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 March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio
----------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
31-0987416
----------------------------------------------
(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750
- ------------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
- --------------------------------------------------- --------------
Not Applicable
------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, at April 26, 2006: 10,577,404 common shares, without par value.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION...........................................................................................3
- ------------------------------
ITEM 1: FINANCIAL STATEMENTS.........................................................................................3
----------------------------
CONSOLIDATED BALANCE SHEETS (Unaudited)..........................................................................3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)....................................................................4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited).......................................................5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)......................................................5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)......................................................6
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS.............................................................7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND FINANCIAL CONDITION.........................9
--------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA..........................................................................................9
RESULTS OF OPERATIONS...........................................................................................12
FINANCIAL CONDITION.............................................................................................17
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................................23
------------------------------------------------------------------
ITEM 4: CONTROLS AND PROCEDURES.....................................................................................23
-------------------------------
PART II - OTHER INFORMATION.............................................................................................25
- ---------------------------
ITEM 1: LEGAL PROCEEDINGS..........................................................................................25
--------------------------
ITEM 1A: RISK FACTORS..............................................................................................25
----------------------
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS................................................25
--------------------------------------------------------------------
ITEM 3: DEFAULTS UPON SENIOR SECURITIES............................................................................25
----------------------------------------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................25
------------------------------------------------------------
ITEM 5: OTHER INFORMATION..........................................................................................26
--------------------------
ITEM 6: EXHIBITS...................................................................................................26
-----------------
SIGNATURES..............................................................................................................27
- ----------
EXHIBIT INDEX...........................................................................................................28
- -------------
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
- ----------------------------
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
March 31, December 31,
2006 2005
Assets
Cash and cash equivalents:
Cash and due from banks $ 32,779 $ 35,564
Interest-bearing deposits in other banks 904 1,084
$
Federal funds sold 2,000 3,000
- -------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 35,683 39,648
- -------------------------------------------------------------------------------------------------------------------------------
Available-for-sale investment securities, at estimated fair value (amortized
cost of $594,876 at March 31, 2006 and $591,022 at December 31, 2005) 588,787 589,313
- -------------------------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees and costs 1,079,027 1,071,876
Allowance for loan losses (14,672) (14,720)
- -------------------------------------------------------------------------------------------------------------------------------
Net loans 1,064,355 1,057,156
- -------------------------------------------------------------------------------------------------------------------------------
Loans held for sale 1,910 1,103
Bank premises and equipment, net 23,163 23,486
Business owned life insurance 47,399 46,993
Goodwill 59,773 59,767
Other intangible assets 8,917 9,513
Other assets 30,539 28,298
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,860,526 $ 1,855,277
===============================================================================================================================
Liabilities
Deposits:
Non-interest-bearing $ 166,782 $ 162,729
Interest-bearing 972,824 926,557
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,139,606 1,089,286
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 194,038 173,696
Long-term borrowings 294,660 362,466
Junior subordinated notes held by subsidiary trusts 29,372 29,350
Accrued expenses and other liabilities 18,181 17,402
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,675,857 1,672,200
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, no par value, 24,000,000 shares authorized,
10,874,222 shares issued at March 31, 2006 and 10,869,655 shares issued
at December 31, 2005, including shares in treasury 162,345 162,231
Retained earnings 34,551 30,740
Accumulated comprehensive loss, net of deferred income taxes (3,962) (1,116)
Treasury stock, at cost, 330,739 shares at March 31, 2006 and 350,675 shares
at December 31, 2005 (8,265) (8,778)
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 184,669 183,077
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,860,526 $ 1,855,277
===============================================================================================================================
See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data) For the Three Months
Ended March 31,
-------------------------------------
2006 2005
----------------- -----------------
Interest Income:
Interest and fees on loans $ 18,961 $ 16,296
Interest on taxable investment securities 6,017 5,659
Interest on tax-exempt investment securities 730 676
Other interest income 40 12
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 25,748 22,643
- ----------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 6,642 5,105
Interest on short-term borrowings 1,767 546
Interest on long-term borrowings 3,201 3,682
Interest on junior subordinated notes held by subsidiary trusts 635 598
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 12,245 9,931
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 13,503 12,712
Provision for loan losses 268 941
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,235 11,771
- ----------------------------------------------------------------------------------------------------------------------------
Other Income:
Investment and insurance commissions 3,375 2,654
Service charges on deposit accounts 2,461 2,274
Income from fiduciary activities 777 757
Electronic banking income 697 647
Business owned life insurance 406 454
Mortgage banking income 170 117
Gain on securities transactions - 233
Other 228 232
- ----------------------------------------------------------------------------------------------------------------------------
Total other income 8,114 7,368
- ----------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Salaries and employee benefits 6,912 6,686
Net occupancy and equipment 1,242 1,289
Professional fees 612 665
Amortization of other intangible assets 582 688
Marketing 475 381
Data processing and software 468 461
Franchise tax 445 411
Other 2,330 2,166
- ----------------------------------------------------------------------------------------------------------------------------
Total other expenses 13,066 12,747
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,283 6,392
Income taxes 2,352 1,700
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 5,931 $ 4,692
============================================================================================================================
Earnings per share:
Basic $ 0.56 $ 0.45
- ----------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.56 $ 0.44
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-average number of shares outstanding:
Basic 10,530,444 10,419,189
- ----------------------------------------------------------------------------------------------------------------------------
Diluted 10,655,233 10,558,003
- ----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared $ 2,120 $ 1,989
- ----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 0.20 $ 0.19
- ----------------------------------------------------------------------------------------------------------------------------
See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in Thousands, except Per Share Data)
Common Stock Accumulatede
-------------------------- Retained Comprehensive Treasuer
Shares Amount Earnings Loss Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 10,869,655 $ 162,231 $ 30,740 $ (1,116) $ (8,778) $ 183,077
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 5,931 5,931
Other comprehensive loss, net of tax (2,846) (2,846)
Cash dividends declared of $0.20 per share (2,120) (2,120)
Stock-based compensation expense 124 124
Purchase of treasury stock, 1,133 shares (33) (33)
Exercise of common stock options (reissued
21,069 treasury shares) (144) 546 402
Issuance of common stock under dividend
reinvestment plan 4,567 134 134
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2006 10,874,222 $ 162,345 $ 34,551 $ (3,962) $ (8,265) $ 184,669
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands) For the Three Months
Ended March 31,
------------------------
2006 2005
------------ -----------
Net income $ 5,931 $ 4,692
Other comprehensive loss:
Unrealized loss on available-for-sale securities arising in the period (4,378) (6,295)
Less: reclassification adjustment for net securities gains included in net income - 233
Unrealized gain on cash flow hedge derivatives arising in the period - 30
- ------------------------------------------------------------------------------------------------------------------------
Total other comprehensive loss (4,378) (6,498)
Income tax benefit 1,532 2,274
- ------------------------------------------------------------------------------------------------------------------------
Total other comprehensive loss, net of tax (2,846) (4,224)
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 3,085 $ 468
- ------------------------------------------------------------------------------------------------------------------------
See notes to the consolidated unaudited financial statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands) For the Three Months
Ended March 31,
-------------------------------------
2006 2005
--------------- ---------------
Net cash provided by operating activities $ 6,139 $ 19,372
Cash flows from investing activities:
Purchases of available-for-sale securities (14,482) (25,840)
Proceeds from sales of available-for-sale securities - 593
Proceeds from maturities, calls and prepayments of available-for-sale
securities 10,432 28,281
Net increase in loans (7,439) (1,980)
Net expenditures for premises and equipment (398) (550)
Net proceeds from sales of other real estate owned 461 266
Investment in limited partnership and tax credit funds - (1,519)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,426) (749)
Cash flows from financing activities:
Net increase in non-interest-bearing deposits 4,053 4,108
Net increase in interest-bearing deposits 46,344 29,780
Net increase in short-term borrowings 20,342 31,829
Payments on long-term borrowings (67,805) (78,222)
Cash dividends paid (1,981) (1,770)
Purchase of treasury stock (33) (1,644)
Proceeds from issuance of common stock 402 192
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,322 (15,727)
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,965) 2,896
Cash and cash equivalents at beginning of period 39,648 31,449
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 35,683 $ 34,345
=====================================================================================================================
Supplemental cash flow information:
Interest paid $ 11,881 $ 10,043
- ---------------------------------------------------------------------------------------------------------------------
Income taxes paid 200 -
- ---------------------------------------------------------------------------------------------------------------------
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 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 accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. To conform to the 2006
presentation, certain reclassifications have been made to prior period
amounts, which had no impact on net income comprehensive income, cash
provided by operating activities or stockholders' equity. Results of
operation for the three months ended March 31, 2006, are not necessarily
indicative of the results that may be expected for the year ending December
31, 2006.
Certain information and footnotes typically included in financial statements
prepared in conformity with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The balance sheet at December 31, 2005
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, 2005 ("2005 Form 10-K"). These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the 2005 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 March 17, 2006, the FASB issued Statement No. 156, "Accounting for
Servicing of Financial Assets - an amendment of FASB Statement No. 140"
("SFAS 156"). SFAS 156 amends FASB Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities-a replacement of FASB Statement No. 125" ("SFAS 140"). SFAS 156
permits entities to subsequently measure servicing rights at fair value and
report changes in fair value in earnings rather than amortize servicing
rights in proportion to and over the estimated net servicing income or loss
and assess the rights for impairment or the need for an increased obligation
as required under SFAS 140. Entities that elect to subsequently measure
their servicing rights at fair value may no longer find it necessary to
qualify for and apply the provisions of FASB Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," to achieve an income
statement effect similar to the application of hedge accounting for
instruments used to manage the effect of interest rate changes on servicing
rights.
SFAS 156 is effective as of the beginning of an entity's first fiscal year
that begins after September 15, 2006. Earlier adoption of the Statement is
permitted as of the beginning of an entity's fiscal year, provided the
entity has not yet issued financial statements for any interim period of
that fiscal year. Peoples elected to adopt SFAS 156 on January 1, 2007, and
has not changed its method of accounting for its mortgage servicing rights.
Management does not expect the adoption to have a material impact on
Peoples' financial condition, results of operations or cash flows.
3. Stock-Based Compensation:
-------------------------
On January 1, 2006, Peoples adopted the fair value recognition provisions of
FASB Statement No. 123(R), "Share-Based Payment" ("SFAS123(R)"), using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized beginning in 2006 includes: (a) the
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated
in accordance with the original provisions of FASB Statement No. 123, and
(b) the compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123(R). Results for prior periods have not been
restated. Prior to January 1, 2006, Peoples accounted for stock-based
compensation using the intrinsic value method. Under the provisions of
Peoples Bancorp's stock option plans, the exercise price per share of each
option granted cannot be less than the fair market value of the underlying
common shares on the date of grant. As a result, Peoples previously did not
recognize any stock-based employee compensation expense in net income prior
to January 1, 2006.
As a result of adopting SFAS 123(R), Peoples' income before income taxes and
net income for the quarter ended March 31, 2006, are $124,000 and $81,000
lower, respectively, than if Peoples had continued to account for
share-based compensation under the intrinsic method. Basic and diluted
earnings per share for the quarter ended March 31, 2006, would have been
$0.57 and $0.56, respectively, if Peoples had not adopted Statement 123(R),
compared to reported basic and diluted earnings per share of $0.56.
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
March 31,
-----------------------------
2006 2005
------------ -------------
Net income, as reported $ 5,931 $ 4,692
Deduct: stock-based compensation expense determined
under fair value based method not included in net
income, net of tax - 145
- -------------------------------------------------------------------------------------------
Pro forma net income $ 5,931 $ 4,547
- -------------------------------------------------------------------------------------------
Basic Earnings Per Share:
As reported $ 0.56 $ 0.45
- -------------------------------------------------------------------------------------------
Pro forma $ 0.56 $ 0.44
- -------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
As reported $ 0.56 $ 0.44
- -------------------------------------------------------------------------------------------
Pro forma $ 0.56 $ 0.43
- -------------------------------------------------------------------------------------------
The fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
2006 2005
--------- ----------
Risk-free interest rate 4.37% 4.44%
Dividend yield 2.61% 2.75%
Volatility factor of the market price of parent stock 26.0% 27.8%
Weighted-average expected life of options 6.5 years 7.4 years
The following table summarizes Peoples' stock options for the three months ended
March 31, 2006:
Weighted
Average
Number Exercise
of Shares Price
--------------------------
Outstanding at January 1, 2006 475,832 $ 20.41
Granted 44,615 28.25
Exercised 50,313 21.34
Canceled - -
- --------------------------------------------------------------------------------
Outstanding at March 31, 2006 470,134 21.05
- --------------------------------------------------------------------------------
Exercisable at March 31, 2006 413,969 20.14
- --------------------------------------------------------------------------------
Weighted average estimated fair value of options
granted during the period $ 7.33
- --------------------------------------------------------------------------------
The following summarizes information concerning Peoples' stock options
outstanding at March 31, 2006:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Option Remaining Average Average
Range of Shares Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
------------------------------------------------------------------------------------
$11.87 to $13.59 76,394 3.3 years $ 13.40 76,394 $ 13.40
$13.59 to $18.70 77,221 3.0 years 15.51 77,221 15.51
$18.70 to $22.32 132,989 4.7 years 20.93 132,989 20.93
$22.33 to $27.74 110,483 7.5 years 25.47 98,933 25.41
$27.74 to $29.48 73,047 9.1 years 28.41 28,432 28.66
---------------- ---------------- ------------ -------------- ------------
470,134 5.5 years $ 21.05 413,969 $ 20.14
4. Employee Benefit Plans:
-----------------------
Components of Net Periodic Benefit Costs
----------------------------------------
Peoples Bancorp sponsors a noncontributory defined benefit pension plan that
covers substantially all employees hired before January 1, 2003, and a
noncontributory defined contribution plan that covers substantially all
employees hired on or after January 1, 2003. Peoples Bancorp also sponsors a
contributory postretirement benefit plan for former employees who were
retired as of December 31, 1992. The following table details the components
of the net periodic benefit cost for the plans:
Pension Benefits Postretirement Benefits
------------------------ ------------------------
Three Months Ended Three Months Ended
March 31, March 31,
------------------------ ------------------------
(Dollars in Thousands) 2006 2005 2006 2005
--------- ----------- ---------- ----------
Service cost $ 217 $ 232 $ - $ -
Interest cost 189 207 6 9
Expected return on plan assets (291) (279) - -
Amortization of prior service cost 1 1 - 3
Amortization of net loss 64 62 - 3
- ----------------------------------------------------------------------------------------
Net periodic benefit cost $ 180 $ 223 $ 6 $ 15
- ----------------------------------------------------------------------------------------
Employer Contributions
----------------------
Through March 31, 2006, Peoples Bancorp contributed $1.2 million to its
pension plan upon the recommendation of and approval by Peoples Bancorp's
Retirement Plan Committee and Board of Directors.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION
- ------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited consolidated
financial statements and management's discussion and analysis that follows:
At or For the Three
Months Ended March 31,
------------------------------------
SIGNIFICANT RATIOS 2006 2005
---------------- ----------------
Return on average equity 13.02 % 10.85 %
Return on average assets 1.30 % 1.05 %
Net interest margin (a) 3.40 % 3.27 %
Efficiency ratio (b) 56.67 % 59.60 %
Average stockholders' equity to average assets 10.00 % 9.69 %
Average loans to average deposits 95.73 % 94.34 %
Cash dividends to net income 35.74 % 42.39 %
- -----------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS
Nonperforming loans as a percent of total loans (c) 0.56 % 0.72 %
Nonperforming assets as a percent of total assets (d) 0.33 % 0.46 %
Allowance for loan losses to loans net of unearned interest 1.36 % 1.50 %
Allowance for loan losses to nonperforming loans (c) 242.7 % 208.1 %
Provision for loan losses to average loans (period only) 0.02 % 0.09 %
Net charge-offs as a percentage of average loans 0.12 % 0.20 %
- -----------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS (end of period)
Tier I capital ratio 11.97 % 11.16 %
Risk-based capital ratio 13.26 % 12.52 %
Leverage ratio 8.40 % 7.60 %
- -----------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Earnings per share - basic $ 0.56 $ 0.45
Earnings per share - diluted 0.56 0.44
Cash dividends declared per share 0.20 0.19
Book value per share (end of period) 17.51 16.61
Tangible book value per share (end of period) (e) 11.00 9.84
Weighted average shares outstanding - Basic 10,530,444 10,419,189
Weighted average shares outstanding - Diluted 10,655,233 10,558,003
Common shares outstanding at end of period 10,543,483 10,393,879
- -----------------------------------------------------------------------------------------------------------------
<FN>
(a) Fully-tax equivalent net interest income as a percentage of average earning
assets.
(b) Non-interest expense (less intangible amortization) as a percentage of
fully-tax equivalent net interest income plus non-interest income.
(c) Nonperforming loans include loans 90 days past due and accruing,
renegotiated loans and nonaccrual loans.
(d) Nonperforming assets include nonperforming loans and other real estate
owned.
(e) Tangible book value per share reflects capital calculated for banking
regulatory requirements and excludes balance sheet impact of intangible
assets acquired through acquisitions.
</FN>
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, charge-offs and
loan loss provisions may be less favorable than expected;
(4) general economic conditions may be less favorable than expected;
(5) political developments, wars or other hostilities may disrupt or
increase volatility in securities markets or other economic
conditions;
(6) legislative or regulatory changes or actions may adversely affect
Peoples' business;
(7) changes and trends in the securities markets;
(8) a delayed or incomplete resolution of regulatory issues that could
arise;
(9) the impact of reputational risk created by these developments on such
matters as business generation and retention, funding and liquidity;
(10) 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
(11) other risk factors relating to the banking industry or Peoples as
detailed from time to time in Peoples' reports filed with the
Securities and Exchange Commission ("SEC"), including those risk
factors included in the disclosure under the heading "ITEM 1A. RISK
FACTORS" of Part I of Peoples' 2005 Form 10-K.
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's
website at http://www.sec.gov and/or from Peoples Bancorp's website.
Business Overview
- -----------------
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 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 48
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 an
unaffiliated registered 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.
Peoples Investment Company and its subsidiary, Peoples Capital Corporation, were
formed in 2001 to optimize Peoples' consolidated capital position and improve
profitability by providing new investment opportunities that are either limited
or restricted at the bank level. These investments include, but are not limited
to, low-income housing tax credit funds or projects, venture capital, and other
higher risk investments. Presently, the operations of both companies do not
represent a significant part of Peoples' overall business activities.
This discussion and analysis should be read in conjunction with the audited
consolidated financial statements, and notes thereto, contained in Peoples' 2005
Form 10-K, as well as the ratios, statistics and discussions contained elsewhere
in this Form 10-Q.
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 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 at March 31, 2006, which were unchanged from the
policies disclosed in Peoples' 2005 Form 10-K.
Summary of Recent Transactions and Events
- -----------------------------------------
The following is a summary of recent transactions that have impacted or are
expected to impact Peoples' results of operations or financial condition:
o On January 17, 2006, Peoples Bancorp announced the authorization to
repurchase up to 425,000, or approximately 4%, of Peoples Bancorp's
outstanding common shares in 2006 from time to time in open market or
privately negotiated transactions (the "2006 Stock Repurchase
Program"). Any repurchased common shares will be held as treasury
shares and are anticipated to be used for future exercises of stock
options granted under Peoples Bancorp's stock option and equity-based
compensation plans, future issuances of common shares in connection
with Peoples Bancorp's deferred compensation plans, and other general
corporate purposes. Through March 31, 2006, Peoples Bancorp had not
repurchased any common shares under the 2006 Stock Repurchase Program.
o On January 27, 2006, Peoples Bank announced plans to open a new
full-service banking office in Lancaster, Ohio. The new office will
include an ATM and drive-through banking and focus on providing
banking and related financial services to prospective and current
clients in the Lancaster area. Management expects this office to open
in May 2006.
o On April 20, 2006, Peoples Bank announced that it had agreed to sell
its South Shore, Kentucky banking office to American Savings Bank,
fsb. This sale is consistent with Peoples' strategic plan to optimize
its branch network for better growth opportunities. The transaction,
which is subject to regulatory approval, is expected to be completed
by September 30, 2006, and includes the sale of approximately $6
million in deposits and $1 million of loans. Management does not
expect the sale of the South Shore office to have a material impact on
Peoples' financial condition, results of operations, capital or cash
flows.
The impact of these transactions, where material, is discussed in the applicable
sections of this management's discussion and analysis.
Financial Overview
- ------------------
For the quarter ended March 31, 2006, net income was $5.9 million, a 26%
increase compared to $4.7 million earned in the first quarter of 2005. Earnings
per diluted share grew 27% to $0.56 for the first quarter of 2006, from $0.44 a
year ago. Key drivers of first quarter earnings growth were higher net interest
income levels, increased insurance and investment revenues and a lower provision
for loan losses. As a result of higher net income, return on average equity
improved to 13.02% for the first quarter of 2006, from 10.85% a year ago, and
return on average assets was 1.30% compared to 1.05% for the same periods,
respectively.
Net interest income increased 6% to $13.5 million in the first quarter of 2006,
from $12.7 million a year ago, as average earning assets and related interest
income increased more than average interest-bearing liabilities and related
funding costs. Net interest margin rose 13 basis points from a year ago, to
3.40% for the quarter ended March 31, 2006, as result of improved asset yields
and some changes in the balance sheet mix of earning assets and funding sources.
For the first quarter of 2006, other income totaled $8.1 million, up 10%
compared to a year ago predominantly due to higher insurance revenues. First
quarter 2005 other income also included net gains on security and asset
transactions of $241,000 compared to nominal net gains in 2006's first quarter.
Other expense was up 3% to $13.1 million for the three months ended March 31,
2006, compared to the same period in 2005. Higher salaries and benefit costs
were the primary factor for the first quarter increase in total expense. Even
with this increase, Peoples' efficiency ratio improved to 56.7% in the first
quarter of 2006, from 59.6% a year ago.
At March 31, 2006, total assets were $1.86 billion, which was comparable to
year-end 2005. Gross portfolio loans increased by $7.2 million since December
31, 2005, totaling $1.08 billion at quarter-end. The largest portion of this
loan growth was from business loan originations. Investment securities totaled
$588.8 million at March 31, 2006, down only slightly from year-end 2005.
Total liabilities were $1.68 billion at March 31, 2006, compared to $1.67
billion at year-end 2005. Deposit balances grew $50.3 million in the first
quarter to $1.14 billion at March 31, 2006, due to increases of $46.3 million in
interest-bearing deposits and $4.1 million in non-interest-bearing balances. The
higher deposit balances allowed Peoples to reduce non-deposit borrowings by
$47.4 million to $518.1 million at March 31, 2006, from $565.5 million at
December 31, 2005.
At March 31, 2006, total stockholders' equity was $184.7 million versus $183.1
million at December 31, 2005. This increase was the result of Peoples' earnings,
net of dividends paid, of $3.8 million, which were partially offset by a $2.8
million increase in accumulated comprehensive loss.
RESULTS OF OPERATIONS
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, totaling $13.5
million in the first quarter of 2006, up 6% from a year ago. For the first
quarter of 2006, interest income grew 14% to $25.7 million, due to higher
average earning assets and improved yields on these assets, while interest
expense was up 23% to $12.2 million, attributable to increased average
interest-bearing liabilities and related funding costs, compared to the same
period in 2005. Compared to the fourth quarter of 2005, net interest income was
essentially unchanged, as increased interest expense offset higher levels of
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%. The following
table details the calculation of FTE net interest income:
Three Months Ended
------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 2006 2005 2005
---------------- ---------------- ----------------
Net interest income, as reported $ 13,503 $ 13,528 $ 12,712
Taxable equivalent adjustments 430 431 394
- ---------------------------------------------------------------------------------------------------
Fully-tax equivalent net interest income $ 13,933 $ 13,959 $ 13,106
- ---------------------------------------------------------------------------------------------------
Between June 2004 and March 2006, the Federal Reserve's Open Market Committee
has increased the target Federal Funds rate 375 basis points, causing a similar
increase in short-term market interest rates. However, market driven longer-term
interest rates have risen very little during this same period, resulting in the
compression of the spread between short-term and longer-term interest rates.
This flattening of the yield curve, coupled with intense competition for loans
and deposits, has made it difficult for many financial institutions, including
Peoples, to improve or even maintain their net interest margins. In the first
quarter of 2006, Peoples grew its net interest margin compared to a year ago as
a result of improved asset yields that exceeded the increase in funding costs
and a change in the balance sheet mix of earning assets and interest-bearing
liabilities.
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 tables details Peoples' average
balance sheet and analysis of net interest income:
For the Three Months Ended March 31,
--------------------------------------------------------------------------
2006 2005
------------------------------------ -----------------------------------
(dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------ ------------ --------- ------------ ------------- ---------
ASSETS
Securities:
Taxable $ 518,662 $ 6,017 4.64% $ 537,014 $ 5,659 4.27%
Tax-exempt (1) 68,902 1,124 6.52% 62,453 1,039 6.75%
- -----------------------------------------------------------------------------------------------------------------
Total securities 587,564 7,141 4.86% 599,467 6,698 4.47%
Loans (2):
Commercial (1) 688,744 12,298 7.24% 611,085 9,587 6.36%
Real estate (3) 318,766 5,334 6.69% 353,769 5,435 6.23%
Consumer 65,053 1,365 8.51% 58,971 1,305 8.97%
- -----------------------------------------------------------------------------------------------------------------
Total loans 1,072,563 18,997 7.16% 1,023,825 16,327 6.47%
Less: Allowance for loan loss (14,834) (14,850)
- -----------------------------------------------------------------------------------------------------------------
Net loans 1,057,729 18,997 7.26% 1,008,975 16,327 6.53%
Interest-bearing deposits with banks 2,500 24 3.93% 2,311 10 1.74%
Federal funds sold 1,472 16 4.27% 256 2 2.38%
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 1,649,265 $ 26,178 6.40% $ 1,611,009 $ 23,037 5.76%
Intangible assets 68,980 70,614
Other assets 129,345 127,746
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,847,590 1,809,369
=================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 127,596 198 0.63% $ 154,344 $ 290 0.76%
Interest-bearing demand deposits 289,206 1,596 2.24% 279,319 1,007 1.46%
Time 538,934 4,848 3.65% 495,992 3,808 3.11%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 955,736 6,642 2.82% 929,655 5,105 2.23%
Borrowed funds:
Short-term 165,332 1,767 4.33% 91,945 546 2.41%
Long-term 361,385 3,836 4.25% 439,523 4,280 3.90%
- -----------------------------------------------------------------------------------------------------------------
Total borrowed funds 526,717 5,603 4.28% 531,468 4,826 3.66%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,482,453 $ 12,245 3.34% $ 1,461,123 $ 9,931 2.75%
Non-interest-bearing deposits 164,722 155,607
Other liabilities 15,715 17,235
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,662,890 1,633,965
Stockholders' equity 184,700 175,404
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 1,847,590 1,809,369
=================================================================================================================
Interest spread $ 13,933 3.06% $ 13,106 3.01%
Interest income to earning assets 6.40% 5.76%
Interest expense to earning assets 3.00% 2.49%
- -----------------------------------------------------------------------------------------------------------------
Net interest margin 3.40% 3.27%
- -----------------------------------------------------------------------------------------------------------------
<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 loan 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 $132 and $124 for the periods presented in 2006 and
2005, respectively.
(3) Loans held for sale are included in the average loan balance listed.
Related interest income on loans originated for sale prior to the loan
being sold is included in loan interest income.
</FN>
Net loans continue to comprise the largest portion of Peoples' earning assets,
averaging $1.06 billion versus $1.01 billion for the first quarters of 2006 and
2005, respectively, and was the driver of the growth in earning assets in the
first quarter of 2006. The FTE yield on net loans improved 73 basis points from
new loans being originated at higher rates and the upward repricing of variable
rate, prime based loans as a result of the Federal Reserve's action to increase
interest rates, although the effect on pricing due to intense competition for
new commercial loans and the repayment of some higher yielding loans have
tempered these improvements. Average investment securities decreased 2% from a
year ago, as management used a portion of the principal runoff to fund loan
growth and manage liquidity.
In the first quarter of 2006, interest-bearing deposits averaged $955.7 million,
up from $929.7 million a year ago due to a $32 million increase in average
certificates of deposit ("CD") balances and an $11 million growth in average
brokered deposits. The average cost of interest-bearing deposits was 2.82% for
the first quarter of 2006 compared to 2.23% for 2005's first quarter. Peoples
also utilizes a variety of borrowings as complementary funding sources to
traditional and brokered deposits. Through three months of 2006, total borrowed
funds averaged $526.7 million compared to $531.5 million a year ago. Peoples'
overall cost of borrowed funds increased to 4.28% in the first quarter of 2006,
from 3.66% last year. The higher costs of both deposits and borrowings reflect
the general increase in short-term interest rates, the increasing competitive
pressures for deposit generation and the impact from the upward repricing of
certain liabilities. Peoples has also utilized special CD promotions to attract
and retain deposit balances, which has contributed to the increase in deposit
costs.
The following details the average balance and rate of Peoples' borrowed funds:
Three months Ended
---------------------------------------------------------------------
March 31, 2006 December 31, 2005 March 31, 2005
-------------------- --------------------- ---------------------
(Dollars in thousands) Average Rate Average Rate Average Rate
Balance Balance Balance
------------ ------- ------------ ------- ------------- -------
Short-term borrowings:
FHLB advances $ 130,532 4.45% $ 141,571 3.90% $ 76,450 2.49%
Retail repurchase agreements 34,800 3.61% 29,125 3.25% 15,495 1.80%
- --------------------------------------------------------------------------------------------------------------
Total short-term borrowings $ 165,332 4.33% $ 170,696 3.84% $ 91,945 2.41%
- --------------------------------------------------------------------------------------------------------------
Long-term borrowings:
FHLB advances $ 185,408 4.18% $ 192,326 4.12% $ 208,466 4.10%
Wholesale repurchase agreements 133,016 3.27% 157,850 3.17% 186,483 3.04%
Other long-term borrowings 42,961 7.85% 42,940 7.64% 44,574 6.77%
- --------------------------------------------------------------------------------------------------------------
Total long-term borrowings $ 361,385 4.25% $ 393,116 4.19% $ 439,523 3.95%
- --------------------------------------------------------------------------------------------------------------
The change in both short-term and long-term borrowings reflects management's
decision to repay maturing long-term debt with short-term FHLB advances rather
than extend the term at current market rates and to use the increase in average
deposit balances to reduce the amount of short-term FHLB advances. Additional
information regarding Peoples' borrowed funds can be found later in this
discussion under the caption "FINANCIAL CONDITION-Funding Sources".
The combination of higher current interest rates and intense competition for
loans and deposits continues to pressure net interest income and margin. One of
Peoples' major strategic initiatives for 2006 is to change its balance sheet mix
by increasing the proportion of loans and decreasing the proportion of
investments to total earning assets while reducing the amount of wholesale
funding. This strategy should produce long-term benefits to Peoples' net
interest income and margin. However, management expects the repricing of
existing funding sources, pricing competition and the flat yield curve to
pressure net interest margin in the short-term which will minimize any positive
margin impact from these balance sheet changes. Peoples will continue to monitor
net interest income performance and manage its balance sheet mix through regular
Asset-Liability Committee ("ALCO") meetings. However, the frequency and/or
magnitude of changes in market interest rates are difficult to predict, much
less react to, and may have a greater impact on net interest income than
adjustments initiated by management.
Provision for Loan Losses
- -------------------------
In the first quarter of 2006, Peoples' provision for loan losses was $268,000,
down from $941,000 in the first quarter of 2005 and $562,000 for the fourth
quarter of 2005. The provision is based on management's in depth quarterly
analysis of the loan portfolio and historical loss experience and is
directionally consistent with Peoples' loan quality and improving loss
experience. Additionally, the first quarter of 2005 included a specific
provision of $500,000 for a group of related commercial loans that management
determined to be impaired.
The provision, when expressed as a percentage of average loans, was 0.02% for
the first quarter of 2006 compared to 0.09% for the first quarter of 2005 and
0.05% for the fourth quarter of 2005. Future provisions for loan losses will
continue to be based on management's quarterly procedural discipline that
estimates the amount of losses incurred within the loan portfolio.
Non-Interest Income
- -------------------
Peoples generates non-interest income from six primary sources: deposit account
service charges, fiduciary activities, investment and insurance commissions,
electronic banking ("e-banking"), mortgage banking and business owned life
insurance ("BOLI"). In the first quarter of 2006, non-interest income, which
excludes gains and losses on securities and asset disposal transactions, was
$8.1 million, up 14% compared to $7.1 million in the first quarter of 2005.
Higher insurance commission income was the key driver of increased non-interest
income. Compared to the fourth quarter of 2005, non-interest income increased
15% in the first quarter as a result of Peoples recognizing annual, performance
based insurance commission income, which is typically earned in the first
quarter of the year.
Insurance and investment commissions comprised the largest portion of
non-interest income in the first quarter of 2006, due in part to annual
performance based commission income. For the three months ended March 31, 2006,
insurance and investment commissions totaled $3.4 million compared to $2.7
million in 2005's first quarter, with performance based commission income
accounting for $0.6 million of this increase. The higher performance based
commission income, which is typically earned in the first quarter of each year
and is based on volume and customer loss experience at Peoples Insurance,
benefited from Peoples combining the books of business of the agencies acquired
in mid-2004 at certain insurance carriers, which produced more economies of
scale and, therefore, larger contingent income generation. The following table
details Peoples' insurance and investment commissions:
Three Months Ended
------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 2006 2005 2005
---------------- ---------------- ----------------
Property and casualty insurance $ 1,935 $ 1,782 $ 1,850
Contingent performance based commissions 1,037 - 481
Brokerage 166 98 94
Life and health insurance 148 125 141
Fixed annuities 57 18 58
Credit life and A&H insurance 32 34 30
- ----------------------------------------------------------------------------------------------------
Total $ 3,375 $ 2,057 $ 2,654
- ----------------------------------------------------------------------------------------------------
Service charges and other fees on deposit accounts, which are based on the
recovery of costs associated with services provided, remain a significant source
of non-interest revenue. In the first quarter of 2006, deposit account service
charges grew 8% compared to the same period a year ago, due to a $2 per item
increase in overdraft and non-sufficient funds fees. Compared to the fourth
quarter of 2005, deposit account service charges were down 2%, attributable to
lower seasonal volumes of overdraft and non-sufficient funds fees. The following
table details Peoples' deposit account service charges:
Three Months Ended
------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 2006 2005 2005
---------------- ---------------- ----------------
Overdraft fees $ 1,527 $ 1,705 $ 1,430
Non-sufficient funds fees 461 531 394
Other fees and charges 473 286 450
- ---------------------------------------------------------------------------------------------------
Total $ 2,461 $ 2,522 $ 2,274
- ---------------------------------------------------------------------------------------------------
Peoples' e-banking services include ATM and debit cards, direct deposit services
and Internet banking and serve as alternative delivery channels to traditional
sales offices for providing services to clients. In the first quarter of 2006,
e-banking income was up 8% over the 2005 first quarter total, attributable to
the combination of an increase in the number of debit cards issued to customers
and higher volumes of debit card activity. At March 31, 2006, Peoples had 92,379
cards issued, with 52% of all eligible deposit accounts having a debit card,
compared to 73,922 cards and a 48% penetration rate a year ago. Peoples'
customers used their debit cards to complete $46 million of transactions in the
first quarter of 2006, up 25% from $37 million a year ago.
In the first quarter of 2006, mortgage banking income was $170,000 versus
$117,000 in the first quarter of 2005 and is comprised mostly of net gains from
the origination and sale of long-term, fixed-rate real estate loans to the
secondary market, which are largely dependent on customer demand. The higher
reported first quarter income was the result of a net loss of $187,000 recorded
in 2005's first quarter from Peoples' selling $11.6 million of acquired
fixed-rate loans due to the associated interest rate risk. Excluding this loss,
mortgage banking income decreased compared to the first quarter of 2006,
reflecting lower volume of loans sold to the secondary market.
Non-Interest Expense
- --------------------
Non-interest expense grew 3% in the first quarter of 2006 compared to the prior
year's first quarter and was also up 4% versus the fourth quarter of 2005. The
majority of the increases were attributable to higher salaries and benefit costs
from annual salary adjustments and higher accrued incentive costs based on
Peoples' higher earnings per share in the first quarter of 2006.
Also in the first quarter of 2006, Peoples recorded compensation expense of
$124,000 under the new stock-based compensation accounting rules adopted on
January 1, 2006, compared to no compensation expense in prior periods, due to
Peoples accounting for stock-based compensation using the intrinsic value method
of accounting for stock options in periods prior to January 1, 2006.
Approximately $97,000 of 2006's first quarter expense was for options granted to
certain employees in 2006 deemed fully vested for expense recognition due to the
implicit service period under Peoples' stock option plans. Consequently,
compensation expense related to stock options outstanding at March 31, 2006,
will be lower in future quarters. However, the total amount of stock-based
compensation expense recorded each quarter depends on the level and type of
future stock-based awards, the requisite service periods of any such awards and
the valuation method used by management.
Net occupancy and equipment costs decreased 4% in the first quarter of 2006 from
a year ago. This decline is primarily attributable to a $72,000 decrease in
depreciation expense from assets becoming fully depreciated, which was partially
offset by a $37,000 increase in maintenance costs.
Marketing expense, which includes the cost of advertising, public relations and
charitable contributions, was up $94,000, or 25%, in the first quarter of 2006.
This increase was largely attributable to costs associated with Peoples' deposit
growth marketing campaign implemented in late 2005 and a $75,000 higher
charitable contribution to Peoples Bancorp Foundation, Inc. The timing of
various marketing campaigns and charitable contributions, including
contributions to Peoples Bancorp Foundation, Inc., will continue to be key
drivers of Peoples' future marketing expense.
Return on Equity
- ----------------
In the first quarter of 2006, Peoples' return on equity ("ROE") was 13.02%
versus 10.85% in the first quarter of 2005, attributable to Peoples' increased
earnings. Management uses ROE to evaluate Peoples' long-term performance but
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 value of Peoples' investment portfolio.
Return on Assets
- ----------------
Return on assets ("ROA") was 1.30% in the first quarter of 2006, up from 1.05% a
year ago, reflecting the higher level of net income. 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 of the effectiveness of Peoples' asset
utilization.
Income Tax Expense
- ------------------
Peoples' effective tax rate was 28.4% for the first quarter of 2006 versus 26.6%
a year ago. This increase was due to higher pre-tax income without a comparable
increase in income from tax-exempt sources and reflects management's current
estimate of the approximate annual effective rate for 2006.
Peoples continues to make tax-advantaged investments in order to manage its
effective tax rate and overall tax burden. At March 31, 2006, the amount of
tax-advantaged investments totaled $130.1 million compared to $121.5 million at
March 31, 2005. While the volume of tax advantaged assets was up, the percentage
of tax exempt to taxable income was down in the first quarter of 2006. Depending
on economic and regulatory conditions, Peoples may make additional investments
in various tax credit pools and other tax-advantaged assets.
FINANCIAL CONDITION
Cash and Cash Equivalents
- -------------------------
At March 31, 2006, cash and cash equivalents totaled $35.7 million versus $39.6
million at December 31, 2005, with fewer items in process of collection
accounting for much of the decline. The amount of cash and cash equivalents
fluctuates on a daily basis due to customer activity and Peoples' liquidity
needs. Management believes the current balance of cash and cash equivalents,
along with the availability of other funding sources, provides Peoples with
sufficient liquidity to meet its cash requirements. Further information
regarding Peoples' liquidity can be found later in this discussion under
"Interest Rate Sensitivity and Liquidity."
Investment Securities
- ---------------------
Total investment securities had a fair market value of $588.8 million at March
31, 2006 and were down only slightly since year-end 2005 Through three months of
2006, Peoples purchased $14.5 million of investment securities, which exceeded
proceeds from calls, maturities and prepayments of $10.4 million. The resulting
increase in amortized cost was offset by a $4.4 million decline in market value
attributable to changes in market interest rates. As a result, Peoples
unrealized loss on investment securities was $6.1 million at March 31, 2006,
compared to $1.7 million at December 31, 2005. Management does not believe any
individual unrealized loss at March 31, 2006, represents an other-than-temporary
impairment since Peoples has the ability and intent to hold those securities for
a period of time sufficient to recover the amortized cost. The following table
details Peoples' investment portfolio, at estimated fair value:
(Dollars in Thousands) March 31, December 31, 2005 March 31,
2006 2005
----------------- ------------------ ------------------
US Treasury securities and obligations of
US government agencies and corporations $ 121,417 $ 110,373 $ 69,722
Obligations of states and political subdivisions 68,014 69,482 62,081
Mortgage-backed securities 344,343 353,084 401,872
Other securities 55,013 56,374 59,017
- ---------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 588,787 $ 589,313 $ 592,692
- ---------------------------------------------------------------------------------------------------------
Overall, the composition of Peoples' investment portfolio at March 31, 2006 was
comparable to recent periods. Peoples' investment in mortgage-backed securities
declined from the prior year-end amount due to management using a portion of the
principal runoff to fund loan growth and for other corporate liquidity purposes.
Management has also reinvested some of the cash flows from mortgage-backed
securities into U.S. agency and municipal securities to improve the
diversification and overall performance of the investment portfolio in a
changing rate environment.
Management regularly evaluates the performance and liquidity of the investment
portfolio. For the remainder of 2006, management may continue to utilize some or
all of the cash flows from the investment portfolio to fund loan growth or
reduce borrowed funds, as deemed appropriate from a net earnings and liquidity
perspective. While Peoples' investment portfolio is used to prudently leverage
excess capital when appropriate, it serves, first and foremost, as a means of
maintaining liquidity to satisfy cash flow requirements and an interest rate
risk management tool to balance the the timing of cash flows and repricing of
Peoples' earning assets and interest-bearing liabilities.
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 March
31, 2006, gross loans totaled $1.08 billion, up $7.2 million since year-end
2005. The following table details total outstanding loans:
(Dollars in Thousands) March 31, December 31, March 31,
2006 2005 2005
-------------- ------------- --------------
Commercial, mortgage $ 466,707 $ 504,923 $ 457,667
Commercial, other 182,801 136,331 128,898
Real estate, construction 52,698 50,745 32,120
Real estate, mortgage 310,048 316,081 334,681
Consumer 66,773 63,796 59,634
- ------------------------------------------------------------------------------
Total loans $ 1,079,027 $ 1,071,876 $ 1,013,000
- ------------------------------------------------------------------------------
Commercial loan balances, including loans secured by commercial real estate,
continue to represent the largest portion of Peoples' total loan portfolio,
comprising 60.2% and 59.8% of total loans at March 31, 2006 and December 31,
2005, respectively. Much of the first quarter 2006 commercial loan growth
resulted from continued demand for commercial mortgage loans in key markets and
lower than expected payoffs. A significant portion of the changes in both
commercial mortgage balances and other commercial loans was attributable to a
reclassification of certain loans resulting from Peoples' ongoing regulatory
reporting compliance and loan review process. While management believes lending
opportunities exist in Peoples' markets, 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 normal
underwriting considerations. Additionally, the potential for larger than normal
commercial loan payoffs may limit loan growth during the remainder of 2006.
While commercial loans comprise the largest portion of Peoples' loan portfolio,
generating residential real estate loans remains a major focus of Peoples'
lending efforts. Included in real estate loans are home equity credit line
balances of $45.6 million at March 31, 2006 versus $46.6 million at December 31,
2005. Real estate loan balances continue to be impacted by customer demand for
long-term, fixed-rate mortgages, which Peoples generally sells to the secondary
market with servicing rights retained. At March 31, 2006, Peoples was servicing
$147.4 million of real estate loans previously sold to the secondary market
compared to $144.3 million at year-end 2005 and $124.1 million at March 31,
2005.
At March 31, 2006, consumer loan balances, including overdrafts, were $66.8
million, up from $63.8 million at year-end 2005. Peoples' indirect lending area
contributed a significant portion of Peoples' consumer loan growth, with
balances of $31.2 million and $28.2 million at March 31, 2006 and December 31,
2005, respectively. Peoples' ability to maintain, or even grow, consumer loans
in future quarters continues to be impacted by strong competition for various
types of consumer loans, especially automobile loans, as well as availability of
alternative credit products, such as home equity credit lines. Additionally,
Peoples' commitment to originate quality loans based on sound underwriting
practices and appropriate loan pricing discipline remains the paramount
objective and could limit any future growth.
Loan Concentration
- ------------------
Peoples' largest concentration of commercial loans is credits to assisted living
facilities and nursing homes, which comprised approximately 8.8% of Peoples'
outstanding commercial loans at quarter-end, compared to 8.9% at December 31,
2005. Loans to lodging and lodging-related companies also represented a
significant portion of Peoples' commercial loans, comprising 6.8% of Peoples'
outstanding commercial loans at March 31, 2006, versus 8.8% at year-end 2005.
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 assisted living facilities and nursing homes, as well as loans
to lodging and lodging-related companies, do not pose abnormal risk when
compared to risk assumed in other types of lending since these credits have been
subjected to Peoples' normal underwriting standards, 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 1.36% of total
loans, at March 31, 2006, compared to $15.2 million, or 1.50% of total loans, at
March 31, 2005, and $14.7 million, or 1.37% of total loans, at year-end 2005.
The following table presents changes in Peoples' allowance for loan losses:
Three Months Ended
March 31,
-----------------------------
(Dollars in Thousands) 2006 2005
-------------- -------------
Balance, beginning of period $ 14,720 $ 14,760
Chargeoffs (653) (1,068)
Recoveries 337 569
- ----------------------------------------------------------------------------
Net chargeoffs (316) (499)
Provision for loan losses 268 941
- ----------------------------------------------------------------------------
Balance, end of period $ 14,672 $ 15,202
- ----------------------------------------------------------------------------
The allowance is allocated among the loan categories based upon management's
consistent, quarterly procedural discipline. 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) March 31, December 31, March 31,
2006 2005 2005
--------------- ---------------- ----------------
Commercial $ 11,883 $ 11,883 $ 12,251
Consumer 1,150 1,149 1,386
Real estate 1,400 1,400 1,175
Overdrafts 239 288 269
Credit cards - - 121
- ----------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 14,672 $ 14,720 $ 15,202
- ----------------------------------------------------------------------------------------------------
The significant allocation of the allowance to commercial loans reflects the
higher credit risk associated with this type of lending and continued growth in
this portfolio. The allowance allocated to the real estate and consumer loan
portfolios is based upon Peoples' allowance methodology for homogeneous pools of
loans, which includes a consideration of changes in total balances in those
portfolios. 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 credit 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.
In the first quarter of 2006, net loan charge-offs were $316,000, down 37% from
$499,000 a year ago and 43% from $550,000 in the fourth quarter of 2005. The
lower net charge-offs are attributable to a reduced amount of loans deemed
uncollectible by management. The following table details Peoples' net
charge-offs:
Three Months Ended
------------------------------------------------------
March 31, December 31, March 31,
(Dollars in Thousands) 2006 2005 2005
----------------- ----------------- ----------------
Commercial $ 137 $ 143 $ 43
Overdrafts 104 199 88
Real estate 90 113 315
Consumer (13) 97 61
Credit card (2) (2) (8)
- ---------------------------------------------------------------------------------------------------
Total net charge-offs $ 316 $ 550 $ 499
- ---------------------------------------------------------------------------------------------------
As a percent of average loans (a) 0.12% 0.20% 0.20%
- ---------------------------------------------------------------------------------------------------
<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. Since December 31, 2005, the level
of both nonperforming loans and assets has decreased slightly. The allowance for
loan losses grew to 242.7% of nonperforming loans at quarter-end 2006, compared
to 225.2% at December 31, 2005, reflecting the decline in nonperforming loans.
The following table details Peoples' nonperforming assets:
March 31, December 31, March 31,
(Dollars in Thousands) 2006 2005 2005
------------------ ---------------- ------------------
Loans 90+ days past due and accruing $ - $ 251 $ 84
Renegotiated loans - - 1,116
Nonaccrual loans 6,045 6,284 6,105
- -----------------------------------------------------------------------------------------------------------
Total nonperforming loans 6,045 6,535 7,305
Other real estate owned 38 308 873
- -----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 6,083 $ 6,843 $ 8,178
- -----------------------------------------------------------------------------------------------------------
Nonperforming loans as a percent of total loans 0.56% 0.61% 0.72%
- -----------------------------------------------------------------------------------------------------------
Nonperforming assets as a percent of total assets 0.33% 0.37% 0.46%
- -----------------------------------------------------------------------------------------------------------
At March 31, 2006, the recorded investment in loans that were considered to be
impaired was $15.7 million, of which $12.2 million were accruing interest and
$3.5 million were nonaccrual loans. Included in this amount were $3.8 million of
impaired loans for which the related allowance for loan losses was $1.2 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 three months ended March 31, 2006, Peoples' average recorded
investment in impaired loans was approximately $13.2 million and interest income
of $258,000 was recognized on impaired loans during the period, representing
1.0% of Peoples' total interest income. This compares to average impaired loans
of $10.4 million and interest income of $115,000, or 0.5% of Peoples' total
interest income, for the first quarter of 2005.
Funding Sources
- ---------------
Deposits, both interest-bearing and non-interest-bearing, continue to be the
most significant source of funds for Peoples, totaling $1.14 billion at March
31, 2006, versus $1.09 billion at year-end 2005. Much of this increase is
attributable to higher interest-bearing balances, primarily certificates of
deposits and brokered deposits. Non-interest-bearing deposits, which serve as a
core funding source, have also increased $4.1 million since year-end 2005,
reflecting Peoples' efforts to grow these balances and reduce its reliance on
higher cost funding. The following table details Peoples' deposit balances:
(Dollars in Thousands) March 31, December 31, March 31,
2006 2005 2005
------------------ ----------------- -----------------
Retail certificates of deposit $ 493,235 $ 465,148 $ 451,359
Interest-bearing transaction accounts 183,411 178,030 187,034
Savings accounts 129,556 131,221 151,592
Money market deposit accounts 106,367 110,372 111,224
Brokered certificates of deposits 60,255 41,786 44,837
------------------------------------------------------------------------------------------------
Total interest-bearing deposits 972,824 926,557 946,046
------------------------------------------------------------------------------------------------
Non-interest-bearing deposits 166,782 162,729 157,087
------------------------------------------------------------------------------------------------
Total deposit balances $ 1,139,606 $ 1,089,286 $ 1,103,133
------------------------------------------------------------------------------------------------
The higher certificates of deposit balances in the first quarter of 2006 were
primarily the result of special, short-term promotional offerings with very
competitive rates. Peoples continues to experience fierce competition for
deposits in its markets, which makes it difficult to maintain, let alone grow,
deposit balances.
Peoples also accesses other funding sources, including short-term and long-term
borrowings, to fund asset growth and satisfy liquidity needs. At March 31, 2006,
borrowed funds totaled $518.1 million, down from $565.5 million at year-end
2005. The following details Peoples' short-term and long-term borrowings:
(Dollars in Thousands) March 31, December 31, March 31,
2006 2005 2005
------------------ ----------------- -----------------
Short-term borrowings:
FHLB advances $ 158,400 $ 137,800 $ 65,300
Retail repurchase agreements 35,638 35,896 18,424
---------------------------------------------------------------------------------------------------------
Total short-term borrowings $ 194,038 $ 173,696 $ 83,724
Long-term borrowings:
FHLB advances $ 174,810 $ 191,016 $ 207,241
National market repurchase agreements 106,250 157,850 164,100
Term note payable 13,600 13,600 15,300
---------------------------------------------------------------------------------------------------------
Total long-term borrowings $ 294,660 $ 362,466 $ 386,641
---------------------------------------------------------------------------------------------------------
Subordinated notes held by subsidiary trusts $ 29,372 $ 29,350 $ 29,285
---------------------------------------------------------------------------------------------------------
Total borrowed funds $ 518,070 $ 565,512 $ 499,650
---------------------------------------------------------------------------------------------------------
The short-term FHLB advances consist of overnight REPO advances used to manage
Peoples' daily liquidity needs, which has caused some of the increase in recent
periods. The remaining increase in short-term FHLB advances was due to
management repaying maturing long-term borrowings using short-term FHLB advances
rather than extending the borrowings at current market rates. Management expects
to continue to utilize various wholesale borrowings, 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."
Capital/Stockholders' Equity
- ----------------------------
At March 31, 2006, stockholders' equity was $184.7 million versus $183.1 million
at December 31, 2005, as Peoples' earnings, net of dividends paid, of $3.8
million were partially offset by a $2.8 million reduction in accumulated
comprehensive income due to the change in market value of the investment
portfolio.
For the quarter ended March 31, 2006, Peoples Bancorp declared dividends of $2.1
million, representing a dividend payout ratio of 35.7% of earnings, compared to
$2.0 million, and a payout ratio of 42.4% a year ago. While management
anticipates Peoples Bancorp continuing its 40-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. In
addition, other restrictions and limitations may prohibit Peoples Bancorp from
paying dividends even when sufficient cash is available. Further, 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. At March 31, 2006, Peoples Bank had approximately $2.3
million of net retained profits available to Peoples Bancorp as dividends
without regulatory approval.
At March 31, 2006, Peoples had treasury stock totaling $8.3 million compared to
$8.8 million at year-end 2005, reflecting the reissuance of shares for stock
option exercises. Peoples may repurchase additional common shares in 2006 as
authorized under the 2006 Stock Repurchase Program and deemed appropriate by
management.
Management uses the tangible equity ratio as one measure of the adequacy of
Peoples' capital. 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
March 31, 2006, Peoples' tangible equity ratio was 6.47% compared to 6.37% at
December 31, 2005 and 5.94% at March 31, 2005. This higher ratio compared to
prior periods reflects a greater proportional increase in tangible equity than
tangible assets.
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. At March 31, 2006,
all three risk-based capital ratios for both Peoples and Peoples Bank were well
above the minimum standards for a well-capitalized institution.
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 minimizing interest rate
and liquidity risk exposure 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. 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 from 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 streams 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 IRR. 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. There
have been no material changes to these policies or methods used by the ALCO to
assess IRR from those disclosed in Peoples' 2005 Form 10-K.
The difference between rate sensitive assets and rate sensitive liabilities for
specified time periods is known as the gap. The ALCO reviews static gap measures
for specific periods focusing on a one-year cumulative gap. At March 31, 2006,
Peoples' one-year cumulative gap amount was negative 12.7% of earning assets,
which represented $213.3 million more in liabilities than assets that may
contractually reprice or mature during that period, which is within the IRR
policy limit of +/-15% of earning assets.
The following table is provided to illustrate the estimated earnings at risk and
value at risk positions of Peoples, on a pre-tax basis, at March 31, 2006
(dollars in thousands):
Immediate
Interest Rate Estimated Estimated
Increase (Decrease) in (Decrease) Increase (Decrease)Increase in
Basis Points In Net Interest Income Economic Value of Equity
- --------------------------- ----------------------------- --------------------------------
200 $ (5,742) (11.4) % $ (30,398) (12.2)%
100 (2,780) (5.5) (14,698) (5.9)
(100) 1,188 2.3 7,332 2.9
(200) $ 841 1.7 % $ 6,368 2.6%
Peoples is within the established IRR policy limits for all simulations and all
scenarios shown in the above table. The interest rate risk analysis shows that
Peoples is liability sensitive, which means that increasing interest rates
should negatively impact Peoples' net interest income while decreasing interest
rates should positively impact net interest income, based on the assumptions
used. However, the variability of cash flows from the investment and loan
portfolios continues to have a significant influence on future net interest
income and earnings, especially during periods of changing interest rates. In
addition, many variable rate loans contain features limiting the amount of
annual and lifetime changes in interest rates that can mitigate the impact of
changes in interest rates and the corresponding IRR of those loans.
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.
In the first quarter of 2006, cash provided by financing activities totaled $1.3
million, while cash used in investing activities was $11.4 million.
Additionally, net cash of $6.1 million was provided from operations. These
compare to net cash from operations of $19.4 million a year ago, of which $15.7
million was used in financing activities, primarily payments on long-term
borrowings, and $0.7 million was used in investing activities. In the financing
activities during the first quarter of 2006, a net increase in deposits of $50.4
million was used to reduce borrowings of $47.5 million. Cash used in investing
activities during the same period included a net increase in loans of $7.4
million and $4.1 million in investment securities.
As part of the process of the management of liquidity, the ALCO reviews trends
of deposits and loans, as well as other maturing liabilities, in relation to the
need for cash or additional funding. A liquidity forecast is prepared based on
that information and the ALCO may discuss appropriate actions, if any, that
should be taken. However, actual future cash flows may be materially different
from the forecast due to the level of uncertainty regarding the timing and
magnitude of anticipated cash flows, such as demands for funding related to
unfunded loan commitments and other contractual obligations and prepayments on
loans and investment securities.
When appropriate, Peoples takes advantage of external sources of funds, such as
advances from the FHLB, national market repurchase agreements and brokered
deposits. These external sources often provide attractive interest rates and
flexible maturity dates that enable Peoples to match-fund the payment,
amortization and pricing characteristics of corresponding earning assets. At
March 31, 2006, Peoples had available borrowing capacity of approximately $168
million through these external sources, along with unpledged investment
securities of approximately $150 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 of deposits that are
considered short-term in nature along with a variable-rate loan from an
unrelated institution. Liquid assets include short-term investments and
unpledged available-for-sale securities. At March 31, 2006, Peoples' net
liquidity position was $121.4 million, or 6.5% of total assets, compared to
$104.3 million, or 5.6% of total assets, at December 31, 2005. The liquidity
position for both periods were 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:
March 31, December 31, March 31,
(Dollars in Thousands) 2006 2005 2005
------------ -------------- -------------
Loan commitments $ 178,679 $ 162,065 $ 148,276
Standby letters of credit 28,276 29,803 32,483
Peoples also has commitments to make additional capital contributions to
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 March
31, 2006, 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 and 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 ten 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 impact Peoples to the same degree as
companies in capital-intensive industries in a replacement cost environment.
During a period of rising prices, a net monetary asset position results in a
loss in purchasing power and conversely a net monetary liability position
results in an increase in purchasing power. The opposite would be true during a
period of decreasing prices. In the banking industry, typically monetary assets
exceed monetary liabilities. The current monetary policy targeting low levels of
inflation has resulted in relatively stable price levels. Therefore, inflation
has had little impact on Peoples' net assets.
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 Results of Operation and Financial Condition in this Form 10-Q, and
is incorporated herein by reference.
ITEM 4: CONTROLS AND PROCEDURES
- -------------------------------
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
Peoples' management, with the participation of Peoples Bancorp's President and
Chief Executive Officer and Peoples Bancorp's Chief Financial Officer and
Treasurer, has evaluated the effectiveness of Peoples Bancorp's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended) (the "Exchange Act") as of March
31, 2006. Based upon that evaluation, Peoples Bancorp's President and Chief
Executive Officer and Peoples Bancorp's 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 other reports Peoples 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 in this Quarterly
Report on Form 10-Q and other reports Peoples Bancorp files or submits
under the Exchange Act would be recorded, processed, summarized and
reported within the timeframe 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 fiscal quarter covered by this Quarterly Report on
Form 10-Q to ensure that material information relating to Peoples
Bancorp and its consolidated subsidiaries is made known to them,
particularly during the period in which Peoples Bancorp's periodic
reports, including this Quarterly Report on Form 10-Q, are 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 March 31, 2006, 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
- --------------------------
In the ordinary course of business or operations, Peoples Bancorp and its
subsidiaries may be named as plaintiff, defendant, or a party or any of its
subsidiaries' property may be subject to various pending and threatened legal
proceedings. In view of the inherent difficulty of predicting the outcome of
such matters, Peoples Bancorp cannot state what the eventual outcome of any such
matters will be; however, based on current knowledge and after consultation with
legal counsel, management believes that these proceedings will not have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of Peoples.
ITEM 1A: RISK FACTORS
- ----------------------
There have been no material changes from those risk factors previously disclosed
in "ITEM 1A. RISK FACTORS" of Part I of Peoples' 2005 Form 10-K.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------------------------
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 March 31, 2006;
(d)
(c) Maximum Number
(a) Total Number of of Common Shares
Total Common Shares that May Yet be
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 Programs (1) Programs (1)(2)
- --------------------------- -------------------- ------------------ ----------------------- -------------------
January 1 - 31, 2006 978(3) $29.54(3) - 425,000
February 1 - 28, 2006 623(4) $29.92(4) - 425,000
March 1 - 31, 2006 155(3) $30.08(3) - 425,000
- --------------------------- -------------------- ------------------ ----------------------- -------------------
Total 1,756 $29.73 - 425,000
- --------------------------- -------------------- ------------------ ----------------------- -------------------
<FN>
(1) Information reflects solely the 2006 Stock Repurchase Program
originally announced on January 17, 2006, which authorizes the
repurchase of up to 425,000 common shares, with an aggregate purchase
price of not more than $11.5 million. The 2006 Stock Repurchase
Program expires on December 31, 2006.
(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.
(4) Information reflects solely common shares acquired in connection with
the exercise of stock options under Peoples Bancorp's stock option
plans.
</FN>
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On April 13, 2006, Peoples Bancorp Inc. held its Annual Meeting of Shareholders
in the Ball Room at the Holiday Inn in Marietta, Ohio, with 78% of the
outstanding common shares represented by proxy. No votes were placed in person.
Four Directors of Peoples Bancorp were re-elected to serve terms of three years
each (expiring in 2009): Carl L. Baker, Jr., George W. Broughton, Wilford D.
Dimit and Richard Ferguson. Other Directors of Peoples Bancorp who continue to
serve after the 2006 Annual Meeting include Mark F. Bradley, Frank L. Christy,
Robert W. Price, Theodore P. Sauber, Paul T. Theisen (Vice Chairman and
Leadership Director), Joseph H. Wesel (Chairman of the Board) and Thomas J.
Wolf. The following is a summary of the voting results:
Abstentions
and Broker
Nominee For Withheld Non-Votes
- --------------------------- -------------- -------------- --------------
Carl L. Baker, Jr. 7,877,477 413,470 n/a
George W. Broughton 7,892,925 398,023 n/a
Wilford D. Dimit 5,676,231 2,614,716 n/a
Richard Ferguson 6,929,520 1,361,428 n/a
In addition, the shareholders approved the Peoples Bancorp Inc. 2006 Equity Plan
and adopted amendments to Sections 2.06, 2.07, 3.01 and 3.04 of Peoples
Bancorp's Code of Regulations, which clarify when a Leadership Director is to be
elected by Peoples Bancorp's directors as well as the role of the Leadership
Director in providing a bridge between the independent directors and management.
The following is a summary of voting results for these matters:
Broker
Proposal For Against Abstentions Non-Votes
- ------------------------------------------------- ------------- ---------- ------------- -------------
Approval of Peoples Bancorp Inc. 2006 Equity Plan 5,954,696 526,479 106,770 1,703,002
Adoption of Amendments to Code of Regulations 8,168,889 42,923 79,136 -
ITEM 5: OTHER INFORMATION
- --------------------------
None.
ITEM 6: EXHIBITS
- -----------------
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------------------------- ----------------------------------
3(a) Certificate regarding Adoption of Amendments to Incorporated herein by reference
Sections 2.06, 2.07, 3.01 and 3.04 of to Exhibit 3.1 to Peoples
Peoples Bancorp Inc.'s Code of Regulations Current Report of 8-K dated and filed
by the Shareholders on April 13, 2006 April 14, 2006 (Filed No. 0-16772)
3(b) Code of Regulations (reflecting amendments through Filed herewith
April 13, 2006) [For SEC reporting compliance purposes
only]
10(a) Peoples Bancorp Inc. 2006 Equity Plan Incorporated herein by reference
to Exhibit 3.1 to Peoples Bancorp's
Current Report of Form 8-K dated and
filed April 14, 2006
(Filed No. 0-16772)
10(b) Summary of Cash Compensation Payable to Directors Filed herewith
of Peoples Bancorp Inc.
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: April 27, 2006 By: /s/ MARK F. BRADLEY
-------------------------------------
Mark F. Bradley
President and Chief Executive Officer
Date: April 27, 2006 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 THE QUARTERLY PERIOD ENDED MARCH 31, 2006
Exhibit
Number Description Exhibit Location
- ------------ ------------------------------------------------------ ---------------------------------
3(a) Certificate regarding Adoption of Amendments to Incorporated herein by reference
Sections 2.06, 2.07, 3.01 and 3.04 of to Exhibit 3.1 to Peoples
Peoples Bancorp Inc.'s Code of Regulations Current Report of 8-K dated and filed
by the Shareholders on April 13, 2006 April 14, 2006 (Filed No. 0-16772)
3(b) Code of Regulations (reflecting amendments through Filed herewith
April 13, 2006) [For SEC reporting compliance purposes
only]
10(a) Peoples Bancorp Inc. 2006 Equity Plan Incorporated herein by reference
to Exhibit 3.1 to Peoples Bancorp's
Current Report of Form 8-K dated and
filed April 14, 2006
(Filed No. 0-16772)
10(b) Summary of Cash Compensation Payable to Directors Filed herewith
of Peoples Bancorp Inc.
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