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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, 2003
______________________________
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
__________
PEOPLES COMMUNITY BANCORP, INC.
______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Maryland 31-1686242
_______________________________ _____________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6100 West Chester Road, West Chester, Ohio 45069
______________________________________________________________________________
(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
---- ----
As of February 12, 2004, the latest practicable date, 2,522,088 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 20
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 18
SIGNATURES 20
2
PEOPLES COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, September 30,
ASSETS 2003 2003
Cash and due from banks $ 11,821 $ 4,905
Interest-bearing deposits in other financial institutions 2,753 5,118
------- -------
Cash and cash equivalents 14,574 10,023
Certificates of deposit 221 221
Investment securities designated as available for sale - at market 2,286 2,156
Mortgage-backed securities designated as available for sale - at market 199,767 133,828
Loans receivable - net 565,646 554,351
Office premises and equipment - at depreciated cost 14,220 13,056
Real estate acquired through foreclosure 899 1,293
Federal Home Loan Bank stock - at cost 10,323 10,221
Accrued interest receivable on loans 2,098 2,089
Accrued interest receivable on mortgage-backed securities and other investments 806 480
Prepaid expenses and other assets 880 488
Goodwill, net of accumulated amortization 5,528 5,528
Prepaid federal income taxes 2,136 1,506
Deferred federal income taxes 3,164 3,443
------- -------
Total assets $822,548 $738,683
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $450,832 $455,900
Advances from the Federal Home Loan Bank 306,500 218,500
Other borrowed money 1,750 1,400
Guaranteed preferred beneficial interests in junior subordinated debentures 12,500 12,500
Advances by borrowers for taxes and insurance 112 74
Accrued interest payable 570 709
Other liabilities 2,439 2,901
------- -------
Total liabilities 774,703 691,984
Stockholders' equity
Common stock - 15,000,000 shares of $.01 par value authorized;
2,522,088 shares issued 25 25
Additional paid-in capital 24,524 24,478
Retained earnings - restricted 24,006 23,171
Shares acquired by stock benefit plan (238) (286)
Accumulated comprehensive loss, unrealized losses on
securities designated as available for sale, net of related tax effects (472) (689)
------- -------
Total stockholders' equity 47,845 46,699
------- -------
Total liabilities and stockholders' equity $822,548 $738,683
======= =======
3
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 31,
(In thousands, except share data)
2003 2002
Interest income
Loans $8,524 $9,054
Mortgage-backed securities 1,214 277
Investment securities 23 10
Interest-bearing deposits and other 112 202
----- -----
Total interest income 9,873 9,543
Interest expense
Deposits 2,818 3,071
Borrowings 1,994 1,762
----- -----
Total interest expense 4,812 4,833
----- -----
Net interest income 5,061 4,710
Provision for losses on loans 900 1,051
----- -----
Net interest income after provision
for losses on loans 4,161 3,659
Other income
Gain on sale of loans 10 -
Gain on sale of real estate 206 -
Other operating 179 152
----- -----
Total other income 395 152
General, administrative and other expense
Employee compensation and benefits 1,821 1,137
Occupancy and equipment 472 441
Franchise taxes 172 118
Data processing 248 112
Other operating 577 537
----- -----
Total general, administrative and other expense 3,290 2,345
----- -----
Earnings before income taxes 1,266 1,466
Federal income taxes
Current 264 925
Deferred 167 (425)
----- -----
Total federal income taxes 431 500
----- -----
NET EARNINGS $ 835 $ 966
===== =====
EARNINGS PER SHARE
Basic $.33 $.39
=== ===
Diluted $.33 $.39
=== ===
4
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31,
(In thousands)
2003 2002
Net earnings $ 835 $ 966
Other comprehensive income, net of tax:
Unrealized holding gains on securities during the period,
net of taxes of $112 and $65 for the respective periods 217 126
----- -----
Comprehensive income $1,052 $1,092
===== =====
Accumulated comprehensive income $ 472 $ 189
===== =====
5
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(In thousands)
2003 2002
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 835 $ 966
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 155 150
Amortization of deferred loan origination fees (419) (410)
Amortization expense of stock benefit plan 48 48
Compensation expense related to vested stock options 46 35
Depreciation and amortization 224 197
Provision for losses on loans 900 1,051
Federal Home Loan Bank stock dividends (102) (112)
Investment securities dividends (16) (6)
Gain on sale of real estate (206) -
Gain on sale of loans (10) -
Proceeds from sale of loans and loan participations 533 74
Loans originated for sale in the secondary market (523) -
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (9) 205
Accrued interest receivable on investments and
mortgage-backed securities (326) (183)
Prepaid expenses and other assets (392) 236
Accrued interest payable (139) (128)
Other liabilities (462) (228)
Federal income taxes
Current (630) (76)
Deferred 167 (425)
------ ------
Net cash provided by (used in) operating activities (326) 1,394
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities (70,720) (43,151)
Principal repayments on mortgage-backed securities 4,841 3,379
Purchase of investment securities - (500)
Principal repayments on loans 45,902 78,147
Loan disbursements (57,267) (78,216)
Purchase of office premises and equipment (1,672) (208)
Proceeds from sale of real estate acquired through foreclosure 473 -
------ ------
Net cash used in investing activities (78,443) (40,549)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (5,068) 21,306
Proceeds from Federal Home Loan Bank advances and
other borrowings 88,350 15,375
Net increase (decrease) in advances by borrowers for taxes and insurance 38 (27)
------ ------
Net cash provided by financing activities 83,320 36,654
------ ------
Net increase (decrease) in cash and cash equivalents 4,551 (2,501)
Cash and cash equivalents at beginning of period 10,023 26,637
------ ------
Cash and cash equivalents at end of period $14,574 $24,136
====== ======
6
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended December 31,
(In thousands)
2003 2002
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $1,000 $1,000
===== =====
Interest on deposits and borrowings $4,951 $4,961
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available
for sale, net of related tax effects $ 217 $ 126
===== =====
Transfers from loans to real estate acquired through
foreclosure $ 79 $ 47
===== =====
Loans disbursed to facilitate sale of real estate acquired
through foreclosure $ - $ 193
===== =====
Loans disbursed to facilitate sale of real estate $ 491 $ -
===== =====
7
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended December 31, 2003 and 2002
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,
2003. 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, 2003 are not necessarily indicative of the results
which may be expected for the entire fiscal year.
2. Business Combinations
---------------------
On April 26, 2002, the Company completed its acquisition of Kenwood
Bancorp, Inc. for consideration of $25.22 per outstanding share,
totaling $7.9 million in cash. Kenwood was merged with and into the
Company and Kenwood's wholly-owned banking subsidiary, Kenwood Savings
Bank, became a wholly-owned subsidiary of Peoples Community Bank. The
Company acquired $56.6 million in total assets and recorded
approximately $3.4 million in goodwill as a result of the transaction.
On July 25, 2003, Peoples Bank sold Kenwood Savings Bank, including
$10.0 million in deposits and $10.1 million of loans, to Fort
Washington Trust Company, a subsidiary of Western and Southern Life
Insurance Company.
On September 26, 2003, Peoples Bank acquired two Ohio branch offices
from Ameriana Bank and Trust, including $32.8 million in loans and
$55.6 million in deposits. Peoples Bank recorded approximately $2.3
million in goodwill as a result of this transaction.
3. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and the Bank, its wholly-owned subsidiary.
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 three-month periods, less 23,800 and 42,840
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:
For the three months ended
December 31,
2003 2002
Weighted-average common shares
outstanding (basic) 2,493,580 2,465,067
Dilutive effect of assumed exercise
of stock options 38,697 38,444
Weighted-average common shares --------- ---------
outstanding (diluted) 2,532,277 2,503,511
========= =========
8
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 2003 and 2002
4. Earnings Per Share (continued)
------------------
Options to purchase 26,391 shares of common stock at a weighted-
average exercise price of $23.22 were outstanding at December 31,
2003, but were excluded from the computation of diluted earnings per
share because the exercise price was greater than the average market
price of the common shares.
5. Effects of Recent Accounting Pronouncements
-------------------------------------------
There were no recent accounting pronouncements or developments through
December 31, 2003 that would have a material effect on the Company's
consolidated financial statements.
6. Stock Option Plan
-----------------
During fiscal 2001 the Board of Directors adopted the Peoples
Community Bancorp, Inc. Stock Option and Incentive Plan (the "Plan")
that provides for the issuance of 197,773 shares of authorized but
unissued shares of common stock at fair value at the date of grant.
Through December 31, 2003, the Company has granted 144,996 shares, net
of forfeitures, under the Plan. The Plan provides that one-fifth of
the options granted become exercisable on each of the first five
anniversaries of the date of grant. The remaining shares in the Plan
may be granted to employees in increments of 20% per year based on
management's discretion.
The Company accounts for the Plan in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair value-
based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the
fair value of the award. Compensation is then recognized over the
service period, which is usually the vesting period. Alternatively,
SFAS No. 123 permits entities to continue to account for stock options
and similar equity instruments under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion
No. 25 are required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied.
It is the Company's policy to recognize expense related to the vesting
of its stock options in accordance with the provisions of SFAS No.
123. Total expense recognized related to stock options amounted to
$47,000 and $35,000 for the three months ended December 31, 2003 and
2002, respectively.
The fair value of the option grants are estimated on the date of grant
using the modified Black-Scholes options-pricing model with the
following assumptions used for grants in fiscal 2003 and 2002: no
dividend yield; expected volatility of 21.4% and 20.0%, respectively;
a risk-free interest rate of 3.6% and 2.0%, respectively, and an
expected life of ten years for all grants.
9
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 2003 and 2002
6. Stock Option Plan (continued)
-----------------
A summary of the status of the Plan for the three months ended
December 31, 2003 and for the fiscal years ended September 30, 2003
and 2002, is presented below:
Three months ended Year ended
December 31, September 30,
2003 2003 2002
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of period 144,528 $16.75 120,329 $15.34 94,861 $14.00
Granted - - 26,391 23.22 25,728 20.25
Exercised - - (468) 14.00 - -
Forfeited - - (1,724) 17.99 (260) 14.00
------- ----- ------- ----- ------- -----
Outstanding at end of period 144,528 $16.75 144,528 $16.75 120,329 $15.34
======= ===== ======= ===== ======= =====
Options exercisable at period-end 42,152 $14.73 42,152 $14.73 18,924 $14.00
======= ===== ======= ===== ======= =====
Weighted-average fair value of
options granted during the period N/A $ 9.41 $ 6.19
===== =====
The following information applies to options outstanding at December 31, 2003:
Number outstanding 118,137
Range of exercise prices $14.00 - $20.25
Number outstanding 26,391
Exercise price $23.22
Weighted-average exercise price $16.75
Weighted-average remaining contractual life 8.0 years
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.
Critical Accounting Policies
- ----------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as disclosures found elsewhere in this
quarterly report, are based upon the Company's consolidated financial
statements, which are prepared in accordance with US GAAP. The
preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. Several factors are considered in
determining whether or not a policy is critical in the preparation of
financial statements. These factors include, among other things,
whether the estimates are significant to the financial statements, the
nature of the estimates, the ability to readily validate the estimates
with other information, including third parties or available prices,
and sensitivity of the estimates to changes in economic conditions and
whether alternative accounting methods may be utilized under US GAAP.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses and goodwill impairment. Actual results could differ
from those estimates.
Allowance for Loan Losses
The procedures for assessing the adequacy of the allowance for loan
losses reflect management's evaluation of credit risk after
consideration of all information available. In developing this
assessment, management must rely on estimates and exercise judgment
regarding matters where the ultimate outcome is unknown, such as
economic factors, developments affecting companies in specific
industries and issues with respect to single borrowers. Depending on
changes in circumstances, future assessments of credit risk may yield
materially different results, which may require an increase or a
decrease in the allowance for loan losses.
The allowance is regularly reviewed by management to determine whether
the amount is considered adequate to absorb probable losses. This
evaluation includes specific loss estimates on certain individually
reviewed loans, statistical loss estimates for loan pools that are
based on historical loss experience, and general loss estimates that
are based upon the size, quality, and concentration characteristics of
the various loan portfolios, adverse situations that may affect a
borrower's ability to repay, and current economic and industry
conditions. Also considered as part of that judgment is a review of
the Bank's trends in delinquencies and loan losses, as well as trends
in delinquencies and losses for the region and nationally, and
economic factors.
11
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Critical Accounting Policies (continued)
- ----------------------------
Goodwill
The Company has developed procedures to test goodwill for impairment
on an annual basis using September 30 financial data. The evaluation
of possible impairment is outsourced to a third party. This
evaluation is based on the analysis set forth below.
The test involves assigning tangible assets and liabilities,
identified intangible assets and goodwill to reporting units and
comparing the fair value of each reporting unit to its carrying value
including goodwill. The value is determined assuming a freely
negotiated transaction between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having
reasonable knowledge of relevant facts. The third party selected by
management utilizes the following common approaches to valuing
business combination transactions involving financial institutions to
derive the fair value of the reporting unit: (1) the comparable
transactions approach which is specifically based on earnings, book
value, assets and deposit premium multiples received in recent sales
of comparable bank franchises; and (2) the discounted cash flow
("DCF") approach. The application of the valuation techniques takes
into account the reporting unit's operating history, the current
market environment and future prospects. As of the most recent
evaluation, the only reporting unit carrying goodwill is the Bank.
If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and no
second step is required. If the fair value does not exceed the
carrying amount, a second test is required to measure the amount of
goodwill impairment. The second test of the overall goodwill
impairment compares the implied fair value of the reporting unit
goodwill with the carrying amount of the goodwill. The impairment
loss shall equal the excess of carrying value over fair value.
After each testing period, the third party compiles a summary of the
test that is then provided to the audit committee for review.
Discussion of Financial Condition Changes from September 30, 2003 to
- --------------------------------------------------------------------
December 31, 2003
- -----------------
At December 31, 2003, the Company's assets totaled $822.5 million, an
increase of $83.9 million, or 11.4%, compared to September 30, 2003.
The increase in assets was comprised primarily of an increase of $65.9
million in mortgage-backed securities and an increase of $11.3 million
in loans receivable, primarily funded by an $88.4 million increase in
borrowings.
Cash and cash equivalents increased by $4.6 million from September 30,
2003 levels, to a total of $14.6 million at December 31, 2003.
Mortgage-backed securities totaled $199.8 million at December 31,
2003, an increase of $65.9 million, or 49.3%, compared to September
30, 2003. The purchase of $70.7 million in mortgage-backed securities
during the period was partially offset by $4.8 million in principal
repayments.
Loans receivable totaled $565.6 million at December 31, 2003, an
increase of $11.3 million, or 2.0%, over September 30, 2003 levels.
Loan disbursements totaling $58.3 million during the three-month
period ended December 31, 2003 were substantially offset by principal
repayments of $46.4 million and sales of loans in the secondary market
totaling $533,000. The Company's volume of loan disbursements
decreased by $20.1 million, or 25.6%, compared to the record loan
origination volume attained in the three-month period ended December
31, 2002, due primarily to the
12
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, 2003 to
- --------------------------------------------------------------------
December 31, 2003 (continued)
- -----------------
continued low interest rate environment and a corresponding decrease
in loan refinancing. Loan disbursements were comprised of $17.3
million of loans secured by one- to four-family residential real
estate, $10.7 million of loans secured by multi-family real estate,
$24.3 million of loans secured by commercial real estate and land and
$6.0 million in commercial lines of credit and other loans.
The allowance for loan losses totaled $10.5 million at December 31,
2003, compared to $9.7 million at September 30, 2003. Due primarily
to a continuing change in the composition and the relative credit risk
of the loan portfolio, $900,000 was added to the allowance through the
provision for losses on loans during the three months ended December
31, 2003. Over the past three fiscal years, the Bank has placed an
increasing emphasis on multi-family residential loans, nonresidential
real estate and land loans, construction loans, unsecured commercial
loans and consumer loans. Nonresidential real estate lending and
unsecured commercial lending are generally considered to involve a
higher degree of risk than residential real estate lending due to the
relatively larger loan amounts and the effect of general economic
conditions on the successful operation of the related business and/or
income-producing properties. The Bank has endeavored to reduce such
risk by evaluating the credit history and the past performance of the
borrower, the location of the real estate, the quality of the
borrowers' management, the debt service ratio, the quality and
characteristics of the income stream generated by the business or the
property and appraisals supporting the property's valuation, as
applicable.
Nonperforming loans and impaired loans totaled $9.3 million and $9.6
million at December 31, 2003 and September 30, 2003, respectively.
Nonperforming loans and impaired loans at December 31, 2003 consisted
of approximately $4.0 million of one- to four-family residential
loans, $5.0 million in multi-family residential loans, $218,000 in
loans secured by commercial real estate and land, and $65,000 in
consumer loans. As of the date of this report, it is management's
belief that the nonperforming loans are adequately reserved and no
material unreserved losses are presently anticipated on these
nonperforming loans.
In spite of the $300,000 decrease in nonperforming and impaired loans,
the Bank's internally classified loans increased by $1.8 million, or
13.7%, to a total of $15.0 million at December 31, 2003, compared to
September 30, 2003. The classifications consisted of loans classified
special mention totaling $4.5 million, substandard loans of $10.5
million, and $10,000 of loans classified as doubtful. The increase
was due primarily to the classification of approximately $1.7 million
of construction loans and $881,000 in an unsecured commercial line of
credit to one borrower who is a local developer and builder. The
classification to special mention was due to the borrower experiencing
cash flow difficulties. This increase in classified loans was
partially offset by a $987,000 decrease due to the completion and
payoff of five single-family residential construction loans of a
financially troubled builder.
The allowance for loan losses represented 1.66% and 1.57% of total
loans at December 31, 2003 and September 30, 2003, respectively. The
allowance for loan losses represented 133.68% and 134.15% of
nonperforming loans as of December 31, 2003 and September 30, 2003,
respectively. Although management believes that its allowance for
loan losses at December 31, 2003 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 $450.8 million at December 31, 2003, a decrease of
$5.1 million, or 1.1%, from September 30, 2003 levels. The decrease
in deposits was due primarily to the withdrawal of $7.4 million in
public funds, bringing the remaining portfolio of public funds to a
total of $14.1 million at December 31, 2003, and a $2.2 million
maturity of brokered deposits, bringing the remaining portfolio of
brokered deposits to $19.6 million at December 31, 2003. These
decreases were partially offset by a $4.5 million increase in retail
deposits during the period. Management continues to focus on deposit
growth through marketing and pricing strategies.
13
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, 2003 to
- --------------------------------------------------------------------
December 31, 2003 (continued)
- -----------------
Advances from the Federal Home Loan Bank and other borrowings totaled
$308.3 million at December 31, 2003, an increase of $88.4 million, or
40.2%, compared to September 30, 2003 totals. Proceeds obtained from
the advances and other borrowings were generally used to fund the
purchase of mortgage-backed securities and to fund loan originations.
Stockholders' equity totaled $47.8 million, or 5.8% of total assets,
at December 31, 2003, an increase of $1.1 million, or 2.5%, over
September 30, 2003 levels. The increase resulted primarily from net
earnings of $835,000, the expense amortization effects of the stock
benefit and option plans totaling $94,000, and a $217,000 decrease in
unrealized losses on available for sale securities.
The Bank is required to meet minimum capital standards promulgated by
the Office of Thrift Supervision ("OTS"). At December 31, 2003, the
Bank's regulatory capital exceeded each of the minimum capital
requirements.
Comparison of Operating Results for the Three-Month Periods Ended
- -----------------------------------------------------------------
December 31, 2003 and 2002
- --------------------------
General
- -------
Net earnings amounted to $835,000 for the three months ended December
31, 2003, a decrease of $131,000, or 13.6%, compared to the $966,000
of net earnings reported for the same period in 2002. The decrease in
earnings resulted primarily from a $945,000 increase in general,
administrative and other expense, partially offset by a $351,000
increase in net interest income, an increase of $243,000 in other
income, a decrease of $151,000 in the provision for losses on loans,
and a $69,000 decrease in federal income taxes.
Net Interest Income
- -------------------
Interest income on loans decreased by $530,000, or 5.9% during the
three-month period ended December 31, 2003, compared to the 2002
period, due primarily to a 110 basis point decrease in the weighted-
average yield, to 6.00% for the 2003 period, which was partially
offset by a $57.6 million, or 11.3%, increase in the average portfolio
balance outstanding. The increase in the average balance was due
primarily to the acquisition of two branch offices of Ameriana Bank
and Trust in September 2003 and the Company's continued strong loan
origination volume during the 2003 fiscal year, while the decrease in
yield reflected a general decrease in market rates and the
corresponding downward repricing of adjustable rate loans, as well as
$273,000 of amortization of the premium paid on the loans purchased
from Ameriana.
Interest income on mortgage-backed securities increased by $937,000,
or 338.3%, due primarily to a $141.8 million, or 376.1%, increase in
the average balance outstanding, partially offset by a 24 basis point
decrease in the weighted-average yield, to 2.70% in the 2003 period.
Management purchased $70.7 million of adjustable-rate mortgage-backed
securities during the three months ended December 31, 2003, in an
effort to manage liquidity and interest rate risk, as well as to
provide interest income with minimal credit risk, due to the implicit
guaranty of government-sponsored agencies.
Interest income on investment securities and interest-bearing deposits
and other decreased by $77,000, or 36.3%, due primarily to a $19.6
million, or 54.8%, decrease in the average balance of the related
assets, partially offset by a 97 basis point increase in the weighted-
average yield, to 3.35% in the 2003 period. The decrease in the
average balance of such assets was primarily due to the reinvestment
of excess funds in mortgage-backed securities and the funding of loan
disbursements.
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
- -----------------------------------------------------------------
December 31, 2003 and 2002 (continued)
- --------------------------
Net Interest Income (continued)
- -------------------
Interest expense on deposits decreased by $253,000, or 8.2%, due
primarily to a 71 basis point decrease in the weighted-average cost of
deposits, to 2.56% for the 2003 period, partially offset by an
increase of approximately $65.0 million, or 17.3%, in the average
balance of deposits outstanding. Interest expense on borrowings
increased by $232,000, or 13.2%, due primarily to a $116.3 million, or
67.2%, increase in the average balance of borrowings outstanding,
partially offset by a 131 basis point decrease in the average cost of
borrowings, to 2.76% for the 2003 period.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $351,000, or 7.5%, to a
total of $5.1 million for the three months ended December 31, 2003,
compared to the same period in 2002. The interest rate spread
decreased to 2.53% for the three months ended December 31, 2003, from
3.02% for the comparable 2002 period, while the net interest margin
decreased to 2.65% for the three months ended December 31, 2003,
compared to 3.23% for the same period in 2002.
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 $900,000 and $1.1 million for the three-month periods ended
December 31, 2003 and 2002, respectively. The provision recorded
during the period ended December 31, 2003 was predicated primarily
upon the $11.3 million, or 2.0%, of growth in the loan portfolio,
taking into account the increase in loans secured by multi-family and
nonresidential real estate, and unsecured commercial lines of credit,
as well as the increase in the level of the Bank's internally
classified loans year to year, as previously discussed. Such types of
lending are generally considered to involve a higher degree of risk
than one- to four-family residential lending. 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 $395,000 for the three months ended December 31,
2003, an increase of $243,000, or 159.9%, compared to $152,000
recorded for the same period in 2002. The increase was primarily due
to a $206,000 gain on sale of real estate recorded during the period
ended December 31, 2003, a $27,000, or 17.8%, increase in other
income, and a $10,000 gain on sale of loans in the secondary market.
The gain on sale of real estate resulted from the sale of a former
branch office that was acquired in the Kenwood merger transaction.
In connection with the Ameriana transaction, management initiated a
program during the 2003 quarter, to originate and sell certain
residential loans in the secondary market on a servicing released
basis. Management believes that personnel added to the Bank's staff
through the Ameriana transaction possess the requisite experience to
promote this sales activity. This sales activity is being conducted
in order to accommodate consumer demand through origination and sale
of lower-rate, one- to four-family residential loans and as a means
for the Bank to maintain its interest rate risk position.
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
- -----------------------------------------------------------------
December 31, 2003 and 2002 (continued)
- --------------------------
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $3.3 million for the
three months ended December 31, 2003, an increase of $945,000, or
40.3%, compared to the same period in 2002. This increase resulted
primarily from an increase of $684,000, or 60.2%, in employee
compensation and benefits, a $136,000, or 121.4%, increase in data
processing, an increase of $54,000, or 45.8%, in franchise taxes, an
increase of $31,000, or 7.0%, in occupancy and equipment, and a
$40,000, or 7.4%, increase in other operating expense.
The increase in employee compensation and benefits was due primarily
to an increase in staffing levels to support the growth and branch
structure of the Bank, normal merit increases, and an increase of
$80,000 in health and other employee benefits. The increase in data
processing reflects continued growth in loan and deposit accounts, as
well as expenses related to the acquisition and conversion of accounts
acquired from Ameriana. The increase in franchise taxes reflects the
continued growth and profitability of the Company. The increase in
occupancy and equipment expense primarily reflects increased
depreciation and maintenance costs associated with the Company's new
and acquired branch offices, in accordance with the Company's ongoing
commitment to expand its branch office network. The increase in other
operating expense was due primarily to a $35,000 increase in costs
related to maintaining real estate acquired through foreclosure, and a
$5,000, or .9%, increase in other operating costs associated with the
Company's overall growth year to year.
During January 2004, the Company entered into an agreement to change
its data processing provider, based upon a six-month evaluation of
available alternatives. The new system will provide an enhanced
framework for expanded products and services and continued growth.
The effects of the agreement will require after-tax expense to be
recognized over the next four quarters of approximately $72,000 per
quarter, or a total of approximately $290,000.
Federal Income Taxes
- --------------------
The provision for federal income taxes totaled $431,000 for the three
months ended December 31, 2003, a decrease of $69,000, or 13.8%,
compared to the $500,000 provision recorded in the same period in
2002. This decrease was primarily due to a decrease in pre-tax
earnings of $200,000, or 13.6%. The Company's effective tax rates
were 34.0% and 34.1% for the three-month periods ended December 31,
2003 and 2002, 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.
16
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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,"
"expect," "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 3: 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, 2003.
ITEM 4: Controls and Procedures
-----------------------
(a) Our management evaluated, with the participation of our
Chief Executive Officer and Chief Financial Officer, the effectiveness
of our disclosure controls and procedures (as defined under Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Securities and Exchange
Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and regulations and are
operating in an effective manner.
(b) No change in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) occurred during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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
---------------------------------------------------
On February 4, 2004, the Company held its Annual Meeting of
Shareholders. Four matters were submitted to the shareholder's
for a vote. The shareholders elected two directors to terms
expiring in 2007 by the following votes:
For Withheld
--- --------
Paul E. Hasselbring 2,148,663 12,220
John E. Rathkamp 2,113,609 47,274
The shareholders approved the adoption of the 2004 Stock Option
Plan by the following vote:
For: 1,315,067 Against: 154,397 Abstain: 17,932
The shareholders approved the adoption of the 2004 Recognition and
Retention Plan and Trust Agreement by the following vote:
For: 1,326,068 Against: 131,574 Abstain: 29,754
The shareholders also ratified the selection of Grant Thornton LLP
as the Company's auditors for the 2004 fiscal year by the following
vote:
For: 2,136,731 Against: 9,166 Abstain: 14,986
ITEM 5. Other Information
-----------------
On January 16, 2004, Peoples Community Bancorp announced that it
filed a registration statement with the SEC relating to a proposed
rights offering to its existing stockholders and a concurrent
offering to members of the general public. Presently, it is
anticipated that the offering will consist of 1,365,674 shares of
common stock. Peoples anticipates that the offering will begin
promptly following declaration of the effectiveness of the
registration statement filed with the Securities and Exchange
Commission, and will continue for approximately thirty days
thereafter. The net proceeds of the offering will be used to fund
Peoples Community Bancorp's growth strategy and for general
corporate purposes.
18
Peoples Community Bancorp, Inc.
PART II (continued)
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
Reports on Form 8-K: Peoples Bancorp filed a Form 8-K dated
October 31, 2003 under Item 12 in order
to file its press release reporting
earnings for the period ended September
30, 2003. No financial statements were
filed.
Peoples Bancorp filed a Form 8-K dated
January 16, 2004 in order to file its
press release announcing the filing of a
registration statement related to a
proposed rights offering to its existing
stockholders and a concurrent offering to
members of the general public.
Exhibits:
31.1 Written statement of Chief Executive
Officer furnished pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350
31.2 Written statement of Chief Financial
Officer furnished pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350
32.1 Written statement of Chief Executive
Officer furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350
32.2 Written statement of Chief Financial
Officer furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350
19
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 13, 2004 By: /s/Jerry D. Williams
-----------------------------------
Jerry D. Williams
President
Date: February 13, 2004 By: /s/Teresa A. O'Quinn
-----------------------------------
Teresa A. O'Quinn
Chief Financial Officer
20