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 March 31, 2001
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
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(Address of principal executive offices)
45750
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(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 May 1, 2001: 6,580,243.
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. and subsidiaries ("Peoples"),
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 three months ended March 31, 2001, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001. The balance
sheet at December 31, 2000, contained herein has been derived from the audited
balance sheet included in Peoples' Annual Report on Form 10-K for the year ended
December 31, 2000 ("2000 Form 10-K"). Complete audited consolidated financial
statements with footnotes thereto are included in Peoples' 2000 Form 10-K.
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)
March 31, December 31,
ASSETS 2001 2000
Cash and cash equivalents:
Cash and due from banks $ 34,165 $ 28,242
Interest-bearing deposits in other banks 210 207
Federal funds sold 10,015 -
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Total cash and cash equivalents 44,390 28,449
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $323,447 and $335,111 at March 31, 2001, and
December 31, 2000, respectively) 324,508 330,521
Loans, net of unearned interest 752,845 736,965
Allowance for loan losses (12,029) (10,930)
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Net loans 740,816 726,035
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Bank premises and equipment, net 15,665 15,565
Other assets 34,690 35,264
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Total assets $ 1,160,069 $ 1,135,834
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LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 87,817 $ 84,974
Interest bearing 721,173 672,647
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Total deposits 808,990 757,621
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Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 38,472 54,729
Federal Home Loan Bank term advances 45,000 65,186
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Total short-term borrowings 83,472 119,915
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Long-term borrowings 140,876 138,511
Accrued expenses and other liabilities 7,604 7,572
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Total liabilities 1,040,942 1,023,619
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Guaranteed preferred beneficial interests in junior subordinated debentures 29,029 29,021
Stockholders' Equity
Common stock, no par value, 12,000,000 shares authorized - 6,692,865 shares
issued at March 31, 2001, and 6,679,028 issued
at December 31, 2000, including shares in treasury 66,607 66,364
Accumulated comprehensive income, net of deferred income taxes 689 (2,983)
Retained earnings 25,050 23,381
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92,346 86,762
Treasury stock, at cost, 108,623 shares at March 31, 2001, and
189,357 shares at December 31, 2000 (2,248) (3,568)
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Total stockholders' equity 90,098 83,194
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Total liabilities, minority interests and stockholders' equity $ 1,160,069 $ 1,135,834
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Three Months Ended
March 31,
2001 2000
Interest Income $ 22,120 $ 20,112
Interest expense 11,809 10,008
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Net interest income 10,311 10,104
Provision for loan losses 675 522
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Net interest income after provision for loan losses 9,636 9,582
Net gain (loss) on securities transactions 2 (11)
Net gain (loss) on asset disposals 20 (6)
Mark-to-market adjustment on interest rate caps (173) -
Non-interest income:
Service charges on deposits 810 752
Trust revenues 614 698
Insurance commissions 321 156
Electronic banking revenues 319 282
Other non-interest income 137 241
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Total non-interest income 2,201 2,129
Non-interest expense:
Salaries and benefits 3,585 3,293
Occupancy and equipment 945 976
Trust preferred 652 655
Amortization of intangibles 566 571
Data processing and software 247 245
Other non-interest expense 1,956 1,813
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Total non-interest expense 7,951 7,553
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Income before income taxes 3,735 4,141
Income taxes 1,139 1,279
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Net income $ 2,596 $ 2,862
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Basic earnings per share $ 0.40 $ 0.43
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Diluted earnings per share $ 0.39 $ 0.43
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Weighted average shares outstanding (basic) 6,531,986 6,602,504
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Weighted average shares outstanding (diluted) 6,619,399 6,705,526
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Cash dividends declared $ 927 $ 932
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Cash dividend per share $ 0.14 $ 0.14
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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, 2000 6,679,028 $ 66,364 $ 23,381 $ (3,568) $ (2,983) $ 83,194
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Comprehensive income:
Net income 2,596 2,596
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
securities 3,672 3,672
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Comprehensive income 6,268
Exercise of common stock options
(reissuance of 7,659 treasury (81) 155 74
shares)
Tax benefit from exercise of stock 19 19
options
Reissuance of 79,785 treasury shares to
purchase Lower Salem Commercial Bank 7,783 220 1,280 1,500
Cash dividends declared (927) (927)
Common stock issued under dividend
reinvestment plan 6,054 85 85
Purchase of 6,710 shares of treasury stock, (115) (115)
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Balance, March 31, 2001 6,692,865 $ 66,607 $ 25,050 $ (2,248) $ 689 $ 90,098
=====================================================================================================================
Comprehensive Income:
Net unrealized appreciation arising during period, net of tax 3,673
Less: reclassification adjustment for securities gains included in net income, 1
net of tax
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Net unrealized appreciation on investment securities 3,672
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Three Months Ended
March 31,
Cash flows from operating activities:
Net income $ 2,596 $ 2,862
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 675 522
(Gain) loss on securities transactions (2) 11
(Gain) loss on asset disposals (20) 6
Mark-to-market adjustment on interest rate caps 173 -
Depreciation, amortization, and accretion 1,146 1,201
Increase in interest receivable (197) (393)
Increase (decrease) in interest payable 17 (169)
Deferred income tax (benefit) expense (178) 268
Deferral of loan origination fees and costs 135 (79)
Other, net (94) (438)
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Net cash provided by operating activities 4,251 3,791
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Cash flows from investing activities:
Purchases of available-for-sale securities - (4,271)
Proceeds from sales of available-for-sale securities - 429
Proceeds from maturities of available-for-sale securities 14,114 5,583
Net decrease (increase) in loans 602 (12,908)
Expenditures for premises and equipment (57) (156)
Proceeds from sales of other real estate owned 41 -
Acquisitions, net of cash received (162) -
Investment in limited partnership and tax credit funds (400) (400)
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Net cash provided by (used in) investing activities 14,138 (11,723)
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Cash flows from financing activities:
Net decrease in non-interest bearing deposits (4,006) (2,310)
Net increase in interest-bearing deposits 37,962 15,504
Net decrease in short-term borrowings (35,443) (14,071)
Payments on long-term borrowings (158) (157)
Cash dividends paid (762) (764)
Purchase of treasury stock (115) (1,094)
Proceeds from issuance of common stock 74 56
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Net cash used in financing activities (2,448) (2,836)
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Net increase (decrease) in cash and cash equivalents 15,941 (10,768)
Cash and cash equivalents at beginning of period 28,449 43,751
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Cash and cash equivalents at end of period $ 44,390 $ 32,983
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NOTES TO FINANCIAL STATEMENTS
Basis of Presentation
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The accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries
("Peoples") conform to accounting principles generally accepted in the United
States 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 accounting principles
generally accepted in the United States 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.
1. Mergers and Acquisitions
Effective at the close of business on February 23, 2001, Peoples acquired Lower
Salem Commercial Bank for total consideration of $2.4 million ($0.9 million in
cash and $1.5 million in common stock, or 87,568 common shares). The acquisition
was accounted for under the purchase method of accounting, and accordingly, the
consolidated results include the operations of Lower Salem Commercial Bank from
the date of acquisition. Lower Salem Commercial Bank had one full-service
banking office located in Lower Salem, Ohio and total assets of $22.9 million,
deposits of $18.1 million and shareholders' equity of $2.2 million at December
31, 2000. Peoples now operates the former Lower Salem Commercial Bank as a
full-service sales office of Peoples Bank.
2. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
This statement, as amended by Statement Nos. 137 and 138, establishes new
accounting and reporting requirements for derivative instruments, including
certain derivative instruments embedded in other contracts and hedging
activities. Peoples adopted SFAS No. 133 on January 1, 2001, as required,
resulting in pre-tax mark-to-market adjustments on interest rate caps totaling
$173,000, decreasing net income in the first quarter of 2001 by $112,000, or
$0.02 per share. Unrealized gains or losses and contribution to net profits from
these instruments were immaterial in previous periods. Based on Peoples' current
interest rate caps, management believes the adoption of SFAS No. 133 will not
have a significant impact on future results of operations.
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
Months Ended March 31,
SIGNIFICANT RATIOS 2001 2000
Operating return on average equity (a) 12.67 % 15.85 %
Cash basis operating return on average equity (a) (b) 18.43 % 24.93 %
Operating return on average assets (a) 0.95 % 1.08 %
Cash basis operating return on average assets (a) (b) 1.11 % 1.26 %
Return on average equity 12.15 % 15.85 %
Cash basis return on average equity (b) 17.76 % 24.93 %
Return on average assets 0.91 % 1.08 %
Cash basis return on average assets (b) 1.07 % 1.26 %
Net interest margin (c) 3.98 % 4.25 %
Efficiency ratio (d) 57.81 % 55.92 %
Non-interest income leverage ratio (e) 29.80 % 30.48 %
Average stockholders' equity to average assets 7.51 % 6.84 %
Cash dividends to net income 35.71 % 32.56 %
Loans net of unearned interest to deposits (end of period) 93.06 % 90.74 %
Allowance for loan losses to loans net of unearned interest (end of period) 1.60 % 1.58 %
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CAPITAL RATIOS
Tier I capital ratio 12.98 % 12.64 %
Risk-based capital ratio 14.32 % 14.30 %
Leverage ratio 8.89 % 8.46 %
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PER SHARE DATA Operating income per share (a):
Basic $ 0.41 $ 0.43
Diluted 0.41 0.43
Cash basis earnings - diluted (b) 0.47 0.49
Net income per share:
Basic $ 0.40 $ 0.43
Diluted 0.39 0.43
Cash basis earnings - diluted (b) 0.45 0.49
Cash dividends per share 0.14 0.14
Book value per share $ 13.68 $ 11.07
Tangible book value per share (b) $ 10.83 $ 8.07
Weighted average shares outstanding:
Basic 6,531,986 6,602,504
Diluted 6,619,399 6,705,526
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<FN>
(a) In 2001, excludes after-tax mark-to-market adjustment of $112,000 on
interest rate caps due to the adoption of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Instruments."
(b) Excludes after-tax impact of intangible amortization expense and/or
balance sheet impact of intangible assets acquired through the use of
purchase accounting for acquisitions.
(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
operating expenses) as a percentage of fully-tax equivalent net interest
income plus non-interest income. All non-recurring items are removed
from this calculation.
(e) Non-interest income (less securities and asset disposal gains) as a
percentage of non-interest expense (less intangible amortization and
non-direct operational expenses). All non-recurring items are removed
from this calculation.
</FN>
Introduction
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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' subsidiaries are Peoples Bank, National Association
("Peoples Bank") and Northwest Territory Life Insurance Company, an Arizona
corporation that reinsures credit life and disability insurance issued to
customers of Peoples' banking subsidiary. Peoples Bank also operates Peoples
Insurance Agency, Inc. ("Peoples Insurance"), which offers a full range of life,
health, property, and casualty insurance products to customers in Peoples'
markets, and Peoples Loan Services, Inc., which manages a portion of Peoples'
loan portfolio.
Peoples Bank, a nationally chartered banking association and member of the
Federal Reserve System, is subject to the regulation, supervision, and
examination by the Office of the Comptroller of the Currency ("OCC"). Peoples
Bank offers complete financial products and services through 40 financial
service locations and 27 ATM's in the states of Ohio, West Virginia, and
Kentucky. Peoples OnLine Connection, Peoples Bank's e-banking service, 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 provides services through walk-in offices and automobile drive-in
facilities, automated teller machines, telephone banking, and the Internet.
Peoples Insurance also offers investment and insurance products. 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 and an independent
broker/dealer, located at Peoples Bank).
This 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 the following transactions that
have impacted or will impact Peoples' results of operations:
On January 12, 2001, Peoples announced approval to repurchase 125,000
shares (or approximately 2% of Peoples' outstanding common shares) from
time to time in open market or privately negotiated transactions ("2001
Stock Repurchase Program"). Through May 1, 2001, Peoples repurchased
15,157 treasury shares under the 2001 Stock Repurchase Plan (or 12%
complete). The 2001 Stock Repurchase Plan will expire on December 31,
2001.
Effective at the close of business on February 23, 2001, Peoples acquired
Lower Salem Commercial Bank for total consideration of $2.4 million ($0.9
million in cash and $1.5 million in common stock, or 87,568 common
shares) ("Lower Salem Bank Acquisition"). The acquisition was accounted
for under the purchase method of accounting, and accordingly, the
consolidated results include the operations of Lower Salem Commercial
Bank from the date of acquisition. Lower Salem Commercial Bank had one
full-service banking office located in Lower Salem, Ohio and total assets
of $22.9 million, deposits of $18.1 million and shareholders' equity of
$2.2 million at December 31, 2000. Peoples now operates the former Lower
Salem Commercial Bank as a full-service sales office of Peoples Bank.
The impact of these transactions, where significant, is discussed in the
applicable sections of this Management's Discussion and Analysis.
RESULTS OF OPERATIONS
Overview of the Income Statement
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For the three months ended March 31, 2001, operating income totaled $2,708,000
compared to $2,862,000 for the first quarter of 2000. Operating and cash basis
earnings were $0.41 and $0.47 per diluted share through the first three months
of 2001 versus $0.43 and $0.49 the previous year. Operating return on equity
("ROE") was 12.67% in the first quarter of 2001 compared to 15.85% for the first
quarter of 2000 while cash basis operating return on equity was 18.43% and
24.93% for the same periods. Cash basis earnings exclude the effects of
intangible assets and related amortization expenses. Operating income in 2001
excludes the after-tax mark-to-market adjustment of $112,000 on interest rate
caps as a result of Peoples' adopting Statement of Financial Accounting
Standards Number 133 "Accounting for Derivative Instruments and Hedging
Instruments" ("SFAS No. 133"), as required on January 1, 2001.
Because the economic and interest rate environment has significantly changed
since early last year, management believes that Peoples' results of operations
from the fourth quarter of 2000, or the linked quarter, provide a better
comparison than the results from the first quarter of 2000. For the fourth
quarter of 2000, operating income totaled $2,682,000, or $0.41 per diluted
share, and operating return on equity was 13.62%. On a cash basis, operating
income totaled $3,082,000, or $0.47 per diluted share for the linked quarter,
and cash basis operating return on equity was 20.34%.
Including the impact of adopting SFAS No. 133, net income totaled $2,596,000, or
$0.39 per diluted share, in the first quarter of 2001. This compares to
$2,682,000, or $0.41 per diluted share, for the fourth quarter of 2000 and
$2,862,000, or $0.43 per diluted share, in the first quarter last year. Cash
basis earnings totaled $0.45 per diluted share through the first three months of
2001 compared to diluted cash basis earnings of $0.47 per share last quarter and
$0.49 per share in the first quarter of 2000. Return on equity ("ROE") was
12.15% in the first quarter of 2001 versus 13.62% for the fourth quarter of 2000
and 15.85% the previous year.
Net interest income increased $345,000 (or 3.5%) to $10,311,000 for the quarter
ended March 31, 2001, compared to the linked quarter. The increased net interest
income in 2001 is the result of earning asset growth in late 2000 and net assets
acquired in the Lower Salem Bank Acquisition. The provision for loan losses
totaled $675,000 for the first quarter of 2001, up $75,000 (or 12.5%) from the
fourth quarter of 2000 as a result of less favorable loan loss experience and a
general economic slowdown in markets served by Peoples.
For the three months ended March 31, 2001, non-interest income totaled
$2,201,000 compared to $2,339,000 for the fourth quarter of 2000 and $2,129,000
a year ago. While service charges on deposits remain the largest source of
non-interest income, insurance and investment commissions produced the largest
growth percentage in the first quarter of 2001. Non-interest expenses totaled
$7,951,000 for the first quarter of 2001, down $14,000 (or 0.2%) from $7,965,000
the previous quarter and up $398,000 (or 5.3%) compared to the first quarter of
2000. Salaries and benefits remain the largest portion of Peoples' non-interest
expense and represent the largest part of the increase in the first quarter of
2001 compared to the first quarter of 2000.
Interest Income and Expense
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Peoples' largest source of revenue is net interest income, the amount by which
interest income on earning assets exceeds interest paid on interest-bearing
liabilities. Interest earning assets include loans and investment securities
while interest-bearing liabilities include interest-bearing deposits and
borrowed funds. Various factors impact net interest income such as changes in
market interest rates and adjustments in the mix of interest-earning assets and
interest-bearing liabilities. While management can adjust the mix of assets and
liabilities to try to control and improve net interest income, the actions of
the Federal Reserve, competitors and other factors have a greater impact on
market interest rates (and thus Peoples' net interest income) than those
adjustments made by management. Consequently, net interest margin and income
will be difficult to predict, and to control, in volatile interest rate
environments.
For the three months ended March 31, 2001, net interest income grew to
$10,311,000 compared to $9,966,000 for the fourth quarter of 2000, an increase
of $345,000 (or 3.5%). Total interest income reached $22,120,000 while interest
expense totaled $11,809,000. Compared to the first quarter of 2000, net interest
income grew $207,000 (or 2.0%) from $10,104,000. The increased net revenues in
2001 are due to balance sheet growth in 2000, as well as the Lower Salem Bank
Acquisition.
Included in interest income is $457,000 of income from investments issued by and
loans made to states and political subdivisions that is not subject to taxation.
As a result, it is more meaningful to analyze net interest income on a fully-tax
equivalent ("FTE") basis. In the first quarter of 2001, FTE net interest income
grew $342,000 (or 3.3%) compared to 2000's fourth quarter and increased $215,000
(or 2.1%) from last year's first quarter total of $10,358,000.
For the first quarter of 2001, the FTE yield on Peoples' earning assets was
8.48% compared to 8.58% the previous quarter and 8.36% a year ago, while the
cost of interest-bearing liabilities was 5.13%, 5.29% and 4.61% for the same
periods, respectively. Average total earning assets reached $1.06 billion in the
first quarter of 2001, up $14.6 million (or 1.4%) versus the fourth quarter of
2000 and up $85.5million (or 8.7%) compared to the first quarter of 2000.
Interest-bearing liabilities averaged $931.1 million during the first three
months of 2001 compared to $927.2 million the previous quarter and $872.0
million a year ago.
A key measurement of the net revenue stream generated by the mix and pricing of
Peoples' earning assets and interest-bearing liabilities is net interest margin.
Net interest margin is calculated by dividing FTE net interest income by average
interest-earning assets. For the first quarter of 2001, net interest margin was
3.98% compared to the 2000 fourth quarter ratio of 3.91% and first quarter 2000
ratio of 4.25%.
During the first quarter of 2001, the Federal Reserve reduced key interest rates
150 basis points, which had a positive impact on net interest income and margin.
However, competition for loans and deposits, a factor that negatively impacted
net interest margin in the latter half of 2000, remained fierce and partially
offset the positive impact of the rate reductions. Through the first three
months of 2001, net interest margin, on a month only basis, increased
approximately 10 basis points per month from 3.90% in January to 4.10% in March.
Management believes continued intense competition for loans and deposits will
slow future net interest margin improvement, although additional interest rate
cuts should modestly improve net interest margin in the second half of 2001.
Loans account for the largest portion of earning assets and averaged $740.4
million during the three months ended March 31, 2001 with a FTE yield of 9.09%.
For the three months ended December 31, 2000, average loans were $731.4 million
with a FTE yield of 9.09%, while in the first quarter of 2000, loans averaged
$662.9 million and with a FTE yield of 8.93%. Peoples' other major earning
assets are investment securities, which increased $4.6 million (or 1.4%) from
2000's first quarter average of $323.8 million to $328.4 million for the three
months of 2001. The FTE yield on investments decreased 13 basis point in the
first quarter of 2001 to 6.85% compared 6.98% for the linked quarter. Interest
rate reductions in the first quarter of 2001 increased the market value of
Peoples' investment portfolio, which has a negative impact on the FTE yield.
Compared to the linked quarter, deposit costs decreased 9 basis points during
the first quarter of 2001 to 5.04%. Compared to the first quarter of 2000,
deposits costs increased 66 basis points in 2001 due to growth in higher cost
customer funding sources such as certificates of deposit and money market
accounts. As a result of the recent interest rate reductions by the Federal
Reserve, management anticipates some additional reduction in deposit costs in
the second quarter of 2001 although competitors' pricing of deposits and
alternative investments may limit Peoples' ability to reduce deposit costs.
In recent quarters, Peoples utilized various sources of short-term and long-term
borrowings as additional funding sources along with core deposits to fund loan
growth. The cost of borrowed funds increased to 5.40% for the first three months
of 2001 in comparison to 5.29% in the first quarter of 2000, due to rising
interest rates in the latter half of 2000. However, Peoples' cost of borrowed
funds decreased 33 basis points compared to the fourth quarter of 2000. The
series of interest rate reductions by the Federal Reserve and the decreased
volume in borrowed funds of approximately $11.5 million since year-end 2000 have
contributed to these reduced borrowing costs.
The primary source of borrowed funds is advances, both short and long-term, from
the Federal Home Loan Bank ("FHLB"). The short-term advances are primarily
LIBOR-based advances that had an average cost of 6.10% during the first quarter
of 2001 compared to 6.69% the previous quarter and 6.02% in the first quarter of
2000. Most of the long-term FHLB advances are fixed rate advances. Through three
months in 2001, the cost of long-term FHLB advances averaged 5.03%, down 6 basis
points in comparison to the fourth quarter of 2000 and down 10 basis points from
the first quarter of 2000. Management will continue to use FHLB borrowings to
fund earning asset growth when appropriate.
Peoples' cash management services (offered to a variety of business customers)
have also provided short-term funding, primarily in the form of overnight
repurchase agreements. In the first quarter of 2001, these overnight repurchase
agreements (excluding balances of wholesale market term repurchase agreements)
averaged $27.4 million, a decrease of $5.9 million, from 2000's fourth quarter
average balance of $33.2 million. The average rate paid on overnight repurchase
agreements during the three months ended March 31, 2001, was 5.03%, down 65
basis points from the prior quarter's average rate of 5.68%. In comparison to
the first quarter of 2000, the average balance of overnight repurchase
agreements decreased $1.7 million and the average rate paid increased 16 basis
points. Peoples also accesses national market repurchase agreements to diversify
short-term funding sources. During the first quarter of 2001, national market
term repurchase agreements averaged $24.1 million with a rate of 6.24%, down
from the fourth quarter 2000's average balance of $25.8 million at an average
rate of 6.86%.
While management anticipates continued competition for loans and deposits
throughout the remainder of 2001, the interest rate reductions during the first
quarter of 2001, coupled with the 50 basis point reduction in April 2001 should
sustain modest net interest margin improvement in 2001, although the full impact
of the most recent rate reductions is not expected to significantly impact
earnings until later in 2001. The slight improvement in each of the three months
in 2001 is a positive sign. However, management believes any additional
improvement in net interest margin as a result of the interest rate cuts could
be partially, or fully, offset by the immediate decrease in prime-based
commercial lending and the refinancing of other loans by consumers due to the
rate reductions. Provision for Loan Losses Peoples recorded a provision for loan
losses of $675,000 in the first quarter of 2001, compared to $600,000 in the
linked quarter, and $522,000 in the first quarter of 2000. The increased
provision in the first quarter of 2001 is based upon the continuing effects of
the economic slowdown in Peoples markets and contiguous areas, combined with
less favorable loss experience in the past two quarters. Management believes the
current provision is reflective of the volume concentrations, relative quality
of certain loans in the portfolio, and overall inherit credit risk and reflects
the aggressive steps taken to assure the adequacy of the allowance for loan
losses.
Management anticipates that the provision in the second quarter of 2001 will be
similar to the first quarter of 2001. Any change in the provision in future
quarters will be based on loan volumes and other factors affecting loan losses,
such as loan delinquencies, portfolio risk, overall loan growth, and general
economic conditions in Peoples' markets. Further information can be found later
in this discussion under "Allowance for Loan Losses."
Net Gain (Loss) on Securities Transactions
- ------------------------------------------
Peoples reported net gains on securities transactions of $2,000 for the first
quarter 2001 compared to net losses of $11,000 recorded in 2000. The net gains
in 2001 and net losses in 2000 were the result of normal portfolio management.
Net Gain (Loss) on Asset Disposals
- ----------------------------------
Net gains on asset disposals totaled $20,000 for first three months of 2001
compared to net losses of $6,000 in the same period last year. These gains and
losses were the result of asset disposals in conjunction with normal asset
replacement.
Mark-to-Market Adjustment on Interest Rate Caps
- -----------------------------------------------
From time to time, management enters into interest rate contracts of a
derivative or hedging nature with unaffiliated financial institutions as a means
of managing the risk of changing interest rates. The interest rate contracts, or
"caps" in Peoples' present case, protect the company from significant loss of
net interest income in a rising interest rate environment. The interest rate
caps are off-balance sheet commitments to receive payments for interest rate
differentials between an index rate and a specified rate, computed on notional
amounts. At March 31, 2001, Peoples had interest rate contracts with notional
amounts totaling $30 million.
On January 1, 2001, Peoples adopted Statement of Financial Accounting Standards
Number 133 "Accounting for Derivative Instruments and Hedging Instruments"
("SFAS No. 133"), as required. The adoption resulted in a mark-to-market
adjustment on interest rate caps totaling $173,000, on a pre-tax basis, and
decreased net income in the first quarter of 2001 by $112,000, or $0.02 per
share. Unrealized gains or losses and contribution to net profits from these
instruments were immaterial as of and for the year ended December 31, 2000. Any
remaining adjustments related to existing interest rate caps will be immaterial.
Non-Interest Income
- -------------------
Peoples generates non-interest income from four primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions, and
electronic banking. During the first three months of 2001, non-interest income
decreased $138,000 (or 5.9%) to $2,201,000 compared to the fourth quarter 2000
total of $2,339,000. The decrease is due primarily to seasonal debit card
activity in the fourth quarter of 2000 as well as revenues generated from
overdraft fees, which are typically higher in the last quarter of each calendar
year. Non-interest income totaled $2,201,000 for the first quarter of 2001, an
increase of $72,000 (or 3.4%) compared to the same period in 2000. The increased
non-interest income compared to the first quarter of 2000 is due largely to
increased insurance and investment commissions, especially life insurance and
annuity sales. All of the other areas experienced increased income in comparison
to the previous year except fiduciary revenues, which continue to be affected by
the US stock market decline - the primary basis for fiduciary fees.
Peoples' fee income generated from deposits is based on the recovery of costs
associated with services provided and continues to be the largest component of
Peoples' non-interest income. For the three months ended March 31, 2001, deposit
account service charge income increased $58,000 (or 7.7%), compared to the first
quarter of 2000, to $810,000. The increased deposit account income is primarily
attributable to higher volumes of standard fees such as overdraft and
non-sufficient fund fees. The growth in Peoples' deposit service income
generated from business customers also contributed to the increase in 2001
compared to the first quarter of 2000. Income generated from deposit accounts
totaled $863,000 for the fourth quarter of 2000.
Income from fiduciary activities totaled $614,000 in the first quarter of 2001,
down $84,000 (or 12.0%) compared to the first quarter of 2000 and $20,000 (or
3.2%) versus the linked quarter. The fee structure for investment and fiduciary
activities is based primarily on the market value of assets being managed, which
totaled approximately $480 million at March 31, 2001, compared to $519 million
at mid-year 2000. During the same period, most of the major US market indices
showed significant decreases. Despite the current volatility in fees, management
is committed to fiduciary revenues being a significant contributor to future
non-interest income.
Peoples also offers a complete line of insurance and investment products through
Peoples Insurance and Peoples Investments. Through the first three months of
2001, Peoples continued to add resources and expand its product offerings and
market penetration resulting in increased commission revenues. For the quarter
ended March 31, 2001, commissions on insurance and securities sales generated
revenues of $321,000, up $165,000 (or 106%) compared to the same period a year
earlier. The sale of life insurance and annuities accounted for a majority of
the revenue growth. Property and casualty insurance commission revenues have
increasingly contributed to the growth since mid-2000 and management anticipates
these revenues becoming a more significant contributor to insurance and
investment revenues throughout the rest of 2001.
Peoples' other significant source of non-interest income is electronic banking,
which includes ATM and debit card services, direct deposit services and Internet
banking. Electronic banking is also one of Peoples' many delivery channels for
providing products and services to its clients. For the first quarter of 2001,
electronic banking revenues totaled $319,000, an increase of $37,000 (or 13.1%)
compared to the first three months of 2000. Electronic banking revenues totaled
$334,000 in the fourth quarter of 2000. The increase from the first quarter of
2000 is due largely to the sustained growth of debit card usage by Peoples'
clients and marginal increased ATM usage fees. The decrease from the previous
quarter is primarily the result of heavy debit card usage during the peak
holiday shopping period in the fourth quarter of 2000. As the financial services
industry continues to develop additional e-commerce capabilities, management
anticipates opportunities will exist for electronic banking to produce
additional sources of revenue.
Non-Interest Expense
- --------------------
Peoples has continually focused on controlling overall non-interest expense
growth. For the first three months of 2001, non-interest expenses grew $398,000
(or 5.3%) to $7,951,000 compared to the same period last year and were flat
compared to the fourth quarter of 2000. Salaries and benefits accounted for most
of the increase from a year ago and reflect both the necessary adjustments to
bring key associates salaries to a level at or above peer averages and the
escalating cost of benefits. All of the other major areas of Peoples'
non-interest expense were virtually unchanged from their levels in recent
periods except for a slight increase in non-income based taxes.
The largest component of Peoples' non-interest expense is salaries and benefits,
which is inherent in a service-based industry such as financial services. For
the three months ended March 31, salaries and benefits totaled $3,585,000 in
2001 versus $3,293,000 in 2000, an increase of $292,000 (or 8.9%). Compared to
the fourth quarter of 2000, total of $3,516,000, salaries and benefits grew
$69,000 (or 2.0%) in 2001. Most of the increase in 2001 is due to the
combination of commissions paid to insurance and investment associates, higher
medical insurance costs, as well as wage adjustments necessary to retain key
personnel in the competitive labor market and corresponding increases in
benefits. Salaries and benefits expense also increased due to growth of the
number of sales associates. At March 31, 2001, Peoples had 392 full-time
equivalent associates, compared to 388 at year-end 2000 and 383 at March 31,
2000. Management will continue to leverage its resources while retaining key
associates, effectively optimizing customer service and return to shareholders.
Net occupancy and equipment expenses totaled $945,000, down $31,000 (or 3.2%)
compared to the first quarter of the previous year and essentially unchanged
compared to the fourth quarter of 2000. For the remainder of 2001, management
expects net occupancy and equipment expense to remain near first quarter 2001
levels or increase modestly due to continued investment in technology and other
customer service enhancements.
While Peoples' other major non-interest expenses remained level compared to
previous quarters, non-income-based taxes that include property and franchise
taxes increased slightly. For the first quarter of 2001, these taxes totaled
$251,000 compared to $165,000 and $202,000 for the three months ended December
31 and March 31, 2000, respectively. The increased level of these taxes is due
primarily to equity growth at Peoples Bank and taxes applied to equity.
Management places significant emphasis on paying and expensing appropriate
levels of income based taxes as well as other taxes.
Management uses the efficiency ratio as a key indicator of performance. The
efficiency ratio is defined as operating non-interest expenses as a percentage
of the aggregate of FTE net interest income and non-interest income. Excluded
from the ratio calculation are securities and asset disposal gains and losses,
as well as intangible amortization and any other non-recurring, non-operational
transactions. Peoples' efficiency ratio was 57.81% for the first three months of
2001 versus 58.54% last quarter and 55.92% for first quarter of 2000.
In addition to the efficiency ratio, management uses the non-interest income
leverage ratio to measure performance. The non-interest income leverage ratio,
defined as non-interest income as a percentage of operating expenses, allows
management to better measure efficiency and removes the impact of net interest
income, which often fluctuates due to interest rate changes. Securities and
asset disposal gains and losses are excluded from both ratio calculations, along
with intangible amortization and any other non-recurring, non-operational
transactions.
For the first quarter of 2001, Peoples' non-interest leverage ratio was 29.8%
compared to 31.5% for the fourth quarter of 2000 and 30.5% a year ago. The
decreased market values of US equities - the basis for most of Peoples'
fiduciary revenues - will continue to challenge fiduciary based revenue during
the remaining nine months of 2001. Part of Peoples' long-term strategy includes
growing top-line revenues without proportional increases in expenses or
deterioration of the level of service to Peoples' clients. Peoples' target
non-interest income leverage ratio for 2001 is 34% and management believes the
target is attainable, although the decline of fiduciary revenues has intensified
the challenge.
Return on Equity
- ----------------
For the three months ended March 31, 2001, operating return on equity ("ROE")
was 12.67% versus 13.62% for the linked quarter and 15.85% in the first quarter
of 2000. On a cash basis, operating ROE was 18.43% through three months in 2001
compared to 24.93% for the same period in 2000 while in the fourth quarter of
2000 was 20.34%. Including the impact of adopting SFAS No. 133, ROE was 12.15%
for the first quarter of 2001, while on a cash basis it was 17.76%.
The declining interest rate environment has caused Peoples' adjustment to equity
to increase due to market value increases on investments held as
available-for-sale securities. 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, causing ROE to fluctuate. At March 31, 2001, the
adjustment for the net unrealized holding gain on available-for-sale securities,
net of deferred income taxes, totaled $0.7 million, a change of $3.7 million
since year-end 2000 and $9.9 million compared to March 31, 2000. This drastic
shift has challenged and is expected to challenge ROE enhancement in 2001.
However, increasing earnings per share continues to be the main focus of
Peoples' management team.
Return on Assets
- ----------------
Return on assets ("ROA") for the three months ended March 31, 2001, was 0.91%.
This compares to 0.96% for the fourth quarter of 2000 and 1.08% a year ago.
Removing the impact of intangibles and the related amortization, tangible ROA
was 1.11% in the first quarter of 2001 versus 1.12% the previous quarter and
1.26% for the first three months of 2000. For the first quarter of 2001,
operating ROA and cash basis ROA were 0.95% and 1.07%, respectively.
In recent years, the emphasis on ROA has diminished not only within the
investment community but also as a key performance indicator for management with
the focus shifting to ROE and most importantly EPS enhancement. Despite the
lesser emphasis, management continues to monitor ROA and considers it an
indicator of Peoples' ability to effectively deploy its assets. Management
expects any enhancement to ROA in 2001 to be minimal.
Income Tax Expense
- ------------------
During the first quarter of 2001, Peoples continued to implement tax expense
control strategies through investments in low-income housing and historic tax
credits. These investments are geared toward reducing Peoples' tax burden and
lowering the effective tax rate. For the first three months of 2001, Peoples'
effective tax rate was 30.5% compared to 30.9% in 2000. Peoples' cumulative
investment related to the tax expense control strategies approximated $3.5
million at March 31, 2001, compared to $3.1 million at year-end 2000. Additional
investments in various tax credit pools are planned over the next several years.
These investments are part of a long-term strategy, which could include similar
types of investments in the future, that management believes can further reduce
Peoples' tax burden going forward.
FINANCIAL CONDITION
Overview of Balance Sheet
- -------------------------
Total assets were $1.16 billion at March 31, 2001, an increase of $24.2 million
compared to year-end 2000. Loan volumes increased $15.9 million (or 2.2%) to
$752.8 million, with most of the growth occurring in real estate loans through
the Lower Salem Bank Acquisition. Peoples also experienced growth in cash and
cash equivalents, due to maturities of investment securities and normal loan
paydowns of $15.9 million since December 31, 2000.
Total liabilities were $1.04 billion at March 31, 2001, an increase of $17.3
million (or 1.7%) during the first quarter of 2001. Peoples' interest bearing
deposits, including money market accounts, grew $48.5 million (or 7.2%) to
$721.2 million at March 31, 2001, while at the same time non-interest bearing
deposits totaled $87.8 million, up $2.8 million (or 3.3%). Since December 31,
2000, Peoples reduced the amount of short-term borrowings by $36.4 million (or
30.4%) while long-term borrowings increased $2.4 million (or 1.7%).
Stockholders' equity totaled $90.1 million at March 31, 2001 compared to $83.2
million at December 31, 2000, an increase of $6.9 million (or 8.3%). The
increased market value of Peoples' available-for-sale securities and the stock
issued as a result of the Lower Salem Bank Acquisition account for a majority of
the change in equity in 2001. The Lower Salem Bank Acquisition resulted in the
reissuance of approximately $1.3 million of treasury stock and an overall
increase in equity of $1.5 million. At December 31, 2000, Peoples had net
unrealized losses of $3.0 million on available-for-sale securities compared to
net unrealized gains of $0.7 million at the end of the first quarter 2001.
Peoples held treasury stock totaling $2.2 million at March 31, 2001, compared to
$3.6 million at year-end 2000.
Cash and Cash Equivalents
- -------------------------
At March 31, 2001, cash and cash equivalents totaled $44.4 million, up $15.9
million from year-end 2000. Peoples' cash and due from bank balance increased
$5.9 million to $34.2 million compared to December 31, 2000, due largely to
increased transactions in process, which fluctuate on a daily basis, at the end
of the first quarter in comparison to year-end 2000. Also included in cash and
cash equivalent are federal funds sold. Since year-end 2000, Peoples has
accumulated funds as a result of allowing securities to mature instead of
reinvesting and modest growth in deposits. These excess funds were placed in
Federal funds sold, which totaled $10.0 million at March 31, 2001. Peoples had
no Federal funds sold at year-end 2000.
The amount of cash and cash equivalents fluctuates on a daily basis due to
customer activity and Peoples' liquidity needs and in response to other
strategic actions. Management believes 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 adequately serve Peoples' liquidity needs and should enable
Peoples to meet cash obligations, special needs and off-balance sheet
commitments as they come due. Management monitors the level of cash and cash
equivalents on a constant basis to ensure funds are appropriately deployed in
higher-yielding assets without compromising liquidity and funding needs.
Investment Securities
- ---------------------
At March 31, 2001, the amortized cost of Peoples' investment securities totaled
$323.4 million compared to $335.1 million at year-end, a decrease of $11.7
million (or 3.5%). Since late 2000, management has used the principal runoff
from maturing and called securities to temporarily reduce the amount of borrowed
funds and fund potential loan growth rather than reinvesting those proceeds in
securities. Management continues to evaluate Peoples' balance sheet structure
and other needs and will make appropriate use of funds generated from portfolio
runoff.
The increases in market value of Peoples' investment portfolio during the first
quarter of 2001 partially offset decreases from principal runoff. At March 31,
2001, Peoples' investment securities had a market value of $324.5 million
compared to $330.5 million at year-end 2000, a decrease of $6.0 million (or
1.8%). The difference in amortized cost and market value at March 31 resulted in
unrealized appreciation in the investment portfolio of $1.1 million and a
corresponding increase in Peoples' equity of $0.7 million. In comparison, the
difference in amortized cost and market value at December 31, 2000, resulted in
unrealized depreciation of $4.6 million and a decrease in equity of $3.0
million. The change from year-end 2000 can be attributed to market interest rate
reductions.
At March 31, 2001, investments in US Treasury securities and obligations of US
government agencies and corporations totaled $100.7 million, down $5.3 million
(or 5.0%) since year-end 2000. Peoples' investment in mortgage-backed securities
decreased $3.4 million (or 2.4%) during the first quarter of 2001 to $140.1
million at March 31, 2001, due primarily to maturities and prepayments. The
total investment in obligations of states and political subdivisions was $39.0
million at March 31, 2001, an increase of $0.5 million (or 1.2%) during the
first quarter. Other investments at March 31, 2001, totaled $44.7 million
compared to $42.5 million at year-end 2000, a change of $2.2 million (or 5.1%).
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 Peoples' interest rate risk. In late 2000, Peoples' ALCO recommended
reducing the level of the investment portfolio as a mechanism to fund
higher-yielding assets and may recommend a further reduction in 2001, if needed.
Through active balance sheet management and analysis of the investment
securities portfolio, Peoples maintains sufficient liquidity to satisfy
depositor demand, company liquidity 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 primarily focuses on lending opportunities in central and southeastern
Ohio, northern West Virginia, and northeastern Kentucky markets, especially
retail lending, which includes single-family residential mortgages and other
consumer lending. At March 31, 2001, gross loans totaled $752.8 million, an
increase of $15.9 million (or 2.2%) since year-end 2000 and $80.1 million (or
11.9%) compared to a year ago. Most of the growth during the first quarter of
2001 was the result of the loans acquired in the Lower Salem Bank Acquisition.
Since the first quarter of 2000, retail and commercial loan growth occurred
primarily in Peoples' existing markets, while some commercial lending activity
continues with selected customers outside Peoples' primary markets. The
following table details total outstanding loans:
(dollars in thousands) March 31, December 31, March 31,
2001 2000 2000
---------- ------------ -----------
Commercial, financial, and agricultural $ 309,313 $ 310,558 $ 271,077
Real estate, construction 26,970 20,267 18,419
Real estate, mortgage 293,350 283,323 259,928
Consumer 123,212 122,817 123,312
- -------------------------------------------------------------------------------
Total loans $ 752,845 $ 736,965 $ 672,736
- -------------------------------------------------------------------------------
Peoples experienced loan growth in the first quarter of 2001 primarily in real
estate loans, which grew $16.7 million (or 5.5%) compared to year-end 2000 to
$320.3 million (including construction loans) at March 31, 2001. Real estate
loans (including construction loans) account for the largest portion of the loan
portfolio, comprising 42.5% of Peoples' total loan portfolio, and a majority of
the loan growth, increasing $42.0 million (or 15.1%) since March 31, 2000.
Included in real estate loans are home equity credit lines ("Equilines"), which
totaled $26.7 million at the end of the first quarter of 2001 compared to $26.1
million at December 31, 2000. Management believes Equiline loans are a
competitive product with an acceptable return on investment after risk
considerations. Residential real estate loans continue 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 risk/return ratios to Peoples.
Through three months of 2001, commercial, financial and agricultural loans
("commercial loans") decreased $1.2 million (or 0.4%) from a year-end 2000
balance of $310.6 million. Commercial loans represent 41.1% of Peoples' total
loan portfolio at March 31, 2001, versus 42.1% at December 31, 2000. Internal
loan growth was tempered in early 2001 as a result of the general economic
slowdown that affected Peoples' markets and contiguous areas, causing fewer
lending opportunities that fit Peoples' underwriting criteria. Future commercial
lending activities will depend on economic conditions and related parameters,
such as general demand for loans in Peoples' primary markets and interest rates
offered by Peoples. In addition to the anticipated in-market penetration,
Peoples will continue to selectively lend to creditworthy customers outside its
primary markets.
Consumer lending continues to be a vital part of Peoples' core lending.
Excluding credit card balances, consumer loans increased $0.8 million (or 0.7%)
to $116.7 million since year-end 2000. The majority of Peoples' consumer loans
are in the indirect lending area, where volume decreases were experienced due to
the recent general economic slowdown and declining creditworthy indirect sales
opportunities, as well as normal runoff of indirect loans. At March 31, 2001,
Peoples had indirect loan balances of $69.0 million, compared to $71.2 million
at December 31, 2000, a change of $2.2 million (or 3.1%).
Management is pleased with the performance of Peoples' consumer loan portfolio,
which can be attributed to a commitment of high customer service levels. 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 had a positive impact on indirect lending
delinquencies. Management plans to continue its commitment to the use of this
tiered pricing system in the foreseeable future to improve the performance of
Peoples consumer loan portfolio and promote controlled growth of quality
indirect loans.
Peoples' credit card balances totaled $6.5 million at March 31, 2001, down $0.4
million since December 31, 2000, and up $0.1 million from a year ago. Management
routinely explores new opportunities to serve credit card customers and grow the
credit card balance; although, management does not intend to subject Peoples to
additional and/or unnecessary risk merely for such growth.
Loan Concentration
- ------------------
Peoples' largest concentration of commercial loans is in credits to assisted
living facilities/nursing homes, which comprised approximately 12.0% of Peoples'
outstanding commercial loans at March 31, 2001, compared to 11.6% at year-end
2000. These lending opportunities have arisen due to recent industry growth in
certain markets or contiguous areas. Management believes Peoples' loans to
assisted living facilities/nursing homes do not present more than the normal
amount of risk assumed in other types of lending, and management is confident
Peoples has sufficient knowledge of this industry to make sound underwriting
decisions.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses totaled $12.0 million, or 1.60% of total loans, at
the end of the first quarter of 2001 compared to $10.9 million, or 1.48%, at
year-end 2000. As part of the Lower Salem Bank Acquisition, Peoples acquired a
loan loss reserve of $967,000, accounting for most of the $1.1 million overall
increase. The following table presents changes in Peoples' allowance for loan
losses:
Three Months Ended
(dollars in thousands) March 31,
----------------------------
2001 2000
------------ -----------
Balance, beginning of period $ 10,930 $ 10,264
Chargeoffs (642) (266)
Recoveries 99 108
- -----------------------------------------------------------------------------
Net chargeoffs (543) (158)
Provision for loan losses 675 522
Allowance for loan losses acquired 967 -
- -----------------------------------------------------------------------------
Balance, end of period $ 12,029 $ 10,628
- -----------------------------------------------------------------------------
While loan delinquencies have declined approximately 10% since year-end 2000,
management anticipates that the loan loss provision in the second quarter of
2001 will be similar to that of the first quarter of 2001 due to the continuing
effects of the economic slowdown in Peoples' markets, combined with less
favorable loss experience in the previous two quarters. In the second half of
2001, the loan loss provision will be dependent on loan delinquencies, portfolio
risk, overall loan growth and other economic factors management considers when
evaluating the adequacy of the allowance.
In the first quarter of 2001, commercial and consumer loan net chargeoffs
accounted for most of net chargeoffs. For the three months ended March 31, 2001,
commercial loan net chargeoffs totaled $276,000 and consumer loan net chargeoffs
(excluding credit cards) were $220,000 compared to $583,000 and $158,000,
respectively, for the linked quarter. In the first quarter of 2000, consumer net
chargeoffs (excluding credit cards) totaled $116,000 while commercial loan net
chargeoffs were insignificant. Real estate chargeoffs continue to be an
insignificant portion of total net chargeoffs, reflecting the quality of the
real estate loan portfolio.
In late 2000, nonperforming assets (which include loans 90 days or more past
due, those loans classified as nonaccrual loans, renegotiated loans, and other
real estate owned) increased due to certain commercial loans being downgraded to
nonaccrual status. Since then, management has aggressively dealt with these loan
issues. As a result, the amount of nonperforming assets decreased to $4.1
million, or 0.36% of total assets, at March 31, 2001, compared to $5.2 million,
or 0.46%, at year-end 2000. The decrease is due primarily to net chargeoffs of
several nonaccrual loans in the first quarter of 2001.
Nonaccrual loans comprise the largest component of nonperforming assets totaling
$3.3 million at March 31, 2001, a three-month decrease of $950,000 (or 22.2%)
due to chargeoffs of certain nonaccrual loans. The remaining components of
nonperforming assets were near or slightly below fourth quarter totals. While
the total amount of nonperforming assets is up compared to the first quarter
2000 level, management believes Peoples' asset quality continues to be above
peer group levels.
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 March 31, 2001, the recorded investment in loans that were considered to be
impaired was $7.8 million of which $5.1 million was accruing interest, and $2.7
million were nonaccrual loans. Included in this amount are $4.3 million of
impaired loans for which the related allowance for loan losses is $1.5 million.
The remaining impaired loan balances of $3.4 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 indicative of ability to repay the
loan. For the three months ended March 31, 2001, the average recorded investment
in impaired loans was approximately $8.4 million and interest income of $143,000
was recognized on impaired loans during the period, representing 0.6% of
Peoples' total interest income.
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 $809.0 million, or 78.3% of Peoples' funding
sources at March 31, 2001.
Non-interest bearing deposits serve as a core funding source for Peoples. At
March 31, 2001, non-interest bearing balances totaled $87.8 million, a $2.8
million (or 3.3%) increase compared to year-end 2000. Peoples acquired $1.4
million of non-interest bearing deposits in the Lower Salem Bank Acquisition.
Management intends to continue to focus on maintaining its base of lower-cost
funding sources, through product offerings that benefit customers who enhance
their relationship with Peoples by using multiple products and services.
Interest-bearing deposits totaled $721.2 million at March 31, 2001, an increase
of $48.5 million (or 7.2%) compared to $672.6 million at December 31, 2000. The
Lower Salem Bank Acquisition accounts for a portion of the increase, adding
approximately $16.0 million of interest-bearing deposits, including
approximately $5.0 million of core, interest-bearing deposits such as savings
and NOW accounts. Interest-bearing transaction accounts, primarily Peoples'
money market deposit accounts, were the largest growth component of Peoples'
deposits totaling $279.0 million, up $47.5 million (or 20.5%) compared to the
previous year. Peoples' money market accounts offer variable, competitive rates
that allow clients flexibility and opportunity to optimize investment yields.
In addition to offering traditional deposits, Peoples utilizes 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 March 31, 2001, short-term
borrowings totaled $83.5 million, down $36.4 million (or 30.4%) since year-end
2000. The largest component of Peoples' short-term borrowings at March 31, 2001,
were FHLB advances of $45.0 million, a three-month decrease of $20.2 million (or
31.0%). Since December 31, 2000, Peoples has used a portion of the managed funds
from principal runoff of maturing securities and normal loan repayments to
reduce the amount of short-term FHLB borrowings.
In addition to short-term FHLB advances, Peoples had total short-term, national
market term repurchase agreement balances of $14.3 million at March 31, 2001, a
decrease of $11.5 million (or 44.6%) compared to year-end 2000. Peoples also had
$24.2 million of retail overnight repurchase agreement balances with its
customers at March 31, 2001, a decrease of $4.6 million (or 16.0%). Short-term
FHLB advances and short-term, national market term repurchase agreements were
accessed heavily during 2000 to fund Peoples' strong loan growth. The slower
loan growth in 2001 allowed Peoples to reduce the balance of short-term FHLB
borrowings during the first quarter of 2001. Management may access these funding
sources at various times throughout 2001, as appropriate, to meet corporate
funding objectives.
Peoples also maintains long-term borrowing capacity with the FHLB. Long-term
FHLB advances increased $2.5 million (or 1.8%) since year-end 2000, totaling
$138.9 million at March 31, 2001 due to advances acquired in the Lower Salem
Bank Acquisition. Peoples' current long-term FHLB advances are primarily 10-year
borrowings, with initial fixed rate features for periods of two, three, or four
years, depending on the specific advance. Each advance has the opportunity, at
the discretion of the FHLB, to reprice after its initial fixed rate period, and
Peoples has the option to prepay any repriced advance without penalty, or allow
the borrowing to reprice to a LIBOR based, variable product. Management plans to
maintain access to any long-term FHLB borrowing 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 March 31, 2001, the balance was $1.95
million, a decrease of $0.15 million since year-end 2000. Principal payments
began in 1998 and continue semi-annually over the next three years.
Capital/Stockholders' Equity
- ----------------------------
At March 31, 2001, stockholders' equity was $90.1 million, an increase of $6.9
million (or 8.3%) since December 31, 2000. In the first quarter of 2001, Peoples
had net income of $2,596,000 and paid dividends of $927,000, a dividend payout
ratio of 35.71% of earnings, compared to a ratio of 32.56% for the same period a
year earlier and 34.08% in the fourth quarter of 2000. Management believes
recent dividends represent an acceptable payout ratio for Peoples and
anticipates similar payout ratios in future periods through quarterly dividends.
At March 31, 2001, the adjustment for the net unrealized holding gains on
available-for-sale securities, net of deferred income taxes, totaled $0.7
million versus net holding losses of $3.0 million at year-end 2000, a change of
$3.7 million. 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 0% (lowest risk assets), 20%, 50% or 100% (highest risk
assets) is assigned to each asset on the balance sheet. At March 31, 2001,
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 14.32% at March 31, 2001, is well above the well-capitalized standard of 10%.
Peoples' Tier 1 capital ratio of 12.98% also exceeded the well-capitalized
minimum of 6%. The Leverage ratio at March 31, 2001, was 8.89% and also above
the well-capitalized standard of 5%.
Peoples is authorized to repurchase 125,000 shares of Peoples common stock under
the 2001 Stock Repurchase Program, and through May 1, 2001, Peoples has
purchased 15,157 shares, or 12.1% of the authorized total. Purchases to date
have been limited due to a variety of factors. Since there are no pending
acquisitions, Peoples intends to resume repurchasing common shares, at
reasonable prices, throughout 2001. The 2001 Stock Repurchase Program expires on
December 31, 2001.
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 first quarter of 2001, Peoples purchased 5,000 treasury
shares at a weighted-average price of $17.25 per share, totaling $86,000.
Management expects to purchase additional shares in future quarters, up to the
authorized level, 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 Peoples Bank.
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 requirements, the account balances invested in
Peoples common shares are reported as treasury stock in Peoples' financial
statements. At March 31, 2001, there was $0.9 million of treasury stock
attributed to the Deferred Compensation Plan and its participants. 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 exposure based on changes in economic conditions,
interest rate levels and customer preferences.
INTEREST RATE RISK
The most significant risk resulting from Peoples' normal business of extending
loans and accepting deposits is interest rate risk. Interest rate risk ("IRR")
is the potential for economic loss due to future interest rate changes that can
impact both the earnings stream as well as market values of financial assets and
liabilities. Peoples' management has charged the ALCO with the overall
management of Peoples' and Peoples Bank's balance sheet and off-balance sheet
transactions related to the management of IRR. 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 interest rate risk 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.
Peoples' ALCO relies on different methods of assessing interest rate risk
including simulating net interest income, monitoring the sensitivity of the net
present market 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 because it is a dynamic measure. By employing a simulation
process that measures 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 simulation process starts with a base case simulation that represents
projections of current balance sheet growth trends. Base case simulation results
are prepared under an assumed flat interest rate scenario and at least two
alternative interest rate scenarios, 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 deemed appropriate, additional balance sheet strategies are
developed and simulations prepared. These additional simulations are run with
the same interest rate scenarios used with the base case simulation and/or using
different yield curves. 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 effectiveness of current interest rate risk
strategies. The ALCO periodically reviews the appropriateness of the assumptions
used in the modeling and the overall techniques employed.
Peoples monitors interest rate risk for both the short and long-term. Therefore,
to effectively evaluate results from model simulations, limits on changes in net
interest income and the value of the balance sheet have been established. To
monitor the short-term exposure to interest rate risk, the ALCO limited the
earnings at risk of the bank to 10% or less from base case for each 1% shift in
interest rates measured on an annual basis. To monitor the long-term exposure to
interest rate risk, management has limited the negative impact on net equity
value to 40% or less 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.
The following table is provided to show the estimated earnings at risk and value
at risk positions of Peoples at March 31, 2001 (dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
400 $ (8,223) (20.3) % $ (57,621) (53.4) %
300 (3,706) (14.1) (43,229) (40.1)
200 (2,248) (8.5) (27,935) (25.9)
100 (778) (3.0) (13,502) (12.5)
(100) 538 2.0 8,119 7.6
(200) $ 785 3.0 % $ 15,447 14.3 %
The interest risk analysis shows that Peoples is moderately liability sensitive.
This means that downward moving interest rates should favorably impact net
interest income and upward moving interest rates should negatively impact net
interest income. The analysis also shows that for all simulations and all
scenarios, Peoples is within the interest rate risk limits that the ALCO has
established in the policy. Peoples was within the policy limits at all measured
points during the preceding year.
The liability sensitivity increased in the past twelve months due primarily to
the loan growth Peoples experienced in 2000. To protect earnings streams should
there be an increase in interest rates (or hedge the liability sensitivity), the
ALCO authorized the purchase of interest rate options (or "caps") that will
provide additional income if there is a significant increase in interest rates.
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. The ALCO's
policy for liquidity management sets limits on the net liquidity position of
Peoples and the concentration of non-core funding sources.
The main source of liquidity for Peoples is deposit growth. Liquidity is also
provided from cash generated from assets such as maturities, principal payments
and income from loans and investment securities. In 2001, cash used in financing
activities totaled $2.4 million due to the decrease of short-term borrowings
that offset the interest-bearing deposit growth. For the first quarter of 2001,
cash flows from investing activity totaled $14.1 million due to the volume of
maturities of investment securities during the quarter. Peoples, when
appropriate, takes advantage of external sources of funds such as advances from
the Federal Home Loan Bank, national market repurchase agreements, and brokered
funds. These external sources often provide attractive interest rates and
flexible maturity dates that enable Peoples to match funding dates 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. As of March
31, 2001, Peoples' net liquidity position was $96.9 million, or 8.34% of total
assets, in comparison to a net liquidity position of $99.2 million, or 8.74% of
total assets, at December 31, 2000. The decrease in 2001 is the result of
maturities in available-for-sale securities. The liquidity position as of
year-end was within Peoples' policy limit of negative 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
- --------------
The first three months of 2001 challenged the financial services industry and
confirmed the general economic slowdown affecting many companies through recent
economic information as well as a decline in lending activity. Despite these
challenges, management is pleased with Peoples' operating performance in the
first quarter of 2001. Net interest margin and asset quality improved during the
quarter and good signs remain on the horizon for additional improvement in the
second quarter of 2001.
Management views the actions of the Federal Reserve during the first quarter as
a positive sign for Peoples. The recent Federal Reserve rate reductions should
lead to modest improvement in net interest margin for the remainder of 2001;
however, management believes any improvements will be limited by the sustained
competition for loans and deposits, along with the immediate decreases in
prime-based commercial lending and other loan refinancings that occur as a
result of significant rate reductions.
While the outlook for net interest margin improvement in 2001 is positive, one
of Peoples' primary goals continues to be the growth of top-line revenues.
Through the first three months of 2001, Peoples has experienced growth in
non-traditional revenue sources, such as insurance and investment commissions
while at the same time has controlled the growth of expenses to about 5%. The
ability of Peoples to grow non-interest income without proportional increases in
non-interest expense or deterioration of client services will help to reduce the
reliance on net interest income as a major revenue source and improve the
long-term shareholder value.
Since year-end 2000, internal loan growth has slowed due primarily to the
general economic slowdown and the uncertain interest rate environment and
concentration on maintaining sound underwriting practices. The Lower Salem Bank
Acquisition accounted for much of the balance sheet growth in the first quarter
of 2001. Although Peoples has sufficient capital to leverage the balance sheet
through loan growth, management believes loan growth in the second quarter of
2001 will once again be less that the 2000 growth rate due to the current
economic conditions in Peoples' markets and neighboring areas. In the latter
half of 2001, should the recent actions by the Federal Reserve, coupled with the
anticipated move by Congress to reduce taxes, stimulate the economy, management
believes Peoples could experience reasonable loan growth.
In the future, management will continue to explore new methods to enhance
Peoples' fee generation through multiple product and service relationships from
Peoples' needs-based selling approach. Through the complete integration of
traditional products with newer, non-traditional products, such as investments
and insurance, Peoples' clients will have access to a world of financial
products through their preferred delivery channel. Management anticipates that a
significant portion of future earnings growth will be derived from the expanded
fee-base business and believes the relationships created with Peoples' clients
serve as the foundation from which top-line revenues can be built.
The first quarter of 2001 marked the opening of Peoples' Emerson Avenue
Financial Services Center, Peoples' fourth banking center in Wood County, West
Virginia. Since opening on January 2, the Emerson Avenue Financial Services
Center has been featured in various media outlets for its creative layout and
inviting customer service areas such as a "Home Resource Center", an "Investment
Resource Center" and an "Internet Cafe". These unique features, compared to
Peoples' other sales offices, could be duplicated in some of Peoples' existing
sales office in the future. Management will continue to explore opportunities to
expand Peoples' physical presence in markets that offer strong economic activity
and the ability to expand and penetrate client relationships through Peoples'
needs-based selling approach.
Peoples also completed the acquisition of Lower Salem Commercial Bank in the
first quarter of 2001. The Lower Salem office, a full-service sales office
consistent with Peoples' other client service locations and Peoples' 40th sales
office, hit the ground running - a testament to the integration team in place -
and management now shifts its focus to further developing long-lasting financial
service relationships with Peoples' new Lower Salem client base. Management
projects the Lower Salem Bank Acquisition will be marginally accretive to 2001
earnings.
Management continues to evaluate mergers and acquisitions of banking centers,
whole banks or thrifts, insurance agencies and other businesses as a viable
strategic option for growth of operations and scope of client service. Mergers
and acquisitions are also evaluated as a means of enhancing Peoples' earnings
potential. Future acquisitions, if they occur, may not be limited to specific
geographic location or proximity to current market, but ultimately will depend
upon opportunities to complement Peoples' core competencies and strategic
intent. Management will continue to pursue appropriate business opportunities
that complement existing company locations and revenue growth strategies through
a variety of means including mergers and acquisitions.
Management believes Peoples is positioned for continued revenue growth during
the remaining months of 2001 and beyond. Although competition for loans and
deposits, as well as short-term borrowing costs, continue to impact Peoples'
short-term profitability due to challenges to net interest income levels,
management will continue to analyze and implement strategies designed to enhance
the long-term value of Peoples. Peoples' many sales associates are firmly
committed to client service and long-term stakeholder success.
"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 a number of 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 technological changes, the
effect of economic conditions, the impact of competitive products and pricing,
and other risks detailed in Peoples' Securities and Exchange Commission filings.
Although management believes that the expectations in these forward-looking
statements are based on reasonable assumptions within the bounds of management's
knowledge of Peoples' business and operations, it is possible that actual
results may differ materially from these projections.
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.
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended March 31,
2001 2000
(dollars in thousands) Average Yield/ Average Yield/
Balance Rate Balance Rate
ASSETS
Securities:
Taxable $ 291,243 6.80% $ 290,461 6.83%
Tax-exempt 37,202 7.20% 33,346 7.70%
- --------------------------------------------------------------------------------------------------------
Total securities 328,445 6.85% 323,807 6.92%
Loans:
Commercial 327,872 8.88% 280,544 9.07%
Real estate 291,474 8.46% 260,971 8.14%
Consumer 121,053 10.68% 121,384 10.29%
- --------------------------------------------------------------------------------------------------------
Total loans 740,399 9.09% 662,899 8.93%
Less: Allowance for loan loss (11,515) (10,463)
------------ ----------- ------------
Net loans 728,881 9.23% 652,436 9.07%
Interest-bearing deposits 1,614 6.02% 674 4.18%
Federal funds sold 4,045 6.13% 572 5.78%
- --------------------------------------------------------------------------------------------------------
Total earning assets 1,062,987 8.48% 977,489 8.36%
Other assets 74,722 78,671
- --------------------------------------------------------------------------------------------------------
Total assets $ 1,137,709 $ 1,056,160
========================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 75,769 2.17% $ 88,758 2.37%
Interest-bearing demand deposits 266,570 4.23% 219,938 3.91%
Time 345,282 6.16% 341,377 5.20%
- --------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 687,621 5.04% 650,073 4.38%
Borrowed funds:
Short-term 104,142 5.85% 71,731 5.58%
Long-term 139,322 5.00% 150,190 5.16%
- --------------------------------------------------------------------------------------------------------
Total borrowed funds 243,464 5.40% 221,921 5.29%
Total interest bearing liabilities 931,085 5.13% 871,994 4.61%
Non-interest bearing deposits 85,490 80,323
Other liabilities 37,471 31,618
- --------------------------------------------------------------------------------------------------------
Total liabilities 1,052,219 983,935
Stockholders' equity 85,490 72,225
- --------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,137,709 $ 1,056,160
========================================================================================================
Interest income to earning assets 8.48% 8.36%
Interest expense to earning assets 4.50% 4.11%
- --------------------------------------------------------------------------------------------------------
Net interest margin 3.98% 4.25%
========================================================================================================
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.
On April 12, 2001, the Annual Meeting of Shareholders was held in the Ball Room
at the Holiday Inn in Marietta, Ohio. The meeting was well-attended and over 86%
of the outstanding common shares were represented by proxy. No votes were placed
in person.
Four Directors of Peoples were re-elected to serve terms of three years each
(expiring in 2004): Robert E. Evans; Robert W. Price; Paul T. Theisen; and
Thomas C. Vadakin. Directors of Peoples who continue to serve after the 2001
Annual Meeting include Carl Baker, Jr., George W. Broughton, Frank L. Christy,
Wilford D. Dimit, Rex E. Maiden, and Joseph H. Wesel (Chairman of the Board).
Voting results were as follows:
Shareholder Voting Results
- --------------------------------------------------------------------
Nominee For Withheld
- --------------------------------- ------------- ---------------
Robert E. Evans 5,558,351 56,714
Robert W. Price 5,532,929 82,136
Paul T. Theisen 5,571,723 43,342
Thomas C. Vadakin 5,574,169 40,896
ITEM 5: Other Information.
None.
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.
b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the three
months ended March 31, 2001:
1) Filed January 12, 2001 - News release announcing the adoption of a
resolution authorizing Peoples to repurchase up to 125,000 of its
common shares.
2) Filed January 22, 2001 - News release announcing Peoples' earnings for
the fourth quarter of 2000 and year ended December 31, 2000.
3) Filed February 9, 2001 - News release announcing the declaration of a
$0.14 per share dividend by Peoples' Board of Directors.
4) Filed February 21, 2001 - News release announcing the appointment of
Mark F. Bradley as Chief Integration Officer.
5) Filed February 21, 2001 - News release announcing the shareholder
approval of the Lower Salem Commercial Bank acquisition.
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: May 14, 2001 By: /s/ ROBERT E. EVANS
---------------
Robert E. Evans
President and Chief Executive Officer
Date: May 14, 2001 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 MARCH 31, 2001
Exhibit
Number Description Exhibit Location
- ------------ ---------------------------------- ---------------------
11 Computation of Earnings Per Share. Page 29