FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio
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(Address of principal executive offices)
45750
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(Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, at May 1, 2002: 7,159,970.
Page 1 of 28 Pages
Exhibit Index Appears on Page 27
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
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 three months ended March 31, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. The balance sheet at December 31, 2001, 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, 2001 ("2001 Form 10-K"). Complete audited
consolidated financial statements with footnotes thereto are included in
Peoples' 2001 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)
March 31, December 31,
ASSETS 2002 2001
Cash and cash equivalents:
Cash and due from banks $ 24,898 $ 31,642
Interest-bearing deposits in other banks 527 346
Federal funds sold - 850
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Total cash and cash equivalents 25,425 32,838
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $341,306 and $329,081 at March 31, 2002, and
December 31, 2001, respectively) 340,484 330,364
Loans, net of unearned interest 780,710 772,856
Allowance for loan losses (12,426) (12,357)
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Net loans 768,284 760,499
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Bank premises and equipment, net 16,001 16,369
Goodwill 15,115 15,388
Other intangible assets 1,505 1,622
Other assets 38,074 36,886
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Total assets $ 1,204,888 $ 1,193,966
============================================================================================================
LIABILITIES
Deposits:
Non-interest bearing $ 93,823 $ 96,533
Interest bearing 745,399 717,835
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Total deposits 839,222 814,368
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Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 31,446 23,752
Federal Home Loan Bank term advances 9,400 32,300
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Total short-term borrowings 40,846 56,052
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Long-term borrowings 198,582 192,448
Accrued expenses and other liabilities 7,728 8,188
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Total liabilities 1,086,378 1,071,056
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Guaranteed preferred beneficial interests in junior subordinated debentures 22,284 29,056
STOCKHOLDERS' EQUITY
Common stock, no par value, 12,000,000 shares authorized - 7,294,237 shares
issued at March 31, 2002, and 7,289,266 issued
at December 31, 2001, including shares in treasury 78,612 78,664
Accumulated comprehensive income, net of deferred income taxes (535) 834
Retained earnings 21,172 17,735
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99,249 97,233
Treasury stock, at cost, 158,528 shares at March 31, 2002, and
178,344 shares at December 31, 2001 (3,023) (3,379)
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Total stockholders' equity 96,226 93,854
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Total liabilities, beneficial interests and stockholders' equity $ 1,204,888 $ 1,193,966
============================================================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data) Three Months Ended
March 31,
2002 2001
Interest income $ 20,315 $ 22,120
Interest expense 8,156 11,809
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Net interest income 12,159 10,311
Provision for loan losses 861 675
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Net interest income after provision for loan losses 11,298 9,636
Other income:
Service charges on deposits 1,366 807
Fiduciary revenues 616 614
Insurance and investment commissions 524 380
Electronic banking revenues 368 322
Business owned life insurance 325 -
Gain on securities transactions 51 2
(Loss) gain on asset disposals (7) 20
Net mark-to-market adjustment on interest rate caps - (173)
Other non-interest income 84 78
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Total other income 3,327 2,050
Other expenses:
Salaries and benefits 4,484 3,585
Occupancy and equipment 926 945
Trust Preferred Securities expense 561 652
Marketing 386 119
Data processing and software 323 247
Amortization of goodwill 274 440
Amortization of other intangible assets 111 126
Other non-interest expense 1,886 1,837
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Total other expenses 8,951 7,951
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Income before income taxes and extraordinary gain 5,674 3,735
Income taxes 1,569 1,139
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Income before extraordinary gains 4,105 2,596
Extraordinary gain on early debt extinguishment, net of tax expense of $221 410 -
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Net income $ 4,515 $ 2,596
=============================================================================================================
Basic earnings per share:
Income before extraordinary gains $ 0.58 $ 0.36
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Extraordinary gain $ 0.05 $ -
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Net income $ 0.63 $ 0.36
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Diluted earnings per share:
Income before extraordinary gains $ 0.57 $ 0.36
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Extraordinary gain $ 0.05 $ -
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Net income $ 0.62 $ 0.36
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Weighted average shares outstanding (basic) 7,128,732 7,185,185
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Weighted average shares outstanding (diluted) 7,254,055 7,281,339
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Cash dividends declared $ 1,078 $ 927
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Cash dividend per share $ 0.15 $ 0.13
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share and per share amounts)
Accumulated
Other
Common Stock Retained Treasury Comprehensive
Shares Earnings Stock Income (Loss) Total
Amount
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Balance, December 31, 2001 7,289,266 $ 78,664 $ 17,735 $ (3,379) $ 834 $ 93,854
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Comprehensive income:
Net income 4,515 4,515
Other comprehensive income, net of tax
Unrealized loss on available-for-sale
securities, net of reclassification (1,369) (1,369)
adjustment
Total comprehensive income 3,146
Exercise of common stock options
(reissued 7,659 treasury shares) (173) 390 217
Tax benefit from exercise of stock options 30 30
Cash dividends declared (1,078) (1,078)
Common stock issued under dividend
reinvestment plan 4,971 91 91
Purchase of treasury stock, 1,740 shares (34) (34)
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Balance, March 31, 2002 7,294,237 $ 78,612 $ 21,172 $ (3,023) $ (535) $ 96,226
===================================================================================================================================
Comprehensive Income:
Net unrealized appreciation arising during period, net of tax (1,336)
Less: reclassification adjustment for securities gains included in net income, net 33
of tax
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Net unrealized appreciation on investment securities (1,369)
==================================================================================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Three Months Ended
March 31,
2002 2001
Cash flows from operating activities:
Net income $ 4,515 $ 2,596
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 861 675
Gain on securities transactions (51) (2)
Extraordinary gain on early debt extinguishment (631) -
Depreciation, amortization, and accretion 966 1,146
Decrease (increase) in interest receivable 32 (197)
(Decrease) increase in interest payable (23) 17
Deferred income tax expense (benefit) 131 (178)
Deferral of loan origination fees and costs (54) 135
Other, net (772) 59
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Net cash provided by operating activities 4,974 4,251
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Cash flows from investing activities:
Purchases of available-for-sale securities (67,988) -
Proceeds from sales of available-for-sale securities 32,793 -
Proceeds from maturities of available-for-sale securities 22,599 14,114
Net (increase) decrease in loans (8,565) 602
Expenditures for premises and equipment (133) (57)
Proceeds from sales of other real estate owned 75 41
Acquisitions, net of cash received - (162)
Investment in limited partnership and tax credit funds - (400)
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Net cash (used in) provided by investing activities (21,219) 14,138
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Cash flows from financing activities:
Net decrease in non-interest bearing deposits (2,710) (4,006)
Net increase in interest-bearing deposits 27,564 37,962
Net decrease in short-term borrowings (15,206) (35,443)
Proceeds from long-term debt 7,000 -
Payments on long-term borrowings (866) (158)
Cash dividends paid (983) (762)
Purchase of treasury stock (34) (115)
Repurchase of Trust Preferred Securities (6,150) -
Proceeds from issuance of common stock 217 74
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Net cash provided by (used in) financing activities 8,832 (2,448)
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Net (decrease) increase in cash and cash equivalents (7,413) 15,941
Cash and cash equivalents at beginning of period 32,838 28,449
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Cash and cash equivalents at end of period $ 25,425 $ 44,390
==================================================================================================================
Supplemental cash flow information:
Interest paid $ 4,430 $ 6,189
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Income taxes paid $ 1,675 $ 493
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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 financial services 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. Certain
reclassifications have been made to prior period amounts, which had no impact on
net income, to conform to 2002 presentation. All share and per share information
has been adjusted for a 10% stock dividend issued September 12, 2001. The
consolidated financial statements include all accounts of Peoples' parent
company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
1. Mergers and Acquisitions
On January 4, 2002, Peoples announced it had signed a stock purchase
agreement with the shareholders of First Colony Bancshares, Inc. ("First
Colony") to acquire all of the outstanding common stock of First Colony, the
holding company of The Guernsey Bank, Federal Savings Bank based in
Cambridge, Ohio. Under the terms of the agreement, Peoples has agreed to pay
approximately $18 million total cash consideration and assume approximately
$2 million of First Colony debt to acquire full-service office locations in
Cambridge (two offices), Byesville, Quaker City in Ohio's Guernsey County
and Flushing in Ohio's Belmont County, involving assets of approximately
$110 million and deposits of approximately $100 million. Peoples will not
acquire the Worthington, Ohio, operations, or its related loans and
deposits, and will operate the Guernsey and Belmont County offices as
full-service sales office of Peoples Bank. This transaction is subject to
regulatory approval and Peoples anticipates completing the acquisition in
late second quarter or early third quarter of 2002.
On May 6, 2002, Peoples announced that Peoples Bank had signed a definitive
agreement to acquire a full-service banking center in Malta, Ohio, from
Century National Bank of Zanesville, Ohio, a subsidiary of Park National
Corporation of Newark, Ohio. At March 31, 2002, the Century National Bank's
Malta banking center had $4 million in loans and $10 million in total
deposits, including about $3 million of core deposits (checking and savings
accounts). Peoples expects to serve the Malta office customers from its
full-service office in neighboring McConnelsville. The proposed transaction
is subject to regulatory approval and is anticipated to be completed in the
third quarter of 2002.
2. Accounting Pronouncements
On January 1, 2002, Peoples adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142")
issued by the Financial Accounting Standards Board in July 2001. Under SFAS
142, Peoples is no longer required to amortize approximately $6.0 million of
its goodwill, but rather must perform, at least annually, an assessment for
impairment applying a fair-value based test. Peoples continues to amortize
the portion of goodwill recorded in accordance with Statement of Financial
Accounting Standards Number 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions", and separable intangible assets that are
not deemed to have an indefinite life. As a result, Peoples' goodwill
amortization expense decreased $166,000, or approximately $0.02 per share,
totaling $274,000 in the first quarter of 2002 compared to $440,000 in the
first quarter of 2001. The following is pro forma information for the three
months ended March 31, 2002 and 2001, assuming SFAS 142 had been in effect
for both periods:
(Dollars in thousands, except share and per share data) 2002 2001
Amortization of goodwill $ 274 $ 274
Total other expense 8,951 7,785
Income before extraordinary gains 4,105 2,762
Net income $ 4,515 $ 2,762
Basic earnings per share:
Income before extraordinary gains $ 0.58 $ 0.38
Net income $ 0.63 $ 0.38
Diluted earnings per share:
Income before extraordinary gains $ 0.57 $ 0.38
Net income $ 0.62 $ 0.38
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
SELECTED GAAP FINANCIAL DATA
The following data should be read in conjunction with the unaudited consolidated
financial statements and the management discussion and analysis that follows:
For the Three
Months Ended March 31,
SIGNIFICANT RATIOS 2002 2001
Return on average equity (a) 18.62 % 12.15 %
Return on average assets (a) 1.50 % 0.91 %
Net interest margin (b) 4.52 % 3.98 %
Non-interest income leverage ratio (c) 38.33 % 29.80 %
Efficiency ratio (d) 54.24 % 57.81 %
Average stockholders' equity to average assets 8.04 % 7.51 %
Cash dividends to net income 23.88 % 35.71 %
Loans net of unearned interest to deposits (end of period) 93.03 % 93.06 %
Allowance for loan losses to loans net of unearned interest (end of period) 1.59 % 1.60 %
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Tier I capital ratio 12.37 % 12.98 %
Risk-based capital ratio 13.72 % 14.32 %
Leverage ratio 8.63 % 8.89 %
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PER SHARE DATA
Net income per share - basic $ 0.63 $ 0.36
Net income per share - diluted 0.62 0.36
Cash dividends per share 0.15 0.13
Book value per share $ 13.49 $ 12.44
Weighted average shares outstanding - Basic 7,128,732 7,185,185
Weighted average shares outstanding - Diluted 7,254,055 7,281,339
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<FN>
(a) Includes the effect of extraordinary gains.
(b) Calculated using fully-tax equivalent net interest income as a percentage
of average earning assets.
(c) Non-interest income (less securities and asset disposal gains) as a
percentage of non-interest expense (less intangible amortization).
Significant non-recurring items are excluded from the calculation.
(d) Non-interest expense (less intangible amortization) as a percentage of
fully tax equivalent net interest income plus non-interest income.
Significant non-recurring items are excluded from the calculation.
</FN>
OTHER FINANCIAL DATA
The following data is prepared on a basis of accounting different from the
preceding table, which was prepared in accordance with generally accepted
accounting principles ("GAAP"), and excludes the impact of certain items which
management believes will assist the reader in better understanding Peoples' core
operating results and tangible (cash basis) results:
For the Three
OPERATING RATIOS (a) Months Ended March 31,
Operating return on average equity 16.81 % 12.60 %
Operating return on average assets 1.35 % 0.95 %
Operating income per share - basic $ 0.57 $ 0.37
Operating income per share - diluted $ 0.56 $ 0.37
- --------------------------------------------------------------------------------------------------------------------------
CASH BASIS RATIOS (b)
Cash basis operating return on average equity 21.60 % 18.35 %
Cash basis operating return on average assets 1.46 % 1.10 %
Tangible book value per share $ 11.16 $ 9.85
Cash basis earnings per share - diluted 0.66 0.41
Cash basis operating earnings per share - diluted $ 0.60 $ 0.42
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Excludes after-tax impact of non-operating gains of $439,000 and $14,000 in
2002 and 2001, respectively, and after-tax impact of $112,000 loss relating
to the adoption of a new accounting pronouncement for derivatives (SFAS
133) relative to the mark-to-market adjustment on interest rate caps in
2001.
(b) Excludes after-tax impact of intangible amortization expense of $254,000
and $396,000 in 2002 and 2001, respectively, and the after-tax impact on
the balance sheet impact of excluding $16,620,000 and $18,793,000 of
goodwill and other intangible assets acquired through use of purchase
accounting for acquisitions.
</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"), Peoples Investment Company, PEBO Capital Trust I and PEBO
Capital Trust II. Peoples Bank also operates Peoples Insurance Agency, Inc.
("Peoples Insurance"), which offers a full range of life, property, and casualty
insurance products to customers in Peoples' markets, and Peoples Loan Services,
Inc., which invests in certain loans originated in Peoples' markets. Peoples
Investment Company also owns Peoples Capital Corporation.
Peoples Bank is a member of the Federal Reserve System and subject to
regulation, supervision, and examination by the Office of the Comptroller of the
Currency. Peoples Bank offers complete financial products and services through
40 financial service locations and 26 ATMs in Ohio, West Virginia, and Kentucky.
Peoples Bank's e-banking service, Peoples OnLine Connection, can be found on the
Internet at www.peoplesbancorp.com. Peoples Bank provides an array of financial
products and services to customers that include traditional banking products
such as deposit accounts, lending products, credit and debit cards, corporate
and personal trust services, and safe deposit rental facilities. Peoples
Insurance makes available investment and insurance products. Peoples provides
services through ordinary walk-in offices and automobile drive-in facilities,
automated teller machines, banking by phone, and the Internet.
Peoples Bank also makes available other financial services through Peoples
Investment Services, which provides customer-tailored solutions for fiduciary
needs, investment alternatives, financial planning, retirement plans, and other
asset management needs. Brokerage services are offered exclusively through
Raymond James Financial Services, member NASD/SIPC and an independent
broker/dealer, located at Peoples Bank offices.
Peoples Investment Company and Peoples Capital Corporation were formed in
2001 permitting management to deploy investable funds better and providing new
opportunities to make investments, including, but not limited to, low-income
housing tax credit funds, that are either limited or restricted at the bank
level.
This discussion and analysis should be read in conjunction with the prior
year-end audited consolidated financial statements and footnotes thereto and the
ratios, statistics, and discussions contained elsewhere in this Form 10-Q.
References will be found in this Form 10-Q to the following transactions that
have impacted or will impact Peoples' results of operations:
On November 9, 2001, Peoples announced authorization 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 may choose to purchase shares, based on
timing and prices it deems appropriate through the expiration of the 2002
Stock Repurchase Program on December 31, 2002.
On January 4, 2002, Peoples announced it had signed a stock purchase
agreement with the shareholders of First Colony Bancshares, Inc. ("First
Colony") to acquire all of the outstanding common stock of First Colony,
the holding company of The Guernsey Bank, Federal Savings Bank based in
Cambridge, Ohio. Under the terms of the agreement, Peoples has agreed to
pay approximately $18 million total cash consideration and assume
approximately $2 million of First Colony debt to acquire full-service
office locations in Cambridge (two offices), Byesville, Quaker City in
Ohio's Guernsey County and Flushing in Ohio's Belmont County, involving
assets of approximately $110 million and deposits of approximately $100
million. Peoples will not acquire the Worthington, Ohio, operations, or its
related loans and deposits, and will operate the Guernsey and Belmont
County offices as full-service sales offices of Peoples Bank. This
transaction is subject to regulatory approval and is expected to be
completed in late second or early third quarter of 2002.
On April 10, 2002, Peoples issued $7.0 million of LIBOR based variable rate
trust preferred securities through PEBO Capital Trust II (a newly-formed
subsidiary), which participated in a pooled offering. PEBO Capital Trust II
used the proceeds from the issuance to purchase, from Peoples, Variable
Rate Junior Subordinated Debentures due April 22, 2032 (the "Debentures").
Peoples intends to use the net proceeds from the sale of the Debentures for
general corporate purposes, which may include capital contributions to
Peoples Bank and the financing of future acquisitions.
The impact of these transactions, where significant, is discussed in the
applicable sections of this Management's Discussion and Analysis.
RESULTS OF OPERATIONS
Overview of the Income Statement
- --------------------------------
For the three months ended March 31, 2002, net income totaled $4,515,000, or
$0.62 per diluted share, up from $2,596,000, or $0.36 per diluted share, for the
first quarter of 2001 and $3,537,000, or $0.49 per diluted share, for the fourth
quarter of 2001 (the "linked quarter"). The increased net income in the first
quarter of 2002 is due in large part to higher levels of net interest income and
non-interest revenues, which grew $1,848,000 (or 18%) and $1,082,000 (or 49%),
respectively, compared to the first quarter of 2001.
On an operating basis, income was $4,076,000 in the first quarter of 2002, up
$548,000 (or 16%) from $3,528,000 in the linked quarter. Operating diluted
earnings per share were $0.56 for the three months ended March 31, 2002, versus
$0.49 the prior quarter, an increase of $0.07 per share (or 14%). Compared to
the first quarter of 2001, operating income grew $1,382,000 (or 51%) from
$2,694,000 while operating diluted earnings per share increased $0.19 (or 51%).
Operating earnings do not include the extraordinary gain of $631,000 (and
related tax expense of $221,000) relating to the purchase, at a discount, of
$7.0 million of trust preferred securities issued by PEBO Capital Trust I
("Trust Preferred Repurchase") and the $51,000 pre-tax gain on sales of
investment securities, as well as the $7,000 pre-tax loss on asset disposals for
the current period and related items in the comparative quarters.
Through the first three months of 2002, return on average equity was 18.62%
versus 14.76% and 12.15% in the fourth and first quarters of 2001, respectively,
while operating return on average equity was 16.81% versus 14.72% for the linked
quarter and 12.60% for the first three months of 2001.
Peoples has made several acquisitions in prior years accounted for under the
purchase method of accounting. Included in other assets is $16,620,000 of
goodwill and identified intangible assets (primarily core deposits). Peoples
calculates it tangible book value per share by excluding these intangible assets
from its total stockholders' equity. While SFAS 142 eliminated a portion of
Peoples' goodwill amortization expense, Peoples, as required, continues to
amortize the remainder of its intangible assets acquired in banking center
acquisitions and core deposit intangibles. Cash basis operating earnings, which
excludes the impact of all intangible assets and related amortization expense,
net of applicable taxes, as well as significant non-operating income and
expenses excluded from operating income discussed previously, grew to $0.60 per
share for the first quarter of 2002 versus $0.42 for the three months ended
March 31, 2001, and $0.55 for the linked quarter, increases of $0.18 (or 43%)
and $0.05 (or 9%), respectively. Cash basis operating ROE was 21.60% for the
quarter ended March 31, 2002, compared to 18.35% the same period a year ago and
20.16% last quarter.
Net interest income totaled $12,159,000 for the first quarter of 2002, up
$915,000 (or 8%) compared to the linked quarter and up $1,848,000 (or 18%)
compared to the first quarter of 2001. For the quarter ended March 31, 2002, net
interest margin was 4.52% versus 4.30% in the prior quarter and 3.98% a year
ago. This improvement in net interest income and net interest margin is
attributable to interest rate cuts in 2001, which provided opportunities to
lower funding costs, as well as modest growth in average earning assets in 2002.
For the quarter ended March 31, non-interest income (excluding non-operating
gains and losses) totaled $3,283,000 in 2002 compared to $2,201,000 in 2001, an
increase of $1,082,000 (or 49%), with a $559,000 (or 69%) increase in deposit
account service charges and business owned life insurance income ("BOLI") of
$325,000 accounting for the majority of the growth. Compared to the linked
quarter, non-interest income was down $460,000 (or 12%) from $3,743,000, the
result of Peoples' recognition of non-recurring income of $877,000 relating to a
demutualization in the fourth quarter of 2001. Non-interest expense grew $1.0
million (or 13%) compared to the first quarter of 2001, but declined $225,000
(or 2%) when compared to the linked quarter. The increase from a year ago is due
largely to higher salaries and benefits expenses and marketing costs, which were
up $889,000 (or 25%) and $267,000 (or 224%), respectively, while reduced
intangible amortization and trust preferred expense reductions of $232,000 (or
38%)and $84,000 (or 13%), respectively, account for the majority of the decrease
versus 2001's fourth quarter.
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 manage 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 to
manage net interest margin and income, let alone predict future changes.
Peoples' net interest income totaled $12,159,000 in first quarter of 2002
compared to $10,311,000 in the same quarter the prior year, an increase of
$1,848,000 (or 18%). Compared to the linked quarter, net interest income grew
$915,000 (or 8%) from $11,244,0000. For the three months ended March 31, 2002,
total interest income was $20,315,000, down $1,805,000 (or 8%) compared to last
year and down $224,000 (or 1%) versus the linked quarter. Interest expense
totaled $8,156,000, down $3,653,000 (or 31%) and $1,139,000 (or 12%) compared to
the first and fourth quarters of 2001. The improvement in net interest income is
due to a modest increase in earnings assets and the combination of the Federal
Reserve's aggressive lowering of key interest rates throughout 2001 and Peoples'
proactive management of funding costs.
Since Peoples derives a portion of its interest income from states and political
subdivisions, which is exempt from taxation, management believes it is more
meaningful to analyze net interest income on a fully-tax equivalent ("FTE")
basis, which adjusts interest income by converting tax-exempt income to the
pre-tax equivalent of taxable income using a tax rate of 35%. In first quarter
of 2002, interest income was increased by $351,000 for the impact of the
tax-equivalent adjustment, resulting in FTE net interest income of $12,510,000,
up $1,937,000 (or 18%) from $10,573,000 a year ago and up $968,000 (or 8%)
compared to the linked quarter. The FTE yield on Peoples' earning assets was
7.49% for the quarter ended March 31, 2002, versus 7.73% for the fourth quarter
of 2001 and 8.48% for the first quarter of 2001, while the cost of
interest-bearing liabilities was 3.37%, 3.90% and 5.13% for the same periods,
respectively.
Earning assets averaged $1.1 billion in first quarter of 2002, up $48.3 million
(or 5%) compared to the prior year, with the majority of the increase
attributable to modest growth in loan and investment balances. Average loans
increased $37.8 million (or 5%) versus the first quarter of 2001, while average
investments are up $14.4 million (or 4%). Peoples' average interest-bearing
liabilities increased $50.8 million (or 5%) in 2002 from $931.1 million for the
first quarter of 2001, the majority of which is due to increases in deposit
volumes.
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. In the first quarter of 2002, Peoples' net
interest margin improved to 4.52% compared to 4.30% and 3.98% for the fourth and
first quarters of 2001. The Federal Reserve's 475 basis point reduction in key
interest rates in 2001 was the significant driver of improvement in net interest
margin, which facilitated a lowering of Peoples' costs of funds; however, the
magnitude of this reduction has intensified the pressure for lower loan rates in
Peoples' markets. Management believes these rate cuts will continue to have a
positive impact on net interest income streams in the second quarter of 2002,
although, any improvements could be limited by decreases in income from prime
based commercial loan repricings, other loan refinancings or increases in market
interest rates.
Loans account for the largest portion of earning assets, averaging $778.2
million for the three months ended March 31, 2002, with a FTE yield of 7.87%,
compared to average loans of $740.4 million, with a FTE yield of 9.09%, in the
first quarter of 2001. Average investment securities increased $14.4 million (or
4%) in the first quarter of 2002 to $342.8 million from 2001's first quarter
average of $328.4 million. The FTE yield on investments was 6.41% in the first
quarter of 2002 compared to 6.85% a year ago. Yields on both loans and
investment securities have been impacted by lower market interest rates.
Traditional deposits comprise a majority of Peoples' interest bearing
liabilities, averaging $725.5 million in the first quarter of 2002 compared to
$687.6 million a year ago. Cost of funds from interest bearing deposits was
3.10% in the first quarter of 2002 compared to 3.74% and 5.04% in the fourth and
first quarters of 2001, respectively. Peoples lowered rates paid on interest
bearing deposit accounts in response to the Federal Reserve's rate cuts, but
changes in deposit mix due to volume increases in certificates of deposit, as
well as competitive rates paid on these deposits, have tempered the overall drop
in average deposit costs. In the second quarter of 2002, management anticipates
deposit costs to remain near current levels; however, the Fed has indicated
interest rates may increase in 2002, which could cause Peoples' deposit costs to
increase.
In addition to traditional deposits, Peoples utilizes a variety of borrowings,
both short-term and long-term, as complementary funding sources. Total borrowed
funds averaged $256.4 million for the three months ended March 31, 2002, up
$12.9 million (or 5%) from the prior year's average. The cost of Peoples'
borrowed funds declined 127 basis points during the same period to 4.13%. The
lower borrowing cost is primarily due to Peoples repaying higher cost borrowings
in the latter half of 2001 and replacing them with borrowings at lower rates,
while the increased volume reflects Peoples' planned growth of the investment
portfolio. Peoples' main source of borrowed funds is short and long-term
advances from the FHLB. The short-term FHLB advances are primarily LIBOR based
advances while the long-term FHLB advances consist largely of 10-year borrowings
with initial fixed rate periods. After the initial fixed rate period, the FHLB
has the option to convert each advance to a LIBOR based, variable rate advance;
however, Peoples may repay the advance, without a penalty, if the FHLB exercises
its option.
In the first quarter of 2002, Peoples' short-term FHLB borrowings averaged $32.7
million, at a cost of 1.81%, compared to $10.8 million and an average cost of
2.10% in the linked quarter and $52.6 million and an average cost of 6.18% in
the first quarter of 2001. Average long-term FHLB borrowings were up $21.1
million (or 12%) compared to last quarter and up $55.4 million (or 40%) versus a
year ago, totaling $192.8 million for the quarter ended March 31, 2002, while
the average cost dropped to 4.87% from 4.97% and 4.96% for the fourth and first
quarters of 2001. In the second half of 2001, Peoples converted a portion of its
short-term FHLB advances to long-term advances to secure lower rate, longer-term
funding. Management will continue to use a variety of FHLB borrowings to fund
asset growth and manage interest rate sensitivity, as deemed appropriate.
Peoples' cash management services (offered to a variety of business customers)
also provide short-term funding, primarily in the form of overnight repurchase
agreements. For the three months ended March 31, 2002, overnight repurchase
agreements (excluding balances of wholesale market term repurchase agreements)
averaged $22.9 million, a decrease of $4.5 million (or 16%) from last year's
average of $27.4 million. The decreased volume of repurchase agreements compared
to the first quarter of 2001 is due largely to a withdrawal of a significant
balance in mid-year 2001 by a client who opted for an alternative investment
product. The average rate paid on overnight repurchase agreements was 1.51%,
down 359 basis points from the prior year, a result of reductions in the market
index tied to the pricing of these accounts.
Peoples also periodically accesses national market repurchase agreements to
diversify short-term funding sources. In the first quarter of 2002, wholesale
market term repurchase agreements averaged $6.4 million at a rate of 3.60%, down
from $24.1 million and an average rate of 6.24% in 2001's first quarter. Peoples
has reduced the amount of wholesale repurchase agreements outstanding due to the
availability and attractiveness of other funding sources. Management may
continue to access such funding in the future, as deemed appropriate.
In the first quarter of 2002, the combination of the Federal Reserve's rate cuts
in 2001 and Peoples' proactive management of funding costs has resulted in the
costs of funds dropping more than the yield on earning assets. As a result,
Peoples has benefited through improved net interest income and margin. However,
Peoples' current asset-liability simulations indicate that an increase in
interest rates later this year could have a moderately negative impact based on
Peoples' current interest rate risk position. Although management continually
works to mitigate the impact of future rate changes, Peoples' net interest
margin and income remains difficult to predict, and to manage, in volatile
interest rate environments.
Provision for Loan Losses
- -------------------------
Peoples' provision for loan losses totaled $861,000 for the first quarter of
2002, compared to $634,000 last quarter and $675,000 a year ago. The increased
provision is based upon management's ongoing evaluation of the adequacy of the
allowance for loan losses and factors affecting probable loan losses, as well as
provisions relating to the Overdraft Privilege program of $161,000 and $34,000
in the first quarter of 2002 and fourth quarter of 2001, respectively.
Management believes the current provision is appropriate for the overall
quality, inherent risk and volume concentrations of Peoples' loan portfolio.
While the overall quality of Peoples' loan portfolio remains strong, management
anticipates that the provision for the second quarter of 2002 will increase
marginally compared to recent quarters due in part to the Overdraft Privilege
program and other loan quality factors. Ultimately, the provision will increase
or decrease each quarter based upon the results of Peoples' formal analysis of
the allowance for loan losses. Further information can be found later in this
discussion under "Allowance for Loan Losses."
Gains and/or Losses on Securities Transactions
- ----------------------------------------------
For the three months ended March 31, Peoples recognized net gains on securities
transactions of $51,000 in 2002 compared to $2,000 for the same period in 2001.
The net gains on securities transactions in the first quarter of 2002 is due
largely to the sale of the Anthem stock, received in the fourth quarter of 2001
as part of a demutualization, at a gain of $172,000. The gain on the Anthem sale
was partially offset by a loss of $112,000 on the sale of a $31 million callable
agency bond. This sale was part of management's plan to balance the yield and
overall maturity and duration of the investment portfolio. As for the first
quarter of 2001, the net gains resulted from normal portfolio activity.
Gains and/or Losses on Asset Disposals
- --------------------------------------
Net losses on asset disposals totaled $7,000 for the quarter ended March 31,
2002, compared to net gains of $20,000 in the same period last year. The gains
and losses were the result of asset disposals in conjunction with normal asset
replacement.
Mark-to-Market Adjustment on Interest Rate Caps
- -----------------------------------------------
On January 1, 2001, Peoples adopted Statement of Financial Accounting Standards
Number 133 "Accounting for Derivative Instruments and Hedging Instruments"
("SFAS No. 133"), as required. As a result of this adoption, Peoples recognized
the change in market value of certain interest rate contracts as an increase or
decrease to income. In the first quarter of 2001, the net mark-to-market
adjustment was $173,000, reducing net income by $112,000, or $0.02 per share.
Management does not anticipate any additional adjustments related to Peoples'
existing interest rate cap contracts.
Non-Interest Income
- -------------------
Peoples generates non-interest income from five primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking and business owned life insurance income ("BOLI"). For the
three months ended March 31, non-interest income (excluding all non-operating
gains and losses) totaled $3,283,000 in 2002 compared to $2,201,000 in 2001, an
increase of $1,082,000 (or 49%), with increased deposit account service charges
and BOLI the key contributors, accounting for $559,000 and $325,000 of the
growth, respectively. Compared to the linked quarter, non-interest income was
down $460,000 (or 12%) from $3,743,000, the result of Peoples' recognition of
non-recurring income of $877,000 in the fourth quarter of 2002 relating to a
demutualization.
Service charges on deposits remain Peoples' largest source of non-interest
revenues, reaching $1,366,000 in the first quarter of 2002, up $559,000 (or 69%)
from $807,000 a year ago and up $317,000 (or 30%) from $1,049,000 in the prior
quarter, due to higher volumes of overdraft and non-sufficient funds fees.
Peoples' implementation of the Overdraft Privilege program and other
enhancements in late 2001 led to volume increases and helped boost overdraft
fees by $392,000 (or 141%) compared to the prior year and $198,000 (or 42%)
versus 2001's fourth quarter total. Management expects deposit service charges
to remain near first quarter levels or increase modestly in the second quarter
of 2002.
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. Electronic banking revenues grew
$46,000 (or 14%) in the first quarter of 2002, totaling $368,000 compared to the
same period in the previous year, but down $22,000 (or 6%) from the linked
quarter. Sustained growth of ATM and debit card usage by Peoples' clients
accounts for the higher revenues versus last year, while the decline from the
linked quarter can be attributed to heavier debit card usage in the fourth
quarter of 2001 due to peak holiday shopping. 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.
Insurance and investment commissions were $524,000 in the first quarter of 2002,
up $144,000 (or 38%) from $380,000 a year ago and up $97,000 (or 23%) versus the
fourth quarter of 2001's total of $427,000. While these increases are primarily
the result of strong annuity sales in the first quarter of 2002, additional
property and casualty insurance commissions also contributed to the growth. In
the first quarter of 2002, commissions from the sale of annuities totaled
$280,000 versus $58,000 a year ago and $190,000 in the fourth quarter of 2001,
and property and casualty insurance commissions increased $23,000 (or 37%)
compared to $62,000 in the first quarter of 2001 but were flat versus the linked
quarter's total. Peoples' fiduciary fees totaled $616,000 in the quarter ended
March 31, 2002, versus $614,000 a year ago and $640,000 last quarter. Management
believes the completion of the First Colony acquisition will provide additional
opportunities to grow these revenues and continues to pursue new ways to provide
asset and risk management products to Peoples' clients and prospects. Insurance
and investment commission, as well as fiduciary revenues, should continue to be
a significant contributor to future non-interest income growth.
For the quarter ended March 31, 2002, BOLI produced tax-advantaged income of
$325,000 compared to $239,000 last quarter, an increase of $86,000 (or 36%)
attributable to an adjustment in the mix of investment funds during the first
quarter. Management believes BOLI income will remain at first quarter levels for
the remainder of 2002. Due to the timing of Peoples' BOLI purchase in mid-2001,
Peoples recognized no income in the first quarter of 2001.
Non-Interest Expense
- --------------------
For the three months ended March 31, 2002, non-interest expense grew $1.0
million (or 13%) compared to the first quarter of 2001 but declined $225,000 (or
2%) when compared to the linked quarter. The increase from 2001's first quarter
is due largely to higher salaries and benefits expenses and marketing costs,
while the decrease versus the linked quarter is the result of reduced intangible
amortization and trust preferred expenses.
Salaries and benefits continue to be Peoples' largest component of non-interest
expense, which is inherent in a service-based industry such as financial
services. In the first quarter of 2002, salaries and benefits totaled $4,484,000
compared to $3,585,000 for the same period last, an increase of $899,000 (or
25%). Higher incentive and medical plan expenses, as well as salary increases
necessary to retain and recruit key personnel were significant contributors to
this increase. Salaries and benefit expenses were down $89,000 (or 2%) in the
first quarter of 2002 compared to the linked quarter. At March 31, 2002, Peoples
had 398 full-time equivalent associates, up from 392 a year ago. Management will
continue to leverage Peoples' resources, while retaining and recruiting key
associates, to effectively optimize customer service and produce additional
future revenue streams.
In the first quarter of 2002, Peoples aggressively advertised its new Free
Checking and Overdraft Privilege products and implemented a new marketing
campaign designed to build brand name awareness in Peoples' markets. As a
result, Peoples' marketing expenses were up compared to recent periods, totaling
$386,000 for the three months ended March 31, 2002 versus $119,000 a year ago
and $178,000 for the linked quarter, increases of $267,000 (or 224%) and
$208,000 (or 117%), respectively. Management believes these initiatives will
help attract new clients and produce benefits in future periods and does not
anticipate similar levels of marketing expenses in the second quarter as those
in the first quarter of 2002.
Peoples' intangible amortization expense of $385,000 in the first quarter of
2002 was down $232,0000 (or 38%) from $617,000 last quarter, due largely to
Peoples' adoption of SFAS 142. Compared to 2001's first quarter, intangible
amortization expense declined $181,000 (or 32%) in 2002. For the quarter ended
March 31, 2002, Peoples' trust preferred costs fell in response to the Trust
Preferred Repurchase, totaling $561,000, down from $645,000 and $652,000 in the
fourth and first quarters of 2001, respectively. As a result of the PEBO Capital
Trust II issuance in April 2002, trust preferred costs will increase in the
second quarter of 2002 and should approximate $630,000. Peoples' other major
non-interest expense categories were below their levels in recent periods,
except data processing and software costs, which were up $76,000 (or 31%)
compared to a year ago due to software licensing renewal fees.
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 gains and losses on securities transaction and
asset disposals, as well as intangible asset amortization. In the first quarter
of 2002, Peoples' non-interest income leverage ratio was 38.3% compared to 43.6%
last quarter and 29.8% for the three months ended March 31, 2001. Enhanced
deposit account service charges, as well as the revenue streams generated from
Peoples' BOLI investment accounted for a majority of the improvement compared to
last year while the demutualization income boosted fourth quarter 2001's ratio.
In the second quarter of 2002, operating expenses should remain at or slightly
below the first quarter of 2002 levels, as management continues to implement
strategies aimed at producing additional non-interest income without
proportional increases in expense.
Return on Equity
- ----------------
Peoples' return on equity ("ROE") was 18.62% in first quarter of 2002 versus
12.15% the prior year and 14.76% in the linked quarter. On a cash basis, ROE was
23.79% for the three months ended March 31, 2002, compared to 17.76% and 20.20%
for the quarters ended March 31 and December 31, 2001, respectively. On an
operating basis, ROE was 16.81% in the first quarter of 2002 versus 12.60% in
2001's first quarter and 14.72% in the linked quarter, while cash basis ROE was
21.60%, 18.35% and 20.16% for the same periods, respectively.
The ROE improvement in the first quarter of 2002 is due primarily to Peoples'
higher earnings, while the mark-to-market adjustment on available-for-sale
investment portfolio lowered equity $1.4 million since year-end 2001and further
enhanced the ratio. 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. Since ROE will
continue to be impacted by changing market conditions, management focuses on
earnings per share ("EPS") as the most meaningful measurement of short-term
performance.
Return on Assets
- ----------------
Return on assets ("ROA") in the first quarter of 2002 was 1.50% and operating
ROA was 1.35%, up from 0.91% and 0.95% a year ago. Removing the impact of
intangibles and related amortization expense, operating ROA was 1.46% for the
quarter ended March 31, 2002, up from 1.10% in 2001's first quarter.
In recent years, the primary focus of both the investment community and
management has shifted to EPS enhancement and ROE while reducing the emphasis on
ROA as a key performance indicator. However, management continues to monitor ROA
and considers it a measurement of Peoples' asset leverage. Management expects
any further enhancement to ROA in 2002 to be minimal.
Income Tax Expense
- ------------------
Peoples has made several tax advantaged investments in recent periods, including
investments in low-income housing tax credit funds and the purchase of BOLI. At
March 31, 2002, the total amount of tax advantaged investments included in Other
Assets approximated $27.1 million compared to $3.5 million a year ago. Peoples'
effective tax rate was 28.4% in first quarter of 2002 versus 30.5% last year.
Depending on economic and regulatory conditions, Peoples may make additional
investments in various tax credit pools over the next several years that could
impact Peoples' effective tax rate and overall tax burden.
FINANCIAL CONDITION
Overview of Balance Sheet
- -------------------------
At March 31, 2002, total assets were $1.20 billion compared to $1.19 billion at
year-end 2001, an increase of $10.9 million (or 1%). Gross loans grew $7.9
million (or 1%) during the first three months of 2002 from $772.9 million at
December 31, 2001, with commercial and real estate loans accounting for the
increase. In the first quarter of 2002, Peoples planned growth of the investment
portfolio resulted in total investment securities of $340.5 million at March 31,
2002, up $10.1 million (or 3%) from year-end 2001.
Liabilities totaled $1.09 billion at March 31, 2002 compared to $1.07 billion at
year-end 2001, an increase of $15.3 million (or 1%). At March 31, 2002, Peoples'
total deposits were $839.2 million versus $814.4 million at year-end, as growth
in interest-bearing balances of $27.6 million (or 4%) was partially offset by a
decline in non-interest bearing deposits of $2.7 million (or 3%). During the
first quarter of 2002, the amount of borrowed funds declined 4% from $248.5
million at year-end 2001, to $239.4 million at March 31, 2002.
As a result of the Trust Preferred Repurchase, the balance of Trust Preferred
Securities, presented on the balance sheet as "Guaranteed preferred beneficial
interest in junior subordinated debentures", declined $6.8 million (or 23%)
since year-end to $22.3 million at March 31, 2002. However, the issuance of new
securities through PEBO Capital Trust II will cause the balance to increase in
the second quarter of 2002 and help maintain Peoples' strong capital ratios.
Stockholders' equity totaled $96.2 million at March 31, 2002, versus $93.9
million at December 31, 2001, an increase of $2.3 million (or 3%). The higher
level of equity in 2002 is due primarily to increased earnings, net of dividends
paid and mark-to-market adjustments on Peoples' investment portfolio.
Cash and Cash Equivalents
- -------------------------
Peoples' cash and cash equivalents are Federal funds sold, cash and balances due
from banks, and interest bearing balances in other institutions. The amount of
cash and cash equivalents fluctuates on a daily basis due to client activity and
Peoples' liquidity needs. At March 31, 2002, cash and cash equivalents totaled
$25.4 million, down $7.4 million (or 23%) compared to $32.8 million at December
31, 2001. This decrease is due largely to additional items in process of
collection at year-end. At December 31, 2001, Peoples had Federal funds sold of
$850,000 compared to no Federal funds sold at March 31, 2002, which also
contributed to the overall decrease in cash and cash equivalents.
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 actively manage the principal runoff from the 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 March 31, 2002, the amortized cost of Peoples' investment securities totaled
$341.3 million compared to $329.1 million at year-end 2001, while the market
value of the investment portfolio was up $10.1 million from $330.4 million at
December 31, 2001, to $340.5 million at March 31, 2002. In first quarter of
2002, management continued to implement the planned growth of the investment
portfolio initiated in late 2001 that was intended to return the portfolio, as a
percent of earning assets, to pre-2000 levels in anticipation of modest loan
growth in 2002.
The difference in amortized cost and market value at March 31, 2002, resulted in
unrealized depreciation in the investment portfolio of $822,000 and a
corresponding decrease in Peoples' equity of $535,000, net of deferred taxes. In
comparison, the difference in amortized cost and market value at December 31,
2001, resulted in unrealized appreciation of $1,283,000 and an increase in
equity of $834,000, net of deferred taxes.
At March 31, 2002, Peoples' investment in US treasury securities and obligations
of US government agencies and corporations decreased $35.5 million (or 54%)
versus year-end 2001, due primarily to the sale of a $31.0 million callable
security late in the first quarter. Management reinvested $16 million of the
proceeds from this sale in mortgage-backed securities and obligations of states
and political subdivisions by March 31, 2002, which accounts for a portion of
the increase in those security types, and intends to reinvest the remaining
proceeds along with principal runoff from the investment portfolio during the
second quarter of 2002. The following table details Peoples' investment
portfolio, at estimated fair value:
(Dollars in Thousands) March 31, December 31, March 31,
2002 2001 2001
US Treasury securities and obligations of
US government agencies and corporations $ 30,774 $ 66,294 $ 100,745
Obligations of states and political subdivisions 60,710 49,562 38,969
Mortgage-backed securities 199,953 166,269 140,123
Other securities 49,047 48,239 44,671
- -------------------------------------------------------------------------------------
Total available-for-sale securities $ 340,484 $ 330,364 $ 324,508
=====================================================================================
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 deposit pricing and
maturity guidelines, and manages Peoples' interest rate risk. Through active
management of the balance sheet and investment portfolio, Peoples maintains
sufficient liquidity to satisfy depositor demand, other company liquidity
requirements and various credit needs of its customers. Management believes the
risk characteristics inherent in the investment portfolio are acceptable.
Loans
- -----
Peoples Bank primarily focuses on lending opportunities in central and
southeastern Ohio, northern West Virginia, and northeastern Kentucky markets,
especially retail lending, which includes single-family residential mortgages
and other consumer lending. At March 31, 2002, gross loans totaled $780.7
million, an increase of $7.9 million (or 1%) since year-end 2001. In the first
quarter of 2002, Peoples experienced growth in commercial, financial and
agricultural loans ("commercial loans"), as well as real estate loans; however,
consumer loans continued to decline and partially offset the commercial and real
estate loan growth. The following table details total outstanding loans:
(dollars in thousands) March 31, December 31, March 31,
2002 2001 2001
Commercial, financial, and agricultural $ 352,531 $ 343,800 $ 309,313
Real estate, construction 18,135 14,530 26,970
Real estate, mortgage 296,082 295,944 293,350
Consumer 107,757 111,912 116,747
Credit cards 6,205 6,670 6,465
- ----------------------------------------------------------------------------------
Total loans $ 780,710 $ 772,856 $ 752,845
==================================================================================
At March 31, 2002, commercial loans were up $8.7 million (or 3%) from year-end
2001's balance of $343.8 million, a result of Peoples purchasing a group of
multi-family real estate loans, totaling approximately $7 million, from an
unrelated financial institution and limited commercial lending opportunities
within Peoples' existing markets, which comprise the remainder of the increase.
Commercial loans continue to represent the largest portion of Peoples' total
loan portfolio, comprising 45.2% of total loans at March 31, 2002, versus 44.5%
at December 31, 2001. 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.
Real estate loans (including construction loans) totaled $314.2 million at March
31, 2002, up $3.7 million (or 1%) compared to year-end 2001, when total balances
were $310.5 million. Real estate loans comprise 40.2% of Peoples' total loan
portfolio at March 31, 2002, unchanged from the prior year-end. Included in real
estate loans are home equity credit line ("Equiline") balances of $26.2 million
at March 31, 2002, down 4% from $27.3 million at December 31, 200. This decline
is due to intense competition for home equity loans, which has affected Peoples'
ability to maintain Equiline balances. 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.
Excluding credit card balances, consumer loans decreased $4.2 million (or 4%)
since year-end 2001, totaling $107.8 million at March 31, 2002. The indirect
lending area represents the majority of Peoples' consumer loans, with balances
of $63.4 million. Indirect loan balances have declined $2.8 million (or 4%) from
$66.2 million at year-end 2001, a result of declining creditworthy indirect
sales opportunities, normal runoff of indirect loans, and automobile
manufacturers offering attractive financing options to car buyers through their
captive credit affiliates.
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. Due to current economic conditions, management
continues to stress loan quality and risk-based pricing more than loan growth.
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 $6.2 million at March 31, 2002, down $0.5
million (or 7%) since December 31, 2001. Management routinely evaluates new
opportunities to serve credit card customers and grow the credit card balance.
Management does not intend to subject Peoples to additional and/or unnecessary
risk merely to pursue growth and considers Peoples' credit cards to be a
complementary product offering for client relationships.
Loan Concentration
- ------------------
Peoples' largest concentration of commercial loans are credits to assisted
living facilities and nursing homes, which comprised 12.8% of Peoples'
outstanding commercial loans at March 31, 2002, versus 11.9% at year-end 2001.
Loans to lodging and lodging related companies also represent a significant
portion of Peoples' commercial loans accounting for approximately 12.6% of
Peoples' outstanding commercial loans at quarter-end, compared to 12.8% at
December 31, 2001.
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 and nursing homes, as well as loans to lodging and lodging
related companies, do not pose abnormal risk when compared to risk 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
- -------------------------
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 an 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 factors are 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 each particular
lending market. 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.
Peoples recorded a provision for loan losses of $861,000 in the first quarter
2002, $634,000 in the linked quarter and $675,000 in the first quarter of 2001,
which includes provisions of $161,000 and $34,000 in the first quarter of 2002
and fourth quarter of 2001, respectively, relating to the Overdraft Privilege
program. The provision is based upon management's ongoing evaluation of the
adequacy of the allowance for loan losses and factors affecting probable loan
losses, including higher loss experience, loan balances and continued growth of
higher risk commercial loans. When expressed as a percentage of average loans,
the provision was 0.11% in the first quarter of 2002 compared to 0.08% and 0.09%
in the fourth and first quarters of 2001, respectively, and net chargeoffs
amounted to 0.10%, 0.07% and 0.07% for the same periods, respectively.
At the end of the first quarter of 2002, Peoples' allowance for loan losses
totaled $12.4 million, unchanged since year-end 2001. The allowance as a
percentage of total loans is 1.59% at March 31, 2002, and 1.60% at December 21,
2001, and March 31, 2001. The following table presents changes in Peoples'
allowance for loan losses:
Three Months Ended
(dollars in thousands) March 31,
2002 2001
Balance, beginning of period $ 12,357 $ 10,930
Chargeoffs (953) (642)
Recoveries 161 99
- -----------------------------------------------------------------------------
Net chargeoffs (792) (543)
Provision for loan losses 861 675
Allowance for loan losses acquired - 967
- -----------------------------------------------------------------------------
Balance, end of period $ 12,426 $ 12,029
=============================================================================
In the first quarter of 2002, net chargeoffs totaled $792,000 compared to
$543,000 a year ago and $562,000 in the fourth quarter of 2001. Commercial and
consumer loan net chargeoffs continue to account for a majority of Peoples net
chargeoffs. In the first quarter of 2002, commercial net chargeoffs totaled
$448,000 compared to $276,000 a year ago and $208,000 last quarter, while
consumer loan net chargeoffs were $270,000, $220,000 and $238,000 for the same
periods, respectively. The higher level of commercial net chargeoffs is related
to the charge-down of troubled loans that are part of a single client
relationship. Management continues to evaluate the potential for loss from this
relationship and believes additional charge-downs may be necessary, which could
impact Peoples' provision for loan losses. The increase in consumer chargeoffs
is related, in part, to the Overdraft Privilege program. Real estate chargeoffs
represented a small percentage of total net chargeoffs in recent periods,
reflecting the quality of the real estate loan portfolio. Management believes
chargeoffs in the second quarter of 2002 will be similar to or slightly higher
than net chargeoffs in the first quarter.
Peoples' nonperforming assets (which include loans 90 days or more past due,
nonaccrual loans, renegotiated loans, and other real estate owned) increased in
the first quarter of 2002. At March 31, 2002, nonperforming assets totaled $8.0
million, or 0.67% of total assets, versus $5.7 million, or 0.48%, at year-end
2001. This increase is due almost entirely to the restructuring of a single
commercial loan during the first quarter of 2002, which has been performing
under the terms of the restructuring and consequently, management does not
expect a loss from this loan. Even though nonperforming assets have risen, total
loan delinquencies are down 38% and nonaccrual loans have decreased 8% since
year-end 2001, largely attributable to fewer real estate and consumer loans that
were 30-89 days past due or on nonaccrual status. The following table details
Peoples' nonperforming assets:
(dollars in thousands) March 31, December 31, March 31,
2002 2001 2001
Loans 90+ days past due and accruing $ 971 $ 686 $ 230
Renegotiated loans 2,864 425 518
Nonaccrual loans 4,040 4,380 3,330
- ------------------------------------------------------------------------------
Total nonperforming loans 7,875 5,491 4,078
Other real estate loans 167 181 57
- ------------------------------------------------------------------------------
Total nonperforming assets $ 8,042 $ 5,672 $ 4,135
==============================================================================
Management continues to review the entire loan portfolio as part of the risk
management process and will deal aggressively with problem loans as they are
identified to minimize the amount of any future loss. Management has confidence
in Peoples' loan review programs and the level of Peoples' allowance for loan
losses, which totaled 158% of nonperforming loans at March 31, 2002.
At March 31, 2002, the recorded investment in loans that were considered to be
impaired was $8.4 million of which $5.3 million was accruing interest, and $3.1
million were nonaccrual loans. Included in this amount are $3.4 million of
impaired loans for which the related allowance for loan losses is $940,000. 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 ability to repay the
loan. For the three months ended March 31, 2002, the average recorded investment
in impaired loans was approximately $8.2 million and interest income of $106,000
was recognized on impaired loans during the period, representing 0.5% of
Peoples' total interest income.
Funding Sources
- ---------------
Peoples considers a number of sources when evaluating its funding needs,
including but not limited to deposits, short-term borrowings, and long-term
borrowings. Traditional deposits continue to be the most significant source of
funds for Peoples, totaling $839.2 million, or 77.8% of total funding sources at
March 31, 2002.
Non-interest bearing deposits serve as a core funding source with total balances
of $93.8 million at March 31, 2002, a $2.7 million (or 3%) decrease compared to
the prior year-end. In the fourth quarter of 2001, Peoples implemented two
programs aimed at attracting new clients and core deposits, as well as producing
additional non-interest income opportunities: Overdraft Privilege and Free
Checking. These programs have already had a positive impact by generating many
new non-interest bearing accounts, which partially offset a decline in
non-interest bearing commercial deposit balances, and boosting non-interest
revenues. Management expects these programs to produce additional benefits
throughout the remainder of 2002. In addition, management will continue to focus
on expanding its base of lower-cost funding sources and enhancing client
relationships by providing incentives for clients to utilize more of Peoples'
products and services.
Interest-bearing deposits totaled $745.4 million at March 31, 2002, an increase
of $27.6 million (or 4%) compared to $717.8 million at December 31, 2001, with
increased savings balances of $17.4 million (or 22%) since year-end 2001
accounting for the majority of the growth. The increase in Peoples' savings
balances during the first quarter of 2002 is primarily the result of a new
savings product for deposits of states and political subdivisions. Certificates
of deposit remain Peoples' largest group of interest-bearing deposits, totaling
$365.3 million at March 31, 2002, up $4.6 million (or 1%) since year-end 2001.
Interest-bearing transaction accounts (primarily Peoples' money market deposit
accounts), are also a significant portion of Peoples' interest-bearing deposits,
totaling $283.1 million at March 31, 2002, compared to $277.5 million at
year-end 2001, up $5.6 million (or 2%). Peoples' money market accounts offer
variable, competitive rates that allow clients flexibility and opportunity to
enhance their investment yields.
Peoples also accesses other funding sources, including short-term and long-term
advances, to fund asset growth and satisfy liquidity needs. FHLB advances and
repurchase agreements comprise Peoples' short-term borrowings, while long-term
borrowings are primarily 10-year FHLB advances, with initial fixed rate features
for periods of two, three, or four years, depending on the specific advance.
Each 10-year 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 rate product.
During the first quarter of 2002, long-term borrowings increased $6.2 million
(or 3%) from $192.4 million at year-end 2001, as part of Peoples' continuing
shift to longer-term funding to "lock in" costs during this period of low
interest rates. At March 31, 2002, Peoples' short-term borrowings totaled $40.8
million, down $15.2 million (or 27%) compared to year-end 2001. Peoples' ability
to reinvest the proceeds from the callable agency bond sale was limited due to
the timing of the transaction late in the first quarter of 2002, resulting in a
decreased level of short-term borrowings at quarter-end. Management intends to
use a short-term borrowing from an unrelated financial institution to initially
fund the First Colony acquisition and is evaluating the appropriate
capitalization and methodology to fund Peoples' balance sheet long-term.
Capital/Stockholders' Equity
- ----------------------------
At March 31, 2002, stockholders' equity was $96.2 million, an increase of $2.4
million (or 3%) since December 31, 2001 as increased first quarter earnings
positively impacted Peoples' stockholders' equity. In the first quarter of 2002,
Peoples had net income of $4,515,000 and paid dividends of $1,078,000, a
dividend payout ratio of 23.9% of earnings, compared to a ratio of 35.7% a year
ago. Management believes Peoples' recent dividend payments represent an
acceptable payout ratio and anticipates Peoples continuing its 36-year history
of consistent dividend growth, at payout ratios deemed appropriate, in future
periods.
The adjustment for the net unrealized holding losses on available-for-sale
securities, net of deferred income taxes, totaled $535,000 million at March 31,
2002 versus unrealized gains of $834,000 at December 31, 2001, a change of $1.4
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.
Peoples had treasury stock totaling $3.0 million at March 31, 2002, compared to
$3.4 million at year-end 2001. During the first quarter of 2002, Peoples
repurchased 1,740 common shares at an average price of $19.06 per share and
reissued approximately 7,659 shares through various stock option plans. In 2002,
Peoples may repurchase additional shares under the 2002 Stock Repurchase
Program, based on timing and market prices management deems appropriate, until
its expiration on December 31, 2002.
Peoples has also complied with the standards of capital adequacy mandated by the
banking industry. Bank regulators have established "risk-based" capital
requirements designed to measure capital adequacy. Risk-based capital ratios
reflect the relative risks of various assets banks hold in their portfolios. A
weight category of 0% (lowest risk assets), 20%, 50% or 100% (highest risk
assets) is assigned to each asset on the balance sheet. At March 31, 2002,
Peoples' Total Capital, Tier 1 and Leverage ratios were 13.72%, 12.37% and
8.63%, exceeding the well-capitalized standards of 10%, 6% and 5%, respectively.
In addition, all three risk-based capital ratios for Peoples Bank were also well
above the minimum standards for a well-capitalized institution at March 31,
2002.
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 mix, 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 has charged the ALCO with the overall management
of Peoples' balance sheet and off-balance sheet transactions related to the
management of IRR. The ALCO strives to keep Peoples focused on the future,
anticipating change and exploring alternatives, rather than simply reacting to
change.
To this end, the ALCO has established an IRR management policy that sets the
minimum requirements and guidelines for monitoring and managing 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 various 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, produced from the simulation data, showing the earnings
variance from the flat rate forecast illustrate the risks associated with the
current balance sheet structure. When deemed appropriate, additional simulations
will be prepared modeling possible changes in the balance sheet. These
additional simulations are run with the same interest rate scenarios used with
the base case simulation and/or using different yield curve scenarios. The
additional simulations 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 control the
amount of short-term exposure to IRR, the ALCO limits the decrease in net
interest income of Peoples Bank to 10% or less from base case for each 100 basis
point shift in interest rates measured on an annual basis. To control the
long-term exposure, the ALCO limits the negative impact on net equity value to
40% or less when interest rates shift 200 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 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, on a pre-tax basis, at March 31, 2002 (dollars in
thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in (Decrease) Increase (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- ---------------------- ------------------------ ------------------------
300 $ (2,641) (5.4) % $ (36,019) (33.3) %
200 (1,430) (2.9) (24,028) (22.2)
100 (671) (1.4) (11,724) (10.9)
(100) $ 167 0.3 % $ 7,265 6.7 %
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 various options
including, but not limited to, the purchase of 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 year-end 2001 due in part to the ALCO's continuing efforts to
secure long-term funding in the current low interest rate environment. As part
of this process, management has priced Peoples' 3 and 5-year certificates of
deposit to make them more attractive to clients than shorter-term certificates.
Many clients have shifted, and continue to shift, funds to the longer-term
certificates as their existing deposits mature, which helps reduce Peoples'
short-term liability sensitivity. The interest rate analysis also shows 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 the first quarter
of 2002, cash provided by financing activities totaled $8.8 million as increases
in deposits and long-term borrowings of $24.9 million and $7.0 million,
respectively, were partially offset by decreases in short-term borrowings and
Trust Preferred Securities of $15.2 million and $6.2 million, respectively. Cash
flows used in investing activity totaled $21.2 million, due to a net increase in
loan balances totaling $ 8.6 million and investment securities purchases, net of
maturities and sales, of $12.6 million.. 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
March 31, 2002, Peoples' net liquidity position was $170.5 million, or 14.13% of
total assets, in comparison to a net liquidity position of $177.2 million, or
14.85% of total assets, at December 31, 2001. This minimal decrease in liquidity
is attributed to an $8.5 million increase in volatile funds due to a decrease in
what Peoples considers stable funds, as well as a modest increase in liquid
assets, primarily investment securities, of $1.6 million. The liquidity position
as of March 31, 2002, 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. As a result, inflation does not impact Peoples 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 a
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, inflation
has had little impact on Peoples' net assets.
Future Outlook
- --------------
Recent economic conditions have challenged the entire financial services
industry and intensified asset quality pressures. Despite these factors, Peoples
successfully achieved several key goals in the first quarter of 2002, including
double-digit earnings growth, top-line revenue generation and enhanced return on
equity. Future success in the financial service industry will revolve around
three issues: earnings growth and quality, asset quality, and capital quality.
Management believes that Peoples is sound in all of these areas. Earnings
reached record levels in the first three months of 2002, due in part to solid
asset/liability management and generating diversified revenue streams. Peoples'
asset quality remains good and capital ratios continue to be at levels that
provide a strong foundation to withstand the impact of adverse economic
conditions while still affording growth opportunities.
Although changes in economic conditions and the interest rate environment
continue to influence Peoples' short-term performance, management remains
focused on enhancing long-term shareholder value. Loans and deposits currently
comprise a majority of Peoples' balance sheet while net interest income is the
largest component of earnings. However, management recognizes there are areas of
opportunity, improvement and challenges. Peoples' goal is to continue to develop
and integrate revenue sources beyond the balance sheet, and concentrate on sales
effectiveness and efficiency initiatives that differentiate Peoples from the
competition. In the end, Peoples will continue to pursue strategic opportunities
that create a more diversified financial services company with banking at the
core.
Management remains focused on growing non-interest income in order to minimize
the impact of changes in interest rates and economic conditions. The
introduction of the Overdraft Privilege program and Free Checking in late 2001
have already produced positive benefits as a result of the aggressive marketing
of these products. Management believes the growth of core deposits is a key
strategy going forward because it generates cross-selling opportunities for
Peoples' other financial services, such as loans, investments and insurance. In
second quarter of 2002, management will continue to aggressively advertise
Peoples' Free Checking product and expand on the new relationships and revenue
opportunities created by these programs, through an integrated, needs-based
sales process.
E-banking remains a key focal point for management as more and more clients
enjoy the benefits of Peoples' award winning e-banking services that include
Internet banking through Peoples OnLine Connection, ATMs and TeleBank
capabilities. Peoples' investment in technology in recent periods is aligned
with the strategy to provide the core of its business, those clients who
complete thousands of transactions each week in their deposit and loan accounts,
with speedy, technologically superior services that make it easier to do
business with Peoples.
Peoples' capital ratios continue to be comfortably above the well-capitalized
regulatory thresholds, which provide downside earnings protection but also
affords management the opportunity to enhance Peoples' long-term value through
strategic balance sheet growth. Mergers and acquisitions remain a viable
strategic option to expand Peoples' operations and scope of client service even
while management implements new products and services aimed at attracting new
clients and producing additional revenues. The expected completion of the First
Colony acquisition in June or July of 2002 should produce immediate benefits to
Peoples' operating results, as Peoples integrates its non-traditional products
and services (such as insurance and investments) and the traditional array of
banking products with the limited products currently offered to clients in these
markets.
While management works to complete the First Colony acquisition, Peoples
recently announced plans for Peoples Bank to acquire, from Century National Bank
of Zanesville, a full-service banking center in Malta, Ohio. Peoples expects to
serve the Malta office customers from its full-service office in neighboring
McConnelsville. The proposed transaction is subject to regulatory approval and
is anticipated to be completed in the third quarter of 2002. Management
continues to explore other merger and acquisition prospects in and around
Peoples' current footprint. However, the evaluation of future acquisitions will
focus more on enhancing Peoples' earnings potential rather than geographic
location or proximity to current markets and ultimately, will depend upon
opportunities that complement Peoples' core competencies and strategic intent.
Peoples' earnings momentum of the second half of 2001 continued into the first
quarter of 2002. Management anticipates earnings growth will continue in the
second quarter due to non-interest income growth and flat or modestly lower
operating expenses and continues to proactively manage Peoples' interest rate
risk position and shift away from liability sensitivity in anticipation of
rising interest rates later in 2002. Peoples' focus remains long-term with
strategies linked to filling the financial needs of every client through an
integrated, seamless service process, regardless of economic conditions. In
2002, management's goals remain unchanged and centered around producing
long-term financial benefits for every stakeholder: integrating traditional and
non-traditional products and services; controlling operating expenses; and
enhancing non-interest revenues.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
- ----------------------------------------------------------------
The statements in this Form 10-Q which are not historical fact are forward
looking statements that involve a number of risks and uncertainties, including,
but not limited to, the interest rate environment, the effect of federal and
state banking and tax regulations, the effect of technological changes, the
effect of economic conditions, the impact of competitive products and pricing,
and other risks detailed in Peoples' Securities and Exchange Commission filings.
Although management believes that the expectations in these forward-looking
statements are based on reasonable assumptions within the bounds of management's
knowledge of Peoples' business and operations, it is possible that actual
results may differ materially from these projections.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption "Liquidity
and Interest Rate Sensitivity" under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations in this Form 10-Q, and
is incorporated herein by reference.
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended
March 31,
2002 2001
(dollars in thousands) Average Yield/ Average Yield/
Balance Rate Balance Rate
ASSETS
Securities:
Taxable $ 289,138 6.29% $ 291,243 6.80%
Tax-exempt 53,664 7.00% 37,202 7.20%
- --------------------------------------------------------------------------------------------------------
Total securities 342,802 6.41% 328,445 6.85%
Loans:
Commercial 365,187 6.99% 327,872 8.88%
Real estate 297,172 7.86% 291,474 8.46%
Consumer 115,864 10.27% 121,053 10.68%
- --------------------------------------------------------------------------------------------------------
Total loans 778,223 7.87% 740,399 9.09%
Less: Allowance for loan loss (12,622) (11,515)
------------ ----------- ------------
Net loans 765,601 7.99% 728,881 9.23%
Interest-bearing deposits 2,918 1.51% 1,614 6.02%
Federal funds sold 9 - 4,045 6.13%
- --------------------------------------------------------------------------------------------------------
Total earning assets 1,111,330 7.49% 1,062,987 8.48%
Other assets 94,880 74,722
- --------------------------------------------------------------------------------------------------------
Total assets $ 1,206,210 $ 1,137,709
========================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 84,798 1.34% $ 75,769 2.17%
Interest-bearing demand deposits 276,706 1.61% 266,570 4.23%
Time 363,959 4.55% 345,282 6.16%
- --------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 725,463 3.10% 687,621 5.04%
Borrowed funds:
Short-term 61,979 1.88% 104,142 5.85%
Long-term 194,424 4.78% 139,322 5.00%
- --------------------------------------------------------------------------------------------------------
Total borrowed funds 256,403 4.13% 243,464 5.40%
- --------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 981,866 3.37% 931,085 5.13%
Non-interest bearing deposits 93,961 85,490
Other liabilities 33,370 37,471
- --------------------------------------------------------------------------------------------------------
Total liabilities 1,109,197 1,052,219
Stockholders' equity 97,013 85,490
- --------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,206,210 $ 1,137,709
========================================================================================================
Interest income to earning assets 7.49% 8.48%
Interest expense to earning assets 2.97% 4.50%
- --------------------------------------------------------------------------------------------------------
Net interest margin 4.52% 3.98%
- --------------------------------------------------------------------------------------------------------
Interest income and yields presented on a fully tax-equivalent basis using a 35%
tax rate.
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities and Use of Proceeds.
None.
ITEM 3: Defaults upon Senior Securities.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
On April 11, 2002, Peoples held its Annual Meeting of Shareholders in
the Ball Room at the Holiday Inn in Marietta, Ohio. The meeting was
well-attended and 85% of the outstanding common shares were
represented by proxy. No votes were placed in person.
Three Directors of Peoples were re-elected to serve terms of three
years each (expiring in 2005): Frank L. Christy; Rex E. Maiden; and
Joseph H. Wesel (Chairman of the Board). Directors of Peoples who
continue to serve after the 2002 Annual Meeting include Carl Baker,
Jr., George W. Broughton, Wilford D. Dimit, Robert E. Evans, Robert W.
Price, Thomas C. Vadakin, and Paul T. Theisen.
Voting results were as follows:
Shareholder Voting Results
------------------------------------------------------------------
Nominee For Withheld Against
------------------------ ------------- ---------- -----------
Frank L. Christy 6,049,325 27,010 111
Rex E. Maiden 6,049,552 26,033 1,861
Joseph H. Wesel 6,049,799 26,365 1,282
In addition, the shareholders approved the Peoples Bancorp Inc. 2002
Stock Option Plan. The adoption of the plan authorized the granting
of options of up to 425,000 common shares.
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ---------------------------------- ----------------
11 Computation of Earnings Per Share. Page 28
b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the three
months ended March 31, 2002:
1) Filed January 4, 2002 - News release announcing the signing
of a definitive agreement to acquire all the outstanding
common shares of First Colony Bancshares, Inc.
2) Filed January 22, 2002 - News release announcing Peoples'
earnings for the fourth quarter of 2001 and year ended
December 31, 2001.
3) Filed February 14, 2002 - News release announcing the
declaration of a $0.15 per share dividend by Peoples' Board
of Directors.
4) Filed March 29, 2002 - News release announcing Peoples will
report first quarter gains and increased operating earnings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORP INC.
Date: May 13, 2002 By: /s/ ROBERT E. EVANS
-------------------------------------
Robert E. Evans
President and Chief Executive Officer
Date: May 13, 2002 By: /s/ JOHN W. CONLON
-------------------------------------
John W. Conlon
Chief Financial Officer
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR PERIOD ENDED MARCH 31, 2002
Exhibit
Number Description Exhibit Location
- ------------ ---------------------------------- ----------------
11 Computation of Earnings Per Share. Page 28