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 September 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.
------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio
----------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
31-0987416
----------------------------------------------
(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
--------------
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
------------- --------------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, at November 1, 2001: 7,116,272.
Page 1 of 27 Pages
Exhibit Index Appears on Page 26
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 accounting principles generally accepted in the United States.
Operating results for the nine months ended September 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)
September 30, December 31,
ASSETS 2001 2000
Cash and cash equivalents:
Cash and due from banks $ 23,230 $ 28,242
Interest-bearing deposits in other banks 1,054 207
Federal funds sold 23,100 -
- ---------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 47,384 28,449
- ---------------------------------------------------------------------------------------------------------------
Available-for-sale investment securities, at estimated fair value (amortized
cost of $303,862 and $335,111 at September, 2001, and
December 31, 2000, respectively) 308,528 330,521
Loans, net of unearned interest 756,183 736,965
Allowance for loan losses (12,285) (10,930)
- ---------------------------------------------------------------------------------------------------------------
Net loans 743,898 726,035
- ---------------------------------------------------------------------------------------------------------------
Bank premises and equipment, net 16,461 15,565
Other assets 55,045 35,264
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 1,171,316 $ 1,135,834
===============================================================================================================
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 81,597 $ 84,974
Interest bearing 760,988 672,647
- ---------------------------------------------------------------------------------------------------------------
Total deposits 842,585 757,621
- ---------------------------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 25,833 54,729
Federal Home Loan Bank term advances - 65,186
- ---------------------------------------------------------------------------------------------------------------
Total short-term borrowings 25,833 119,915
- ---------------------------------------------------------------------------------------------------------------
Long-term borrowings 170,616 138,511
Accrued expenses and other liabilities 9,273 7,572
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 1,048,307 1,023,619
- ---------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in junior subordinated debentures 29,047 29,021
Stockholders' Equity
Common stock, no par value, 12,000,000 shares authorized - 7,274,142 shares
issued at September 30, 2001, and 6,679,028 issued
at December 31, 2000, including shares in treasury 78,730 66,364
Accumulated comprehensive income, net of deferred income taxes 3,033 (2,983)
Retained earnings 15,272 23,381
- ---------------------------------------------------------------------------------------------------------------
97,035 86,762
Treasury stock, at cost, 160,750 shares at September 30, 2001, and
189,357 shares at December 31, 2000 (3,073) (3,568)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 93,962 83,194
- ---------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and stockholders' equity $ 1,171,316 $ 1,135,834
===============================================================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Interest income: $ 21,456 $ 21,799 $ 65,568 $ 62,835
Interest expense 10,674 11,804 33,679 32,511
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 10,782 9,995 31,889 30,324
Provision for loan losses 675 600 2,025 1,722
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,107 9,395 29,864 28,602
Net gain on securities transactions 26 66 27 10
Net (loss) gain on asset disposals (12) 36 13 (109)
Mark-to-market adjustment on interest rate caps - - (131) -
Non-interest income:
Service charges on deposits 863 835 2,559 2,380
Fiduciary revenues 626 648 1,868 1,974
Insurance commissions 368 480 1,077 1,138
Electronic banking revenues 356 294 1,032 886
Business owned life insurance 242 - 242 -
Other non-interest income 59 70 207 310
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2,514 2,327 6,985 6,688
Non-interest expense:
Salaries and benefits 3,790 3,393 11,017 9,987
Occupancy and equipment 885 963 2,792 2,957
Trust preferred 665 656 1,976 1,961
Goodwill amortization 457 432 1,354 1,295
Other intangible asset amortization 125 139 376 418
Data processing and software 279 263 757 776
Other non-interest expense 1,916 1,904 5,964 5,703
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 8,117 7,750 24,236 23,097
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,518 4,074 12,522 12,094
Income taxes 1,321 1,192 3,724 3,650
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 3,197 $ 2,882 $ 8,798 $ 8,444
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.45 $ 0.40 $ 1.22 $ 1.18
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.44 $ 0.40 $ 1.20 $ 1.16
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (basic) 7,172,290 7,170,006 7,195,286 7,185,677
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (diluted) 7,303,350 7,241,457 7,304,688 7,278,201
- ----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared $ 1,090 $ 916 $ 3,007 $ 2,763
- ----------------------------------------------------------------------------------------------------------------------------
Cash dividend per share $ 0.15 $ 0.13 $ 0.41 $ 0.38
- ----------------------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 6,679,028 $ 66,364 $ 23,381 $ (3,568) $ (2,983) $ 83,194
-------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 8,798 8,798
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
securities 6,016 6,016
----------
Comprehensive income 14,814
Exercise of common stock options
(reissuance of 49,306 treasury (519) 893 374
shares)
Tax benefit from exercise of stock 65 65
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 (3,007) (3,007)
Common stock issued under dividend
reinvestment plan 14,440 242 242
10% stock dividend 572,891 12,358 (13,900) 1,542
Purchase of 178,764 shares of treasury stock (3,225) (3,225)
-------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 7,274,142 $ 78,730 $ 15,272 $ (3,073) $ 3,033 $ 93,962
===============================================================================================================================
Comprehensive Income:
Net unrealized appreciation arising during period, net of tax 6,034
Less: reclassification adjustment for securities gains included in net income, 18
net of tax
-------------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investment securities 6,016
===============================================================================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Nine Months Ended
September 30,
2001 2000
Cash flows from operating activities:
Net income $ 8,798 $ 8,444
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 2,025 1,722
Gain on securities transactions (13) 109
Mark-to-market adjustment on interest rate caps 131 -
Depreciation, amortization, and accretion 3,380 3,476
Decrease (increase) in interest receivable 514 (1,276)
(Decrease) increase in interest payable (709) 81
Deferred income tax (benefit) expense (178) 268
Deferral of loan origination fees and costs 15 (225)
Other, net 2,746 239
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,682 12,828
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities (37,260) (23,940)
Proceeds from sales of available-for-sale securities 134 3,220
Proceeds from maturities of available-for-sale securities 71,159 19,697
Net increase in loans (3,614) (64,827)
Expenditures for premises and equipment (2,365) (2,099)
Proceeds from sales of other real estate owned 90 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)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,582 (68,299)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net decrease in non-interest bearing deposits (10,226) (2,518)
Net increase in interest-bearing deposits 77,777 28,996
Net (decrease) increase in short-term borrowings (93,082) 27,692
Proceeds from long term borrowings 30,000 -
Payments on long-term borrowings (418) (11,820)
Cash dividends paid (2,529) (2,430)
Purchase of treasury stock (3,225) (2,527)
Proceeds from issuance of common stock 374 389
- ------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,329) 37,782
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 18,935 (17,689)
Cash and cash equivalents at beginning of period 28,449 43,751
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 47,384 $ 26,062
- ------------------------------------------------------------------------------------------------------------------
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.
On August 10, 2001, Peoples declared a 10% stock dividend issued September 12,
2001, to common shareholders of record on August 24, 2001. Accordingly, all per
share data reflects the dividend.
1. 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 third quarter of 2001, Peoples' diluted earnings per
share would have been $0.48 versus the $0.44 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 Months For the Nine Months
Ended September 30, Ended September 30,
SIGNIFICANT RATIOS 2001 2000 2001 2000
Return on average equity 13.90 % 15.33 % 13.19 % 15.38 %
Cash basis return on average equity (a) 19.46 % 23.26 % 18.85 % 23.87 %
Return on average assets 1.09 % 1.04 % 1.01 % 1.04 %
Cash basis return on average assets (a) 1.25 % 1.21 % 1.17 % 1.21 %
Net interest margin (b) 4.10 % 3.99 % 4.05 % 4.14 %
Efficiency ratio (c) 55.56 % 56.80 % 56.74 % 56.60 %
Non-interest income leverage ratio (d) 33.36 % 32.41 % 31.04 % 31.28 %
Average stockholders' equity to average assets 7.83 % 6.81 % 7.67 % 6.78 %
Cash dividends to net income 34.09 % 31.78 % 34.18 % 32.73 %
Loans net of unearned interest to deposits (end of 89.75 % 95.98 % 89.75 % 95.98 %
period)
Allowance for loan losses to loans, net of unearned
interest (end of period) 1.62 % 1.55 % 1.62 % 1.55 %
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS (end of period)
Tier I capital ratio 12.92 % 12.58 % 12.92 % 12.58 %
Risk-based capital ratio 14.26 % 14.03 % 14.26 % 14.03 %
Leverage ratio 8.86 % 8.54 % 8.86 % 8.54 %
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA Net income per share:
Basic $ 0.45 $ 0.40 $ 1.22 $ 1.18
Diluted 0.44 0.40 1.20 1.16
Cash basis earnings - diluted (a) 0.49 0.45 1.37 1.33
Cash dividends per share 0.15 0.13 0.41 0.38
Book value per share $ 13.21 $ 10.78 $ 13.21 $ 10.78
Tangible book value per share (a) $ 10.74 $ 8.21 $ 10.74 $ 8.21
Weighted average shares outstanding:
Basic 7,172,290 7,170,006 7,195,286 7,185,677
Diluted 7,303,350 7,241,457 7,304,688 7,278,201
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(a) 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.
(b) Calculated using fully-tax equivalent net interest income as a percentage
of average earning assets.
(c) 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.
(d) 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
- ------------
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. 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 an array of financial products and services to clients, 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 bank provides services through 40 financial service
locations, both walk-in and drive-in facilities, and 25 ATMs in the states of
Ohio, West Virginia, and Kentucky, as well as telephone banking and the
Internet. Peoples' e-banking service, Peoples OnLine Connection, can be found on
the Internet at www.peoplesbancorp.com.
Peoples Bank also makes other financial services available to clients via
Peoples Insurance and Peoples Investment Services. Peoples Insurance offers a
full set of life, health, property and casualty insurance products and services
while Peoples Investment Services 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).
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.
RESULTS OF OPERATIONS
Overview of the Income Statement
- --------------------------------
Net income totaled $3,197,000 for the third quarter of 2001, up $315,000 (or
10.9%) compared to the same period in 2000. Diluted earnings per share were
$0.44 for the three months ended September 30, 2001, versus $0.40 per diluted
share a year ago. Compared to the previous quarter, net income grew $192,000 (or
6.4%) while earnings per diluted share improved $0.03 (or 7.3%). On a
year-to-date basis, net income totaled $8,798,000, or $1.20 per diluted share,
in 2001 compared to $8,444,000, or $1.16 per share, last year. The combination
of increased net interest income and controlled expense growth accounted for the
improved earnings in 2001.
For the three months ended September 30, 2001, cash basis earnings were $0.49
per share, up $0.04 (or 8.9%) compared to the same period a year ago. Cash basis
ROE was 19.46% for the third quarter of 2001, 23.26% for the third quarter of
2000 and 19.27% for the second quarter of 2001 (the "linked quarter"). Cash
basis earnings exclude the effects of intangible assets and related amortization
expenses. Through nine months, cash basis earnings were $1.37 per share in 2001
versus $1.33 in 2000, an increase of $0.04 (or 3.0%), while cash basis ROE was
18.85% compared to 23.87% in 2000.
Compared to last year, net interest income increased $1,565,000 (or 5.2%) to
$31,889,000 for the nine months ended September 30, 2001, due to Peoples' payoff
of higher cost borrowings and overall lower costs of funds. Peoples' provision
for loan losses totaled $2,025,000 through September 30, 2001, an increase of
$303,000 (or 17.6%) from $1,722,000 last year. The provision for loan losses
totaled $675,000 for the third quarter of 2001, up $75,000 (or 12.5%) from the
third quarter of 2000.
For the quarter ended September 30, 2001, non-interest income totaled
$2,514,000, up $187,000 (or 8.0%) from $2,327,000 a year ago and $244,000 (or
10.7%) from $2,270,000 for the second quarter of 2001. On a year-to-date basis,
non-interest income grew $297,000 (or 4.4%) in 2001 from $6,688,000 the prior
year. Non-interest expense totaled $8,117,000 for the third quarter of 2001, up
$367,000 (or 4.7%) compared to the third quarter of 2000. Non-interest expense
was down slightly from the prior quarter's level. Through nine months,
non-interest expenses were $24,236,000 in 2001 versus $23,097,000 in 2000, an
increase of $1,139,000 (or 4.9%). Salaries and benefits remain the largest
portion of Peoples' non-interest expense and represent the majority of the
increases in 2001.
Interest Income and Expense
- ---------------------------
Peoples derives a majority of its interest income from loans and investment
securities and incurs interest expense on interest-bearing deposits and borrowed
funds. Net interest income, the amount by which interest income exceeds interest
expense, remains Peoples' largest source of revenue. Management periodically
adjusts the mix of assets and liabilities in an attempt to control and improve
net interest income; however, factors that influence market interest rates, such
as interest rate changes by the Federal Reserve and Peoples' competitors, may
have a greater impact on net interest income than those adjustments made by
management. Consequently, a volatile rate environment can make it difficult for
management to control net interest margin and income, let alone predict future
changes.
Net interest income was up $787,000 (or 7.9%) compared to the third quarter of
2000 to $10,782,000 for the third quarter of 2001, as lower interest income was
offset by a larger reduction in Peoples' interest expense. For the three months
ended September 30, 2001, interest income totaled $21,456,000, down $343,000 (or
1.6%) versus last year while total interest expense was $10,674,000, down
$1,130,000 (or 9.6%). Net interest income was virtually unchanged compared to
the linked quarter. The increased net revenues in 2001 are due to both a
reduction in the volume of borrowed funds and the aggregate decrease in costs of
funds, a direct result of the Fed's rate cuts.
Peoples' interest income includes income derived from states and political
subdivisions. Since such income is exempt from taxation, it is more meaningful
to analyze Peoples' net interest income on a fully-tax equivalent ("FTE") basis.
In the third quarter of 2001, FTE net interest income was $11,049,000 compared
to last year's third quarter total of $10,250,000, an increase of $799,000 (or
7.8%). Through nine months, FTE net interest income grew $1,584,000 (or 5.1%) to
$32,679,000 in 2001 from $31,095,000 in 2000.
For the third quarter of 2001, the FTE yield on Peoples' earning assets was
8.02% compared to 8.19% the previous quarter and 8.56% a year ago, while the
cost of interest-bearing liabilities was 4.45%, 4.71% and 5.16% for the same
periods, respectively. Earning assets averaged $1.08 billion in the third
quarter of 2001, down $8.6 million (or 0.8%) versus the second quarter of 2001
and up $51.8 million (or 5.0%) compared to the third quarter of 2000. Average
interest-bearing liabilities were $959.9 million during the three months ended
September 30, 2001, compared to $951.5 million for the linked quarter and $915.7
million a year ago.
On a year-to-date basis through September 30, 2001, Peoples' average earning
assets increased $75.6 million (or 7.6%) from last year's average of $1.00
billion, a result of strong loan growth in late 2000. Even though earning assets
increased, the FTE yield on those assets dropped 24 basis points versus a year
ago due to rate reductions in 2001. Total interest-bearing liabilities averaged
$947.6 million during the first nine months of 2001 compared to $893.4 million a
year ago with higher volumes of interest bearing deposits, particularly
certificates of deposits, accounting for the increase. Rate reductions also
resulted in an 11 basis points drop in the year-to-date average cost of funds
from 4.85% in 2000 to 4.74% in 2001.
Net interest margin (calculated by dividing FTE net interest income by average
interest-earning assets) serves as an important measurement of the net revenue
stream generated by the mix and pricing of Peoples' earning assets and
interest-bearing liabilities. For the third quarter of 2001, net interest margin
was 4.10% compared to the second quarter ratio of 4.07% and third quarter 2000
ratio of 3.99%. Net interest margin was 4.05% and 4.14% for the nine months
ended September 30, 2001 and 2000, respectively. The Federal Reserve reduced key
interest rates 450 basis points in 2001, which has had a positive impact on
Peoples' net interest income and margin during 2001. However, fierce competition
for loans and deposits tempered the positive impact of these rate reductions.
Management believes that the recent rate cuts will modestly enhance net interest
income streams in the fourth quarter, although anticipated enhancements could be
offset in part by immediate decreases in income from prime based commercial
loans and other loan refinancings.
Loans account for the largest portion of earning assets, averaging $756.4
million during the three months ended September 30, 2001, with a FTE yield of
8.61%. For the linked quarter, average loans were $752.6 million with a FTE
yield of 8.83%, while in the third quarter of 2000, loans averaged $711.2
million with a FTE yield of 9.20%. Through nine months in 2001, loans averaged
$750.0 million with a FTE yield of 8.81% versus $687.0 million and a FTE yield
of 9.05% last year.
Investment securities decreased $13.5 million (or 4.1%) from 2000's third
quarter average of $327.9 million to $314.4 million for the third quarter of
2001. The FTE yield on investments decreased 27 basis points in the third
quarter of 2001 to 6.68% from 6.95% a year ago. Investment securities averaged
$319.5 million and $324.8 million on a year-to-date basis through September 30,
2001 and 2000, with FTE yields of 6.76% and 6.95%, respectively. The interest
rate reductions in 2001 have increased the market value of Peoples' investment
portfolio and the resulting increased volumes have resulted in a slightly lower
FTE yield.
Traditional deposits comprise the largest component of Peoples' interest-bearing
liabilities. During the third quarter of 2001, Peoples' deposit costs decreased
54 basis points to 4.38% compared to the comparative quarter last year while
compared to the linked quarter, deposits costs decreased 28 basis points. The
lower deposit costs are the result of decreased rates paid on Peoples' money
market accounts and other higher cost customer funding sources. On a
year-to-date basis, deposit costs grew 5 basis points in 2001 versus 2000's cost
of 4.61%, due largely to the increased volume of interest bearing deposits,
particularly certificates of deposits in the first half of this year, as well as
very competitive rates paid on interest bearing deposits. In the fourth quarter
of 2001, management anticipates deposit costs to remain near current levels as
competitors' pricing of deposits and customer's alternative investment
opportunities may limit the opportunity to reduce deposit costs in response to
any Federal Reserve action in the fourth quarter.
Peoples continues to utilize a variety of borrowings, both short-term and
long-term, as complementary funding sources to core deposits. As a result of the
Fed's interest rate cuts in 2001 and the payoff of some higher cost borrowings,
the cost of borrowed funds decreased by 53 basis points to 4.99% for the first
nine months of 2001 compared to 5.52% for the same period last year. In the
third quarter of 2001, Peoples' cost of borrowed funds decreased 20 basis points
compared to the second quarter of 2001 and declined 108 basis points compared to
the third quarter of 2000.
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 4.24% during the third quarter
of 2001 compared to 4.75% for the linked quarter and 6.82% in the third quarter
of 2000. On a year-to-date basis through September 30, average cost of
short-term FHLB advances was 5.19% in 2001 versus 6.64% in 2000. The majority of
Peoples' long-term FHLB advances are fixed rate advances. The cost of long-term
FHLB advances averaged 5.03% for the quarter ended September 30, 2001, down
slightly from the linked quarter and the third quarter of 2000. Management will
continue to use FHLB borrowings to fund earning assets, when it is deemed
appropriate.
Late in the third quarter of 2001, Peoples converted $30.0 million of short-term
FHLB advances to long-term FHLB advances. The new, long-term advances were
10-year, convertible rate advances with fixed rates for 3 years on $15.0 million
and 4 years on the remaining $15.0 million. In addition, management has taken
steps to prepay approximately $2.4 million of long-term FHLB advances acquired
as part of an acquisition early in 2001 utilizing a longer term advance with a
lower interest rate.
Peoples' cash management services (offered to a variety of business customers)
also provides short-term funding, primarily in the form of overnight repurchase
agreements. In the third quarter of 2001, these overnight repurchase agreements
(excluding balances of wholesale market term repurchase agreements) averaged
$25.3 million, an increase of $1.3 million, from the second quarter average
balance of $24.0 million. The average rate paid on overnight repurchase
agreements during the three months ended September 30, 2001, was 3.04%, down 83
basis points from the prior quarter's average rate of 3.87%. In comparison to
the third quarter of 2000, the average balance of overnight repurchase
agreements declined $7.0 million and the average rate paid decreased 258 basis
points. The decreased volume of repurchase agreements in 2001 is due largely to
the decision of a customer with a significant balance to invest in a
market-based product.
Peoples has also accessed national market repurchase agreements in recent
periods to diversify short-term funding sources. During the third quarter of
2001, national market term repurchase agreements averaged $12.3 million with a
rate of 3.70%, down from the second quarter's average balance of $14.3 million
at an average rate of 4.84%. For the third quarter of 2000, national market
repurchase agreements averaged $25.8 million at an average rate of 6.72%.
Peoples has reduced the balance of these agreements throughout the year due to
the availability of other funding sources and at September 30, 2001, had no
national market repurchase agreements outstanding. Management may utilize this
funding source in the future, when it is deemed appropriate.
The Federal Reserve's rate cuts in 2001 have enhanced year-to-date and third
quarter net interest income; however, the magnitude of these reductions has
intensified the competition for lower loan rates in Peoples' markets as clients
seek to refinance existing loans. Management anticipates that further reductions
in market interest rates would challenge net interest income and net interest
margin in the fourth quarter and increase the competition for loans,
particularly mortgage loans.
Provision for Loan Losses
- -------------------------
Peoples had a provision for loan losses of $675,000 in the third quarter of
2001, compared to $600,000 in the third quarter of 2000, and unchanged from the
second quarter of 2001. For the nine months ended September 30, 2001, the
provision for loan losses was $2,025,000, up $303,000 (or 17.6%) compared to the
same period in 2000. The increased provision in 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 these quarterly provisions have been appropriate for the
volume concentrations, relative quality of certain loans in the portfolio, and
overall inherit credit risk, and reflect the progressive steps taken to assure
the adequacy and reasonableness of the allowance for loan losses.
While general economic conditions remain unchanged, the overall quality of
Peoples' loan portfolio has gradually improved in 2001. As a result, management
anticipates a reduction in Peoples provision in the fourth quarter of 2001,
although changes in loan volume and concentrations, general economic conditions
and other factors affecting loan losses, such as loan delinquencies and
portfolio risk, could limit the amount of any reduction. Further information can
be found later in this discussion under "Allowance for Loan Losses."
Gains and/or Losses on Securities Transactions
- ----------------------------------------------
For the third quarter 2001, gains on securities transactions, net of losses,
totaled $26,000 compared to $66,000 in the third quarter of 2000. On a
year-to-date basis, net gains on securities transactions totaled $27,000 in 2001
versus $10,000 in 2000. The net gains on securities transactions in both 2001
and 2000 resulted from normal portfolio management.
Gains and/or Losses on Asset Disposals
- --------------------------------------
Net gains on asset disposals totaled $13,000 for the nine months ended September
30, 2001, compared to net losses of $109,000 in the same period last year. For
the three months ended September 30, 2001, net losses on asset disposals were
$12,000 versus net gains of $36,000 in 2000. The gains and losses in 2001 were
the result of asset disposals in conjunction with normal asset replacement,
while 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
- -----------------------------------------------
As a result of Peoples' adoption of Statement of Financial Accounting Standards
Number 133 "Accounting for Derivative Instruments and Hedging Instruments"
("SFAS No. 133"), as required on January 1, 2001, Peoples had recognized the
change in market value of certain interest rate contracts as an increase or
decrease to income. On a year-to-date basis, the mark-to-market adjustment was
$131,000 at September 30, 2001, decreasing net income by $85,000, or $0.01 per
share, and unchanged from the year-to-date adjustment at June 30, 2001.
Management does not anticipate any additional adjustments related to Peoples'
existing interest rate contracts.
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 nine months of 2001, non-interest income
increased $297,000 (or 4.4%) to $6,985,000 compared to the same period last
year. In the third quarter of 2001, non-interest income totaled $2,514,000, up
$187,000 (or 8.0%) compared to the prior year and up $244,000 (or 10.7%)
compared to the three months ended June 30, 2001. These increases are due
primarily to new income streams from Peoples' investment in business owned life
insurance ("BOLI"), as well as increased electronic banking income.
The largest component of Peoples' non-interest income is fee income generated
from deposit accounts, which is based on the recovery of costs associated with
services provided. For the three months ended September 30, 2001, deposit
account service charge income increased $28,000 (or 3.4%) to $863,000 compared
to the third quarter of 2000. The increased deposit account income is primarily
attributable to higher volumes of overdraft and non-sufficient fund fees on
checking accounts. Deposit account income totaled $2,559,000 on a year-to-date
basis through September 30, 2001, up $179,000 (or 7.5%) 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 third quarter of 2001, fiduciary income totaled $626,000, down from
$648,000 in the third quarter of 2000. Fiduciary revenues were virtually
unchanged compared to the linked quarter. The fee structure for investment and
fiduciary activities is based primarily on the market value of assets being
managed, which totaled approximately $477 million at September 30, 2001,
compared to $519 million at mid-year 2000, a decline consistent with most major
US market indices. Even though the value of assets managed has decreased, the
number of fiduciary accounts remains virtually unchanged from year-end 2000.
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.
Insurance and investment commissions totaled $1,077,000 through nine months in
2001 and $368,000 for the third quarter of 2001 compared to $1,138,000 and
$480,000 for the same periods in 2000, decreases of $61,000 (or 5.4%) and
$112,000 (or 23.3%), respectively. Peoples' ability to grow insurance and
investment commissions in 2001 has been challenged due to decreased brokerage
and annuity sales activity. While the significant annuity sales and brokerage
activity a year ago were not expected to continue into 2001, the current
interest rate environment and US stock market conditions reduced that activity
even more than expected. Increased insurance revenues, particularly property and
casualty, have partially offset that decrease. Compared to the linked quarter,
insurance and investment commissions grew $39,000 (or 11.9%) in the third
quarter from $329,000, a result of higher life insurance commissions and an
increased number of credit life and accident/health insurance sales. Management
believes insurance and investment commissions remain a viable source for future
non-interest growth as Peoples continues to pursue new ways to provide asset and
risk management products to clients and prospects.
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 third quarter of 2001,
electronic banking income totaled $356,000, up $62,000 (or 21.1%) compared to
$294,000 for the third quarter of 2000 and essentially unchanged from last
quarter's total. On a year-to-date basis, electronic banking income increased
$146,000 (or 16.5%) to $1,032,000 in 2001 from $886,000 in 2000, a result of
volume increases in ATM and debit card usage by Peoples' clients. Management
will continue to explore and develop new e-banking capabilities that complement
existing delivery channels, both traditional and non-traditional, and 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 or slowing expansion into
non-traditional products and services. In the third quarter of 2001,
non-interest expense totaled $8,117,000, up $367,000 (or 4.7%) compared to the
prior year and essentially unchanged compared to the second quarter of 2001. On
a year-to-date basis, non-interest expense totaled $24,236,000 in 2001, an
increase of $1,139,000 (or 4.9%) compared to the previous year. Although
salaries and benefits have accounted for most of the expense growth in 2001,
Peoples has also experienced a slight increase in non-income based taxes.
Peoples' other major areas of non-interest expense were at or below their levels
of recent periods.
The largest component of Peoples' non-interest expense is salaries and benefits,
which is inherent in a service-based industry like financial services. Compared
to the same period in 2000, salaries and benefits grew $1,030,000 (or 10.3%) to
$11,017,000 in the first nine 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 this increase. For the
quarter ended September 30, 2001, salaries and benefits totaled $3,790,000, an
increase of $397,000 (or 11.7%) from $3,393,000 for the third quarter of 2000,
and up $148,000 (or 4.1%) compared to the linked quarter. Management will
continue to leverage Peoples' resources, while retaining and recruiting key
associates, to effectively optimize customer service and return to shareholders.
Net occupancy and equipment expenses totaled $885,000 for the third quarter of
2001, down $78,000 (or 8.1%) compared to the previous year and $77,000 (or 8.0%)
from the linked quarter's total of $962,000. On a year-to-date basis, net
occupancy and equipment expenses decreased $165,000 (or 5.6%) in 2001 to
$2,792,000 compared to $2,957,000 for the first nine months of 2000. For the
fourth quarter 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 may slightly increase these costs.
Peoples' other major non-interest expenses remained at levels comparable to
previous quarters, except for non-income-based taxes, which increased modestly.
For the nine months ended September 30, 2001, these taxes totaled $681,000
compared to $592,000 the same period last year. The increased level of these
taxes is due primarily to equity growth at Peoples Bank, the primary basis for
these taxes. A strategic goal of Peoples is to appropriately manage its overall
tax burden.
Management uses the non-interest income leverage ratio to measure efficiency and
Peoples' performance. The ratio, defined as non-interest income as a percentage
of operating expenses, excludes securities and asset disposal gains and losses
along with intangible amortization and any significant non-recurring,
non-operational transactions. In the third quarter of 2001, Peoples'
non-interest income leverage ratio was 33.4% compared to 30.0% for the second
quarter of 2001 and 32.4% a year ago. The new revenue streams generated from
Peoples' BOLI investment accounts for a majority of the improvement in the third
quarter. For the nine months ended September 30, 2001, Peoples non-interest
income leverage ratio was 31.0% versus 31.3% for the same period in 2000.
Tempered non-interest revenue growth during the first nine months of 2001, due
to economic and US stock market conditions, led to this slight decrease.
Management continues to implement strategies aimed at producing additional
non-interest income and improving Peoples' non-interest income leverage ratio.
Return on Equity
- ----------------
For the three months ended September 30, 2001, return on equity ("ROE") was
13.90% versus 13.46% for the linked quarter and 15.33% in the third quarter of
2000. On a cash basis, tangible ROE was 19.46% for the third quarter of 2001
compared to 23.26% for the same period in 2000. In the second quarter of 2001,
tangible ROE was 19.27%. Year-to-date ROE was 13.19% while cash basis tangible
ROE was 18.85% in 2001 versus 15.38% and 23.87% in 2000.
Peoples' ROE, both GAAP and cash basis, has been negatively impacted in 2001 by
the mark-to-market adjustment on Peoples' entire available-for-sale investment
portfolio that increased equity. As market interest rates change, both the
investment and equity sections of Peoples' balance sheet are sensitive to the
corresponding change in the overall market value of the investment portfolio. At
September 30, 2001, the adjustment for the net unrealized holding gain on
available-for-sale securities, net of deferred income taxes, totaled $3.0
million, a change of $6.0 million since year-end 2000 and $10.4 million compared
to September 30, 2000. Since ROE enhancement during the fourth quarter and first
half of 2002 will be limited due to market conditions, management continues to
make increasing earnings per share its primary focus.
Return on Assets
- ----------------
Return on assets ("ROA") for the three months ended September 30, 2001, was
1.09%. This compares to 1.03% for the second quarter of 2001 and 1.04% a year
ago. Removing the impact of intangibles and related amortization expense,
tangible ROA was 1.25% in the third quarter of 2001 versus 1.19% the previous
quarter and 1.21% for the first three months of 2000. On a year-to-date basis,
operating ROA was 1.01% in 2001 compared to 1.04% in 2000.
In recent years, the primary focus of both the investment community and
management has shifted to EPS enhancement and ROE while diminishing the emphasis
on ROA as a key performance indicator. Despite the reduced emphasis, management
continues to monitor ROA and considers it a measurement of Peoples' assets
leverage. Management expects any enhancement to ROA in the fourth quarter of
2001 to be minimal.
Income Tax Expense
- ------------------
During the third quarter of 2001, Peoples reduced its effective tax rate and
overall tax burden as a result of recent investments. These investments, which
include tax credit funds and business owned life insurance, are part of a longer
term focus on tax advantaged investment opportunities that reduce Peoples' tax
burden. On a year-to-date basis, Peoples' effective tax rate was 29.7% through
nine months in 2001 compared to 30.2% last year. In the third quarter of 2001,
Peoples had an effective tax rate of 29.2% versus 29.3% a year ago. Peoples'
investment in tax advantaged investments approximated $6.8 million at September
30, 2001, compared to $3.1 million at year-end 2000. Depending on economic and
regulatory conditions, additional investments in various tax credit pools are
being considered over the next several years that could further reduce Peoples'
tax burden.
FINANCIAL CONDITION
Overview of Balance Sheet
- -------------------------
Total assets were $1.17 billion at September 30, 2001, an increase of $35.5
million (or 3.1%) compared to year-end 2000. Gross loans increased $19.2 million
(or 2.6%) to $756.2 million, with the majority of the growth occurring in real
estate loans. Peoples also experienced an increase in cash and cash equivalents
of $18.9 million (or 66.6%) since December 31, 2000, as a result of an early
redemption of a $25 million security in late September 2001. This increase was a
temporary condition due to the timing of the redemption and the reinvestment
into new investment securities, which occurred in mid-October.
In late June 2001, Peoples purchased $20.0 million of business owned life
insurance ("BOLI") using accumulated funds from investments and other sources.
The BOLI investment accounts for most of the increase in other assets while also
producing a tax-advantaged revenue stream that enhances Peoples' operating
efficiency by offsetting the rising employee benefit costs.
Total liabilities were $1.05 billion at September 30, 2001, an increase of $24.7
million (or 2.4%) during the first nine months of 2001. Peoples' interest
bearing deposits, including money market accounts, grew $88.3 million (or 13.1%)
to $761.0 million at September 30, 2001, while at the same time non-interest
bearing deposits declined $3.4 million (or 4.0%) to $81.6 million. Since
December 31, 2000, Peoples has reduced its total amount of borrowed funds by
$62.0 million (or 24.0%).
Stockholders' equity totaled $94.0 million at September 30, 2001 compared to
$83.2 million at December 31, 2000, an increase of $10.8 million (or 12.9%). The
increased market value of Peoples' available-for-sale securities accounted for a
majority of the change in equity in 2001.
Cash and Cash Equivalents
- -------------------------
The amount of cash and cash equivalents fluctuates on a daily basis due to
client activity and Peoples' liquidity needs. At September 30, 2001, cash and
cash equivalents totaled $47.4 million, up $18.9 million (or 66.6%) from
year-end 2000. Federal funds sold account for both a significant portion of
Peoples' cash and cash equivalents as well as the increase in 2001. At September
30, 2001, Peoples had Federal funds sold of $23.1 million compared to no Federal
funds sold at December 31, 2000, a result of management holding a significant
portion of the proceeds from the call of a $25 million security in Federal funds
sold due to timing of funds reinvestment.
Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, should allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments as they come due.
Management will continue to manage the principal runoff from Peoples' investment
and loan portfolios and reinvest those funds based on loan demand and investment
opportunities, as appropriate, while monitoring the level of cash and cash
equivalents to ensure funds are appropriately deployed while maintaining
adequate liquidity.
Investment Securities
- ---------------------
At September 30, 2001, the amortized cost of Peoples' investment securities
totaled $303.9 million with a market value of $308.5 million compared to $335.1
million and $330.5 million at year-end 2000, decreases of $31.2 million (or
9.3%) and $22.0 million (or 6.7%), respectively. In 2001, management used a
portion of the principal runoff for other strategic purposes resulting in the
decrease; however, this decrease in amortized cost was partially offset by an
increase in the investment portfolio's market value attributable to interest
rate fluctuations. The difference in amortized cost and market value at
September 30 resulted in unrealized appreciation in the investment portfolio of
$4.7 million and a corresponding increase in Peoples' equity of $3.0 million,
net of deferred taxes. 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, net of deferred taxes.
Peoples' investment in US treasury securities and obligations of US government
agencies and corporations decreased $36.6 million (or 34.5%) due to the call of
a $25.0 million security in late September. In October, management reinvested a
significant portion of the proceeds in similar securities. Peoples' other
investment categories experienced modest increases due to changes in market
values and normal portfolio management. The following table details Peoples'
investment portfolio, at estimated fair value:
September 30, December 31, September 30,
(Dollars in Thousands) 2001 2000 2000
----------------- ----------------- ----------------
US Treasury securities and obligations of
US government agencies and corporations $ 69,439 $ 106,019 $ 103,733
Obligations of states and political subdivisions 44,967 38,507 37,773
Mortgage-backed securities 148,726 143,505 144,880
Other securities 45,396 42,490 43,035
- ------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 308,528 $ 330,521 $ 329,421
======================================================================================================
Management monitors the earnings performance and liquidity of the investment
portfolio on a regular basis through Asset/Liability Committee ("ALCO")
meetings. The ALCO also monitors net interest income, sets pricing guidelines,
and manages Peoples' interest rate risk. Through active balance sheet investment
securities portfolio management, 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.
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 September 30, 2001, gross loans totaled $756.2 million, an
increase of $19.2 million (or 2.6%) since year-end 2000 and $31.9 million (or
4.4%) compared to a year ago. Most of the growth in 2001 was the result of loans
acquired as part of an acquisition in February 2001. Since the third quarter of
2000, retail and commercial loan growth occurred primarily in Peoples' existing
markets, while some commercial lending activity continues with selected
customers outside Peoples' primary markets. The following table details total
outstanding loans:
(Dollars in thousands) September 30, June 30, December 31, September 30,
2001 2001 2000 2000
---------------- ------------- ---------------- ----------------
Commercial, financial, and agricultural $ 315,607 $ 313,806 $ 310,558 $ 290,308
Real estate, construction 21,077 20,683 20,267 27,344
Real estate, mortgage 295,747 293,817 283,323 280,206
Consumer 117,328 118,996 115,913 120,080
Credit Card 6,424 6,454 6,904 6,390
- ----------------------------------------------------------------------------------------------------------------
Total loans $ 756,183 $ 753,756 $ 736,965 $ 724,328
================================================================================================================
Peoples experienced loan growth throughout 2001, primarily in real estate loans,
which grew $13.2 million (or 4.4%) compared to year-end 2000 to $316.8 million
(including construction loans) at September 30, 2001. Real estate loans
(including construction loans) account for the largest portion of the loan
portfolio, comprising 41.9% of Peoples' total loan portfolio. Included in real
estate loans are home equity credit lines ("Equilines"), which totaled $28.9
million at the end of the third quarter of 2001 compared to $26.1 million at
December 31, 2000. Management believes Equiline loans are a relationship 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 nine months of 2001, commercial, financial and agricultural loans
("commercial loans") increased $5.0 million (or 1.6%) from year-end 2000's
balance of $310.6 million. Commercial loans represent 41.7% of Peoples' total
loan portfolio at September 30, 2001, versus 42.1% at December 31, 2000. Since
September 30, 2000, commercial loans have grown $25.3 million (or 8.7%) from
$290.3 million, or 40.1% of total loans, with a majority of the increase
occurring in the fourth quarter of 2000. Internal loan growth has been tempered
in 2001 as a result of general economic conditions affecting Peoples' markets
and contiguous areas, causing fewer lending opportunities that fit Peoples'
underwriting criteria. Future commercial lending activities will depend on
economic and related conditions, such as general demand for loans in Peoples'
primary markets and interest rates offered by Peoples. In addition to in-market
opportunities, 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 $1.4 million (or 1.2%)
to $117.3 million since year-end 2000. The indirect lending area represents a
majority of Peoples' consumer loans. Even though Peoples has experienced growth
throughout most of the consumer loan portfolio, its indirect loan balances have
declined $1.0 million (or 1.4%) since year-end 2000 to $70.1 million at
September 30, 2001, a result of declining creditworthy indirect sales
opportunities and normal runoff of indirect loans.
Management is pleased with the performance of Peoples' consumer loan portfolio,
which can be attributed to a commitment to sound lending practices and a strong
customer service orientation. Lenders use a tiered pricing system that enables
Peoples to apply interest rates based on the corresponding risk associated with
the loan. Although consumer debt delinquency has increased in the financial
services industry, management's actions to reinforce Peoples' pricing system and
underwriting criteria have had a positive impact on consumer loan delinquencies.
Management plans to continue its commitment to the use of this tiered pricing
system to improve the performance of Peoples consumer loan portfolio and promote
controlled growth of quality consumer loans.
Peoples' credit card balances totaled $6.4 million at September 30, 2001, down
$0.5 million (or 7.0%) since December 31, 2000, and unchanged from last year's
balances. 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 12.7% of Peoples'
outstanding commercial loans at September 30, 2001, compared to 11.6% at
year-end 2000. Loans to lodging and lodging related companies also represent a
significant portion of Peoples' commercial loans accounting for 12.1% of
Peoples' outstanding commercial loans at September 30, 2001, 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 when compared to those assumed in
other types of lending. 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 $12.3 million, or 1.62% of total loans, at
the end of the third quarter of 2001 compared to $10.9 million, or 1.48%, at
year-end 2000, and $12.2 million, or 1.61% of total loans at June 30, 2001. In
February 2001, Peoples acquired an allowance for loan losses of $967,000 as part
of an acquisition, accounting for most of the $1.4 million increase. The
following table presents changes in Peoples' allowance for loan losses:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
(dollars in thousands) 2001 2000 2001 2000
------------ ----------- -----------------------------
Balance, beginning of period $ 12,155 $ 10,913 $ 10,930 $ 10,264
Chargeoffs (642) (422) (1,985) (1,063)
Recoveries 97 115 348 283
- --------------------------------------------------------------------------------------------------------------
Net chargeoffs (545) (307) (1,637) (780)
Provision for loan losses 675 600 2,025 1,722
Allowance for loan losses acquired - - 967 -
- --------------------------------------------------------------------------------------------------------------
Balance, end of period $ 12,285 $ 11,206 $ 12,285 $ 11,206
==============================================================================================================
Peoples' provision for loan losses in the third quarter remained above last
year's level due to the sluggish economic conditions in Peoples' markets and
contiguous areas and the less favorable loss experience in recent quarters.
Despite these factors, loan delinquencies are only slightly above year-end 2000
levels and management believes Peoples' loan quality has improved. As a result,
management anticipates a reduction in Peoples provision for loan losses in the
fourth quarter of 2001, although changes in loan volume and concentrations,
general economic conditions and other factors affecting loan losses, such as
loan delinquencies and portfolio risk, could limit the amount of any reduction.
In the third quarter of 2001, consumer and commercial loans accounted for a
majority of net chargeoffs. For the three months ended September 30, 2001, net
chargeoffs from consumer loans (excluding credit cards) totaled $319,000, or
58.5% of the total, and from commercial loans were $159,000, or 29.2% of the
total, compared to $125,000 and $281,000, respectively, for the linked quarter.
In the third quarter of 2000, consumer net chargeoffs totaled $186,000, or
60.6%, while commercial loan net chargeoffs were $16,000, or 5.2%. Real estate
chargeoffs represented a small percentage of total net chargeoffs for both the
third quarter of 2001 and 2000, reflecting the quality of the real estate loan
portfolio.
In general, Peoples' asset quality is better than its peers with nonperforming
assets (which include loans 90 days or more past due, nonaccrual loans,
renegotiated loans, and other real estate owned) representing 0.39% of total
assets at quarter end compared to 0.46% at year-end 2000. Although total
nonperforming assets were down in the third quarter of 2001 compared to year-end
2000, nonaccrual commercial loans were up about $275,000 and nonaccrual real
estate loans increased approximately $400,000. 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 losses, which stands at a healthy 274% of
nonperforming loans, and 1.62% of total loans, at September 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, and allocation of the allowance among loan types. 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 based 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 September 30, 2001, the recorded investment in loans that were considered to
be impaired was $8.1 million of which $5.1 million was accruing interest, and
$3.0 million were nonaccrual loans. Included in this amount are $3.0 million of
impaired loans for which the related allowance for loan losses is $956,000. The
remaining impaired loan balances 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 the ability to repay
the loan. For the three months ended September 30, 2001, the average recorded
investment in impaired loans was approximately $7.7 million and interest income
of $97,000 was recognized on impaired loans during the period, representing 0.5%
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 $842.6 million, or 81.1% of Peoples' funding
sources at September 30, 2001.
Non-interest bearing deposits serve as a core funding source for Peoples. At
September 30, 2001, non-interest bearing balances totaled $81.6 million, a $3.4
million (or 4.0%) decrease compared to year-end 2000. 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 $761.0 million at September 30, 2001, an
increase of $88.3 million (or 13.1%) compared to $672.6 million at December 31,
2000. Certificates of deposits account for the majority of Peoples
interest-bearing deposits, and related growth, increasing $49.7 million (or
14.6%) since year-end 2000 to $390.7 million at September 30, 2001.
Interest-bearing transaction accounts, primarily Peoples' money market deposit
accounts, also contributed to the overall increased level of interest-bearing
deposits increasing $35.7 million (or 13.9%) during the first nine months of
2001. Peoples' money market accounts offer variable, competitive rates that
allow clients flexibility and opportunity to enhance their investment yields.
Peoples also maintains long-term borrowing capacity with the FHLB. Long-term
FHLB advances increased $32.4 million (or 23.8%) since year-end 2000, totaling
$168.8 million at September 30, 2001. The majority of this increase is due to
utilizing these advances to reduce short-term FHLB borrowings. 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.
Capital/Stockholders' Equity
- ----------------------------
At September 30, 2001, stockholders' equity was $94.0 million, an increase of
$10.8 million (or 12.9%) since December 31, 2000 as changes in the market value
of Peoples' investment portfolio directly impacted Peoples' stockholders'
equity. At September 30, 2001, the adjustment for the net unrealized holding
gains on available-for-sale securities, net of deferred income taxes, totaled
$3.0 million versus holding losses of $3.0 million at year-end 2000, a change of
$6.0 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. Management believes Peoples' capital continues to provide a strong
base for profitable growth.
In the third quarter of 2001, Peoples had net income of $3,197,000 and paid
dividends of $1,090,000, a dividend payout ratio of 34.09% of earnings, compared
to a ratio of 31.78% for the same period a year earlier and 32.98% in the second
quarter of 2001. The dividend payout ratio on a year-to-date basis through
September 30 was 34.18% in 2001 compared to 32.73% in 2000. Management believes
recent dividends represent an acceptable payout ratio for Peoples and
anticipates similar payout ratios in future periods through quarterly dividends.
In addition to monitoring performance through traditional capital measurements
(i.e., dividend payout ratios and ROE), Peoples has also complied with the
capital adequacy standards mandated by the banking industry. Bank regulators
have established "risk-based" capital requirements designed to measure capital
adequacy in relationship to the relative risks of various assets banks hold. At
September 30, 2001, Peoples' Total capital, Tier 1 and Leverage ratios were
14.26%, 12.92% and 8.86% exceeding the well-capitalized standards of 10%, 6% and
5%, respectively. All three risk-based capital ratios for Peoples Bank were also
above the minimum standards for a well-capitalized institution at September 30,
2001.
At September 30, 2001, Peoples had treasury stock totaling $3.1 million compared
to $3.6 million at year-end 2000. During 2001, Peoples was authorized to
repurchase 137,500 shares of Peoples' common stock under the 2001 Stock
Repurchase Program. Peoples also maintained a formal stock repurchase plan that
served as the basis for treasury purchases in anticipation of Peoples' projected
stock option exercises, which authorized the repurchase of 19,965 common shares
each quarter. Through November 6, 2001, Peoples has repurchased 205,239 shares
of Peoples' common stock, at an average price of $18.75, under these plans.
Peoples is not authorized to repurchase any additional shares under these plans.
On November 9, 2001, Peoples announced approval to repurchase 175,000 (or
approximately 2.5% of Peoples' outstanding common shares) from time to time in
open market or privately negotiated transactions (the "2002 Stock Repurchase
Program"). Management expects to purchase shares in future, at appropriate
prices, until the expiration of the 2002 Stock Repurchase Program on December
31, 2002.
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
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, account balances invested in Peoples
common shares are reported as treasury stock in Peoples' financial statements.
At September 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
- ------------------
One of the most significant risks 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
parameters. 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 100 basis point 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 200 basis points and 75% when rates shift 400 basis points. 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 September 30, 2001 (dollars in thousands):
Immediate Estimated Estimated
Interest Rate
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- --------------------------- ----------------------------- --------------------------------
300 $ (3,466) (8.0) % $ (26,079) (19.0) %
200 (1,369) (3.2) (14,538) (10.6)
100 (592) (1.4) (5,168) (3.8)
(100) 549 1.3 63 0.0
(200) $ 377 0.9 % $ 3,348 2.4 %
The interest risk analysis shows that Peoples is moderately liability sensitive,
which means that downward moving interest rates should favorably impact Peoples'
net interest income while upward moving interest rates should negatively impact
net interest income. As a result, the ALCO may consider the purchase of
additional interest rate hedge positions, as available and appropriate, that
would provide net interest income protection in a rising rate environment.
Peoples' liability sensitivity reflects a moderate decrease from the second
quarter of 2001 due in part to the ALCO's efforts to secure long-term funding in
the current low interest rate environment. The interest rate analysis also shows
that Peoples is within the established IRR policy limits for all simulations and
all scenarios for the current period as well as at all measured points during
the preceding year.
Liquidity
- ---------
In addition to IRR management, a primary objective of the ALCO is the
maintenance of a sufficient level of liquidity. The ALCO defines liquidity as
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 liquidity management policy 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 earning assets such as maturities, principal
payments and income from loans and investment securities. In 2001, cash used in
financing activities totaled $1.3 million as the reduction of short-term
borrowings was offset by increases in interest-bearing deposits and long-term
borrowings. Through nine months of 2001, cash flows provided by investing
activity totaled $3.6 million as management retained a portion of 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 FHLB, 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 and pricing characteristics with contractual maturity dates and pricing
parameters of earning 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, short-term growth in deposits and brokered funds, from liquid
assets, short-term investments and unpledged available-for-sale securities. At
September 30, 2001, Peoples' net liquidity position was $150.7 million, or
12.85% of total assets, in comparison to a net liquidity position of $91.9
million, or 7.83% of total assets, at June 30, 2001. The increase in liquidity
is attributed to an increase in liquid assets, which includes Federal funds sold
and investment securities, and an increase in what Peoples considers stable
deposits during the third quarter of 2001. 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. The opposite would be true during a period of
decreasing prices. In the banking industry, typically monetary assets exceed
monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, there has
been little impact from inflation to net assets.
Future Outlook
- --------------
The operating results of the financial services industry evolve around three
qualities: earnings quality, asset quality, and capital quality. In the third
quarter, Peoples' earnings reached record levels attributable to sound
asset/liability management and the diversification of revenue streams while
sound underwriting over the last decade has produced asset quality that is
better than peer levels. Management continues to explore new revenue sources and
opportunities to position Peoples for the future of financial services while
maintaining traditional banking as the core of its business.
Loans and deposits anchor our balance sheet while net interest income and
deposit account service charges are the largest components of Peoples' earnings.
As a result, the economic conditions and interest rate environment in the fourth
quarter will influence Peoples' short-term performance. The rate cuts by the
Federal Reserve have been beneficial thus far in 2001. While funding cost
decreases have fueled the improvements to date, management expects minimal
benefit from additional rate cuts in the near-term due to the constraints on
deposit pricing and the impact on prime based commercial lending and loan
refinancings. Thus, management remains focused on growing non-interest income
and controlling operating expenses. Management's goal is to enhance Peoples' fee
revenue generation by strengthening client relationships and adding products and
services that complement our business and serve each client's needs.
As part of that goal, Peoples plans to introduce new products late in the fourth
quarter, including "Overdraft Privilege" and free checking accounts for
non-business clients. Management believes the Overdraft Privilege program is a
way for Peoples to fill a void between "check cashing stores" and traditional
overdraft protection (such as a line of credit) while also providing a boost to
service charge revenues. The Overdraft Privilege program will provide qualified
retail clients with virtually automatic protection by establishing an Overdraft
Privilege amount, based on the client's credit quality and other parameters,
against which Peoples will apply overdraft amounts and overdraft fees. While
Peoples will be an early implementer of the Overdraft Privilege concept in its
markets, management looks forward to the challenges and opportunities it brings.
Non-traditional revenues, including insurance, investment and fiduciary,
represent an important part of Peoples' future revenue projections. Even though
current market conditions, along with jittery investors, have combined to slow
what had been very solid earnings growth in these areas, Peoples remains
committed to a need-based selling approach and the complete integration of
non-traditional products and services, including insurance and investments. As
part of this commitment, Peoples integrated the management and resources of its
trust, investments, and brokerage groups in the third quarter to form Peoples
Investment Services. This newly formed team allows Peoples to enhance the
service level to clients and capitalize on sales opportunities. In addition,
management continues to increase the exposure of Peoples' insurance products to
existing clients while also looking for ways to attract new clients through
multi-product relationships.
Peoples' capital ratios have reached stronger levels, which can be a comfort to
both investors and regulators, and reflect Peoples' ability and preparedness to
weather the storm in difficult economic times. The current capital levels also
provide some downside earnings protection but also allows for future growth.
Management continues to examine a variety of methods in which to leverage
Peoples' equity, including mergers and acquisitions. The evaluation of future
acquisitions will focus more on enhancing Peoples' earnings potential rather
than the geographic location or proximity to current markets. Ultimately, future
mergers and acquisitions, if they occur, will depend on management's ability to
identify accretive financial service opportunities that complement Peoples' core
competencies and strategic intent.
Even as potential mergers and acquisitions are evaluated, management is working
to finalize the establishment of new capital management subsidiaries in the
fourth quarter. These new subsidiaries will allow management to better manage
Peoples' investments and provide new opportunities to make investments, such as
low-income housing tax credit funds, that are either limited or restricted at
the bank level. The goal is to invest Peoples' capital across business units,
based on projected risk and return on investments, which have potential for both
strong growth and enhancement to Peoples' overall long-term value. Management
expects that these subsidiaries will also provide opportunities to reduce
Peoples' overall tax burden (both income based and non-income based) while
helping to optimize Peoples' operational effectiveness.
In the last several years, Peoples has completed several acquisitions using the
purchase method of accounting, which added goodwill balances to Peoples' balance
sheet and amortization expense to results of operations. In order to provide a
comparison versus those companies who used pooling-of-interests accounting, we
also provide cash basis earnings, which exclude the effects of intangible assets
and related amortization expenses. This gives the investment community
additional information about Peoples that will become even more important in the
first quarter of 2002, when new accounting rules take effect, and goodwill
amortization expense is discontinued. On a cash basis, Peoples' quarterly
operating income per share reached $0.49 compared to $0.45 last year. If the new
accounting rules were in effect, and no goodwill amortization is expensed,
Peoples' GAAP earnings per share would have approximated $0.48 per share, or
about four cents higher than the $0.44 per share reported under current GAAP
guidelines.
Management believes Peoples has a strong base from which to further enhance
Peoples' long-term value and produce future financial benefits for all
stakeholders. Peoples' goals for the fourth quarter and into 2002 remain
unchanged - further integration of traditional and non-traditional products and
services; top-line revenue growth; non-interest expense control.
"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 September 30, For the Nine months Ended September 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 $ 276,056 6.62% $ 291,523 6.88% $ 281,969 6.70% $ 290,367 6.88%
Tax-exempt 38,294 7.14% 36,364 7.50% 37,535 7.19% 34,447 7.61%
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 314,350 6.68% 327,887 6.95% 319,504 6.76% 324,814 6.95%
Loans:
Commercial 332,964 8.17% 304,387 9.38% 330,301 8.50% 292,150 9.20%
Real estate 298,899 8.27% 280,203 8.38% 296,224 8.39% 270,601 8.25%
Consumer 124,551 10.62% 126,604 10.62% 123,432 10.65% 124,238 10.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 756,414 8.61% 711,194 9.20% 749,957 8.81% 686,989 9.05%
Less: Allowance for loan loss (12,379) (11,161) (12,078) (10,824)
----------- --------- ----------- --------- ----------- --------- --------- ----------
Net loans 744,035 8.76% 700,033 9.35% 737,879 8.96% 676,165 9.20%
Interest-bearing deposits 2,418 3.16% 324 4.94% 2,661 4.07% 554 4.62%
Federal funds sold 19,197 3.50% - - 17,306 4.08% 190 5.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,080,000 8.02% 1,028,244 8.56% 1,077,350 8.23% 1,001,723 8.47%
Other assets 95,334 75,953 82,112 78,151
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,175,334 $ 1,104,197 $ 1,159,462 $ 1,079,874
====================================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 77,796 1.78% $ 81,109 2.37% $ 77,340 1.98% $ 85,555 2.36%
Interest-bearing demand 277,615 2.92% 241,879 4.53% 273,032 3.53% 228,041 4.25%
deposits
Time 388,642 5.95% 336,625 5.82% 369,529 6.05% 340,388 5.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 744,053 4.38% 659,613 4.92% 719,901 4.66% 653,984 4.61%
deposits
Borrowed funds:
Short-term 62,678 3.73% 117,531 6.49% 83,217 4.88% 93,584 6.10%
Long-term 153,188 5.07% 138,527 5.14% 144,497 5.06% 145,866 5.16%
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 215,866 4.68% 256,058 5.76% 227,714 4.99% 239,450 5.52%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing 959,919 4.45% 915,671 5.16% 947,615 4.74% 893,434 4.85%
liabilities
Non-interest bearing deposits 87,230 80,298 86,418 81,067
Other liabilities 36,211 33,041 36,478 32,186
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,083,360 1,029,010 1,070,511 1,006,687
Stockholders' equity 91,974 75,187 88,951 73,187
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,175,334 $ 1,104,197 $ 1,159,462 $ 1,079,874
====================================================================================================================================
Interest income to earning assets 8.02% 8.56% 8.23% 8.47%
Interest expense to earning assets 3.92% 4.57% 4.18% 4.33%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.10% 3.99% 4.05% 4.14%
====================================================================================================================================
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 27
b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the three
months ended September 30, 2001:
1) Filed July 25, 2001 - News release announcing Peoples' earnings for the
second quarter of 2001.
2) Filed May 11, 2001 - News release announcing the declaration of a 10% stock
dividend and a $0.15 per share cash 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: November 13, 2001 By:/s/ ROBERT E. EVANS
-------------------
Robert E. Evans
President and Chief Executive Officer
Date: November 13, 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 SEPTEMBER 30, 2001
Exhibit
Number Description Exhibit Location
- ------------ ---------------------------------- ----------------
11 Computation of Earnings Per Share. Page 27