FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750-0738
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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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
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 August 3, 2005: 10,424,251 common shares, without par value.
Exhibit Index Appears on Page 36
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2005 2004
Assets
Cash and cash equivalents:
Cash and due from banks $ 33,052 $ 30,670
Interest-bearing deposits in other banks 862 779
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Total cash and cash equivalents 33,914 31,449
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $597,512 at June 30, 2005 and $594,457 at December 31, 2004) 603,731 602,364
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Loans, net of deferred fees and costs 1,034,077 1,023,058
Allowance for loan losses (14,728) (14,760)
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Net loans 1,019,349 1,008,298
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Loans held for sale 1,566 612
Bank premises and equipment, net 21,798 22,640
Business owned life insurance 46,144 45,253
Goodwill 59,748 59,096
Other intangible assets 10,795 12,022
Other assets 31,410 27,352
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Total assets $ 1,828,455 $ 1,809,086
===============================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 153,270 $ 152,979
Interest-bearing 942,152 916,442
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Total deposits 1,095,422 1,069,421
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Short-term borrowings 131,030 51,895
Long-term borrowings 375,074 464,864
Junior subordinated notes held by subsidiary trusts 29,307 29,263
Accrued expenses and other liabilities 18,169 18,225
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Total liabilities 1,649,002 1,633,668
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Stockholders' Equity
Common stock, no par value, 24,000,000 shares authorized, 10,859,881 shares
issued at June 30, 2005 and 10,850,641 shares issued
at December 31, 2004, including shares in treasury 162,343 162,284
Retained earnings 24,454 18,442
Accumulated comprehensive income, net of deferred income taxes 3,848 4,958
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190,645 185,684
Treasury stock, at cost, 448,002 shares at June 30, 2005 and 415,539 shares
at December 31, 2004 (11,192) (10,266)
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Total stockholders' equity 179,453 175,418
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Total liabilities and stockholders' equity $ 1,828,455 $ 1,809,086
===============================================================================================================================
See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) For the Three Months For the Six Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
Interest Income:
Interest and fees on loans $ 16,677 $ 14,603 $ 32,973 $ 29,247
Interest on taxable investment securities 6,011 5,833 11,670 12,004
Interest on tax-exempt investment securities 691 699 1,367 1,410
Other interest income 18 10 30 70
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Total interest income 23,397 21,145 46,040 42,731
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Interest Expense:
Interest on deposits 5,589 4,159 10,694 7,959
Interest on short-term borrowings 726 191 1,272 468
Interest on long-term borrowings 3,552 3,517 7,234 6,895
Interest on junior subordinated notes held by subsidiary 614 581 1,212 1,164
trusts
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Total interest expense 10,481 8,448 20,412 16,486
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Net interest income 12,916 12,697 25,628 26,245
Provision for loan losses 40 616 981 1,410
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Net interest income after provision for loan losses 12,876 12,081 24,647 24,835
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Other Income:
Service charges on deposit accounts 2,472 2,459 4,746 4,712
Investment and insurance commissions 2,266 1,428 4,920 1,727
Income from fiduciary activities 915 812 1,672 1,586
Electronic banking income 734 623 1,381 1,146
Business owned life insurance 437 506 891 922
Mortgage banking income 264 283 381 482
Gain on securities transactions 3 5 236 37
Gain on asset disposals 113 17 121 47
Other 114 134 338 495
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Total other income 7,318 6,267 14,686 11,154
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Other Expenses:
Salaries and employee benefits 6,658 5,819 13,344 11,208
Net occupancy and equipment 1,338 1,289 2,627 2,510
Amortization of other intangible assets 674 526 1,362 927
Data processing and software 463 441 924 913
Professional fees 550 411 1,215 867
Marketing 408 402 789 510
Bankcard costs 305 378 587 702
Franchise tax 418 371 829 712
Other 2,048 1,894 3,932 3,472
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Total other expenses 12,862 11,531 25,609 21,821
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Income before income taxes 7,332 6,817 13,724 14,168
Income taxes 2,033 1,764 3,733 3,749
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Net income $ 5,299 $ 5,053 $ 9,991 $ 10,419
===============================================================================================================================
Earnings per share:
Basic $ 0.51 $ 0.48 $ 0.96 $ 0.98
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Diluted $ 0.50 $ 0.47 $ 0.95 $ 0.97
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Weighted-average number of shares outstanding:
Basic 10,405,989 10,603,510 10,412,552 10,581,879
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Diluted 10,541,774 10,766,289 10,549,868 10,787,867
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Cash dividends declared $ 1,990 $ 1,937 $ 3,979 $ 3,837
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Cash dividends declared per share $ 0.19 $ 0.18 $ 0.38 $ 0.36
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See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, except Per Share Data) Accumulated
Common Stock Retained Comprehensive Treasury
Shares Amount Earnings Income Stock Total
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Balance, December 31, 2004 10,850,641 $ 162,284 $ 18,442 $ 4,958 $ (10,266) $ 175,418
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Net income 9,991 9,991
Other comprehensive loss, net of tax (1,110) (1,110)
Cash dividends declared of $0.38 per share (3,979) (3,979)
Purchase of treasury stock, 62,528 shares (1,674) (1,674)
Exercise of common stock options (reissued
25,403 treasury shares) (307) 632 325
Tax benefit from exercise of stock options 114 114
Issuance of common stock under dividend
reinvestment plan 9,240 249 249
Issuance of common stock related to acquisition
of Putnam Agency, Inc. (reissued 4,662
treasury shares) 3 116 119
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Balance, June 30, 2005 10,859,881 $ 162,343 $ 24,454 $ 3,848 $ (11,192) $ 179,453
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands) For the Three Months For the Six Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
Net income $ 5,299 $ 5,053 $ 9,991 $ 10,419
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities arising in the 4,816 (15,960) (1,450) (8,739)
period
Less: reclassification adjustment for net securities gains included in 3 5 236 37
net income
Unrealized (loss) gain on cash flow hedge derivatives arising in the (22) 17 (22) 21
period
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Total other comprehensive income (loss) 4,791 (15,948) (1,708) (8,755)
Income tax (expense) benefit (1,677) 5,582 598 3,064
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Total other comprehensive income (loss), net of tax 3,114 (10,366) (1,110) (5,691)
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Total comprehensive income (loss) $ 8,413 $ (5,313) $ 8,881 $ 4,728
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See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) For the Six Months
Ended June 30,
2005 2004
Net cash provided by operating activities $ 24,955 $ 18,142
Cash flows from investing activities:
Purchases of available-for-sale securities (59,112) (87,978)
Proceeds from sales of available-for-sale securities 596 2,065
Proceeds from maturities of available-for-sale securities 55,110 78,109
Net increase in loans (23,650) (22,099)
Net expenditures for premises and equipment (2,925) (1,797)
Net proceeds from sales of other real estate owned 973 11
Business acquisitions, net of cash received (668) (6,948)
Investment in business owned life insurance - (20,000)
Investment in limited partnership and tax credit funds (3,518) (2,672)
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Net cash used in investing activities (33,194) (61,309)
Cash flows from financing activities:
Net increase in non-interest-bearing deposits 291 3,626
Net increase (decrease) in interest-bearing deposits 26,045 (18,372)
Net increase in short-term borrowings 79,135 5,185
Proceeds from long-term borrowings - 52,500
Payments on long-term borrowings (89,789) (7,021)
Cash dividends paid (3,629) (3,563)
Purchase of treasury stock (1,674) (7,857)
Proceeds from issuance of common stock 325 562
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Net cash provided by financing activities 10,704 25,060
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Net increase (decrease) in cash and cash equivalents 2,465 (18,107)
Cash and cash equivalents at beginning of period 31,449 73,426
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Cash and cash equivalents at end of period $ 33,914 $ 55,319
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Supplemental cash flow information:
Interest paid $ 20,924 $ 16,325
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Income taxes paid $ 1,392 $ -
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See notes to the consolidated unaudited financial statements
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation:
---------------------
The accounting and reporting policies of Peoples Bancorp Inc. ("Peoples
Bancorp") and Subsidiaries (collectively, "Peoples") conform to accounting
principles generally accepted in the United States ("US GAAP") and to
general practices within the financial services industry. Peoples considers
all of its principal activities to be financial services related. The
accompanying unaudited consolidated financial statements of Peoples reflect
all adjustments (which include normal recurring adjustments) necessary to
present fairly such information for the periods and dates indicated. The
preparation of the financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. To conform to
the 2005 presentation, certain reclassifications have been made to prior
period amounts, which had no impact on net income or stockholders' equity.
Results of operations for the six months ended June 30, 2005, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
Certain information and footnotes typically included in financial statements
prepared in conformity with US GAAP have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission
("SEC"). The balance sheet at December 31, 2004, contained herein has been
derived from the audited balance sheet included in Peoples Bancorp's Annual
Report on Form 10-K for the fiscal year ended December 31, 2004 ("2004 Form
10-K"). These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the 2004 Form 10-K.
The consolidated financial statements include the accounts of Peoples
Bancorp and its consolidated subsidiaries, Peoples Bank, National
Association ("Peoples Bank") and Peoples Investment Company, along with
their wholly-owned subsidiaries. Peoples Bancorp has two statutory business
trusts that are variable interest entities for which Peoples Bancorp is not
the primary beneficiary. As a result, the accounts of these trusts are not
included in Peoples' consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated.
2. New Accounting Pronouncements:
-----------------------------
On June 1, 2005, the Financial Accounting Standards Board ("FASB ") issued
Statement No. 154, "Accounting Changes and Error Corrections" ("SFAS 154").
SFAS 154 replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements", and changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS 154 applies to all
voluntary changes in accounting principle, as well as changes required by an
accounting pronouncement in the unusual instance that the pronouncement does
not include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed. SFAS
154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors made occurring in
fiscal years beginning after June 1, 2005. The adoption of this standard is
not expected to have a material impact on financial condition, results of
operations or liquidity.
On December 16, 2004, the FASB issued a revision of Statement No. 123,
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires the compensation
cost relating to share-based payment transactions to be recognized in
financial statements based on the fair value of the equity or liability
instruments issued. SFAS 123(R) replaces SFAS 123 and supercedes APB Opinion
25. SFAS 123 (R) was originally effective for public companies that do not
file as small business issuers as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. On April 15, 2005,
the SEC adopted a new rule that amends the compliance date for SFAS 123 (R)
to allow public companies that do not file as small business issuers to
implement SFAS 123 (R) at the beginning of their next fiscal year that
begins after June 15, 2005. For Peoples, SFAS 123(R) now becomes effective
for the fiscal year beginning January 1, 2006. Upon adoption, management
expects Peoples to recognize compensation expense similar to the pro forma
amounts disclosed in Note 3.
In March 2004, the FASB Emerging Issues Task Force ("EITF") released Issue
03-01, "Meaning of Other-Than-Temporary Impairment" ("Issue 03-01"), which
addressed other-than-temporary impairment for certain debt and equity
investments. The recognition and measurement requirements of Issue 03-01,
and other disclosure requirements not already implemented, were effective
for periods beginning after June 15, 2004. In September 2004, the FASB staff
issued FASB Staff Position ("FSP") EITF 03-1-1, which delayed the effective
date for certain measurement and recognition guidance contained in Issue
03-01. The FSP requires the application of pre-existing other-than-temporary
guidance during the period of delay until a final consensus is reached. On
June 29, 2005, the FASB staff issued FSP FAS 115-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments",
which replaces the guidance on the meaning of other-than-temporary
impairment in Issue 03-01 with reference to existing guidance. Under FSP FAS
115-1, an impairment loss should be recognized no later than when the
impairment is deemed other-than-temporary, even if a decision to sell has
not been made. FSP FAS 115-1 is effective for other-than-temporary
impairment analysis conducted for periods beginning after September 15,
2005. Management does not anticipate the adoption of FSP FAS 115-1 will have
a material impact on financial condition, the results of operations or
liquidity.
3. Stock-Based Compensation:
------------------------
Peoples accounts for stock-based compensation using the intrinsic value
method. Under the provisions of Peoples Bancorp's stock option plans, the
option price per share granted cannot be less than the fair market value of
the underlying common shares on the date of grant. As a result, Peoples does
not recognize any stock-based employee compensation expense in net income.
The following table illustrates the effect on net income and earnings per
share had Peoples applied fair value recognition to stock-based employee
compensation, assuming the estimated fair value of the options as of the
grant date is amortized to expense over the vesting period:
(Dollars in Thousands, except Per Share Data) Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Net Income, as reported $ 5,299 $ 5,053 $ 9,991 $ 10,419
Deduct: stock-based compensation expense determined
under fair value based method, net of tax 114 116 259 250
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Pro forma net income $ 5,185 $ 4,937 $ 9,732 $ 10,169
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Basic Earnings Per Share:
As reported $ 0.51 $ 0.48 $ 0.96 $ 0.98
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Pro forma $ 0.50 $ 0.47 $ 0.93 $ 0.96
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Diluted Earnings Per Share:
As reported $ 0.50 $ 0.47 $ 0.95 $ 0.97
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Pro forma $ 0.49 $ 0.46 $ 0.92 $ 0.94
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The fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
2005 2004
Risk-free interest rate 3.91% 4.39%
Dividend yield 2.50% 2.83%
Volatility factor of the market price of parent stock 27.0% 29.5%
Weighted-average expected life of options 7.4 years 7.0 years
4. Employee Benefit Plans:
----------------------
Components of Net Periodic Benefit Costs
Peoples Bancorp sponsors a noncontributory defined benefit pension plan and
a contributory postretirement benefit plan. The following table details the
components of the net periodic benefit cost for both plans:
PENSION BENEFITS:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(Dollars in Thousands) 2005 2004 2005 2004
Service cost $ 223 $ 239 $ 455 $ 451
Interest cost 201 201 408 386
Expected return on plan assets (312) (259) (591) (486)
Amortization of transition asset - - - -
Amortization of prior service cost - 1 1 2
Amortization of net loss 55 60 117 104
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Net periodic benefit cost $ 167 $ 242 $ 390 $ 457
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POSTRETIREMENT BENEFITS:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(Dollars in Thousands) 2005 2004 2005 2004
Service cost $ - $ - $ - $ -
Interest cost 7 9 16 18
Expected return on plan assets - - - -
Amortization of transition asset - - - -
Amortization of prior service cost 2 3 5 6
Amortization of net (gain) loss (2) - 1 -
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Net periodic benefit cost $ 7 $ 12 $ 22 $ 24
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EMPLOYER CONTRIBUTIONS:
Through June 30, 2005, Peoples made contributions totaling $1.5 million to
its defined benefit pension plan for the current year, as recommended by the
Retirement Plan Committee and authorized by the Board of Directors of
Peoples Bancorp.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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:
At or For the Three At or For the Six
Months Ended June 30, Months Ended June 30,
SIGNIFICANT RATIOS 2005 2004 2005 2004
Return on average equity 12.04 % 11.83 % 11.45 % 12.17 %
Return on average assets 1.17 % 1.17 % 1.11 % 1.21 %
Net interest margin (a) 3.32 % 3.39 % 3.29 % 3.48 %
Non-interest income leverage ratio (b) 59.09 % 56.75 % 59.10 % 51.98 %
Efficiency ratio (c) 59.40 % 56.87 % 59.50 % 55.09 %
Average stockholders' equity to average assets 9.75 % 9.92 % 9.72 % 9.95 %
Average loans to average deposits 92.71 % 89.39 % 93.52 % 88.97 %
Cash dividends to net income 37.55 % 38.33 % 39.83 % 36.83 %
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ASSET QUALITY RATIOS (end of period)
Nonperforming loans as a percent of total loans (d) 0.74 % 0.62 % 0.74 % 0.62 %
Nonperforming assets as a percent of total assets (e) 0.44 % 0.35 % 0.44 % 0.35 %
Allowance for loan losses to total loans 1.42 % 1.57 % 1.42 % 1.57 %
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CAPITAL RATIOS (end of period)
Tier I capital ratio 11.21 % 12.27 % 11.21 % 12.27 %
Risk-based capital ratio 12.57 % 13.58 % 12.57 % 13.58 %
Leverage ratio 7.78 % 8.17 % 7.78 % 8.17 %
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PER SHARE DATA
Earnings per share - basic $ 0.51 $ 0.48 $ 0.96 $ 0.98
Earnings per share - diluted 0.50 0.47 0.95 0.97
Cash dividends declared per share 0.19 0.18 0.38 0.36
Book value per share (end of period) 17.24 16.01 17.24 16.01
Tangible book value per share (end of period) (f) $ 10.46 $ 9.86 $ 10.46 $ 9.86
Weighted average shares outstanding - Basic 10,405,989 10,603,510 10,412,552 10,581,879
Weighted average shares outstanding - Diluted 10,541,774 10,766,289 10,549,868 10,787,867
Common shares outstanding at end of period 10,411,879 10,602,767 10,411,879 10,602,767
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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 and/or
losses) 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) Nonperforming loans include loans 90 days past due and accruing,
renegotiated loans and nonaccrual loans. (e) Nonperforming assets include
nonperforming loans and other real estate owned. (f) Tangible book value
per share reflects capital calculated for banking regulatory requirements
and excludes balance sheet impact of intangible assets acquired through
acquisitions accounted for using the purchase method of accounting.
</FN>
INTRODUCTION
The following discussion and analysis of the unaudited consolidated financial
statements of Peoples is presented to provide insight into management's
assessment of the financial condition and results of operations. Peoples
Bancorp's primary subsidiaries are Peoples Bank, National Association ("Peoples
Bank"), Peoples Investment Company, PEBO Capital Trust I and PEBO Capital Trust
II. Peoples Bank also operates Peoples Insurance Agency, Inc. ("Peoples
Insurance"), PBNA L.L.C. and Peoples Loan Services, Inc. Peoples Investment
Company also owns Peoples Capital Corporation.
Peoples Bancorp is a financial holding company subject to the reporting
requirements of, and examination and regulation by, the Federal Reserve Board.
As a financial holding company, the activities of Peoples Bancorp and its
subsidiaries are limited to those deemed financial in nature by the Federal
Reserve Board and complementary to financial activities, including securities
and insurance activities, sponsoring mutual funds and investment companies, and
merchant banking. In addition, the Federal Reserve Board has adopted risk-based
capital guidelines for financial holding companies and their banking
subsidiaries. Failure to maintain the "well-capitalized" standard or the other
criteria for a financial holding company or its banking subsidiaries may result
in requirements to correct the deficiency or limit activities to those generally
allowed bank holding companies.
Peoples Bank is a member of the Federal Reserve System and subject to
regulation, supervision and examination by the Office of the Comptroller of the
Currency. Peoples Bank offers financial products and services through 50
financial service locations and 34 ATMs in Ohio, West Virginia and Kentucky.
Peoples Bank's Internet-banking service, Peoples OnLine Connection, can be found
on the Internet at www.peoplesbancorp.com (this uniform resource locator (URL)
is an inactive, textual reference only). Peoples Bank provides an array of
financial products and services to customers that include traditional banking
products such as deposit accounts, lending products, credit and debit cards,
corporate and personal trust services, and safe deposit rental facilities.
Peoples provides services through traditional walk-in offices and automobile
drive-in facilities, automated teller machines, banking by phone, and the
Internet.
Peoples Bank also makes available other financial services through Peoples
Financial Advisors, which provides customer-tailored services 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 at Peoples Bank offices. Peoples Bank also offers a full
range of life, health, property and casualty insurance products to customers in
Peoples' markets through Peoples Insurance Agency, Inc.
Peoples Investment Company and Peoples Capital Corporation were formed in 2001
to better deploy investable funds and provide new investment opportunities,
including, but not limited to, low-income housing tax credit funds, that are
either limited or restricted at the bank level.
This discussion and analysis should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2004, and
notes thereto, as well as the ratios, statistics and discussions contained
elsewhere in this Form 10-Q.
References will be found in this Form 10-Q to the following significant events
that have impacted or are expected to impact Peoples' results of operations:
o Peoples completed the acquisition of certain assets of, and assumed
certain liabilities from, Putnam Agency, Inc. ("Putnam") on April 30,
2004, and the acquisition of Barengo Insurance Agency, Inc. ("Barengo")
through a merger effective on May 28, 2004, (collectively, the
"Insurance Agency Acquisitions"). In addition, Peoples Bank acquired
two full-service banking offices in the Ashland, Kentucky area at the
close of business on December 3, 2004 (the "Ashland Banking
Acquisition"). In conjunction with the Ashland Banking Acquisition,
Peoples Bank consolidated two of its then existing offices in the
Ashland area market into other Peoples Bank offices and closed one of
the acquired offices.
o On December 10, 2004, Peoples Bancorp announced the authorization to
repurchase up to 525,000, or approximately 5%, of Peoples Bancorp's
outstanding common shares in 2005 from time to time in open market or
privately negotiated transactions (the "2005 Stock Repurchase
Program"). Any repurchased common shares will be held as treasury
shares and are anticipated to be used for future exercises of options
granted under Peoples Bancorp's stock option plans, future issuances of
common shares in connection with Peoples Bancorp's deferred
compensation plans, and other general corporate purposes. Through June
30, 2005, Peoples Bancorp had repurchased a total of 59,700 common
shares (or 11% of the total authorized) under the 2005 Stock Repurchase
Program, at an average price of $26.78 per share.
The following is a summary of significant events during the second quarter of
2005 that resulted in changes to the management of Peoples:
On May 31, 2005, Robert E. Evans retired and resigned from his position
as Chief Executive Officer, and as an employee, of each of Peoples
Bancorp and Peoples Bank. Mr. Evans continued to serve as Chairman of
the Board and a non-employee director of each Peoples Bancorp and
Peoples Bank. Also on May 31, 2005, the Board of Directors of Peoples
Bancorp ("Peoples Bancorp Board"), upon the recommendation of the
Compensation Committee, approved the payment of a monthly fee of
$8,333.33 to Mr. Evans in his capacities as Chairman of the Board of
Peoples Bancorp and of Peoples Bank, effective June 1, 2005. As part of
the succession plan announced in February 2005, Mark F. Bradley was
named President and Chief Executive Officer of both Peoples Bancorp and
Peoples Bank effective May 31, 2005.
On June 9, 2005, the Peoples Bancorp Board, upon the recommendation of
the Compensation Committee, approved a Director Retirement Plan for the
benefit of Mr. Evans in recognition of his 35 years of service with the
organization and his direct responsibility for its substantial success
and growth. The Director Retirement Plan was intended to provide Mr.
Evans with a monthly benefit for life, commencing July 1, 2005, and a
reduced monthly benefit for Mr. Evans' spouse for her life, as
beneficiary. Additionally, Joseph H. Wesel was elected Chairman of the
Board, pro tem. and Paul T. Theisen was elected Vice Chairman of the
Board.
On June 15, 2005, Mr. Evans passed away after a year-long illness. On
June 16, 2005, the Peoples Bancorp Board reconfirmed and ratified the
election of Mr. Wesel as Chairman of the Board.
The impact of these events, where significant, is discussed in the applicable
sections of this management's discussion and analysis.
CRITICAL ACCOUNTING POLICIES
============================
The accounting and reporting policies of Peoples conform to generally accepted
accounting principles in the United States ("US GAAP") and to general practices
within the financial services industry. The preparation of the financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could materially differ from those estimates.
Management has identified the accounting policies described below as those that,
due to the judgments, estimates and assumptions inherent in those policies, are
critical to an understanding of Peoples' consolidated financial statements and
management's discussion and analysis.
Income Recognition
- ------------------
Interest income on loans and investment securities is recognized by methods that
result in level rates of return on principal amounts outstanding, including
yield adjustments resulting from the amortization of loan costs and premiums on
investment securities and accretion of loan fees and discounts on investment
securities. Since mortgage-backed securities comprise a sizable portion of
Peoples' investment portfolio, a significant increase in principal payments on
those securities could negatively impact interest income due to the
corresponding acceleration of premium amortization.
In the event management believes collection of all or a portion of contractual
interest on a loan has become doubtful, which generally occurs after the loan is
90 days past due, Peoples discontinues the accrual of interest. In addition,
previously accrued interest deemed uncollectible that was recognized in income
in the current year is reversed, while amounts recognized in income in the prior
year are charged against the allowance for loan losses. Interest received on
nonaccrual loans is included in income only if principal recovery is reasonably
assured. A nonaccrual loan is restored to accrual status after appropriate
review by lending and/or loan review personnel indicates the collectibility of
the total contractual principal and interest is no longer considered doubtful.
Allowance for Loan Losses
- -------------------------
In general, determining the amount of the allowance for loan losses requires
significant judgment and the use of estimates by management. Peoples maintains
an allowance for loan losses to absorb probable losses based on a quarterly
analysis of the portfolio. This formal analysis determines an appropriate level
and allocation of the allowance for loan losses among loan types and resulting
provision for loan losses by considering factors affecting losses, including
specific losses, levels and trends in impaired and nonperforming loans,
historical loan loss experience, current national and local economic conditions,
volume, growth and composition of the portfolio, regulatory guidance and other
relevant factors. Management continually monitors the loan portfolio through its
Loan Review Department and Loan Loss Committee to evaluate the adequacy of the
allowance. The provision could increase or decrease each quarter based upon the
results of management's formal analysis.
The amount of the allowance for loan losses for the various loan types
represents management's estimate of expected losses from existing loans based
upon specific allocations for individual lending relationships and historical
loss experience for each category of homogeneous loans. The allowance for loan
losses related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans. This evaluation requires management to make
estimates of the amounts and timing of future cash flows on impaired loans,
which consists primarily of nonaccrual and restructured loans. While allocations
are made to specific loans and pools of loans, the allowance is available for
all loan losses.
Individual loan reviews are based upon specific quantitative and qualitative
criteria, including the size of the loan, loan quality ratings, value of
collateral, repayment ability of borrowers, and historical experience factors.
The historical experience factors utilized for individual loan reviews are based
upon past loss experience, known trends in losses and delinquencies, the growth
of loans in particular markets and industries, and known changes in economic
conditions in particular lending markets. Allowances for homogeneous loans (such
as residential mortgage loans, personal loans, etc.) are evaluated based upon
historical loss experience, trends in losses and delinquencies, growth of loans
in particular markets, and known changes in economic conditions in each lending
market. Consistent with the evaluation of allowances for homogenous loans,
allowances relating to the Overdraft Privilege program are based upon
management's monthly analysis of accounts in the program. This analysis
considers factors that could affect losses on existing accounts, including
historical loss experience and length of overdraft.
There can be no assurance the allowance for loan losses will be adequate to
cover all losses, but management believes the allowance for loan losses of $14.7
million at June 30, 2005, is adequate to provide for probable losses from
existing loans based on information currently available. 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 and other
relevant factors. As such, adverse changes in economic activity could reduce
cash flows for both commercial and individual borrowers, which would likely
cause Peoples to experience increases in problem assets, delinquencies and
losses on loans.
Investment Securities
- ---------------------
Investment securities are initially recorded at cost, which includes premiums
and discounts if purchased at other than par or face value. Peoples amortizes
premiums and accretes discounts as an adjustment to interest income over the
estimated life of the security. The cost of investment securities sold, and any
resulting gain or loss, is based on the specific identification method.
Management determines the appropriate classification of investment securities at
the time of purchase. Held-to-maturity securities are those securities that
Peoples has the positive intent and ability to hold to maturity and are reported
at amortized cost. Available-for-sale securities are those securities that would
be available to be sold in the future in response to Peoples' liquidity needs,
changes in market interest rates, and asset-liability management strategies,
among other considerations. Available-for-sale securities are reported at
estimated fair value, with unrealized holding gains and losses reported in
stockholders' equity as a separate component of other comprehensive income, net
of applicable deferred income taxes. Trading securities are those securities
bought and held principally for the purpose of selling in the near term. Trading
securities are reported at fair value, with holding gains and losses recognized
in earnings.
Presently, Peoples classifies its entire investment portfolio as
available-for-sale. As a result, both the investment and equity sections of
Peoples' balance sheet are more sensitive to changes in the overall market value
of the investment portfolio, due to changes in market interest rates, investor
confidence and other factors affecting market values, than if the investment
portfolio was classified as held-to-maturity.
While temporary changes in the market value of available-for-sale securities are
not recognized in earnings, a decline in fair value below amortized cost deemed
to be "other-than-temporary" results in an adjustment to the cost basis of the
investment, with a corresponding loss charged against earnings. Management
systematically evaluates Peoples' investment securities for other-than-temporary
declines in estimated fair value on a quarterly basis. This analysis requires
management to consider various factors in order to determine if a decline in
estimated fair value is temporary or other-than-temporary. These factors include
duration and magnitude of the decline in value, the financial condition of the
issuer, and Peoples' ability and intent to continue holding the investment for a
period of time sufficient to allow for any anticipated recovery in market value.
At June 30, 2005, there were no investment securities identified by management
to be other-than-temporarily impaired. If investments decline in fair value due
to adverse changes in the financial markets, charges to income could occur in
future periods.
Goodwill and Other Intangible Assets
- ------------------------------------
Over the past several years, Peoples has grown through mergers and acquisitions
accounted for under the purchase method of accounting. Under the purchase
method, Peoples is required to allocate the cost of an acquired company to the
assets acquired, including identified intangible assets, and liabilities assumed
based on their estimated fair values at the date of acquisition. At June 30,
2005, Peoples had $10.0 million of identifiable intangible assets acquired in
acquisitions, subject to amortization, and $59.7 million of goodwill, not
subject to periodic amortization.
The determination of fair value and subsequent allocation of the cost of an
acquired company generally requires management to make estimates based on third
party valuations, such as appraisals, or internal valuations based on discounted
cash flow analyses or other valuation techniques. In addition, the valuation and
amortization of intangible assets representing the present value of future net
income to be earned from customers (commonly referred to as "customer
relationship intangibles" or "core deposit intangibles") requires significant
judgment and the use of estimates by management. While management feels the
assumptions and variables used to value recent acquisitions are reasonable, the
use of different, but still reasonable, assumptions could produce materially
different results.
Customer relationship intangibles are required to be amortized over their
estimated useful lives. The method of amortization should reflect the pattern in
which the economic benefits of the intangible assets are consumed or otherwise
used up. Since Peoples' acquired customer relationships are subject to routine
customer attrition, the relationships are more likely to produce greater
benefits in the near-term than in the long-term, which typically supports the
use of an accelerated method of amortization for the related intangible assets.
Management is required to evaluate the useful life of customer relationship
intangibles to determine if events or circumstances warrant a change in the
estimated life. Should management determine in future periods the estimated life
of any intangible asset is shorter than originally estimated, Peoples would
shorten the amortization period of that asset, which could increase future
amortization expense.
Goodwill arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Goodwill recorded
by Peoples in connection with its acquisitions relates to the inherent value in
the businesses acquired and this value is dependent upon Peoples' ability to
provide quality, cost effective services in a competitive market place. As such,
goodwill value is supported ultimately by revenue that is driven by the volume
of business transacted. A decline in earnings as a result of a lack of growth or
the inability to deliver cost effective services over sustained periods can lead
to impairment of goodwill that could adversely impact earnings in future
periods.
Peoples has reviewed its recorded goodwill and concluded that no impairment
existed as of June 30, 2005. However, future events could cause management to
conclude that impairment indicators exist and re-evaluate goodwill. If such
re-evaluation indicates impairment, Peoples would recognize the loss, if any.
Any resulting impairment loss could have a material, adverse impact on Peoples'
financial condition and results of operations.
RESULTS OF OPERATIONS
OVERVIEW OF THE INCOME STATEMENT
================================
Net income was $5,299,000 for the quarter ended June 30, 2005, up 5% compared to
$5,053,000 earned in the second quarter a year ago. Diluted earnings per share
were $0.50, up 6% from $0.47 in 2004's second quarter. Peoples' improved second
quarter earnings are primarily attributable to increased net interest income and
non-interest income of $219,000 and $1,051,000, respectively, and a $576,000
reduction in provision for loan losses when compared to the three months ended
June 30, 2004.
For the six months ended June 30, 2005, net income totaled $9,991,000, or $0.95
per diluted share, versus $10,419,000, or $0.97 per diluted share, for the same
period in 2004. The combination of lower net interest income of $617,000 and
$3,788,000 additional non-interest expense offset increases in net revenues
generated by acquisitions completed during 2004.
Net interest income totaled $12,916,000 in the second quarter of 2005, up 2%
from $12,697,000 a year ago, largely attributable to an increase in earning
assets that exceeded the increase in interest-bearing liabilities. Net interest
margin was 3.32% for the three months ended June 30, 2005, down from 3.39% the
same period in 2004. This compression is the result of increases in short-term
interest rates without comparable increases in long-term rates. Compared to the
first quarter of 2005, both net interest income and margin improved in the
second quarter, primarily the result of improved asset yields and changes in the
mix of funding sources due to an increase in both lower-cost and
non-interest-bearing deposits. Through six months in 2005, net interest income
was $25,628,000 and net interest margin was 3.29%, compared to $26,245,000 and
3.48%, respectively, for the first six months of 2004.
Other income was $7,318,000 for the second quarter of 2005, up 17% from
$6,267,000 for the same period a year ago. On a year-to-date basis through June
30, 2005, other income was $14,686,000 versus $11,154,000 in 2004, a 32%
increase. Revenues attributable to the Insurance Agency Acquisitions accounted
for nearly all of these increases. In the second quarter of 2005, other expense
was $12,862,000 versus $11,531,000 in 2004's second quarter. Operating costs
attributable to the Insurance Agency Acquisitions comprised 73% of this
increase. Higher salaries and benefits and professional fees also contributed to
the increase. Second quarter 2005 non-interest expense was up only 1% compared
to the first quarter of 2005. For the six months ended June 30, 2005, other
expense totaled $25,609,000 compared to $21,821,000 a year ago, with the
Insurance Agency Acquisitions the primary reason for the increase.
INTEREST INCOME AND EXPENSE
===========================
Peoples earns interest income from loans, investment securities and short-term
investments 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 that are within its
control, as well as the expected rates to be earned or paid on those 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 negate
any adjustments management is able to make. Consequently, a volatile rate
environment or extended periods of unusually low or high interest rates can make
it extremely difficult to manage net interest margin and income in the
short-term, much less be effective at anticipating and repositioning the balance
sheet for future changes.
For the quarter ended June 30, 2005, net interest income totaled $12,916,000, up
2% from $12,697,000 a year ago. This improvement was largely attributable to
increased interest income from additional earning assets that exceeded the
interest expense from increases in average interest-bearing liabilities. The
increase in earning assets was driven by a $104 million increase in average
loans over the same quarter last year. Compared to the first quarter of 2005,
net interest income was up 2%, primarily the result of improved asset yields.
However, net interest income was down 2% to $25,628,000 through six months of
2005, compared to $26,245,000 for the same period in 2004, due to increased
interest expense that was greater than the corresponding increase in interest
income.
Peoples derives a portion of its interest income from loans to and investments
issued by states and political subdivisions. Since these revenues generally are
not subject to income taxes, 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 an effective tax rate of 35%. Net interest
margin, calculated by dividing FTE net interest income by average
interest-earning assets, serves as an important measurement of the net revenue
stream generated by the mix and pricing of Peoples' earning assets and
interest-bearing liabilities. The following table details the calculation of FTE
net interest income and margin:
For the Three Months Ended For the Six Months Ended
June 30, March 31, June 30, June 30,
(Dollars in Thousands) 2005 2005 2004 2005 2004
Net interest income, as reported $ 12,916 $ 12,712 $ 12,697 $ 25,628 $ 26,245
Taxable equivalent adjustments 401 394 409 796 824
- --------------------------------------------------------------------------------------------------------------------------
Fully-tax equivalent net interest income $ 13,317 13,106 $ 13,106 $ 26,424 $ 27,069
==========================================================================================================================
Average earning assets $ 1,610,024 $ 1,611,019 $ 1,550,370 $ 1,610,513 $ 1,562,748
==========================================================================================================================
Net interest margin 3.32% 3.27% 3.39% 3.29% 3.48%
==========================================================================================================================
Short-term interest rates continue to increase without comparable increases in
longer-term rates. This flattening of the yield curve, coupled with intense
competition for loans and deposits, has compressed net interest margin for many
financial institutions, including Peoples, due to the cost of funds rising at a
faster pace than the yield on earnings assets. These factors resulted in lower
net interest margin versus the same periods in 2004. However, Peoples' net
interest margin improved 5 basis points in the second quarter of 2005 compared
to the first quarter of 2005, largely attributable to the combination of
improved asset yields and an increase in both lower-cost and
non-interest-bearing deposits. In the second quarter of 2005, the FTE yield on
earning assets was 5.92%, compared to 5.76% in the prior quarter and 5.57% in
2004's second quarter, while Peoples' cost of funds was 2.87%, 2.75% and 2.40%
for the same periods, respectively.
Net loans comprise the largest portion of Peoples' earning assets, averaging
$1.01 billion in the first and second quarters of 2005, compared to $905.7
million in the second quarter of 2004. In the first half of 2005, net loans
averaged $1.01 billion, up from $901.5 million through six months of 2004. The
higher volume of loans in 2005 is largely the result of internal loan
originations, primarily commercial loans, and loans acquired in the Ashland
Banking Acquisition. For the three months ended June 30, 2005, the FTE yield on
net loans was 6.63%, versus 6.53% and 6.48% for the first quarter of 2005 and
second quarter of 2004, respectively. On a year-to-date basis, net loan yields
improved to 6.58% in 2005 from 6.53% in 2004. The Federal Reserve's action to
increase interest rates has allowed loan yields to stabilize, although
competition for commercial loans and prepayments of higher rate loans, primarily
commercial loans, have tempered the improvement in loan yields due to these rate
pressures.
Investment securities averaged $597.6 million in the second quarter of 2005,
down from $599.5 million last quarter and $639.7 million a year ago, with FTE
yields of 4.73%, 4.47% and 4.32%, respectively. For the six months ended June
30, 2005, average investment securities were $598.5 million, with a FTE yield of
4.60% versus $645.2 million and 4.39% for the same period in 2004. The decrease
in average balances from a year ago is largely attributable to management using
a portion of the principal runoff to manage liquidity, fund loan growth and for
other corporate purposes. Management anticipates maintaining, or slightly
growing, the investment portfolio in the second half of 2005, depending on loan
growth and other corporate liquidity needs.
Peoples' interest-bearing liabilities averaged $1.46 billion in the first and
second quarters of 2005 compared to $1.41 billion for the second quarter of
2004. Traditional deposits comprise the majority of Peoples' interest-bearing
liabilities, averaging $946.6 million for the quarter ended June 30, 2005,
compared to $929.7 million in the first quarter of 2005 and $887.2 million in
2004's second quarter. The higher volume of deposits from a year ago was due
primarily to deposits acquired in the Ashland Banking Acquisition and additional
brokered deposits, while higher public funds and interest-bearing transaction
account balances were the key drivers of the increase from the prior quarter.
For the quarter ended June 30, 2005, the average cost of funds from
interest-bearing deposits was 2.37%, up from 2.23% and 1.88% for the prior
quarter and second quarter of 2004, respectively.
Peoples also utilizes a variety of borrowings as complementary funding sources
to traditional deposits. For the three months ended June 30, 2005, total
borrowed funds averaged $512.9 million compared to $531.5 million for the first
quarter of 2005 and $518.8 million a year ago. The lower volume of borrowed
funds in the second quarter of 2005 was due to deposit growth, which allowed
Peoples to reduce borrowings. Peoples' overall cost of borrowed funds increased
to 3.80% from 3.66% last quarter and 3.29% in the second quarter of 2004, due to
higher short-term rates resulting from the Federal Reserve's actions to increase
the Federal Funds rate.
Peoples' main source of borrowed funds is short- and long-term advances from the
FHLB. Short-term FHLB borrowings averaged $85.1 million in the second quarter of
2005 compared to $76.5 million last quarter and $63.3 million a year ago, with
an average cost of 2.94%, 2.49% and 1.03% for the same periods, respectively.
Long-term FHLB borrowings averaged $204.8 million in the second quarter of 2005,
down from $208.5 million in the first quarter of 2005, and up from $170.3
million a year ago, with an average cost of 4.11%, 4.10% and 4.24% for the same
periods, respectively. These changes in average balance and cost reflect
management's continued use of FHLB borrowings, to fund asset growth and manage
interest rate sensitivity. Additionally, management has match-funded selected
three- and five-year adjustable rate commercial loans using long-term FHLB
advances with similar amortization and repricing characteristics. Management may
continue to use longer-term borrowings, when deemed desirable, to as a hedge
against rising interest rates. Additional information regarding Peoples'
advances from the FHLB can be found later in this Discussion under the caption
"FINANCIAL CONDITION-Funding Sources".
In addition to FHLB borrowings, Peoples also accesses national market repurchase
agreements to diversify funding sources. In the second quarter of 2005,
wholesale market term repurchase agreements averaged $162.5 million compared to
$186.5 million for the prior quarter and $223.5 million for the second quarter
of 2004. On a year-to-date basis, average wholesale repurchase agreements were
$174.4 million in 2005 versus $219.9 million in 2004. These decreases were
attributable to Peoples replacing matured agreements with short-term FHLB
advances, with rates similar to the matured agreements, rather than extending
maturities at higher rates. The average cost of wholesale repurchase agreements
was 3.12% in the second quarter of 2005, up from 3.04% and 2.85% for the first
quarter of 2005 and second quarter of 2004, respectively. For the six months
ended June 30, 2005, the average cost was 3.08% compared to 2.89% for the same
period in 2004.
Even with the challenges of the current interest rate environment and intense
competition for loans and deposits, Peoples has experienced some improvement in
asset yields in the second quarter of 2005 due to repricing of variable rate
loans and reinvestments of investment portfolio cash flows into higher yielding
securities. Management continues its efforts to position Peoples' balance sheet
for the expected increases in rates during the second half of 2005. Based on
Peoples' interest rate risk position and asset-liability simulations at June 30,
2005, management believes additional interest rate increases could cause net
interest income to increase modestly; however, the flattening yield curve and
certain strategic actions, such as the match-funding of longer-term loan
commitments, could mitigate any projected improvement. Peoples' net interest
margin and income remain difficult to predict, and to manage, since changes in
market interest rates and the timing of these changes remain uncertain and
fierce competition for loans and deposits puts pricing pressure on both sides of
the balance sheet.
PROVISION FOR LOAN LOSSES
=========================
In the second quarter of 2005, Peoples' provision for loan losses was $40,000,
compared to $616,000 a year ago, and $941,000 in the first quarter of 2005. For
the six months ended June 30, 2005, the provision for loan losses was $981,000
versus $1,410,000 for the first six months of 2004. The lower provisions were
based on management's quarterly evaluation of loss factors and are reflective of
Peoples' recent loss experience and recoveries of previously charged-off loans
during the second quarter.
As previously reported, the first quarter of 2005 provision included $500,000
for a group of loans comprising a $2.7 million commercial relationship that
management determined was impaired. This level of provision was based on
management's initial evaluation of the financial condition of the borrowers and
value of the collateral when the impairment was determined in late April 2005.
As part of management's ongoing loan review process, the loans in this
relationship were charged-down $518,000 in the second quarter. Additional
information regarding this relationship can be found later in this discussion
under the caption "FINANCIAL CONDITION-Allowance for Loan Losses".
When expressed as a percentage of average loans, the provision for loan losses
was 0.10% through six months of 2005 compared to 0.15% for the same period in
2004. Future provisions will continue to be based on management's quarterly
analysis described in the "Critical Accounting Policies" section of this
discussion.
NON-INTEREST INCOME
===================
Peoples generates non-interest income from six primary sources: deposit account
service charges, investment and insurance commissions, fiduciary activities,
electronic banking ("e-banking"), mortgage banking and business owned life
insurance ("BOLI"). Non-interest income grew 17% in the second quarter of 2005
to $7,318,000, from $6,267,000 a year ago. Through six months of 2005,
non-interest income improved to $14,686,000, up 32% from $11,154,000 for the
same period in 2004. Increased insurance revenues, due in part to the timing of
the Insurance Agency Acquisitions in the second quarter of 2004, comprised most
of these increases. Compared to the first quarter of 2005, non-interest income
was down slightly, as increases in nearly every major non-insurance revenue
source were offset by lower insurance commissions attributable to annual
contingency income from insurance operations of $481,000 recognized in the first
quarter.
Service charges and other fees on deposit accounts, which are based on the
recovery of costs associated with services provided, comprised the largest
source of non-interest revenue in the second quarter of 2005, totaling
$2,472,000 versus $2,459,000 in 2004's second quarter. Deposit account service
charges were $4,746,000 on a year-to-date basis, compared to $4,712,000 last
year. The following table details Peoples' deposit account service charges:
For the Three Months Ended For the Six Months Ended
June 30, March 31, June 30, June 30,
(Dollars in Thousands) 2005 2005 2004 2005 2004
Overdraft fees $ 1,722 $ 1,430 $ 1,657 $ 3,152 $ 3,037
Non-sufficient funds fees 464 394 482 858 878
Other fees and charges 286 450 320 736 797
- --------------------------------------------------------------------------------------------------------------------
Total $ 2,472 $ 2,274 $ 2,459 $ 4,746 $ 4,712
====================================================================================================================
Insurance and investment commissions were up 59% in the second quarter of 2005
and 185% on a year-to-date basis compared to the same periods in 2004. These
increases were the result of the timing of the Insurance Agency Acquisitions in
mid-2004. Compared to the first quarter of 2005, insurance and investment
commissions were down 15% due to Peoples recognizing contingency income of
$481,000 in that quarter, compared to only $30,000 in the second quarter. The
following table details Peoples' insurance and investment commissions:
For the Three Months Ended For the Six Months Ended
June 30, March 31, June 30, June 30,
(Dollars in Thousands) 2005 2005 2004 2005 2004
Property and casualty insurance $ 1,891 $ 2,331 $ 1,116 $ 4,222 $ 1,224
Life and health insurance 127 141 78 268 105
Brokerage 104 94 115 198 216
Fixed annuities 104 58 55 162 111
Credit life and A&H insurance 40 30 64 70 71
- --------------------------------------------------------------------------------------------------------------------
Total $ 2,266 $ 2,654 $ 1,428 $ 4,920 $ 1,727
====================================================================================================================
Peoples offers various e-banking services, including ATM and debit cards, direct
deposit services and Internet banking, as alternative delivery channels to
traditional sales offices, for providing services to clients. For the quarter
ended June 30, 2005, e-banking income was $734,000 compared to $647,000 in the
prior quarter and $623,000 in 2004's second quarter, increases of $87,000 (or
13%) and $111,000 (or 18%), respectively. Peoples' e-banking revenues have
remained strong due in large part to an increase in the number of debit cards
issued to customers and higher volumes of debit card activity. At June 30, 2005,
Peoples had 78,027 cards issued, with 49% of all eligible deposit accounts
having a debit card, compared to 61,270 cards and a 45% penetration rate a year
ago. Peoples' customers used their debit cards to complete $76 million of
transactions in through six months of 2005, up 31% from $58 million a year ago.
Peoples' fiduciary revenues totaled $915,000 in the second quarter of 2005,
compared to $812,000 a year ago and $757,000 for the first quarter of 2005. On a
year-to-date basis, fiduciary revenues were $1,672,000 in 2005 versus $1,586,000
in 2004. This increase in fiduciary income is attributable to the timing of the
recognition of certain fee income, due in part to a change in the fee structure
of certain account types in 2004, while a modest increase in assets under
management contributed to the increase from the second quarter a year ago. At
June 30, 2005, Peoples Bank held trust assets with an approximate market value
of $631.2 million versus $626.8 million at March 31, 2005 and $618.4 million at
June 30, 2004. Peoples' future fiduciary revenues will be influenced by the
relative performance of equity markets since a significant portion of fiduciary
fees is based on the market value of assets managed.
Peoples' mortgage banking involves the origination and selling of long-term,
fixed-rate real estate loans into the secondary market, with servicing rights
retained on most loans sold. In the second quarter of 2005, mortgage banking
produced revenues of $264,000 compared to $117,000 in the prior quarter and
$283,000 in the second quarter of 2004. Mortgage banking income was down 21% on
a year-to-date basis, totaling $381,000 in 2005 versus $482,000 in 2004. The
increase in mortgage banking income from the prior quarter and decline through
six months is attributable to Peoples' selling $11.6 million of fixed-rate
loans, acquired in the Ashland Banking Acquisition, at net loss of $187,000 in
the first quarter of 2005, due to their associated interest rate risk in the
current rate environment. While future mortgage banking revenues will be largely
dependent on customer demand for long-term fixed-rate mortgage loans, mortgage
banking is a key part of Peoples' long-term business strategy.
Peoples' BOLI investment enhances operating efficiency by offsetting rising
employee benefit costs. For the quarter ended June 30, 2005, BOLI income totaled
$437,000 compared to $506,000 a year ago and $454,000 last quarter. BOLI income
was $891,000 and $922,000 for the six months ended June 30, 2005 and 2004,
respectively. The modest decline in BOLI income in 2005 is attributable to the
impact of the flattening yield curve on the associated investment funds. Still,
management believes BOLI continues to provide a better vehicle for funding
future benefit costs than alternative investment opportunities with similar risk
characteristics.
NON-INTEREST EXPENSE
====================
For the quarter ended June 30, 2005, non-interest expense totaled $12,862,000,
up $1,331,000 (or 12%) from $11,531,000 in the same quarter a year ago.
Operating expenses relating to the Insurance Agency Acquisitions, primarily
salaries and benefits expense, occupancy and equipment costs and intangible
amortization, accounted for 73% of this increase. Other contributing factors
included increased professional fees of $139,000, primarily exam and audit fees,
costs of $176,000 for the Director Retirement Plan for the benefit of former
Chairman Robert E. Evans' spouse as beneficiary (included in salaries and
benefits) and a $100,000 donation to establish the Robert E. Evans Education
Fund (included in marketing expense). This fund was established to honor the
many years of service and dedication of former Chairman and CEO Evans to both
Peoples and the community, as well as recognize his focus on and passion for
education. Compared to the first quarter of 2005, non-interest expense was up
only $115,000 in the second quarter of 2005.
Salaries and benefits remain Peoples' largest operating expense, which is
inherent in a service-based industry such as financial services, totaling
$6,658,000 in the second quarter of 2005, compared to $5,819,000 for the three
months ended June 30, 2004. The timing of the Insurance Agency Acquisitions
accounted for $482,000 (or 58%) of this increase, with higher incentive costs
based on Peoples' performance and the Director Retirement Plan expense also
being significant factors. Compared to the first quarter of 2005, salaries and
benefits were virtually unchanged from $6,686,000. Through six months of 2005,
salaries and benefits totaled $13,344,000, up 19% from $11,208,000 in the first
half of 2004, with $1.4 million (or 66%) of the increase due to the Insurance
Agency Acquisitions. At June 30, 2005, Peoples had 543 full-time equivalent
employees, compared to 537 at December 31, 2004 and 545 a year ago.
In the second quarter of 2005, net occupancy and equipment expenses were
$1,338,000, up 4% from $1,289,000 for the same period a year ago. Net occupancy
and equipment expenses totaled $2,627,000 and $2,510,000 for the six months
ended June 30, 2005 and 2004, respectively. These increases resulted from
additional occupancy and equipment expenses, particularly depreciation expense
due to recent acquisitions.
Last year's acquisitions also caused an increase in amortization expense of
customer relationship intangible assets. In the second quarter of 2005,
intangible amortization was $674,000 compared to $526,000 in the second quarter
of 2004. Since Peoples uses an accelerated method of amortization for existing
intangible assets, amortization expense in the second quarter of 2005 was down
slightly from $688,000 last quarter. Management expects slight reductions in
intangible amortization in future quarters based on the intangible assets at
June 30, 2005.
Professional fees, which include accounting, legal and other professional
expenses, totaled $550,000 for the second quarter of 2005, compared to $411,000
for the second quarter of 2004, a 34% increase. On a year-to-date basis,
professional fees were $1,215,000 through June 30, 2005, compared to $867,000 a
year ago. Higher audit fees associated with the new regulatory reporting
environment under Sarbanes-Oxley was the primary factor driving the increased
professional fees. Compared to the first quarter of 2005, professional fees
dropped 17% in the second quarter, from $665,000.
Peoples is subject to various state franchise taxes, which are based largely on
Peoples Bank's equity at year-end. Franchise taxes totaled $418,000 and $829,000
for the three and six months ended June 30, 2005, respectively, compared to
$371,000 for 2004's second quarter and $712,000 for the first half of 2004.
These increases were primarily attributable to additional equity at Peoples Bank
from the Insurance Agency Acquisitions. Management believes Peoples Bank's
stronger capital level positions can provide the foundation for strategic
growth. In addition, management regularly evaluates the capital position of
Peoples' other direct and indirect subsidiaries and seeks to maximize Peoples'
consolidated capital position through an allocation of capital which is intended
to enhance profitability and shareholder value.
The non-interest leverage ratio measures the percentage Peoples' normal
non-interest expense that are offset by non-interest income and is one of the
performance indicators for Peoples' incentive compensation plan for senior
management and certain other associates. The non-interest leverage ratio is
defined as non-interest income as a percentage of operating expenses, excluding
gains and losses on securities transactions, asset disposals, early debt
extinguishment and sale of the credit card portfolio, as well as intangible
asset amortization. The following details the components of the non-interest
leverage ratio calculation:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(Dollars in Thousands) 2005 2004 2005 2004
Total other income, as reported $ 7,318 $ 6,267 $ 14,686 $ 11,154
Deduct: Gain on securities transactions 3 5 236 37
Gain on asset disposal 113 17 121 47
Recovery of loss on sale of other real estate owned - - - 210
-----------------------------------------------------------------------------------------------------------------------------
Adjusted total other income 7,202 6,245 14,329 10,860
-----------------------------------------------------------------------------------------------------------------------------
Total other expense, as reported 12,862 11,531 25,609 21,821
Deduct: Amortization of other intangible assets 674 526 1,362 927
-----------------------------------------------------------------------------------------------------------------------------
Adjusted total other expense 12,188 11,005 24,247 20,894
-----------------------------------------------------------------------------------------------------------------------------
Non-interest leverage ratio 59.1% 56.8% 59.1% 52.0%
-----------------------------------------------------------------------------------------------------------------------------
RETURN ON EQUITY
================
In the second quarter of 2005, Peoples' return on equity ("ROE") was 12.04%
versus 10.85% last quarter and 11.83% for the second quarter a year ago.
Peoples' higher earnings in the second quarter was the primary reason for the
improvement in ROE, which was tempered by increased average equity of $1.2
million and $4.8 million compared to the quarters ended March 31, 2005 and June
30, 2004, respectively. ROE was 11.45% for the six months ended June 30, 2005,
compared to 12.17% for the same period in 2004, with the combination of lower
earnings and higher equity causing the decline in ROE. Management uses ROE to
evaluate Peoples' long-term performance, but management believes earnings per
share ("EPS") serves as a more meaningful measurement of short-term performance
due to the volatility that can occur in equity from changes in the estimated
fair values of Peoples' investment portfolio.
RETURN ON ASSETS
================
Return on assets ("ROA") was 1.17% in the second quarter of both 2005 and 2004,
as the impact of Peoples' higher earnings on ROA was offset by a $79.6 million
increase in average assets. On a year-to-date basis, ROA was 1.11% through June
30, 2005 versus 1.21% for the first six months of 2004. In recent years,
Peoples' primary focus 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 the effectiveness of Peoples' asset
utilization.
INCOME TAX EXPENSE
==================
For the six months ended June 30, 2005, Peoples' effective tax rate was 27.2%,
up from 26.5% a year ago. Peoples continues to make tax-advantaged investments
in order to manage its effective tax rate and overall tax burden. At June 30,
2005, the amount of tax-advantaged investments totaled $56.9 million compared to
$53.4 million at December 31, 2004 and $53.3 million at June 30, 2004. Depending
on economic and regulatory conditions, Peoples may make additional investments
in various tax credit pools and other tax-advantaged assets.
FINANCIAL CONDITION
OVERVIEW OF BALANCE SHEET
=========================
Total assets were $1.83 billion at June 30, 2005, compared to $1.81 billion at
year-end 2004 and $1.79 billion at March 31, 2005, increases of $19.4 million
and $36.8 million, respectively, largely the result of loan growth. Gross loans
were up $11.0 million to $1.03 billion at June 30, 2005, from $1.02 billion at
December 31, 2004, and up $21.1 million versus $1.01 billion at March 31, 2005.
Investment securities totaled $603.7 million at June 30, 2005 versus $602.4
million at year-end 2004 and $592.7 million at March 31, 2005.
Total liabilities were $1.65 billion at June 30, 2005, compared to $1.63 billion
at year-end 2004, an increase of $15.3 million. At June 30, 2005, deposits
totaled $1.10 billion, up $26.0 million from the prior year-end, while borrowed
funds declined $10.6 million to $535.4 million, from $546.0 million at December
31, 2004.
Stockholders' equity totaled $179.5 million at June 30, 2005, up $4.1 million
versus $175.4 million at December 31, 2004. This increase was primarily the
result of Peoples' earnings, net of dividends paid, of $6.0 million, which was
partially offset by the impact of treasury stock purchases and the change in
market value of the investment portfolio.
CASH AND CASH EQUIVALENTS
=========================
Peoples' cash and cash equivalents include Federal funds sold, cash and balances
due from banks, interest-bearing balances in other institutions and other
short-term investments that are readily liquid. The amount of cash and cash
equivalents fluctuates on a daily basis due to customer activity and Peoples'
liquidity needs. At June 30, 2005, cash and cash equivalents totaled $33.9
million, up 8% from $31.4 million at December 31, 2004. Cash and balances due
from banks comprised the largest portion of Peoples' cash and cash equivalents
at June 30, 2005, totaling $33.1 million, up $2.3 million from $30.7 million at
December 31, 2004. This increase is due largely to additional items in the
process of collection at June 30, 2005.
Management believes the current balance of cash and cash equivalents, along with
the availability of other funding sources, will allow Peoples to meet cash
obligations, special needs and off-balance sheet commitments, such as unfunded
loan commitments, 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 seek to reinvest those funds
appropriately, based on loan demand and investment opportunities, while
maintaining adequate liquidity. Further information regarding Peoples' liquidity
can be found later in this discussion under "Interest Rate Sensitivity and
Liquidity."
INVESTMENT SECURITIES
=====================
At June 30, 2005, the amortized cost of Peoples' investment securities totaled
$597.5 million compared to $594.5 million at year-end 2004, while the market
value of the investment portfolio was $603.7 million and $602.4 million for the
same periods, respectively. The difference in amortized cost and market value at
June 30, 2005, resulted in unrealized appreciation in the investment portfolio
of $6.2 million and a corresponding increase in Peoples' equity of $4.0 million,
net of deferred taxes. In comparison, the difference in amortized cost and
market value at December 31, 2004, resulted in unrealized appreciation of $7.9
million and an increase in equity of $5.1 million, net of deferred taxes.
The following table details Peoples' investment portfolio, at estimated fair
value:
(Dollars in Thousands) June 30, March 31, December 31, June 30,
2005 2005 2004 2004
US Treasury securities and obligations of
US government agencies and corporations $ 94,925 $ 69,722 $ 62,770 $ 55,440
Obligations of states and political subdivisions 67,856 62,081 62,234 62,926
Mortgage-backed securities 382,849 401,872 418,094 459,918
Other securities 58,101 59,017 59,266 60,906
- ----------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 603,731 $ 592,692 $ 602,364 $ 639,190
- ----------------------------------------------------------------------------------------------------------------------------
Since June 30, 2004, Peoples' investment in mortgage-backed securities has
declined due to management using a portion of the principal runoff to fund loan
growth and other corporate purposes. Management has also reinvested some of the
cash flows from mortgage-backed securities in U.S. agency securities to improve
the diversification and overall performance of the investment portfolio in the
expected rising rate environment. Management anticipates maintaining, or
slightly growing, the investment portfolio during the remainder of 2005
depending on loan growth and other corporate liquidity needs.
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, provides recommendations
for 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 and consumer
loans, focusing primarily on lending opportunities in central and southeastern
Ohio, northwestern West Virginia, and northeastern Kentucky markets. At June 30,
2005, gross loans totaled $1.03 billion, up $11.0 million since year-end 2004.
This increase was the result of commercial loan growth of $31.1 million, which
was partially offset by the first quarter sale of $11.6 million of fixed-rate
mortgage loans, acquired in the Ashland Banking Acquisition. The following table
details total outstanding loans:
(Dollars in Thousands) June 30, March 31, December 31, June 30,
2005 2005 2004 2004
Commercial, mortgage $ 474,344 $ 457,667 $ 450,270 $ 428,580
Commercial, other 133,537 128,898 126,473 110,208
Real estate, construction 35,950 32,120 35,423 22,853
Real estate, mortgage 330,881 334,681 349,965 304,328
Consumer 59,365 59,634 60,927 69,587
- ---------------------------------------------------------------------------------------------------
Total loans $ 1,034,077 $ 1,013,000 $ 1,023,058 $ 935,556
- ---------------------------------------------------------------------------------------------------
Commercial loan balances, including loans secured by commercial real estate,
totaled $607.9 million at June 30, 2005, up 5% million from $576.7 million at
year-end 2004. This increase is the result of strong loan production in Peoples'
new central Ohio loan production office and lending opportunities within
Peoples' existing markets. Commercial loans continued to represent the largest
portion of Peoples' total loan portfolio, comprising 58.8% and 56.4% of total
loans at June 30, 2005, and December 31, 2004, respectively. Future commercial
lending activities will be dependent on economic and related conditions, such as
general demand for loans in Peoples' primary markets, interest rates offered by
Peoples and Peoples' customary underwriting considerations. In addition to
in-market opportunities, Peoples will continue to lend selectively to
creditworthy customers outside its primary markets.
While commercial loans comprise the largest portion of Peoples' loan portfolio,
residential real estate loans (whether the loans are ultimately sold into the
secondary market or retained on Peoples' balance sheet) remain a major focus of
Peoples' lending efforts, due in part to the opportunity to sell additional
products and services to these consumers. At June 30, 2005, real estate loans,
which include construction loans but exclude loans secured by commercial real
estate, totaled $366.8 million compared to $385.4 million at December 31, 2004,
a decrease of $18.6 million. Real estate loans comprised 35.5% of Peoples' total
loan portfolio at June 30, 2005, versus 37.7% at year-end 2004. Included in real
estate loans are home equity credit line balances of $46.9 million at June 30,
2005, up 7% from $43.7 million at December 31, 2004.
Peoples' real estate loan portfolio continues to be affected by customer demand
for long-term, fixed-rate mortgages, which Peoples generally sells to the
secondary market with servicing rights retained. In the second quarter of 2005,
Peoples originated 139 long-term, fixed-rate mortgage loans, with total loan
amounts of $12 million, compared to 110 loans, with total loan amounts of $9
million, in the first quarter of 2005 and 141 loans, with total loan amounts of
$11 million, in the second quarter of 2004. At June 30, 2005, Peoples was
servicing $132.0 million of real estate loans previously sold to the secondary
market compared to $106.4 million at year-end 2004. In addition, Peoples had
$1.6 million of fixed-rate real estate loans held for sale to the secondary
market at June 30, 2005 compared to $0.6 million at December 31, 2004.
Management anticipates selling the loans held for sale at June 30, 2005, during
the third quarter.
At June 30, 2005, consumer loan balances, including overdrafts, were $59.4
million, down $1.5 million since year-end 2004. Excluding overdrafts, consumer
loans grew $1.9 million during the second quarter to $58.0 million, from $56.1
million. The indirect lending area represented a significant portion of Peoples'
consumer loans and the second quarter growth, with balances of $23.0 million at
June 30, 2005, up $1.7 million since March 31, 2005, but down $0.6 million
compared to December 31, 2004, respectively. Strong competition for loans,
particularly automobile loans, as well as availability of alternative credit
products, such as home equity credit lines, have challenged the performance and
growth of Peoples' consumer loan portfolio. Regardless of management's desire to
maintain, or even grow, consumer loan balances, Peoples' commitment to quality
loan origination based on sound underwriting practices and appropriate loan
pricing discipline remains the paramount objective.
LOAN CONCENTRATION
==================
Peoples' largest concentration of commercial loans is credits to lodging and
lodging-related companies, which comprised approximately 9.7% of Peoples'
outstanding commercial loans at quarter-end, compared to 11.4% at December 31,
2004. Loans to assisted living facilities and nursing homes also represented a
significant portion of Peoples' commercial loans, comprising 9.0% of Peoples'
outstanding commercial loans at June 30, 2005, versus 10.2% at year-end 2004.
These lending opportunities have arisen due to the growth of these industries in
markets served by Peoples or in contiguous areas, and also from sales
associates' efforts to develop these lending relationships. Management believes
Peoples' loans to lodging and lodging-related companies, as well as loans to
assisted living facilities and nursing homes, 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, which includes an
evaluation of the financial strength, market expertise and experience of the
borrowers and principals in these business relationships. In addition, a
sizeable portion of the loans to lodging and lodging-related companies is spread
over various geographic areas and is guaranteed by principals with substantial
net worth.
ALLOWANCE FOR LOAN LOSSES
=========================
Peoples' allowance for loan losses totaled $14.7 million, or 1.42% of total
loans, at June 30, 2005, compared to $15.2 million, or 1.50%, at March 31, 2005,
and $14.8 million, or 1.44%, at year-end 2004. The following table presents
changes in Peoples' allowance for loan losses:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in Thousands) 2005 2004 2005 2004
Balance, beginning of period $ 15,202 $ 14,774 $ 14,760 $ 14,575
Chargeoffs (1,104) (980) (2,172) (2,210)
Recoveries 590 283 1,159 918
- -----------------------------------------------------------------------------------------------------
Net chargeoffs (514) (697) (1,013) (1,292)
Provision for loan losses 40 616 981 1,410
- -----------------------------------------------------------------------------------------------------
Balance, end of period $ 14,728 $ 14,693 $ 14,728 $ 14,693
- -----------------------------------------------------------------------------------------------------
The allowance is allocated among the loan categories based upon the consistent,
quarterly procedural discipline described in the "Critical Accounting Policies"
section of this discussion. However, the entire allowance for loan losses is
available to absorb future loan losses in any loan category. The following
details the allocation of the allowance for loan losses:
(Dollars in thousands) June 30, March 31, 2005 December 31, June 30,
2005 2004 2004
Commercial $ 11,884 $ 12,251 $ 11,751 $ 11,858
Real estate 1,400 1,175 1,175 1,032
Consumer 1,149 1,386 1,394 1,350
Overdrafts 295 269 327 347
Credit cards - 121 113 106
------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 14,728 $ 15,202 $ 14,760 $ 14,693
------------------------------------------------------------------------------------------------------------
The significant allocation to commercial loans in recent periods reflects the
higher credit risk associated with this type of lending and continued growth of
commercial loans. In prior periods, Peoples had maintained an allowance for
credit cards that reflected an estimate of the loss from the retained recourse
on the business cards included in the credit card portfolio sale. This recourse
arrangement expired during the second quarter of 2005, eliminating the need for
an allocation for credit cards. While allocations are made to specific loans and
pools of loans, the entire allowance is available for all loan losses existing
as of June 30, 2005.
In the second quarter of 2005, net loan chargeoffs were $514,000, down 26% from
$697,000 a year ago, but up 3% from $499,000 in the first quarter of 2005.
Peoples continues to experience higher recoveries in 2005 compared to the same
periods in 2004, resulting in the lower net chargeoffs. Net chargeoffs in the
second quarter of 2005 were also impacted by management's ongoing review of the
previously reported impaired commercial loan relationship, which resulted in a
charge-down of $518,000. The following table details Peoples' net chargeoffs:
For the Three Months Ended For the Six Months Ended
June 30, March 31, June 30, June 30,
(Dollars in Thousands) 2005 2005 2004 2005 2004
Commercial $ 201 $ 43 $ 475 $ 244 $ 374
Overdrafts 156 88 211 244 346
Real estate 126 315 47 441 202
Consumer 45 61 (32) 106 244
Credit card (14) (8) (4) (22) 126
- --------------------------------------------------------------------------------------------------------------------------
Total $ 514 $ 499 $ 697 $ 1,013 $ 1,292
- --------------------------------------------------------------------------------------------------------------------------
As a percent of average loans (a) 0.20% 0.20% 0.30% 0.20% 0.28%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Presented on an annualized basis.
</FN>
Asset quality remains a key focus, as management continues to stress loan
underwriting quality more than loan growth. At June 30, 2005, the amount of
nonperforming loans was up slightly from the prior quarter-end, due largely to
the net impact of Peoples placing the remaining $2 million of commercial loans
in the previously mentioned impaired commercial loan relationship on nonaccrual
status, as expected, and the commercial loan comprising the entire $1.1 million
of renegotiated loans at March 31, 2005, returning to performing status. Despite
the higher level of nonperforming loans, Peoples' nonperforming assets decreased
during the second quarter compared to March 31, 2005, due to the sale of two
former banking office properties included in other real estate owned at a
combined gain of $167,000. In the third quarter of 2005, management expects the
$2 million of nonaccrual commercial loans in the previously mentioned impaired
loan relationship to be classified as other real estate owned. The following
table details Peoples' nonperforming assets:
June 30, March 31, December 31, June 30,
(Dollars in Thousands) 2005 2005 2004 2004
Loans 90+ days past due and accruing $ 475 $ 84 $ 285 $ 374
Renegotiated loans - 1,116 1,128 -
Nonaccrual loans 7,173 6,105 5,130 5,465
- -----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 7,648 7,305 6,543 5,839
Other real estate owned 353 873 1,163 392
- -----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 8,001 $ 8,178 $ 7,706 $ 6,231
- -----------------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percent of total loans 0.74% 0.72% 0.64% 0.62%
- -----------------------------------------------------------------------------------------------------------------------
Nonperforming assets as a percent of total assets 0.44% 0.46% 0.43% 0.35%
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percent of
nonperforming loans 192.6% 208.1% 225.6% 251.6%
- -----------------------------------------------------------------------------------------------------------------------
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 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, if any, is
based on the fair value of the collateral.
At June 30, 2005, the recorded investment in loans that were considered impaired
was $11.9 million, of which $7.0 million were accruing interest and $4.9 million
were nonaccrual loans. Included in this amount were $4.1 million of impaired
loans for which the related allowance for loan losses was $1.6 million. The
remaining impaired loan balances do not have a related allocation of the
allowance for loan losses because the loans have previously been written-down,
are well secured or possess characteristics indicative of the ability to repay
the loan. For the six months ended June 30, 2005, Peoples' average recorded
investment in impaired loans was approximately $10.9 million and interest income
of $234,000 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 $1.10 billion at June 30,
2005, compared to $1.07 billion at December 31, 2004.
Non-interest-bearing deposits serve as a core funding source. At June 30, 2005,
non-interest-bearing deposit balances totaled $153.3 million, up $0.3 million
compared to the prior year-end. Since customer activity can cause significant,
temporary changes in deposit balances from one period to another, management
believes a comparison of average balances to be a more meaningful reflection of
the trend in non-interest-bearing deposits. In the second quarter of 2005,
non-interest-bearing deposits averaged $158.8 million versus $155.6 in the first
quarter of 2005 and $142.9 million in the second quarter of 2004, reflecting
Peoples' efforts to increase non-interest-bearing deposits. Peoples' strategies
include continued emphasis on core deposit growth in products such as
non-interest-bearing checking accounts.
Interest-bearing deposits totaled $942.2 million at June 30, 2005, compared to
$916.4 million at December 31, 2004. This $25.8 million increase is largely the
result of higher public fund balances of $19.5 million and additional brokered
deposits of $14.9 million. These increases were partially offset by declines in
retail certificates of deposits ("CDs") and savings balances. The following
details Peoples' interest-bearing deposits:
(Dollars in Thousands) June 30, March 31, December 31, June 30,
2005 2005 2004 2004
Retail certificates of deposit $ 451,522 $ 451,359 $ 456,850 $ 433,547
Interest-bearing transaction accounts 184,308 187,034 165,144 158,025
Savings accounts 145,806 151,592 157,145 178,651
Money market deposit accounts 115,666 111,224 107,394 95,866
Brokered certificates of deposits 44,850 44,837 29,909 9,900
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 942,152 $ 946,046 $ 916,442 $ 875,989
- --------------------------------------------------------------------------------------------------------------------
Peoples continues to experience highly competitive pricing of CDs, which makes
it difficult to maintain these balances at reasonable rates. In the first
quarter of 2005, Peoples introduced its new Ultimate Freedom Checking, an
interest-bearing checking product that pays a rate comparable to money market
products offered by Peoples' competitors, which is designed to attract customers
with higher balances. As expected, Peoples experienced declines in savings
balances as customers looked for better returns in this rising rate environment.
Peoples also accesses other funding sources, including short-term and long-term
borrowings, to fund asset growth and satisfy liquidity needs. At June 30, 2005,
borrowed funds totaled $535.4 million, down $10.6 million (or 2%) from $546.0
million at year-end 2004, as Peoples utilized the higher deposit balances during
the period to fund asset growth and repay a portion of the borrowings. The
following details Peoples' short-term and long-term borrowings:
(Dollars in Thousands) June 30, March 31, December 31, June 30,
2005 2005 2004 2004
Short-term borrowings:
FHLB advances $ 111,000 $ 65,300 $ 37,400 $ 99,700
Retail repurchase agreements 20,030 18,424 14,495 14,253
- ---------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 131,030 83,724 51,895 113,953
Long-term borrowings:
FHLB advances $ 203,624 $ 207,241 $ 210,814 $ 175,076
National market repurchase agreements 157,850 164,100 238,750 243,750
Term note payable 13,600 15,300 15,300 15,300
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term borrowings 375,074 386,641 464,864 434,126
- ---------------------------------------------------------------------------------------------------------------------------
Subordinated notes held by subsidiary trusts 29,307 29,285 29,263 29,220
- ---------------------------------------------------------------------------------------------------------------------------
Total borrowed funds $ 535,411 $ 499,650 $ 546,022 $ 577,299
- ---------------------------------------------------------------------------------------------------------------------------
Peoples' short-term FHLB advances are typically overnight repo advances or
variable rate cash management advances used to manage Peoples' daily liquidity
needs and may be repaid, in whole or part, at anytime without a penalty. Peoples
occasionally utilizes short-term, repo advances with terms of one year or less
to manage its cost of funds and temporary cash needs, as appropriate. Peoples'
long-term FHLB advances are primarily convertible rate advances, with the
initial rate fixed for periods ranging from two to four years, depending on the
specific advance. After the initial fixed-rate period, these advances are
subject to conversion, at the discretion of the FHLB, to a LIBOR based, variable
rate product. Peoples has the option to prepay, without penalty, any advance
that has been converted or allow the borrowing to reprice. In addition to these
convertible rate advances, Peoples utilizes fixed-rate, long-term FHLB advances,
both amortizing and non-amortizing, to help manage its interest rate sensitivity
and liquidity. Further information regarding Peoples' management of interest
rate sensitivity can be found later in this discussion under "Interest Rate
Sensitivity and Liquidity."
In addition to FHLB advances, Peoples accesses national market repurchase
agreements to diversify its funding sources. At June 30, 2005, wholesale
repurchase agreements totaled $157.9 million, down $80.9 million from $238.8
million at year-end 2004, as management chose to replace maturing repurchase
agreements with short-term FHLB advances and $14.9 million of brokered deposits,
which Peoples occasionally uses as an alternative funding sources to wholesale
repurchase agreements. Peoples' current wholesale repurchase agreements, based
on their original terms, range from two to five years. The repurchase agreements
may not be repaid prior to maturity and must remain sufficiently collateralized
during the entire term. As a result, a decline in the market value of the
investment securities associated with these agreements would require Peoples to
allocate additional investment securities to these repurchase agreements.
CAPITAL/STOCKHOLDERS' EQUITY
============================
At June 30, 2005, stockholders' equity was $179.5 million versus $175.4 million
at December 31, 2004, an increase of $4.0 million (or 2%). This increase from
earnings, net of dividends paid, of $6.0 million was offset by net treasury
stock transactions of $1.2 million and a decline in accumulated comprehensive
income of $1.1 million from a reduction in the fair value of the
available-for-sale investment portfolio.
For the six months ended June 30, 2005, Peoples Bancorp declared dividends of
$4.0 million, representing a dividend payout ratio of 39.8% of earnings,
compared to $3.8 million and payout ratio of 36.8% a year ago. While management
anticipates Peoples Bancorp continuing its 39-year history of consistent
dividend growth in future periods, Peoples Bancorp's ability to pay dividends on
its common shares is largely dependent upon dividends from Peoples Bank.
Additionally, Peoples Bancorp has established two trust subsidiaries which have
issued preferred securities. If Peoples Bancorp suspends interest payments
relating to the trust preferred securities issued by either of the two trust
subsidiaries, Peoples will be prohibited from paying dividends on its common
shares. Peoples Bancorp or Peoples Bank may decide to limit the payment of
dividends, even when the legal ability to pay them exists, in order to retain
earnings for other strategic purposes.
One component of Peoples' equity is accumulated comprehensive income, net of
deferred taxes, which consists of the adjustment for the net unrealized holding
gains on available-for-sale securities and a cash flow hedging instrument. At
June 30, 2005, accumulated comprehensive income totaled $3.8 million versus $5.0
million at December 31, 2004, a decrease of $1.2 million. Since all the
investment securities in Peoples' portfolio are classified as
available-for-sale, both the investment and equity sections of Peoples'
consolidated balance sheet are more sensitive to the changing market values of
investments than if the investment portfolio was classified as held-to-maturity.
At June 30, 2005, Peoples had treasury stock totaling $11.2 million, up $0.9
million from year-end 2004. Through six months of 2005, Peoples Bancorp
repurchased 59,700 common shares (or 11% of the total authorized), at an average
price of $26.78 per share, under the 2005 Stock Repurchase Program and 2,828
common shares, at an average price of $26.66, in conjunction with the deferred
compensation plan for directors of Peoples Bancorp and its subsidiaries. During
the same period, Peoples reissued 25,403 treasury shares due to stock option
exercises. Peoples Bancorp anticipates repurchasing additional common shares as
authorized under the 2005 Stock Repurchase Program and in compliance with
applicable Federal securities laws.
Management uses the tangible equity ratio as one measure of the adequacy of
Peoples' equity. The ratio, defined as tangible equity as a percentage of
tangible assets, excludes the balance sheet impact of intangible assets acquired
through acquisitions accounted for using the purchase method of accounting. At
June 30, 2005, Peoples' tangible equity ratio was 6.20% compared to 6.00% at
December 31, 2004 and 6.12% at June 30, 2004.
In addition to monitoring performance through traditional capital measurements
(i.e., dividend payout ratios and ROE), Peoples has also complied with the
capital adequacy standards mandated by the banking industry. Bank regulators
have established "risk-based" capital requirements designed to measure capital
adequacy. Under the risk-based capital framework, a bank's balance sheet assets
and credit equivalent amounts of off-balance sheet items are typically assigned
to one of four broad risk categories: 0% (lowest risk), 20%, 50% or 100%
(highest risk). The sum of the resulting weighted values from each of the four
risk categories is used in calculating key capital ratios. At June 30, 2005,
Peoples' Total Capital, Tier 1 and Leverage ratios were 12.57%, 11.21% and
7.78%, respectively, 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
June 30, 2005.
INTEREST RATE SENSITIVITY AND LIQUIDITY
=======================================
While Peoples is exposed to various business risks, the risks relating to
interest rate sensitivity and liquidity are typically the most complex and
dynamic risks that can materially impact future results of operations and
financial condition. The objective of Peoples' asset/liability management
("ALM") function is to measure and manage these risks in order to optimize net
interest income within the constraints of prudent capital adequacy, liquidity
and safety. This objective requires Peoples to focus on interest rate risk
exposure and adequate liquidity through its management of the mix of assets and
liabilities, their related cash flows and the rates earned and paid on those
assets and liabilities, respectively. Ultimately, the ALM function is intended
to guide management in the acquisition and disposition of earning assets and
selection of appropriate funding sources.
Interest Rate Risk
- ------------------
Interest rate risk ("IRR") is one of the most significant risks for Peoples, and
the entire financial services industry, primarily arising in the normal course
of business of offering a wide array of financial products to its customers,
including loans and deposits, as well as the diversity of its own investment
portfolio and borrowed funds. 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' exposure to IRR is
due primarily to differences in the maturity, or repricing, of earning assets
and interest-bearing liabilities. In addition, other factors, such as
prepayments of loans and investment securities or early withdrawal of deposits,
can expose Peoples to IRR and increase interest costs or reduce revenue streams.
Peoples has charged the ALCO with the overall management of Peoples' balance
sheet mix, off-balance sheet commitments and hedging transactions related to the
management of IRR. The ALCO consists of Peoples' Chief Financial Officer,
President and Chief Executive Officer, and Chief Lending Officer, as well as
other members of senior management. It is the ALCO's responsibility to focus on
the future net interest income stream by evaluating trends and potential future
events, researching alternatives, then recommending and authorizing an
appropriate course of action. To this end, the ALCO has established an IRR
management policy that sets minimum requirements and guidelines for monitoring
and managing the level and amount of IRR. The objective of the IRR policy is to
encourage adherence to sound fundamentals of banking while allowing sufficient
flexibility to exercise the creativity and innovation 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
simulations, to project future net interest income streams and to monitor the
sensitivity of the net present estimated fair value of equity and the
difference, or "gap", between maturing or repricing of rate-sensitive assets and
liabilities over various time periods. Peoples uses these methods to monitor IRR
for both the short- and long-term. 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 composition and by
establishing limits on these estimated changes to net income and net market
value, the ALCO is better able to evaluate interest rate risks and their
potential impact to earnings and the projected fair value of equity.
The modeling process starts with a base case simulation using the current
balance sheet and current interest rates held constant for the next twelve
months. At least two alternative interest rate scenarios, one with higher
interest rates and one with lower interest rates, assuming parallel, immediate
and sustained changes are also applied to the base case scenario. Comparisons
produced from the simulation data, showing the earnings variance from the base
interest rate scenario, illustrate the risks associated with the current balance
sheet structure. Additional simulations, when deemed appropriate or necessary,
are prepared using different interest rate scenarios than those used with the
base case simulation and/or possible changes in balance sheet composition. The
additional simulations are used to better evaluate risks and highlight
opportunities inherent in the modeled 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
evaluated for indications of effectiveness of current IRR management strategies.
As part of the evaluation of IRR, the ALCO has established limits on changes in
net interest income and the net value of the balance sheet. The ALCO limits the
decrease in net interest income of Peoples Bank to 15% or less from base case
for each 200 basis point shift in interest rates measured over a twelve- and
twenty-four-month period. The ALCO limits the negative impact on net equity to
30% or less given an immediate and sustained 200 basis points shift in interest
rates, also assuming a static balance sheet. The difference between rate
sensitive assets and rate sensitive liabilities for specified time periods is
known as the gap. The ALCO also reviews static gap measures for specific periods
focusing on a one-year cumulative gap. Based on historical trends and
performance, the ALCO has determined the ratio of the one-year cumulative gap
should be within +/-15% of earning assets at the date of measurement. Results
that are outside of any of these limits will prompt a discussion by the ALCO of
appropriate actions, if any, which should be taken.
At June 30, 2005, Peoples' one-year cumulative gap amount was positive 3.1% of
earning assets, which represented $50.4 million more in assets than liabilities
that are contractually scheduled to reprice or mature during that period.
Management believes a portion of interest-bearing liabilities are not likely to
reprice at their first opportunity, based on current rates and management's
control over the pricing of most deposits. Excluding those liabilities, Peoples'
adjusted one-year cumulative gap amount at quarter-end was positive 5.5% of
earning assets, which represented $88.7 million more in assets than liabilities
that mature or may reprice during the next twelve months.
The following table is provided to illustrate the estimated earnings at risk and
value at risk positions in the one-year horizon of Peoples, on a pre-tax basis,
at June 30, 2005 (dollars in thousands):
Immediate Estimated Estimated
Interest Rate
Increase (Decrease) in Increase (Decrease) (Decrease) Increase in
Basis Points In Net Interest Income Economic Value of Equity
- --------------------------- ----------------------------- --------------------------------
200 $ 1,927 3.7 % $ (4,498) (2.0) %
100 882 1.7 1,122 0.5
(100) (2,933) (5.6) (8,053) (3.6)
(200) $ (7,223) (13.8) % $ (25,410) (11.2) %
The interest rate risk analysis shows that Peoples is asset sensitive, which
means that increasing interest rates should favorably impact Peoples' net
interest income while downward moving interest rates should negatively impact
net interest income, based on the assumptions used. However, the variability of
cash flows from the investment and loan portfolios continue to have a
significant influence on future net interest income and earnings, especially
during periods of changing interest rates. In general, the amount of principal
runoff from these portfolios tends to decrease as interest rates increase due to
fewer prepayments, limiting the amount of funds which can be reinvested at
higher rates, while declining interest rates tend to result in a higher level of
funds that must be reinvested at lower rates, due to an increase in prepayments.
The interest rate table also shows Peoples is within the established IRR policy
limits for all simulations and all scenarios for the current period.
The ALCO has implemented a hedge position to help protect Peoples' net interest
income streams in the event of rising rates which will complement the current
IRR position. Peoples has a hedge position on a $17 million long-term,
fixed-rate borrowing from the FHLB that may convert to a variable rate, at the
FHLB's discretion. In addition, the ALCO may consider additional hedging
opportunities, 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 changing rate environment.
Liquidity
- ---------
In addition to IRR management, a primary objective of the ALCO is to maintain 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 wholesale
funding and brokered deposits.
Typically, the main source of liquidity for Peoples is deposit growth. Liquidity
is also provided by cash generated from earning assets such as maturities,
calls, principal payments and net income from loans and investment securities.
Through six months of 2005, cash provided by financing activities totaled $10.7
million compared to $25.1 million a year ago. Cash used in investing activities
totaled $33.2 million through six months of 2005 versus $61.3 million for the
first six months of 2004. The higher cash used for investing activities last
year was primarily due to the additional $20 million BOLI investment and
Insurance Agency Acquisitions in 2004.
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 help enable Peoples to match-fund payment
amortization and pricing characteristics with contractual maturity dates and
pricing parameters of earning assets. At June 30, 2005, Peoples had available
borrowing capacity of approximately $137 million through these external sources
and unpledged securities in the investment portfolio of approximately $169
million that can be utilized as an additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting volatile
funds from liquid assets. Peoples' volatile funds consist primarily of
short-term deposits, while liquid assets includes short-term investments and
unpledged available-for-sale securities. At June 30, 2005, Peoples' net
liquidity position was $153.1 million, or 8.4% of total assets, compared to
$141.4 million, or 7.8% of total assets, at December 31, 2004. The liquidity
position as of June 30, 2005, was within Peoples' policy limit of negative 10%
of total assets.
OFF-BALANCE SHEET ACTIVITIES AND CONTRACTUAL OBLIGATIONS
========================================================
Peoples routinely engages in activities that involve, to varying degrees,
elements of risk that are not reflected in whole or in part in the consolidated
financial statements. These activities are part of Peoples' normal course of
business and include traditional off-balance sheet credit-related financial
instruments, interest rate contracts, operating leases, long-term debt and
commitments to make additional capital contributions in low-income housing tax
credit investments.
Traditional off-balance sheet credit-related financial instruments are primarily
commitments to extend credit, and standby letters of credit. These activities
could require Peoples to make cash payments to third parties in the event
certain specified future events occur. The contractual amounts represent the
extent of Peoples' exposure in these off-balance sheet activities. However,
since certain off-balance sheet commitments, particularly standby letters of
credit, are expected to expire or be only partially used, the total amount of
commitments does not necessarily represent future cash requirements. These
activities are necessary to meet the financing needs of customers. The following
table details the total contractual amount of loan commitments and standby
letters of credit:
June 30, March 31, December 31, June 30,
(Dollars in Thousands) 2005 2005 2004 2004
Loan commitments $ 153,536 $ 148,276 $ 139,731 $ 140,882
Standby letters of credit 31,832 32,483 31,612 23,274
Peoples also enters into interest rate contracts where Peoples is required to
either receive cash from or pay cash to counter parties depending on changes in
interest rates. Peoples utilizes interest rate contracts to help manage the risk
of changing interest rates. At June 30, 2005, Peoples held an interest rate
contract with notional amounts totaling $17 million and fair values totaling
$702,000. Interest rate contracts are carried at fair value on the consolidated
balance sheet, with the fair value representing the net present value of
expected future cash receipts or payments based on market interest rates as of
the balance sheet date. As a result, the amounts recorded on the balance sheet
at June 30, 2005, do not represent the amounts that may ultimately be paid or
received under these contracts.
Peoples also has commitments to make additional capital contributions in
low-income housing tax credit funds, consisting of a pool of low-income housing
projects. As a limited partner in these funds, Peoples receives Federal income
tax benefits, which assists Peoples in managing its overall tax burden. At June
30, 2005, these commitments approximated $2.5 million, with approximately $0.7
million expected to be paid over the next twelve months. Management may make
additional investments in various tax credit funds. Management does not
anticipate Peoples' current off-balance sheet activities will have a material
impact on future results of operations or financial condition.
Peoples continues to lease certain banking facilities and equipment under
noncancelable operating leases with terms providing for fixed monthly payments
over periods ranging from two to fifteen years. Many of Peoples' leased banking
facilities are inside retail shopping centers and, as a result, are not
available for purchase. Management believes these leased facilities increase
Peoples' visibility within its markets and afford sales associates additional
access to current and potential clients.
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 affect 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
==============
In the second quarter of 2005, Peoples achieved good financial results
reflecting management's efforts to diversify revenue and continue Peoples'
history of strong asset quality. While net interest income and margin improved
in the second quarter, the flattening yield curve, coupled with intense
competition, is likely to limit any significant additional improvement in the
near term and emphasizes the need to grow non-interest income. Peoples' capital
position, coupled with management's commitment to sound underwriting discipline
and Peoples' solid asset quality, serves as a foundation of strength in the
current business environment. Management continues its efforts to position
Peoples for long-term earnings growth in anticipation of a continued rising
interest rate environment, which will pose additional challenges as competition
for loans and deposits intensifies.
Earnings in the second quarter benefited from a substantially lower provision
for loan losses due to recoveries exceeding prior year levels and Peoples'
continued strong asset quality, which has helped to limit losses. In the third
quarter of 2005, management expects a higher provision for loan losses compared
to its second quarter level, which assumes net chargeoffs return to more
historic levels. However, the final determination of future provisions will be
based on the quarterly analysis of the allowance for loan losses described in
the "Critical Accounting Policies" section of this discussion.
Recent acquisitions and escalating costs associated with the regulatory burden
of Sarbanes-Oxley and banking compliance guidelines have resulted in higher
non-interest expense in the first half of 2005 as compared to recent periods. In
the second half of 2005, management expects non-interest expense to remain
comparable to the second quarter level, although Peoples' regulatory compliance
and marketing efforts could cause a modest increase. However, management will
continue to monitor expenses and explore opportunities to enhance Peoples'
operating efficiency by limiting the overall increase in expenses.
Loan growth is a key factor in achieving Peoples' 2005 operating goals. In the
final half of 2005, management anticipates Peoples' lending efforts will result
in loan growth of $8 to $15 million per quarter, assuming no significant loan
payoffs occur, which is difficult to predict. While much of this growth is
expected to come from commercial lending, one of management's goals is to
reverse the recent trend of declining mortgage loan balances. Over the next six
months, management plans to fill open positions and enhance its delivery process
with recently acquired technology. In addition, Peoples' commercial lenders
continue to focus on penetrating the central Ohio and the Ashland,
Kentucky/Huntington, West Virginia, market areas.
Another strategic goal is to grow core deposit balances to a larger percentage
of total funding sources, which should benefit net interest income. In the third
quarter, management will emphasize the growth and retention of
non-interest-bearing and other lower cost deposits, which could reduce Peoples'
reliance on higher costing deposits and borrowed fund. As part of this focus,
management is evaluating new marketing strategies to attract deposits that
include direct mail campaigns and free gifts for new account openings, with the
intent of implementing these strategies in early fourth quarter of 2005.
Management believes the combination of Peoples' extensive branch and ATM
network, which includes extended hours in some offices, and focus on technology,
such as Internet banking and online billpay, will allow Peoples to be successful
in the competition for deposits.
Peoples has experienced a significant increase in assets, revenues and capital
in recent years through a combination of internal and external growth. Recent
acquisitions, such as the Insurance Agency Acquisitions, have boosted revenues
and changed Peoples' revenue mix to be less reliant on net interest margin.
Peoples has also expanded by establishing new loan production offices in Central
Ohio, which have been very successful at generating quality loans. In the second
half of 2005, management plans to focus its efforts on integrating recently
acquired businesses and creating more synergies and cross sale opportunities
across Peoples' universal financial service offering.
Peoples remains a service-oriented company with a sales focus that strives 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 investment services. In the
remainder of 2005, management expects earnings catalysts to include loan growth,
a full-year's impact of recent acquisitions, controlled operating expenses and
possible improvement in net interest revenue due to interest rate increases.
FORWARD-LOOKING STATEMENTS
==========================
Certain 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. Words such as
"expects," "believes", "plans", "will", "would", "should", "could" and similar
expressions are intended to identify these forward-looking statements but are
not the exclusive means of identifying such statements. Forward-looking
statements are subject to risks and uncertainties that may cause actual results
to differ materially. Factors that might cause such a difference include, but
are not limited to:
(1) competitive pressures among depository institutions which may increase
significantly;
(2) changes in the interest rate environment which may adversely impact
interest margins;
(3) prepayment speeds, loan originations and sale volumes, chargeoffs and
loan loss provisions may be less favorable than expected;
(4) the expected synergies from the Insurance Agency Acquisitions and
Ashland Banking Acquisition may make it difficult to maintain
relationships with clients, associates or suppliers;
(5) general economic conditions may be less favorable than expected;
(6) political developments, wars or other hostilities may disrupt or
increase volatility in securities markets or other economic
conditions;
(7) legislative or regulatory changes or actions may adversely affect
Peoples' business;
(8) changes and trends in the securities markets;
(9) a delayed or incomplete resolution of regulatory issues that could
arise;
(10) the impact of reputational risk created by these developments on such
matters as business generation and retention, funding and liquidity;
(11) the costs and effects of regulatory and legal developments, including
the outcome of regulatory or other governmental inquiries and legal
proceedings and results of regulatory examinations; and
(12) other risk factors relating to the banking industry or Peoples as
detailed from time to time in Peoples Bancorp's reports filed with the
Securities and Exchange Commission ("SEC").
All forward-looking statements speak only as of the execution date of this Form
10-Q and are expressly qualified in their entirety by the cautionary statements.
Although management believes 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. Additionally, Peoples
undertakes no obligation to release revisions to these forward-looking
statements to reflect events or circumstances after the date of this Form 10-Q.
Copies of documents filed with the SEC are available free of charge at the SEC
website at http://www.sec.gov and/or from Peoples' website.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The information called for by this item is provided under the caption "Interest
Rate Sensitivity and Liquidity" under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations in this Form 10-Q, and
is incorporated herein by reference.
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended June 30,
2005 2004
------------------------------------ -----------------------------------
(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Securities:
Taxable $ 533,006 $ 6,011 4.52% $ 576,319 $ 5,833 4.05%
Tax-exempt (1) 64,619 1,063 6.60% 63,408 1,075 6.78%
- --------------------------------------------------------------------------------------------------------------------
Total securities 597,625 7,074 4.73% 639,727 6,908 4.32%
Loans (2):
Commercial (1) 627,944 10,069 6.43% 541,684 7,975 5.89%
Real estate (3) 338,605 5,351 6.34% 307,476 5,044 6.56%
Consumer 58,246 1,286 8.86% 71,658 1,617 9.03%
- --------------------------------------------------------------------------------------------------------------------
Total loans 1,024,795 16,706 6.52% 920,818 14,636 6.36%
Less: Allowance for loan loss (15,447) (15,079)
- --------------------------------------------------------------------------------------------------------------------
Net loans 1,009,348 16,706 6.63% 905,739 14,636 6.48%
Interest-bearing deposits with banks 2,495 14 2.38% 2,456 3 0.46%
Federal funds sold 556 4 2.96% 2,448 7 1.14%
- --------------------------------------------------------------------------------------------------------------------
Total earning assets 1,610,024 23,798 5.92% 1,550,370 21,554 5.57%
Other assets 200,753 180,803
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 1,810,777 $ $ 1,731,173
====================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 148,284 $ 265 0.72% $ 178,938 $ 254 0.57%
Interest-bearing demand deposits 302,401 1,365 1.81% 257,677 495 0.77%
Time 495,884 3,959 3.20% 450,615 3,410 3.03%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 946,569 5,589 2.37% 887,230 4,159 1.88%
Borrowed funds:
Short-term 101,387 726 2.87% 79,104 191 0.97%
Long-term 411,557 4,166 4.05% 439,668 4,098 3.73%
- --------------------------------------------------------------------------------------------------------------------
Total borrowed funds 512,944 4,892 3.80% 518,772 4,289 3.29%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,459,513 $ 10,481 2.87% 1,406,002 $ 8,448 2.40%
Non-interest-bearing deposits 158,774 142,901
Other liabilities 15,903 10,502
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,634,190 1,559,405
Stockholders' equity 176,587 171,768
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 1,810,777 $ 1,731,173
====================================================================================================================
Interest spread $ 13,317 3.05% $ 13,106 3.17%
Interest income to earning assets 5.92% 5.57%
Interest expense to earning assets 2.60% 2.18%
- --------------------------------------------------------------------------------------------------------------------
Net interest margin 3.32% 3.39%
- --------------------------------------------------------------------------------------------------------------------
<FN>
(1) Interest income and yields are presented on a fully tax-equivalent
basis using a 35% tax rate.
(2) Nonaccrual and impaired loans are included in the average balances.
Related interest income on nonaccrual loans prior to the loan being
placed on nonaccrual is included in loan interest income. Loan fees
included in interest income totaled $117 and $121 for the periods
presented in 2005 and 2004, respectively.
(3) Loans held for sale are included in the average balance listed.
Related interest income on loans originated for sale prior to the loan
being sold is included in loan interest income.
</FN>
For the Six Months Ended June 30,
2005 2004
------------------------------------- -----------------------------------
(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Securities:
Taxable $ 534,999 $ 11,670 4.40% $ 580,882 $ 12,004 4.13%
Tax-exempt (1) 63,542 2,103 6.67% 64,306 2,168 6.74%
- --------------------------------------------------------------------------------------------------------------------
Total securities 598,541 13,773 4.60% 645,188 14,172 4.39%
Loans (2):
Commercial (1) 619,561 19,656 6.40% 534,774 15,781 5.90%
Real estate (3) 346,145 10,785 6.28% 307,435 10,154 6.61%
Consumer 58,607 2,592 8.92% 74,321 3,378 9.09%
- --------------------------------------------------------------------------------------------------------------------
Total loans 1,024,313 33,033 6.45% 916,530 29,313 6.40%
Less: Allowance for loan loss (15,150) (15,047)
- --------------------------------------------------------------------------------------------------------------------
Net loans 1,009,163 33,033 6.58% 901,483 29,313 6.53%
Interest-bearing deposits with banks 2,404 25 2.07% 2,504 6 0.48%
Federal funds sold 405 5 2.78% 13,573 64 0.94%
- --------------------------------------------------------------------------------------------------------------------
Total earning assets 1,610,513 $ 46,836 5.84% 1,562,748 $ 43,555 5.59%
Other assets 199,531 168,604
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 1,810,044 $ 1,731,352
====================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 151,297 $ 556 0.74% $ 174,941 $ 487 0.56%
Interest-bearing demand deposits 290,924 2,372 1.64% 260,270 992 0.76%
Time 495,938 7,766 3.16% 455,786 6,480 2.84%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 938,159 10,694 2.30% 890,997 7,959 1.80%
Borrowed funds:
Short-term 96,692 1,272 2.65% 91,283 468 1.03%
Long-term 425,463 8,446 4.00% 428,126 8,059 3.76%
- --------------------------------------------------------------------------------------------------------------------
Total borrowed funds 522,155 9,718 3.73% 519,409 8,527 3.27%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,460,314 $ 20,412 2.81% 1,410,406 $ 16,486 2.34%
Non-interest-bearing deposits 157,187 139,205
Other liabilities 16,544 9,533
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,634,045 1,559,144
Stockholders' equity 175,999 172,208
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 1,810,044 $ 1,731,352
====================================================================================================================
Interest spread $ 26,424 3.03% $ 27,069 3.25%
Interest income to earning assets 5.84% 5.59%
Interest expense to earning assets 2.55% 2.11%
- --------------------------------------------------------------------------------------------------------------------
Net interest margin 3.29% 3.48%
- --------------------------------------------------------------------------------------------------------------------
<FN>
(1) Interest income and yields are presented on a fully tax-equivalent
basis using a 35% tax rate.
(2) Nonaccrual and impaired loans are included in the average balances.
Related interest income on nonaccrual loans prior to the loan being
placed on nonaccrual is included in loan interest income. Loan fees
included in interest income totaled $241 for both periods presented in
2005 and 2004.
(3) Loans held for sale are included in the average balance listed.
Related interest income on loans originated for sale prior to the loan
being sold is included in loan interest income.
</FN>
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
With the participation of the President and Chief Executive Officer and the
Chief Financial Officer and Treasurer of Peoples Bancorp Inc. ("Peoples
Bancorp"), Peoples Bancorp's management has evaluated the effectiveness of
Peoples Bancorp's disclosure controls and procedures, as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on that evaluation, Peoples Bancorp's President and Chief Executive
Officer and Chief Financial Officer and Treasurer have concluded that:
(a) information required to be disclosed by Peoples Bancorp in this
Quarterly Report on Form 10-Q and the other reports which Peoples
Bancorp files or submits under the Exchange Act would be accumulated
and communicated to Peoples Bancorp's management, including its
President and Chief Executive Officer and Chief Financial Officer and
Treasurer, as appropriate to allow timely decisions regarding required
disclosure;
(b) information required to be disclosed by Peoples Bancorp in this
Quarterly Report on Form 10-Q and the other reports which Peoples
Bancorp files or submits under the Exchange Act would be recorded,
processed, summarized and reported within the time periods specified in
the SEC's rules and forms; and
(c) Peoples Bancorp's disclosure controls and procedures are effective as
of the end of the quarterly period covered by this Quarterly Report on
Form 10-Q to ensure that material information relating to Peoples
Bancorp and its consolidated subsidiaries is made know to them,
particularly during the period in which this Quarterly Report on Form
10-Q is being prepared.
Changes in Internal Control Over Financial Reporting
- ----------------------------------------------------
There were no changes in Peoples Bancorp's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred
during Peoples Bancorp's fiscal quarter ended June 30, 2005, that have
materially affected, or are reasonably likely to materially affect, Peoples
Bancorp's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
- ---------------------------
There are no pending legal proceedings to which Peoples or any of its
subsidiaries is a party or to which any of their property is subject other than
ordinary routine litigation to which Peoples' subsidiaries are parties
incidental to their respective businesses. Peoples considers none of such
proceedings to be material.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
- ---------------------------------------------------------------------
On May 28, 2004, Peoples Insurance Agency, Inc. ("Peoples Insurance"), a
wholly-owned subsidiary of Peoples Bancorp, acquired Barengo Insurance Agency,
Inc. ("Barengo Insurance Agency") through the merger of Barengo Insurance Agency
into Peoples Insurance (the "Barengo Insurance Agency Merger"). As contemplated
by the agreement and plan of merger, dated as of May 28, 2004, related to the
Barengo Insurance Agency Merger, on July 18, 2005, each of the two former
shareholders of Barengo Insurance Agency received "earn out consideration" based
on the performance of the former Barengo Insurance Agency in achieving specified
revenue growth goals during the twelve-month period ended May 31, 2005 (the
"2005 Earn-Out Period"). The "earn out consideration" paid to each former
Barengo Insurance Agency shareholder was in the form of $95,043 in cash and
$98,957 in Peoples Bancorp common shares, representing 3,678 Peoples Bancorp
common shares based on the average of the daily closing prices of the Peoples
Bancorp common shares for the 20 consecutive trading days ending at the close of
business on the fifth trading day before July 15, 2005 (i.e., July 8, 2005).
Accordingly, an aggregate of 3,678 Peoples Bancorp common shares were issued as
"earn out consideration" for the 2005 Earn-Out Period. These common shares were
issued in a private placement in reliance upon the exemption from registration
under Section 4 (2) of the Securities Act of 1933, as amended (the "Securities
Act"), based upon the limited number of persons to whom the common shares were
"sold" (two former shareholders of Barengo Insurance Agency) and the
representations from each person (a) that such person was either (i) an
"accredited investor" as defined in Rule 501 promulgated under the Securities
Act or (ii) possessed such experience, knowledge and sophistication in financial
and business matters generally, and familiarity with the transactions related to
the Barengo Insurance Agency Merger, including the performance associated with
determining any "earn out consideration", that, together with such person's
investment advisors, such person was capable of evaluating the merits and
economic risks of consummating the transactions related to the Barengo Insurance
Agency Merger; and (b) that such person was acquiring the common shares of
Peoples Bancorp for such person's own account, for investment and not with a
view to, or for sale in connection with, any distribution in contravention of
the Securities Act. As part of the Barengo Insurance Agency Merger, Peoples
Bancorp agreed to file a registration statement with the SEC to register for
resale common shares issued to the former Barengo Insurance Agency shareholders
as "earn out consideration" in respect of the Barengo Insurance Agency Merger.
The Registration Statement on Form S-3 filed by Peoples Bancorp for this purpose
(Registration No. 333-116683) became effective on July 2, 2004.
The following table details repurchases by Peoples Bancorp and purchases by
"affiliated purchasers" as defined in Rule 10b-18(a)(3) of Peoples Bancorp's
common shares during the three months ended June 30, 2005:
(d)
Maximum Number
(c) of common shares
(a) Common Shares that may yet be
Total Number of (b) Purchased as part of Purchased under
Common Shares Average Price Publicly Announced the plans or
Period Purchased Paid Per Share Plans or Program (1) Programs (1)(2)
April 1 - 30, 2005 661(3) $26.11(3) - 465,300
May 1 - 31, 2005 - - 465,300
June 1 - 30, 2005 463(3) $26.86(3) - 465,300
- -----------------------------------------------------------------------------------------------------
Total 1,124 $26.42 - 465,300
=====================================================================================================
<FN>
(1) Information reflects solely the 2005 Stock Repurchase Program
originally announced on December 10, 2004, which authorized the
repurchase of 525,000 common shares, with an aggregate purchase price
of not more than $17.0 million. The 2005 Stock Repurchase Program
expires on December 31, 2005.
(2) Information reflects maximum number of common shares that may be
purchased at the end of the period indicated.
(3) Information reflects solely common shares purchased in open market
transactions by Peoples Bank under the Rabbi Trust Agreement
establishing a rabbi trust holding assets to provide payment of the
benefits under the Peoples Bancorp Inc. Deferred Compensation Plan for
Directors of Peoples Bancorp Inc. and Subsidiaries.
</FN>
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.
- ------------------
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- ----------------
11 Computation of Earnings Per Share Filed herewith
12 Computation of Ratios Filed herewith
31(a) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[President and Chief Executive Officer]
31(b) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[Chief Financial Officer and Treasurer]
32 Section 1350 Certifications Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORP INC.
Date: August 8, 2005 By: /s/ MARK F. BRADLEY
---------------------------------------
Mark F. Bradley
President and Chief Executive Officer
Date: August 8, 2005 By: /s/ JOHN W. CONLON
---------------------------------------
John W. Conlon
Chief Financial Officer and Treasurer
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED JUNE 30, 2005
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- ----------------
11 Computation of Earnings Per Share Filed herewith
12 Computation of Ratios Filed herewith
31(a) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[President and Chief Executive Officer]
31(b) Certification Pursuant to Rule 13a-14(a)/15d-14(a) Filed herewith
[Chief Financial Officer and Treasurer]
32 Section 1350 Certifications Filed herewith