FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Indicate by check mark whether the registrant (1) has filed all reports required
by Section 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
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Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, at August 1, 2000: 6,527,492.
Page 1 of 29 Pages
Exhibit Index Appears on Page 28
PART I - FINANCIAL INFORMATION
ITEM 1
The following Condensed Consolidated Balance Sheets, Consolidated
Statements of Income, Consolidated Statements of Stockholders' Equity, and
Consolidated Statements of Cash Flows of Peoples Bancorp Inc. ("Peoples") and
subsidiaries, reflect all adjustments (which include normal recurring accruals)
necessary to present fairly such information for the periods and dates
indicated. Since the following condensed unaudited financial statements have
been prepared in accordance with instructions to Form 10-Q, they do not contain
all information and footnotes necessary for a fair presentation of financial
position in conformity with generally accepted accounting principles. Operating
results for the six months ended June 30, 2000, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000.
Complete audited consolidated financial statements with footnotes thereto are
included in Peoples' Annual Report on Form 10-K for the year ended December 31,
1999.
The consolidated financial statements include the accounts of Peoples
and its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
ASSETS 2000 1999
Cash and cash equivalents:
Cash and due from banks $ 27,552 $ 42,713
Interest-bearing deposits in other banks 440 1,038
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Total cash and cash equivalents 27,992 43,751
Available-for-sale investment securities, at estimated fair value (amortized
cost of $341,953 and $340,082 at June 30, 2000 and
December 31, 1999, respectively) 326,660 328,306
Loans, net of unearned interest 701,413 659,833
Allowance for loan losses (10,914) (10,264)
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Net loans 690,499 649,569
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Bank premises and equipment, net 15,791 15,321
Other assets 40,410 38,503
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Total assets $ 1,101,352 $ 1,075,450
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LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 79,687 $ 83,267
Interest bearing 650,215 644,940
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Total deposits 729,902 728,207
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Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 57,399 64,989
Federal Home Loan Bank term advances 65,386 22,450
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Total short-term borrowings 122,785 87,439
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Long-term borrowings 138,674 150,338
Accrued expenses and other liabilities 8,026 7,606
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Total liabilities 999,387 973,590
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Guaranteed preferred beneficial interests in junior subordinated debentures 29,003 28,986
Stockholders' Equity
Common stock, no par value, 12,000,000 shares authorized - 6,666,859 shares
issued at June 30, 2000 and 6,387,509 issued
at December 31, 1999, including shares in treasury 66,296 65,043
Accumulated comprehensive income, net of deferred income taxes (9,941) (7,654)
Retained earnings 19,648 26,241
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76,003 83,630
Treasury stock, at cost, 139,767 shares at June 30, 2000 and
363,385 shares at December 31, 1999 (3,041) (10,756)
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Total stockholders' equity 72,962 72,874
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Total liabilities, minority interests and stockholders' equity $ 1,101,352 $ 1,075,450
==================================================================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Interest income $ 20,924 $ 17,622 $ 41,036 $ 33,607
Interest expense 10,699 8,162 20,707 15,404
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Net interest income 10,225 9,460 20,329 18,203
Provision for loan losses 600 447 1,122 984
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Net interest income after
provision for loan losses 9,625 9,013 19,207 17,219
(Loss) gain on securities transactions (45) 1 (56) 1
Loss on asset disposals (140) (5) (145) (5)
Other income 2,233 1,815 4,361 3,659
Amortization of intangibles 571 657 1,142 1,313
Other expenses 7,223 6,417 14,206 11,997
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Income before income taxes 3,879 3,750 8,019 7,564
Income taxes 1,179 1,201 2,458 2,385
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Net income $ 2,700 $ 2,549 $ 5,561 $ 5,179
=======================================================================================================================
Basic earnings per share $0.41 $0.37 $0.85 $0.75
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Diluted earnings per share $0.41 $0.36 $0.84 $0.73
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Weighted average shares
outstanding (basic) 6,515,837 6,910,065 6,520,208 6,928,517
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Weighted average shares
outstanding (diluted) 6,600,252 7,087,693 6,615,283 7,098,102
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Cash dividends declared $915 $893 $1,846 $1,702
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Cash dividend per share $0.14 $0.13 $0.28 $0.24
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share amounts)
Accumulated
Other
Common Stock Retained Treasury Comprehensive
Shares Amount Earnings Stock Income Total
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Balance, December 31, 1999 6,387,509 $ 65,043 $ 26,241 $ (10,756) $ (7,654) $ 72,874
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Comprehensive income:
Net income 5,561 5,561
Other comprehensive income,
net of tax:
Unrealized losses on available-
for-sale securities (2,287) (2,287)
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Comprehensive income 3,274
Exercise of common stock options
(reissued 38,657 treasury shares) (453) 753 300
Tax benefit from exercise of
stock options 57 57
Distribution of treasury shares from
deferred compensation plan 113 113
Cash dividends declared (1,846) (1,846)
10% stock dividend 269,597 1,469 (10,308) 8,839
Common stock issued under dividend
reinvestment plan 9,753 180 180
Purchase of treasury stock, 107,362 shares (1,990) (1,990)
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Balance, June 30, 2000 6,666,859 $ 66,296 $ 19,648 $ (3,041) $ (9,941) $ 72,962
=======================================================================================================================
Comprehensive Income:
Net unrealized depreciation arising during period, net of tax (2,323)
Less: reclassification adjustment for losses included in net income, net (36)
of tax
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Net unrealized depreciation on investment securities (2,287)
=======================================================================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Six Months Ended
June 30,
2000 1999
Cash flows from operating activities:
Net income $ 5,561 $ 5,179
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,122 984
Loss (gain) on securities transactions 56 (1)
Loss on asset disposals 145 5
Depreciation, amortization, and accretion 2,348 2,574
Increase in interest receivable (307) (1,447)
Increase in interest payable 334 203
Deferred income tax expense (benefit) 268 (513)
Deferral of loan origination fees and costs (180) (112)
Other, net (1,447) (2,596)
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Net cash provided by operating activities 7,900 4,276
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Cash flows from investing activities:
Purchases of available-for-sale securities (14,426) (154,416)
Proceeds from sales of available-for-sale securities 451 20
Proceeds from maturities of available-for-sale securities 11,941 27,218
Net increase in loans (41,723) (32,719)
Expenditures for premises and equipment (1,650) (1,246)
Proceeds from sales of other real estate owned 50 176
Investment in limited partnership and tax credit funds (400) (400)
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Net cash used in investing activities (45,757) (161,367)
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Cash flows from financing activities:
Net decrease in non-interest bearing deposits (3,580) (4,584)
Net increase (decrease) in interest-bearing deposits 5,282 (16,371)
Net increase in short-term borrowings 35,346 29,126
Proceeds from long-term borrowings -- 110,000
Payments on long-term borrowings (11,664) (163)
Cash dividends paid (1,596) (1,374)
Purchase of treasury stock (1,990) (2,811)
Proceeds from issuance of common stock 300 355
Proceeds from issuance of Capital Securities -- 30,000
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Net cash provided by financing activities 22,098 144,178
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Net decrease in cash and cash equivalents (15,759) (12,913)
Cash and cash equivalents at beginning of period 43,751 40,121
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Cash and cash equivalents at end of period $ 27,992 $ 27,208
=============================================================================================================
NOTES TO FINANCIAL STATEMENTS
Basis of Presentation
The accounting and reporting policies of Peoples Bancorp Inc. and
Subsidiaries ("Peoples") conform to generally accepted accounting principles and
to general practices within the banking industry. Peoples considers all of its
principal activities to be financial services related. The preparation of the
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. The consolidated financial statements include
the accounts of Peoples' parent company and its wholly-owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
On January 13, 2000, Peoples declared a 10% stock dividend issued March
14, 2000, to common shareholders of record at February 22, 2000. On May 13,
1999, Peoples declared a 10% stock dividend issued June 15, 1999, to
shareholders of record at May 28, 1999. Accordingly, all per share data reflects
the dividends.
1. Mergers and Acquisitions
In March 2000, Peoples consolidated its banking and thrift
subsidiaries, as well as reorganized its insurance agencies. Management believes
these actions enhanced customer service, increased product offerings, and add
consistency to product delivery in all Peoples financial service centers. In the
consolidation effective Mach 10, 2000, Peoples merged its banking and thrift
subsidiaries, The Peoples Banking and Trust Company and Peoples Bank FSB, with
its national banking subsidiary, The First National Bank of Southeastern Ohio.
The resulting single banking entity was renamed "Peoples Bank, National
Association", and operates under the trade name "Peoples Bank". While the
consolidation is expected to provide some enhancement to future shareholder
return via added operating efficiencies, the primary focus is on customer
retention and market share growth by improving product and service convenience
and availability. Also, effective March 31, 2000, Peoples Bancorp combined its
life insurance agency and property and casualty agency into a single entity as
an operating subsidiary under Peoples Bank named "Peoples Insurance Agency,
Inc.". The reorganization will provide enhanced opportunities for Peoples'
investment and insurance associates to meet customer needs as well as increase
market awareness through the more recognizable "Peoples" brand name.
The following text will include references to this merger and its
impact on Peoples' results of operations.
2. Accounting Pronouncements
In June 1998, Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), as amended by SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133
("SFAS No. 137"), which requires derivative instruments be carried at fair value
on the balance sheet. The statement continues to allow derivative instruments to
be used to hedge various risks and sets forth specific criteria to be used to
determine when hedge accounting can be used. The statement also provides for
offsetting changes in fair value or cash flows of both the derivative and the
hedged asset or liability to be recognized in earnings in the same period;
however, any changes in fair value or cash flow that represent the ineffective
portion of a hedge are required to be recognized in earnings and cannot be
deferred. For derivative instruments not accounted for as hedges, changes in
fair value are required to be recognized in earnings.
Peoples plans to adopt the provisions of this statement, as amended,
for its quarterly and annual reporting beginning January 1, 2001, the
statement's effective date. The impact of adopting the provisions of this
statement on Peoples' financial position, results of operations and cash flow
subsequent to the effective date is not currently estimable and will depend on
the financial position of Peoples as well as the nature and purpose of the
derivative instruments in use at that time.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited
consolidated financial statements and the management discussion and analysis
that follows.
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
SIGNIFICANT RATIOS 2000 1999 2000 1999
Net Income to:
Average assets 1.00% 1.04% 1.04% 1.12%
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Average stockholders' equity 15.10% 11.90% 15.41% 12.01%
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Cash earnings to: (a)
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Average tangible assets (b) 1.17% 1.26% 1.21% 1.35%
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Average tangible equity (b) 23.75% 18.56% 24.20% 18.74%
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Net interest margin (c) 4.20% 4.36% 4.22% 4.45%
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Efficiency ratio (d) 56.62% 55.26% 56.38% 53.31%
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Average stockholders' equity to average assets 6.63% 8.78% 6.76% 9.34%
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Loans net of unearned interest to deposits (end of period) 93.44% 83.45% 92.10% 82.12%
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Allowance for loan losses to loans net of
unearned interest (end of period) 1.58% 1.68% 1.58% 1.68%
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Capital ratios:
Tier I capital ratio 12.53% 13.97% 12.53% 13.97%
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Risk-based capital ratio 14.11% 15.56% 14.11% 15.56%
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Leverage ratio 8.46% 9.54% 8.46% 9.54%
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Cash dividends to net income 33.89% 35.05% 33.21% 32.87%
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PER SHARE DATA
Net income per share:
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Basic $0.41 $0.37 $0.85 $0.75
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Diluted $0.41 $0.36 $0.84 $0.73
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Cash basis earnings - diluted (a) $0.47 $0.42 $0.96 $0.86
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Cash dividends per share $0.14 $0.13 $0.28 $0.24
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Book value per share $11.17 $11.52 $11.17 $11.52
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<FN>
(a) Excludes after-tax impact of amortization of intangible assets acquired
through the use of purchase accounting for acquisitions.
(b) Cash earnings as a percentage of average total assets or average
stockholders' equity minus average intangibles.
(c) Calculated using fully tax equivalent net interest income as a
percentage of average earning assets.
(d) Non-interest expense (less intangible amortization and non-direct
operational expenses) as a percentage of fully tax equivalent net interest
income plus non-interest income. All non-recurring items are removed from
the calculation of the efficiency ratio.
</FN>
Introduction
The following discussion and analysis of the consolidated financial
statements of Peoples is presented to provide insight into management's
assessment of the financial results. Peoples' wholly-owned subsidiaries are
Peoples Bank, National Association ("Peoples Bank") and Northwest Territory Life
Insurance Company ("Northwest Territory"). Peoples Bank also operates Peoples
Insurance Agency, Inc. ("Peoples Insurance"), which offers a full set of life,
property, and casualty insurance products to customers in Peoples' markets.
Peoples Bank is a member of the Federal Reserve System and subject to
regulation, supervision, and examination by the Office of the Comptroller of the
Currency ("OCC"). Peoples Bank offers complete banking products and services
through 38 financial service locations and 25 ATM's in the states of Ohio, West
Virginia, and Kentucky. Peoples Bank's e-banking service is Peoples OnLine
Connection, and can be found on the internet at www.peoplesbancorp.com. Peoples
Bank provides an array of financial products and services to customers,
including traditional banking products such as deposit accounts, lending
products, credit and debit cards, corporate and personal trust services, and
safe deposit rental facilities. Peoples Insurance also offers investment and
insurance products. Peoples provides services through ordinary walk-in offices,
automated teller machines, and automobile drive-in facilities and banking by
phone.
Peoples Bank also makes available other financial services via Peoples
Investments, which provides customer-tailored solutions for fiduciary needs,
investment alternatives, and asset management needs (securities are offered
exclusively through Raymond James Financial Services, member NASD/SIPC, an
independent broker/dealer located at Peoples Bank). Peoples common stock is
traded through the NASDAQ National Market System under the symbol PEBO.
The discussion and analysis should be read in conjunction with the
prior year-end audited consolidated financial statements and footnotes thereto
and the ratios, statistics, and discussions contained elsewhere in this Form
10-Q. References will be found in this Form 10-Q to transactions that have
impacted or will impact Peoples' results of operations.
On April 20, 1999, Peoples sold, through PEBO Capital Trust I (a
newly-formed subsidiary) $30.0 million of 8.62% Capital Securities ("Capital
Securities" or "Trust Preferred Securities"). The proceeds were used by the
Trust to purchase, from Peoples, Junior Subordinated Deferrable Interest
Debentures due May 1, 2029. In late April, 1999, Peoples invested $10.0 million
in Peoples Bank. The remaining proceeds were used for general corporate
purposes, including the repurchase of a portion of Peoples' outstanding common
shares.
On April 22, 1999, Peoples announced intentions to repurchase 5% of
Peoples' outstanding common shares (or 346,500 shares) from time to time in open
market or privately negotiated transactions ("1999 Stock Repurchase Program").
The 1999 Stock Repurchase Program was completed at December 31, 1999.
On December 10, 1999, Peoples announced intentions to repurchase 2.5%
of Peoples' outstanding common shares (or 165,000 shares) from time to time in
open market or privately negotiated transactions ("2000 Stock Repurchase
Program"). At August 1, 2000, Peoples had purchased approximately 76,000
treasury shares under the 2000 Stock Repurchase Plan (or 46% complete).
The combination of the issuance of Capital Securities and the stock
repurchase programs has impacted and will continue to impact several key
performance indicators of Peoples' future financial results. The impact, where
significant, is discussed in the applicable sections of this Management's
Discussion and Analysis.
Results of Operations
Overview of the Income Statement
Net income increased by $151,000 (or 5.9%), to $2,700,000 in the second
quarter of 2000 from $2,549,000 in 1999's second quarter. Diluted cash earnings
per share for the quarter ended June 30, 2000, were $0.47, up $0.05 (or 11.9%)
from $0.42 in diluted cash earnings per share a year ago. Cash earnings removes
the after-tax impact of intangible amortization expense. On a year-to-date
basis, net income totaled $5,561,000 and diluted cash earnings were $0.96, an
increase of $382,000 (or 7.4%) and $0.10 (or 11.6%), respectively, compared to
the first six months last year. Earnings in the second quarter of 2000 were
impacted by net losses on sales of investment securities and disposal of capital
assets. Pre-tax net losses on these transactions totaled $185,000 and decreased
net income in the second quarter of 2000 by $120,000, or $0.02 per share.
On January 13, 2000, Peoples declared a 10% stock dividend issued March
14, 2000, to common shareholders of record at February 22, 2000. On May 13,
1999, Peoples declared a 10% stock dividend issued June 15, 1999, to
shareholders of record at May 28, 1999. Accordingly, all per share data reflects
the dividends.
Return on tangible assets was 1.17% in the second quarter of 2000
compared to 1.26% for the same period a year ago. For the first six months,
return on tangible assets was 1.21% in 2000 versus 1.35% in 1999. Return on
tangible assets is defined as cash earnings as a percentage of average total
assets minus goodwill and core deposit intangibles. Return on tangible equity
improved to 23.75% in the second quarter of 2000 compared to 18.56% in the
second quarter of 1999 and on a year-to-date basis improved to 24.20% compared
to 18.74% a year ago. Return on tangible equity is defined as cash earnings as a
percentage of average total stockholders' equity minus goodwill and core deposit
intangibles.
On a diluted basis, earnings per share reached $0.84 for the first six
months of 2000, up $0.11 (or 14.1%) compared to the previous year. For the three
months ended June 30, diluted earnings per share totaled $0.41 in 2000 compared
to $0.36 in 1999, an increase of $0.05 (or 13.8%). Peoples' core earnings
increased due to strong net interest income growth and additional revenue
streams from market expansion and insurance revenues. Return on average equity
reached 15.41% for the first six months of 2000 compared to 12.01% for the same
period a year earlier. Return on average assets was 1.04% for the six months
ended June 30, 2000, compared to 1.12% a year earlier, due to significant asset
growth in mid-1999.
Net interest income in the second quarter of 2000 increased $765,000
(or 8.1%) to $10,225,000, due primarily to earning asset growth. The provision
for loan losses in the second quarter of 2000 totaled $600,000 compared to
$447,000 a year ago. Bolstered by growth in investment and insurance
commissions, non-interest income increased $418,000 (or 23.0%) to $2,233,000.
Non-interest expense increased $806,000 (or 12.6%) to $7,223,000 due to a
combination of costs related to market expansion and acquisition, as well as
interest expense from the issuance of the Trust Preferred Securities reported in
other expenses.
Peoples has grown through acquisitions accounted for as purchase
transactions. While acquisitions using stock are continually evaluated,
management is cognizant of not diluting shareholder ownership merely for the
sake of growth. Management believes a comparative approach to financial
reporting should include the discussion of "cash earnings", which removes the
after-tax impact of the amortization of intangibles on Peoples' results of
operations and facilitates comparison of Peoples with competitors making
acquisitions using pooling of interests accounting. Management uses cash
earnings as one of several ways to evaluate the impact of acquisitions on
profitability and Peoples' return on its investment. Recent acquisitions have
increased Peoples' amortization expense related to goodwill and other
intangibles and as a result, the purchase method of accounting has affected
earnings per share and other ratios. Return on tangible assets and return on
tangible equity removes the after-tax impact of intangible amortization expense
and the balance sheet impact of average intangibles. In the second quarter of
2000, intangible amortization expense totaled $571,000 ($400,000 after taxes)
compared to $657,000 ($456,000 after taxes) for the same period a year earlier.
Due to amortization of intangibles, average balance sheet intangibles decreased
to $19.0 million in the second quarter of 2000 compared to $20.8 million in the
second quarter of 1999.
Interest Income and Expense
Net interest income is the amount by which interest income on earning
assets exceeds interest paid on interest-bearing liabilities. Interest earning
assets include loans and investment securities. Interest-bearing liabilities
include interest-bearing deposits, borrowed funds such as Federal Home Loan Bank
("FHLB") borrowings and other wholesale funding sources such as national market
repurchase agreements. Net interest income remains the primary source of revenue
for Peoples. Changes in market interest rates, as well as adjustments in the mix
of interest-earning assets and interest-bearing liabilities, impact net interest
income.
During the second quarter of 1999, Peoples initiated an asset growth
strategy to offset the costs to service the Trust Preferred Securities, thereby
leveraging Peoples' increased regulatory capital levels ("Leverage Strategy").
The Leverage Strategy increased Peoples' earnings asset base approximately $150
million and was funded primarily by FHLB borrowings and other wholesale funding
sources. The Leverage Strategy was implemented throughout the second quarter of
1999 and was completed on June 30, 1999.
The Leverage Strategy and continued strong internal loan growth
generated additional net interest income in the second quarter of 2000. Net
interest income grew to $10,225,000 for the three months ended June 30, 2000,
compared to $9,460,000 for the same period a year earlier, an increase of
$765,000 (or 8.1%). On a year-to-date basis, net interest income totaled
$20,329,000, an increase of $2,126,000 (or 11.7%) compared to the same six
months last year with total interest income of $41,036,000 and interest expense
totaling $20,707,000. Included in interest income is $938,000 of tax-exempt
income from investments issued by and loans made to states and political
subdivisions. Since these revenues are not taxed, it is more meaningful to
analyze net interest income on a fully-tax equivalent ("FTE") basis.
Net interest margin is calculated by dividing FTE net interest income
by average interest-earning assets and serves as a measurement of the net
revenue stream generated by Peoples' balance sheet. In the second quarter of
2000, net interest margin was 4.20% compared to 1999's second quarter ratio of
4.36% while year-to-date net interest margin was 4.22% versus 4.45% in 1999. The
FTE yield on earning assets was 8.50% in the second quarter of 2000 and 8.43%
year-to-date, compared to 7.99% and 8.10% for the same periods a year earlier.
This increase is attributable to recent increases in short-term interest rates
by the Federal Reserve. The ratio of interest expense to earning assets
increased 66 basis points to 4.30% for the three months ended June 30, 2000 and
56 basis points to 4.21% for the first half of 2000.
Net interest margin also faced downward pressure due to competitive
pricing of loans and deposits in Peoples' markets, as well as recent increases
in interest rates, which significantly increased Peoples' cost of funding
earning assets. Net interest margin has also compressed in 2000 due to the
impact of the Leverage Strategy, which significantly increased Peoples' earning
asset base in comparatively lower-yielding assets such as mortgage-backed
investment securities and other investments. Management continues to analyze
methods to redeploy Peoples' assets to an earning asset mix which will result in
a net interest margin similar to Peoples' ratios before the Leverage Strategy
was initiated. Loan growth continues to be strong and management anticipates
that loan activity will remain strong in the near term, which will enable
Peoples to continue expansion of its earning asset base in these higher-yield
assets. Due to increased competitive pressure for deposits and recent rises in
interest rates, management believes that any enhancement to net interest margin
through loan growth will be offset by increased interest costs.
Average total earning assets reached $999.1 million in the second
quarter of 2000, a $99.8 million (or 11.1%) increase over 1999's second quarter.
For the first half of 2000, average earning assets totaled $988.3 million, an
increase of $139.5 million (or 16.4%) compared to first six months of 1999.
Average loans were $674.8 million for the six months ended June 30, 2000 in
comparison to $579.2 million during the same period in 1999 and comprise the
largest earning asset component on Peoples' balance sheet. Due primarily to
Peoples' Leverage Strategy acquisitions, Peoples' average balances of investment
securities increased $58.1 million from $265.1 million in 1999 to $323.3 million
in 2000.
Deposit costs, which result from the largest dollar volume of Peoples'
interest-bearing liabilities in customer funding sources, increased 50 basis
points to 4.56% in the second quarter of 2000 and through the first six months
of 2000 increased 37 basis points to 4.47%. The increased costs of money market
accounts and certificates of deposit contributed to the overall increases in
deposit costs in 2000. Management expects deposit pricing to be increasingly
competitive and will continue to focus its efforts to increase balances in
non-interest bearing demand deposits, which grew, on average, $4.5 million to
$81.5 million in average balances for the six months ended June 30, 2000.
In the second quarter of 2000, Peoples continued to use a combination
of short-term and long-term borrowings as funding sources to fuel loan growth.
The cost of borrowed funds increased to 5.40% for the first half of 2000 in
comparison to 4.62% a year ago. For the second quarter of 2000, the cost of
borrowed funds cost was up 82 basis points to 5.51% in 2000 versus 4.69% in
1999. Costs of borrowed funds have increased due to recent rises in interest
rates as well as repricing of certain Peoples' long-term FHLB borrowings that
are fixed rate borrowings for a specified period of time, and can reprice to
current market rates at the discretion of the FHLB. Rather than allow certain
borrowings to reprice to a variable rate advance, Peoples prepaid $11.5 million
of these long-term FHLB advances in June 2000. Peoples used short-term
repo-based FHLB advances to replace the $11.5 million of advances and to
optimize future borrowing costs.
Peoples' cash management services (offered to a variety of business
customers) have provided short-term funding, specifically from overnight
repurchase agreements. In the second quarter of 2000, Peoples' average balances
of these overnight repurchase agreements (excluding balances of national
repurchase agreements available through wholesale funding sources) totaled $30.9
million, an increase of $1.1 million from 1999 average balance of $29.8 million.
On a year-to-date basis, average balances remained stable at $30.0 million. The
average rate paid in the second quarter of 2000 on overnight repurchase
agreements totaled 5.27%, up 119 basis points from the prior year's second
quarter average rate of 4.08%. For the six months ended June 30, 2000, the
average rate paid on overnight repurchase agreements was 5.08% versus 4.11% for
the same period in 1999, an increase of 97 basis points.
In late 1999 and continuing through the second quarter of 2000, Peoples
accessed national market repurchase agreements to diversify short-term funding
sources. During the second quarter of 1999, average national market repurchase
agreements totaled $8.0 million at an average rate of 5.02% while for the three
months ended June 30, 2000, the average balance grew to $26.3 million with an
average rate of 6.38%.
Peoples also continued to use short-term FHLB advances as a source to
fund its operations and investments during the second quarter of 2000. Average
short-term FHLB balances increased from $2.1 million in the second quarter of
1999 to $34.0 million for the three months ended June 30, 2000 and for the first
half of 2000 increased $20.8 million from 1999's average balances of $1.5
million. As previously stated, a portion of this increase is the result of
prepaying $11.5 million long-term FHLB advances using short-term, repo-based
FHLB advances. Interest costs on these short-term borrowings grew $528,000
(rate: 6.53%) compared to $25,000 (rate: 4.87%) in the second quarter of 1999
while on a year-to-date basis, interest costs totaled $711,000 (rate: 6.41%) in
2000, an increase of $675,000 from the first half of 1999's total of $36,000
(rate: 4.93%). Management plans to maintain short-term FHLB borrowings as an
appropriate funding source.
Long-term borrowing costs, which represent the largest average volume
of borrowed fund costs, also increased compared to 1999. The rate paid on
average long-term borrowings totaled 4.79% for the first half of 1999, compared
to 5.16% for same six months in 2000. The majority of Peoples' long-term
borrowings are fixed rate FHLB borrowings. Management plans to maintain access
to long-term FHLB borrowings as an appropriate funding source.
Additional interest rate increases will cause net interest margin to
compress in the short-term. Management expects interest rate pressures on
funding sources will continue to challenge Peoples' net interest margin in 2000
as financial institutions and other competitors continue to search for new
methods and products to satisfy increasing customer demand for higher yields on
their invested funds. Management will continue to monitor the effects of net
interest margin on the performance of Peoples.
Provision for Loan Losses
In the second quarter of 2000, Peoples recorded a provision for loan
losses of $600,000, compared to $447,000 for the same period a year earlier. For
the six months ended June 30, provision for loan losses amounted to $1,122,000
in 2000, an increase of $138,000 over 1999's provision of $984,000. The
provision is based upon management's continuing evaluation of the adequacy of
the allowance for loan losses and is reflective of the quality of the portfolio
and overall management of the inherit credit risk.
Due primarily to expected continued loan generation, management
anticipates future provision expense will remain stable or modestly increase for
the remainder of 2000, dependent on loan delinquencies, portfolio risk, overall
loan growth, and general economic conditions in Peoples' markets. Further
discussion can be found later in this discussion under "Allowance for Loan
Losses."
Loss (Gain) on Securities Transactions
Peoples reported net losses on securities transactions of $45,000 for
the second quarter 2000 compared to net gains of $1,000 recorded in 1999. On a
year-to-date basis, Peoples recorded net losses on securities transactions of
$56,000 in 2000 compared to net gains of $1,000 the previous year. The net
losses on securities transactions in 2000 were the result of sales of selected
equity securities in Peoples' investment portfolio.
Loss on Asset Disposals
Losses on asset disposals, net of disposal gains, totaled $145,000 for
the first half of 2000 compared to $5,000 in the same period last year. For the
three months ended June 30, 2000, net losses on asset disposals were $140,000
versus $5,000 in 1999. The increase in net losses on asset disposals resulted
from Peoples' investment in a larger central processing unit during the second
quarter of 2000. Management believes the investment will enhance Peoples'
processing capabilities and better support the integrated sales processes and
improve client service though speedier delivery of products and services.
Management does not anticipate similar losses in the near term.
Non-Interest Income
Peoples' non-interest income is generated from four primary sources:
cost-recovery fees related to deposit accounts, income derived from fiduciary
activities, electronic banking revenues, and insurance commissions. Non-interest
income from operations reached $2,233,000 and $4,361,000 for the first six
months, increases of $418,000 (or 23.0%) and $702,000 (or 19.2%), respectively,
compared to the same periods in 1999. All non-interest income categories had
strong growth compared to last year, reflecting management's focus on top-line
revenue enhancement as a primary source of cost-recovery.
Deposit account service charge income increased $272,000 (or 18.7%) to
$1,730,000 for the six months ended June 30, 2000. For the second quarter alone,
service charge income increased $141,000 (or 18.8%) from 1999's total of
$752,000. Most of the increases are attributable to volume increases of standard
fees such as overdraft and non-sufficient fund fees, as well as growth in
Peoples' deposit service income generated from business customers. Peoples' fee
income generated from deposits is based on recovery of costs associated with
services provided.
The fee structure for investment and fiduciary activities is based
primarily on the market value of assets being managed, which have decreased in
the first six months of 2000 due primarily to decreases in relative market
values of many investment instruments. Total market value of managed assets at
June 30, 2000, was approximately $519 million, compared to $560 million at year
end 1999. Income from fiduciary activities totaled $628,000 in the second
quarter of 2000, up $15,000 (or 2.4%) and $1,326,000 for the year-to-date, up
$47,000 (or 3.7%) over the same periods a year earlier. Peoples continues to
build on its leadership position in its core markets and investment and
fiduciary services will be significant contributors to Peoples' non-interest
income streams.
Electronic banking, including ATM and debit card services, direct
deposit services, and internet banking, is one of the many delivery channels
offered by Peoples to provide products and services to customers. For the three
months ended June 30, 2000, electronic banking revenues totaled $310,000, an
increase of $56,000 (or 22.0%) compared to the same period last year. On a
year-to-date basis, electronic banking income increased $98,000 (or 19.8%) in
2000 compared to the same six months in 1999. These increases are due primarily
to growth in the number of debit card users as well as corresponding volume
increases in debit card usage. Management will continue to focus on electronic
banking as a source of revenue as the financial services industry develops
additional e-commerce capabilities.
In addition to traditional sources of non-interest income, Peoples also
offers a complete line of insurance and investment products through Peoples
Insurance and Peoples Investments. Peoples' product offerings include credit
life and disability insurance, as well as life and property insurance to
consumers in Ohio and West Virginia. For the quarter ended June 30, 2000,
commissions on insurance and securities sales generated revenues totaling
$330,000, a $215,000 (or 187%) increase over the same period a year earlier. On
a year-to-date basis through June 30, 2000, insurance and securities sales
generated revenues of $443,000, up $200,000 (or 82.3%) from 1999's first half
total of $243,000. Peoples Investments offers its customers asset management
services, corporate bonds, municipal bonds, portfolio evaluation, asset
allocation, tax shelters, unit trusts, common/preferred stocks, government
securities, mutual funds, retirement planning, estate planning, tax-exempt
securities, annuities, and financial planning services. Management believes
these services are integral to Peoples' relationship and needs-based sales
philosophy. Securities are offered exclusively through Raymond James Financial
Services, Member NASD/SIPC, an independent broker/dealer, located at many
Peoples sales offices. Insurance products are underwritten by various insurance
companies and are made available through licensed insurance agency affiliates of
Peoples.
Management will continue to explore new methods of enhancing
non-interest income. Other traditional and non-traditional financial service
products and delivery channels are analyzed regularly for potential inclusion in
Peoples' product mix.
Non-Interest Expense
For the six months ended June 30, 2000, total non-interest expense
reached $15,629,000, up $2,309,000 (or 17.3%) compared to 1999. Non-interest
expense for the second quarter of 2000 totaled $7,981,000 versus $7,084,000 in
1999, an increase of $897,000 (or 12.7%). When comparing 2000 non-interest
expense information to 1999's results, it is important to consider that several
categories within non-interest expense were directly impacted by the costs
(combination of debt service expenses and amortization of associated capitalized
issuance costs) associated with the Trust Preferred Securities. Total costs in
the second quarter of 2000 related to the Trust Preferred Securities were
$642,000 compared to $506,000 in 1999. On a year-to-date basis, costs relating
to the Trust Preferred Securities totaled $1,288,000 in 2000 versus $506,000 in
1999. The substantial increase is due to the timing of the issuance of the Trust
Preferred Securities in 1999.
Compared to 1999's second quarter, salaries and benefits expense
increased $414,000 (or 13.9%) to $3,393,000 for the three months ended June 30,
2000 and $803,000 (13.5%) to $6,764,000 for the first half 2000, reflecting
Peoples continuing effort to expand both inside and outside its geographic
markets. Acquisitions in previous years, new financial service center openings,
and increased customer service representatives for investment and insurance
services have increased the number of Peoples' employees. At June 30, 2000,
Peoples had 383 full-time equivalent employees, compared to 370 full-time
equivalent employees at the end of the second quarter of 1999. Management will
continue to leverage its resources while retaining key associates, effectively
optimizing customer service and return to shareholders.
Acquisitions and investments designed to enhance client service
processes also impacted net occupancy and furniture and equipment expenses, in
particular depreciation expense. For the three months ended June 30, 2000, these
expenses totaled $1,018,000, an increase of $87,000 (or 9.3%) compared to the
same period a year earlier and year-to-date 2000 expenses totaled $1,994,000, up
$164,000 (or 9.0%) from $1,830,000 a year ago. These increases can be attributed
primarily to the depreciation of assets acquired through recent market
expansion, such as remodeling projects and new construction projects at several
of Peoples Bank's financial service centers (specifically three Wal-Mart
Financial Service Centers opened in 1999 and early 2000, as well as other
banking center refurbishments), and increased depreciation of additional
expenditures on technology. Peoples increased investment in technology and other
customer-service enhancements designed to add convenience and speed to product
delivery will also impact depreciation expense in the future.
Maintaining acceptable levels of non-interest expense and operating
efficiency are key performance indicators for Peoples in its strategic
initiatives. The financial services industry uses the efficiency ratio (total
non-interest expense less amortization of intangibles and non-recurring items as
a percentage of the aggregate of fully-tax equivalent net interest income and
non-interest income) as an important indicator of performance. Gains and losses
on sales of investment securities, as well as other nonrecurring charges, are
not included in the calculation of Peoples' efficiency ratio.
Peoples reported an efficiency ratio of 56.62% for the second quarter
and 56.38% for the first six months compared to 55.26% and 53.31% for the same
periods in 1999. Peoples experienced a period of transition in 1999 due to the
Trust Preferred Securities issuance and the implementation of the Leverage
Strategy. As anticipated, these events coupled with increased operational costs,
negatively impacted Peoples' efficiency ratio. Management believes the interest
cost associated with the 8.62%, 30-year fixed rate Trust Preferred Securities is
attractive low cost funding, considering the current interest rate environment
and provides Peoples with strong long-term funding. Management anticipates the
efficiency ratio will stabilize at or near 56% in 2000 as Peoples leverages
non-interest expense associated with market expansion, continues to shift
earning assets to higher-yielding assets such as loans, and refines its sales
processes to increase customer satisfaction and revenues.
Return on Assets
After removing the impact of intangibles and corresponding
amortization, return on tangible assets was 1.17% in the second quarter of 2000
and 1.21% for the first half of 2000 compared to 1.26% and 1.35% in the previous
year. Return on average assets ("ROA") was 1.00% for the quarter ended June 30,
2000, compared to 1.04% in 1999's second quarter. On a year-to-date basis, ROA
was 1.04% in 2000 compared to 1.12% a year ago.
The Leverage Strategy implemented in the second quarter of 1999
significantly increased the asset base of Peoples and caused a reduction in
Peoples' tangible return on assets and ROA. Additional net interest income
streams from the Leverage Strategy were offset primarily by the Trust Preferred
Securities costs, resulting in lower ROA levels than previous periods. Earnings
in the second quarter of 2000 were also impacted by net losses on sales of
investment securities and disposals of capital assets which totaled $185,000
($120,000 after taxes or $0.02 per share). These losses also contributed to the
reduction of ROA in the second quarter 2000.
Management anticipates that ROA will remain at second quarter 2000
levels through the remainder of the year. Peoples will be challenged to employ
its asset base in a manner that will produce higher returns on assets.
Management believes that recent changes to Peoples' balance sheet, particularly
through the Trust Preferred Securities issuance and Leverage Strategy, will
direct Peoples' strategic focus to ratios such as return on tangible equity,
return on equity, cash earnings per share, and earnings per share.
Return on Equity
After removing the impact of intangibles and corresponding
amortization, return on tangible equity increased to 23.75% in the second
quarter of 2000 compared to 18.56% for the same period a year earlier. For the
six months ended June 30, 2000, return on tangible equity was 24.20% compared to
18.74% last year. Peoples' return on average stockholders' equity ("ROE") was
15.10% for the three months ended June 30, 2000 and 15.41% for the first six
months of 2000 compared to 11.90% and 12.01% for the same periods a year
earlier.
Using a portion of the proceeds from the Trust Preferred Securities
issuance to implement Peoples' 1999 Stock Repurchase Program and continuing in
early 2000 with the 2000 Stock Repurchase Plan, ROE was favorably impacted
through the reduction in the number of outstanding common shares and its
corresponding reduction in equity through repurchases. Future enhancements to
ROE will depend on the timing of common share repurchases and the availability
of Peoples' common shares. Management views the issuance of the Trust Preferred
Securities as an opportunity to leverage Peoples' equity position and expects
continued ROE improvement into the latter part of 2000 and into 2001.
Peoples and its banking subsidiary, Peoples Bank, are considered
well-capitalized under regulatory and industry standards of risk-based capital
(as detailed in the Capital/Stockholders' Equity section of this Form 10-Q).
Such ratios were enhanced through the Trust Preferred Securities issuance in
mid-1999.
Income Tax Expense
Peoples' effective tax rate was 32.0% in the second quarter of 2000
compared to 32.0% for the second quarter of 1999. For the six months ended June
30, the effective tax rates was 30.7% compared to 31.5% in 1999. Peoples has
implemented tax reduction strategies, including investing in low income housing
and historic tax credits, in an effort to reduce tax burden and lower the
effective tax rate reflected in the second quarter of 2000 and going forward.
At June 30, 2000, Peoples' cumulative investment in these types of
projects approximated $3.5 million and plans to make additional investments in
various tax credit pools over the next several years. Total investment in these
tax credit pools is not expected to exceed $7 million and is expected to benefit
Peoples' future results of operations through reductions in Peoples' effective
tax rate. Management continues to explore methods in which to decrease Peoples'
tax burden.
Financial Condition
Overview of Balance Sheet
Total assets were $1.1 billion at June 30, 2000, an increase of $25.9
million compared to year-end 1999. Loan volumes continued to grow in the second
quarter of 2000, increasing $41.6 million (or 6.3%) to $701.4 million, with most
of the growth occurring in the commercial loan portion of the portfolio.
Total liabilities increased $25.9 million (or 2.7%) to $999.5 million
from year-end 1999 to June 30, 2000. Due to growth of Peoples' interest bearing
deposits, particularly market accounts, Peoples' total deposits increased $1.7
million (or 0.2%) to $729.9 million at June 30, 2000. Peoples' total short-term
borrowings increased $35.3 million (or 40.4%) to $122.8 million at June 30,
2000.
The April 1999 issuance of the Trust Preferred Securities is presented
as "Guaranteed Preferred Beneficial Interest in Junior Subordinated Debentures".
Peoples has classified the Trust Preferred Securities as "mezzanine" equity on
its balance sheet, net of amortized issuance costs of approximately $1.0
million.
Stockholders' equity totaled $73.0 million at June 30, 2000, unchanged
from December 31, 1999. At December 31, 1999, Peoples had $7.7 million of net
unrealized losses on available for sale securities compared to $9.9 million of
unrealized losses on available-for-sale securities at June 30, 2000. At year-end
1999, Peoples had a treasury share balance of $10.8 million, compared to $3.0
million at June 30, 2000. This decrease occurred due to Peoples' reissuance of
treasury shares in connection with Peoples 10% stock dividend issued to
shareholders in the first quarter of 2000. Peoples continues to purchase
treasury shares through Peoples' 2000 Stock Repurchase Plan and stock benefit
plans, as well as the deferred compensation plan that permits Peoples' directors
to acquire common shares through deferral of directors fees.
Cash and Cash Equivalents
Cash and cash equivalents totaled $28.0 million at June 30, 2000, down
$15.8 million from year-end 1999. At June 30, 2000, the Company's balance of
cash and due from banks dropped $15.1 million to $27.6 million. At year-end
1999, Peoples retained additional cash reserves for potential customer
withdrawals related to the Y2K date change. In January 2000, management reduced
cash balances to normal operating levels. Normally, management directs liquid
funds into higher-yielding assets such as loans to meet loan demand in its
markets, as well as enhance profitability.
Total cash and cash equivalents fluctuate on a daily basis due to
transactions in process and other liquidity needs. Management believes the
liquidity needs of Peoples are satisfied by the current balance of cash and cash
equivalents, readily available access to traditional and non-traditional funding
sources, and the portions of the investment and loan portfolios that mature
within one year. These sources of funds should enable Peoples to meet cash
obligations and off-balance sheet commitments as they come due. While the
current balance of cash and cash equivalents adequately serves Peoples'
liquidity needs, management monitors the level of cash and cash equivalents to
ensure that any excess funds are shifted to higher-yielding assets.
Investment Securities
Investment securities totaled $326.7 million at June 30, 2000, down
$1.6 million (or 0.5%) compared to year-end 1999. The decrease that occurred in
the first six months of 2000 was due primarily to modest decreases in the market
value of Peoples' investment securities.
All of Peoples' investment securities are classified as
available-for-sale. Management believes the available-for-sale classification
provides flexibility for Peoples in terms of selling securities as well as
interest rate risk management opportunities. At June 30, 2000, the amortized
cost of the Peoples' investment securities totaled $342.0 million, resulting in
unrealized depreciation in the investment portfolio of $13.3 million and a
corresponding decrease in Peoples' equity of $9.9 million.
At June 30, 2000, investments in US Treasury securities and obligations
of US government agencies and corporations totaled $125.4 million, up $3.3
million (or 2.7%) since year-end 1999. In the second quarter of 2000,
investments in mortgage-backed securities decreased $4.6 million (or 4.1%) to
$107.0 million at June 30, 2000, due primarily to maturities and prepayments.
Peoples' balances in investment obligations of states and political subdivisions
totaled $36.6 million at June 30, 2000, a six month increase of $1.5 million (or
4.3%). Other investments at June 30, 2000, totaled $43.9 million, a decrease of
$1.1 million (or 2.4%).
Management may reduce investment securities in future periods as a
mechanism to fund higher-yielding investments such as loans. Management monitors
the earnings performance and liquidity of the investment portfolio on a regular
basis through Asset/Liability Committee ("ALCO") meetings. The group also
monitors net interest income, sets pricing guidelines, and manages interest rate
risk for the Company. Through active balance sheet management and analysis of
the investment securities portfolio, the Company maintains sufficient liquidity
to satisfy depositor requirements and the various credit needs of its customers.
Management believes the risk characteristics inherent in the investment
portfolio are acceptable based on these parameters.
Loans
Peoples' lending is primarily focused in central and southeastern Ohio,
northern West Virginia, and northeastern Kentucky markets, and consists
principally of retail lending, which includes single-family residential
mortgages and other consumer lending.
Gross loans totaled $701.4 million at June 30, 2000, an increase of
$28.7 million (or 4.3%) since March 31, 2000. Retail loan growth occurred
primarily in Peoples' existing markets, while commercial lending activity
continues with selected customers outside Peoples' primary markets. The
following table details total outstanding loans:
(dollars in thousands) June 30, March 31, December 31,
2000 2000 1999
--------- ---------- ---------
Commercial, financial, and agricultural $ 283,157 $ 271,077 $ 272,219
Real estate, construction 20,243 18,419 14,067
Real estate, mortgage 271,274 259,928 252,427
Consumer 126,739 123,312 121,120
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Total loans $ 701,413 $ 672,736 $ 659,833
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Peoples experienced loan growth in the second quarter of 2000 in
primarily real estate loans, which grew $13.2 million (or 4.7%) to $291.5
million (including construction loans) at June 30, 2000. Real estate loans
(including construction loans) account for the largest portion of the loan
portfolio, comprising 41.6% of Peoples' total loan portfolio. Included in real
estate loans are home equity credit lines ("Equilines"), which totaled $23.9
million at June 30, 2000, compared to $22.7 million at March 31, 2000.
Management believes the Equiline loans are a competitive product with an
acceptable return on investment after risk considerations. Residential real
estate lending continues to represent a major focus of Peoples' lending due to
the lower risk factors associated with this type of loan and the opportunity to
provide additional products and services to these consumers at reasonable yields
to Peoples.
At June 30, 2000, commercial, financial, and agricultural loans
("commercial loans") increased $12.1 million (or 4.5%) from December 31, 1999,
to $283.2 million, or 40.4% of Peoples' total loan portfolio. Commercial loan
activity continued to be strong in the second quarter of 2000. Economic
conditions in Peoples' markets have provided quality credit opportunities,
particularly in southeastern and central Ohio. Management will continue to focus
on the enhancement and growth of the commercial loan portfolio while maintaining
appropriate underwriting standards and risk/price balance. Management expects
commercial loan demand to remain strong into mid-2000. In addition to the
anticipated in-market penetration, Peoples will continue to selectively lend to
customers outside its primary markets.
Consumer lending continues to be a vital part of Peoples' core lending.
At June 30, 2000, consumer loan balances (excluding credit card loans) increased
$3.4 million (or 2.9%) to $120.4 million. The majority of Peoples' consumer
loans are in the indirect lending area, where volume increases were experienced,
combined with reduced indirect loan payoffs. At June 30, 2000, Peoples had
indirect loan balances of $74.6 million, compared to $72.7 million at March 31,
2000.
Management is pleased with the performance and quality of Peoples'
consumer loan portfolio, which can be attributed to a commitment of high
customer service levels and the continued demand for indirect loans in the
markets served by Peoples. Lenders use a tiered pricing system that enables
Peoples to apply interest rates based on the corresponding risk associated with
the indirect loan. Although consumer debt delinquency has increased in the
financial services industry (due mostly to credit card debt), management's
actions to reinforce Peoples' pricing system and underwriting criteria have
tempered indirect lending delinquencies. Management plans to continue its focus
on the use of this tiered pricing system in the future, combined with controlled
growth of the indirect lending portfolio if economic conditions remain strong.
Peoples' credit card balances at June 30, 2000, totaled $6.4 million,
unchanged since March 31, 2000. While management continues to explore new
opportunities to serve credit card customers, those plans do not include the
assumption of additional unnecessary risk merely for the sake of growth.
Loan Concentration
At June 30, 2000, real estate lending (including both mortgage and
construction loans) totaled $291.5 million (or 41.6%) of total loans. Peoples'
lending is primarily focused in the local southeastern Ohio market and
contiguous mid-Ohio valley areas. Peoples' loan mix of retail lending, which
includes single-family residential mortgages and other consumer loan products,
is periodically reviewed for appropriate changes in mix.
At June 30, 2000, commercial loans totaled $283.2 million (or 40.4%) of
gross loans. Peoples' largest concentration of commercial loans is in credits to
assisted living facilities/nursing homes, which comprised approximately 9.7% of
Peoples' outstanding commercial loans at June 30, 2000. These lending
opportunities have arisen due to recent industry growth in certain markets or
contiguous areas. Management believes Peoples' assisted living
facilities/nursing homes loans do not present more than the normal amount of
risk assumed in other types of lending.
In addition to assisted living facilities/nursing homes, another of
Peoples' larger groups of commercial loans consists of lodging and lodging
related companies, which accounted for 9.4% of commercial loans at June 30,
2000.
Allowance for Loan Losses
The allowance for loan losses as a percentage of loans increased from
1.56% at December 31, 1999, to 1.58% at the end of the second quarter of 2000.
The balance in the allowance for loan losses increased $649,000, due to
increased provision for loan losses and loan growth.
The following table presents changes in the Company's allowance for
loan losses:
Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
---------------------- ---------------------
2000 1999 2000 1999
--------- ---------- ---------- ---------
Balance, beginning of period ... $ 10,628 $ 9,855 $ 10,264 $ 9,509
Chargeoffs ..................... (375) (319) (641) (574)
Recoveries ..................... 60 136 168 200
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Net chargeoffs ............ (315) (183) (473) (374)
- --------------------------------------------------------------------------------
Provision for loan losses ...... 600 447 1,122 984
- --------------------------------------------------------------------------------
Balance, end of period $ 10,913 $ 10,119 $ 10,913 $ 10,119
================================================================================
Management expects continued loan growth in 2000 and believes that
future provision expense will remain stable or modestly increase, although such
increases will be dependent on loan delinquencies, portfolio risk, overall loan
growth, general economic conditions in Peoples' markets and other factors
management considers in evaluating the adequacy of the allowance.
Peoples' consumer loan net chargeoffs continue to comprise the largest
portion total net chargeoffs, reaching $359,000 for the six months ended June
30, 2000, an increase of $32,000 (or 9.7%) in comparison to 1999's first half
total of $327,000. This increase is due primarily to increased direct personal
loan chargeoffs. For the first six months of 2000, commercial loan net
chargeoffs totaled $104,000 compared to $4,000 a year earlier. Peoples had
insignificant real estate loan chargeoffs in the second quarter of 2000,
demonstrating the quality of the portfolio.
Nonperforming assets (which include loans 90 days or more past due,
those loans classified as nonaccrual loans, renegotiated loans, and other real
estate owned) as a percentage of outstanding assets were 0.23% at June 30, 2000,
compared to 0.21% at year-end 1999. Nonaccrual loans and renegotiated loans
totaled $1,363,000 and $573,000 at June 30, 2000, compared to $1,109,000 and
$747,000, respectively, at year-end 1999. Other real estate owned totaled
$211,000 at June 30, 2000, compared to $207,000 at year-end 1999. Management
believes the current level of nonperforming assets is below peer group levels
and is a reflection of the overall quality of Peoples' loan portfolio.
Management also evaluates Peoples' loan portfolio quality by monitoring
the amount of loans past due 90 days or more. At June 30, 2000, loans past due
90 days or more totaled $304,000, compared to $249,000 at year-end 1999.
Management believes the balances of loans 90 days or more past due are
reasonable and reflect the overall quality of Peoples' loan portfolio.
Management continually monitors the loan portfolio through its Loan
Review Department and Loan Loss Committee to determine the adequacy of the
allowance for loan losses. This formal analysis determines the appropriate level
of the allowance for loan losses, allocation of the allowance among loan types
and the adequacy of the unallocated component of the allowance. The portion of
the allowance allocated among the various loan types represents management's
estimate of expected losses based upon specific allocations for individual
lending relationships and historical loss experience for each category of loans.
The individual loan reviews are based upon specific qualitative and quantitative
criteria, including the size of the loan and loan grades below a predetermined
level. The historical experience factor is based upon historical loss
experience, trends in losses and delinquencies, the growth of loans in
particular markets and industries, and known changes in economic conditions in
the particular lending markets.
Allowances for homogeneous loans (such as residential mortgage loans,
credit cards, personal loans, etc.) are collectively evaluated upon historical
loss experience, trends in losses and delinquencies, the growth of loans in
particular markets, and known changes in economic conditions in the particular
lending markets. A loan is considered impaired when, based on current
information and events, it is probable that Peoples will be unable to collect
the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of potential impaired
loan losses is generally based on the present value of expected future cash
flows discounted at the loan's historical effective interest rate, or the fair
value of the collateral if the loan is collateral dependent. If foreclosure is
probable, impairment loss is measured based on the fair value of the collateral.
At June 30, 2000, the recorded investment in loans that were considered
to be impaired under Statement of Financial Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended by SFAS No.
118, was $9.2 million of which $8.8 million were accruing interest, and $409,000
were nonaccrual loans. Included in this amount is $7.3 million of impaired loans
for which the related allowance for loan losses is $1.7 million. The remaining
impaired loan balances of $1.9 million do not have a related allocation of the
allowance for loan losses as a result of write-downs, being well-secured, or
possessing characteristics demonstrating ability to repay the loan. The average
recorded investment in impaired loans during the six months ended June 30, 2000,
was approximately $8.0 million. For the six months ended June 30, 2000, Peoples
recognized interest income on impaired loans of $452,000, or 1.1% of Peoples'
total interest income in the same period.
Funding Sources
Peoples considers a number of alternatives, including but not limited
to deposits, short-term borrowings, and long-term borrowings when evaluating
funding sources. Traditional deposits continue to be the most significant source
of funds for Peoples, totaling $729.9 million, or 73.6% of Peoples' funding
sources at June 30, 2000.
Non-interest bearing deposits remain a core funding source for Peoples.
At June 30, 2000, non-interest bearing balances totaled $79.7 million, a $3.6
million (or 4.3%) decrease compared to year-end 1999. Management intends to
continue to focus on maintaining its base of lower-costing funding sources,
through product offerings that benefit customers who increase their relationship
with Peoples by using multiple products and services.
Interest-bearing deposits totaled $650.2 million at June 30, 2000, an
increase of $5.3 million (or 0.8%) compared to year-end 1999. Interest-bearing
transaction accounts were the largest growth component of Peoples' deposits,
increasing $16.5 million (or 7.7%) to $231.2 million at June 30, 2000. In the
first quarter of 2000, Peoples began offering a 17-month "special" CD, which
provides an attractive rate of return for customers and increases Peoples'
competitive position to retain and grow deposits. Peoples continued to offer
this product during the second quarter and into the third quarter of 2000 to
fund loan growth. Management will continue to emphasize deposit-gathering in the
future by offering special "relationship accounts" (both non-interest bearing
and interest-bearing) based on other products and services offered while
balancing deposit growth with adequate net interest margin to meet Peoples'
strategic goals.
In addition to traditional deposits, Peoples accesses both short-term
and long-term borrowings to fund its operations and investments. Peoples'
short-term borrowings consist of federal funds purchased, corporate deposits
held in overnight repurchase agreements, wholesale funds such as term repurchase
agreements, and various FHLB borrowings. At June 30, 2000, short-term borrowings
totaled $122.8 million, an increase of $35.3 million (or 40.4%) over year-end
1999. The largest component of Peoples' short-term borrowing at June 30, 2000,
was FHLB advances which totaled $65.4 million, a six month increase of $42.9
million (or 191.3%) of which $11.5 million of the increase is attributed to
prepayments of certain long-term FHLB advances using short-term, repo-based FHLB
advances. Growth in borrowings such as FHLB advances were due primarily to
sustained loan growth.
In addition to short-term FHLB advances, Peoples had total short-term,
national market repurchase agreement balances of $25.8 million at the end of the
second quarter of 2000, a decrease of $8.2 million (or 24.1%) compared to
year-end 1999. Peoples also had $31.5 million of retail overnight repurchase
agreement balances with its customers at June 30, 2000, a six month increase of
$1.1 million (or 3.5%). Short-term FHLB advances and short-term, national market
repurchase agreements were accessed heavily at the end of 1999 to fund Peoples'
Y2K cash reserves for potentially large customer deposit withdrawals. Such
borrowings were repaid in the early weeks of January 2000. In general, Peoples
accesses these funding sources at various times to balance liquidity needs.
Peoples also maintains long-term borrowing capacity with the FHLB.
Long-term FHLB advances decreased $11.5 million (or 7.8%) since year-end 1999,
totaling $136.4 million at June 30, 2000. Peoples' long-term FHLB advances are
primarily 10-year borrowings, with fixed rate features for periods of two,
three, or four years, depending on the specific advance. Each advance has the
opportunity to reprice after its initial fixed rate period (at the discretion of
the FHLB), and Peoples has the option to prepay any repriced advance without
penalty, or allow the borrowing to reprice to a LIBOR based, variable product.
In June 2000, management opted to prepay those long-term FHLB advances that
would have repriced to current market rates of interest to take advantage of
potential cost savings using short-term advances offered. Management plans to
maintain access to long-term FHLB borrowings as an appropriate funding source.
Peoples also has a long-term note with an unaffiliated financial
institution. The original principal balance of the note was $3.0 million and was
used to finance an acquisition in early 1997. At June 30, 2000, the balance was
$2.3 million, a decrease of $0.1 million since year-end 1999. Principal payments
began in 1998 and continue semi-annually over the next three years.
Capital/Stockholders' Equity
At June 30, 2000, stockholders' equity was $73.0 million, unchanged
from the balance at year-end 1999. In the second quarter of 2000, Peoples had
net income of $2.7 million and paid dividends of $0.9 million, a dividend payout
ratio of 33.89% of earnings, compared to a ratio of 35.05% for the same period a
year earlier. Management believes recent dividends represent an acceptable
payout ratio for Peoples and anticipates similar payout ratios in future periods
through quarterly dividends.
At June 30, 2000, the adjustment for the net unrealized holding loss on
available-for-sale securities, net of deferred income taxes, totaled $9.9
million, an increase of $2.3 million since year-end 1999. Since all the
investment securities in Peoples' portfolio are classified as
available-for-sale, both the investment and equity sections of Peoples' balance
sheet are more sensitive to the changing market values of investments. The
changes in market value of Peoples' investment portfolio directly impacted
Peoples' stockholders' equity. Management believes Peoples' capital continues to
provide a strong base for profitable growth.
Peoples has also complied with the standards of capital adequacy
mandated by the banking industry. Bank regulators have established "risk-based"
capital requirements designed to measure capital adequacy. Risk-based capital
ratios reflect the relative risks of various assets banks hold in their
portfolios. A weight category of either 0% (lowest risk assets), 20%, 50%, or
100% (highest risk assets) is assigned to each asset on the balance sheet. At
June 30, 2000, Peoples' and Peoples Bank's risk-based capital ratios were above
the minimum standards for a well-capitalized institution. Peoples' risk-based
capital ratio of 14.11% at June 30, 2000, is well above the well-capitalized
standard of 10%. Peoples' Tier 1 capital ratio of 12.53% also exceeded the
well-capitalized minimum of 6%. The Leverage ratio at June 30, 2000, was 8.46%
and also above the well-capitalized standard of 5%.
On December 10, 1999, Peoples announced intentions to repurchase 2.5%
of Peoples' outstanding common shares (or 165,000 common shares) from time to
time in open market or privately negotiated transactions under the 2000 Stock
Repurchase Program. The timing of the purchases and the actual number of common
shares purchased have depended and will depend on market conditions and other
business factors. The 2000 Stock Repurchase Program will expire December 31,
2000. At August 1, 2000, Peoples had purchased approximately 76,000 treasury
shares under the 2000 Stock Repurchase Plan (or 46% complete) at a weighted
average price of $17.02 per share.
In June 1998, Peoples implemented a formal plan to purchase treasury
shares for use in its stock option plans. The formal plan serves as the basis
for treasury purchases in anticipation of Peoples' projected stock option
exercises and is based upon specific criteria related to market prices, as well
as the number of common shares expected to be reissued under Peoples' stock
option plans. Under the plan, Peoples is currently authorized to repurchase
18,150 common shares each quarter. During the second quarter of 2000, Peoples
purchased 18,150 treasury shares at a weighted-average price of $17.96 per
share, totaling $0.3 million. Management expects to purchase similar share
amounts in future quarters for use in its stock option plans. Future changes, if
any, to Peoples' systematic share repurchase program may be necessary to respond
to the number of common shares expected to be reissued for Peoples' stock option
plans. Management intends to continue its systematic quarterly treasury share
program.
Peoples also maintains the Peoples Bancorp Inc. Deferred Compensation
Plan ("Deferred Compensation Plan") for the directors of Peoples and its
subsidiaries. The Deferred Compensation Plan is designed to recognize the value
to Peoples of the past and present service of its directors and encourage their
continued service through implementation of a deferred compensation plan. As a
result and in accordance with accounting regulations, the account balances
invested in Peoples common shares are reported as treasury stock in Peoples'
financial statements. At June 30, 2000, the Deferred Compensation Plan and its
participants were entitled to $0.8 million of Peoples' common shares, which is a
reduction to Peoples' equity balance. In April 2000, Peoples distributed
approximately $0.1 million of Peoples' common shares from the Deferred
Compensation Plan to its participants in conjunction with several director
retirements resulting from the consolidation of Peoples' banking and thrift
subsidiaries in March. Management does not expect the Deferred Compensation Plan
to have a material impact on future financial statements or results of
operations of Peoples.
Liquidity and Interest Rate Sensitivity
The objective of Peoples' asset/liability management function is to
maintain consistent growth in net interest income within Peoples' policy
guidelines. This objective is accomplished through management of Peoples'
balance sheet liquidity and interest rate risk ("IRR") exposure based on changes
in economic conditions, interest rate levels, and customer preferences.
Interest Rate Risk
The most significant market risk resulting from Peoples' normal course
of business, extending loans and accepting deposits, is interest rate risk.
Interest rate risk is the potential for economic loss due to future interest
rate changes which can impact both the earnings stream as well as market values
of financial assets and liabilities. Peoples' management has charged the
Asset/Liability Committee ("ALCO") with the overall management of Peoples' and
Peoples Bank's balance sheets and off-balance sheet transactions related to the
management of interest rate risk. The ALCO strives to keep Peoples focused on
the future, anticipating and exploring alternatives, rather than simply reacting
to change after the fact.
To this end, the ALCO has established an IRR management policy that
sets the minimum requirements and guidelines for monitoring and controlling the
level and amount of interest rate risk. The objective of the interest rate risk
policy is to encourage management to adhere to sound fundamentals of banking
while allowing sufficient flexibility to exercise the creativity and innovations
necessary to meet the challenges of changing markets. The ultimate goal of these
policies is to optimize net interest income within the constraints of prudent
capital adequacy, liquidity, and safety.
The ALCO relies on different methods of assessing IRR including
simulating net interest income, monitoring the sensitivity of the net present
market value of equity or economic value of equity, and monitoring the
difference or gap between maturing or rate-sensitive assets and liabilities over
various time periods. The ALCO places emphasis on simulation modeling as the
most beneficial measurement of interest rate risk do to its dynamic measure. By
employing a simulation process that projects the impact of potential changes in
interest rates and balance sheet structures and by establishing limits on
changes in net income and net market value, the ALCO is better able to evaluate
the possible risks associated with alternative strategies.
The following table is provided to show the earnings at risk and value
at risk positions of Peoples at June 30, 2000 (dollars in thousands):
Immediate Estimated Estimated
Interest Rate Increase (Decrease) Increase (Decrease) in
Change in Net Interest Economic Value
(in Basis Points) Income of Equity
- ----------------- ------------------------ ------------------------
300 $ (5,649) (13.9)% $(10,277) (10.3)%
200 (3,748) (9.2) (7,154) (7.1)
100 (1,865) (4.6) (3,737) (3.7)
(100) 1,482 3.6 2,967 3.0
(200) 2,950 7.2 6,200 6.2
(300) $ 4,402 10.8% $ 9,719 9.7%
The simulation process starts with a base case simulation which
represents projections of current balance sheet growth trends. Base case
simulation results are prepared under a flat interest rate forecast and at least
two alternative interest rate forecasts, one rising and one declining, assuming
parallel yield curve shifts. Comparisons showing the earnings variance from the
flat rate forecast illustrate the risks associated with the current balance
sheet strategy. When necessary, additional balance sheet strategies are
developed and simulations prepared. These additional simulations are run with
the same interest rate forecasts used with the base case simulation and/or using
non-parallel yield curve shifts. The additional strategies are used to measure
yield curve risk, prepayment risk, basis risk, and index lag risk inherent in
the balance sheet. Comparisons showing the earnings and equity value variance
from the base case provide the ALCO with information concerning the risks
associated with implementing the alternative strategies. The results from model
simulations are reviewed for indications of whether current interest rate risk
strategies are accomplishing their goal and, if not, suggest alternative
strategies that could. The policy calls for periodic review by the ALCO of
assumptions used in the modeling.
The interest risk analysis shows that Peoples is liability sensitive.
This means that downward moving interest rates favorably impact net interest
income while upward rate movements have a negative effect. Inherent within the
risk analysis are a large number of interrelated assumptions. As with all
estimates, actual performance could vary; however, management believes that the
analysis is reasonable in the aggregate. Peoples' ALCO believes it is beneficial
to monitor interest rate risk for both the short and long-term. Therefore, to
effectively evaluate and act on projections from model simulations, management
through its ALCO established limits on changes in net interest income and the
value of the balance sheet. To monitor the short-term exposure IRR, the ALCO has
limited the earnings at risk to no more than 10% from base case for each 1%
shift in interest rates. To monitor the long-term exposure IRR, management has
limited the negative impact to Peoples' economic value of equity to not more
than 40% when interest rates shift 2% and 75% when rates shift 4%, respectively.
For an assessment of the current interest rate risk position, the ALCO
reviews static gap measures for specific time periods focusing on one year
cumulative gap. Based on historical trends and performance, the ALCO has
determined that the ratio of the one year cumulative gap should be within 15% of
earning assets. At June 30, 2000, both the earnings at risk and the change in
economic value of equity were within policy limits. While interest rates are
currently trending higher and this could potentially have a negative impact to
net interest income, the magnitude of this impact will be substantially less
then demonstrated in the above table. The rate shock scenarios are used in the
modeling process as a stress test to net interest earnings. Management believes
that actual changes in interest rates will occur more gradually, allowing for
appropriate adjustments in ALCO strategies. Through periodic ALCO meetings,
management continues to explore methods to reduce Peoples' interest rate
sensitivity through a variety of traditional and off-balance sheet methods.
Liquidity
Maintenance of a sufficient level of liquidity is a primary objective
of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet
anticipated and unanticipated operating cash needs, loan demand, and deposit
withdrawals, without incurring a sustained negative impact on profitability. It
is Peoples' policy to manage liquidity so that there is no need to make
unplanned sales of assets or to borrow funds under emergency conditions. The
ALCO's policy for liquidity management sets limits on the net liquid position of
Peoples and the concentration of non core funding sources.
The main source of liquidity for Peoples comes through deposit growth.
Liquidity is also provided from cash generated from assets such as maturities,
principal payments and income from loans and investment securities. During the
six months ended June 30, 2000, cash provided by financing activities increased
$22.1 million due to short term borrowings and interest-bearing deposit growth,
while outflows from investing activity totaled $45.8 million. The majority of
the increase in cash outflows from investing activities occurred as a result of
the growth in Peoples' loan portfolio. When appropriate, Peoples takes advantage
of external sources of funds such as advances from the FHLB, national market
repurchase agreements, and brokered funds. These external sources often provide
attractive interest rates and flexible maturity dates which enables Peoples to
match funding with contractual maturity dates of assets. Securities in the
investment portfolio that are available for sale can be utilized as an
additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting
volatile liabilities, non core deposits and brokered funds, from liquid assets,
short-term investments and unpledged available-for-sale securities. At year-end
1999, the net liquidity position of Peoples was $122.5 million or 11.43% of
total assets. At June 30, 2000, the net liquidity position of Peoples was $126.3
million or 11.52% of total assets. The change can be attributed to increased
market value of Peoples' investment portfolio. The liquidity position at June
30, 2000 and year-end 1999 were within Peoples' policy limit of -10% of total
assets. The ALCO believes Peoples has sufficient liquidity to meet current
obligations to borrowers, depositors, debt holders, and others.
Effects of Inflation on Financial Statements
Substantially all of the Company's assets relate to banking and are
monetary in nature. Therefore they are not impacted by inflation to the same
degree as companies in capital intensive industries in a replacement cost
environment. During a period of rising prices, a net monetary asset position
results in loss in purchasing power and conversely a net monetary liability
position results in an increase in purchasing power. In the banking industry,
typically monetary assets exceed monetary liabilities. Therefore as prices have
recently increased, financial institutions experienced a decline in the
purchasing power of their net assets.
Future Outlook
Results of operations in the second quarter of 2000 represent enhanced
financial performance through a combination of growth and a continued focus on
core competencies. Management will continue to integrate Peoples' sales
processes and provide high quality products and services to a broad range of
business and consumer clients. In addition, management has identified and will
continue to analyze key performance areas which quantitatively measure the
relative performance of Peoples compared to prior year results.
With the second quarter 2000 consolidation of Peoples' three banking
subsidiaries into Peoples Bank, NA, management's focus in the near-term future
is to continue integration of Peoples' many sales processes, products, and
services. The transition to a unified financial services entity has allowed
Peoples to focus on a marketing program based on establishing consistent brand
awareness of Peoples Bank, Peoples Investments and Peoples Insurance. The
primary focus of the consolidation was client retention and market share growth
through improved product and service convenience and availability, achieved by
placing more of Peoples' associates in client service positions and lessen the
administrative duties experienced with three separate banking charters. The
consolidation also allows Peoples' clients to access all 38 offices, 25 ATM's,
and internet banking system, and connects the northeastern Kentucky markets with
contiguous Ohio and West Virginia markets, providing enhanced synergies and
client service opportunities in the Huntington, West Virginia - Ashland,
Kentucky greater metropolitan area.
Management strives to enhance revenue streams by reorganizing and
revitalizing its client relationship management process. Areas of focus will
include enhancement of non-interest income streams, including asset management
fees (such as fiduciary fees, insurance revenues, etc.), electronic banking
revenues, etc. Peoples Bank will continue to offer a wide array of banking
products and services, while two new operating divisions have made strong moves
to fully serve client needs: Peoples Investments provides customer-tailored
solutions for fiduciary needs, investment alternatives, and other asset
management capabilities; and Peoples Insurance provides a full set of life,
property and casualty insurance products and services. Management plans to
continue Peoples' investment in sales expertise and relationship building skills
of all client service representatives as the sales process evolves.
In the first half of 2000, Peoples completed a review of its
utilization of its core operating system. Peoples partnered with its core system
provider to optimize the use of Peoples' main operating system and enhance
profitability over the next 12 to 18 month period. As part of the review and to
add speed to Peoples' client service initiatives, management purchased new
technology to power an integrated sales process and provide high-velocity
responses to client needs.
Peoples continues to prepare for the fourth quarter opening of its
fourth sales office in Wood County, West Virginia. The office will be located at
3411 Emerson Avenue and, after renovations and refurbishments, will offer
Peoples' professionals an enhanced environment for easy delivery of all
financial services. An ATM will also offer 24-hour banking convenience. The
Emerson Avenue office is on the north side of Parkersburg and will complement
Peoples Bank's sales office in the nearby Vienna Wal-Mart supercenter, which
opened in mid-1999. Peoples Bank also has a full-service office at 2107 Pike
Street in Parkersburg and in the recently opened Wal-Mart supercenter in the
Patriot Center slightly south of Parkersburg.
Management recognizes the importance of electronic financial services
to its client base and focuses efforts to provide clients e-access to banking
products and services at their convenience. Peoples Bank has offered a fully
integrated internet banking system ("Internet Banking System" or "Peoples OnLine
Connection") since late 1999 and now has over 2,200 clients using the system.
Peoples OnLine Connection offers real-time transaction capability and
portability for Peoples' clients, including the capability to perform online
transactions, pay bills, view account history, stop payments, open accounts,
change address, reorder checks, purchase savings bonds and complete other
financial transactions.
Peoples' website was recently upgraded to provide a variety of links to
news, weather, sports information, as well as banking online using Peoples
OnLine Connection. Links are also provided to a national shopping mall,
increasing virtual shopping access to all peoplesbancorp.com visitors, giving
Peoples' clients a natural extension for timely information from around the
world. In the future, management plans to develop electronic links to local
retailers, providing e-commerce capabilities to merchants by allowing internet
users to shop online at their stores without leaving their homes. Management
believes the e-commerce capabilities of peoplesbancorp.com are unlimited, and
continue to balance high levels of personal service, security, connection, and
confidentiality that clients expect from Peoples.
In addition to internet banking enhancements, Peoples added an ATM in
the third quarter of 2000 to increase electronic presence in northern Washington
County, Ohio. Peoples Bank recently introduced a new ATM machine in Beverly,
Ohio, its sixth ATM in Washington County. The new ATM is located in a
convenience store at the intersection of State Route 339 and State Route 60 in
Beverly, a well-traveled route. Access to the ATM will be available during the
Corner Store's regular hours of 6:00 a.m. until midnight, seven days a week.
Management believes the new ATM offers added convenience and access to Peoples'
clients in northern Washington County and surrounding communities, and
complements Peoples Bank's Washington and Morgan County financial service
centers, which offer complete banking, insurance, investment, and trust
products. Management will continue to identify opportunities to provide
convenient delivery points for clients in its markets.
Mergers and acquisitions remain a viable strategic option for the
continued growth of Peoples' operations and scope of client service. Future
acquisitions, if they occur, may not be limited to specific geographic location
or proximity to current markets. Management will continue to focus its energies
on review and research of possible mergers, consolidations, banking center
purchases, or insurance agency acquisitions as a means of acquiring sales
centers and revenue opportunities that complement existing company locations and
revenue growth strategies. Ultimately, acquisitions will depend upon financial
service opportunities that complement Peoples' core competencies and strategic
intent. Management considers mergers and acquisitions to be a viable method of
enhancing Peoples' earnings potential and will continue to pursue appropriate
business opportunities.
Management continues to position Peoples for the future of financial
services without sacrificing a compatible focus on community-based values. Since
many products and services in the industry are easily copied, Peoples' focus is
to deliver these products and services better, faster, and more efficiently than
competitors. Peoples' goal is to be a high-performing financial services
company, committed to community leadership, while focusing efforts to provide
shareholders at least a 15% annual return on their investment.
Going forward, Peoples will work to achieve these goals by growing the
relationship of existing clients to optimize the client's full-service
connection, increasing market share in markets where Peoples does not have
significant presence; continuing to create a business environment where clients
can access traditional banking products and services, investment services, and
insurance products in the most convenient manner possible; working to create a
model that identifies new ways to fill customers' investment and insurance
needs; and expanding Peoples' e-commerce capabilities through
peoplesbancorp.com. Management believes that Peoples can produce enhanced future
performance levels through integrated sales techniques and commitment to the
strategic initiatives outlined in this section, which are designed to enhance
client service and increase future shareholder value.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
The statements in this Form 10-Q which are not historical fact are
forward looking statements that involve risks and uncertainties, including, but
not limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of economic conditions, the impact of
competitive products and pricing, and other risks detailed in the Company's
Securities and Exchange Commission filings.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption
"Liquidity and Interest Rate Sensitivity" under Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations in this Form 10-Q,
and is incorporated herein by reference.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended June 30, For the Six Months Ended June 30,
2000 1999 2000 1999
Average Yield/ Average Yield/ Average Yield/ Average Yield/
(dollars in thousands) Balance Rate Balance Rate Balance Rate Balance Rate
ASSETS
Securities:
Taxable $ 289,101 6.92% $ 252,164 6.23% $ 289,781 6.88% $ 219,733 6.15%
Tax-exempt 33,609 7.64% 47,350 7.25% 33,477 7.67% 45,404 7.31%
- -----------------------------------------------------------------------------------------------------------------------
Total 322,710 7.00% 299,514 6.40% 323,258 6.96% 265,137 6.35%
Loans:
Commercial 291,385 9.18% 241,591 8.65% 285,965 9.16% 233,138 8.64%
Real estate 270,523 8.24% 235,712 8.30% 265,747 8.19% 235,692 8.35%
Consumer 124,698 10.45% 110,504 10.23% 123,042 10.35% 110,338 10.35%
- -----------------------------------------------------------------------------------------------------------------------
Total loans 686,606 9.07% 587,807 8.81% 674,754 9.00% 579,168 8.85%
Less: Allowance for loan (10,845) (10,013) (10,654) (9,867)
loss
- -----------------------------------------------------------------------------------------------------------------------
Net loans 675,761 9.22% 577,794 8.96% 664,100 9.15% 569,301 9.00%
Interest-bearing deposits 665 4.94% 8,405 4.24% 670 4.53% 5,303 4.18%
Federal funds sold -- -- 13,654 4.73% 286 5.77% 9,453 4.78%
- -----------------------------------------------------------------------------------------------------------------------
Total earning assets 999,136 8.50% 899,367 8.00% 988,314 8.43% 849,194 8.10%
Other assets 79,246 75,899 79,265 74,141
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,078,382 $ 975,266 $ 1,067,579 $ 923,335
=======================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 86,848 2.36% $ 98,323 2.40% $ 87,803 2.36% $ 98,374 2.40%
Interest-bearing
demand deposits 226,911 4.33% 213,514 3.42% 221,046 4.10% 209,295 3.45%
Time 338,448 5.24% 314,706 5.01% 342,290 5.02% 320,668 5.05%
- -----------------------------------------------------------------------------------------------------------------------
Total 652,207 4.56% 626,543 4.06% 651,139 4.47% 628,337 4.10%
Borrowed funds:
Short-term 91,226 6.04% 39,873 4.31% 81,479 5.82% 35,327 4.26%
Long-term 148,962 5.17% 115,668 4.82% 149,576 5.16% 78,305 4.79%
- -----------------------------------------------------------------------------------------------------------------------
Total 240,188 5.51% 155,541 4.69% 231,055 5.40% 113,632 4.62%
Total interest
bearing liabilities 892,395 4.82% 782,084 4.18% 882,194 4.71% 741,969 4.18%
Non-interest bearing 82,588 77,822 81,456 76,945
deposits
Other liabilities 31,888 29,690 31,754 18,182
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,006,871 889,596 995,404 837,096
Stockholders' equity 71,511 85,670 72,175 86,239
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and $ 1,078,382 $ 975,266 $ 1,067,579 $ 923,335
equity
=======================================================================================================================
Interest income to earning assets 8.50% 8.00% 8.43% 8.10%
Interest expense to earning assets 4.30% 3.64% 4.21% 3.65%
- -----------------------------------------------------------------------------------------------------------------------
Net interest margin 4.20% 4.36% 4.22% 4.45%
=======================================================================================================================
Interest income and yields presented on a fully tax-equivalent basis using a 35%
tax rate.
PART II
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities and Use of Proceeds.
None.
ITEM 3: Defaults upon Senior Securities.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None.
ITEM 5: Other Information.
On August 10, 2000, the Company announced its quarterly dividend of
$0.14 per share. The second quarter dividend payout of approximately $912,000 on
an estimated 6.51 million shares is payable October 2, 2000, to shareholders of
record September 15, 2000.
ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ---------- ----------------------------------- -----------------------------
11 Computation of Earnings Per Share. Page 29.
27 Financial Data Schedule. EDGAR electronic filing only.
b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the six
months ended June 30, 2000:
1)Filed January 14, 2000 - News release announcing the
declaration of a 10% stock dividend by the Board of
Directors of Peoples
2)Filed January 18, 2000 - News release announcing plans
to form a single national banking company. 3) Filed
January 21, 2000 - News release announcing earnings for
the fourth quarter ended December 31, 1999.
4)Filed February 7, 2000 - News release announcing the opening
of a sales center by Peoples Banking and Trust Company, a
subsidiary of Peoples, in a Wal*Mart superstore located in
south Parkersburg, West Virginia.
5)Filed February 7, 2000 - News release announcing the
appointment of new executive officer and election of new
director.
6)Filed February 16, 2000 - News release announcing the
declaration of a $0.14 per share quarterly dividend by the
Board of Directors of Peoples.
7)Filed March 30, 2000 - News release announcing the plan to
open a full-service by Peoples Bank, a subsidiary of Peoples,
on Emerson Avenue in Parkersburg, West Virginia.
8)Filed April 7, 2000 - News release announcing the successful
completion of the merger of Peoples' banking and insurance
subsidiaries.
9)Filed April 18, 2000 - News Release announcing earnings for
the first quarter of 2000.
10)Filed May 5, 2000 - News Release announcing the improvements
to Peoples' internet banking services .
11)Filed June 29, 2000 - News Release announcing the naming of
Peoples to the Cleveland Plain Dealer list of top 100
businesses in Ohio.
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.
PEOPLES BANCORP INC.
Date: August 11, 2000 By:/s/ ROBERT E. EVANS
-------------------------------------
Robert E. Evans
President and Chief Executive Officer
Date: August 11, 2000 By:/s/ JOHN W. CONLON
------------------------------------
John W. Conlon
Chief Financial Officer
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR PERIOD ENDED JUNE 30, 2000
Exhibit
Number Description Exhibit Location
- ---------- ---------------------------------- -----------------------
11 Computation of Earnings Per Share. Page 29
27 Financial Data Schedule. EDGAR electronic filing only.