Back to GetFilings.com
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, 2004
_______________________________
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 4, 2004, the latest practicable date, 3,899,118 shares of the
registrant's common stock, $.01 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 19
SIGNATURES 20
2
PEOPLES COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, September 30,
ASSETS 2004 2004
(Unaudited)
Cash and due from banks $ 12,163 $ 10,807
Interest-bearing deposits in other financial institutions 109 3,623
------- -------
Cash and cash equivalents 12,272 14,430
Investment securities designated as available for sale - at market 1,070 1,069
Mortgage-backed securities designated as available for sale - at market 194,504 228,085
Loans receivable - net 616,446 599,466
Office premises and equipment - at depreciated cost 20,263 17,816
Real estate acquired through foreclosure 1,592 301
Federal Home Loan Bank stock - at cost 10,957 10,841
Accrued interest receivable on loans 3,278 2,721
Accrued interest receivable on mortgage-backed securities and
other investments 751 878
Prepaid expenses and other assets 460 1,206
Goodwill 6,089 6,089
Prepaid federal income taxes 1,195 2,114
Deferred federal income taxes 4,461 4,105
------- -------
Total assets $873,338 $889,121
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $486,489 $472,436
Advances from the Federal Home Loan Bank 294,500 324,500
Guaranteed preferred beneficial interests in junior subordinated debentures 12,887 12,887
Accrued interest payable 572 228
Other liabilities 2,821 3,295
------- -------
Total liabilities 797,269 813,346
Commitments and contingent liabilities - -
Stockholders' equity
Common stock - 15,000,000 shares of $.01 par value authorized;
3,899,118 and 3,898,910 shares issued at December 31, 2004 and September 30,
2004, respectively 39 39
Additional paid-in capital 51,956 51,901
Retained earnings - restricted 25,241 24,891
Shares acquired by stock benefit plan (657) (723)
Accumulated comprehensive loss, unrealized losses on
securities designated as available for sale, net of related tax effects (510) (333)
------- -------
Total stockholders' equity 76,069 75,775
------- -------
Total liabilities and stockholders' equity $873,338 $889,121
======= =======
See notes to unaudited consolidated financial statements.
3
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except share data)
Three months ended
December 31,
2004 2003
Interest income
Loans $ 9,405 $ 8,524
Mortgage-backed securities 1,228 1,214
Investment securities 11 23
Interest-bearing deposits and other 141 112
------ ------
Total interest income 10,785 9,873
Interest expense
Deposits 3,175 2,818
Borrowings 2,384 1,994
------ ------
Total interest expense 5,559 4,812
------ ------
Net interest income 5,226 5,061
Provision for losses on loans 900 900
------ ------
Net interest income after provision
for losses on loans 4,326 4,161
Other income
Gain on sale of loans 23 10
Gain on sale of securities 724 -
Gain on sale of real estate - 206
Other operating 225 179
------ ------
Total other income 972 395
General, administrative and other expense
Employee compensation and benefits 2,004 1,821
Occupancy and equipment 658 472
Franchise taxes 168 172
Data processing 303 248
Other operating 749 577
------ ------
Total general, administrative and other expense 3,882 3,290
------ ------
Earnings before income taxes 1,416 1,266
Federal income taxes
Current 746 264
Deferred (265) 167
------ ------
Total federal income taxes 481 431
------ ------
NET EARNINGS $ 935 $ 835
====== ======
EARNINGS PER SHARE
Basic $.24 $.33
=== ===
Diluted $.24 $.33
=== ===
DIVIDENDS PER SHARE $.15 $. -
=== ===
See notes to unaudited consolidated financial statements.
4
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
For the three months
ended December 31,
2004 2003
Net earnings $ 935 $ 835
Other comprehensive income (loss), net of tax:
Unrealized holding gains on securities during the period,
net of taxes of $155 and $112 for the respective periods 301 217
Reclassification adjustment for realized gains included in
earnings, net of taxes of $246 for the 2004 period (478) -
---- -----
Comprehensive income $ 758 $1,052
==== =====
Accumulated comprehensive income (loss) $(510) $ 189
==== =====
See notes to unaudited consolidated financial statements.
5
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended December 31,
(In thousands)
2004 2003
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 935 $ 835
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 358 155
Amortization of deferred loan origination fees (559) (419)
Amortization expense of stock benefit plan 66 48
Compensation expense related to vested stock options 52 46
Depreciation and amortization - net 485 224
Provision for losses on loans 900 900
Federal Home Loan Bank stock dividends (116) (102)
Investment securities dividends (11) (16)
Gain on sale of securities (724) -
Gain on sale of real estate - (206)
Gain on sale of loans (23) (10)
Proceeds from sale of loans in the secondary market 1,529 533
Loans originated for sale in the secondary market (1,506) (523)
Increase (decrease) in cash, due to changes in:
Accrued interest receivable on loans (557) (9)
Accrued interest receivable on mortgage-backed securities 127 (326)
Prepaid expenses and other assets 746 (392)
Accrued interest payable 344 (139)
Other liabilities (474) (424)
Federal income taxes
Current 919 (630)
Deferred (265) 167
------ ------
Net cash provided by (used in) operating activities 2,226 (288)
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities (21,391) (70,720)
Principal repayments on mortgage-backed securities 17,754 4,841
Proceeds from sale of mortgage-backed securities designated as
available for sale 37,326 -
Principal repayments on loans 36,307 45,902
Loan disbursements (55,314) (57,267)
Purchase of office premises and equipment (2,699) (1,672)
Proceeds from sale of real estate acquired through foreclosure 162 473
------ ------
Net cash provided by (used in) investing activities 12,145 (78,443)
------ ------
Net cash provided by (used in) operating and investing activities
(balance carried forward) 14,371 (78,731)
See notes to unaudited consolidated financial statements.
6
Peoples Community Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
For the three months ended December 31,
(In thousands)
2004 2003
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ 14,371 $ (78,731)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 14,053 (5,068)
Proceeds from Federal Home Loan Bank advances and other borrowings 40,000 88,350
Repayment of Federal Home Loan Bank advances and other borrowings (70,000) -
Proceeds from exercise of stock options 3 -
Dividends paid on common shares (585) -
------ ------
Net cash (used in) provided by financing activities (16,529) 83,282
------ ------
Net (decrease) increase in cash and cash equivalents (2,158) 4,551
Cash and cash equivalents at beginning of period 14,430 10,023
------ ------
Cash and cash equivalents at end of period $ 12,272 $ 14,574
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 500 $ 1,000
====== ======
Interest on deposits and borrowings $ 5,215 $ 4,951
====== ======
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (177) $ 217
====== ======
Transfers from loans to real estate acquired through foreclosure $ 1,453 $ 79
====== ======
Loans disbursed to facilitate sale of real estate $ - $ 491
====== ======
See notes to unaudited consolidated financial statements.
7
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended December 31, 2004 and 2003
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, 2004. 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,
2004 are not necessarily indicative of the results which may be
expected for the entire fiscal year. The consolidated statement of
financial condition of the Company as of September 30, 2004 has been
derived from the audited statement of financial condition of the
Company as of that date.
2. Business Combinations
---------------------
On March 16, 2004, the Company announced that it had entered into a
stock purchase agreement with various stockholders of Columbia
Bancorp, Inc., Cincinnati, Ohio, a closely held bank holding company,
to acquire 69,925 shares held by these stockholders for an aggregate
purchase price of $2.5 million. These shares represent approximately
38% of Columbia's presently issued and outstanding common stock. This
stock purchase was concluded on January 14, 2005. As a result, the
Company became a bank holding company subject to the requirements of
the Bank Holding Company Act of 1956 and is no longer a savings and
loan holding company subject to the requirements of the Home Owners'
Loan Act. The Company does not anticipate any significant changes to
its operations as a result of this transaction.
On December 20, 2004 the Company entered into a definitive agreement
and plan of merger whereby the Company will acquire American State
Corporation, the parent company of American State Bank ("American").
American operates three offices in the Southeast Indiana communities
of Lawrenceburg, Aurora and Bright, offering a wide range of bank
products and services, including trust services. Under the terms of
the agreement, Peoples will pay $4.79 in cash for each of the
1,469,062 outstanding common shares of American. Based upon the
outcome of certain specific events, common shareholders may receive up
to an additional $.82 per share. American's outstanding preferred
stock will be redeemed for cash at par value, totaling $700,000. This
merger is expected to be consummated in the second quarter of 2005
pending approval by American's shareholders, regulatory approval and
other customary conditions of closing. This transaction will be
accounted for using the purchase method of accounting.
3. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and Peoples Community Bank ("the Bank"), its
wholly-owned subsidiary. All significant intercompany items have been
eliminated. In December 2003, FASB issued a revision to FIN 46 to
clarify certain provisions that affected the accounting for trust
preferred securities. As a result of the provisions in FIN 46,
Peoples Bancorp Capital Trust I was deconsolidated as of June 30,
2004, with the Company accounting for its investment in Peoples
Community Bancorp Capital Trust I as assets, its subordinated
debentures as debt, and the interest paid thereon as interest expense.
The Company had always classified the trust preferred securities as
debt, but eliminated its common stock investment.
8
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 2004 and 2003
4. Earnings Per Share
------------------
Basic earnings per share is based upon the weighted-average shares
outstanding during the period, less 33,888 and 23,800 unallocated ESOP
shares as of December 31, 2004 and 2003, respectively. Diluted
earnings per share is computed by 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,
2004 2003
Weighted-average common shares
outstanding (basic) 3,859,520 2,493,580
Dilutive effect of assumed exercise
of stock options 40,548 38,697
--------- ---------
Weighted-average common shares
outstanding (diluted) 3,900,068 2,532,277
========= =========
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, 2004 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, 2004, the Company has granted options for 170,804
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 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.
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 options for the three month
periods ended December 31, 2004 and 2003 amounted to $52,000 and
$47,000, respectively.
9
Peoples Community Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended December 31, 2004 and 2003
6. Stock Option Plan (continued)
-----------------
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 2004 and 2003:
dividend yield of 2.5% for 2004 and no dividend yield for 2003;
expected volatility of 26.6% and 21.4%, respectively; a risk-free
interest rate of 4.6% and 3.6%, respectively, and an expected life of
ten years for all grants.
A summary of the status of the Plan for the three months ended
December 31, 2004 and for the fiscal years ended September 30, 2004
and 2003, is presented below:
Three months ended Year ended
December 31, September 30,
2004 2004 2003
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of period 170,336 $17.76 144,528 $16.75 120,329 $15.34
Granted - - 26,969 23.20 26,391 23.22
Exercised (208) 14.00 - - (468) 14.00
Forfeited - - (1,161) 18.60 (1,724) 17.99
------- ------- ------- ------- ------- ------
Outstanding at end of period 170,128 $17.76 170,336 $17.76 144,528 $16.75
======= ======= ======= ======= ======= ======
Options exercisable at period-end 70,631 $15.53 70,839 $15.53 42,152 $14.73
======= ======= ======= ======= ======= ======
Weighted-average fair value of
options granted during the period $ N/A $ 4.50 $ 9.41
======= ======= ======
The weighted-average fair value of options granted during the period
is lower than those in previous periods due to the current payment of
dividends on the stock and the present value of these future dividend
payments over the life of the option. In calculating the fair value
of the options, the present value of these dividends reduces the final
fair value of the options.
The following information applies to options outstanding at December 31, 2004:
Number outstanding 92,833
Exercise price $14.00
Weighted-average exercise price $14.00
Weighted-average remaining contractual life 6.50 years
Options exercisable at period end 55,628
Number outstanding 77,295
Range of exercise prices $20.25 - $23.22
Weighted-average exercise price $22.28
Weighted-average remaining contractual life 8.53 years
Options exercisable at period end 15,003
Total number outstanding 170,128
Weighted-average exercise price (all outstanding shares) $17.76
Weighted-average remaining contractual life 7.42 years
Options exercisable at period end 70,631
10
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, 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 average balances of the associated assets
and liabilities. 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.
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 individual 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 of the Bank (which is the
Company's reporting unit as defined under SFAS No. 142) and comparing
the fair value of this 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, 2004 to
December 31, 2004
- --------------------------------------------------------------------
At December 31, 2004, the Company's assets totaled $873.3 million, a
decrease of $15.8 million, or 1.8%, compared to September 30, 2004.
The decrease in assets was due primarily to a decline of $33.6
million, or 14.7% in mortgage-backed securities which was partially
offset by an increase of $17.0 million, or 2.8% in loans receivable.
Proceeds from the sale and repayments of mortgage-backed securities
totaling $55.1 million were utilized to fund loan originations and to
repay advances from the Federal Home Loan Bank. Deposits increased by
$14.1 million, or 3.0%, while advances from the Federal Home Loan Bank
decreased by $30.0 million, or 9.2%
Cash and cash equivalents decreased by $2.2 million or 15.0% from
September 30, 2004 levels, to a total of $12.3 million at December 31,
2004. Mortgage-backed securities totaled $194.5 million at December
31, 2004, a decrease of $33.6 million, or 14.7%, compared to September
30, 2004. Sales of $37.3 million and repayments totaling $17.8
million were partially offset by purchases of $21.4 million in
mortgage-backed securities during the period. The sales of mortgage-
backed securities during the period were predicated on favorable
market conditions and the desire to utilize the proceeds to originate
higher yielding loans and repay advances.
Loans receivable totaled $616.4 million at December 31, 2004, an
increase of $17.0 million, or 2.8%, over the September 30, 2004
levels. Loan disbursements totaling $56.8 million during the three-
month period ended December 31, 2004 were partially offset by
principal repayments of $36.3 million and sales of loans in the
secondary market totaling $1.5 million. The Company's volume of loan
disbursements decreased by $1.0 million, or 1.7%,
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, 2004 to
December 31, 2004 (continued)
- --------------------------------------------------------------------
compared to the loan origination volume in the three month period
ended December 31, 2003, due primarily to the low interest rate
environment and a corresponding decrease in loan refinancing during
the 2004 period. Loan disbursements were comprised of $19.7 million
of loans secured by one-to-four-family residential real estate, $8.0
million of loans secured by multi-family real estate, $15.2 million of
loans secured by commercial real estate and land and $13.9 million in
commercial lines of credit and other loans.
The allowance for loan losses totaled $11.1 million at December 31,
2004, compared to $11.0 million at September 30, 2004. Due primarily
to a continuing change in the composition and the relative credit risk
of the loan portfolio, as well as an increase in internally classified
loans, $900,000 was added to the allowance through the provision for
losses on loans during the three months ended December 31, 2004, while
approximately $860,000 of loans were charged-off during the same
period. The charged-off loans were comprised of $100,000 in loans
secured by one-to-four-family residential real estate, and a $760,000
loan secured by multi-family real estate. The $760,000 charge-off on
the multi-family property resulted from a new appraisal obtained on
the property which was subsequently acquired through foreclosure
during the period.
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 to
a lesser degree, 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 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.
Nonaccruing loans totaled $7.4 million and $6.0 million at December
31, 2004 and September 30, 2004, respectively or 1.2% and 1.2%,
respectively, of net loans at such dates. Nonaccruing loans at
December 31, 2004 consisted of approximately $2.6 million of one-to-
four-family residential loans, $4.4 million in multi-family
residential loans, $156,000 in loans secured by commercial real estate
and land and $309,000 in commercial and consumer loans.
The Bank's internally classified loans increased by $8.7 million, or
72.0%, to a total of $20.7 million at December 31, 2004, compared to
$12.0 million at September 30, 2004. Loans classified as special
mention increased by $3.6 million to a total of $7.9 million at
December 31, 2004, while loans classified as substandard increased by
$5.1 million to a total of $12.8 million at December 31, 2004.
Classified one-to-four family residential real estate loans increased
by $1.7 million due to cash flow difficulties of two specific
borrowers who refurbish rental property. Classified non residential
real estate and land loans increased by $6.6 million during the period
due to financial problems of a builder and developer of existing
properties for re-sale. Classified commercial and other loans
increased $400,000 due primarily to specific borrowers experiencing
business cash flow difficulties. As of the date of this report, it is
management's belief that the nonaccruing and classified loans are
adequately reserved and no material unreserved losses are presently
anticipated on these loans.
The allowance for loan losses represented 1.56% and 1.64% of total
loans at December 31, 2004 and September 30, 2004, respectively. The
allowance for loan losses represented 149.2% and 182.9% of
nonperforming and impaired loans as of December 31, 2004 and September
30, 2004, respectively. Although management believes that the
allowance for loan losses at December 31, 2004 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.
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, 2004 to
December 31, 2004 (continued)
- --------------------------------------------------------------------
Deposits totaled $486.5 million at December 31, 2004, an increase of
$14.1 million, or 3.0%, over September 30, 2004 levels. The increase
in deposits was due primarily to management's continuing focus on
deposit growth through marketing and pricing strategies and the
addition of one new branch location during the quarter.
Advances from the Federal Home Loan Bank and other borrowings totaled
$294.5 million at December 31, 2004, a decrease of $30.0 million, or
9.2%, compared to September 30, 2004 totals. Proceeds from the sales
and repayments of mortgage-backed securities, as discussed earlier,
were partially utilized to pay down advances during the period.
Stockholders' equity totaled $76.1 million, or 8.7% of total assets,
at December 31, 2004, an increase of $294,000, or .4%, over September
30, 2004 levels. The increase resulted primarily from net earnings of
$935,000 and the expense amortization effects of the stock benefit and
option plans totaling $118,000, which were partially offset by
dividends paid of $585,000 and a $177,000 decrease attributable to the
change 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, 2004, the
Bank's regulatory capital exceeded each of the minimum capital
requirements.
Comparison of Operating Results for the Three-Month Periods Ended
December 31, 2004 and 2003
- -----------------------------------------------------------------
General
- -------
Net earnings amounted to $935,000 for the three months ended December
31, 2004, an increase of $100,000, or 12.0%, compared to the $835,000
of net earnings reported for the same period in 2003. The increase in
earnings resulted primarily from a $577,000 or 146.1% increase in
other income and a $165,000 or 3.3% increase in net interest income,
which were partially offset by a $592,000 or 18.0% increase in general
administrative and other expenses and an increase of $50,000 or 11.6%
in federal income taxes.
Net Interest Income
- -------------------
Interest income on loans increased by $881,000, or 10.3% during the
three-month period ended December 31, 2004, compared to the 2003
period, due primarily to a $47.4 million, or 8.3%, increase in the
average portfolio balance outstanding, coupled with an 11 basis point
increase in the weighted-average yield, to 6.11% for the 2004 period.
The increase in the average balance was due primarily to the Company's
steady loan origination volume, associated with the opening of new
branch office locations. The increase in yield reflects a moderate
upward shift in market rates and the corresponding impact on
adjustable-rate loans and new originations.
Interest income on mortgage-backed securities increased by $14,000, or
1.2%, due primarily to a $21.5 million, or 12.0%, increase in the
average balance outstanding, which was partially offset by a 26 basis
point decrease in the weighted-average yield, to 2.44% in the 2004
period. Management purchased $21.4 million of adjustable-rate
mortgage-backed securities during the three months ended December 31,
2004, in an effort to manage liquidity and interest rate risk, as well
as to provide interest income with minimal credit risk, due to the
direct or implicit guaranty of government-sponsored agencies.
Additionally, management sold $37.3 million of adjustable-rate
mortgage-backed securities during the period to take advantage of
fluctuations in the securities market and to provide funds for
origination of higher yielding loan products.
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, 2004 and 2003 (continued)
- -----------------------------------------------------------------
Net Interest Income (continued)
- -------------------
Interest income on investment securities and interest-bearing deposits
and other increased by $17,000, or 12.6%, due primarily to a 52 basis
point increase in the weighted-average yield, partially offset by a
decrease of approximately $419,000, or 2.6%, in the average balance
outstanding for the 2004 period. The decrease in the average balance
of such assets was primarily due to the use of sales proceeds to fund
loan disbursements. The increase in the weighted-average yield was
due to an increase in interest rates available on these types of
investments period to period.
Interest expense on deposits increased by $357,000, or 12.7%, due
primarily to a 16 basis point increase in the weighted-average cost of
deposits, to 2.72% and an increase of $26.6 million or 6.0%, in the
average balance of deposits outstanding period to period. These
increases are the result of management's marketing efforts and pricing
strategies implemented to be competitive and promote deposit growth.
Interest expense on borrowings increased by $390,000, or 19.6%, due
primarily to a $16.6 million, or 5.7%, increase in the average balance
of borrowings outstanding along with a 36 basis point increase in the
average cost of borrowings, to 3.12% for the 2004 period. Proceeds
from advances from the Federal Home Loan Bank were generally used to
fund the purchase of adjustable rate mortgage-backed securities and to
fund loan originations. The increase in the average cost of borrowings
was due primarily to the increase in the interest rate environment and
its effect on the Company's overnight advances during the period.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $165,000, or 3.3%, to a
total of $5.2 million for the three months ended December 31, 2004,
compared to the same period in 2003. The interest rate spread
decreased to 2.31% for the three months ended December 31, 2004, from
2.53% for the comparable 2003 period, while the net interest margin
decreased to 2.51% for the three months ended December 31, 2004,
compared to 2.65% for the same period in 2003.
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 for each of the three-month periods ended December
31, 2004 and 2003. The provision recorded during the three-month
period ended December 31, 2004 was predicated primarily upon the
change in the Bank's loan portfolio mix taking into account the
increase in loans secured by nonresidential real estate and land,
unsecured commercial lines of credit and consumer loans as well as an
increase in both the overall loan portfolio and the level of the
Bank's classified assets period to period. 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 the loan portfolio in
the future.
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, 2004 and 2003 (continued)
- -----------------------------------------------------------------
Other Income
- ------------
Other income totaled $972,000 for the three months ended December 31,
2004, an increase of $577,000, or 146.1%, compared to the $395,000
recorded for the same period in 2003. The increase was primarily due
to gains recorded on sales of mortgage-backed securities totaling
$724,000 in the current quarter and no such gains in the comparable
quarter in 2003, a $46,000 or 25.7% increase in other income as well
as a $13,000 or 130.0% increase in gains on sales of loans in the
secondary market, which were partially offset by the absence of a
$206,000 gain on sale of real estate recorded in the same period in
2003. The gain on sale of mortgage-backed securities resulted from
the sale of $37.3 million of adjustable rate mortgage-backed
securities, while the increase in other operating income resulted
primarily from increases in fees related to the growth of loans and
deposit transactions from period to period.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $3.9 million for the
three months ended December 31, 2004, an increase of $592,000, or
18.0%, compared to the same period in 2003. This increase resulted
primarily from an increase of $183,000, or 10.0%, in employee
compensation and benefits, an increase of $186,000, or 39.4%, in
occupancy and equipment, an increase of $55,000, or 22.2%, in data
processing and a $172,000, or 29.8%, increase in other operating
expense.
The increase in employee compensation and benefits was due primarily
to an increase in staffing levels to support the overall growth and
branch structure of the Bank, normal merit increases, and an increase
in health insurance costs and other employee benefits. The number of
employees has increased from 130 to 138, or 6.2% period to period.
The increase in occupancy and equipment expense primarily reflects
costs associated with software purchases for asset and liability
management, increased depreciation and maintenance costs associated
with the Company's new branch offices, in accordance with the
Company's ongoing commitment to expand its branch office network. The
increase in data processing reflects costs associated with continued
growth in loan and deposit accounts and costs associated with the
development and implementation of internet banking. The increase in
other operating expense was due primarily to an increase in costs
related to maintaining real estate acquired through foreclosure,
increased professional costs and other operating costs associated with
the Company's overall growth year to year.
Federal Income Taxes
- --------------------
The provision for federal income taxes totaled $481,000 for the three
months ended December 31, 2004, an increase of $50,000, or 11.6%,
compared to the $431,000 provision recorded in the same period in
2003. This increase was primarily due to an increase in pre-tax
earnings of $150,000, or 11.8%. The Company's effective tax rate was
34.0% for each of the three-month periods ended December 31, 2004 and
2003.
16
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
- --------------------------
Certain statements contained herein are not based on historical facts
and are "forward-looking statements" within the meaning of Section 21
A of the Securities Exchange Act of 1934, as amended. Forward-looking
statements, which are based on various assumptions (some of which are
beyond our control), may be identified by reference to a future
period or periods, or by the use of forward-looking terminology, such
as "may," "will," "believe," "expect," "estimate," "anticipate,"
"continue" or similar terms or variation's on those terms or the
negative of those terms. Forward-looking statements are subject to
various factors which could cause actual results to differ materially
from these estimates. These factors include, but are not limited to,
changes in general economic conditions, interest rates, deposit
flows, loan demand, competition, legislation or regulation and
accounting principles, policies or guidelines, as well as other
economic, competitive, governmental, regulatory and technological
factors affecting our operations. In addition, acquisitions may
result in large one-time charges to income, may not produce revenue
enhancements or cost savings at levels or within time frames
originally anticipated and may result in unforeseen integration
difficulties. We do not undertake, and specifically disclaim any
obligation, to publicly release the result of any revisions which may
be made to any forward-looking statements to reflect the occurrence
of events or circumstances after the date of such statements.
17
Peoples Community Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, 2004.
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.
18
Peoples Community Bancorp, Inc.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Unregistered Sales of Equity 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
-----------------
On January 14, 2005, Peoples Community Bancorp, Inc.
completed its previously announced stock purchase of 69,925
shares from various stockholders of Columbia Bancorp, Inc.
for an aggregate purchase price of $2.5 million. These
shares represent approximately 38% of Columbia's presently
issued and outstanding common stock. Columbia Bancorp, Inc.
is a closely held bank holding company located in
Cincinnati, Ohio.
ITEM 6. Exhibits
--------
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 14, 2005 By: /s/ Jerry D. Williams
--------------------- ----------------------------
Jerry D. Williams
President
Date: February 14, 2005 By: /s/ Teresa A. O'Quinn
---------------------- ----------------------------
Teresa A. O'Quinn
Chief Financial Officer
20