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 December 31, 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)
Maryland 31-1686242
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(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 [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
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As of February 14, 2003, the latest practicable date, 2,512,615 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 11
PART II - OTHER INFORMATION 16
SIGNATURES 17
CERTIFICATIONS 18
2
PEOPLES COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, September 30,
ASSETS 2002 2002
Cash and due from banks $ 10,086 $ 4,460
Interest-bearing deposits in other financial institutions 14,050 22,177
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Cash and cash equivalents 24,136 26,637
Investment securities designated as available for sale - at market 1,811 1,231
Mortgage-backed securities designated as available for sale - at market 58,502 18,763
Loans receivable - net 503,463 504,012
Office premises and equipment - at depreciated cost 10,984 10,973
Real estate acquired through foreclosure - 97
Federal Home Loan Bank stock - at cost 10,019 9,907
Accrued interest receivable on loans 2,059 2,264
Accrued interest receivable on mortgage-backed securities 260 77
Prepaid expenses and other assets 385 621
Goodwill, net of accumulated amortization 4,875 4,875
Deferred federal income taxes 2,535 2,175
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Total assets $619,029 $581,632
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $390,386 $369,080
Advances from the Federal Home Loan Bank 167,500 152,500
Other borrowed money 825 450
Guaranteed preferred beneficial interests in junior subordinated debentures 12,500 12,500
Advances by borrowers for taxes and insurance 162 189
Accrued interest payable 715 843
Accrued federal income taxes 75 151
Other liabilities 2,701 2,929
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Total liabilities 574,864 538,642
Stockholders' equity
Common stock - 15,000,000 shares of $.01 par value authorized;
2,512,615 shares issued 25 25
Additional paid-in capital 23,966 23,931
Retained earnings - restricted 20,413 19,447
Shares acquired by stock benefit plan (428) (476)
Accumulated comprehensive income, unrealized gains on
securities designated as available for sale, net of related tax effects 189 63
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Total stockholders' equity 44,165 42,990
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Total liabilities and stockholders' equity $619,029 $581,632
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3
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 31,
(In thousands, except share data)
2002 2001
Interest income
Loans $9,054 $7,435
Mortgage-backed securities 277 93
Investment securities 10 4
Interest-bearing deposits and other 202 134
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Total interest income 9,543 7,666
Interest expense
Deposits 3,071 2,648
Borrowings 1,762 1,444
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Total interest expense 4,833 4,092
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Net interest income 4,710 3,574
Provision for losses on loans 1,051 1,057
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Net interest income after provision
for losses on loans 3,659 2,517
Other income
Gain on sale of branch offices - 89
Other operating 152 77
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Total other income 152 166
General, administrative and other expense
Employee compensation and benefits 1,137 794
Occupancy and equipment 441 282
Franchise taxes 118 112
Data processing 112 81
Other operating 537 348
Amortization and other charges related to goodwill - 114
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Total general, administrative and other expense 2,345 1,731
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Earnings before income taxes 1,466 952
Federal income taxes
Current 925 903
Deferred (425) (536)
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Total federal income taxes 500 367
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NET EARNINGS $ 966 $ 585
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EARNINGS PER SHARE
Basic $.39 $.24
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Diluted $.39 $.24
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4
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31,
(In thousands)
2002 2001
Net earnings $ 966 $585
Other comprehensive income, net of tax:
Unrealized holding gains on securities during the period,
net of taxes of $65 and $62 for the respective periods 126 121
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Comprehensive income $1,092 $706
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Accumulated comprehensive income $ 189 $103
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5
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(In thousands)
2002 2001
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 966 $ 585
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums on investment and
mortgage-backed securities, net 150 -
Amortization of deferred loan origination fees (410) (106)
Amortization expense of stock benefit plan 48 127
Compensation expense related to vested stock options 35 -
Amortization and other charges related to goodwill - 114
Depreciation and amortization 197 121
Provision for losses on loans 1,051 1,057
Federal Home Loan Bank stock dividends (112) (109)
Investment securities dividends (6) -
Gain on sale of branch offices - (89)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 205 (101)
Accrued interest receivable on mortgage-backed securities (183) (41)
Prepaid expenses and other assets 236 (4,718)
Accrued interest payable (128) 218
Other liabilities (255) (332)
Federal income taxes
Current (76) 2,257
Deferred (425) (536)
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Net cash provided by (used in) operating activities 1,293 (1,553)
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities (43,151) (10,000)
Principal repayments on mortgage-backed securities 3,379 56
Purchase of investment securities (500) -
Principal repayments on loans 78,291 36,876
Loan disbursements (78,360) (68,195)
Proceeds from sale of loan participations 74 2,440
Purchase of office premises and equipment (208) (794)
Proceeds from sale of branch offices - 132
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Net cash used in investing activities (40,475) (39,485)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 21,306 16,130
Proceeds from Federal Home Loan Bank advances and
other borrowings 15,375 23,300
Repayments of Federal Home Loan Bank advances - (16,300)
Proceeds from issuance of junior subordinated debentures - 12,500
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Net cash provided by financing activities 36,681 35,630
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Net decrease in cash and cash equivalents (2,501) (5,408)
Cash and cash equivalents at beginning of period 26,637 14,595
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Cash and cash equivalents at end of period $24,136 $ 9,187
====== =======
6
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended December 31,
(In thousands)
2002 2001
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $1,000 $1,000
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Interest on deposits and borrowings $4,961 $3,874
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Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available
for sale, net of related tax effects $ 126 $ 121
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Transfers from loans to real estate acquired through
foreclosure $ 47 $ 33
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Loans disbursed to facilitate sale of real estate acquired
through foreclosure $ 193 $ -
===== =====
7
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended December 31, 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. ("Peoples Bancorp" or the "Company") included in the Annual Report
on Form 10-K for the year ended September 30, 2002. 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 three-month
period ended December 31, 2002 are not necessarily indicative of the results
which may be expected for the entire fiscal year.
2. Business Combination
On April 26, 2002, Peoples Community Bancorp, Inc. (the "Company") completed its
acquisition of Kenwood Bancorp, Inc. ("Kenwood") for consideration of $25.22 per
outstanding share, totaling $7.9 million in cash. Kenwood was liquidated into
Peoples Community Bank and Kenwood's wholly-owned banking subsidiary, Kenwood
Savings Bank, became a wholly-owned subsidiary of Peoples Community Bank. The
Corporation acquired $56.6 million in total assets and recorded approximately
$3.4 million in goodwill as a result of the transaction. Future references to
"Peoples" or the "Bank" include both Peoples and Kenwood Savings Bank.
3. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, the Bank and Peoples Bancorp Capital
Trust I. All significant intercompany items have been eliminated.
4. Earnings Per Share
Basic earnings per share is based upon the weighted-average shares outstanding
during the period, less 42,840 and 66,640 unallocated ESOP shares, 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. The computations were as follows:
2002 2001
Weighted-average common shares
outstanding (basic) 2,465,067 2,417,093
Dilutive effect of assumed exercise
of stock options 38,444 21,243
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Weighted-average common shares
outstanding (diluted) 2,503,511 2,438,336
========= =========
8
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 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
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.
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. 121. 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.
Management adopted SFAS No. 142 effective October 1, 2002, as required.
Adoption of SFAS No. 142 will result in the elimination of annual goodwill
amortization expense of approximately $460,000.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 carries over the recognition and
measurement provisions in SFAS No. 121. Accordingly, an entity must recognize an
impairment loss if the carrying value of a long-lived asset or asset group (a)
is not recoverable and (b) exceeds its fair value. Similar to SFAS No. 121, SFAS
No. 144 requires an entity to test an asset or asset group for impairment
whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable. SFAS No. 144 differs from SFAS No. 121 in that it
provides guidance on estimating future cash flows to test recoverability. An
entity may use either a probability-weighted approach or best-estimate approach
in developing estimates of cash flows to test recoverability. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. Management
adopted SFAS No. 144 effective October 1, 2002, without material effect on the
Company's financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 provides financial accounting
and reporting guidance for costs associated with exit or disposal activities,
including one-time termination benefits, contract termination costs other than
for a capital lease, and costs to consolidate facilities or relocate employees.
SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002. SFAS No. 146 is not expected to have a material effect on the
Company's financial condition or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Accounting for Certain Financial
Institutions: An Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9," which removes acquisitions of financial institutions from
the scope of SFAS No. 72, "Accounting for Certain Acquisitions of Banking and
Thrift Institutions," except for transactions between mutual enterprises.
Accordingly, the excess of the fair value of liabilities assumed over the fair
value of tangible and intangible assets acquired in a business combination
should be recognized and accounted for as goodwill in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets."
9
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 2002 and 2001
5. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 147 also requires that the acquisition of a less-than-whole financial
institution, such as a branch, be accounted for as a business combination if the
transferred assets and activities constitute a business. Otherwise, the
acquisition should be accounted for as the acquisition of net assets.
SFAS No. 147 also amends the scope of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include long-term customer
relationship assets of financial institutions (including mutual enterprises)
such as depositor- and borrower-relationship intangible assets and credit
cardholder intangible assets.
The provisions of SFAS No. 147 related to unidentifiable intangible assets and
the acquisition of a less-than-whole financial institution are effective for
acquisitions for which the date of acquisition is on or after October 1, 2002.
The provisions related to impairment of long-term customer relationship assets
are effective October 1, 2002. Transition provisions for previously recognized
unidentifiable intangible assets are effective on October 1, 2002, with earlier
application permitted.
Management adopted SFAS No. 147 on October 1, 2002, without material effect on
the Company's financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. SFAS No. 148 is not expected to have a material effect on the Company's
financial position or results of operations.
10
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Peoples Bancorp'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,
principally on interest-bearing deposits and borrowings from the Federal Home
Loan Bank of Cincinnati. Net interest income is dependent upon the level of
interest rates and the extent to which such rates are changing. Peoples
Bancorp'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.
Peoples Bancorp'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.
Discussion of Financial Condition Changes from September 30, 2002 to December
31, 2002
At December 31, 2002, the Company's assets totaled $619.0 million, an increase
of $37.4 million, or 6.4%, compared to September 30, 2002. The increase in
assets resulted primarily from an increase of $39.7 million in mortgage-backed
securities, partially funded by a $21.3 million increase in deposits and a $15.4
million increase in advances from the Federal Home Loan Bank and other
borrowings.
Cash and cash equivalents decreased by $2.5 million from September 30, 2002
levels, to a total of $24.1 million at December 31, 2002. Mortgage-backed
securities totaled $58.5 million at December 31, 2002, an increase of $39.7
million, or 211.8%, compared to September 30, 2002. The purchase of $43.2
million in mortgage-backed securities during the period was partially offset by
$3.4 million in principal repayments.
Loans receivable totaled $503.5 million at December 31, 2002, a decrease of
$549,000, or 0.1%, from September 30, 2002 levels. Loan originations totaling
$78.4 million during the three-month period ended December 31, 2002 were
substantially offset by principal repayments of $78.3 million. Loan originations
were comprised of $34.7 million of loans secured by one- to four-family
residential real estate, $18.7 million of loans secured by multi-family real
estate, $15.8 million of loans secured by commercial real estate and land and
$9.2 million in commercial lines of credit and other loans.
The allowance for loan losses totaled $8.8 million at December 31, 2002 compared
to $7.7 million at September 30, 2002. Due primarily to a continuing change in
the composition and the relative credit risk of the loan portfolio, $1.1 million
was added through the provision for losses on loans during the quarter ended
December 31, 2002. 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 and commercial real estate, construction
loans, as well as commercial lines of credit and 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. Nonperforming loans totaled $4.6 million and $7.5 million at
December 31, 2002 and September 30, 2002, respectively. The $2.9 million
decrease in nonperforming loans resulted primarily from the restructure of a
11
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, 2002 to December
31, 2002 (continued)
$3.2 million multi-family real estate loan, which is currently performing in
accordance with the restructured terms. At December 31, 2002, approximately $2.8
million of the nonperforming loans consisted of a series of construction loans
to a financially troubled builder. The remaining $1.8 million of nonperforming
loans consisted of $372,000 secured by commercial and non-residential real
estate and $1.4 million secured by one-to-four family residential loans. It is
management's belief that the nonperforming loans are adequately reserved and no
unreserved losses are presently anticipated on these nonperforming loans.
In spite of the decrease in non-performing loans, the Bank's internally
classified loans increased by $6.7 million, or 53.3%, to a total of $19.2
million at December 31, 2002, compared to September 30, 2002. The increase was
due primarily to the classification of $1.9 million in construction loans for
single-family residences and $4.1 million in loans partially secured by
commercial real estate and equipment.
The allowance for loan losses represented 1.69% and 1.37% of total loans at
December 31, 2002 and September 30, 2002, respectively. The allowance for loan
losses represented 188.8% and 102.2% of nonperforming loans as of December 31,
2002 and September 30, 2002, respectively. Although management believes that its
allowance for loan losses at December 31, 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 $390.4 million at December 31, 2002, an increase of $21.3
million, or 5.8%, over September 30, 2002 levels. The increase in deposits was
primarily attributable to management's efforts to maintain deposit growth
through marketing strategies. Proceeds from deposit growth were generally used
to fund the aforementioned purchases of mortgage-backed securities.
Advances from the Federal Home Loan Bank and other borrowings totaled $168.3
million at December 31, 2002, an increase of $15.4 million, or 10.1%, compared
to September 30, 2002 totals. Proceeds obtained from the advances and other
borrowings were generally used to purchase mortgage-backed securities and
investment securities.
Stockholders' equity totaled $44.2 million at December 31, 2002, an increase of
$1.2 million, or 2.7%, over September 30, 2002 levels. The increase resulted
primarily from net earnings of $966,000, amortization effects of the stock
benefit plan totaling $48,000 and an increase in net unrealized gains on
available for sale securities totaling $126,000 during the period.
The Bank is required to meet minimum capital standards promulgated by the Office
of Thrift Supervision ("OTS"). At December 31, 2002, the Bank's regulatory
capital was well in excess of the minimum capital requirements.
Comparison of Operating Results for the Three-Month Periods Ended December 31,
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 December 31, 2002 compared to the three
month period ended December 31, 2001. In accordance with the purchase method of
accounting, the consolidated statement of earnings for the three-month period
ended December 31, 2001 was not restated for the acquisition.
12
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 December 31,
2002 and 2001 (continued)
General (continued)
Net earnings amounted to $966,000 for the three months ended December 31, 2002,
an increase of $381,000, or 65.1%, compared to the $585,000 of net earnings
reported for the same period in 2001. The increase in earnings resulted
primarily from a $1.1 million increase in net interest income, partially offset
by a $614,000 increase in general, administrative and other expense and a
$133,000 increase in the provision for federal income taxes.
Net Interest Income
Interest income on loans increased by $1.6 million, or 21.8%, during the
three-month period ended December 31, 2002, compared to the 2001 period, due
primarily to a $111.7 million, or 28.0%, increase in the average portfolio
balance outstanding, which was partially offset by a 36 basis point decrease in
the weighted-average yield, to 7.10% 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 lower pricing of new loans relative to loans in the
portfolio. Interest income on investment and mortgage-backed securities and
interest-bearing deposits and other increased by $258,000, or 111.7%, due
primarily to a $51.9 million, or 242.0%, increase in the average balance of the
related assets, partially offset by a 164 basis point decrease in the
weighted-average yield, to 2.67% in the 2002 period. The increase in the average
balance of such assets was primarily due to the investment of excess funds from
deposit growth and advances from the Federal Home Loan Bank.
Interest expense on deposits increased by $423,000, or 16.0%, due primarily to
an increase of approximately $139.5 million, or 59.0%, in the average balance of
deposits outstanding, which included the addition of $48.4 million in deposits
from the acquisition of Kenwood, partially offset by a 121 basis point decrease
in the weighted-average cost of deposits, to 3.27% for the 2002 period. Interest
expense on borrowings increased by $318,000, or 22.0%, due primarily to a $23.5
million, or 15.7%, increase in the average balance of borrowings outstanding,
coupled with a 21 basis point increase in the average cost of borrowings, to
4.07% for the 2002 period.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $1.1 million, or 31.8%, to a total of $4.7
million for the three months ended December 31, 2002, compared to the same
quarter in 2001. The interest rate spread decreased to 3.02% for the three
months ended December 31, 2002, from 3.06% for the 2001 period, while the net
interest margin decreased to 3.23% for the three months ended December 31, 2002,
compared to 3.40% for the same period in 2001.
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.
After considering the above factors, management recorded a provision for losses
on loans totaling $1.1 million for each of the three-month periods ended
December 31, 2002 and 2001. The provision recorded during the current
three-month period was due primarily to a continuing change in the composition
and the relative credit risk of the loan portfolio. 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 and
13
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 December 31,
2002 and 2001 (continued)
Provision for Losses on Loans (continued)
commercial real estate, construction loans and 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. 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 $152,000 for the three months ended December 31, 2002, a
decrease of $14,000, or 8.4%, compared to the $166,000 recorded for the three
months ended December 31, 2001. The decrease was due to the effects of an
$89,000 gain on sales of branch offices recorded during the quarter ended
December 31, 2001, partially offset by a $75,000, or 97.4%, increase in other
income during the three months ended December 31, 2002. The increase in other
operating income resulted primarily from the inclusion of Kenwood Savings'
operations and increases in fees related to loans and deposits transactions year
to year.
General, Administrative and Other Expense
General, administrative and other expense totaled $2.3 million for the three
months ended December 31, 2002, an increase of $614,000, or 35.5%, compared to
the same quarter in 2001. This increase resulted primarily from an increase of
$343,000, or 43.2%, in employee compensation and benefits, a $159,000, or 56.4%,
increase in occupancy and equipment and an increase of $189,000, or 54.3%, in
other operating expense, partially offset by a decrease of $114,000 in
amortization of goodwill.
Generally, as previously noted, the level of general, administrative and other
expenses increased due to the effects of the Kenwood acquisition. Additionally,
the increase in employee compensation and benefits was due primarily to an
increase in staffing levels and normal merit increases. The increase in
occupancy and equipment expense primarily reflects increased depreciation and
maintenance costs associated with the Company's office additions and
improvements. The increase in other operating expense relates primarily to an
increase in advertising costs, professional fees and pro-rata increases in costs
associated with the Company's overall growth year to year. The decrease in
goodwill amortization reflects the Company's adoption of SFAS No. 142 effective
October 1, 2002. Pursuant to SFAS No. 142, goodwill is no longer amortized, but
is subject to a periodic impairment evaluation. The adoption of SFAS No. 142
will eliminate annual goodwill amortization charges totaling approximately
$460,000.
Federal Income Taxes
The provision for federal income taxes totaled $500,000 for the three months
ended December 31, 2002, an increase of $133,000, or 36.2%, compared to the
$367,000 provision recorded in the 2001 quarter. This increase was primarily due
to the increase in pre-tax earnings of $514,000, or 54.0%, coupled with the
effects of nondeductible goodwill amortization included in the 2001 three-month
period. The Company's effective tax rates were 34.1% and 38.6% for the
three-month periods ended December 31, 2002 and 2001, respectively.
14
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
ITEM 2: Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Company's market risk since the Form
10-K filed with the Securities and Exchange Commission for the fiscal year ended
September 30, 2002.
ITEM 3: Controls and Procedures
(a) The Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined under Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934, as amended) as of a date within ninety days of the filing date of this
quarterly report on Form 10-Q. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective.
(b) There were no significant changes in the Company's internal
controls or in any factors that could significantly affect these controls
subsequent to the date of the Chief Executive Officer and the Chief Financial
Officer's evaluation.
15
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
16
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: February 14, 2003 By: /s/Jerry D. Williams
-------------------------- -------------------------------
Jerry D. Williams
President
Date: February 14, 2003 By: /s/Teresa A. O'Quinn
-------------------------- ----------------------
Teresa A. O'Quinn
Chief Financial Officer
17
CERTIFICATION
I, Jerry D. Williams, Chief Executive Officer of Peoples Community Bancorp,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Community
Bancorp, Inc.;
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 quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003 /s/Jerry D. Williams
-------------------------------------
Jerry D. Williams
Chief Executive Officer
18
CERTIFICATION
I, Teresa A. O'Quinn, Chief Financial Officer of Peoples Community Bancorp,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-K of Peoples Community
Bancorp, Inc.;
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 quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003 /s/Teresa A. O'Quinn
-----------------------------------
Teresa A. O'Quinn
Chief Financial Officer
19