FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 45750
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, at August 1, 2001: 6,543,287.
Page 1 of 28 Pages
Exhibit Index Appears on Page 27
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 six months ended June 30, 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, except share data)
June 30, December 31,
ASSETS 2001 2000
Cash and cash equivalents:
Cash and due from banks $ 28,080 $ 28,242
Interest-bearing deposits in other banks 259 207
Federal funds sold 14,352 -
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Total cash and cash equivalents 42,691 28,449
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $317,592 and $335,111 at June 30, 2001, and
December 31, 2000, respectively) 316,182 330,521
Loans, net of unearned interest 753,756 736,965
Allowance for loan losses (12,155) (10,930)
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Net loans 741,601 726,035
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Bank premises and equipment, net 16,405 15,565
Other assets 57,385 35,264
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Total assets $ 1,174,264 $ 1,135,834
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LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 87,475 $ 84,974
Interest bearing 737,635 672,647
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Total deposits 825,110 757,621
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Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 37,586 54,729
Federal Home Loan Bank term advances 45,000 65,186
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Total short-term borrowings 82,586 119,915
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Long-term borrowings 140,665 138,511
Accrued expenses and other liabilities 7,318 7,572
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Total liabilities 1,055,679 1,023,619
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Guaranteed preferred beneficial interests in junior subordinated debentures 29,038 29,021
Stockholders' Equity
Common stock, no par value, 12,000,000 shares authorized - 6,697,011 shares
issued at June 30, 2001, and 6,679,028 issued
at December 31, 2000, including shares in treasury 66,410 66,364
Accumulated comprehensive income, net of deferred income taxes (917) (2,983)
Retained earnings 27,065 23,381
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92,558 86,762
Treasury stock, at cost, 150,585 shares at June 30, 2001, and
189,357 shares at December 31, 2000 (3,011) (3,568)
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Total stockholders' equity 89,547 83,194
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Total liabilities, minority interests and stockholders' equity $ 1,174,264 $ 1,135,834
=====================================================================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
Interest income $ 21,992 $ 20,924 $ 44,112 $ 41,036
Interest expense 11,196 10,699 23,005 20,707
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Net interest income 10,796 10,225 21,107 20,329
Provision for loan losses 675 600 1,350 1,122
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Net interest income after provision for loan losses 10,121 9,625 19,757 19,207
Net (loss) gain on securities transactions (1) (45) 1 (56)
Net gain (loss) on asset disposals 5 (140) 25 (145)
Mark-to-market adjustment on interest rate caps 42 - (131) -
Non-interest income:
Service charges on deposits 889 793 1,696 1,545
Fiduciary revenues 628 628 1,242 1,326
Insurance commissions 263 374 584 530
Electronic banking revenues 354 310 676 592
Other non-interest income 136 128 273 368
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Total non-interest income 2,270 2,233 4,471 4,361
Non-interest expense:
Salaries and benefits 3,642 3,301 7,227 6,594
Occupancy and equipment 962 1,018 1,907 1,994
Trust preferred 659 651 1,311 1,306
Goodwill amortization 457 440 897 863
Other intangible amortization 125 131 251 279
Data processing and software 231 268 478 513
Other non-interest expense 2,092 1,985 4,048 3,799
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Total non-interest expense 8,168 7,794 16,119 15,348
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Income before income taxes 4,269 3,879 8,004 8,019
Income taxes 1,264 1,179 2,403 2,458
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Net income $ 3,005 $ 2,700 $ 5,601 $ 5,561
============================================================================================================================
Basic earnings per share $ 0.46 $ 0.41 $ 0.85 $ 0.85
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Diluted earnings per share $ 0.45 $ 0.41 $ 0.84 $ 0.84
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Weighted average shares outstanding (basic) 6,571,387 6,515,837 6,551,796 6,520,208
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Weighted average shares outstanding (diluted) 6,668,300 6,600,252 6,644,193 6,615,283
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Cash dividends declared $ 991 $ 915 $ 1,917 $ 1,847
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Cash dividend per share $ 0.15 $ 0.14 $ 0.29 $ 0.28
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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 5,601 5,601
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
securities 2,066 2,066
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Comprehensive income 7,667
Exercise of common stock options
(reissuance of 34,537 treasury (386) 657 271
shares)
Tax benefit from exercise of stock 52 52
options
Distribution of treasury stock from
deferred
compensation plan 5 5
Reissuance of 79,785 treasury shares to
purchase Lower Salem Commercial Bank 7,783 220 1,280 1,500
Cash dividends declared (1,917) (1,917)
Common stock issued under dividend
reinvestment plan 10,200 160 160
Purchase of 73,865 shares of treasury stock (1,385) (1,385)
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Balance, June 30, 2001 6,697,011 $ 66,410 $ 27,065 $ (3,011) $ (917) $ 89,547
===============================================================================================================================
Comprehensive Income:
Net unrealized appreciation arising during period, net of tax 2,067
Less: reclassification adjustment for securities gains included in net income, 1
net of tax
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Net unrealized appreciation on investment securities 2,066
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Six Months Ended
June 30,
2001 2000
Cash flows from operating activities:
Net income $ 5,601 $ 5,561
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 1,350 1,122
(Gain) loss on securities transactions (1) 56
(Gain) loss on asset disposals (25) 145
Mark-to-market adjustment on interest rate caps 131 -
Depreciation, amortization, and accretion 2,303 2,348
Decrease (increase) in interest receivable 509 (307)
(Decrease) increase in interest payable (316) 334
Deferred income tax (benefit) expense (178) 268
Deferral of loan origination fees and costs 28 (180)
Other, net 800 (1,447)
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Net cash provided by operating activities 10,202 7,900
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Cash flows from investing activities:
Purchases of available-for-sale securities (8,227) (14,426)
Proceeds from sales of available-for-sale securities 108 451
Proceeds from maturities of available-for-sale securities 28,038 11,941
Net increase in loans (703) (41,723)
Expenditures for premises and equipment (1,353) (1,650)
Proceeds from sales of other real estate owned 87 50
Acquisitions, net of cash received (162) -
Investment in business owned life insurance (20,000) -
Investment in limited partnership and tax credit funds (4,400) (400)
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Net cash used in investing activities (6,612) (45,757)
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Cash flows from financing activities:
Net decrease in non-interest bearing deposits (4,348) (3,580)
Net increase in interest-bearing deposits 54,424 5,282
Net (decrease) increase in short-term borrowings (36,329) 35,346
Payments on long-term borrowings (369) (11,664)
Cash dividends paid (1,612) (1,596)
Purchase of treasury stock (1,385) (1,990)
Proceeds from issuance of common stock 271 300
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Net cash provided by financing activities 10,652 22,098
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Net increase (decrease) in cash and cash equivalents 14,242 (15,759)
Cash and cash equivalents at beginning of period 28,449 43,751
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Cash and cash equivalents at end of period $ 42,691 $ 27,992
==================================================================================================================
NOTES TO FINANCIAL STATEMENTS
Basis of Presentation
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 July 2001, the Financial Accounting Standards Board issued Statements No.
141, Business Combinations ("SFAS 141"), and Statement No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). SFAS 141 requires all business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method and further clarifies the criteria to recognize intangible
assets separately from goodwill. At July 1, 2001, Peoples did not have any
pending business combinations; therefore, the impact of SFAS 141 on Peoples'
results of operations and financial condition is immaterial.
Under SFAS 142, goodwill and indefinite lived intangible assets are no longer
subject to amortization but rather subject to at least an annual assessment for
impairment applying a fair-value based test. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives (but with no maximum life). The amortization provisions of
SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1, 2001,
Peoples is required to adopt Statement 142 on January 1, 2002. If SFAS 142 had
been in effect for the second quarter of 2001, Peoples' diluted earnings per
share would have been $0.50 versus the $0.45 reported. Management anticipates a
similar impact on Peoples' results of operations and earnings per share upon
adoption of SFAS 142 in the first quarter of 2002.
.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited consolidated
financial statements and the management discussion and analysis that follows:
For the Three For the Six
Months Ended June 30, Months Ended June 30,
SIGNIFICANT RATIOS 2001 2000 2001 2000
Operating return on average equity (a) 13.34 % 15.81 % 13.01 % 15.88 %
Cash basis operating return on average equity (a) (b) 19.12 % 24.76 % 18.78 % 24.92 %
Operating return on average assets (a) 1.02 % 1.04 % 0.99 % 1.06 %
Cash basis operating return on average assets (a) (b) 1.18 % 1.21 % 1.15 % 1.23 %
Return on average equity 13.46 % 15.13 % 12.81 % 15.41 %
Cash basis return on average equity (b) 19.27 % 23.75 % 18.53 % 24.20 %
Return on average assets 1.03 % 1.00 % 0.97 % 1.04 %
Cash basis return on average assets (b) 1.19 % 1.17 % 1.13 % 1.21 %
Net interest margin (c) 4.07 % 4.20 % 4.02 % 4.22 %
Efficiency ratio (d) 56.39 % 56.62 % 57.36 % 56.38 %
Non-interest income leverage ratio (e) 29.96 % 30.92 % 29.89 % 30.70 %
Average stockholders' equity to average assets 7.67 % 6.63 % 7.60 % 6.76 %
Cash dividends to net income 32.98 % 33.89 % 34.24 % 33.21 %
Loans net of unearned interest to deposits (end of 91.35 % 92.10 % 91.35 % 92.10 %
period)
Allowance for loan losses to loans, net of unearned
interest (end of period) 1.61 % 1.58 % 1.61 % 1.58 %
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CAPITAL RATIOS (end of period)
Tier I capital ratio 12.76 % 12.53 % 12.76 % 12.53 %
Risk-based capital ratio 14.09 % 14.11 % 14.09 % 14.11 %
Leverage ratio 8.83 % 8.46 % 8.83 % 8.46 %
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PER SHARE DATA Operating income per share (a):
Basic $ 0.45 $ 0.43 $ 0.87 $ 0.87
Diluted 0.45 0.43 0.86 0.86
Cash basis earnings - diluted (b) 0.51 0.49 0.98 0.98
Net income per share:
Basic $ 0.46 $ 0.41 $ 0.85 $ 0.85
Diluted 0.45 0.41 0.84 0.84
Cash basis earnings - diluted (b) 0.51 0.47 0.96 0.96
Cash dividends per share 0.15 0.14 0.29 0.28
Book value per share $ 13.68 $ 11.17 $ 13.68 $ 11.17
Tangible book value per share (b) $ 10.90 $ 8.25 $ 10.90 $ 8.25
Weighted average shares outstanding:
Basic 6,571,387 6,515,837 6,551,796 6,520,208
Diluted 6,668,300 6,600,252 6,644,193 6,615,283
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<FN>
(a) Excludes the after-tax impact of significant non-recurring, non-operating
income and expenses.
(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. Significant 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). Significant 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 25 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 August 1, 2001, Peoples repurchased
68,132 treasury shares under the 2001 Stock Repurchase Plan (or 55%
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
- --------------------------------
For the three months ended June 30, 2001, net income totaled $3,005,000 compared
to $2,700,000 for the second quarter of 2000, an increase of $305,000 (or
11.3%). Compared to the first quarter of 2001, or linked quarter, net income
increased $409,000 (or 15.8%). Diluted earnings per share were $0.45 for the
second quarter of 2001 versus $0.39 per diluted share for the linked quarter and
$0.41 a year ago. On a year-to-date basis, net income totaled $5,601,000 in 2001
compared to $5,561,000 last year. Earnings were $0.84 per diluted share for the
first half of 2001, unchanged from a year ago.
For the second quarter of 2001, operating earnings were $0.45 per diluted share
versus $0.43 for the second quarter of 2000 and $0.41 for the linked quarter.
Operating income removes the after-tax impact of significant non-recurring,
non-operating income and expenses such as gains and/or losses on asset disposals
and securities transactions, mark-to-market adjustments on interest rate caps,
adoption of new accounting standards, etc. Year-to-date operating earnings per
share were $0.86 in 2001 and 2000. Operating return on equity ("ROE") was 13.34%
for the quarter ended June 30, 2001, compared to 15.81% for the same period in
2000 while year-to-date operating ROE was 13.01% in 2001 versus 15.88% in 2000.
On a cash basis, earnings per share were $0.51 for the three months ended June
30, 2001, up $0.04 (or 8.5%) compared to the same period a year ago and up $0.06
(or 13.3%) compared to the first quarter of 2001. Cash basis ROE was 19.27% for
the second quarter of 2001, 23.75% for the second quarter of 2000 and 17.76% for
the linked quarter. Cash basis earnings exclude the effects of intangible assets
and related amortization expenses. For the six months ended June 30, 2001, cash
basis earnings were $0.98 per share in 2001, unchanged from the same period last
year while cash basis ROE was 18.53% compared to 24.20% in 2000.
Earnings growth in the second quarter of 2001 was driven by net interest income
growth. Compared to last year, net interest income increased $778,000 (or 3.8%)
to $21,107,000 for the six months ended June 30, 2001, due to earning asset
growth during the first half of 2001. For the first half of 2001, Peoples'
provision for loan losses totaled $1,350,000, an increase of $228,000 (or 20.3%)
in comparison to last year due to less favorable loan loss experience and the
general economic slowdown in Peoples' primary markets and contiguous areas. The
provision for loan losses totaled $675,000 for the second quarter of 2001, up
$75,000 (or 12.5%) from the second quarter of 2000. The loan loss provision was
unchanged compared to the linked quarter.
For the three months ended June 30, 2001, non-interest income totaled $2,270,000
compared to $2,201,000 for the first quarter of 2001 and $2,233,000 a year ago.
On a year-to-date basis, non-interest income grew $110,000 (or 2.5%) in 2001
from $4,361,000 the prior year. Non-interest expenses totaled $8,168,000 for the
second quarter of 2001, up $217,000 (or 2.7%) compared to the previous quarter
and up $374,000 (or 4.8%) compared to the second quarter of 2000. For the six
months ended June 30, non-interest expenses were $16,119,000 in 2001 and
$15,348,000 in 2000, an increase of $771,000 (or 5.0%). Salaries and benefits
remain the largest portion of Peoples' non-interest expense and represent the
majority of the increase in the second quarter of 2001.
Interest Income and Expense
- ---------------------------
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. Loans and investment securities comprise a majority of Peoples'
interest-earning assets 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 try to adjust the mix of assets and liabilities in an attempt to
control and improve net interest income, the actions of the Federal Reserve and
competitors, as well as other factors have a greater impact on market interest
rates (and thus Peoples' net interest income) than those adjustments that can be
controlled and made by management. Consequently, net interest margin and income
are difficult to predict, and to control, especially in volatile interest rate
environments.
For the quarter ended June 30, 2001, net interest income grew to $10,796,000
compared to $10,225,000 for the second quarter of 2000, an increase of $571,000
(or 5.6%). Total interest income reached $21,992,000 while interest expense
totaled $11,196,000. Compared to the first quarter of 2001, net interest income
grew $485,000 (or 4.7%) from $10,311,000. The increased net revenues in 2001 are
due to recent balance sheet growth and the related increase in earning assets,
as well as net interest margin improvement compared to late 2000 and the first
quarter of 2001.
Peoples derives a portion of its interest income from investments issued by and
loans made to states and political subdivisions. Since this income is not
subject to taxation, it is more meaningful to analyze net interest income on a
fully-tax equivalent ("FTE") basis. In the second quarter of 2001, FTE net
interest income grew $484,000 (or 4.6%) to $11,057,000 compared to the linked
quarter and increased $551,000 (or 5.2%) from last year's second quarter total
of $10,506,000. Year-to-date FTE net interest income was $21,630,000 in 2001
versus $20,834,000 in 2000.
For the second quarter of 2001, the FTE yield on Peoples' earning assets was
8.19% compared to 8.48% the previous quarter and 8.50% a year ago, while the
cost of interest-bearing liabilities was 4.71%, 5.13% and 4.82% for the same
periods, respectively. Earning assets averaged $1.09 billion in the second
quarter of 2001, up $25.6 million (or 2.4%) versus the first quarter of 2001 and
$89.5 million (or 9.0%) compared to the second quarter of 2000. Average
interest-bearing liabilities were $951.5 million during the three months ended
June 30, 2001, compared to $931.1 million for the linked quarter and $892.4
million a year ago.
On a year-to-date basis, the FTE yield on Peoples' earning assets was 8.33% and
the cost of interest-bearing liabilities was 4.92% in 2001 compared to 8.43% and
4.71%, respectively, for the previous year. Average earning assets increased
$87.7 million (or 8.9%) during the first six months of 2001 from last year's
average of $988.3 million with the strong loan growth in late 2000 accounting
for a majority of the increase. Interest-bearing liabilities averaged $941.3
million during the first half of 2001, compared to $882.2 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 second quarter of 2001, net interest margin was
4.07% compared to the first quarter ratio of 3.98% and second quarter 2000 ratio
of 4.20%. Net interest margin was 4.02% and 4.22% for the six months ended June
30, 2001 and 2000, respectively.
In the first half of 2001, the Federal Reserve reduced key interest rates 275
basis points. This series of rate reductions has had a positive impact on
Peoples' net interest income and margin. However, fierce competition for loans
and deposits partially offset the positive impact of the rate reductions.
Management believes that the recent rate cuts will modestly enhance net interest
income streams in the third quarter, although anticipated enhancements could be
offset in part by immediate decreases in prime based commercial loans and other
loan refinancings resulting from those interest rate cuts.
Loans account for the largest portion of earning assets averaging $752.6 million
during the three months ended June 30, 2001 with a FTE yield of 8.83%. For the
linked quarter, average loans were $740.4 million with a FTE yield of 9.09%,
while in the second quarter of 2000, loans averaged $686.6 million with a FTE
yield of 9.07%. Through six months in 2001, loans averaged $746.7 million with a
FTE yield of 8.96% versus $674.8 million and a FTE yield of 9.00% last year.
Peoples' other significant earning assets, investment securities, decreased $6.8
million (or 2.1%) from 2000's second quarter average of $322.7 million to $315.9
million for the second quarter of 2001. The FTE yield on investments decreased
10 basis points in the second quarter of 2001 to 6.75% from 6.85% for the linked
quarter. Investment securities averaged $322.1 million and $323.3 million on a
year-to-date basis through June 30, 2001 and 2000 with FTE yields of 6.80% and
6.96%, respectively. Interest rate reductions in the second quarter of 2001
increased the market value of Peoples' investment portfolio and the resulting
increased volumes had a modestly negative impact on the FTE yield.
Compared to the linked quarter, deposit costs decreased 38 basis points during
the second quarter of 2001 to 4.66% as a result of decreased rates paid on
Peoples' money market accounts and other high cost customer funding sources.
Compared to the second quarter of 2000, deposits costs increased 10 basis points
while on a year-to-date basis, deposit costs grew 38 basis points in 2001 versus
2000's cost of 4.47%. These increases are due largely to the increased volume of
interest bearing deposits, particularly certificates of deposits. For the second
half of 2001, management anticipates deposit costs to remain near their current
level as competitors' pricing of deposits and customer's alternative investment
opportunities may limit Peoples' ability to reduce deposit costs in response to
the Federal Reserve actions in 2001.
Peoples continues to utilize a variety of short-term and long-term borrowings as
additional funding sources in addition to core deposits. As a result of the
interest rate cuts in the first half of 2001, the cost of borrowed funds
decreased by 25 basis points to 5.15% for the first six months of 2001 compared
to 5.40% for the same period last year. Peoples' cost of borrowed funds
decreased 52 basis points in the second quarter of 2001 compared to the first
quarter of 2001 and decreased 63 basis points compared to the previous year. The
series of interest rate reductions and the decreased volume in borrowed funds in
recent quarters have contributed to these reduced borrowing costs.
Peoples' 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 4.67% during the second quarter
of 2001 compared to 6.10% for the linked quarter and 6.53% in the second quarter
of 2000. On a year-to-date basis through June 30, average cost of short-term
FHLB advances was 5.44% in 2001 versus 6.41% in 2000. The majority of Peoples'
long-term FHLB advances are fixed rate advances. The cost of long-term FHLB
advances averaged 5.12% for the quarter ended June 30, 2001, up 9 basis points
in comparison to the first quarter of 2001 and virtually unchanged from the
second 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 second quarter of 2001, these overnight repurchase
agreements (excluding balances of wholesale market term repurchase agreements)
averaged $24.0 million, a decrease of $3.4 million, from the first quarter
average balance of $27.4 million. The average rate paid on overnight repurchase
agreements during the three months ended June 30, 2001, was 3.81%, down 122
basis points from the prior quarter's average rate of 5.03%. In comparison to
the second quarter of 2000, the average balance of overnight repurchase
agreements decreased $6.9 million and the average rate paid decreased 146 basis
points. The decreased volume of repurchase agreements in 2001 is due largely to
the loss of a customer with a significant balance, who opted for a market-based
product, despite the efforts of Peoples' sales associates to retain these funds.
The recent interest rate cuts have also had an impact on the volume and rate
paid.
Peoples also accesses national market repurchase agreements to diversify
short-term funding sources. During the second quarter of 2001, national market
term repurchase agreements averaged $14.3 million with a rate of 4.78%, down
from the first quarter's average balance of $24.1 million at an average rate of
6.24%. For the second quarter of 2000, national market repurchase agreements
averaged $26.3 million at an average rate of 6.38%. In the first six months of
2001, Peoples reduced the balance of these agreements as a result of deposit
growth although management may utilize this funding source in the future.
Competition for loans and deposits is expected to remain strong throughout the
remainder of 2001 due to the magnitude of interest rate reductions in 2001.
Peoples' interest rate modeling data indicates that the recent rate cuts will
modestly enhance net interest income streams in the third quarter, although
anticipated enhancements could be offset in part by immediate decreases in prime
based commercial loans and other loan refinancings resulting from those interest
rate cuts. Some of Peoples' loans, particularly real estate loans, permit the
customer to refinance with no prepayment or refinancing fees, although
management anticipates the impact to Peoples' earnings stream from such
refinancings as well as the impact of any additional interest rate cuts to have
minimal impact in the short-term. Management plans to continue to maintain
strong customer relationships while structuring loan agreements to mitigate the
impact of such loan repricings to future earnings.
Provision for Loan Losses
- -------------------------
Peoples had a provision for loan losses of $675,000 in the second quarter of
2001, compared to $600,000 in the second quarter of 2000, and unchanged compared
to the first quarter of 2001. For the six months ended June 30, 2001, the
provision for loan losses was $1,350,000, up $228,000 (or 20.3%) compared to the
same period in 2000. The increased provision in the second 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 recent
quarters. Management believes the current provision is responsive to the volume
concentrations, relative quality of certain loans in the portfolio, and overall
inherit credit risk, and reflects the progressive steps taken to assure the
adequacy of the allowance for loan losses.
Management anticipates that the provision in the third quarter of 2001 will be
comparable to the second 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."
Gains and/or Losses on Securities Transactions
- ----------------------------------------------
Peoples reported net losses on securities transactions of $1,000 for the second
quarter 2001 compared to $45,000 recorded in the second quarter of 2000. On a
year-to-date basis, net gains on securities transactions totaled $1,000 in 2001
versus net losses of $56,000 in 2000. The net gains and losses in 2001 and 2000
resulted from normal portfolio management.
Gains and/or Losses on Asset Disposals
- --------------------------------------
Gains on asset disposals, net of disposal losses, totaled $25,000 for the first
half of 2001 compared to net losses of $145,000 in the same period last year.
For the three months ended June 30, 2001, net gains on asset disposals were
$5,000 versus net losses of $140,000 in 2000. The gains and losses in 2001 were
the result of asset disposals in conjunction with normal asset replacement,
while the net losses in 2000 resulted from Peoples' investment in a larger
central processing unit during the second quarter of 2000. This investment has
enhanced Peoples' processing capabilities and improved client service though
more timely delivery of products and services.
Mark-to-Market Adjustment on Interest Rate Caps
- -----------------------------------------------
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. 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 June 30, 2001, Peoples had
interest rate contracts with notional amounts totaling $30 million.
As a result of the adoption, Peoples had recognized the change in market value
of certain interest rate contracts as an increase or decrease to income. In the
second quarter of 2001, the mark-to-market adjustment on interest rate caps was
$42,000, increasing net income by $27,000. On a year-to-date basis, the
mark-to-market adjustment has decreased earnings by $85,000, or $0.01 per share.
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 six months of 2001, non-interest income
increased $110,000 (or 2.5%) to $4,471,000 compared to the same period last
year. In the second quarter of 2001, non-interest income totaled $2,270,000, up
$69,000 (or 3.1%) compared to the linked quarter and up $37,000 (or 1.7%)
compared to the three months ended June 30, 2000. These increases are due
primarily to increased deposit account service charges and electronic banking
income.
The largest components of Peoples' non-interest income are service charges and
other fee income generated from deposit accounts, which are based on the
recovery of costs associated with services provided. For the three months ended
June 30, 2001, deposit account service charge income increased $96,000 (or
12.1%) to $889,000 compared to the second quarter of 2000. The increased deposit
account income is primarily attributable to higher volumes of overdraft and
non-sufficient fund fees primarily from retail customers. Deposit account income
totaled $1,696,000 on a year-to-date basis through June 30, 2001, up $151,000
(or 9.8%) compared to a year ago. Growth in Peoples' deposit service income
generated from commercial customers also contributed to the increase in 2001
compared to the previous year.
In the second quarter of 2001, fiduciary income totaled $628,000, up from
$614,000 for the first quarter of 2001. Fiduciary revenues were unchanged
compared to a year ago. The fee structure for investment and fiduciary
activities is based primarily on the market value of assets being managed, which
totaled approximately $493 million at June 30, 2001, compared to $519 million at
mid-year 2000. This decline is consistent with most major US market indices.
Despite the current volatility in fees, management is committed to fiduciary
revenues being a significant contributor to future non-interest income and is
currently analyzing strategic opportunities to leverage this expertise and
expand market penetration to more clients.
In the first half of 2001, insurance and investment commissions totaled $584,000
compared to $530,000 for the first half of 2000, an increase of $54,000 (or
10.2%). Peoples continues to pursue new ways to provide asset and risk
management products as a method to grow non-interest revenues. Insurance and
investment commissions totaled $263,000 for the second quarter of 2001, down
from $321,000 for the linked quarter and $374,000 for the second quarter of
2000, due primarily to lower annuity sales and reduced brokerage income. The
current interest rate environment has reduced the volume of Peoples' annuity
sales, and associated revenues, in the second quarter of 2001, while brokerage
income has been impacted by US stock market conditions and corresponding
decreased client investment activity.
Electronic banking is one of Peoples' many delivery channels for providing
products and services to its clients and includes ATM and debit card services,
direct deposit services and Internet banking. In the second quarter of 2001,
electronic banking income totaled $354,000 compared to $319,000 last quarter and
$310,000 for the second quarter of 2000. On a year-to-date basis, electronic
banking income increased $84,000 (or 14.2%) to $676,000 in 2001 from $592,000 in
2000 as a result of volume increases in ATM and debit card usage by Peoples'
clients. 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
- --------------------
One of Peoples' goals is to limit the growth of non-interest expense to 5% or
less in 2001, without sacrificing client service levels or slowing expansion
into non-traditional products and services. In the second quarter of 2001,
non-interest expense totaled $8,168,000, up $217,000 (or 2.7%) compared to the
linked quarter and up $374,000 (or 4.8%) compared to second quarter of 2000. On
a year-to-date basis, non-interest expense totaled $16,119,000 in 2001, an
increase of $771,000 (or 5.0%) compared to the previous year. Although salaries
and benefits accounted for most of the increases in the second quarter of 2001,
Peoples also incurred approximately $100,000 of expenses related to the
conversion of ATM and debit card processing to a new vendor. Management believes
that this change enhances Peoples' ability to remain competitive in electronic
banking services through improved client service levels and long-term operating
efficiencies. All of the other major areas of Peoples' non-interest expense were
virtually unchanged from their levels in recent periods except 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 like the financial services.
Compared to the same period in 2000, salaries and benefits grew $633,000 (or
9.6%) to $7,227,000 in the first six months of 2001. Wage increases and rising
benefit costs in 2001, as well as increases in the number of full-time
equivalent associates in customer service positions, accounted for the increase
salaries and benefit expenses. For the quarter ended June 30, 2001, salaries and
benefits totaled $3,642,000, an increase of $341,000 (or 10.3%) from $3,301,000
for the second quarter of 2000, and up $57,000 (or 1.6%) compared to the linked
quarter. Management will continue to leverage its resources, while retaining and
recruiting key associates, to effectively optimize customer service and return
to shareholders.
Net occupancy and equipment expenses totaled $962,000 for the second quarter of
2001, down $56,000 (or 5.5%) compared to the previous year and up $17,000 (or
1.8%) from the linked quarter's total of $945,000. On a year-to-date basis, net
occupancy and equipment expenses decreased $87,000 (or 4.4%) to $1,907,000 in
2001 compared to the first half of 2000. For the remainder of 2001, management
expects net occupancy and equipment expense to remain near current period levels
although continued investment in technology and other customer service
enhancements could produce a moderate increase.
Peoples' other major non-interest expenses remained level compared to previous
quarters although non-income-based taxes such as property and franchise taxes
increased modestly. For the six months ended June 30, 2001, these taxes totaled
$484,000 compared to $394,000 the same period last year. The increased level of
these taxes is due primarily to equity growth at Peoples Bank and taxes applied
to equity. Management focuses on paying taxes at appropriate levels and
continuously seeks opportunities to optimize Peoples' tax position.
Management uses the non-interest income leverage ratio as a key indicator of
performance. The non-interest income leverage ratio, defined as non-interest
income as a percentage of operating expenses, allows management to 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 significant non-recurring, non-operational transactions. In the second
quarter of 2001, Peoples' non-interest income leverage ratio was 30.0% compared
to 29.8% for the first quarter of 2001 and 30.9% a year ago. For the six months
ended June 30, 2001, Peoples non-interest income leverage ratio was 29.9% versus
30.7% for the same period in 2000. Non-interest revenue growth, particularly
brokerage and investment income, was tempered in the first half of 2001 by
skittish US stock market conditions which led to a modest decrease in this
ratio. Peoples' target non-interest income leverage ratio for 2001 is 34% and
management believes the target is attainable and continues to implement
strategies aimed at producing additional non-interest income. Part of Peoples'
long-term strategy includes growing top-line revenues without proportional
increases in expenses and deterioration of the level of service to Peoples'
clients.
Return on Equity
- ----------------
For the three months ended June 30, 2001, return on equity ("ROE") was 13.46%
versus 12.15% for the linked quarter and 15.13% in the second quarter of 2000.
On a cash basis, tangible ROE was 19.27% for the second quarter of 2001 compared
to 23.75% for the same period in 2000 while in the first quarter of 2001 was
17.76%. Year-to-date ROE was 12.81% while cash basis tangible ROE was 18.53% in
2001 versus 15.41% and 24.20% in 2000.
Excluding the impact of significant non-recurring, non-operating income and
expenses, ROE for the second quarter of 2001 was 13.34% compared to 12.67% and
15.81% for the linked quarter and second quarter of 2000, respectively. Tangible
ROE was 19.12% for the three months ended June 30, 2001 compared to 18.43% last
quarter and 24.76% a year ago. Through six months, operating and tangible ROE
was 13.01% and 18.78% in 2001 compared to 15.88% and 24.92% for the same period
in 2000.
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 sensitive to the changing market values
of investments, causing ROE to fluctuate. At June 30, 2001, the adjustment for
the net unrealized holding loss on available-for-sale securities, net of
deferred income taxes, totaled $0.9 million, a change of $2.1 million since
year-end 2000 and $9.0 million compared to June 30, 2000. This dramatic shift
has challenged and is expected to challenge GAAP reported ROE enhancement in
2001. However, increasing earnings per share continues to be the primary focus
of Peoples' management team.
Return on Assets
- ----------------
Return on assets ("ROA") for the three months ended June 30, 2001, was 1.03%.
This compares to 0.91% for the first quarter of 2001 and 1.00% a year ago.
Removing the impact of intangibles and the related amortization, tangible ROA
was 1.19% in the second quarter of 2001 versus 1.07% the previous quarter and
1.17% for the first three months of 2000. For the second quarter of 2001,
operating ROA and cash basis tangible ROA were 1.02% and 1.18%, respectively,
compared to 1.04% and 1.21% a year ago. On a year-to-date basis, operating ROA
was 0.99% in 2001 compared to 1.06% in 2000.
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
reduced emphasis, management continues to monitor ROA and considers it a
measurement of Peoples' deployment of its assets. Management expects any
enhancement to ROA in 2001 to be minimal.
Income Tax Expense
- ------------------
During the second 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 managing Peoples' tax burden and
lowering the effective tax rate. Peoples' effective tax rate was 30.0% for the
first six months ended June 30, 2001, compared to 30.7% in 2000. In the second
quarter of 2001, these strategies produced an effective tax rate of 29.6% versus
30.5% last quarter and 30.4% a year ago. Peoples' cumulative investment related
to the tax expense control strategies approximated $7.1 million at June 30,
2001, compared to $3.1 million at year-end 2000. Additional investments in
various tax credit pools are being considered over the next several years. These
investments are part of a long-term strategy, which in the future could include
similar types of investments, that management believes can further reduce
Peoples' tax burden going forward.
FINANCIAL CONDITION
Overview of Balance Sheet
- -------------------------
Total assets were $1.17 billion at June 30, 2001, an increase of $38.4 million
(or 3.4%) compared to year-end 2000. Gross loans increased $16.8 million (or
2.3%) to $753.8 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 $14.2 million since December 31, 2000.
Late in the second quarter of 2001, Peoples purchased $20.0 million of business
owned life insurance ("BOLI") using the proceeds from matured investment
securities. The BOLI investment, which accounts for most of the increase in
other assets, will produce a tax-advantaged revenue stream and enhance Peoples'
operating efficiency as rising employee benefit costs are offset by the
anticipated increased revenue stream of the BOLI investment.
Total liabilities were $1.06 billion at June 30, 2001, an increase of $32.1
million (or 3.1%) during the first six months of 2001. Peoples' interest bearing
deposits, including money market accounts, grew $65.0 million (or 9.7%) to
$737.6 million at June 30, 2001, while at the same time non-interest bearing
deposits totaled $87.5 million, up $2.5 million (or 2.9%). Since December 31,
2000, Peoples reduced the amount of short-term borrowings by $37.3 million (or
31.1%) while long-term borrowings increased $2.2 million (or 1.6%)
Stockholders' equity totaled $89.5 million at June 30, 2001 compared to $83.2
million at December 31, 2000, an increase of $6.4 million (or 7.6%). 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 an
overall increase in equity of $1.5 million with approximately $1.3 million of
increase attributed to Peoples' reissuance of treasury stock. At December 31,
2000, Peoples had net unrealized losses of $3.0 million on available-for-sale
securities compared to net unrealized losses of $0.9 million at the end of the
second quarter 2001. Peoples had treasury stock totaling $3.0 million at June
30, 2001, compared to $3.6 million at year-end 2000.
Cash and Cash Equivalents
- -------------------------
At June 30, 2001, cash and cash equivalents totaled $42.7 million, up $14.2
million (or 50.1%) from year-end 2000. Included in cash and cash equivalents are
Federal funds sold. Since year-end 2000, Peoples has accumulated funds from the
proceeds of maturing securities and as a result of modest deposit growth. The
accumulated funds were placed in Federal funds sold and account for the overall
increase in cash and cash equivalents in 2001. At June 30, 2001, Peoples had
Federal funds sold of $14.4 million compared to 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 activities. 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 deployed in appropriate
assets while managing liquidity and funding needs.
Investment Securities
- ---------------------
At June 30, 2001, the amortized cost of Peoples' investment securities totaled
$317.6 million compared to $335.1 million at year-end, a decrease of $17.5
million (or 5.2%). Since late 2000, management has used the principal runoff
Peoples' securities to temporarily reduce the amount of borrowed funds rather
than reinvesting those proceeds in securities. In addition, management used a
portion of the matured proceeds for the June 2001 BOLI purchase. 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 second
quarter of 2001 partially offset decreases from principal runoff. At June 30,
2001, Peoples' investment securities had a market value of $316.2 million
compared to $330.5 million at year-end 2000, a decrease of $14.3 million (or
4.3%). The difference in amortized cost and market value at June 30 resulted in
unrealized depreciation in the investment portfolio of $1.4 million and a
corresponding decrease in Peoples' equity of $0.9 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
fluctuations.
At June 30, 2001, investments in US Treasury securities and obligations of US
government agencies and corporations totaled $94.2 million, down $11.8 million
(or 11.2%) since year-end 2000. Peoples' investment in mortgage-backed
securities decreased $4.2 million (or 2.9%) in 2001 to $139.3 million at June
30, 2001, due primarily to maturities and prepayments. The total investment in
obligations of states and political subdivisions was $38.4 million at June 30,
2001, a decrease of $72,000 (or 0.2%) during the first half of 2001. Other
investments at June 30, 2001, totaled $44.3 million compared to $42.5 million at
year-end 2000, a change of $1.8 million (or 4.2%).
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. Through active balance sheet management
and analysis of the investment securities portfolio, Peoples maintains
sufficient liquidity to satisfy depositor demand, other 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 June 30, 2001, gross loans totaled $753.8 million, an
increase of $16.8 million (or 2.3%) since year-end 2000 and $52.3 million (or
7.5%) compared to a year ago. Most of the growth in 2001 was the result of the
loans acquired in the Lower Salem Bank Acquisition. Since the second 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:
June 30, March 31, December 31, June 30,
(Dollars in thousands) 2001 2001 2000 2000
--------------- ------------- ---------------- ---------------
Commercial, financial, and agricultural $ 313,806 $ 309,313 $ 310,558 $ 283,157
Real estate, construction 20,683 26,970 20,267 20,243
Real estate, mortgage 293,817 293,350 283,323 271,274
Consumer 125,450 123,212 122,817 126,739
- ---------------------------------------------------------------------------------------------------------------
Total loans $ 753,756 $ 752,845 $ 736,965 $ 701,413
===============================================================================================================
Peoples experienced loan growth in the first half of 2001 primarily in real
estate loans, which grew $10.9 million (or 3.6%) compared to year-end 2000 to
$314.5 million (including construction loans) at June 30, 2001. Real estate
loans (including construction loans) account for the largest portion of the loan
portfolio, comprising 41.7% of Peoples' total loan portfolio, and a majority of
the loan growth, increasing $23.0 million (or 7.9%) since June 30, 2000.
Included in real estate loans are home equity credit lines ("Equilines"), which
totaled $28.2 million at the end of the second 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 six months of 2001, commercial, financial and agricultural loans
("commercial loans") increased $3.2 million (or 1.0%) from a year-end 2000
balance of $310.6 million. Commercial loans represent 41.6% of Peoples' total
loan portfolio at June 30, 2001, versus 42.1% at December 31, 2000. Internal
loan growth has been tempered in 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 $3.1 million (or 2.7%)
to $119.0 million since year-end 2000. Although Peoples experienced growth
throughout most of the consumer loan portfolio, the indirect lending area, which
represents the majority of Peoples' consumer loans, was unchanged compared to
year-end 2000 with balances of $70.5 million at June 30, 2001.
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 June 30, 2001, down $0.4
million since December 31, 2000, and up $0.1 million from a year ago. Management
routinely evaluates 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 are credits to assisted
living facilities/nursing homes, which comprised approximately 12.0% of Peoples'
outstanding commercial loans at June 30, 2001, compared to 11.6% at year-end
2000. While loans to assisted living facilities/nursing homes comprise the
largest portion, loans to lodging and lodging related companies also represent a
significant portion of Peoples' commercial loans. At June 30, 2001, lodging and
lodging related loans accounted for 11.5% of Peoples' outstanding commercial
loans versus 10.6% at year-end 2000.
These lending opportunities have arisen due to the growth of these industries in
certain markets or contiguous areas, as well as sales associates' efforts to
develop these key relationships. Management believes Peoples' loans to assisted
living facilities/nursing homes as well as loans to lodging and lodging related
companies do not possess abnormal risk levels compared to those assumed in other
types of lending, and management is confident Peoples has sufficient knowledge
of these industries to make sound underwriting decisions.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses totaled $12.2 million, or 1.61% of total loans, at
the end of the second quarter of 2001 compared to $10.9 million, or 1.48%, at
year-end 2000, and $12.0 million, or 1.60% of total loans at March 31, 2001. As
part of the Lower Salem Bank Acquisition, Peoples acquired a loan loss reserve
of $967,000, accounting for most of the $1.2 million overall increase. The
following table presents changes in Peoples' allowance for loan losses:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
(dollars in thousands) 2001 2000 2001 2000
------------ ----------- -----------------------------
Balance, beginning of period $ 12,029 $ 10,628 $ 10,930 $ 10,264
Chargeoffs (701) (375) (1,343) (641)
Recoveries 152 60 251 168
- --------------------------------------------------------------------------------------------------------------
Net chargeoffs (549) (315) (1,092) (473)
Provision for loan losses 675 600 1,350 1,122
Allowance for loan losses acquired - - 967 -
- --------------------------------------------------------------------------------------------------------------
Balance, end of period $ 12,155 $ 10,913 $ 12,155 $ 10,913
==============================================================================================================
While loan delinquencies have declined approximately 25% since year-end 2000,
management anticipates that the loan loss provision in the third quarter of 2001
will be similar to that of the second quarter of 2001 due to the continuing
effects of the economic slowdown in Peoples' markets, combined with less
favorable loss experience in recent 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 second quarter of 2001, commercial and consumer loans accounted for most
of the net chargeoffs. For the three months ended June 30, 2001, net chargeoffs
from commercial loans totaled $281,000, or 51.3% of the total, and from consumer
loans (excluding credit cards) were $125,000, or 22.8% of the total, compared to
$276,000 and $220,000, respectively, for the linked quarter. In the second
quarter of 2000, commercial loan net chargeoffs were $103,000 while consumer net
chargeoffs totaled $148,000. Real estate chargeoffs continue to be a small
portion of total net chargeoffs, reflecting the quality of the real estate loan
portfolio.
In general, Peoples' asset quality is comparable to peer levels, despite minimal
increases in nonperforming assets (which include loans 90 days or more past due,
nonaccrual loans, renegotiated loans, and other real estate owned). As a
percentage of total assets, nonperforming assets were 0.43% at quarter end,
compared to 0.46% at year-end 2000, and up 7 basis points since March 31, 2001.
Nonaccrual commercial loans were up about $750,000 in the second quarter, and
nonaccrual real estate loans increased approximately $250,000. Peoples'
nonperforming commercial loan assets are not specific to one industry or
geographic area, but more attributable to the general economic conditions in
Peoples' primary markets. Management continues to review the entire loan
portfolio as part of the risk management process and has confidence in Peoples'
loan review programs and the level of Peoples' allowance for loan loss, which
stands at a healthy 240% of nonperforming loans, and 1.61% of total loans, at
June 30, 2001.
Management continually monitors the loan portfolio through its Loan Review
Department and Loan Loss Committee to determine the adequacy of the allowance
for loan losses. This formal analysis determines the appropriate level of the
allowance for loan losses, allocation of the allowance among loan types and the
adequacy of the unallocated component of the allowance. The portion of the
allowance allocated among the various loan types represents management's
estimate of expected losses based upon specific allocations for individual
lending relationships and historical loss experience for each category of loans.
The individual loan reviews are based upon specific qualitative and quantitative
criteria, including the size of the loan and loan grades below a predetermined
level. The historical experience factor is based upon historical loss
experience, trends in losses and delinquencies, the growth of loans in
particular markets and industries, and known changes in economic conditions in
the particular lending markets.
Allowances for homogeneous loans (such as residential mortgage loans, credit
cards, personal loans, etc.) are collectively evaluated upon historical loss
experience, trends in losses and delinquencies, the growth of loans in
particular markets, and known changes in economic conditions in the particular
lending markets. A loan is considered impaired when, based on current
information and events, it is probable that Peoples will be unable to collect
the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of potential impaired
loan losses is generally based on the present value of expected future cash
flows discounted at the loan's historical effective interest rate, or the fair
value of the collateral if the loan is collateral dependent. If foreclosure is
probable, impairment loss is measured based on the fair value of the collateral.
At June 30, 2001, the recorded investment in loans that were considered to be
impaired was $7.0 million of which $3.9 million was accruing interest, and $3.1
million were nonaccrual loans. Included in this amount are $3.0 million of
impaired loans for which the related allowance for loan losses is $1.1 million.
The remaining impaired loan balances of $4.0 million do not have a related
allocation of the allowance for loan losses as a result of previous write-downs,
being well-secured, or possessing characteristics indicative of ability to repay
the loan. For the three months ended June 30, 2001, the average recorded
investment in impaired loans was approximately $7.7 million and interest income
of $69,000 was recognized on impaired loans during the period, representing 0.3%
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 $825.1 million, or 78.7% of Peoples' funding
sources at June 30, 2001.
Non-interest bearing deposits serve as a core funding source for Peoples. At
June 30, 2001, non-interest bearing balances totaled $87.5 million, a $2.5
million (or 2.9%) 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 $737.6 million at June 30, 2001, an increase
of $65.0 million (or 9.7%) 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 lower interest-bearing deposits such as savings
and NOW accounts. Certificates of deposits account for the majority of Peoples
interest-bearing deposits and related growth increasing $35.0 million (or 10.3%)
since year-end 2000 to $375.9 million at June 30, 2001. Interest-bearing
transaction accounts, primarily Peoples' money market deposit accounts, also
contributed to the overall increased level of interest-bearing deposits
increasing $27.4 million (or 10.7%) during the first half of 2001. Peoples'
money market accounts offer variable, competitive rates that allow clients
flexibility and opportunity to optimize investment yields.
In addition to traditional deposits and retained equity, 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 June 30, 2001, short-term
borrowings totaled $82.6 million, down $37.3 million (or 31.1%) since year-end
2000. The largest component of Peoples' short-term borrowings at June 30, 2001,
were FHLB advances of $45.0 million, a decrease of $20.2 million (or 31.0%) from
year-end 2000. 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 June 30, 2001, a
decrease of $11.5 million (or 44.6%) compared to year-end 2000. Peoples also had
$23.3 million of retail overnight repurchase agreement balances with its
customers at June 30, 2001, a decrease of $5.5 million (or 19.1%) over the same
period. Short-term FHLB advances and short-term, national market term repurchase
agreements were accessed heavily during 2000 to fund Peoples' strong loan
growth. Slower loan growth in 2001 allowed Peoples to reduce the balance of
short-term FHLB borrowings in the first half of 2001. Management may access
these funding sources in the future, 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 June 30, 2001 due to advances acquired in the Lower Salem Bank
Acquisition. Peoples' 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 long-term FHLB borrowings as an appropriate funding source.
Peoples also has a long-term note with an unaffiliated financial institution.
The original principal balance of the note was $3.0 million and was used to
finance an acquisition in early 1997. At June 30, 2001, the balance was $1.8
million, a decrease of $0.3 million since year-end 2000. Principal payments
began in 1998 and continue semi-annually over the next three years.
Capital/Stockholders' Equity
- ----------------------------
At June 30, 2001, stockholders' equity was $89.5 million, an increase of $6.4
million (or 7.6%) since December 31, 2000. In the second quarter of 2001,
Peoples had net income of $3,005,000 and paid dividends of $991,000, a dividend
payout ratio of 32.98% of earnings, compared to a ratio of 33.89% for the same
period a year earlier and 35.71% in the first quarter of 2001. The dividend
payout ratio on a year-to-date basis through June 30 was 34.24% in 2001 compared
to 33.21% in 2000. Management believes recent dividends represent an acceptable
payout ratio for Peoples and anticipates similar payout ratios in future periods
through quarterly dividends.
At June 30, 2001, the adjustment for the net unrealized holding losses on
available-for-sale securities, net of deferred income taxes, totaled $0.9
million versus $3.0 million at year-end 2000, a change of $2.1 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 June 30, 2001,
Peoples' and Peoples Bank's risk-based capital ratios were above the minimum
standards for a well-capitalized institution. Peoples' total risk-based capital
ratio of 14.09% at June 30, 2001, exceeds the well-capitalized standard of 10%.
Peoples' Tier 1 capital ratio of 12.76% is also above the well-capitalized
minimum of 6%. The Leverage ratio at June 30, 2001, was 8.83% compared to 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 August 1, 2001, Peoples has
purchased 68,132 shares, or 54.5% of the authorized total, at an average price
of $19.06 per share. Peoples is authorized to continue repurchasing common
shares, at appropriate prices, until the expiration of the 2001 Stock Repurchase
Program 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 second quarter of 2001, Peoples purchased 100% of the
authorized shares at a weighted-average price of $18.60 per share. 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.
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 June 30, 2001, Peoples had $0.9 million of treasury stock
attributed to the Deferred Compensation Plan and its participants.
Liquidity and Interest Rate Sensitivity
- ---------------------------------------
The objective of Peoples' asset/liability management function is to optimize and
protect 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 IRR management policy that sets the
minimum requirements and guidelines for monitoring and controlling the level and
amount of IRR. The objective of the IRR 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 and
opportunities 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 IRR 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 IRR
because it is a dynamic measure. By employing a simulation process that
estimates the impact of potential changes in interest rates and balance sheet
structures and by establishing limits on these estimated changes in net income
and net market value, the ALCO is better able to evaluate the risks expected,
based on the simulation data, associated with alternative strategies.
The modeling process starts with a base case simulation that represents the
current balance sheet. 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 produced from the simulation data. The
results from model simulations are reviewed for indications of effectiveness of
current IRR strategies.
Peoples monitors IRR 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 IRR, 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 long-term exposure, 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 illustrate the estimated earnings at risk and
value at risk positions of Peoples at June 30, 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 $ (9,219) (21.7) % $ (58,301) (56.4) %
300 (6,478) (15.3) (44,293) (42.8)
200 (4,009) (9.4) (29,389) (28.4)
100 (1,570) (3.7) (14,740) (14.3)
(100) 914 2.2 8,920 8.6
(200) $ 1,309 3.1 % $ 16,008 15.5 %
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 IRR limits that the ALCO has established in the
policy. Peoples was also within the policy limits at all measured points during
the preceding year.
Peoples' liability sensitivity reflects a moderate increase from the first
quarter of 2001. 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 and will add other
hedge positions as appropriate.
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 provided by
financing activities totaled $10.7 million due to increases in interest-bearing
deposits that were offset by a reduction of short-term borrowings. In the second
quarter of 2001, cash flows used in investing activity totaled $6.6 million as
management used the net proceeds from Peoples' investment portfolio for other
investing activities such as the BOLI purchase. When appropriate, Peoples 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. At June 30,
2001, Peoples' net liquidity position was $91.9 million, or 7.83% of total
assets, in comparison to a net liquidity position of $96.9 million, or 8.34% of
total assets, at March 31, 2001. During the second quarter of 2001, Peoples
experienced an increase in deposits. For the purposes of calculating net
liquidity, these new deposits will be considered volatile funds until they are
held for six months. The liquidity position as of quarter-end was within
Peoples' policy limit of negative 10% of total assets.
Effects of Inflation on Financial Statements
- --------------------------------------------
Substantially all of the Peoples' 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 economic and interest rate environment has drastically changed during first
six months of 2001 compared to the same period in 2000 and particularly the
second half of 2000 when Peoples' net interest margin experienced pressures.
Through June 30, 2001, the Federal Reserve has cut interest rates a total of 275
basis points in an attempt to boost a sluggish economy and has hinted that
additional cuts are possible in the third quarter. At the same time, Congress
has taken steps to spur the economy by passing the Economic Growth and Tax
Relief Reconciliation Act of 2001, including a provision for the issuance of
advance refund checks. Despite the sluggish economy and the uncertainty
regarding the effectiveness of interest rate cuts and tax relief, Peoples second
quarter results positively moved toward Peoples' target earnings goals in 2001.
Although steps have been taken to improve economic conditions, management
believes Peoples' internal loan growth will continue to be challenged. In
addition, the Federal Reserve interest rate reductions will challenge the
financial services industry as more clients seek to refinance existing loans
rather than obtain new loans. This activity could limit Peoples' ability to
internally grow loans in the second half of 2001 and challenge any net interest
margin enhancements. However, management views loan refinancings as an
opportunity for Peoples' sales associates to interact with clients, giving
personal bankers and commercial lenders a great chance to analyze all of the
financial needs of the customer. This type of cross-selling is the focal point
of Peoples' needs-based sales approach that management believes is key to
enhancing shareholder value and growing revenues.
Increasing Peoples' shareholder value requires a strong, community-minded
associate base that is capable, professional, and fairly compensated through
salaries, incentives, and benefits. Given the probability that employee benefit
expense, particularly medical insurance costs, will continue to grow, Peoples
purchased $20 million of business owned life insurance ("BOLI") to be able to
continue providing a competitive wage and benefits package for Peoples'
associates. The BOLI investment will produce a tax-advantaged revenue stream and
enhance Peoples' operating efficiency by offsetting anticipated rising employee
benefit costs.
Another key to Peoples' future success is the growth of investment and insurance
revenues. In the third quarter, Peoples plans to better integrate the management
and resources of its trust, investments, and brokerage groups to regain and
focus momentum in this business area. Peoples has offered trust services since
its inception in 1902, and in the last several years, brokerage products and
services and other asset management alternatives have been added to complement
those services. By working together to leverage resources, management hopes to
enhance the service level to Peoples' clients and better capitalize on sales
opportunities. It also gives Peoples a better chance to present unified
solutions to its clients, and ramp the financial planning services so Peoples
can be the primary financial advisor for its clients' asset management needs.
For the past several quarters, management has provided cash basis earnings,
which exclude the effects of intangible assets and related amortization
expenses. Since Peoples has completed several acquisitions accounted for under
the purchase method of accounting in recent years, cash earnings has allowed the
investment community to compare Peoples' results with other companies that have
used the pooling-of-interests method to account for acquisitions. Management has
also used cash basis earnings in the past to evaluate the impact of acquisitions
on performance and return on investment.
In the first quarter of 2002, new accounting rules will take effect that
eliminates goodwill amortization expense. If the new accounting rules had been
in effect, Peoples' GAAP earnings per share in the second quarter of 2001 would
have approximated $0.50 per share or about 10% higher than second quarter's
$0.45 reported under current GAAP guidelines. Management anticipates a similar
impact to earnings in the first quarter of 2002 due to the new accounting rules.
Mergers and acquisitions remain a viable strategic option for the continued
growth of Peoples' operations and scope of client service. Future acquisitions,
if they occur, may not be limited to specific geographic location or proximity
to current markets. Management will continue to focus its energies on review and
research of possible mergers, consolidations, banking center purchases, or
insurance agency acquisitions as a means of acquiring sales centers and revenue
opportunities that complement existing company locations and revenue growth
strategies. Ultimately, acquisitions will depend upon financial service
opportunities that complement Peoples' core competencies and strategic intent.
Although management recognizes there are areas of opportunity, improvement, and
challenges, Peoples' goal is to continue to develop and integrate revenue
sources beyond the balance sheet, and concentrate on selling and efficiency
initiatives that differentiate Peoples from the competition. Peoples will
continue to pursue strategic opportunities that create a more diversified
financial services company with banking at its core. Management will continue to
analyze and implement strategies designed to enhance Peoples' long-term value.
In the final half of 2001, management is optimistic that the realization of
recent and current strategic initiatives will continue to provide speedy,
professional financial products and services tailored to meet the client's
financial needs.
"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 June 30, For the Six Months Ended June 30,
----------------------------------------------- ------------------------------------------------
2001 2000 2001 2000
----------------------- ---------------------- ----------------------- ------------------------
(dollars in thousands) Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate Balance Rate
ASSETS
Securities:
Taxable $ 278,778 6.68% $ 289,101 6.92% $ 284,975 6.74% $ 289,781 6.88%
Tax-exempt 37,097 7.22% 33,609 7.64% 37,149 7.21% 33,477 7.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 315,875 6.75% 322,710 7.00% 322,124 6.80% 323,258 6.96%
Loans:
Commercial 330,012 8.47% 291,385 9.18% 328,948 8.67% 285,965 9.16%
Real estate 298,217 8.44% 270,523 8.24% 294,864 8.45% 265,747 8.19%
Consumer 124,403 10.66% 124,698 10.45% 122,863 10.67% 123,042 10.35%
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 752,632 8.83% 686,606 9.07% 746,675 8.96% 674,754 9.00%
Less: Allowance for loan loss (12,331) (10,845) (11,925) (10,654)
----------- --------- ---------- ----------- --------- ----------- ---------
Net loans 740,301 8.98% 675,761 9.22% 734,750 9.10% 664,100 9.15%
Interest-bearing deposits 3,941 3.85% 665 4.94% 2,785 4.50% 670 4.53%
Federal funds sold 28,510 4.25% - - 16,345 4.47% 286 5.77%
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,088,627 8.19% 999,136 8.50% 1,076,004 8.33% 988,314 8.43%
Other assets 76,373 79,246 75,373 79,265
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,165,000 $ 1,078,382 $ 1,151,377 $ 1,067,579
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LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 78,417 2.03% $ 86,848 2.36% $ 77,100 2.10% $ 87,803 2.36%
Interest-bearing demand 274,772 3.47% 226,911 4.33% 270,693 3.85% 221,046 4.10%
deposits
Time 374,186 6.07% 338,448 5.24% 359,814 6.11% 342,290 5.02%
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Total interest-bearing 727,375 4.66% 652,207 4.56% 707,608 4.85% 651,139 4.47%
deposits
Borrowed funds:
Short-term 83,283 4.49% 91,226 6.04% 93,655 5.25% 81,479 5.82%
Long-term 140,827 5.12% 148,962 5.17% 140,079 5.06% 149,576 5.16%
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Total borrowed funds 224,110 4.88% 240,188 5.51% 233,734 5.15% 231,055 5.40%
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Total interest bearing 951,485 4.71% 892,395 4.82% 941,342 4.92% 882,194 4.71%
liabilities
Non-interest bearing deposits 88,119 82,588 86,023 81,456
Other liabilities 36,078 31,888 36,598 31,754
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Total liabilities 1,075,682 1,006,871 1,063,963 995,404
Stockholders' equity 89,318 71,510 87,414 72,175
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Total liabilities and equity $ 1,165,000 $ 1,078,382 $ 1,151,377 $ 1,067,579
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Interest income to earning assets 8.19% 8.50% 8.33% 8.43%
Interest expense to earning assets 4.12% 4.30% 4.31% 4.21%
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Net interest margin 4.07% 4.20% 4.02% 4.22%
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Interest income and yields presented on a fully tax-equivalent basis using a 35%
tax rate.
PART II
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities and Use of Proceeds.
None.
ITEM 3: Defaults upon Senior Securities.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None
ITEM 5: Other Information.
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 28
b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the three months
ended June 30, 2001:
1) Filed April 24, 2001 - News release announcing Peoples' earnings
for the first quarter of 2001.
2) Filed May 11, 2001 - News release announcing the declaration of a
$0.15 per share dividend by Peoples' Board of Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORP INC.
Date: August 9, 2001 By: /s/ ROBERT E. EVANS
---------------
Robert E. Evans
President and Chief Executive Officer
Date: August 9, 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 JUNE 30, 2001
Exhibit
Number Description Exhibit Location
- ------------ ---------------------------------- ----------------
11 Computation of Earnings Per Share. Page 28