loans secured by
multi-family and commercial real estate, as well as unsecured loans, coupled
with the decreased cost of interest-bearing liabilities.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical loss experience, the volume and type of lending conducted by the
Bank, the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market area,
and other factors related to the collectibility of the Bank's loan portfolio.
The Company recorded a provision for losses on loans totaling $1.3 million for
the three-month period ended June 30, 2002, compared to $1.1 million recorded in
the same quarter in 2001. The provision recorded during the current three-month
period was due primarily to growth in the loan portfolio, a continuing change in
the composition and the relative credit risk of the loan portfolio and a
significant increase in nonperforming loans. Loans receivable, net increased
$110.5 million, or 29.2%, to $488.2 million at June 30, 2002, compared to $377.7
million at September 30, 2001. In addition, the Company has continued to change
its loan portfolio mix, from a preponderance of one- to four-family residential
loans to an increasing amount of loans secured by multi-family, nonresidential
and commercial real estate, as well as unsecured loans. Although such loans
typically carry higher interest rates and may have shorter
15
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended June 30, 2002
and 2001 (continued)
Provision for Losses on Loans (continued)
terms than one- to four-family loans, such loans also generally have a
relatively higher degree of credit risk, as evidenced by the increase in
nonperforming loans set forth below. Nonperforming loans totaled $7.5 million
and $783,000 at June 30, 2002 and September 30, 2001, respectively. The $6.7
million increase in nonperforming loans resulted primarily from a $3.5 million
loan concentration consisting primarily of a series of construction loans to a
financially troubled builder. Management has thoroughly reviewed the Company's
exposure to this builder, its lien position, the status of the relevant
construction projects and other pertinent factors. Based upon such review and
the Company's internal loan review and analysis procedures, the Company provided
an additional $1.0 million to its allowance for loan losses due to this lending
relationship. Presently, management does not anticipate any further unreserved
loss with respect to the lending relationship. Additionally, the increase in
nonperforming loans resulted from a $3.2 million multi-family real estate loan.
Management's review of this loan indicates that this loan is adequately
reserved. It is management's belief that the remaining $800,000 of nonperforming
loans, comprised of one to four family loans, are adequately reserved and no
unreserved losses are presently anticipated on nonperforming loans. While
management presently believes the Company's allowance for loan losses is
sufficient to absorb inherent losses in the portfolio, there can be no assurance
that the allowance will be sufficient to cover losses on nonperforming assets in
the future.
Other Income
Other income totaled $291,000 for the three months ended June 30, 2002, a
decrease of $2.5 million, or 89.7%, compared to the $2.8 million recorded for
the three months ended June 30, 2001. The decrease was due to the effects of
$2.5 million in gains on securities transactions recorded during the quarter
ended June 30, 2001. No gains were recognized on sales of securities during the
2002 period.
General, Administrative and Other Expense
General, administrative and other expense totaled $2.4 million for the three
months ended June 30, 2002, a decrease of $554,000, or 18.7%, compared to the
same quarter in 2001. This decrease resulted primarily from a decrease of
$925,000, or 89.0%, in amortization and other charges related to goodwill and a
$258,000, or 21.3%, decrease in employee compensation and benefits, which were
partially offset by a $310,000, or 154.2%, increase in occupancy and equipment
expense, and a $348,000, or 143.2%, increase in other operating expenses.
The decrease in amortization and other charges related to goodwill was a result
of the effects of an acceleration of the goodwill charge during the three months
ended June 30, 2001, due to the sale of significant amounts of interest-earning
assets acquired in the Harvest Home acquisition in 2000. The decrease in
employee compensation and benefits expense was due primarily to an increase in
deferred loan origination costs attendant to the increase in loan volume year to
year. The increase in occupancy and equipment expense reflects increased
depreciation and maintenance costs associated with additions and improvements
made at several branch office locations. These improvements reflect the
continuing effects of the Company's previously announced commitment to expand
its branch office network through the acquisition and construction of new branch
facilities. The increase in other operating expense was due primarily to
increased legal and advertising costs as well as pro-rata increases related to
the Company's overall growth year to year.
16
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended June 30, 2002
and 2001 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $530,000 for the three months
ended June 30, 2002, a decrease of 428,000, or 44.7%, compared to the $958,000
provision recorded in the 2001 quarter. This decrease resulted primarily from
the effects of merger expenses included in the 2001 three-month period, which
were nondeductible for federal income tax purposes, coupled with a decrease in
earnings before taxes of $273,000, or 15.9%. The Company's effective tax rates
were 36.6% and 55.7% for the three-month periods ended June 30, 2002 and 2001,
respectively.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have been
prepared in accordance with instructions to Form 10-Q, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in relative purchasing power over time due
to inflation.
Unlike most industrial companies, virtually all of the Bank's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. In
addition, in those and other portions of this document, the words "anticipate,"
"believe," "estimate," "except," "intend," "should" and similar expressions, or
the negative thereof, as they relate to the Company or the Company's management,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future looking events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
17
Peoples Community Bancorp, Inc.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None
Exhibits:
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2002 By: /s/Jerry D. Williams
---------------------- -------------------------------
Jerry D. Williams
President
Date: August 14, 2002 By: /s/Thomas J. Noe
---------------------- -------------------------------
Thomas J. Noe
Chief Financial Officer
19