FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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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Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, at November 1, 2002: 7,907,510 common shares, without par value.
Exhibit Index Appears on Page 31
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
The following Condensed Consolidated Balance Sheets, Condensed Consolidated
Statements of Income, Consolidated Statements of Stockholders' Equity, and
Consolidated Statements of Cash Flows of Peoples Bancorp Inc. and subsidiaries
("Peoples"), reflect all adjustments (which include normal recurring accruals)
necessary to present fairly such information for the periods and dates
indicated. Since the following condensed unaudited financial statements have
been prepared in accordance with instructions to Form 10-Q, they do not contain
all information and footnotes necessary for a fair presentation of financial
position in conformity with accounting principles generally accepted in the
United States. Operating results for the nine months ended September 30, 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
Bancorp Inc.'s 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 the 2001 Form 10-K.
The consolidated financial statements include the accounts of Peoples Bancorp
Inc. and its wholly-owned subsidiaries. Material intercompany accounts and
transactions have been eliminated.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
ASSETS 2002 2001
Cash and cash equivalents:
Cash and due from banks $ 34,298 $ 31,642
Interest-bearing deposits in other banks 211 346
Federal funds sold 3,100 850
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Total cash and cash equivalents 37,609 32,838
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $369,391 and $329,081 at September 30, 2002, and
December 31, 2001, respectively) 380,600 330,364
Loans, net of unearned interest 867,627 772,856
Allowance for loan losses (12,886) (12,357)
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Net loans 854,741 760,499
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Bank premises and equipment, net 18,166 16,369
Goodwill 24,517 15,388
Other intangible assets 5,112 1,622
Other assets 37,576 36,886
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Total assets $ 1,358,321 $ 1,193,966
=====================================================================================================================
LIABILITIES
Deposits:
Non-interest bearing $ 108,995 $ 96,533
Interest-bearing 842,743 717,835
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Total deposits 951,738 814,368
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Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 33,350 23,752
Federal Home Loan Bank term advances - 32,300
Other short-term borrowings 17,000 -
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Total short-term borrowings 50,350 56,052
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Long-term borrowings 205,680 192,448
Accrued expenses and other liabilities 9,685 8,188
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Total liabilities 1,217,453 1,071,056
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Guaranteed preferred beneficial interests in junior subordinated debentures 29,068 29,056
STOCKHOLDERS' EQUITY
Common stock, no par value, 12,000,000 shares authorized - 7,969,386 shares
issued at September 30, 2002, and 7,289,266 issued
at December 31, 2001, including shares in treasury 96,876 78,664
Accumulated comprehensive income, net of deferred income taxes 7,292 834
Retained earnings 8,814 17,735
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112,982 97,233
Treasury stock, at cost, 65,740 shares at September 30, 2002, and
178,344 shares at December 31, 2001 (1,182) (3,379)
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Total stockholders' equity 111,800 93,854
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Total liabilities, beneficial interests and stockholders'
equity $ 1,358,321 $ 1,193,966
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Interest income $ 21,683 $ 21,456 $ 62,310 $ 65,568
Interest expense 8,545 10,674 24,502 33,679
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Net interest income 13,138 10,782 37,808 31,889
Provision for loan losses 1,182 675 3,023 2,025
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Net interest income after provision for loan losses 11,956 10,107 34,785 29,864
Other income:
Service charges on deposits 1,958 863 4,999 2,559
Fiduciary revenues 626 626 1,882 1,868
Insurance and investment commissions 532 368 1,518 1,077
Electronic banking revenues 464 356 1,246 1,032
Business owned life insurance 384 242 1,085 242
Gain on securities transactions 51 26 102 27
Gain on sale of loans 22 - 22 -
(Loss) gain on asset disposals - (12) (14) 13
Net mark-to-market adjustment on interest rate caps - - - (131)
Other non-interest income 80 59 230 207
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Total other income 4,117 2,528 11,070 6,894
Other expenses:
Salaries and benefits 4,771 3,790 13,601 11,017
Occupancy and equipment 988 885 2,854 2,792
Trust Preferred Securities expense 643 665 1,827 1,976
Professional fees 533 233 1,416 756
Data processing and software 251 279 868 757
Amortization of goodwill 273 457 820 1,354
Marketing 242 154 778 430
Amortization of other intangible assets 208 125 431 376
Other non-interest expense 1,843 1,529 4,931 4,778
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Total other expenses 9,752 8,117 27,526 24,236
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Income before income taxes and extraordinary gain 6,321 4,518 18,329 12,522
Income taxes 1,702 1,321 5,020 3,724
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Income before extraordinary gains 4,619 3,197 13,309 8,798
Extraordinary gain on early debt extinguishment, net of
tax expense of $221 - - 410 -
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Net income $ 4,619 $ 3,197 $ 13,719 $ 8,798
=============================================================================================================================
Basic earnings per share:
Income before extraordinary gains $ 0.58 $ 0.41 $ 1.69 $ 1.11
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Extraordinary gain $ - $ - $ 0.05 $ -
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Net income $ 0.58 $ 0.41 $ 1.74 $ 1.11
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Diluted earnings per share:
Income before extraordinary gains $ 0.57 $ 0.40 $ 1.65 $ 1.09
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Extraordinary gain $ - $ - $ 0.05 $ -
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Net income $ 0.57 $ 0.40 $ 1.70 $ 1.09
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Weighted average shares outstanding (basic) 7,896,663 7,889,519 7,870,408 7,914,815
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Weighted average shares outstanding (diluted) 8,150,003 8,033,685 8,084,233 8,035,157
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Cash dividends declared $ 1,195 $ 1,089 $ 3,474 $ 3,007
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Cash dividend per share $ 0.15 $ 0.14 $ 0.44 $ 0.38
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands) Accumulated
Other
Common Stock Retained Treasury Comprehensive
Shares Amount Earnings Stock Income Total
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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 13,719 13,719
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
securities, net of reclassification 6,458 6,458
adjustment
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Total comprehensive income 20,177
Exercise of common stock options
(reissued 78,176 treasury shares) (253) 1,286 1,033
Tax benefit from exercise of stock options 139 139
Distribution of treasury stock for deferred
compensation plan (reissued 267 treasury 5 5
shares)
10% stock dividend 668,228 18,053 (19,166) 1,113
Cash dividends declared (3,474) (3,474)
Common stock issued under dividend
reinvestment plan 11,892 273 273
Purchase of treasury stock, 9,155 shares (207) (207)
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Balance, September 30, 2002 7,969,386 $ 96,876 $ 8,814 $ (1,182) $ 7,292 $ 111,800
===================================================================================================================================
Comprehensive Income:
Net unrealized appreciation arising during period, net of tax 6,524
Less: reclassification adjustment for securities gains included in net income, net 66
of tax
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Net unrealized appreciation on investment securities 6,458
==================================================================================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net income $ 13,719 $ 8,798
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion 2,977 3,380
Provision for loan losses 3,023 2,025
Business owned life insurance income (1,085) (242)
Gain on securities transactions (102) (27)
Extraordinary gain on early debt extinguishment (631) -
(Increase) decrease in interest receivable (175) 514
Increase (decrease) in interest payable 34 (709)
Deferred income tax expense (benefit) 131 (178)
Deferral of loan origination fees and costs 65 15
Other, net (683) 3,106
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Net cash provided by operating activities 17,273 16,682
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Cash flows from investing activities:
Purchases of available-for-sale securities (132,901) (37,260)
Proceeds from sales of available-for-sale securities 32,844 134
Proceeds from maturities of available-for-sale securities 66,243 71,159
Net increase in loans (32,397) (3,614)
Expenditures for premises and equipment (937) (2,365)
Proceeds from sales of other real estate owned 206 90
Acquisitions, net of cash received 17,463 (162)
Purchase of business owned life insurance - (20,000)
Investment in limited partnership and tax credit funds (1,315) (4,400)
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Net cash (used in) provided by investing activities (50,794) 3,582
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Cash flows from financing activities:
Net increase (decrease) in non-interest bearing deposits 2,211 (10,226)
Net increase in interest-bearing deposits 37,235 77,777
Net decrease in short-term borrowings (11,192) (93,082)
Proceeds from long-term debt 17,000 30,000
Payments on long-term borrowings (5,558) (418)
Cash dividends paid (3,080) (2,529)
Purchase of treasury stock (207) (3,225)
Repurchase of Trust Preferred Securities (6,150) -
Proceeds from issuance of Trust Preferred Securities 7,000 -
Proceeds from issuance of common stock 1,033 374
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Net cash provided by (used in) financing activities 38,292 (1,329)
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Net increase in cash and cash equivalents 4,771 18,935
Cash and cash equivalents at beginning of period 32,838 28,449
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Cash and cash equivalents at end of period $ 37,609 $ 47,384
====================================================================================================================
Supplemental cash flow information:
Interest paid $ 20,688 $ 28,755
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Income taxes paid $ 4,055 $ 1,733
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
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The accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries
("Peoples") conform to accounting principles generally accepted in the United
States and to general practices within the 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 consolidated 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 have been adjusted for 10% stock dividends issued June
28, 2002 and September 12, 2001. The consolidated financial statements include
all accounts of Peoples Bancorp Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
1. Mergers and Acquisitions
------------------------
On October 4, 2002, Peoples completed the acquisition of a banking center in
Malta, Ohio, from Century National Bank of Zanesville, Ohio, a subsidiary of
Park National Corporation of Newark, Ohio. As part of the transaction,
Peoples acquired deposits of $6.3 million and loans of $1.6 million.
Effective October 4, Peoples discontinued banking operations at the Malta
office located at 50 West Third Street, with the Malta office customers
being served by Peoples' full-service office in neighboring McConnelsville.
On June 14, 2002, Peoples completed the acquisition of First Colony
Bancshares, Inc. ("First Colony"), the holding company of The Guernsey Bank,
f.s.b, a federal savings bank based in Cambridge, Ohio. As part of the
transaction, Peoples acquired full-service offices in Cambridge (two
offices), Byesville, and Quaker City in Ohio's Guernsey County and Flushing
in Ohio's Belmont County, involving total loans of $66.1 million, total
deposits of $97.9 million and total retail overnight repurchase agreements
of $5.5 million. Peoples did not acquire Guernsey Bank's full-service
banking office or loan production office in Worthington, Ohio, which
continue to serve its customers and retained "The Guernsey Bank" name under
a new banking charter.
Peoples accounted for the $18 million cash acquisition of First Colony's
outstanding stock under the purchase method of accounting in accordance with
Statement of Financial Accounting Standards No. 141, "Business Combination"
("SFAS 141"), and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") issued by the Financial
Accounting Standards Board ("FASB") in July 2001. The balances and
operations of the acquisition are included in Peoples' consolidated
financial statements from the date of the acquisition, and are not material
in relationship to Peoples' consolidated financial statements. Subject to
completion of a final audited closing balance sheet, a preliminary purchase
price allocation was prepared and included as a part of these consolidated
financial statements, including approximately $9.8 million of goodwill and
$3.8 million of core deposit intangible assets. Such allocations and
estimates are subject to change when additional information concerning the
audited closing balance sheet, as well as asset and liability valuations, is
finalized in the fourth quarter 2002.
2. Accounting Pronouncements
-------------------------
On October 1, 2002, the FASB issued Statement of Financial Accounting
Standards No. 147, "Acquisitions of Certain Financial Institutions" ("SFAS
147"). Under SFAS 147, the excess of cost over the fair value of liabilities
acquired (goodwill) previously recorded in accordance with Statement of
Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions", is no longer subject to amortization as
provided under SFAS 142, if certain criteria are met. The amortization
provisions of SFAS 147 apply to goodwill acquired after September 30, 2002.
With respect to goodwill acquired prior to October 1, 2002, the transitional
provisions of SFAS 147 are effective October 1, 2002, with earlier
application permitted.
At September 30, 2002, Peoples had goodwill of approximately $9.5 million
recorded and accounted for in accordance with FASB Statement No. 72. As a
result, Peoples' goodwill amortization expense totaled $820,000 for the nine
months ended September 30, 2002, compared to $1,354,000 for the same period
in 2001. Peoples plans to adopt SFAS 147 during the fourth quarter and,
accordingly, expects to discontinue amortization of all goodwill,
retroactive to Peoples' adoption of SFAS 142.
On January 1, 2002, Peoples adopted SFAS 142, whereby Peoples is no longer
required to amortize approximately $6.0 million of its goodwill previously
amortized, but rather must perform, at least annually, an assessment for
impairment applying a fair-value based test. Peoples has performed the
transitional impairment tests on its goodwill assets and has concluded that
the recorded value of Peoples' goodwill is not impaired as of September 30,
2002.
The following pro forma information assumes SFAS 142 had been in effect for
all periods presented:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands, except per share data) 2002 2001 2002 2001
Amortization of goodwill $ 273 $ 273 $ 820 $ 820
Total other expense 9,752 7,933 27,526 23,702
Income before extraordinary gains 4,619 3,381 13,309 9,332
Net income $ 4,619 $ 3,381 $ 13,719 $ 9,332
Basic earnings per share:
Income before extraordinary gains $ 0.58 $ 0.43 $ 1.69 $ 1.18
Net income $ 0.58 $ 0.43 $ 1.74 $ 1.18
Diluted earnings per share:
Income before extraordinary gains $ 0.57 $ 0.42 $ 1.65 $ 1.16
Net income $ 0.57 $ 0.42 $ 1.70 $ 1.16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited consolidated
financial statements and the management discussion and analysis that follows:
For the Three For the Nine
Months Ended September 30, Months Ended September 30,
SIGNIFICANT RATIOS 2002 2001 2002 2001
Return on average equity 17.15 % 13.90 % 17.94 % 13.19 %
Return on average assets 1.37 % 1.09 % 1.45 % 1.01 %
Net interest margin (a) 4.42 % 4.10 % 4.49 % 4.05 %
Non-interest income leverage ratio (b) 43.62 % 33.36 % 41.71 % 31.04 %
Efficiency ratio (c) 52.61 % 55.56 % 52.58 % 56.74 %
Average stockholders' equity to average assets 8.00 % 7.83 % 8.07 % 7.67 %
Average loans to average deposits 92.16 % 90.99 % 93.44 % 93.00 %
Cash dividends to net income 25.87 % 34.09 % 25.32 % 34.18 %
Allowance for loan losses to loans net of unearned interest 1.49 % 1.62 % 1.49 % 1.62 %
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CAPITAL RATIOS
Tier I capital ratio 11.55 % 12.92 % 11.55 % 12.92 %
Risk-based capital ratio 12.91 % 14.26 % 12.91 % 14.26 %
Leverage ratio 7.96 % 8.86 % 7.96 % 8.86 %
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PER SHARE DATA
Net income per share - basic $ 0.58 $ 0.41 $ 1.74 $ 1.11
Net income per share - diluted 0.57 0.40 1.70 1.09
Cash dividends per share 0.15 0.14 0.44 0.38
Book value per share 14.15 12.01 14.15 12.01
Tangible book value per share (d) $ 10.40 $ 9.76 $ 10.40 $ 9.76
Weighted average shares outstanding - Basic 7,896,663 7,889,519 7,870,408 7,914,815
Weighted average shares outstanding - Diluted 8,150,003 8,033,685 8,084,233 8,035,157
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<FN>
(a) Calculated using fully-tax equivalent net interest income as a percentage
of average earning assets.
(b) Non-interest income (less securities and asset disposal gains) as a
percentage of non-interest expense (less intangible amortization).
(c) Non-interest expense (less intangible amortization) as a percentage of
fully tax equivalent net interest income plus non-interest income.
(d) Tangible book value per share reflects capital calculated for banking
regulatory requirements and excludes balance sheet impact of intangible
assets acquired through 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. The subsidiaries of Peoples Bancorp Inc. ("Peoples Bancorp")
are Peoples Bank, National Association ("Peoples Bank"), Peoples Investment
Company, PEBO Capital Trust I and PEBO Capital Trust II. Peoples Bank also owns
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 serves as Peoples' internal
asset management subsidiary. Peoples Investment Company also owns Peoples
Capital Corporation.
Peoples Bank is subject to regulation, supervision and examination by the Office
of the Comptroller of the Currency and, as a national bank, is a member of the
Federal Reserve System. Peoples Bank offers financial products and services
through 45 financial service locations and 30 ATMs in Ohio, West Virginia and
Kentucky. Peoples Bank's e-banking service, Peoples OnLine Connection, can be
found on Peoples' Internet site. Peoples Bank provides an array of financial
products and services to clients 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 Internet-based banking.
Peoples Bank also makes available other financial services through Peoples
Investment Services, a division of Peoples Bank that 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, Inc., member
NASD/SIPC and an independent broker/dealer, located in Peoples Bank offices.
Peoples Investment Company and Peoples Capital Corporation were formed in 2001
and permit Peoples to deploy investable funds more effectively by providing
additional 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 or are more appropriately held in these companies.
This discussion and analysis should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2001, and
notes 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 may impact Peoples' results of operations:
As discussed in Note 1 of the Notes to the Consolidated Financial
Statements, Peoples completed the acquisition of a banking center in Malta,
Ohio, on October 4, 2002, and First Colony Bancshares, Inc. ("First
Colony"), the holding company of The Guernsey Bank, f.s.b., a federal
savings bank based in Cambridge, Ohio, on June 14, 2002.
On April 10, 2002, Peoples issued $7.0 million of LIBOR based floating 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 floating rate junior
subordinated debit securities due April 22, 2032 (the "Debentures").
Peoples has used the net proceeds from the sale of the Debentures for
general corporate purposes and management of corporate liquidity.
On November 9, 2001, Peoples Bancorp announced authorization to repurchase
192,500 (or approximately 2.5%) of its outstanding common shares from time
to time in open market or privately negotiated transactions (the "2002
Stock Repurchase Program"). At September 30, 2002, Peoples Bancorp had
purchased 4,895 shares under the 2002 Stock Repurchase Plan, and management
does not anticipate any significant future purchases before the expiration
of the 2002 Stock Repurchase Program.
The impact of these transactions, where significant, is discussed in the
applicable sections of this discussion and analysis.
RESULTS OF OPERATIONS
Overview of the Income Statement
- --------------------------------
For the three months ended September 30, 2002, net income totaled $4,619,000, up
$1,422,000 (or 44%) from $3,197,000 for the third quarter of 2001. Earnings per
diluted share were $0.57 for the third quarter of 2002 compared to $0.40 a year
ago, an increase of $0.17 (or 43%). Compared to the second quarter of 2002 (the
"linked quarter"), net income increased $34,000 (or 1%) in the third quarter
from $4,585,000, while earnings per diluted share were unchanged. Peoples'
increased earnings compared to last year were due primarily to strong net
interest income and higher levels of non-interest revenue, which grew $2,356,000
and $1,589,000, respectively. Return on average equity was 17.15% in the third
quarter of 2002 versus 18.15% in the linked quarter and 13.90% in 2001's third
quarter.
On a year-to-date basis, net income totaled $13,719,000 in 2002, up 56% compared
to $8,798,000 in 2001, and diluted earnings per share increased to $1.70 from
$1.09 a year ago. For the nine months ended September 30, 2002, return on equity
improved to 17.94% from 13.19% for the same period last year, primarily the
result of Peoples' higher net income.
Net interest income (excluding non-operating gains and losses) totaled
$13,138,000 for the third quarter of 2002, up 22% compared to last year's third
quarter total of $10,782,000 and up 5% versus $12,511,000 for the second quarter
of 2002. Net interest margin was 4.42% for the quarter ended September 30, 2002,
versus 4.10% a year ago and 4.54% last quarter. On a year-to-date basis, net
interest income grew 19% from $31,889,000 in 2001, to $37,808,000 in 2002, while
net interest margin improved to 4.49% compared to 4.05% a year ago. A key
component of net interest income and margin improvement was interest rates
remaining at very low levels, which allowed Peoples' costs of funds to drop more
than its yield on assets.
In the third quarter of 2002, non-interest income (excluding non-operating gains
and losses) was $4,044,000, an increase of $1,530,000 (or 61%) from a year ago,
largely attributable to higher levels of deposit account service charges. On a
year-to-date basis, non-interest income was $10,960,000 through September 30,
2002, up $3,975,000 (or 57%) compared to last year, with deposit account service
charges and business owned life insurance income accounting for $2,440,000 and
$843,000 of the increase, respectively. Non-interest expense totaled $9,752,000
in the third quarter of 2002, up 20% from $8,117,000 a year ago, and $27,526,000
for the nine months ended September 30, 2002, up 14% compared to $24,236,000 for
the same period last year. These increases were primarily the result of
additional salaries and benefit expenses and higher professional fees of
$981,000 and $300,000, respectively, in the third quarter and $2,584,000 and
$660,000, respectively, on a year-to-date basis compared to the same periods a
year ago.
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 Open Market Committee 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 $13,138,000 in the third quarter of 2002
compared to $10,782,000 in 2001's third quarter, an increase of $2,356,000 (or
22%). Interest income totaled $21,683,000 for the three months ended September
30, 2002, up $227,000 (or 1%) compared to the third quarter of 2001 and interest
expense totaled $8,545,000, down $2,129,000 (or 20%) versus the third quarter of
2001, as changes in market interest rates allowed Peoples to lower its costs of
funds more than the decline experienced in yields on earnings assets. Compared
to the linked quarter, net interest income grew $627,000 (or 5%) from
$12,511,000, as interest income growth of $1,371,000 (or 7%) was partially
offset by additional interest expense of $744,000 (or 10%). These increases were
largely attributable to Peoples acquiring earning assets of $71 million and
interest-bearing liabilities of $93 million as part of the First Colony
acquisition.
For the nine months ended September 30, 2002, net interest income increased
$5,919,000 (or 19%) to $37,808,000, from $31,889,000 for the same period in
2001. The sustained low interest rate environment, combined with Peoples'
proactive management of funding costs and a modest increase in earning assets,
enhanced net interest income in 2002 as Peoples' interest expense has declined
more than interest income. On a year-to-date basis, interest income was
$62,310,000 in 2002, down 5% compared to $65,568,000 last year, while interest
expense declined 27%, totaling $24,502,000 and $33,679,000 through nine months
of 2002 and 2001, respectively.
Included in interest income is tax-exempt income derived from loans to and
investments issued by states and political subdivisions. Since these revenues
are not taxed, 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 the third quarter of 2002, interest income was increased by
$439,000 for the impact of the tax-equivalent adjustment, resulting in FTE net
interest income of $13,577,000, up $2,528,000 (or 23%) from $11,049,000 a year
ago and up $658,000 (or 5%) compared to $12,919,000 for the linked quarter. The
FTE yield on Peoples' earning assets was 7.18% for the quarter ended September
30, 2002, versus 7.29% for the second quarter of 2002 and 8.02% for the third
quarter of 2001, while the cost of interest-bearing liabilities was 3.10%, 3.12%
and 4.45% for the same periods, respectively. On a year-to-date basis, FTE net
interest income was $39,007,000 in 2002 compared to $32,679,000 in 2001, an
increase of $6,328,000 (or 19%). The FTE yield on Peoples' earning assets was
7.31% through nine months of 2002 versus 8.23% last year, while the cost of
interest-bearing liabilities was 3.19% through nine months of 2002 versus 4.74%
last year.
Net interest margin (calculated by dividing FTE net interest income by average
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 third quarter of 2002, Peoples' net interest margin was
4.42%, down versus 4.54% in the linked quarter but up when compared to 4.10% for
the third quarter of 2001. Through nine months in 2002, Peoples' net interest
margin was 4.49% compared to 4.05% in 2001. Market interest rates remained at
very low levels in the third quarter of 2002, resulting in enhanced net interest
margin compared to a year ago through a reduction of Peoples' costs of funds. In
the fourth quarter of 2002, the impact from demand for lower rate loans combined
with management's continuing shift to longer-term funding could cause net
interest margin to compress slightly.
Earning assets averaged $1.23 billion in the third quarter of 2002, up $147.5
million (or 14%) compared to $1.08 billion last year. Gross loans account for
the largest portion of earning assets, averaging $863.9 million for the three
months ended September 30, 2002, compared to average gross loans of $756.4
million in the third quarter of 2001. Loans acquired in the First Colony
acquisition accounted for a majority of the loan growth from a year ago. During
2002, management grew the investment portfolio as part of a plan initiated in
late 2001 to return the portfolio, as a percent of earning assets, to pre-2000
levels in anticipation of modest loan growth in 2002. As a result, investment
securities averaged $370.0 million in the third quarter of 2002 compared to
$314.4 million in 2001's third quarter. The FTE yield on loans was 7.58% in the
third quarter of 2002 compared to 7.63% in the linked quarter and 8.61% a year
ago, while the FTE yield on investments was 6.18%, 6.27% and 6.68% for the same
periods, respectively. Declining yields on both loans and investment securities
are a result of lower market interest rates.
For the nine months ended September 30, average earning assets totaled $1.16
billion in 2002 compared to $1.08 billion in 2001. Gross loan balances increased
$63.3 million (or 8%), averaging $813.3 million through nine months of 2002,
versus $750.0 million a year ago. Compared to last year, the FTE yield on loans
dropped 115 basis points on a year-to-date basis, from 8.81% to 7.66%. Average
investment securities totaled $355.0 million for the first nine months of 2002
versus $319.5 million in 2001, while the FTE yield on investments was 6.28% and
6.76% for the same periods, respectively.
Peoples' average interest-bearing liabilities increased $132.2 million (or 14%)
to $1.09 billion in the third quarter of 2002 from $959.9 million for 2001's
third quarter. Traditional deposits comprise a majority of Peoples'
interest-bearing liabilities, averaging $831.8 million for the quarter ended
September 30, 2002, compared to $744.1 million a year ago, an increase of $87.7
million (or 12%) due in large part to deposits acquired in the First Colony
acquisition. Cost of funds from interest-bearing deposits was 2.74% in the third
quarter of 2002, unchanged from last quarter and down from 4.38% for the third
quarter of 2001. On a year-to-date basis, deposits averaged $771.3 million in
2002 versus $719.9 million in 2001, while the interest cost on deposits was
2.85% and 4.66% for the same periods, respectively. The lower rates paid on
interest-bearing deposit accounts were a result of market rates remaining at low
levels; however, management competitively priced Peoples' longer-term
certificates of deposit as part of a strategy to shift from short-term funding,
which tempered the overall drop in average deposit costs. In the fourth quarter
of 2002, management anticipates deposit costs to remain near current levels;
although, Peoples' deposit costs could increase should the Federal Reserve raise
interest rates.
While traditional deposits remain a primary source of funds, Peoples routinely
utilizes a variety of borrowings as complementary funding sources. Peoples' main
sources of borrowed funds are short- and long-term advances from the Federal
Home Loan Bank ("FHLB"). Short-term FHLB advances are primarily LIBOR based
advances while 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. Total borrowed funds averaged $260.3 million for the three months
ended September 30, 2002, up $44.4 million (or 21%) from $215.9 million a year
ago. Through nine months of 2002, borrowings averaged $254.5 million compared to
$227.7 million for the first nine months of last year. The interest cost of
Peoples' borrowed funds was 4.26% in the third quarter, down from 4.29% in the
linked quarter and 4.68% last year and, on a year-to-date basis, dropped to
4.23% from 4.99%.
In the third quarter of 2002, Peoples' short-term FHLB borrowings averaged $5.3
million compared to $12.9 million in the linked quarter and $25.1 million a year
ago and the average cost was 1.90%, 1.83% and 4.24% for the same periods,
respectively. Average long-term FHLB borrowings were up $5.3 million (or 3%)
compared to the linked quarter and up $50.0 million (or 33%) versus a year ago,
totaling $201.3 million for the quarter ended September 30, 2002, while the
average cost dropped to 4.81% from 4.85% and 5.03% for the second quarter of
2002 and third quarter of 2001, respectively. For the nine months ended
September 30, 2002, average short-term FHLB borrowings totaled $16.9 million
versus $40.8 million a year ago, at average costs of 1.82% and 5.19%,
respectively. Long-term FHLB borrowings averaged $196.7 million, at an average
cost of 4.84% through nine months of 2002 compared to $142.6 million at an
average cost of 5.06% for the same period in 2001. The increases in long-term
FHLB advances were due to management's efforts to secure longer-term funding
during this period of low rates. These new long-term FHLB advances are primarily
fixed rate, amortizing advances, which reduces Peoples' liability sensitive
position. Management intends to continue using a variety of FHLB borrowings to
fund asset growth and manage interest rate sensitivity, as deemed appropriate.
Peoples offers cash management services to a variety of its business customers,
which also provide short-term funding in the form of overnight repurchase
agreements. For the three months ended September 30, 2002, overnight repurchase
agreements (excluding balances of wholesale market term repurchase agreements)
averaged $26.1 million, up from $23.8 million last quarter and $25.3 million in
the third quarter of 2001. These increases are attributable in part to $6
million of repurchase agreements acquired in the First Colony acquisition. On a
year-to-date basis through September 30, 2002, overnight repurchase agreements
averaged $24.3 million, down 5% from $25.5 million a year ago. The average rate
paid on overnight repurchase agreements was 1.28% in the third quarter of 2002,
down from 1.40% in the linked quarter and 3.04% in the prior year, while on a
year-to-date basis, was 1.39% in 2002 versus 3.98% in 2001. These declines were
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 third quarter of 2002, wholesale
market term repurchase agreements averaged $9.1 million at a rate of 3.65%, down
from $12.3 million and average rate of 3.70% in 2001's third quarter. For the
nine months ended September 30, wholesale repurchase agreements averaged $8.2
million in 2002 compared to $16.9 million in 2001, at average costs of 3.65% and
5.21%, respectively. 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 third quarter of 2002, net interest income and margin improved as a
result of the low interest rate environment and Peoples' proactive management of
funding costs, as well as a modest increase in earning assets from the First
Colony acquisition. These factors have allowed management to lower Peoples'
funding costs more than the decline in earning asset yields. At September 30,
2002, Peoples' asset-liability simulations indicated that a sustained increase
in interest rates could cause net interest income to decrease modestly based on
Peoples' interest rate risk position at that time. In the fourth quarter of
2002, management expects net interest margin to compress slightly as a result of
Peoples' ongoing shift to longer-term funding and persistent demand for lower
rates on loans even as management continues to focus on minimizing the impact of
future rate changes on Peoples' earnings. However, Peoples' net interest margin
and income remain difficult to predict, and to manage, since changes in market
interest rates can have a greater impact than adjustments by management.
Provision for Loan Losses
- -------------------------
In the third quarter of 2002, Peoples' provision for loan losses was $1,182,000,
up from $980,000 for the linked quarter and $675,000 a year ago. On a
year-to-date basis, the provision was $3,023,000 in 2002 compared to $2,025,000
in 2001. The majority of these increases were due to provisions related to the
Overdraft Privilege program, which totaled $283,000 in the third quarter of 2002
and $673,000 through nine months of 2002. The remaining increases in the
provision were based upon management's ongoing evaluation of the adequacy of the
allowance for loan losses and factors affecting probable loan losses. Management
believes the provisions were appropriate for the overall quality, inherent risk
and volume concentrations of Peoples' loan portfolio.
Management anticipates that the provision for the fourth quarter of 2002 will
remain at or near the third quarter's level; however, the Overdraft Privilege
program and other loan quality factors could impact future provisions.
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
- ----------------------------------------------
Peoples recognized net gains on securities transactions of $51,000 in the third
quarter of 2002 and $102,000 on a year-to-date basis through September 30, 2002,
compared to $26,000 and $27,000 for the same periods a year ago. The net gains
on securities transactions in recent periods were primarily the result of normal
portfolio activity, while management's plan to balance the overall yield,
maturity and duration of the investment portfolio in the first quarter of 2002
contributed to the net gains for the first nine months of 2002.
Mark-to-Market Adjustment on Interest Rate Caps
- -----------------------------------------------
On January 1, 2001, Peoples adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Instruments", 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.
Through nine months of 2001, the net mark-to-market adjustment was $131,000,
decreasing net income by $85,000, or $0.01 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 ("BOLI"). For the quarter
ended September 30, 2002, non-interest income (excluding all non-operating gains
and losses) totaled $4,044,000, up $1,530,000 (or 61%) compared to $2,514,000 in
2001. Compared to the linked quarter, non-interest income grew $411,000 (or 11%)
from $3,633,000. On a year-to-date basis through September 30, 2002,
non-interest income was $10,960,000 versus $6,985,000 for the same period a year
ago, an increase of $3,975,000 (or 57%). Enhanced deposit account service
charges comprised the majority of the increases in non-interest income, while
BOLI income accounted for $843,000 of the increase on a year-to-date basis.
Service charges and other fees on deposit accounts, which are based on the
recovery of costs associated with services provided, remain Peoples' largest
source of non-interest revenues. In the third quarter of 2002, deposit account
service charges totaled $1,958,000, up $1,095,000 (or 127%) from $863,000 a year
ago and up $283,000 (or 17%) from $1,675,000 in the linked quarter. For the nine
months ended September 30, deposit account service charges increased $2,440,000
(or 95%) from $2,559,000 in 2001, to $4,999,000 in 2002. These improvements were
primarily attributable to higher volumes of overdraft and non-sufficient funds
fees, while deposit accounts acquired in the First Colony acquisition accounted
for $197,000 and $183,000 of the increases in deposit account service charges
from the a year ago and the prior quarter, respectively. Compared to last year,
overdraft and non-sufficient funds fees have grown as a result of Peoples'
implementation of the Overdraft Privilege program and other changes to the
assessment of cost recovery fees in late 2001, with the First Colony acquisition
representing nearly 60% of the growth compared to the linked quarter.
Peoples' electronic banking services are alternative delivery channels to
traditional sales offices for providing services to clients and include ATM and
debit cards, direct deposit services and Internet banking. Electronic banking
revenues totaled $464,000 in the third quarter of 2002, up $108,000 (or 30%)
from $356,000 last year, and up $50,000 (or 12%) from $414,000 in the prior
quarter. On a year-to-date basis, electronic banking revenues totaled $1,246,000
in 2002 versus $1,032,000 in 2001, an increase of $214,000 (or 21%). Since
January, Peoples has issued nearly 8,200 new debit cards, with about 30%
attributable to the First Colony acquisition, and clients have increased the
dollar amount of transactions completed using their ATM and debit cards by over
40%. These factors have resulted in Peoples producing additional e-banking
revenues compared to prior periods. Management intends to continue to explore
and develop new e-banking capabilities which complement existing delivery
channels, both traditional and non-traditional, as sources of revenue and
expanded product and service opportunities for Peoples' customers.
Insurance and investment commissions were $532,000 in the third quarter of 2002,
up $164,000 (or 45%) from $368,000 a year ago and up $70,000 (or 15%) versus
$462,000 in the linked quarter. For the first nine months of 2002, insurance and
investment commissions totaled $1,518,000 compared to $1,077,000 for the same
period in 2001, an increase of $441,000 (or 41%). Strong annuity sales in 2002
accounted for most of the increase, with additional property and casualty
insurance commissions also contributing to the growth. The following table
details Peoples' insurance and investment commissions:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2002 2001 2002 2001
Fixed annuities $ 311 $ 97 $ 813 $ 248
Property and casualty insurance 84 66 262 198
Brokerage 46 61 174 259
Credit life and A&H insurance 46 62 141 110
Life and health insurance 45 72 128 174
Reinsurance revenues - 10 - 88
- ------------------------------------------------------------------------------
Total $ 532 $ 368 $ 1,518 $ 1,077
- ------------------------------------------------------------------------------
Peoples' fiduciary fees, which are based in part on the market value of assets
managed, totaled $626,000 for the quarter ended September 30, 2002, unchanged
from last year's third quarter. Through nine months of 2002, fiduciary fees were
$1,882,000 compared to $1,868,000 for the same period a year ago. Management
continues to pursue new ways to provide asset and risk management products to
Peoples' clients and prospects and believes insurance and investment
commissions, as well as fiduciary revenues, should continue to be significant
contributors to future non-interest income growth.
For the quarter ended September 30, 2002, BOLI produced tax-advantaged income of
$384,000 compared to $376,000 in the linked quarter and $242,000 in the third
quarter of 2001. The increase compared to last year was attributable to an
adjustment in the mix of investment funds made late in the first quarter of
2002. On a year-to-date basis, BOLI income totaled $1,085,000 in 2002 versus
$242,000 in 2001, an increase of $843,000 due mainly to the timing of Peoples'
BOLI purchase in mid-2001.
Non-Interest Expense
- --------------------
In the third quarter of 2002, non-interest expense totaled $9,752,000, up
$1,635,000 (or 20%) from $8,117,000 a year ago, and up $929,000 (or 11%) from
$8,823,000 in the second quarter of 2002. For the nine months ended September
30, 2002, non-interest expense was up $3,290,000 (or 14%), totaling $27,526,000
compared to $24,236,000 last year. These increases were largely attributable to
higher salaries and benefits, while additional professional fees compared to
last year of $300,000 in the third quarter and $660,000 on a year-to-date basis
also contributed to the increases.
Peoples' largest non-interest expense remains salaries and benefits, which is
inherent in a service-based industry such as financial services. Salaries and
benefits totaled $4,771,000 in the third quarter of 2002 compared to $3,790,000
for the same period last year and $4,346,000 for the linked quarter, increases
of $981,000 (or 26%) and $425,000 (or 10%), respectively. Salaries and benefits
grew 23% in the first nine months of 2002, totaling $13,601,000 versus
$11,017,000 a year ago. The increases for the quarter and year-to-date in 2002
compared to the same periods in 2001 were due in part to the addition of new
associates, salary increases necessary to retain and recruit key personnel and
higher incentive and medical plan expenses. At September 30, 2002, Peoples had
458 full-time equivalent associates, up from 447 last quarter and 397 a year
ago, with the First Colony acquisition accounting for 54% of the increase from
last year. The remaining increase was attributable to the addition of associates
in both sales and support positions in response to Peoples expanded customer
base. 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 third quarter of 2002, professional fees, which include fees for
accounting, legal and other professional services, were up $300,000 (or 129%),
totaling $533,000 versus $233,000 a year ago. Compared to the second quarter of
2002, professional fees were down $49,000 (or 8%) from $582,000. On a
year-to-date basis, professional fees totaled $1,416,000 through September 30,
2002, versus $756,000 a year ago, an increase of $660,000 (or 87%). Costs
associated with Peoples' implementation of Free Checking and Overdraft Privilege
products, which totaled $352,000 through nine months of 2002, accounted for the
majority of this increase, while other initiatives, such as insurance and
investment strategic initiatives, comprised the remaining increase.
Marketing expense totaled $242,000 for the three months ended September 30,
2002, versus $154,000 a year ago and $150,000 in the second quarter of 2002,
increases of $88,000 (or 57%) and $92,000 (or 61%) attributable to Peoples
advertising its enhanced Internet billpay capabilities and other promotional
campaigns. On a year-to-date basis, marketing expense was up $348,000 (or 81%)
from $430,000 last year, totaling $778,000 through September 30, 2002. In
addition to the Internet billpay promotions, 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 in
the first quarter of 2002, resulting in higher marketing expenses in 2002
compared to recent periods. Management believes these initiatives have helped
Peoples attract new clients.
Net occupancy and equipment expenses totaled $988,000 in the third quarter of
2002, up $103,000 (or 12%) from a year ago and up $48,000 (or 5%) from the
linked quarter. On a year-to-date basis, net occupancy and equipment expenses
were $2,854,000 in 2002 versus $2,792,000 in 2001. These increases were due
largely to continued investments in technology that enhances Peoples' ability to
serve clients and satisfy client needs. Management believes net occupancy and
equipment expenses could be slightly higher in the fourth quarter, especially
considering the timing of recognition of occupancy and equipment expenses
relating to the First Colony acquisition.
Peoples' data processing and software costs were up $111,000 (or 15%) on
year-to-date basis, totaling $868,000 in 2002, a result of software licensing
renewal fees in the first half of 2002. In the third quarter of 2002, data
processing and software costs were $251,000, down $43,000 (or 15%) compared to
last quarter and down $28,000 (or 10%) from a year ago. Further information
regarding factors affecting Peoples' future data processing and software costs
can be found later in this discussion under "Future Outlook."
Peoples' intangible amortization expense was $481,000 in the third quarter of
2002, down $101,000 (or 17%) from $582,000 last year, and was $1,251,000 on a
year-to-date basis through September 30, 2002, down $479,000 (or 28%) from
$1,730,000 for the same period a year ago. The decline in intangible
amortization expense was almost entirely the result of Peoples adopting SFAS
142. Compared to the second quarter of 2002, intangible amortization expense
increased $95,000 (or 25%) from $386,000, attributable to Peoples' amortization
of the core deposit intangible acquired in the First Colony acquisition.
Management expects intangible amortization expense to be approximately $215,000
in the fourth quarter of 2002 in response to Peoples' adoption of SFAS 147.
Peoples' other major non-interest expense categories were below their levels in
recent periods.
Management uses the non-interest income leverage ratio as a measure of
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.
Through the first nine months of 2002, the non-interest leverage ratio improved
to 41.7% from 31.0% a year ago, due to strong non-interest revenues coupled with
controlled expense growth. Peoples' sales associates will strive to generate new
revenues and leverage additional operating expenses through a needs-based
selling approach in order to achieve the long-term target non-interest income
leverage ratio of 50%.
Return on Equity
- ----------------
Peoples' return on equity ("ROE") was 17.15% in the third quarter of 2002 versus
13.90% the prior year and 18.15% in the linked quarter. For the nine months
ended September 30, 2002, ROE improved to 17.94% from 13.19% for the same period
last year. Peoples' higher net income accounted for the majority of the ROE
enhancement in 2002 compared to 2001, while the increased mark-to-market
adjustment on available-for-sale investment portfolio negatively impacted ROE.
As market values 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
a more meaningful measurement of short-term performance.
Return on Assets
- ----------------
Return on assets ("ROA") in the third quarter of 2002 was 1.37%, up from 1.09%
for the third quarter of 2001. On a year-to-date basis, ROA was 1.45% through
September 30, 2002, compared to 1.01% a year ago. The ROA improvement in 2002 is
a result of Peoples' strong earnings.
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. For
the nine months ended September 30, 2002, the total amount of tax advantaged
investments included in Other Assets averaged $28.0 million compared to $12.5
million a year ago. Due in large part to this increased investment, Peoples'
year-to-date effective tax rate was reduced to 27.6% through September 30, 2002,
compared to 29.7% for the same period in 2001. Peoples' adoption of SFAS 142 has
also contributed to the decrease. 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 September 30, 2002, total assets were $1.36 billion compared to $1.19 billion
at year-end 2001, an increase of $164.4 million (or 14%). Gross loans grew $94.7
million (or 12%) during the first nine months of 2002 from $772.9 million at
December 31, 2001, with approximately $66 million attributable to the First
Colony acquisition and organic growth in commercial and real estate loan
balances accounting for the remaining increase. Peoples' planned growth of the
investment portfolio in 2002 resulted in total investment securities of $380.6
million at September 30, 2002, up $50.2 million (or 15%) from year-end 2001.
Total liabilities were $1.22 billion at September 30, 2002 compared to $1.07
billion at year-end 2001, an increase of $146.4 million (or 14%). At September
30, 2002, deposits totaled $951.7 million versus $814.4 million at year-end,
with the bulk of the increase attributable to the First Colony acquisition.
Interest-bearing balances grew $124.9 million (or 17%) while non-interest
bearing deposits were up $12.5 million (or 13%) since December 31, 2001.
Borrowed funds increased $7.5 million (or 3%) at September 30, 2002, totaling
$256.0 million, versus $248.5 million at year-end 2001.
Stockholders' equity totaled $111.8 million at September 30, 2002, versus $93.9
million at December 31, 2001, an increase of $17.9 million (or 19%). The higher
level of stockholders' equity at the end of the third quarter was due primarily
to increased earnings, net of dividends paid, which increased stockholders'
equity by $10.2 million, and the mark-to-market adjustment on Peoples'
investment portfolio, which increased stockholders' equity by $6.5 million.
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 September 30, 2002, cash and cash equivalents
totaled $37.6 million, up $4.8 million (or 15%) compared to $32.8 million at
December 31, 2001. This increase was largely the result of additional items in
process of collection at September 30. At December 31, 2001, Peoples had Federal
funds sold of $0.9 million compared to $3.1 million at September 30, 2002, which
also contributed to the overall increase 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, specifically
undrawn lines of credit, construction loans and letters of credit, as they come
due. Peoples 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 and maintaining adequate
liquidity. Additional information regarding Peoples' liquidity can be found
later in this discussion under "Liquidity and Interest Rate Sensitivity."
Investment Securities
- ---------------------
At September 30, 2002, the amortized cost of Peoples' investment securities
totaled $369.4 million compared to $329.1 million at year-end 2001, while the
market value of the investment portfolio was up $50.2 million from $330.4
million at December 31, 2001, to $380.6 million at September 30, 2002. During
2002, management continued the planned growth of the investment portfolio in
anticipation of modest loan growth in 2002. In addition, Peoples also acquired
investment securities of approximately $6 million, primarily mortgage-backed
securities, in conjunction with the First Colony acquisition.
The difference in amortized cost and market value at September 30, 2002,
resulted in unrealized appreciation in the investment portfolio of $11.2 million
and a corresponding increase in Peoples' equity of $7.3 million, net of deferred
taxes. In comparison, the difference in amortized cost and market value at
December 31, 2001, resulted in unrealized appreciation of $1.3 million and an
increase in equity of $0.8 million, net of deferred taxes.
At September 30, 2002, Peoples' investment in US treasury securities and
obligations of US government agencies and corporations was down $41.3 million
(or 62%) versus year-end 2001, due primarily to the sale of a $31.0 million
callable security late in the first quarter of 2002. Management reinvested the
proceeds from this sale in mortgage-backed securities and obligations of states
and political subdivisions, which accounts for a portion of the increase in
those security types. In addition, management has reinvested the principal
runoff from the investment portfolio throughout 2002. The following table
details Peoples' investment portfolio, at estimated fair value:
(Dollars in Thousands) September 30, June 30, December 31, September 30,
2002 2002 2001 2001
US Treasury securities and obligations of
US government agencies and corporations $ 24,973 $ 33,528 $ 66,294 $ 69,439
Obligations of states and political subdivisions 69,243 67,281 49,562 44,967
Mortgage-backed securities 232,438 214,748 166,269 148,726
Other securities 53,946 51,849 48,239 45,396
- --------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 380,600 $ 367,406 $ 330,364 $ 308,528
====================================================================================================================
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 seeks to
maintain sufficient liquidity to satisfy depositor demand, other company
liquidity requirements and various credit needs of its customers.
Loans
- -----
Peoples Bank originates various types of loans, including commercial, financial
and agricultural loans ("commercial loans"), real estate loans (both commercial
and residential) and consumer loans, focusing primarily on lending opportunities
in central and southeastern Ohio, northern West Virginia, and northeastern
Kentucky markets. At September 30, 2002, gross loans totaled $867.6 million, an
increase of $94.8 million (or 12%) since year-end 2001. Peoples acquired loans
of approximately $66 million in the First Colony acquisition. In addition,
Peoples has experienced moderate organic growth in commercial loans and real
estate loans through the first nine months of 2002; however, consumer loan
balances continued to decline (excluding the impact of loans acquired) and
partially offset the commercial and real estate loan growth. The following table
details total outstanding loans:
(dollars in thousands) September 30, June 30, December 31, September 30,
2002 2002 2001 2001
Commercial, financial, and agricultural $ 386,413 $ 379,243 $ 343,800 $ 315,607
Real estate, construction 20,348 15,782 14,530 21,077
Real estate, mortgage 341,131 345,795 295,944 295,747
Consumer 113,533 115,398 111,912 117,328
Credit cards 6,202 6,159 6,670 6,424
- -----------------------------------------------------------------------------------------------------------------
Total loans $ 867,627 $ 862,377 $ 772,856 $ 756,183
=================================================================================================================
At September 30, 2002, commercial loan balances were $386.4 million, up $42.6
million (or 12%) from year-end 2001's balance of $343.8 million, with a
significant portion of the increase attributable to lending opportunities within
Peoples' existing markets. The First Colony acquisition also accounted for
approximately $4 million of the increase, while approximately $7 million was due
to Peoples' purchase of multi-family real estate loans from an unrelated
financial institution in the first quarter. Commercial loans continue to
represent the largest portion of Peoples' total loan portfolio, comprising 44.5%
of total loans at September 30, 2002 and December 31, 2001. Future commercial
lending activities will be dependent 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 $361.5 million at
September 30, 2002, up $51.0 million (or 16%) compared to year-end 2001, with
the First Colony acquisition accounting for about $48 million of the growth.
Real estate loans comprised 41.7% of Peoples' total loan portfolio at September
30, 2002, versus 40.2% at the prior year-end. Included in real estate loans are
home equity credit line ("Equiline") balances of $29.1 million at September 30,
2002, up 7% from $27.3 million at December 31, 2001. This increase was
attributable to Peoples acquiring home equity loans of approximately $4 million
in the First Colony acquisition; however, Peoples continues to experience
intense competition for home equity loans, which has affected Peoples' ability
to maintain existing 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 have increased $1.6 million (or
1%) since year-end 2001, totaling $113.5 million at September 30, 2002. Peoples
acquired consumer loans of about $13 million as part of the First Colony
acquisition, which accounted for the increase. This increase more than offset
the decline Peoples has experienced in the balance of the consumer loan
portfolio throughout 2002. The indirect lending area represents the majority of
Peoples' consumer loans, with balances of $59.8 million. Since year-end 2001,
indirect loan balances have declined $6.4 million (or 10%) from $66.2 million
due to automobile manufacturers offering attractive financing options to car
buyers through their captive credit affiliates, declining creditworthy indirect
sales opportunities, and normal runoff of indirect loans.
Management is satisfied 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 delinquencies have 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.
Peoples' credit card balances totaled $6.2 million at September 30, 2002, down
$0.5 million (or 7%) since December 31, 2001. While, management routinely
evaluates new opportunities to serve credit card customers and grow the credit
card balance, Peoples' credit cards are marketed as 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 13.5% of Peoples'
outstanding commercial loans at September 30, 2002, versus 11.9% at year-end
2001. Loans to lodging and lodging related companies also represented a
significant portion of Peoples' commercial loans accounting for approximately
11.6% 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
markets served by Peoples or contiguous areas, as well as sales associates'
efforts to develop these 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 since these credits have been subjected to
Peoples' normal underwriting standards. In addition, a sizeable portion of the
loans to lodging and lodging related companies are spread over various
geographic areas, guaranteed by individuals with substantial net worth and/or
possess lower loan-to-collateral value ratios than other commercial loans.
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 this 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 homogeneous loans.
Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan and loan quality ratings. The
historical experience factors are based upon past 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.
There can be no assurance that the allowance for loan losses will be adequate to
cover all losses, but management believes the allowance for loan losses was
adequate at September 30, 2002. While management uses available information to
provide for loan losses, the ultimate collectibility of a substantial portion of
the loan portfolio and the need for future additions to the allowance will be
based on changes in economic conditions. Along with other financial
institutions, management shares a concern for the outlook of the economy during
the remainder of 2002. A slowdown in economic activity beginning in 2001
severely impacted several major industries, as well as the economy as a whole.
Management believes this slowdown has had minimal impact on Peoples' commercial
loan portfolio thus far, based on recent performance; however, a sustained
economic slowdown could eventually have a more significant negative impact. Even
though there are numerous indications of emerging strength, it is not certain
that this strength is sustainable. In addition, consumer confidence may be
negatively impacted by the recent substantial decline in equity prices. These
events could still adversely affect cash flows for both commercial and
individual borrowers, as a result of which, Peoples could experience increases
in problem assets, delinquencies and losses on loans.
In the third quarter of 2002, Peoples' provision for loan losses was $1,182,000,
up from $675,000 a year ago. On a year-to-date basis, the provision was
$3,023,000 in 2002 compared to $2,025,000 in 2001. The majority of these
increases were due to provisions related to the Overdraft Privilege program,
which totaled $283,000 in the third quarter of 2002 and $673,000 through nine
months of 2002. The remaining increase in the provision was a result of
management's ongoing evaluation of the adequacy for loan losses, loan growth and
other factors affecting probable loan losses. When expressed as a percentage of
average loans, the provision was 0.37% for the nine months ended September 30,
2002, compared to 0.27% in 2001, and net chargeoffs amounted to 0.34% and 0.22%
for the same periods, respectively.
At the end of the third quarter of 2002, Peoples' allowance for loan losses
totaled $12.9 million compared to $12.4 million at December 31, 2001, with $0.3
million of the increase attributable to the First Colony acquisition. As a
percentage of total loans, the allowance was 1.49% at September 30, 2002
compared to 1.60% at December 31, 2001. The decrease in the allowance for loan
losses as a percent of total loans is a result of internal loan growth and
acquiring $66 million of loans in the First Colony acquisition.
The acquired portfolio was primarily residential and consumer loans with a
lower credit risk profile and allowance coverage of 0.46%. The following table
presents changes in Peoples' allowance for loan losses:
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2002 2001 2002 2001
Balance, beginning of period $ 12,423 $ 12,155 $ 12,357 $ 10,930
Chargeoffs (1,223) (642) (3,323) (1,985)
Recoveries 199 97 524 348
- -----------------------------------------------------------------------------------------------------
Net chargeoffs (1,024) (545) (2,799) (1,637)
Provision for loan losses 1,182 675 3,023 2,025
Allowance for loan losses acquired 305 - 305 967
- -----------------------------------------------------------------------------------------------------
Balance, end of period $ 12,886 $ 12,285 $ 12,886 $ 12,285
=====================================================================================================
Net chargeoffs totaled $1,024,000 in the third quarter of 2002 and $2,799,000
through nine months of 2002, compared to $545,000 and $1,637,000 for the same
periods a year ago, respectively. Consumer and commercial loans represented the
majority of Peoples' net chargeoffs and comprise the majority of the increase
compared to last year. In 2002, increased consumer net chargeoffs were
attributable to the Overdraft Privilege program, while commercial net chargeoffs
were largely the result of Peoples charging down of a group of troubled
commercial loans in the first half of 2002, which were part of a single
relationship where the client was in the business of leasing equipment to
professionals, to amounts deemed collectible. Management does not anticipate any
future loss from this relationship. The following table details Peoples' net
chargeoffs:
Three Months Ended Nine months Ended
September 30, September 30,
(dollars in thousands) 2002 2001 2002 2001
Consumer $ 474 $ 319 $ 960 $ 664
Commercial 374 159 1,512 716
Real estate 123 29 198 102
Credit card 53 38 129 155
- ----------------------------------------------------------------------------
Total $ 1,024 $ 545 $ 2,799 $ 1,637
============================================================================
As a percent of average loans 0.12% 0.07% 0.34% 0.22%
- ----------------------------------------------------------------------------
Asset quality remains a key focus, as management continues to stress quality
rather than growth in response to the current economic conditions. Peoples'
nonperforming assets (which include loans 90 days or more past due, nonaccrual
loans, renegotiated loans, and other real estate owned) were virtually unchanged
from the prior quarter-end, totaling $7.7 million but remained above their
year-end 2001 level of $5.7 million. Total loan delinquencies have declined 14%
since year-end 2001, largely attributable to fewer loans that were 30-89 days
past due. The following table details Peoples' nonperforming assets:
(dollars in thousands) September 30, June 30, December 31, September 30,
2002 2002 2001 2001
Loans 90+ days past due and accruing $ 635 $ 227 $ 686 $ 551
Renegotiated loans 2,439 2,864 425 146
Nonaccrual loans 4,455 4,425 4,380 3,794
- ------------------------------------------------------------------------------------------------------
Total nonperforming loans 7,529 7,516 5,491 4,491
Other real estate loans 124 124 181 93
- ------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,653 $ 7,640 $ 5,672 $ 4,584
======================================================================================================
Nonperforming loans as a percent of total loans 0.87% 0.87% 0.71% 0.59%
======================================================================================================
Nonperforming assets as a percent of total assets 0.56% 0.57% 0.48% 0.39%
======================================================================================================
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. Peoples' allowance for
loan losses totaled 171% of nonperforming loans at September 30, 2002, versus
165% at June 30, 2002, and 225% at December 31, 2001. Management believes these
levels reflect the overall risk of Peoples' loan portfolio.
A loan is considered impaired when, based on current information and events, it
is probable that Peoples will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of potential impaired loan losses is generally based
on the present value of expected future cash flows discounted at the loan's
historical effective interest rate, or the fair value of the collateral if the
loan is collateral dependent. If foreclosure is probable, impairment loss is
measured based on the fair value of the collateral.
At September 30, 2002, the recorded investment in loans that were considered to
be impaired was $9.6 million, of which $6.4 million were accruing interest, and
$3.2 million were nonaccrual loans. Included in this amount were $1.9 million of
impaired loans for which the related allowance for loan losses was $537,000. The
remaining impaired loan balances do not have a related allocation of the
allowance for loan losses because the loans have been previously written-down,
are well secured, or possess characteristics indicative of the ability to repay
the loan. For the nine months ended September 30, 2002, the average recorded
investment in impaired loans was approximately $8.5 million and interest income
of $303,000 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 funding needs, including
but not limited to deposits, short-term borrowings, and long-term borrowings.
Deposits, both interest-bearing and non-interest bearing, continue to be the
most significant source of funds for Peoples, totaling $951.7 million, or 78.8%
of total funding sources, at September 30, 2002.
Non-interest bearing deposits serve as a core funding source with total balances
of $109.0 million at September 30, 2002, a $12.5 million (or 13%) increase
compared to the prior year-end. Peoples acquired non-interest bearing deposit
balances totaling $10.3 million through the First Colony acquisition. In
addition, Peoples implemented two programs in the first quarter of 2002 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 and boosting non-interest revenues. 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 $842.7 million at September 30, 2002, an
increase of $124.9 million (or 17%) compared to $717.8 million at December 31,
2001, with $87.7 million attributable to the First Colony acquisition. Savings
balances increased $53.6 million (or 67%) since year-end 2001, primarily the
result of a new savings product for states and political subdivisions introduced
earlier this year, while approximately $16 million is attributable to the First
Colony acquisition. Certificates of deposit remain Peoples' largest group of
interest-bearing deposits, totaling $417.3 million at September 30, 2002, up
$56.6 million (or 16%) since year-end 2001, with the First Colony acquisition
accounting for nearly 90% of the increase. Interest-bearing transaction accounts
(primarily Peoples' money market deposit accounts), are also a significant
portion of Peoples' interest-bearing deposits, totaling $292.2 million at
September 30, 2002, compared to $277.5 million at year-end 2001, up $14.7
million (or 5%). Peoples' money market accounts offer variable, competitive
rates that allow clients flexibility and opportunity to better manage their
investment yields.
Peoples also accesses other funding sources, including short-term and long-term
advances, to fund asset growth and satisfy liquidity needs. Peoples' short-term
borrowings include repurchase agreements, a short-term loan from an unrelated
financial institution and FHLB advances, 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. Recent long-term FHLB advances have been fixed rate,
amortizing advances, which helps to reduce Peoples' liability sensitivity.
During the third quarter of 2002, long-term borrowings increased $13.2 million
(or 7%) from $192.4 million at December, 31 2001, as part of Peoples' current
focus to secure longer-term funding and "lock in" costs during this period of
low interest rates. At September 30, 2002, Peoples' short-term borrowings
totaled $50.4 million, down $5.7 million (or 10%) compared to year-end 2001.
Peoples obtained a $17 million short-term loan from an unrelated financial
institution to provide initial funding for the First Colony acquisition, which
partially offset the reduction in short-term FHLB borrowings. Management is
evaluating various long-term funding alternatives for this acquisition and
anticipates converting the short-term loan to longer term financing early in
2003. Management also continues to evaluate the appropriate overall
capitalization and methodology to fund Peoples' balance sheet long-term.
Capital/Stockholders' Equity
- ----------------------------
At September 30, 2002, stockholders' equity was $111.8 million, an increase of
$17.9 million (or 19%) since December 31, 2001, as increased earnings positively
impacted Peoples' stockholders' equity. Through nine months of 2002, Peoples had
net income of $13.7 million and paid dividends of $3.5 million, a dividend
payout ratio of 25.3% of earnings, compared to a ratio of 34.2% a year ago.
While management anticipates Peoples continuing its 36-year history of
consistent dividend growth in future periods, Peoples Bancorp's ability to pay
dividends on its common shares largely depends on receipt of dividends from
Peoples Bank. The amount of dividends that Peoples Bank may pay is limited by
federal banking laws and regulations. Since Peoples Bancorp is a financial
holding company, Peoples Bank is required to maintain capital sufficient to meet
the "well capitalized" standard set by the regulators and will be able to pay
dividends so long as its capital continues to exceed that level. Peoples Bancorp
and Peoples Bank may limit the amount of any future dividends even when the
legal ability exists to pay them in order to retain earnings for use in their
respective businesses. Additionally, Peoples Bancorp will be prohibited from
paying dividends if it suspends interest payments relating to the trust
preferred securities issued by two of its trust subsidiaries.
The adjustment for the net unrealized holding gains on available-for-sale
securities, net of deferred income taxes, also positively impacted equity. At
September 30, 2002, net unrealized holding gains totaled $7.3 million versus
$0.8 million at December 31, 2001, a change of $6.5 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 than if
the investment portfolio was classified as held-to-maturity.
Peoples had treasury stock totaling $1.2 million at September 30, 2002, compared
to $3.4 million at year-end 2001. During the first nine months of 2002, Peoples
repurchased 9,155 common shares at an average price of $22.65 per share and
reissued approximately 78,500 shares through various stock option plans and
Peoples' deferred compensation plan. In the fourth quarter of 2002, management
does not anticipate any significant purchases under the 2002 Stock Repurchase
Program before its expiration.
Peoples has also complied with the standards of capital adequacy mandated for
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
since 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 September 30,
2002, Peoples' Total Capital, Tier 1 and Leverage ratios were 12.91%, 11.55% and
7.96%, 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 September 30,
2002.
Liquidity and Interest Rate Sensitivity
- ---------------------------------------
The objective of the asset/liability management function is to guide management
in the acquisition of funds, while optimizing net interest income within the
constraints of prudent capital adequacy, liquidity, and safety. To accomplish
this objective, Peoples manages the 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 potential changes and evaluating 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 interest rate risks
and their potential impact to earnings and market value of equity.
The modeling process starts with a base case simulation using 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. Additional simulations, when deemed appropriate, are prepared using
different interest rate scenarios than those used with the base case simulation
and/or possible changes in balance sheet structure. 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 are provided to the ALCO for review and
discussion. The results from these model simulations are reviewed for
indications of effectiveness of current IRR management 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 given an immediate and sustained 200 basis points shift in
interest rates. 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. At September 30, 2002, Peoples' one-year cumulative gap
amount was negative 2.5% of earning assets, which represented $30.5 million more
in liabilities than assets that may reprice during that period. 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 September 30, 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 $ (4,052) (7.9) % $ (59,955) (28.0) %
200 (2,442) (4.8) (36,382) (17.0)
100 (1,039) (2.0) (15,039) (7.0)
(100) $ 293 0.6 % $ 12,348 5.8 %
The interest rate risk analysis shows that Peoples is liability sensitive, which
means that decreasing interest rates should favorably impact Peoples' net
interest income while upward moving interest rates should negatively impact net
interest income. Peoples' liability sensitivity decreased moderately during the
third quarter of 2002 due to an increase in rate sensitive assets attributable
to investment portfolio activity as well as continued efforts on securing
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 will help 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.
Since Peoples remains liability sensitive, the ALCO has implemented a hedging
strategy to protect Peoples' net interest income streams in the event of rising
rates. As part of this strategy, the ALCO hedged a $17 million long-term,
fixed-rate borrowing from the FHLB in early October that may convert to a
variable rate, at the FHLB's discretion. In addition, the ALCO may consider
additional hedging options for Peoples' variable rate liabilities, including,
but not limited to, the purchase of other interest rate hedge positions, as
available and appropriate, that would provide net interest income protection in
a rising rate environment.
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,
both total wholesale funding and reliance on brokered deposits.
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. Through nine months of
2002, cash provided by financing activities totaled $38.3 million, due largely
to increases in deposit balances of $39.4 million. Cash used in investing
activity totaled $50.8 million, due to a net increase in loan balances totaling
$32.4 million and investment securities purchases, net of maturities and sales,
of $33.8 million, which was partially offset by net cash of $17.5 million
received as part of the First Colony acquisition. 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
better enable Peoples to match funding dates and pricing characteristics with
contractual maturity dates and pricing parameters of earning assets. Securities
in the investment portfolio that are available-for-sale can be utilized as an
additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting volatile
liabilities, short-term growth in deposits and brokered funds, from liquid
assets, short-term investments and unpledged available-for-sale securities. At
September 30, 2002, Peoples' net liquidity position was $185.2 million, or 13.6%
of total assets, compared to $177.2 million, or 14.9% of total assets, at
December 31, 2001. This decrease in liquidity position as a percent of total
assets was attributed to a $13.8 million increase in volatile funds and Peoples'
$17 million loan to finance the First Colony acquisition, as well as a modest
increase in non-liquid assets. This increase in volatile funds partially offset
an increase in liquid assets through investment security purchases. The
liquidity position as of September 30, 2002, was within Peoples' policy limit of
negative 10% of total assets. At September 30, 2002, total wholesale funding
comprised 16.5% of total assets and brokered funds were 0.7% of total assets,
within Peoples' policy limits of 30% and 10%, respectively.
Effects of Inflation on Financial Statements
- --------------------------------------------
Substantially all of 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
- --------------
Earnings remained strong in the third quarter of 2002 despite sluggish economic
conditions, as Peoples' associates remain focused on integrated financial
service offerings to clients. Future success in the financial service industry
revolves around three issues: earnings growth and quality, asset quality, and
capital quality. Management believes that Peoples is sound in all of these
areas. Peoples' continued earnings growth has been attributable to sound
asset/liability management and diversified revenue streams. Peoples' asset
quality remains good and capital ratios, bolstered by the solid earnings stream,
continue to be at levels that provide a strong foundation to withstand the
impact of adverse economic conditions while still affording some opportunities
for growth.
E-services remain a focus for Peoples. Any additional investments in e-services
will be designed to make it easier for clients to complete transactions and
conduct business with Peoples. As part of this process, Peoples introduced an
enhanced Internet billpay service to its clients in August, which is being
offered at no cost, at least through the end of 2003 to active users. This
enhanced bill payment service offers innovative technology, including online
bill presentment, or e-bill, as well as improved payment processing. Bills paid
online will be processed by one of the nation's leading providers of bill
payment services. Management believes the combination of electronic billpay and
bill presentment is a tremendous retention and recruiting tool for Peoples Bank
and looks forward to adding many customers to the system. Peoples has
implemented an aggressive marketing campaign to raise awareness of its
electronic banking services.
In addition to Peoples' focus on e-services, one of Peoples' key goals is to be
a complete financial services provider to clients through an integrated,
seamless service process. As a result, management routinely evaluates
investments in processes and technology, such as Customer Relationship
Management ("CRM") information systems and processes, that enhance client
contact management, data mining, profitability information and marketing, as
well as improve the ability of Peoples' associates to perform more efficiently.
Management anticipates Peoples will make investments in and initiate
implementation of new systems, including a CRM system, in early 2003. While such
investments may cause Peoples' operating expenses to increase, specifically data
processing and software expenses, management believes Peoples' continued
investment in technology helps to strengthen client relationships and increase
long-term stakeholder value.
Management's strategies of continued growth and diversification of non-interest
revenues are intended to lessen the impact of changes in interest rates on
Peoples' earnings. Recent acquisitions provide Peoples' sales associates the
ability to enhance revenues further by capitalizing on opportunities to serve
additional clients through a needs-based sales process. Management continues to
focus on integrating investment and insurance products, such as fixed annuities,
and other non-traditional financial products and services, with traditional
banking products to increase Peoples' market penetration.
In the third quarter, Peoples commenced operation of secondary mortgage
originations, an additional benefit derived from the First Colony acquisition
due to their experience in this product offering. Thus far, this new real estate
loan product is offered only by those sales associates most familiar with and
experienced in secondary mortgage market operations, including originating and
selling loans through Fannie Mae and other relationships. While the current
impact to Peoples' operations is minimal, management is excited by the future
opportunities this addition could provide Peoples' sales associates. Management
anticipates the development of its secondary market operation will allow Peoples
to offer more competitive long-term loans at fixed rates, which are currently
appealing to clients, without the corresponding interest rate risk, and provide
a source of non-interest income through servicing of the loans.
Peoples' capital ratios continue to be comfortably above the well-capitalized
regulatory thresholds, which provide downside earnings protection but also
afford 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 services even
while management implements new products and services aimed at attracting new
clients and producing additional revenues in its existing markets. Management
continues to explore 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.
In 2002, Peoples has continued to amortize goodwill from four separate and
distinct banking center acquisitions completed since 1996 in accordance with
FASB Statement No. 72. This goodwill amortization totaled $273,000 per quarter,
or $820,000 through nine months. Based on management's preliminary analysis of
SFAS 147, Peoples should be able to discontinue goodwill amortization on those
banking center acquisitions. Peoples plans to adopt SFAS 147 in the fourth
quarter of 2002, retroactive to January 1, 2002, which would increase after-tax
earnings for the year by as much as $710,000, or $0.09 per share.
Peoples remains a service-oriented company with a sales focus that aims to
satisfy clients through a relationship sales process. Through this process,
sales associates work to anticipate, uncover, and solve their clients' every
financial need, from insurance to banking to investments. Management will
continue to be stakeholder-focused with four key long-term goals: double-digit
EPS growth, ROE improvement, consistent dividend growth, and revenue
diversification.
Forward-Looking Statements
- --------------------------
The statements in this Form 10-Q which are not historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995. Although
management believes that Peoples' plans, intentions and expectations reflected
in or suggested by these forward-looking statements are reasonable, Peoples
cannot give any assurance that those plans, intentions or expectations will be
achieved. The forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, the effect of changes in interest
rates, the effect of federal and state banking and tax regulations, the effect
of technological changes, the effect of economic conditions, the effect of
competitive products and pricing, and other risks detailed in Peoples'
Securities and Exchange Commission filings. All forward-looking statements are
expressly qualified in their entirety by the cautionary statements. Although
management believes that the expectations in these forward-looking statements
are based on reasonable assumptions within the bounds of management's knowledge
of Peoples' business and operations, it is possible that actual results may
differ materially from these projections.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption "Liquidity
and Interest Rate Sensitivity" under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations in this Form 10-Q, and
is incorporated herein by reference.
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended September 30, For the Nine months Ended September 30,
2002 2001 2002 2001
----------------------- ---------------------- ----------------------- ------------------------
(dollars in thousands) Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate Balance Rate
ASSETS
Securities:
Taxable $ 303,706 5.96% $ 276,056 6.62% $ 293,805 6.12% $ 281,969 6.70%
Tax-exempt 66,335 7.18% 38,294 7.14% 61,221 7.04% 37,535 7.19%
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 370,041 6.18% 314,350 6.68% 355,026 6.28% 319,504 6.76%
Loans:
Commercial 399,276 6.91% 332,964 8.17% 380,250 6.92% 330,301 8.50%
Real estate 346,379 7.56% 298,899 8.27% 316,848 7.68% 296,224 8.39%
Consumer 118,269 9.92% 124,551 10.62% 116,198 10.06% 123,432 10.65%
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 863,924 7.58% 756,414 8.61% 813,296 7.66% 749,957 8.81%
Less: Allowance for loan loss (12,800) (12,379) (12,653) (12,078)
----------- --------- ---------- ----------- --------- ----------- ---------
Net loans 851,124 7.66% 744,035 8.76% 800,643 7.80% 737,879 8.96%
Interest-bearing deposits 1,577 1.27% 2,418 3.16% 2,225 1.40% 2,661 4.07%
Federal funds sold 4,772 1.68% 19,197 3.50% 1,625 1.67% 17,306 4.08%
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,227,514 7.18% 1,080,000 8.02% 1,159,519 7.31% 1,077,350 8.23%
Other assets 119,208 95,334 104,528 82,112
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,346,722 $ 1,175,334 $ 1,264,047 $ 1,159,462
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings $ 128,870 1.56% $ 77,796 1.78% $ 107,579 1.49% $ 77,340 1.98%
Interest-bearing demand 287,434 1.66% 277,615 2.92% 279,259 1.63% 273,032 3.53%
deposits
Time 415,473 3.91% 388,642 5.95% 384,463 4.11% 369,529 6.05%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 831,777 2.74% 744,053 4.38% 771,301 2.85% 719,901 4.66%
deposits
Borrowed funds:
Short-term 40,494 1.93% 62,678 3.73% 49,335 1.94% 83,217 4.88%
Long-term 219,845 4.73% 153,188 5.07% 205,198 4.77% 144,497 5.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 260,339 4.26% 215,866 4.68% 254,533 4.23% 227,714 4.99%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 1,092,116 3.10% 959,919 4.45% 1,025,834 3.19% 947,615 4.74%
liabilities
Non-interest bearing deposits 105,604 87,230 99,096 86,418
Other liabilities 41,255 36,211 37,135 36,478
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,238,975 1,083,360 1,162,065 1,070,511
Stockholders' equity 107,747 91,974 101,982 88,951
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders'
equity $ 1,346,722 $ 1,175,334 $ 1,264,047 $ 1,159,462
====================================================================================================================================
Interest income to earning 7.18% 8.02% 7.31% 8.23%
assets
Interest expense to earning 2.76% 3.92% 2.82% 4.18%
assets
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.42% 4.10% 4.49% 4.05%
====================================================================================================================================
Interest income and yields presented on a fully tax-equivalent basis using a 35%
tax rate.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
Within ninety days prior to the filing date of this Quarterly Report on Form
10-Q, Peoples Bancorp, under the supervision and with the participation of its
management, including its Chief Executive Officer and Chief Financial Officer,
performed an evaluation of Peoples' disclosure controls and procedures, in
accordance with Rules 13a-14 and 13a-15 of the Securities Exchange Act of 1934.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that such disclosure controls and procedures are effective to
ensure that material information relating to Peoples Bancorp, including its
consolidated subsidiaries, is made known to them, particularly during the period
for which the periodic reports are being prepared.
Changes in Internal Controls
- ----------------------------
No significant changes were made in Peoples' internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation performed pursuant to Rule 13a-15 of the Securities Act of 1934,
referred to above.
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.
None.
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------- -------------------------------------------------- ----------------
4.1 Indenture, dated as of April 10, 2002, between Filed herewith.
Peoples Bancorp Inc. and Wilmington Trust Company,
as Trustee, relating to Floating Rate Junior
Subordinated Debt Securities.
4.2 Amended and Restated Declaration of Trust of PEBO Filed herewith.
Capital Trust II, dated as of April 10, 2002.
4.3 Guarantee Agreement, dated as of April 10, 2002, Filed herewith.
between Peoples Bancorp Inc. and Wilmington Trust
Company, as Guarantee Trustee, relating to Floating
Rate MMCapSSM Capital Securities.
11 Computation of Earnings Per Share. Filed herewith.
12 Computation of Ratios Filed herewith.
b) Reports on Form 8-K:
Peoples filed the following current reports on Form 8-K during the three
months ended September 30, 2002:
1) Form 8-K dated and filed July 1, 2002 - News release announcing
Peoples Bancorp Inc. was recognized by the Cleveland Plain Dealer
as one of the Top 100 businesses in Ohio.
2) Form 8-K dated and filed July 3, 2002 - News release announcing the
selection of Mark F. Bradley as President and Chief operating
Officer of Peoples Bank, National Association.
3) Form 8-K dated and filed July 12, 2002 - News release announcing
Peoples Bancorp Inc. was added as a member of the Russell 3000(R)
index of US publicly traded companies.
4) Form 8-K dated and filed July 22, 2002 - News release announcing
results of operation for the second quarter of 2002.
5) Form 8-K dated and filed August 8, 2002 - News release announcing
declaration of quarterly dividend.
6) Form 8-K dated and filed September 24, 2002 - News release
announcing Peoples Bancorp Inc. was recognized in the 12th annual
edition of America's Finest Companies(R).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORP INC.
Date: November 7, 2002 By: /S/ROBERT E. EVANS
-------------------------------------
Robert E. Evans
President and Chief Executive Officer
Date: November 7, 2002 By:/S/JOHN W. CONLON
-------------------------------------
John W. Conlon
chief Financial Officer
-----------------------------------------------------------------
CERTIFICATIONS
I, Robert E. Evans, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 7, 2002
/S/ ROBERT E. EVANS
-------------------------------------
Robert E. Evans
President and Chief Executive Officer
I, John W. Conlon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 7, 2002
/S/ JOHN W. CONLON
-------------------------------------
John W. Conlon
Chief Financial Officer
CERTIFICATION PURSUANT TO
TITLE 18, UNITED STATES CODE, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Peoples Bancorp Inc.
("Peoples Bancorp") on Form 10-Q for the quarterly period ended September 30,
2002, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Robert E. Evans, President and Chief Executive Officer of
Peoples Bancorp, and I, John W. Conlon, Chief Financial Officer of Peoples
Bancorp, certify, pursuant to Title 18, United States Code, Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Peoples
Bancorp.
Date: November 7, 2002 /S/ ROBERT E. EVANS
-------------------------------------------
Robert E. Evans
President and Chief Executive Officer
Date: November 7, 2002 /S/ JOHN W. CONLON
-------------------------------------------
John W. Conlon
Chief Financial Officer
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR PERIOD ENDED SEPTEMBER 30, 2002
Exhibit
Number Description Exhibit Location
- ------- -------------------------------------------------- ----------------
4.1 Indenture, dated as of April 10, 2002, between Filed herewith.
Peoples Bancorp Inc. and Wilmington Trust Company,
as Trustee, relating to Floating Rate Junior
Subordinated Debt Securities.
4.2 Amended and Restated Declaration of Trust of PEBO Filed herewith.
Capital Trust II, dated as of April 10, 2002.
4.3 Guarantee Agreement, dated as of April 10, 2002, Filed herewith.
between Peoples Bancorp Inc. and Wilmington Trust
Company, as Guarantee Trustee, relating to Floating
Rate MMCapSSM Capital Securities.
11 Computation of Earnings Per Share. Filed herewith.
12 Computation of Ratios Filed herewith.