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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010March 31, 2011
OR
o |
| |
o | 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
Commission File Number: 0-16772 |
| | | | | | | | |
PEOPLES BANCORP INC. |
(Exact name of Registrant as specified in its charter) |
Ohio | | |
Ohio | | 31-0987416 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
| | |
138 Putnam Street, P. O. Box 738, Marietta, Ohio | | | | 45750 |
(Address of principal executive offices) | | (Zip Code) |
| | (Zip Code) |
Registrant’s telephone number, including area code: | | | | (740) 373-3155 |
| | Not Applicable | | |
| 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yeso No oNo o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| | | |
Large accelerated filer o | Accelerated filer x | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes . Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,543,58010,560,782 common shares, without par value, at October 27, 2010.April 29, 2011.
As used in this Quarterly Report on Form 10-Q (“Form 10-Q”), “Peoples” refers to Peoples Bancorp Inc. and its consolidated subsidiaries collectively, except where the context indicates the reference relates solely to the registrant, Peoples Bancorp Inc.
PART I – FINANCIAL INFORMATION
STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
| | | September 30, | | December 31, | March 31, 2011 | December 31, 2010 |
(Dollars in thousands) | 2010 | | 2009 |
Assets | | | | |
Cash and cash equivalents: | | | | |
Cash and due from banks | $30,354 | | $29,969 | $ | 28,677 | | $ | 28,324 | |
Interest-bearing deposits in other banks | 44,306 | | 11,804 | 5,010 | | 46,320 | |
Total cash and cash equivalents | 74,660 | | 41,773 | 33,687 | | 74,644 | |
| | | | |
Available-for-sale investment securities, at fair value (amortized cost of | | | | |
$608,427 at September 30, 2010 and $706,444 at December 31, 2009) | 610,783 | | 726,547 | |
Held-to-maturity investment securities, at amortized cost (fair value of | | | | |
$3,053 at September 30, 2010 and $963 at December 31, 2009) | 2,964 | | 963 | |
Available-for-sale investment securities, at fair value (amortized cost of $635,218 at March 31, 2011 and $617,121 at December 31, 2010) | | 632,140 | | 613,986 | |
Held-to-maturity investment securities, at amortized cost (fair value of $2,929 at March 31, 2011 and $2,954 at December 31, 2010) | | 2,965 | | 2,965 | |
Other investment securities, at cost | 24,356 | | 24,356 | 24,356 | | 24,356 | |
Total investment securities | 638,103 | | 751,866 | 659,461 | | 641,307 | |
| | | | |
Loans, net of deferred fees and costs | 1,010,879 | | 1,052,058 | 948,029 | | 960,718 | |
Allowance for loan losses | (27,210) | | (27,257) | (24,449 | ) | (26,766 | ) |
Net loans | 983,669 | | 1,024,801 | 923,580 | | 933,952 | |
| | | | |
Loans held for sale | 4,082 | | 1,874 | 2,103 | | 4,755 | |
Bank premises and equipment, net | 24,244 | | 24,844 | 24,853 | | 24,934 | |
Bank owned life insurance | 53,419 | | 52,924 | 53,619 | | 53,532 | |
Goodwill | 62,520 | | 62,520 | 62,520 | | 62,520 | |
Other intangible assets | 2,414 | | 3,079 | 2,245 | | 2,350 | |
Other assets | 40,578 | | 38,146 | 39,522 | | 39,991 | |
Total assets | $1,883,689 | | $2,001,827 | $ | 1,801,590 | | $ | 1,837,985 | |
| | | | |
Liabilities | | | | |
Deposits: | | | | |
Non-interest-bearing | $209,693 | | $198,000 | $ | 219,175 | | $ | 215,069 | |
Interest-bearing | 1,182,744 | | 1,197,886 | 1,141,769 | | 1,146,531 | |
Total deposits | 1,392,437 | | 1,395,886 | 1,360,944 | | 1,361,600 | |
| | | | |
Short-term borrowings | 49,060 | | 76,921 | 42,283 | | 51,509 | |
Long-term borrowings | 164,720 | | 246,113 | 151,907 | | 157,703 | |
Junior subordinated notes held by subsidiary trust | 22,557 | | 22,530 | 22,574 | | 22,565 | |
Accrued expenses and other liabilities | 21,156 | | 16,409 | 13,397 | | 13,927 | |
Total liabilities | 1,649,930 | | 1,757,859 | 1,591,105 | | 1,607,304 | |
| | | | |
Stockholders’ Equity | | | | |
Preferred stock, no par value, 50,000 shares authorized, 39,000 shares | | | | |
issued at September 30, 2010, and December 31, 2009 | 38,619 | | 38,543 | |
Common stock, no par value, 24,000,000 shares authorized, | | | | |
11,062,756 shares issued at September 30, 2010 and 11,031,892 shares | | | | |
issued at December 31, 2009, including shares in treasury | 166,152 | | 166,227 | |
Preferred stock, no par value, 50,000 shares authorized, 18,000 shares issued at March 31, 2011, and 39,000 issued at December 31, 2010 | | 17,850 | | 38,645 | |
Common stock, no par value, 24,000,000 shares authorized, 11,080,802 shares issued at March 31, 2011 and 11,070,022 shares issued at December 31, 2010, including shares in treasury | | 166,408 | | 166,298 | |
Retained earnings | 46,545 | | 46,229 | 45,835 | | 45,547 | |
Accumulated comprehensive (loss) income, net of deferred income taxes | (1,974) | | 9,487 | |
Treasury stock, at cost, 624,246 shares at September 30, 2010 and | | | | |
657,255 shares at December 31, 2009 | (15,583) | | (16,518) | |
Accumulated other comprehensive loss, net of deferred income taxes | | (4,390 | ) | (4,453 | ) |
Treasury stock, at cost, 606,295 shares at March 31, 2010 and 612,695 shares at December 31, 2010 | | (15,218 | ) | (15,356 | ) |
Total stockholders’ equity | 233,759 | | 243,968 | 210,485 | | 230,681 | |
Total liabilities and stockholders’ equity | $1,883,689 | | $2,001,827 | $ | 1,801,590 | | $ | 1,837,985 | |
See Notes to the Unaudited Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
| | | For the Three Months | | For the Nine Months | For the Three Months Ended |
| Ended September 30, | | Ended September 30, | March 31, |
(Dollars in thousands, except per share data) | 2010 | 2009 | | 2010 | 2009 | 2011 | 2010 |
Interest Income: | | | | |
Interest and fees on loans | $ 14,262 | $ 16,053 | | $ 43,656 | $ 49,021 | $ | 12,678 | | $ | 14,827 | |
Interest and dividends on taxable investment securities | 7,688 | 8,716 | | 23,392 | 26,321 | 6,203 | | 7,984 | |
Interest on tax-exempt investment securities | 590 | 682 | | 1,850 | 2,147 | 425 | | 642 | |
Other interest income | 32 | 21 | | 57 | 62 | 11 | | 4 | |
Total interest income | 22,572 | 25,472 | | 68,955 | 77,551 | 19,317 | | 23,457 | |
Interest Expense: | | | | |
Interest on deposits | 4,693 | 6,490 | | 14,790 | 20,052 | 3,985 | | 5,144 | |
Interest on short-term borrowings | 62 | 111 | | 209 | 388 | 35 | | 81 | |
Interest on long-term borrowings | 2,058 | 2,907 | | 6,630 | 9,200 | 1,310 | | 2,293 | |
Interest on junior subordinated notes held by subsidiary trust | 495 | | 1,485 | 492 | | 498 | |
Total interest expense | 7,308 | 10,003 | | 23,114 | 31,125 | 5,822 | | 8,016 | |
Net interest income | 15,264 | 15,469 | | 45,841 | 46,426 | 13,495 | | 15,441 | |
Provision for loan losses | 8,005 | 10,168 | | 19,964 | 18,965 | (5,311 | ) | (6,501 | ) |
Net interest income after provision for loan losses | 7,259 | 5,301 | | 25,877 | 27,461 | 8,184 | | 8,940 | |
Gross impairment losses on investment securities | – | (6,395) | | (1,620) | (6,395) | — | | (820 | ) |
Less: Non-credit losses included in other comprehensive income | – | (465) | | 166 | (465) | — | | 166 | |
Net impairment losses on investment securities | – | (5,930) | | (1,786) | (5,930) | — | | (986 | ) |
| | | | |
Other Income: | | | | |
Deposit account service charges | 2,415 | 2,703 | | 7,170 | 7,718 | 2,174 | | 2,298 | |
Insurance income | 2,216 | 2,228 | | 6,888 | 7,378 | 2,832 | | 2,411 | |
Trust and investment income | 1,226 | 1,189 | | 3,991 | 3,484 | 1,325 | | 1,556 | |
Electronic banking income | 1,180 | 986 | | 3,443 | 2,929 | 1,221 | | 1,088 | |
Mortgage banking income | 354 | 276 | | 856 | 1,384 | 374 | | 235 | |
Bank owned life insurance | 137 | 254 | | 495 | 807 | 87 | | 185 | |
Net gain on investment securities | 3,818 | 276 | | 6,852 | 864 | 360 | | 16 | |
Net loss on assets | (443) | (41) | | (1,681) | (103) | |
Loss on debt extinguishment | (3,630) | – | | (3,630) | – | |
Loss on loans held for sale | (565) | – | | (658) | – | |
Net gain on assets disposals and other transactions | | 60 | | 17 | |
Other non-interest income | 183 | 150 | | 691 | 568 | 361 | | 241 | |
Total other income | 6,891 | 8,021 | | 24,417 | 25,029 | 8,794 | | 8,047 | |
Other Expenses: | | | | |
Salaries and employee benefit costs | 7,232 | 7,015 | | 22,105 | 22,038 | 7,627 | | 7,377 | |
Net occupancy and equipment | 1,383 | 1,398 | | 4,341 | 4,366 | 1,501 | | 1,518 | |
Professional fees | 847 | 742 | | 2,140 | 2,183 | 795 | | 692 | |
FDIC insurance | | 662 | | 617 | |
Electronic banking expense | 668 | 618 | | 1,830 | 1,781 | 618 | | 605 | |
FDIC insurance | 617 | 687 | | 1,846 | 2,782 | |
Data processing and software | 461 | 603 | | 1,558 | 1,704 | 463 | | 570 | |
Foreclosed real estate and other loan expenses | | 350 | | 646 | |
Franchise tax | 373 | 466 | | 1,120 | 1,293 | 401 | | 373 | |
Foreclosed real estate and other loan expenses | 282 | 249 | | 1,400 | 736 | |
Amortization of other intangible assets | 224 | 307 | | 704 | 956 | 162 | | 245 | |
Other non-interest expense | 1,871 | 2,002 | | 5,798 | 6,271 | 2,039 | | 1,932 | |
Total other expenses | 13,958 | 14,087 | | 42,842 | 44,110 | 14,618 | | 14,575 | |
Income (loss) before income taxes | 192 | (6,695) | | 5,666 | 2,450 | |
Income tax (benefit) expense | (221) | (2,630) | | 653 | (526) | |
Net income (loss) | $ 413 | $ (4,065) | | $ 5,013 | $ 2,976 | |
Income before income taxes | | 2,360 | | 1,426 | |
Income tax expense | | (491 | ) | (111 | ) |
Net income | | $ | 1,869 | | $ | 1,315 | |
Preferred dividends | 514 | 512 | | 1,539 | 1,364 | (523 | ) | (513 | ) |
Net (loss) income available to common shareholders | $ (101) | $ (4,577) | | $ 3,474 | $ 1,612 | |
| | | | |
Net income available to common shareholders | | $ | 1,346 | | $ | 802 | |
Earnings per common share - basic | $ (0.01) | $ (0.44) | | $ 0.33 | $ 0.16 | $ | 0.13 | | $ | 0.08 | |
Earnings per common share - diluted | $ (0.01) | $ (0.44) | | $ 0.33 | $ 0.16 | $ | 0.13 | | $ | 0.08 | |
| | | | |
Weighted-average number of common shares outstanding - basic | 10,437,770 | 10,372,946 | | 10,417,316 | 10,359,569 | 10,471,819 | | 10,391,542 | |
Weighted-average number of common shares outstanding - diluted | 10,437,770 | 10,372,946 | | 10,425,463 | 10,372,630 | 10,477,360 | | 10,400,243 | |
| | | | |
Cash dividends declared on common shares | $ 1,053 | $ 1,047 | | $ 3,158 | $ 5,852 | $ | 1,058 | | $ | 1,051 | |
Cash dividends declared per common share | $ 0.10 | | $ 0.30 | $ 0.56 | $ | 0.10 | | $ | 0.10 | |
See Notes to the Unaudited Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
|
| | | | | | | | | | | | | | | | | | |
| | | | Accumulated | | |
| | | | Other | | Total |
| Preferred | Common | Retained | Comprehensive | Treasury | Stockholders' |
(Dollars in thousands) | Stock | Stock | Earnings | Loss | Stock | Equity |
Balance, December 31, 2010 | $ | 38,645 | | $ | 166,298 | | $ | 45,547 | | $ | (4,453 | ) | $ | (15,356 | ) | $ | 230,681 | |
Net income | | | 1,869 | | | | 1,869 | |
Other comprehensive loss, net of tax | | | | 63 | | | 63 | |
Preferred stock dividends | | | (318 | ) | | | (318 | ) |
Amortization of discount on preferred stock | 205 | | | (205 | ) | | | — | |
Common stock cash dividends declared | | | (1,058 | ) | | | (1,058 | ) |
Reissuance of treasury stock for deferred compensation plan | | | | | 176 | | 176 | |
Purchase of treasury stock | | | | | (38 | ) | (38 | ) |
Common shares issued under dividend reinvestment plan | | 77 | | | | | 77 | |
Stock-based compensation expense | | 33 | | | | | 33 | |
Repurchase of preferred stock | (21,000 | ) | | | | | (21,000 | ) |
Balance, March 31, 2011 | $ | 17,850 | | $ | 166,408 | | $ | 45,835 | | $ | (4,390 | ) | $ | (15,218 | ) | $ | 210,485 | |
| | | | Accumulated Comprehensive | | |
| Preferred Stock | Common Stock | Retained Earnings | Treasury |
(Dollars in thousands, except per share data) | Income (Loss) | Stock | Total |
Balance, December 31, 2009 | $38,543 | $166,227 | $46,229 | $9,487 | $(16,518) | $243,968 |
Net income | | | 5,013 | | | 5,013 |
Other comprehensive loss, net of tax | | | | (11,461) | | (11,461) |
Exercise of common stock options | | (428) | | | 855 | 427 |
Preferred stock dividends | | | (1,463) | | | (1,463) |
Amortization of discount on preferred stock | 76 | | (76) | | | – |
Cash dividends declared of $0.30 per common share | | (3,158) | | | (3,158) |
Tax benefit from exercise of stock options | | (46) | | | | (46) |
Reissuance of treasury stock for deferred | | | | | | |
compensation plan | | | | | 216 | 216 |
Purchase of treasury stock | | | | | (136) | (136) |
Common shares issued under dividend | | | | | | |
reinvestment plan | | 325 | | | | 325 |
Stock-based compensation expense | | 74 | | | | 74 |
Balance, September 30, 2010 | $38,619 | $166,152 | $46,545 | $(1,974) | $(15,583) | $233,759 |
PEOPLES BANCORP INC. AND SUBSIDIARIES | | | Nine Months Ended | Three Months Ended |
| September 30, | March 31, |
(Dollars in thousands) | 2010 | | 2009 | 2011 | 2010 |
Net cash provided by operating activities | $33,280 | | $21,625 | $ | 13,317 | | $ | 11,128 | |
Investing activities | | | | |
Investing activities: | | |
Available-for-sale securities: | | | | |
Purchases | (207,754) | | (187,374) | (80,103 | ) | (43,388 | ) |
Proceeds from sales | 150,617 | | 41,521 | 26,879 | | 21 | |
Proceeds from maturities, calls and prepayments | 152,995 | | 135,727 | 32,290 | | 46,105 | |
Purchase of held-to-maturity securities | (2,000) | | – | — | | (2,000 | ) |
Net decrease in loans | 18,819 | | 19,513 | |
Net decrease (increase) in loans | | 5,112 | | (6,478 | ) |
Net expenditures for premises and equipment | (1,447) | | (1,853) | (437 | ) | (253 | ) |
Proceeds from sales of other real estate owned | 444 | | 512 | 152 | | 310 | |
Investment in limited partnership and tax credit funds | (249) | | (248) | |
Net cash provided by investing activities | 111,425 | | 7,798 | |
Financing activities | | | | |
Net cash used in investing activities | | (16,107 | ) | (5,683 | ) |
Financing activities: | | |
Net increase in non-interest-bearing deposits | 11,693 | | 6,971 | 4,106 | | 3,337 | |
Net (decrease) increase in interest-bearing deposits | (15,214) | | 20,159 | (4,785 | ) | 35,801 | |
Net decrease in short-term borrowings | (27,861) | | (50,508) | (9,226 | ) | (27,207 | ) |
Proceeds from long-term borrowings | 5,000 | | 5,000 | — | | 5,000 | |
Payments on long-term borrowings | (81,392) | | (36,211) | (5,795 | ) | (10,907 | ) |
Issuance of preferred shares and common stock warrant | – | | 39,000 | |
Repurchase of preferred stock | | (21,000 | ) | — | |
Preferred stock dividends | (1,463) | | (1,056) | (449 | ) | (488 | ) |
Cash dividends paid on common shares | (2,844) | | (6,482) | (980 | ) | (943 | ) |
Purchase of treasury stock | (136) | | (190) | (38 | ) | (46 | ) |
Proceeds from issuance of common shares | 445 | | 4 | — | | 284 | |
Excess tax expense for stock-based compensation | (46) | | (10) | — | | (8 | ) |
Net cash used in financing activities | (111,818) | | (23,323) | |
Net increase in cash and cash equivalents | 32,887 | | 6,100 | |
Net cash (used in) provided by financing activities | | (38,167 | ) | 4,823 | |
Net (decrease) increase in cash and cash equivalents | | (40,957 | ) | 10,268 | |
Cash and cash equivalents at beginning of period | 41,773 | | 35,598 | 74,644 | | 41,773 | |
Cash and cash equivalents at end of period | $74,660 | | $41,698 | $ | 33,687 | | $ | 52,041 | |
See Notes to the Unaudited Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
Note 1. 1 Summary of Significant Accounting Policies
Basis of Presentation:The accompanying Unaudited Consolidated Financial Statements of Peoples Bancorp Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not contain all of the information and footnotes required by US GAAP for annual financial statements and should be read in conjunction with Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 20092010 (“20092010 Form 10-K”).
The accounting and reporting policies followed in the presentation of the accompanying Unaudited Consolidated Financial Statements are consistent with those described in Note 1 of the Notes to the Consolidated Financial Statements included in Peoples’ 20092010 Form 10-K, as updated by the information contained in this Form 10-Q. Management has evaluated all significant events and transactions that occurred after September 30, 2010,March 31, 2011, for potential recognition or disclosure in these consolidated financial statements. In the opinion of management, these consolidated financial statements reflect all adjustments necessary to present fairly such information for the periods and dates indicated. Such adjustments are normal and recurring in nature. All significant intercompany accounts and transactions have been eliminated. The Consolidated Balance Sheet at December 31, 2009,2010, contained herein has been derived from the audited Consolidated Balance Sheet included in Peoples’ 20092010 Form 10-K.
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year, due in part to seasonal variations and unusual or infrequently occurring items. Peoples’ insurance income includesFor the three months ended March 31, 2011 and 2010, the amount of contingent performance based insurance commissions that are recognized by Peoples when received, which typically occurs during the first quarter of each year.totaled $943,000 and $585,000, respectively.
Note 2.2 Fair Value of Financial Instruments
The measurement of fair value under US GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Level 1: Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets.
Level 2:Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.
Level 3:Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.
Assets measured at fair value on a recurring basis comprised the following at September 30, 2010:March 31, 2011:
|
| | | | | | | | | | | | |
| | Fair Value Measurements at Reporting Date Using |
(Dollars in thousands) | | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs |
Fair Value | (Level 1) | (Level 2) | (Level 3) |
March 31, 2011 | | | | |
Obligations of: | | | | |
U.S. Treasury and government agencies | $ | 38 | | $ | — | | $ | 38 | | $ | — | |
U.S. government sponsored agencies | 12,084 | | — | | 12,084 | | — | |
States and political subdivisions | 38,401 | | — | | 38,401 | | — | |
Residential mortgage-backed securities | 523,844 | | 18,400 | | 505,444 | | — | |
Commercial mortgage-backed securities | 41,189 | | — | | 41,189 | | — | |
Bank-issued trust preferred securities | 13,266 | | — | | 13,266 | | — | |
Equity securities | 3,318 | | 3,190 | | 128 | | — | |
Total available-for-sale securities | $ | 632,140 | | $ | 21,590 | | $ | 610,550 | | $ | — | |
December 31, 2010 | | | | |
Obligations of: | | | | |
U.S. Treasury and government agencies | $ | 39 | | $ | — | | $ | 39 | | $ | — | |
U.S. government sponsored agencies | 12,262 | | — | | 12,262 | | — | |
States and political subdivisions | 47,379 | | — | | 47,379 | | — | |
Residential mortgage-backed securities | 507,534 | | 18,179 | | 489,355 | | — | |
Commercial mortgage-backed securities | 30,700 | | 3,545 | | 27,155 | | — | |
Bank-issued trust preferred securities | 12,984 | | — | | 12,984 | | — | |
Equity securities | 3,088 | | 2,960 | | 128 | | — | |
Total available-for-sale securities | $ | 613,986 | | $ | 24,684 | | $ | 589,302 | | $ | — | |
| | | Fair Value Measurements at Reporting Date Using |
(Dollars in thousands) | Fair Value | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs |
(Level 1) | (Level 2) | (Level 3) |
| | | | | | | | |
September 30, 2010 | | | | | | | | |
Obligations of: | | | | | | | | |
U.S. Treasury and government agencies | $ | 60 | $ | – | $ | 60 | $ | – |
U.S. government sponsored agencies | | 13,005 | | – | | 13,005 | | – |
States and political subdivisions | | 51,288 | | – | | 51,288 | | – |
Residential mortgage-backed securities | | 485,663 | | – | | 485,663 | | – |
Commercial mortgage-backed securities | | 44,854 | | 16,268 | | 28,586 | | – |
U.S. government-backed student loan pools | | – | | – | | – | | – |
Bank-issued trust preferred securities | | 12,904 | | – | | 12,904 | | – |
Collateralized debt obligations | | – | | – | | – | | – |
Equity securities | | 3,009 | | 2,836 | | 173 | | – |
Total available-for-sale securities | $ | 610,783 | $ | 19,104 | $ | 591,679 | $ | – |
| | | | | | | | |
December 31, 2009 | | | | | | | | |
Obligations of: | | | | | | | | |
U.S. Treasury and government agencies | $ | 81 | $ | – | | 81 | $ | – |
U.S. government sponsored agencies | | 4,473 | | – | | 4,473 | | – |
States and political subdivisions | | 62,954 | | – | | 62,954 | | – |
Residential mortgage-backed securities | | 558,826 | | – | | 558,826 | | – |
Commercial mortgage-backed securities | | 24,188 | | – | | 24,188 | | – |
U.S. government-backed student loan pools | | 59,440 | | – | | 59,440 | | – |
Bank-issued trust preferred securities | | 13,826 | | – | | 12,826 | | 1,000 |
Collateralized debt obligations | | 165 | | – | | – | | 165 |
Equity securities | | 2,594 | | 2,420 | | 174 | | – |
Total available-for-sale securities | $ | 726,547 | $ | 2,420 | $ | 722,962 | $ | 1,165 |
The fair values used by Peoples are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considerconsiders observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2). At December 31, 2009, Peoples measured two equity tranche collateralized debt obligation (“CDO”) securities at fair value using Level 3 inputs since there was not an active market. These securities were deemed to be total losses at March 31, 2010. The bank-issued trust preferred securities measured using Level 3 inputs represented a single security that was not actively traded. T his security was called during the second quarter of 2010. The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information:
(Dollars in thousands) | Bank-Issued Trust Preferred Securities | Collateralized Debt Obligations |
Balance, December 31, 2009 | $1,000 | $165 |
Other-than-temporary impairment loss | | |
included in earnings | – | (986) |
Calls | (1,000) | – |
Unrealized loss included in comprehensive income | – | 821 |
Balance, September 30, 2010 | $ – | $ – |
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis included the following:
Impaired Loans:Impaired loans are measured and reported at fair value when management believes collection of contractual interest and principal payments is doubtful. Management’s determination of the fair value for these loans uses a market approach representing the estimated net proceeds to be received from the sale of the collateral based on observable market prices and market value provided by independent, licensed or certified appraisers (Level 2 Inputs)inputs). At September 30, 2010,March 31, 2011, impaired loans with an aggregate outstanding principal balance of $20.2$18.0 million were measured and reported at a fair value of $16.8$12.2 million. During the three and nine months ended September 30, 2010,March 31, 2011, Peoples recognized losses on impaired loans of $6.6$5.8 million, and $6.0 million, respectively, through the allowance for loan losses.
Loans Held-For-Sale: Loans held-for-sale are measured and reported at fair value when the aggregate outstanding principal balance of the loan pool exceeds the estimated fair value of the loan pool. Management’s determination of the fair value uses a market approach representing the amounts a third party financial investor would be willing to pay for the loans (Level 1 Inputs). At September 30, 2010, Peoples had $2.1 million of commercial real estate loans classified as held-for-sale (of which all loans were on nonaccrual status) which were measured and reported at a fair value of $1.5 million. As a result, Peoples recognized losses of $565,000 and $658,000 for the three and nine months ended September 30, 2010, re spectively.
Other Real Estate Owned: Other real estate owned (“OREO”) is measured and reported at fair value when the current book value exceeds the estimated fair value of the property. Management’s determination of the fair value for these loans uses a market approach representing the estimated net proceeds to be received from the sale of the property based on observable market prices and market value provided by independent, licensed or certified appraisers (Level 2 Inputs). At September 30, 2010, Peoples had $6.0 million of OREO which was measured and reported at a fair value of $4.3 million. As a result, Peoples recorded losses of $447,000 and $1.7 million for the three and nine months ended September 30, 201 0, respectively.
The following table presents the fair values of financial assets and liabilities carried on Peoples’ consolidated balance sheet,sheets, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
| | September 30, 2010 | | December 31, 2009 | | | | | | | | | |
| Carrying | Fair | | Carrying | Fair | March 31, 2011 | | December 31, 2010 |
(Dollars in thousands) | Amount | Value | | Amount | Value | Carrying Amount | Fair Value | | Carrying Amount | Fair Value |
Financial assets: | | | | | | |
Cash and cash equivalents | $74,660 | | $41,773 | $ | 33,687 | | $ | 33,687 | | | $ | 74,644 | | $ | 74,644 | |
Investment securities | 638,103 | 638,192 | | 751,866 | 659,461 | | 659,425 | | | 641,307 | | 641,296 | |
Loans | 987,751 | 868,828 | | 1,026,675 | 892,182 | 925,683 | | 830,456 | | | 938,707 | | 825,547 | |
| | | | |
Financial liabilities: | | | | | | |
Deposits | $1,392,437 | $1,410,812 | | $1,395,886 | $1,406,371 | $ | 1,360,944 | | $ | 1,374,749 | | | $ | 1,361,600 | | $ | 1,380,336 | |
Short-term borrowings | 49,060 | | 76,921 | 42,283 | | 42,283 | | | 51,509 | | 51,509 | |
Long-term borrowings | 164,720 | 176,435 | | 246,113 | 253,943 | 151,907 | | 156,916 | | | 157,703 | | 164,075 | |
Junior subordinated notes held by subsidiary trust | 22,557 | 23,885 | | 22,530 | 25,968 | 22,574 | | 23,836 | | | 22,565 | | 23,861 | |
The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include cash and cash equivalents, demand and other non-maturity deposits and overnight borrowings. Peoples used the following methods and assumptions in estimating the fair value of the following financial instruments:
Loans:Loans: The fair value of portfolio loans assumes sale of the notes to a third partythird-party financial investor. Accordingly, this value is not necessarily the value to Peoples if the notes were held to maturity. Peoples considered interest rate, credit and market factors in estimating the fair value of loans. In the current whole loan market, financial investors are generally requiring a much higher rate of return than the return inherent in loans if held to maturity given the lack of market liquidity. This divergence accounts for the majority of the difference in carrying amount over fair value.
Deposits:Deposits: The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation based on current rates offered for deposits of similar remaining maturities.
Long-term Borrowings:The fair value of long-term borrowings is estimated using discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms.
Junior Subordinated Notes Held by Subsidiary Trust:The fair value of the junior subordinated notes held by subsidiary trust is estimated using discounted cash flow analysis based on current market rates of securities with similar risk and remaining maturity.
Bank premises and equipment, customer relationships, deposit base, banking center networks, and other information required to compute Peoples’ aggregate fair value are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of Peoples.
Note 3.3 Investment Securities
Available-for-sale
The following table summarizes Peoples’ available-for-sale investment securities:
|
| | | | | | | | | | | | |
(Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
March 31, 2011 | | | | |
Obligations of: | | | | |
U.S. Treasury and government agencies | $ | 36 | | $ | 2 | | $ | — | | $ | 38 | |
U.S. government sponsored agencies | 12,614 | | 44 | | (574 | ) | 12,084 | |
States and political subdivisions | 37,462 | | 1,074 | | (135 | ) | 38,401 | |
Residential mortgage-backed securities | 527,125 | | 13,089 | | (16,370 | ) | 523,844 | |
Commercial mortgage-backed securities | 42,888 | | 317 | | (2,016 | ) | 41,189 | |
Bank-issued trust preferred securities | 13,879 | | 107 | | (720 | ) | 13,266 | |
Equity securities | 1,214 | | 2,200 | | (96 | ) | 3,318 | |
Total available-for-sale securities | 635,218 | | 16,833 | | $ | (19,911 | ) | $ | 632,140 | |
December 31, 2010 | | | | |
Obligations of: | | | | |
U.S. Treasury and government agencies | $ | 38 | | $ | 1 | | $ | — | | $ | 39 | |
U.S. government sponsored agencies | 12,753 | | 55 | | (546 | ) | 12,262 | |
States and political subdivisions | 46,717 | | 1,063 | | (401 | ) | 47,379 | |
Residential mortgage-backed securities | 512,398 | | 14,155 | | (19,019 | ) | 507,534 | |
Commercial mortgage-backed securities | 30,124 | | 648 | | (72 | ) | 30,700 | |
Bank-issued trust preferred securities | 13,877 | | 79 | | (972 | ) | 12,984 | |
Equity securities | 1,214 | | 1,970 | | (96 | ) | 3,088 | |
Total available-for-sale securities | $ | 617,121 | | $ | 17,971 | | $ | (21,106 | ) | $ | 613,986 | |
| | | | Non-Credit | |
| | | | Losses included | |
| | Gross | Gross | in Other | |
| Amortized | Unrealized | Unrealized | Comprehensive | Fair |
(Dollars in thousands) | Cost | Gains | Losses | Income | Value |
September 30, 2010 | | | | | |
Obligations of: | | | | | |
U.S. Treasury and government agencies | $59 | $1 | $– | $– | $60 |
U.S. government sponsored agencies | 12,896 | 109 | – | – | 13,005 |
States and political subdivisions | 48,531 | 2,760 | (3) | – | 51,288 |
Residential mortgage-backed securities | 487,998 | 13,871 | (16,206) | – | 485,663 |
Commercial mortgage-backed securities | 43,855 | 999 | – | – | 44,854 |
U.S. government-backed student loan pools | – | – | – | – | – |
Bank-issued trust preferred securities | 13,875 | 168 | (1,139) | – | 12,904 |
Equity securities | 1,213 | 1,847 | (51) | – | 3,009 |
Total available-for-sale securities | $608,427 | $19,755 | $(17,399) | $– | $610,783 |
| | | | | |
December 31, 2009 | | | | | |
Obligations of: | | | | | |
U.S. Treasury and government agencies | $81 | $1 | $– | $– | $82 |
U.S. government sponsored agencies | 4,384 | 89 | – | – | 4,473 |
States and political subdivisions | 60,943 | 2,064 | (54) | – | 62,953 |
Residential mortgage-backed securities | 546,131 | 17,576 | (4,882) | – | 558,825 |
Commercial mortgage-backed securities | 23,656 | 675 | (143) | – | 24,188 |
U.S. government-backed student loan pools | 52,972 | 6,547 | (77) | – | 59,442 |
Bank-issued trust preferred securities | 16,073 | 47 | (2,294) | – | 13,826 |
Collateralized debt obligations | 986 | – | (655) | (166) | 165 |
Equity securities | 1,218 | 1,426 | (51) | – | 2,593 |
Total available-for-sale securities | $706,444 | $28,425 | $(8,156) | $(166) | $726,547 |
Peoples’ investment in CDO securities at December 31, 2009, consisted of two separate equity tranche securities comprised of trust preferred and subordinated debt securities issued by banks, bank holding companies, insurance companies and real estate investment trusts. These securities were deemed a total loss in the first quarter of 2010. Peoples’ investment in equity securities was comprised entirely of common stocks issued by various unrelated banking holding companies at both September 30, 2010March 31, 2011 and December 31, 2009.2010.
At September 30, 2010,March 31, 2011, there were no securities of a single issuer, other than U.S. Treasury and government agencies and U.S. government sponsored agencies that exceeded 10% of stockholders' equity. Peoples had pledged investment securities with a carrying value of $424.0$391.7 million and $492.8$394.7 million at September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively, to secure public and trust department deposits and repurchase agreements in accordance with federal and state requirements. Peoples also pledged investment securities with carrying values of $30.7$48.4 million and $121.3$28.1 million at September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively, to secure additional borrowing capacity at the Federal Home Loan Bank of Cincinnati (“FHLB”) and the Federal Reserve Bank of Cleveland (“FRB”).
The gross gains and gross losses realized by Peoples from sales of available-for-sale securities for the three and nine months ended September 30March 31 were as follows:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, | | September 30, | March 31, |
(Dollars in thousands) | 2010 | 2009 | | 2010 | 2009 | 2011 | 2010 |
Gross gains realized | $5,272 | $276 | | $8,306 | $878 | $ | 442 | | $ | 16 | |
Gross losses realized | 1,454 | – | | 1,454 | 14 | 82 | | — | |
Net gain realized | $3,818 | $276 | | $6,852 | $864 | $ | 360 | | $ | 16 | |
The cost of investment securities sold, and any resulting gain or loss, was based on the specific identification method and recognized as of the trade date.
The following table presents a summary of available-for-sale investment securities that had an unrealized loss:
| Less than 12 Months | | 12 Months or More | | Total |
(Dollars in thousands) | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss |
September 30, 2010 | | | | | | | | | | |
Obligations of states and | | | | | | | | | | |
political subdivisions | $226 | $3 | 1 | | $– | $– | – | | $226 | $3 |
Mortgage-backed securities: | | | | | | | | | | |
Residential | 143,082 | 15,779 | 18 | | 9,416 | 427 | 7 | | 152,498 | 16,206 |
Commercial | – | – | – | | – | – | – | | – | – |
Bank-issued trust | | | | | | | | | | |
preferred securities | 992 | 7 | 1 | | 6,878 | 1,132 | 6 | | 7,870 | 1,139 |
Equity securities | – | – | – | | 125 | 51 | 1 | | 125 | 51 |
Total | $144,300 | $15,789 | $20 | | $16,419 | $1,610 | $14 | | $160,719 | $17,399 |
| | | | | | | | | | |
December 31, 2009 | | | | | | | | | | |
Obligations of states and | | | | | | | | | | |
political subdivisions | $3,284 | $54 | 6 | | $– | $– | – | | $3,284 | $54 |
Mortgage-backed securities: | | | | | | | | | | |
Residential | 37,720 | 2,400 | 7 | | 60,120 | 2,482 | 19 | | 97,840 | 4,882 |
Commercial | 1,966 | 143 | 1 | | – | – | – | | 1,966 | 143 |
U.S. government-backed | | | | | | | | | | |
student loan pools | – | – | – | | 2,923 | 77 | 1 | | 2,923 | 77 |
Bank-issued trust | | | | | | | | | | |
preferred securities | – | – | – | | 11,574 | 2,294 | 10 | | 11,574 | 2,294 |
Collateralized debt obligations | – | – | – | | 165 | 655 | 2 | | 165 | 655 |
Equity securities | – | – | – | | 125 | 51 | 1 | | 125 | 51 |
Total | $42,970 | $2,597 | 14 | | $74,907 | $5,559 | 33 | | $117,877 | $8,156 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or More | | Total |
(Dollars in thousands) | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss |
March 31, 2011 | | | | | | | | | | |
Obligations of: | | | | | | | | | | |
U.S. government sponsored agencies | $ | 11,131 | | $ | 574 | | 1 | | | $ | 4 | | $ | — | | 1 | | | $ | 11,135 | | $ | 574 | |
States and political subdivisions | 6,061 | | 135 | | 8 | | | — | | — | | — | | | 6,061 | | 135 | |
Residential mortgage-backed securities | 137,701 | | 9,048 | | 24 | | | 51,546 | | 7,322 | | 10 | | | 189,247 | | 16,370 | |
Commercial mortgage-backed securities | 34,810 | | 2,016 | | 4 | | | — | | — | | — | | | 34,810 | | 2,016 | |
Bank-issued trust preferred securities | 3,344 | | 48 | | 3 | | | 3,350 | | 672 | | 4 | | | 6,694 | | 720 | |
Equity securities | — | | — | | — | | | 80 | | 96 | | 1 | | | 80 | | 96 | |
Total | $ | 193,047 | | $ | 11,821 | | 40 | | | $ | 54,980 | | $ | 8,090 | | 16 | | | $ | 248,027 | | $ | 19,911 | |
December 31, 2010 | | | | | | | | | | |
Obligations of: | | | | | | | | | | |
U.S. government sponsored agencies | $ | 11,202 | | $ | 546 | | 1 | | | $ | — | | $ | — | | — | | | $ | 11,202 | | $ | 546 | |
States and political subdivisions | 13,055 | | 401 | | 19 | | | — | | — | | — | | | 13,055 | | 401 | |
Residential mortgage-backed securities | 152,075 | | 13,080 | | 23 | | | 39,540 | | 5,939 | | 9 | | | 191,615 | | 19,019 | |
Commercial mortgage-backed securities | 21,388 | | 72 | | 4 | | | — | | — | | — | | | 21,388 | | 72 | |
Bank-issued trust preferred securities | 4,290 | | 47 | | 3 | | | 5,144 | | 925 | | 5 | | | 9,434 | | 972 | |
Equity securities | — | | — | | — | | | 80 | | 96 | | 1 | | | 80 | | 96 | |
Total | $ | 202,010 | | $ | 14,146 | | 50 | | | $ | 44,764 | | $ | 6,960 | | 15 | | | $ | 246,774 | | $ | 21,106 | |
Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. At September 30, 2010,March 31, 2011, management concluded no individual securities were other-than-temporarily impaired since Peoples did not have the intent to sell nor was it more likely than not that Peoples would be required to sell any of the securities with an unrealized loss prior to recovery. Further, the unrealized losses at both September 30, 2010March 31, 2011 and December 31, 2009,2010, were attributable to changes in market interest rates and spreads since the securities were purchased.
At September 30, 2010,March 31, 2011, the residential mortgage-backed securities that have been at an unrealized loss position for less than twelve months consisted almost entirely of securities purchased since September 2009.December 2010. The interest rate profiles of these securities are such that changes in fair value of the securities are directionally consistent with changes in market interest rates. The securities that have been at an unrealized loss position for twelve months or more were purchased prior to year-end 2008. None of these securities were downgraded by either Moody’sMoody's or S&P during the thirdfirst quarter, and with the exception of a single holding, all of these investments experienced improvement in value during the thirdfirst quarter. In addition, the fair value for nearly all of these securities was within 90% of its September 30March 31 book value, with sixfour positions within 2% of its book value. The positions with a fair value less than 90% of their book value were limited to three bank-issued trust preferred securities, which had an aggregate book value of $3.0 million and fair value of $2.1$2.4 million at September 30, 2010.March 31, 2011, and three residential mortgage-backed securities with book and market values of $36.7 million and $30.0 million, respectively. Management has analyzed the underlying credit quality of these issuers all of whom were part of the Supervisory Capital Assessment Program conducted by federal banking regulators in the first half of 2009, and concluded the unrealized losses were entirely attributable to the floating rate nature of these investments and current market interest rates.
The table below presents the amortized costs,cost, fair value and weighted-average yield of securities by contractual maturity at September 30, 2010.March 31, 2011. The average yields are based on the amortized cost. In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date. Rates are calculated on a fully tax-equivalent basis using a 35% federal income tax rate.
(Dollars in thousands) | Within 1 Year | 1 to 5 Years | 5 to 10 Years | Over 10 Years | Total |
Amortized cost | | | | | |
Obligations of: | | | | | |
U.S. Treasury and government agencies | $– | $19 | $40 | $– | $59 |
U.S. government sponsored agencies | – | 1,105 | 11,791 | – | 12,896 |
States and political subdivisions | 1,290 | 11,880 | 12,467 | 22,894 | 48,531 |
Residential mortgage-backed securities | – | 3,464 | 81,975 | 402,559 | 487,998 |
Commercial mortgage-backed securities | – | – | 20,611 | 23,244 | 43,855 |
Bank-issued trust preferred securities | – | – | – | 13,875 | 13,875 |
Equity securities | – | – | – | 1,213 | 1,213 |
Total available-for-sale securities | $1,290 | $16,468 | $126,884 | $463,785 | $608,427 |
Fair value | | | | | |
Obligations of: | | | | | |
U.S. Treasury and government agencies | $– | $20 | $40 | $– | $60 |
U.S. government sponsored agencies | – | 1,193 | 11,812 | – | 13,005 |
States and political subdivisions | 1,298 | 12,347 | 13,426 | 24,217 | 51,288 |
Residential mortgage-backed securities | – | 3,635 | 84,847 | 397,181 | 485,663 |
Commercial mortgage-backed securities | – | – | 21,105 | 23,749 | 44,854 |
Bank-issued trust preferred securities | – | – | – | 12,904 | 12,904 |
Equity securities | – | – | – | 3,009 | 3,009 |
Total available-for-sale securities | $1,298 | $17,195 | $131,230 | $461,060 | $610,783 |
Total average yield | 7.45% | 5.81% | 4.80% | 4.46% | 4.58% |
10
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | Within 1 Year | 1 to 5 Years | 5 to 10 Years | Over 10 Years | Total |
Amortized cost | | | | | |
Obligations of: | | | | | |
U.S. Treasury and government agencies | $ | — | | $ | 13 | | $ | 23 | | $ | — | | $ | 36 | |
U.S. government sponsored agencies | — | | 910 | | 11,704 | | — | | 12,614 | |
States and political subdivisions | 2,525 | | 7,712 | | 9,313 | | 17,912 | | 37,462 | |
Residential mortgage-backed securities | — | | 6,574 | | 65,844 | | 454,707 | | 527,125 | |
Commercial mortgage-backed securities | — | | — | | 34,695 | | 8,193 | | 42,888 | |
Bank-issued trust preferred securities | — | | — | | — | | 13,879 | | 13,879 | |
Equity securities | — | | — | | — | | 1,214 | | 1,214 | |
Total available-for-sale securities | $ | 2,525 | | $ | 15,209 | | $ | 121,579 | | $ | 495,905 | | $ | 635,218 | |
Fair value | | | | | |
Obligations of: | | | | | |
U.S. Treasury and government agencies | $ | — | | $ | 13 | | $ | 25 | | $ | — | | $ | 38 | |
U.S. government sponsored agencies | — | | 953 | | 11,131 | | — | | 12,084 | |
States and political subdivisions | 2,578 | | 7,984 | | 9,725 | | 18,114 | | 38,401 | |
Residential mortgage-backed securities | — | | 7,090 | | 68,249 | | 448,505 | | 523,844 | |
Commercial mortgage-backed securities | — | | — | | 32,825 | | 8,364 | | 41,189 | |
Bank-issued trust preferred securities | — | | — | | — | | 13,266 | | 13,266 | |
Equity securities | — | | — | | — | | 3,318 | | 3,318 | |
Total available-for-sale securities | $ | 2,578 | | $ | 16,040 | | $ | 121,955 | | $ | 491,567 | | $ | 632,140 | |
Total average yield | 5.61 | % | 5.76 | % | 4.38 | % | 3.78 | % | 3.95 | % |
Held-to-Maturity
At September 30, 2010,March 31, 2011, Peoples’ held-to-maturity investments consisted of two qualified school construction bonds that are classified as held-to-maturity because of Peoples’ intent and ability to hold the securities to maturity given uncertainty regarding ownership rights of associated tax credits. These securities are carried at an aggregate amortized cost of $3.0$3.0 million and have gross unrealized gainslosses totaling $89,000;$36,000; weighted average cash coupon and tax credit rates of 1.83% and 6.09%, respectively, and remaining contractual maturity over 10 years.
Other Securities
Peoples’ other investment securities on the Consolidated Balance Sheets consist solely of restricted equity securities of the FHLB and the FRB. These securities are carried at cost since they do not have readily determinable fair values due to their restricted nature and Peoples does not exercise significant influence over the entities.
11Note 4 Loans
Peoples' loan portfolio consists of various types of loans originated primarily as a result of lending opportunities within Peoples' primary market areas of central and southeastern Ohio, west central West Virginia, and northeastern Kentucky. The major classifications of loan balances, excluding loans held for sale, were as follows:
|
| | | | | | |
| March 31, | December 31, |
(Dollars in thousands) | 2011 | 2010 |
Commercial real estate | $ | 438,224 | | $ | 452,875 | |
Commercial and industrial | 147,386 | | 153,192 | |
Real estate construction | 32,839 | | 22,478 | |
Residential real estate | 197,513 | | 200,275 | |
Home equity lines of credit | 47,906 | | 48,130 | |
Consumer | 82,521 | | 81,567 | |
Deposit account overdrafts | 1,640 | | 2,201 | |
Total loans | $ | 948,029 | | $ | 960,718 | |
Note 4. Long-Term Borrowings
Peoples has acquired various loans through business combinations for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. The carrying amounts of these loans included in the loan balances above are summarized as follows:
|
| | | | | | |
| March 31, | December 31, |
(Dollars in thousands) | 2011 | 2010 |
Commercial real estate | $ | 3,528 | | $ | 3,616 | |
Commercial and industrial | 203 | | 200 | |
Residential real estate | 17,238 | | 17,893 | |
Consumer | 134 | | 123 | |
Total outstanding balance | $ | 21,103 | | $ | 21,832 | |
Net carrying amount | $ | 20,500 | | $ | 21,229 | |
Peoples has pledged certain loans secured by 1-4 family and multifamily residential mortgages under a blanket collateral agreement to secure borrowings consistedfrom the FHLB. The amount of such pledged loans totaled $182.5 million and $181.8 million at March 31, 2011 and December 31, 2010, respectively. Peoples also had pledged commercial loans to secure borrowings with the FRB. The amount of such pledged loans totaled $166.6 million and $195.6 million at March 31, 2011 and December 31, 2010, respectively.
Nonaccrual and Past Due Loans
A loan is considered past due if any required principal and interest payments have not been received as of the following:
| September 30, 2010 | | December 31, 2009 |
(Dollars in thousands) | Balance | Weighted- Average Rate | | Balance | Weighted-Average Rate |
Callable national market repurchase agreements | $65,000 | 3.43% | | $145,000 | 4.01% |
FHLB convertible rate advances | 7,500 | 4.81% | | 7,500 | 4.81% |
FHLB putable non-amortizing, fixed rate advances | 60,000 | 3.28% | | 60,000 | 3.28% |
FHLB amortizing, fixed rate advances | 22,220 | 3.60% | | 18,613 | 3.56% |
FHLB non-amortizing, fixed rate advances | 10,000 | 3.53% | | 15,000 | 3.90% |
Total long-term borrowings | $164,720 | 3.47% | | $246,113 | 3.82% |
Peoples’ national market repurchase agreements consist of agreements with unrelated financial service companies and have original maturities ranging from 3 to 10 years. In general, these agreements may not be terminated by Peoples prior to the maturity without incurring additional costs. The callable agreements contain call option features, in which the buyer has the right, at its discretion, to terminate the repurchase agreement after an initial period ranging from 3 months to 5 years. After the initial call period, the buyer has the right to terminate the agreement on a quarterly basis thereafter until maturity. If the buyer exercises its option, Peoples would bedate such payments were required to repaybe made under the agreementterms of the loan agreement. A loan may be placed on nonaccrual status regardless of whether or not such loan is considered past due. The recorded investment in whole at the quarterly date. During the third quarter of 2010, Peoples prepaid $60.0 million of repurchase agreements resulting in early termination fees of $3.6 million. These repurchase agreements had a weighted-average cost of 4.53%loans on nonaccrual status and accruing loans delinquent for 90 days or more were scheduled to mature over the next two fiscal years.as follows:
|
| | | | | | | | | | | | | |
| | | | Accruing Loans |
| Nonaccrual Loans | | 90+ Days Past Due |
| March 31, | December 31, | | March 31, | December 31, |
(Dollars in thousands) | 2011 | 2010 | | 2011 | 2010 |
Commercial real estate | $ | 25,961 | | $ | 34,392 | | | $ | — | | $ | — | |
Commercial and industrial | 1,536 | | 1,714 | | | — | | — | |
Real Estate Construction | 1,008 | | — | | | — | | — | |
Residential real estate | 2,491 | | 3,790 | | | — | | 27 | |
Home equity lines of credit | 361 | | 554 | | | 37 | | — | |
Consumer | — | | — | | | — | | — | |
Total | $ | 31,357 | | $ | 40,450 | | | $ | 37 | | $ | 27 | |
The FHLB advances consistamounts shown above exclude nonaccrual loans held-for-sale, which totaled $951,000 at both March 31, 2011 and December 31, 2010.
The rate onfollowing table presents the convertible rate advances are fixed from initial periods ranging from one to four years, depending onaging of the specific advance. After the initial fixed rate period, the FHLB has the option to convert each advance to a LIBOR based, variable rate advance. If the FHLB exercises its option, Peoples may repay the advancerecorded investment in whole or in part on the conversion date or any subsequent repricing date without a prepayment fee. At all other times, early repayment of any convertible rate advance would result in Peoples incurring a prepayment penalty. For the putable advances, the FHLB has the option, at its sole discretion following an initial period of three months, to terminate the debtpast due loans and require Peoples to repay the advance prior to the final stated maturity. After the initial period, the FHLB has the option to terminate the debt on a quarterly basis. If the advance is terminated prior to maturity, the FHLB will offer Peoples replacement funding at the then-prevailing rate on an advance product then-offered by the FHLB, subject to normal FHLB underwriting criteria. leases:
|
| | | | | | | | | | | | | | | | | | | |
| Loans Past Due | | Current | Total |
(Dollars in thousands) | 30 - 59 days | 60 - 89 days | 90 + Days | Total | | Loans | Loans |
March 31, 2011 | | | | | | | |
Commercial real estate | $ | 4,893 | | $ | 805 | | $ | 13,748 | | $ | 19,446 | | | $ | 418,778 | | $ | 438,224 | |
Commercial and industrial | 1,594 | | 99 | | — | | 1,693 | | | 145,693 | | 147,386 | |
Real estate construction | — | | — | | 1,008 | | 1,008 | | | 31,831 | | 32,839 | |
Residential real estate | 4,815 | | 945 | | 1,981 | | 7,741 | | | 189,772 | | 197,513 | |
Home equity lines of credit | 412 | | 64 | | — | | 476 | | | 47,430 | | 47,906 | |
Consumer | 70 | | 368 | | 37 | | 475 | | | 82,046 | | 82,521 | |
Deposit account overdrafts | 53 | | — | | — | | 53 | | | 1,587 | | 1,640 | |
Total | $ | 11,837 | | $ | 2,281 | | $ | 16,774 | | $ | 30,892 | | | $ | 917,137 | | $ | 948,029 | |
December 31, 2010 | | | | | | | |
Commercial real estate | $ | 3,208 | | $ | 5,378 | | $ | 14,652 | | $ | 23,238 | | | $ | 429,637 | | $ | 452,875 | |
Commercial and industrial | 563 | | 11 | | 247 | | 821 | | | 152,371 | | 153,192 | |
Real estate construction | 4 | | — | | 815 | | 819 | | | 21,659 | | 22,478 | |
Residential real estate | 4,321 | | 2,022 | | 1,959 | | 8,302 | | | 191,973 | | 200,275 | |
Home equity lines of credit | 725 | | 119 | | — | | 844 | | | 47,286 | | 48,130 | |
Consumer | 186 | | 58 | | 458 | | 702 | | | 80,865 | | 81,567 | |
Deposit account overdrafts | — | | — | | — | | — | | | 2,201 | | 2,201 | |
Total | $ | 9,007 | | $ | 7,588 | | $ | 18,131 | | $ | 34,726 | | | $ | 925,992 | | $ | 960,718 | |
| | | | | | | |
Credit Quality Indicators
As discussed in Note 81 of Peoples' 2010 Form 10-K, Peoples categorizes the majority of its loans into risk categories based upon an established risk grading matrix based on a scale of 1 to 8. A description of the Notesgeneral characteristics of the risk grades used by Peoples is as follows:
“Pass” (grades 1 through 4): Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.
“Watch” (grade 5): Loans in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned” classification. Loans in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in Peoples' credit position.
“Substandard” (grade 6): Loans in this risk grade are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardizes the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.
“Doubtful” (grade 7): Loans in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the Consolidated Financial Statements includedadvantage and strengthening of the exposure, its classification as an estimate loss is deferred until its more exact status may be determined.
“Loss” (grade 8):Loans in Peoples’ 2009 Form 10-K, long-term FHLB advancesthis risk grade are collateralized byconsidered to be non-collectible and of such little value that their continuance as bankable assets owned by Peoples.is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes uncollectible. Consequently, Peoples typically does not maintain a recorded investment in loans within this category.
Consumer loans and other smaller-balance loans are evaluated and categorized as “substandard”, “doubtful” or “loss” based upon the regulatory definition of these classes and consistent with regulatory requirements. All other loans not evaluated individually nor meeting the regulatory conditions to be categorized as describe above would be considered as being “not rated”.
The aggregate minimum annual retirementsfollowing table summarizes the risk category of long-term borrowings in future periods are as follows:
Peoples' loan portfolio based upon the most recent analysis performed:
|
| | | | | | | | | | | | | | | | | | |
| Pass Rated | Watch | Substandard | Doubtful | Not | Total |
(Dollars in thousands) | (Grades 1 - 4) | (Grade 5) | (Grade 6) | (Grade 7) | Rated | Loans |
March 31, 2011 | | | | | | |
Commercial real estate | $ | 314,531 | | $ | 56,892 | | $ | 60,992 | | $ | — | | $ | 5,809 | | $ | 438,224 | |
Commercial and industrial | 105,873 | | 14,336 | | 7,860 | | — | | 19,317 | | 147,386 | |
Real estate construction | 26,400 | | 2,999 | | 3,069 | | — | | 371 | | 32,839 | |
Residential real estate | 4,413 | | 2,432 | | 7,696 | | 20 | | 182,952 | | 197,513 | |
Home equity lines of credit | 801 | | 793 | | 1,461 | | — | | 44,851 | | 47,906 | |
Consumer | 95 | | — | | — | | — | | 82,426 | | 82,521 | |
Deposit account overdrafts | — | | — | | — | | — | | 1,640 | | 1,640 | |
Total | $ | 452,113 | | $ | 77,452 | | $ | 81,078 | | $ | 20 | | $ | 337,366 | | $ | 948,029 | |
December 31, 2010 | | | | | | |
Commercial real estate | $ | 320,306 | | $ | 49,901 | | $ | 77,634 | | $ | — | | $ | 5,034 | | $ | 452,875 | |
Commercial and industrial | 122,874 | | 6,325 | | 9,427 | | 247 | | 14,319 | | 153,192 | |
Real estate construction | 14,991 | | 3,017 | | 3,495 | | — | | 975 | | 22,478 | |
Residential real estate | 5,186 | | 2,135 | | 8,031 | | — | | 184,923 | | 200,275 | |
Home equity lines of credit | 283 | | 339 | | 2,106 | | — | | 45,402 | | 48,130 | |
Consumer | 89 | | — | | — | | — | | 81,478 | | 81,567 | |
Deposit account overdrafts | — | | — | | — | | — | | 2,201 | | 2,201 | |
Total | $ | 463,729 | | $ | 61,717 | | $ | 100,693 | | $ | 247 | | $ | 334,332 | | $ | 960,718 | |
(Dollars in thousands) | Balance | Weighted-Average Rate |
Quarter Ended December 31, 2010 | $7,017 | 3.89% |
Year Ended December 31, 2011 | 15,390 | 4.03% |
Year Ended December 31, 2012 | 7,408 | 3.58% |
Year Ended December 31, 2013 | 2,225 | 3.67% |
Year Ended December 31, 2014 | 1,721 | 3.55% |
Year Ended December 31, 2015 | 1,466 | 3.55% |
Thereafter | 129,493 | 3.36% |
Total long-term borrowings | $164,720 | 3.47% |
Impaired LoansThe following tables summarize loans classified as impaired:
|
| | | | | | | | | | | | | | | | | | | | | |
| Unpaid | Recorded Investment | Total | | Average | Interest |
| Principal | With | Without | Recorded | Related | Recorded | Income |
(Dollars in thousands) | Balance | Allowance | Allowance | Investment | Allowance | Investment | Recognized |
March 31, 2011 | | | | | | | |
Commercial real estate | $ | 52,684 | | $ | 2,886 | | $ | 22,104 | | $ | 24,990 | | $ | 739 | | $ | 27,948 | | $ | — | |
Commercial and industrial | 2,172 | | 1,526 | | — | | 1,526 | | 163 | | 1,547 | | — | |
Real estate construction | 2,202 | | — | | 1,008 | | 1,008 | | — | | 862 | | — | |
Residential real estate | 1,123 | | — | | 1,510 | | 1,510 | | — | | 1,720 | | — | |
Home equity lines of credit | 522 | | 361 | | 96 | | 457 | | 85 | | 228 | | — | |
Total | $ | 58,703 | | $ | 4,773 | | $ | 24,718 | | $ | 29,491 | | $ | 987 | | $ | 32,305 | | $ | — | |
December 31, 2010 | | | | | | | |
Commercial real estate | $ | 58,178 | | $ | 6,403 | | $ | 27,550 | | $ | 33,953 | | $ | 1,789 | | $ | 21,361 | | $ | 10 | |
Commercial and industrial | 2,333 | | 1,086 | | 729 | | 1,815 | | 572 | | 1,713 | | 5 | |
Real estate construction | 1,755 | | 330 | | 485 | | 815 | | 22 | | 913 | | — | |
Residential real estate | 1,170 | | 631 | | 506 | | 1,137 | | 320 | | 867 | | 9 | |
Home equity lines of credit | 522 | | 520 | | — | | 520 | | 254 | | 535 | | — | |
Total | $ | 63,958 | | $ | 8,970 | | $ | 29,270 | | $ | 38,240 | | $ | 2,957 | | $ | 25,389 | | $ | 24 | |
Allowance for Loan Losses
Changes in the allowance for loan losses in the periods ended March 31, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Commercial Real Estate | Commercial and Industrial | Residential Real Estate | Home Equity Lines of Credit | Consumer | Deposit Account Overdrafts | Total |
March 31, 2011 | | | | | | | |
Balance, January 1, 2011 | $ | 21,806 | | $ | 2,160 | | $ | 1,400 | | $ | 431 | | $ | 721 | | $ | 248 | | $ | 26,766 | |
Charge-offs | (7,078 | ) | (835 | ) | (201 | ) | (247 | ) | (283 | ) | (136 | ) | (8,780 | ) |
Recoveries | 315 | | 59 | | 443 | | 10 | | 222 | | 103 | | 1,152 | |
Net charge-offs | (6,763 | ) | (776 | ) | 242 | | (237 | ) | (61 | ) | (33 | ) | (7,628 | ) |
Provision for loan losses | 4,570 | | 350 | | — | | 250 | | 130 | | 11 | | 5,311 | |
Balance, March 31, 2011 | $ | 19,613 | | $ | 1,734 | | $ | 1,642 | | $ | 444 | | $ | 790 | | $ | 226 | | $ | 24,449 | |
| | | | | | | |
Period-end amount allocated to: | | | | | | |
Loans individually evaluated for impairment | $ | 739 | | $ | 163 | | $ | — | | $ | 85 | | $ | — | | $ | — | | $ | 987 | |
Loans collectively evaluated for impairment | 18,874 | | 1,571 | | 1,642 | | 359 | | 790 | | 226 | | 23,462 | |
Ending balance | $ | 19,613 | | $ | 1,734 | | $ | 1,642 | | $ | 444 | | $ | 790 | | $ | 226 | | $ | 24,449 | |
| | | | | | | |
March 31, 2010 | | | | | | | |
Balance, January 1, 2010 | $ | 22,125 | | $ | 1,586 | | $ | 1,619 | | $ | 528 | | $ | 1,074 | | $ | 325 | | $ | 27,257 | |
Charge-offs | (6,423 | ) | (919 | ) | (201 | ) | (12 | ) | (349 | ) | (230 | ) | (8,134 | ) |
Recoveries | 505 | | 25 | | 18 | | 24 | | 235 | | 122 | | 929 | |
Net charge-offs | (5,918 | ) | (894 | ) | (183 | ) | 12 | | (114 | ) | (108 | ) | (7,205 | ) |
Provision for loan losses | 3,181 | | 3,300 | | — | | — | | — | | 20 | | 6,501 | |
Balance, March 31, 2010 | $ | 19,388 | | $ | 3,992 | | $ | 1,436 | | $ | 540 | | $ | 960 | | $ | 237 | | $ | 26,553 | |
| | | | | | | |
Period-end amount allocated to: | | | | | | |
Loans individually evaluated for impairment | $ | 1,684 | | $ | 1,665 | | $ | 85 | | $ | 99 | | $ | — | | $ | — | | $ | 3,533 | |
Loans collectively evaluated for impairment | 17,704 | | 2,327 | | 1,351 | | 441 | | 960 | | 237 | | 23,020 | |
Ending balance | $ | 19,388 | | $ | 3,992 | | $ | 1,436 | | $ | 540 | | $ | 960 | | $ | 237 | | $ | 26,553 | |
Note 5. 5 Stockholders’ Equity
The following table details the progression in shares of Peoples’ preferred, common and treasury stock during the period presented:
|
| | | | | | |
| Preferred Stock | Common Stock | Treasury Stock |
Shares at December 31, 2010 | 39,000 | | 11,070,022 | | 612,695 | |
Changes related to stock-based compensation awards: | | | |
Release of restricted common shares | | 5,337 | | 647 | |
Changes related to deferred compensation plan: | | | |
Purchase of treasury stock | | | 2,162 | |
Reissuance of treasury stock | | | (9,209 | ) |
Repurchase of preferred shares | (21,000 | ) | | |
Common shares issued under dividend reinvestment plan | | 5,443 | | |
Shares at March 31, 2011 | 18,000 | | 11,080,802 | | 606,295 | |
| Preferred | Common | Treasury Stock |
| Stock | Stock |
Shares at December 31, 2009 | 39,000 | 11,031,892 | 657,255 |
Changes related to stock-based compensation awards: | | |
Release of restricted common shares | | 6,202 | |
Exercise of common stock options | | | (31,008) |
Purchase of treasury stock | | | 9,164 |
Rabbi Trust payout | | | (11,165) |
Common shares issued under dividend reinvestment plan | 24,662 | |
Shares at September 30, 2010 | 39,000 | 11,062,756 | 624,246 |
15
Under its Amended Articles of Incorporation, Peoples is authorized to issue up to 50,000 preferred shares, in one or more series, having such voting powers, designations, preferences, rights, qualifications, limitations and restrictions as determined by the Board of Directors. In 2009, Peoples’ Board of Directors created a series of preferred shares designated as Peoples’ Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and having a liquidation preference of $1,000 per share, and fixed 39,000 shares as the authorized number of such shares (the “Series A Preferred Shares”). These Series A Preferred Shares subsequently were sold to the United States Department of the Treasury (the “U.S. Treasury”), along with a ten-year warrant (the “Warrant 8221;“Warrant”) to purchase 313,505 Peoples common shares at an exercise price of $18.66 per share (subject to certain anti-dilution and other adjustments), for an aggregate purchase price of $39 million in cash in connection with Peoples’ participation in the U.S. Treasury’s TARP Capital Purchase Program.
The Series A Preferred Shares accrue cumulative quarterly dividends at a rate of 5% per annum from January 30, 2009 to, but excluding February 15, 2014, and 9% per annum thereafter. These dividends will be paid only if, as and when declared by Peoples’ Board of Directors. The Series A Preferred Shares have no maturity date and rank senior to the common shares with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of Peoples. Peoples has the option to redeem the Series A Preferred Shares at 100% of their liquidation preference plus accrued and unpaid dividends, subject to the approval of the Board of Governors of the Federal Reserve System and the Office of the Comptroller of Currency. The Series A Preferred Shares are ge nerallygenerally non-voting.
The U.S. Treasury has agreed not to exercise voting power with respect to any common shares issued to it upon exercise of the Warrant. Any common shares issued by Peoples upon exercise of the Warrant will be issued from common shares held in treasury to the extent available. If no treasury shares are available, common shares will be issued from authorized but unissued common shares.
The Securities Purchase Agreement, pursuant to which the Series A Preferred Shares and the Warrant were sold, contains limitations on the payment of dividends on the common shares after January 30, 2009. Prior to the earlier of (i) January 30, 2012 and (ii) the date on which the Series A Preferred Shares have been redeemed in whole or the U.S. Treasury has transferred the Series A Preferred Shares to third parties which are not Affiliates (as defined in the Securities Purchase Agreement) of the U.S. Treasury, any increase in common share dividends by Peoples or any of its subsidiaries would be prohibited without the prior approval of the U.S. Treasury.
If the Series A Preferred Shares were redeemed,repurchased in full, Peoples has the right to repurchase the Warrant at its appraised value. Otherwise, the U.S. Treasury must liquidate the related Warrant at the current market price.
On February 2, 2011, Peoples completed the repurchase of 21,000 of the Series A Preferred Shares held by the U.S. Treasury, for an aggregate purchase price of $21,224,583, which included a pro rata accrued dividend of approximately $224,583. In connection with this repurchase, Peoples recognized the pro rata unamortized discount originally recorded at the time of issuance, which totaled $186,000.
Note 6.6 Comprehensive Income (Loss)
The components of other comprehensive income (loss) were as follows:
|
| | | | | | |
| Three Months Ended |
| March 31, |
(Dollars in thousands) | 2011 | 2010 |
Net income | $ | 1,869 | | $ | 1,315 | |
Other comprehensive income (loss): | | |
Available-for-sale investment securities: | | |
Gross unrealized holding gain (loss) arising in the period | 419 | | (5,988 | ) |
Related tax (expense) benefit | (147 | ) | 2,096 | |
Less: reclassification adjustment for net gain (loss) included in net income | 360 | | (970 | ) |
Related tax (expense) benefit | (126 | ) | 340 | |
Net effect on other comprehensive income (loss) | 38 | | (3,262 | ) |
Defined benefit plans: | | |
Amortization of unrecognized loss and service cost on pension plan | 38 | | — | |
Related tax expense | (13 | ) | — | |
Net effect on other comprehensive income (loss) | 25 | | — | |
Total other comprehensive income (loss), net of tax | 63 | | (3,262 | ) |
Total comprehensive income (loss) | $ | 1,932 | | $ | (1,947 | ) |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(Dollars in thousands) | 2010 | 2009 | | 2010 | 2009 |
Net income (loss) | $413 | $(4,065) | | $5,013 | $2,976 |
Other comprehensive (loss) income: | | | | | |
Available-for-sale investment securities: | | | | | |
Gross unrealized holding (loss) gain arising in the period | (4,915) | 12,088 | | (12,681) | 29,939 |
Related tax benefit (expense) | 1,720 | (4,231) | | 4,438 | (10,478) |
Non-credit losses on securities during the period | – | (465) | | – | (932) |
Related tax benefit | – | 163 | | – | 326 |
Less: reclassification adjustment for net gain included in net income (loss) | 3,818 | (5,654) | | 5,066 | (5,066) |
Related tax (expense) benefit | (1,337) | 1,979 | | (1,773) | 1,773 |
Net effect on other comprehensive (loss) income | (5,676) | 11,230 | | (11,536) | 22,148 |
Defined benefit plans: | | | | | |
Amortization of unrecognized loss and service cost on pension plan | 38 | 42 | | 115 | 126 |
Related tax expense | (13) | (15) | | (40) | (44) |
Net effect on other comprehensive (loss) income | 25 | 27 | | 75 | 82 |
Total other comprehensive (loss) income, net of tax | (5,651) | 11,257 | | (11,461) | 22,230 |
Total comprehensive (loss) income | $(5,238) | $7,192 | | $(6,448) | $25,206 |
The following details the change in the components of Peoples’ accumulated other comprehensive income (loss) for the ninethree months ended September 30, 2010:
March 31, 2011:
|
| | | | | | | | | |
(Dollars in thousands) | Unrealized i(Loss Gain) on Securities | Unrecognized Net Pension and Postretirement Costs | Accumulated Comprehensive (Loss) Income |
Balance, December 31, 2010 | $ | (2,038 | ) | $ | (2,415 | ) | $ | (4,453 | ) |
Current period change, net of tax | 38 | | 25 | | 63 | |
Balance, March 31, 2011 | $ | (2,000 | ) | $ | (2,390 | ) | $ | (4,390 | ) |
| | Unrecognized | |
| Unrealized | Net Pension and | Accumulated |
| Gain (Loss) | Postretirement | Comprehensive |
(Dollars in thousands) | on Securities | Costs | Income (Loss) |
Balance, December 31, 2009 | $13,068 | $(3,581) | $9,487 |
Current period change, net of tax | (11,536) | 75 | (11,461) |
Balance, September 30, 2010 | $1,532 | $(3,506) | $(1,974) |
Note 7.7 Employee Benefit Plans
Peoples sponsors a noncontributory defined benefit pension plan that covers substantially all employees hired before January 1, 2010. The plan provides retirement benefits based on an employee’s years of service and compensation. For employees hired before January 1, 2003, the amount of postretirement benefit is based on the employee’s average monthly compensation pay over the highest five consecutive years out of the employee’s last ten years with Peoples while an eligible employee. For employees hired on or after January 1, 2003, the amount of postretirement benefit is based on 2% of the employee’s annual compensation plus accrued interest. Effective January 1, 2010, the pension plan was closed to new entrants. On November 18, 2010, Peoples' Board of Directors authorized a freeze of the accrual of pension plans benefits, which was effective March 1, 2011. Peoples recognized this freeze as a curtailment as of December 31, 2010 and March 1, 2011, under the terms of the pension plan. Peoples also has a contributory postretir ementpost-retirement benefit plan for former employees who were retired as of December 31, 1992. The plan provides health and life insurance benefits. Peoples’ policy is to fund the cost of the benefits as they are incurred.
The following tables detail 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) | 2011 | 2010 | | 2011 | 2010 |
Service cost | $ | — | | $ | 188 | | | $ | — | | $ | — | |
Interest cost | 172 | | 196 | | | 3 | | 3 | |
Expected return on plan assets | (280 | ) | (287 | ) | | — | | — | |
Amortization of prior service cost | — | | 1 | | | — | | (1 | ) |
Amortization of net loss | 8 | | 37 | | | (2 | ) | (2 | ) |
Net periodic benefit cost | $ | (100 | ) | $ | 135 | | | $ | 1 | | $ | — | |
Pension Benefits:
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(Dollars in thousands) | 2010 | 2009 | | 2010 | 2009 |
Service cost | $188 | $200 | | $563 | $599 |
Interest cost | 196 | 196 | | 588 | 589 |
Expected return on plan assets | (287) | (298) | | (861) | (895) |
Amortization of prior service cost | 1 | 1 | | 3 | 3 |
Amortization of net loss | 37 | 36 | | 112 | 108 |
Net periodic benefit cost | $135 | $135 | | $405 | $404 |
Postretirement Benefits:
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(Dollars in thousands) | 2010 | 2009 | | 2010 | 2009 |
Interest cost | 4 | 4 | | 10 | 12 |
Amortization of prior service cost | (1) | (1) | | (2) | (2) |
Amortization of net gain | (2) | (1) | | (7) | (2) |
Net periodic benefit cost | $1 | $2 | | $1 | $8 |
Note 8.8 Stock-Based Compensation
Under the Peoples Bancorp Inc. Amended and Restated 2006 Equity Plan (the “2006 Equity Plan”), Peoples may grant, among other awards, nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights or any combination thereof covering up to 500,000 common shares to employees and non-employee directors. Prior to 2007, Peoples granted nonqualified and incentive stock options to employees and nonqualified stock options to non-employee directors under the 2006 Equity Plan and predecessor plans. Since February 2007, Peoples has granted a combination of restricted common shares and stock appreciation rights (“SARs”) to be settled in common shares to employees and restricted common shares to non-employee directors subject to the terms and conditions prescribed by the 2006 Equity Plan.
In general, common shares issued in connection with stock-based awards are issued from treasury shares to the extent available. If no treasury shares are available, common shares are issued from authorized but unissued common shares.
Stock Options
Under the provisions of the 2006 Equity Plan and predecessor stock option plans, the exercise price per share of any stock option granted may not be less than the fair market value of the underlying common shares on the date of grant of the stock option. All stock options granted to both employees and non-employee directors expire ten years from the date of grant. The most recent stock options granted to employees and non-employee directors occurred in 2006. The following summarizes the changes to Peoples’ stock options for the period ended September 30, 2010:
| Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life | Aggregate Intrinsic Value |
Outstanding at January 1 | 270,757 | $23.90 | | |
Granted | – | – | | |
Exercised | 34,464 | 13.57 | | |
Expired | 29,642 | 24.60 | | |
Outstanding at September 30 | 206,651 | $25.52 | 3.1 years | $– |
| | | | |
Exercisable at September 30 | 206,651 | $25.52 | 3.1 years | $– |
For the nine months ended September 30, 2010, the total intrinsic value of stock options exercised was $86,000. The following table summarizes information concerning Peoples’ stock options outstanding at September 30, 2010:March 31, 2011:
|
| | | | | | | | |
| Options Outstanding & Exercisable |
Range of Exercise Prices | Common Shares Subject to Options Outstanding | Weighted- Average Remaining Contractual Life | Weighted-Average Exercise Price |
$15.55 | to | $21.71 | 9,876 | | 1.2 years | $ | 20.08 | |
$21.72 | to | $23.58 | 47,640 | | 1.7 years | 22.32 | |
$23.59 | to | $25.94 | 41,343 | | 1.2 years | 23.96 | |
$26.01 | to | $27.74 | 41,354 | | 3.0 years | 27.08 | |
$28.25 | to | $28.26 | 34,028 | | 3.9 years | 28.25 | |
$28.57 | to | $30.00 | 31,410 | | 3.7 years | 29.02 | |
Total | 205,651 | | 2.5 years | $ | 25.50 | |
| | | Options Outstanding | | Options Exercisable |
Range of Exercise Prices | Option Shares Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | | Option Shares Exercisable | Weighted-Average Exercise Price |
$13.47 | to | $15.54 | 635 | 0.7 years | $15.54 | | 635 | $15.54 |
$15.55 | to | $21.71 | 9,241 | 2.0 years | 20.39 | | 9,241 | 20.39 |
$21.72 | to | $23.58 | 47,640 | 2.2 years | 22.32 | | 47,640 | 22.32 |
$23.59 | to | $25.94 | 41,343 | 1.7 years | 23.96 | | 41,343 | 23.96 |
$26.01 | to | $27.74 | 41,354 | 3.8 years | 27.08 | | 41,354 | 27.08 |
$28.25 | to | $28.26 | 34,028 | 4.6 years | 28.25 | | 34,028 | 28.25 |
$28.57 | to | $30.00 | 32,410 | 4.3 years | 29.01 | | 32,410 | 29.01 |
Total | | | 206,651 | 3.1 years | $25.52 | | 206,651 | $25.52 |
Stock Appreciation Rights
SARs granted to employees have an exercise price equal to the fair market value of Peoples’ common shares on the date of grant and will be settled using common shares of Peoples. Additionally, the SARs granted will vest three years from the grant date and expire ten years from the date of grant. The following summarizes the changes to Peoples’ SARs for the period ended September 30, 2010:
| Number of Shares | Weighted-Average Exercise Price | Weighted- Average Remaining Contractual Life | Aggregate Intrinsic Value |
|
|
|
|
Outstanding at January 1 | 53,756 | $25.80 | | |
Granted | – | – | | |
Exercised | – | – | | |
Forfeited | 9,088 | 25.29 | | |
Outstanding at September 30 | 44,668 | $25.91 | 6.0 years | $– |
Exercisable at September 30 | 23,110 | $27.90 | 4.8 years | $– |
The following table summarizes information concerning Peoples’ SARs outstanding at September 30, 2010:March 31, 2011:
Exercise Prices | Number of Shares Outstanding | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | Number of Shares Exercisable |
$23.26 | 5,000 | 2.9 years | $23.26 | 5,000 |
$23.77 | 20,793 | 7.3 years | 23.77 | 235 |
$23.80 | to | $27.99 | 1,000 | 7.2 years | 23.80 | – |
$29.25 | 17,875 | 5.4 years | 29.25 | 17,875 |
Total | | | 44,668 | 6.0 years | $25.91 | 23,110 |
|
| | | | | |
Exercise Prices | Number of Common Shares Subject to SARs Outstanding & Exercisable | Weighted- Average Remaining Contractual Life |
| $23.26 | | 5,000 | | 2.5 years |
| $23.77 | | 18,936 | | 6.8 years |
| $23.80 | | 1,000 | | 6.7 years |
| $29.25 | | 17,506 | | 4.6 years |
Total | 42,442 | | 5.4 years |
Restricted Shares
Under the 2006 Equity Plan, Peoples may award restricted common shares to officers, key employees and non-employee directors. In general, the restrictions on common shares awarded to non-employee directors expire after six months, while the restrictions on common shares awarded to employees expire after three years. In the first quarter of 2011, Peoples granted restricted shares to officers and key employees with both time-based and performance-based vesting periods. For those shares subject to time-based vesting, the restrictions on these shares will vest after two years. For the shares subject to performance-based vesting, the restrictions on these shares will vest after two years upon the achievement of a cumulative diluted earnings per common share of $3.10 for the three-year period ending December 31, 2012.
The following summarizes the changes to Peoples’ restricted common shares for the period ended September 30, 2010:March 31, 2011:
|
| | | | | | | | | | | |
| Time Vesting | | Performance Vesting |
| Number of Shares | Weighted-Average Grant Date Fair Value | | Number of Shares | Weighted-Average Grant Date Fair Value |
Outstanding at January 1 | 7,337 | | $ | 19.88 | | | — | | $ | — | |
Awarded | 7,423 | | 13.31 | | | 3,531 | | 13.14 | |
Released | 5,337 | | 22.09 | | | — | | — | |
Outstanding at March 31 | 9,423 | | $ | 13.45 | | | 3,531 | | $ | 13.14 | |
| | Weighted- |
| | Average |
| Number | Grant Date |
| of Shares | Fair Value |
Outstanding at January 1 | 13,991 | $24.48 |
Awarded | 2,000 | 14.82 |
Released | 6,202 | 28.80 |
Forfeited | 1,021 | 23.77 |
Outstanding at September 30 | 8,768 | $19.30 |
For the ninethree months ended September 30, 2010,March 31, 2011, the total intrinsic value of restricted stock released was $82,000.$72,000.
Stock-Based Compensation
Peoples recognized stock-based compensation expense, which is included as a component of Peoples’ salaries and employee benefits costs, based on the estimated fair value of the awards on the grant date. The following summarizes the amount of stock-based compensation expense and related tax benefit recognized:
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(Dollars in thousands) | 2010 | 2009 | | 2010 | 2009 |
Total stock-based compensation | $23 | $35 | | $74 | $113 |
Recognized tax benefit | (8) | (12) | | (26) | (40) |
Net expense recognized | $15 | $23 | | $48 | $73 |
|
| | | | | | |
| Three Months Ended |
| March 31, |
(Dollars in thousands) | 2011 | 2010 |
Total stock-based compensation | $ | 33 | | $ | 26 | |
Recognized tax benefit | (12 | ) | (9 | ) |
Net expense recognized | $ | 21 | | $ | 17 | |
Total unrecognized stock-based compensation expense related to unvested awards was $35,000$66,000 at September 30, 2010,March 31, 2011, which will be recognized over a weighted-average period of 0.71.6 years.
Note 9.9 Earnings Per Common Share
Basic earnings per common share are computed by dividing net (loss) income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issuable upon exercise of outstanding stock options, SARs and non-vested restricted common shares using the treasury stock method. As disclosed in Note 5, Peoples had a warrantWarrant to purchase 313,505 common shares outstanding at September 30, 2010.March 31, 2011. This warrantWarrant was excluded from the calculation of diluted earnings per common share since it was anti-dilutive. In addition, stock options and SARs covering 251,319 shares248,093 and 286,355291,323 shares were excluded from the calculations for the three and nine months ended September 30, 2010, respectively,March 31, 2011 and 251,319 shares and 284,673 shares for the three and nine months ended September 30, 2009,2010, respectively, since they were anti-dilutive.
The calculation of basic and diluted earnings per common share was as follows:
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(Dollars in thousands, except per share data) | 2010 | 2009 | | 2010 | 2009 |
Net income (loss) | $413 | $(4,065) | | $5,013 | $2,976 |
Preferred dividends | 514 | 512 | | 1,539 | 1,364 |
Net (loss) income available to common shareholders | (101) | (4,577) | | 3,474 | 1,612 |
| | | | | |
Weighted-average common shares outstanding | 10,437,770 | 10,372,946 | | 10,417,316 | 10,359,569 |
Effect of potentially dilutive common shares | – | – | | 8,147 | 13,061 |
Total weighted-average diluted common | | | | | |
shares outstanding | 10,437,770 | 10,372,946 | | 10,425,463 | 10,372,630 |
| | | | | |
Earnings per common share: | | | | | |
Basic | $(0.01) | $(0.44) | | $0.33 | $0.16 |
Diluted | $(0.01) | $(0.44) | | $0.33 | $0.16 |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(Dollars in thousands, except per share data) | 2011 | | 2010 |
Net income | $ | 1,869 | | | $ | 1,315 | |
Preferred dividends | 523 | | | 513 | |
Net income available to common shareholders | $ | 1,346 | | | $ | 802 | |
Weighted-average common shares outstanding | 10,471,819 | | | 10,391,542 | |
Effect of potentially dilutive common shares | 5,541 | | | 8,701 | |
Total weighted-average diluted common shares outstanding | 10,477,360 | | | 10,400,243 | |
Earnings per common share: | | | | | |
Basic | $ | 0.13 | | | $ | 0.08 | |
Diluted | $ | 0.13 | | | $ | 0.08 | |
The following data should be read in conjunction with the Unaudited Consolidated Financial Statements and the Management’s Discussion and Analysis that follows:
| | | At or For the Three Months | | At or For the Nine Months | At or For the Three Months Ended |
| Ended September 30, | | Ended September 30, | March 31, |
| 2010 | 2009 | | 2010 | 2009 | 2011 | 2010 |
SIGNIFICANT RATIOS | | | | | |
Return on average stockholders' equity | 0.69% | (6.70%) | | 2.78% | 1.74% | 3.47 | % | 2.19 | % |
Return on average common stockholders' equity | (0.20%) | (8.97%) | | 2.29% | 1.11% | 2.83 | % | 1.58 | % |
Return on average assets | 0.08% | (0.79%) | | 0.34% | 0.20% | 0.42 | % | 0.26 | % |
Net interest margin | 3.58% | 3.45% | | 3.54% | 3.47% | 3.43 | % | 3.52 | % |
Efficiency ratio (a) | 58.78% | 58.28% | | 59.71% | 60.00% | 65.21 | % | 60.07 | % |
Average stockholders' equity to average assets | 12.14% | 11.84% | | 12.13% | 11.27% | 11.96 | % | 12.11 | % |
Average loans to average deposits | 72.00% | 77.45% | | 73.47% | 78.53% | 70.24 | % | 75.49 | % |
Dividend payout ratio | N/A | N/A | | 90.90% | 363.03% | 78.60 | % | 131.05 | % |
| | | | | |
| | | | | |
ASSET QUALITY RATIOS | | | | | |
Nonperforming loans as a percent of total loans (b)(c) | 3.67% | 3.94% | | 3.67% | 3.94% | 3.41 | % | 2.84 | % |
Nonperforming assets as a percent of total assets (b)(c) | 2.21% | 2.16% | | 2.21% | 2.16% | 2.04 | % | 1.79 | % |
Allowance for loan losses to loans net of unearned interest (c) | 2.68% | 2.46% | | 2.68% | 2.46% | 2.58 | % | 2.53 | % |
Allowance for loan losses to nonperforming loans (b)(c) | 73.10% | 62.30% | | 73.10% | 62.30% | 75.56 | % | 89.00 | % |
Provision for loan losses to average loans (annualized) | 3.12% | 3.69% | | 2.57% | 2.30% | 2.24 | % | 0.61 | % |
Net charge-offs as a percentage of average loans (annualized) | 3.11% | 2.57% | | 2.57% | 1.90% | 3.21 | % | 2.76 | % |
| | | | | |
| | | | | |
CAPITAL INFORMATION (c) | | | | | |
Tier 1 common capital ratio | | 11.72 | % | 10.60 | % |
Tier 1 capital ratio | 16.22% | 15.06% | | 16.22% | 15.06% | 15.25 | % | 15.51 | % |
Total risk-based capital ratio | 17.55% | 16.39% | | 17.55% | 16.39% | 16.60 | % | 16.83 | % |
Leverage ratio | 10.26% | 9.82% | | 10.26% | 9.82% | 9.81 | % | 9.97 | % |
Tangible equity to tangible assets (d) | 9.28% | 9.21% | | 9.28% | 9.21% | 8.39 | % | 9.06 | % |
Tangible common equity to tangible assets (d) | 7.16% | 7.22% | | 7.16% | 7.22% | 7.36 | % | 7.07 | % |
Tangible assets (d) | $1,818,755 | $1,938,949 | | $1,818,755 | $1,938,949 | $ | 1,736,825 | | $ | 1,937,914 | |
Tangible equity (d) | 168,825 | 178,558 | | 168,825 | 178,558 | 145,720 | | 175,485 | |
Tangible common equity (d) | $130,206 | $140,040 | | $130,206 | $140,040 | $ | 127,870 | | $ | 136,917 | |
| | | | | |
| | | | | |
PER COMMON SHARE DATA | | | | | |
Earnings per share – Basic | $(0.01) | $(0.44) | | $0.33 | $0.16 | $ | 0.13 | | $ | 0.08 | |
Earnings per share – Diluted | (0.01) | (0.44) | | 0.33 | 0.16 | 0.13 | | 0.08 | |
Cash dividends declared per common share | 0.10 | 0.10 | | 0.30 | 0.56 | |
Cash dividends declared per share | | 0.10 | | 0.10 | |
Book value per share (c) | 18.69 | 19.85 | | 18.69 | 19.85 | 18.39 | | 19.43 | |
Tangible book value per share (c) (d) | $12.47 | $13.50 | | $12.47 | $13.50 | $ | 12.21 | | $ | 13.15 | |
Weighted-average common shares outstanding – Basic | 10,437,770 | 10,372,946 | | 10,417,316 | 10,359,569 | 10,471,819 | | 10,391,542 | |
Weighted-average common shares outstanding – Diluted | 10,437,770 | 10,372,946 | | 10,425,463 | 10,372,630 | 10,477,360 | | 10,400,243 | |
Common shares outstanding at end of period | 10,438,510 | 10,371,357 | | 10,438,510 | 10,371,357 | 10,474,507 | | 10,408,096 | |
| |
(a) | Non-interest expense (less intangible asset amortization) as a percentage of fully tax-equivalent net interest income plus non-interest income (excluding gains or losses on investment securities and asset disposals). |
| |
(b) | Nonperforming loans include loans 90 days past due and accruing, renegotiated loans and nonaccrual loans. Nonperforming assets include nonperforming loans and other real estate owned. |
| |
(c) | Data presented as of the end of the period indicated. |
| |
(d) | These amounts represent non-GAAP measures since they exclude the balance sheet impact of intangible assets acquired through acquisitions on both total stockholders’ equity and total assets. Additional information regarding the calculation of these measures can be found later in this discussion under the caption “Capital/Stockholders’ Equity”. |
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 “anticipate”, “estimates”, “may”, “feels”, “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) | continued |
(1) | continued deterioration in the credit quality of Peoples’ loan portfolio could occur due to a number of factors, such as adverse changes in economic conditions that impair the ability of borrowers to repay their loans, the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected, which may adversely impact the provision for loan losses; |
(2) | |
(1) | competitive pressures among financial institutions or from non-financial institutions, which may increase significantly, includingimpacting product and pricing pressures and Peoples’Peoples' ability to attract, develop and retain qualified professionals; |
(3) | |
(2) | changes in the interest rate environment, which may adversely impact interest margins; |
(4) | |
(3) | changes in prepayment speeds, loan originations, sale volumes and charge-offs, which may be less favorable than expected and adversely impact the amount of interest income generated; |
(5) | |
(4) | general economic conditions and weakening in the real estate market, either nationally or in the states in which Peoples and its subsidiaries do business may be less favorableworse than expected, which could decrease the demand for loans, deposits and other financial services and increase loan delinquencies and defaults; |
(6) | |
(5) | political developments, wars or other hostilities, which may disrupt or increase volatility in securities markets or other economic conditions; |
(7) | |
(6) | the nature, extent and timing of legislative or regulatory changes or actions, including in particular the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations to be promulgated thereunder, which may adversely affect the business of Peoples and its subsidiaries; |
(8) | |
(7) | changes in accounting standards, policies, estimates or procedures may adversely affect Peoples’ reported financial condition or results of operations; |
(9) | |
(8) | adverse changes in the conditions and trends in the financial markets, which may adversely affect the fair value of securities within Peoples’ investment portfolio and interest rate sensitivity of Peoples’ ConsolidatedPeoples' consolidated Balance Sheets; |
(10) | |
(9) | a delayed or incomplete resolution of regulatory issues that could arise; |
(11) | |
(10) | Peoples’ ability to receive dividends from its subsidiaries; |
(12) | |
(11) | Peoples’ ability to maintain required capital levels and adequate sources of funding and liquidity; |
(13) | |
(12) | the impact of larger or similar financial institutions encountering problems, which may adversely affect the banking industry and/or Peoples; |
(14) | |
(13) | the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity; |
(15) | |
(14) | 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 |
(16) | |
(15) | 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 headings “ITEM 1A. RISK FACTORS” of Peoples’ Annual Report on Form 10-K for the year ended December 31, 20092010 (the “2009“2010 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 update these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements. Copies of documents filed with the SEC are available free of charge at the SEC’s websi tewebsite at www.sec.gov and/or from Peoples Bancorp Inc.’s website – www.peoplesbancorp.com under the “Investor Relations” section.
This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements, and notes thereto, contained in Peoples’ 20092010 Form 10-K, as well as the Unaudited Consolidated Financial Statements, ratios, statistics and discussions contained elsewhere in this Form 10-Q.
Business Overview
The following discussion and analysis of Peoples’ Unaudited Consolidated Financial Statements is presented to provide insight into management’s assessment of the financial condition and results of operations.
Peoples offers diversified financial products and services through 47 financial service locations and 3940 ATMs in southeastern Ohio, northwestern West Virginia and northeastern Kentucky through its financial service units – Peoples Bank, National Association (“Peoples Bank”), Peoples Financial Advisors (a division of Peoples Bank) and Peoples Insurance Agency, LLC, a subsidiary of Peoples Bank. 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’ products and services include traditional banking products, such as deposit accounts, lending products and trust services. Peoples also offers a complete array of insurance products and makes available custom-tailored fiduciary and wealth management services. Peoples provides services through traditional offices, ATMs and telephone and internet-based banking. Brokerage services are offered exclusively through an unaffiliated registered broker-dealer located at Peoples’ offices.
Critical Accounting Policies
The accounting and reporting policies of Peoples conform to 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’ Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis at September 30, 2010,March 31, 2011, which were unchanged from the policies disclosed in Peoples’ 20092010 Form 10-K.
Goodwill and Other Intangible Assets
As more fully discussed in Peoples’ 20092010 Form 10-K, goodwill is not amortized but is tested for impairment at least annually and updated quarterly if management believes there are indicators of potential impairment. At June 30, 2010, management performed its annual impairment test of Peoples’ recorded goodwill and concluded no impairment existed since the fair value of Peoples’ single reporting unit exceeded its carrying value.
At March 31, 2011, management believed indicators of potential goodwill impairment existed, such as Peoples' book value exceeding its market capitalization, and performed interim impairment test. The methodology and significant assumptions made by management in estimating the fair value of Peoples’ reporting unit at June 30, 2010,March 31, 2011, were consistent with those disclosed in Peoples’ 20092010 Form 10-K.
In the third quarter of 2010, Peoples recorded a higher provision for loan losses than the first two quarters of 2010. Additionally, Peoples’ market capitalization at quarter-end remained lower than its book value. Management believed these conditions were indicators of potential goodwill impairment and performed an interim impairment test as of September 30, 2010. Based on its analysis, management concluded that the estimated fair value of Peoples’Peoples' single reporting unit exceededdid not exceed its carrying amount at quarter-end. However, the excess fair value of the reporting unit over its carrying amount was not significant enough to provide management with a reasonable basis on which to conclude that further evaluation was not necessary. Therefore,amount. Consequently, management performed an additional an alysesanalysis to estimate the fair value of goodwill and concluded thatno goodwill was impaired since the estimated fair value of goodwill exceeded theits carrying value of goodwill and therefore, no impairment was recorded. Management’svalue. Management's analysis indicated that a decline in the fair value of Peoples’Peoples' single reporting unit of 23%20% or more would result in goodwill impairment.impairment as of December 31, 2010.
Further, management’s analysis indicated any of the following situations would cause the fair value of Peoples’ reporting unit to equal its carrying value: (1) a 15% sustained decline in future cash flows, (2) a 250 basis point decrease in the long-term growth rate or (3) a 250 basis point increase in the discount rate.
Summary of Recent Transactions and Events
The following is a summary of recent transactions or events that have impacted or are expected to impact Peoples’ results of operations or financial condition:
o | |
◦ | As described in Note 5 of the Notes to the Consolidated Financial Statements, on January 30, 2009, Peoples received $39.0 million of new equity capital under the U.S. Treasury’s TARP Capital Purchase Program. The investment was in the form of newly-issued non-voting cumulative perpetual preferred shares and a related 10-year warrant to purchase common shares sold by Peoples to the U.S. Treasury (the “TARP Capital Investment”). On February 2, 2011, Peoples completed a partial redemption of the Tarp Capital Investment by repurchasing $21.0 million of the preferred shares held by the U.S. Treasury (the "Partial TARP Capital Redemption"). In connection with the Partial TARP Capital Redemption, Peoples recognized the portion of the unamortized discount associated with the preferred shares repurchased, which was $186,000 and reduced diluted earnings per share by $0.02. Future quarterly preferred dividends are expected to approximate $240,000 compared to $513,000 in prior quarters. |
| |
◦ | Since 2008, Peoples periodically has taken actions to reduce interest rate exposures within the investment portfolio and entire balance sheet, which have included the sale of low yielding investment securities and repayment of high-cost borrowings. DuringThese actions included the third quartersale of 2010, Peoples sold $86.6 million of investment securities, primarily low yielding U.S. agency mortgage-backed securities and U.S. government-backed student loan pools, at a $3.8 million net gain.during the third quarter of 2010. The proceeds from these investment sales were used to prepay $60.0 million of wholesale repurchase agreements resulting in early repayment charges totaling $3.6 million, thereby deleveraging the balance sheet. The repurchase agreements had a weighted-average cost of 4.53% and originally were scheduled to mature over the next two years. Since y ear-end 2009, the size of the investment portfolio has decreased by $113.8 million and borrowed funds have been reduced by $109.2 million. In comparison, Peoples realized pre-tax gains of $276,000 and $864,000 for the three and nine months ended September 30, 2009. |
o | |
◦ | In the first quarter of 2010, Peoples recognized a non-cash pre-tax other-than-temporary impairment (“OTTI”) loss of $1.0 million on its ten remaining investment in collateralized debt obligation (“CDO”) securities. These securities were equity tranche CDO securities comprised mostly of bank-issued trust preferred securities. The OTTI loss reflectsreflected management’s estimation of credit losses incurred during the first quarter of 2010 based upon actual defaults, its evaluation of the credit quality of the issuers and corresponding analysis of cash flows to be received from the securities. After recognition of the first quarter 2010 OTTI loss, Peoples no longer has any exposure to CDO securities within its investment portfolio. |
o | |
◦ | Since early 2008, Peoples’ loan quality has been negatively impacted by worseningadverse conditions within the commercial real estate market and economy as a whole, which has caused declines in commercial real estate values and deterioration in the financial condition of various commercial borrowers. These conditions led Peoples to Peoples downgradingdowngrade the loan quality ratings onof various commercial real estate loans through its normal loan review process. In addition, several impaired loans have become under-collateralized due to reductions in the estimated net realizable fair value of the underlying collateral. As a result, Peoples’ provision for loan losses, net charge-offs and nonperforming loans in 2008, 2009 and the first nine months of 2010 werehave been significantly higher than long-term historical levels. Peoples ha shas also recognized losses on other real estate owned (“OREO”) in recent quarters due to declining commercial real estate values, which totaled $0.4 million and $1.7 million for the three and nine months ended September 30, 2010, respectively.values. |
o | Peoples’ earnings in recent quarters also have been impacted by ongoing workout efforts related to existing impaired commercial real estate loans. These efforts have included negotiating reduced payoff amounts in connection with the sale of the underlying collateral – commonly referred to as “short sales” – which resulted in additional loan charge-offs and provision for loan losses. In the second quarter of 2010, Peoples successfully completed the short-sale of a $3.9 million commercial real estate loan based on a condominium/apartment project in Florida, which removed this loan from Peoples’ nonperforming loans. Peoples also took steps in the second quarter to sell its remaining Arizona commercial real estate loan exposure, resulting in the loans being re-classified to “held-f or-sale” and written down to their fair value. Peoples recognized losses on loans held-for-sale of $0.6 million and $0.7 million for the three and nine months ended September 30, 2010, respectively. Management believes these actions are prudent since they have afforded opportunities to reduce nonperforming assets and lessen loss exposures within the loan portfolio. |
o ◦ | DuringIn 2009, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) took steps to rebuildrestore the Deposit Insurance Fund, which has been reduced substantially by the higher rate of bank failures in 2008 and 2009 compared to recent years. These actions affected all FDIC-insured depository institutions andinstitutions. These actions included increasing base assessment rates, beginning April 1, 2009, imposing a one-time special assessment during the second quarter of 2009 and requiring the prepayment of assessments for fourth quarter 2009 and full years 2010 through 2012 on December 29, 2009.2012. As a result, of the FDIC’s actions, Peoples has incurred higher FDIC insurance expense overcosts compared to historical amounts. On April 1, 2011, new regulations required by the last several quarters, including additional expense of $930,000 inDodd-Frank Act became effective changing the second quarter of 2009deposit insurance assessment base from total domestic deposits to average total assets minus average tangible equity, as well as changing the assessment system for large institutions and the special assessment. Addition ally, Peoples prepaid $9.0 million of FDIC assessments on December 29, 2009, which was recorded initially as a prepaid expense included in “Other Assets” onassessment rate schedule. Management believes the Consolidated Balance Sheets, and subsequently amortized asnew assessment base will reduce Peoples' FDIC insurance expense based upon actual insurance assessments. The prepayment of FDIC assessments did not have a material adverse effect on Peoples’ liquidity, financial condition or results of operations. |
o | Peoples’ Board of Directors declared quarterly cash dividends of $0.10 per common sharecosts by approximately $250,000 for each of the prior five quarters. These dividends represented a reduction fromremaining quarters of 2011 compared to the $0.23 per common share paidamount recorded in each of the first two quartersquarter of 2009. Management believes2011. |
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◦ | Peoples' net interest income and margin are impacted by changes in market interest rates based upon actions taken by the lower dividend rate balances the need for Peoples to provide a return on shareholder investment and to maintain a dividend payout consistent with recent earnings levels and long-term capital needs. |
o | As described in “ITEM 1. BUSINESS-Recent Corporate Developments” of Peoples’ 2009 Form 10-K, on January 30, 2009, Peoples received $39 million of new equity capital from the U.S. Treasury’s TARP Capital Purchase Program. The investment was in the form of newly-issued non-voting Fixed Rate Cumulative Perpetual Preferred Shares, Series A (the “Series A Preferred Shares”) and a related 10-year warrant sold by Peoples to the U.S. Treasury (the “TARP Capital Investment”). |
o | Federal Reserve either directly or through its Open Market Committee. Between August 2007 and December 2008, the Federal Reserve reduced the target Federal Funds Raterate 500 basis points to a range of 0% to 0.25% and reduced the Discount Rate 575 basis points whichto 0.50%. These actions caused a corresponding downward shift in short-term market interest rates. During this period, longer-term rates did not decrease to the same extent as short-term rates, resulting in a steepening of the yield curve. In 2009, the Federal Reserve allowedmaintained the target Federal Funds Rate and Discount Rate to remain at their historically low levels of 0% to 0.25% and 0.50%, respectively, while the slope of the yield curve steepened slightly. These interest rate conditions have negatively impacted asset yields but provided Peoples with opportunities to offset most of the impact on net interest income and margin by decreasing funding costs from taking advantage of lower-cost funding available in the market place and reducing certain deposit costs. |
o | respectively. In February 2010, the Federal Reserve approved several modifications to the terms of its Discount Window lending programs in light of continued improvement in financial market conditions. Most notably, the Federal Reserve increased the Discount Rate by 25 basis points to 0.75% while leaving its target Federal Funds Rate range unchanged, thereby widening the spread between the Discount Rate and the high end of the target Federal Funds Rate range,Rate. |
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◦ | In late 2008, the Federal Reserve initiated a plan to buy mortgage-backed and other debt securities through its open market operations as a means of lowering longer-term market interest rates and stimulating the economy – a policy commonly referred to as “quantitative easing”. The resulting purchases caused a flattening of the yield curve in the first half of 2009. The yield curve steepened moderately in the second half of 2009 after the Federal Reserve halted its investment purchases. In mid-2010, the Federal Reserve signaled the possibility of additional quantitative easing, which has been maintained since December 2008.resulted in a flatter yield curve during much of the second half of 2010. In late 2010, the yield curve steepened after the Federal Reserve announced its plan to purchase U.S. Treasury securities with shorter maturities than anticipated by many market participants. |
The impact of these transactions, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis.
EXECUTIVE SUMMARY
For the thirdfirst quarter of 2010, Peoples incurred a net loss available to common shareholders of $101,000, or $0.01 per diluted common share, resulting from a higher provision for loan losses than in recent quarters, along with write-downs on other real estate owned (“OREO”) and loans held-for-sale. In comparison, Peoples incurred a net loss available to common shareholders of $4.6 million, or $0.44 per diluted common share, for the third quarter of 2009 and reported net income available to common shareholders of $2.8 million, or $0.27 per diluted common share, for the second quarter 2010 (or “linked quarter”). On a year-to-date basis,2011, net income available to common shareholders was $3.5$1.3 million, through September 30, 2010, an increase over the $1.6or $0.13 per diluted common share, versus $0.8 million reported for the same periodand $0.08 per diluted common share a year ag o, representingago and $55,000 and $0.01 per diluted earnings per common share for
the fourth quarter of 2010 (or "linked quarter"). The key driver of the earnings improvement was lower loan credit losses, plus the recognition of an investment OTTI loss in the first quarter of 2010.
Provision for loan losses totaled $8.0$5.3 million in the thirdfirst quarter of 2010,2011, versus $5.5 million and $10.2$7.0 million for the secondlinked quarter and $6.5 million for the first quarter of 2010 and third quarter of 2009, respectively. On a year-to-date basis, provision for loan losses totaled $20.0 million in 2010 compared to $19.0 million in 2009.2010. The recorded provision reflects the amount needed to maintain the adequacy of the allowance for loan losses based on management’smanagement's formal quarterly analysis.
Net interest income was $15.2 million for the thirdFirst quarter of 2010, matching the linked quarter, while net interest margin improved 9 basis points to 3.58%. Net interest margin expansion was driven primarily by the balance sheet deleveraging during the third quarter of 2010. Year-over-year,2011 net interest income was down slightly forlower when compared to both the threelinked and nine months ended September 30, 2010, whileprior year quarters. Interest income decreased to a greater extent than interest expense, due to the sustained low interest rate environment. Net interest margin was held flat with the linked quarter, due largely to the redeployment of short-term assets into longer-term investments. Year-over-year, net interest margin expanded moderately for both periods. Interest income was impacted bycompressed 9 basis points attributable to the combination of declining loan balances and lower reinvestment rates with limited opportunities for offsetting reductions in the current interest rate environment. However, the impact on net interest income was mostly offset by management’s successful efforts to reduce funding costs by repaying higher-cost borrowings and growing low-cost deposits.costs.
Non-interest income, which excludesexcluding gains and losses on securities and asset disposals, was $7.7 million3% higher for the three months ended September 30, 2010, consistent with bothMarch 31, 2011, compared to the linked quarter and prior year third quarter amounts. Both electronic banking and mortgage banking income experienced strong growthquarter. This increase was the result of Peoples' recognizing $943,000 in the third quarter over the prior year,annual performance based insurance revenues, which waswere partially offset by lower deposit account service charges – primarily overdraft fees. Although new regulations governing overdraft fees became effective during the third quarter, the impact on third quarter fees was minimal due to the timing of the changes. Consequently, much of thea seasonal decline in deposit account service charges fromand lower volume of mortgage banking activity. Non-interest income also increased 4% over the prior year was attributablefirst quarter, due to lower volumes$358,000 of overdrafts resulting from changes in consumer behavior. On a year - -to-date basis, total non-interest income was $23.5 million through September 30, 2010, down 3% from the same period in 2009. Whileadditional performance based insurance revenues, plus stronger mortgage and electronic banking income and trust and investment revenue were up 18% and 15%, respectively, these increases were tempered by declines in other non-interest income categories.income.
Total non-interest expense was $14.0 million forIn the thirdfirst quarter of 2010, versus $14.3 million last quarter and $14.1 million for the third quarter of 2009. Through nine months of 2010,2011, non-interest expense totaled $42.8$14.6 million, versus $44.1 million forup 3% over the linked quarter but consistent with the first nine months of 2009. These decreases reflect the impact of cost control initiatives throughout 2010. Year-to-date non-interest expense in 2010 also benefited from lower FDIC insurance costs, as 2009’s expense included $930,000 for the special assessment imposed on all banks in the second quarter of 2009. Peoples also has been successful2010. The linked quarter increase was driven primarily by higher personnel costs. Compared to the prior year first quarter, lower foreclosed real estate and other loan costs offset the increase in controlling salary and employee benefit costs,costs.
Total assets were down 2% compared to year-end 2010 to $1.80 billion at March 31, 2011. Cash and cash equivalents decreased $41.0 million, which were held flat on a year-to-date basis. These cost savings werewas partially offset by higher costs associated with probleman $18.2 million increase in investment securities. These changes were due primarily to the Partial TARP Redemption and reinvestment of short-term investments into longer-term investments. The total portfolio loan work outs, such as fees for legal and valuation services, and foreclosed real estate.
At September 30, 2010, total assetsbalances declined $12.7 million to $948.0 million at March 31, 2011. These declines were down 4% from the previous quarter-end and down 6% versus year-end 2009. These decreases were largelyprimarily the result of balance sheet deleveraging during the third quarter of 2010, which also reduced the size of the investment portfolio. Totalcommercial loan balances were down slightly at September 30, 2010, compared to the prior quarter-end, due mostly to third quarter 2010 charge-offs. On a year-to-date basis, portfolio loan balances decreased $41.2 million as a result of reductionspayoffs and charge-offs exceeding production. Despite weak economic conditions, Peoples experienced some growth in commercial real estate loan exposures to enhance Peoples’ overall balance sheet risk profile, coupled with the impact of charge-offs and problem loan workouts.consumer loans, primarily through its indirect lending activities.
Total liabilities decreased $76.8 million and $107.9$16.2 million during the three and nine months ended September, 30, 2010,March 31, 2011, to $1.65$1.59 billion. Total retail deposit balances decreased modestlywere essentially unchanged during the thirdfirst quarter of 2010,2011, as declines in interest-bearing retail deposits outpacedwere nearly matched by increases in non-interest-bearing deposits. The lower interest-bearing deposit balances were a result of management maintaining its focus on reducing higher-cost, non-core deposits given recent growth in lower-cost deposits and lack of attractive investment opportunities. Through nine months of 2010, non-interest-bearing deposit balances have grown $11.7 million, while retail interest-bearing deposits decreased $11.4 million.deposits. Total borrowed funds were $236.3$216.8 million at September 30, 2010,March 31, 2011, down $76.0 million for the third quarter and $109.2$15.0 million since December 31, 2009. These reductions primarily reflect the balance sheet deleveraging during the third quarter of 2010.2010, as Peoples continued to repay maturing wholesale borrowings.
Total stockholders’stockholders' equity was $233.8$210.5 million at September 30, 2010,March 31, 2011, a $10.2$20.2 million reduction from $244.0$230.7 million at December 31, 2010, reflecting the impact of the Partial TARP Capital Redemption. Regulatory capital ratios remained significantly higher than "well capitalized" minimums. Peoples' Tier 1 Common Capital ratio increased 13 basis points during the first quarter to 11.72%, while the Total Capital ratio was 16.60% versus 18.24% at December 31, 2009. Lower fair values2010, with the decrease the result of available-for-sale investment securities, netthe Partial TARP Capital Redemption.
Net Interest Income
Net interest income, the amount by which interest income exceeds interest expense, remains Peoples’ largest source of revenue. The amount of net interest income earned by Peoples each quarter is affected by various factors, including changes in market interest rates due to the Federal Reserve Board’s monetary policy, the level and degree of pricing competition for both loans and deposits in Peoples’ markets, and the amount and composition of Peoples’ earning assets and interest-bearing liabilities.
The following table details Peoples’ average balance sheets for the periods presented:
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| For the Three Months Ended |
| March 31, 2011 | | December 31, 2010 | | March 31, 2010 |
(Dollars in thousands) | Average Balance | | Income/ Expense | | Yield/Cost | | Average Balance | | Income/ Expense | | Yield/Cost | | Average Balance | | Income/ Expense | | Yield/Cost |
Short-term investments | $ | 20,204 | | | $ | 11 | | | 0.22 | % | | $ | 53,823 | | | $ | 34 | | | 0.25 | % | | $ | 7,317 | | �� | $ | 4 | | | 0.23 | % |
Investment Securities (1): | | | | | | | | | | | | | | | | | |
Taxable | 617,915 | | | 6,248 | | | 4.04 | % | | 595,535 | | | 6,212 | | | 4.17 | % | | 705,375 | | | 8,015 | | | 4.55 | % |
Nontaxable (2) | 41,323 | | | 654 | | | 6.33 | % | | 49,685 | | | 776 | | | 6.25 | % | | 62,429 | | | 988 | | | 6.33 | % |
Total investment securities | 659,238 | | | 6,902 | | | 4.19 | % | | 645,220 | | | 6,988 | | | 4.33 | % | | 767,804 | | | 9,003 | | | 4.69 | % |
Loans (3): | | | | | | | | | | | | | | | | | |
Commercial | 630,087 | | | 7,835 | | | 5.04 | % | | 661,599 | | | 8,510 | | | 5.10 | % | | 703,886 | | | 9,366 | | | 5.40 | % |
Real estate (4) | 249,918 | | | 3,353 | | | 5.37 | % | | 255,690 | | | 3,631 | | | 5.68 | % | | 266,318 | | | 3,771 | | | 5.66 | % |
Consumer | 83,419 | | | 1,516 | | | 7.37 | % | | 84,159 | | | 1,564 | | | 7.37 | % | | 89,816 | | | 1,713 | | | 7.73 | % |
Total loans | 963,424 | | | 12,704 | | | 5.33 | % | | 1,001,448 | | | 13,705 | | | 5.44 | % | | 1,060,020 | | | 14,850 | | | 5.66 | % |
Less: Allowance for loan losses | (28,338 | ) | | | | | | (29,646 | ) | | | | | | (29,332 | ) | | | | |
Net loans | 935,086 | | | 12,704 | | | 5.49 | % | | 971,802 | | | 13,705 | | | 5.61 | % | | 1,030,688 | | | 14,850 | | | 5.82 | % |
Total earning assets | 1,614,528 | | | 19,617 | | | 4.89 | % | | 1,670,845 | | | 20,727 | | | 4.94 | % | | 1,805,809 | | | 23,857 | | | 5.32 | % |
Intangible assets | 64,820 | | | | | | | 64,860 | | | | | | | 65,484 | | | | | |
Other assets | 145,379 | | | | | | | 146,264 | | | | | | | | 142,240 | | | | | | |
Total assets | $ | 1,824,727 | | | | | | | $ | 1,881,969 | | | | | | | | $ | 2,013,533 | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | |
Savings accounts | $ | 128,784 | | | $ | 55 | | | 0.17 | % | | $ | 121,664 | | | $ | 49 | | | 0.16 | % | | $ | 116,572 | | | $ | 47 | | | 0.16 | % |
Interest-bearing demand accounts | 232,932 | | | 622 | | | 1.08 | % | | 232,144 | | | 632 | | | 1.08 | % | | 229,628 | | | 661 | | | 1.17 | % |
Money market accounts | 278,664 | | | 245 | | | 0.36 | % | | 301,317 | | | 351 | | | 0.46 | % | | 273,567 | | | 656 | | | 0.97 | % |
Brokered deposits | 81,688 | | | 632 | | | 3.14 | % | | 90,514 | | | 698 | | | 3.06 | % | | 106,202 | | | 804 | | | 3.07 | % |
Retail certificates of deposit | 426,917 | | | 2,431 | | | 2.31 | % | | 434,056 | | | 2,603 | | | 2.38 | % | | 475,128 | | | 2,975 | | | 2.54 | % |
Total interest-bearing deposits | 1,148,985 | | | 3,985 | | | 1.41 | % | | 1,179,695 | | | 4,333 | | | 1.46 | % | | 1,201,097 | | | 5,143 | | | 1.74 | % |
Borrowed Funds: | | | | | | | | | | | | | | | | | |
Short-term FHLB advances | 1,401 | | | 1 | | | 0.14 | % | | — | | | — | | | — | % | | 34,333 | | | 9 | | | 0.11 | % |
Retail repurchase agreements | 44,923 | | | 34 | | | 0.31 | % | | 49,992 | | | 53 | | | 0.42 | % | | 51,810 | | | 71 | | | 0.56 | % |
Total short-term borrowings | 46,324 | | | 35 | | | 0.30 | % | | 49,992 | | | 53 | | | 0.41 | % | | 86,143 | | | 80 | | | 0.37 | % |
Long-term FHLB advances | 88,901 | | | 765 | | | 3.49 | % | | 98,310 | | | 862 | | | 3.48 | % | | 103,574 | | | 907 | | | 3.55 | % |
Wholesale repurchase agreements | 65,000 | | | 546 | | | 3.36 | % | | 65,000 | | | 571 | | | 3.49 | % | | 139,222 | | | 1,386 | | | 3.98 | % |
Other borrowings | 22,570 | | | 492 | | | 8.73 | % | | 22,561 | | | 501 | | | 8.68 | % | | 22,535 | | | 498 | | | 8.84 | % |
Total long-term borrowings | 176,471 | | | 1,803 | | | 4.11 | % | | 185,871 | | | 1,934 | | | 4.10 | % | | 265,331 | | | 2,791 | | | 4.23 | % |
Total borrowed funds | 222,795 | | | 1,838 | | | 3.32 | % | | 235,863 | | | 1,987 | | | 3.32 | % | | 351,474 | | | 2,871 | | | 3.28 | % |
Total interest-bearing liabilities | 1,371,780 | | | 5,823 | | | 1.72 | % | | 1,415,558 | | | 6,320 | | | 1.77 | % | | 1,552,571 | | | 8,014 | | | 2.09 | % |
Non-interest-bearing deposits | 222,656 | | | | | | | 218,288 | | | | | | | 203,158 | | | | | |
Other liabilities | 12,001 | | | | | | | | 14,317 | | | | | | | | 13,972 | | | | | | |
Total liabilities | 1,606,437 | | | | | | | 1,648,163 | | | | | | | 1,769,701 | | | | | |
Preferred equity | 25,245 | | | | | | | 38,632 | | | | | | | 38,556 | | | | | |
Common equity | 193,045 | | | | | | | | 195,174 | | | | | | | | 205,276 | | | | | | |
Total stockholders’ equity | 218,290 | | | | | | | | 233,806 | | | | | | | | 243,832 | | | | | | |
Total liabilities and | | | | | | | | | | | | | | | | | |
stockholders’ equity | $ | 1,824,727 | | | | | | | | $ | 1,881,969 | | | | | | | | $ | 2,013,533 | | | | | | |
Interest rate spread | | | $ | 13,794 | | | 3.17 | % | | | | $ | 14,407 | | | 3.17 | % | | | | $ | 15,843 | | | 3.23 | % |
Net interest margin | | 3.43 | % | | | | | | 3.44 | % | | | | | | 3.52 | % |
| | For the Three Months Ended |
| | September 30, 2010 | | June 30, 2010 | | September 30, 2009 |
| | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ |
(Dollars in thousands) | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate |
Short-Term Investments: | | | | | | | | | | | | | | | | | | |
Total short-term investments | | 50,149 | | 32 | | 0.25% | | $34,077 | | $21 | | 0.25% | | $34,490 | | $22 | | 0.25% |
Investment Securities (1): | | | | | | | | | | | | | | | | | | |
Taxable | | 648,458 | | 7,734 | | 4.77% | | 678,806 | | 7,766 | | 4.58% | | 671,069 | | 8,716 | | 5.20% |
Nontaxable (2) | | 58,738 | | 907 | | 6.18% | | 60,400 | | 951 | | 6.31% | | 65,584 | | 1,049 | | 6.40% |
Total investment securities | | 707,196 | | 8,641 | | 4.89% | | 739,206 | | 8,717 | | 4.72% | | 736,653 | | 9,765 | | 5.30% |
Loans (3): | | | | | | | | | | | | | | | | | | |
Commercial (2)(4) | | 672,037 | | 9,017 | | 5.32% | | 694,004 | | 9,275 | | 5.36% | | 725,804 | | 10,104 | | 5.52% |
Real estate (4) | | 259,710 | | 3,606 | | 5.56% | | 262,270 | | 3,642 | | 5.55% | | 268,788 | | 4,076 | | 6.07% |
Consumer | | 85,175 | | 1,667 | | 7.76% | | 85,736 | | 1,674 | | 7.83% | | 97,467 | | 1,897 | | 7.72% |
Total loans | | 1,016,922 | | 14,290 | | 5.60% | | 1,042,010 | | 14,591 | | 5.62% | | 1,092,059 | | 16,077 | | 5.85% |
Less: Allowance for loan losses | | (28,749) | | | | | | (30,669) | | | | | | (24,479) | | | | |
Net loans | | 988,173 | | 14,290 | | 5.75% | | 1,011,341 | | 14,591 | | 5.78% | | 1,067,580 | | 16,077 | | 5.99% |
Total earning assets | | 1,745,518 | | 22,963 | | 5.24% | | 1,784,624 | | 23,329 | | 5.24% | | 1,838,723 | | 25,864 | | 5.60% |
Intangible assets | | 65,029 | | | | | | 65,248 | | | | | | 65,969 | | | | |
Other assets | | 146,521 | | | | | | 146,234 | | | | | | 129,745 | | | | |
Total assets | | $1,957,068 | | | | | | $1,996,106 | | | | | | $2,034,437 | | | | |
Deposits: | | | | | | | | | | | | | | | | | | |
Savings accounts | | $121,878 | | $49 | | 0.16% | | $121,017 | | $48 | | 0.16% | | $130,290 | | $176 | | 0.54% |
Interest-bearing demand accounts | 238,902 | | 671 | | 1.11% | | 237,262 | | 650 | | 1.10% | | 210,855 | | 823 | | 1.55% |
Money market accounts | | 297,140 | | 509 | | 0.68% | | 294,138 | | 654 | | 0.89% | | 234,513 | | 689 | | 1.17% |
Brokered certificates of deposit | | 41,661 | | 402 | | 3.83% | | 41,717 | | 398 | | 3.83% | | 56,232 | | 567 | | 4.00% |
Retail certificates of deposit | | 503,008 | | 3,062 | | 2.42% | | 524,038 | | 3,203 | | 2.45% | | 580,281 | | 4,235 | | 2.90% |
Total interest-bearing deposits | | 1,202,589 | | 4,693 | | 1.55% | | 1,218,172 | | 4,953 | | 1.63% | | 1,212,171 | | 6,490 | | 2.12% |
Borrowed Funds: | | | �� | | | | | | | | | | | | | | | |
Short-term FHLB advances | | 978 | | 1 | | 0.16% | | – | | – | | 0.00% | | 1,630 | | 1 | | 0.17% |
Retail repurchase agreements | | 50,026 | | 61 | | 0.49% | | 48,931 | | 66 | | 0.53% | | 54,070 | | 109 | | 0.80% |
Total short-term borrowings | | 51,004 | | 62 | | 0.48% | | 48,931 | | 66 | | 0.53% | | 55,700 | | 110 | | 0.77% |
Long-term FHLB advances | | 103,842 | | 924 | | 3.53% | | 105,058 | | 929 | | 3.55% | | 136,982 | | 1,354 | | 3.92% |
Wholesale repurchase agreements | 114,457 | | 1,133 | | 3.87% | | 135,000 | | 1,350 | | 3.96% | | 150,380 | | 1,554 | | 4.04% |
Other borrowings | | 22,552 | | 496 | | 8.59% | | 22,544 | | 492 | | 8.64% | | 22,517 | | 495 | | 8.60% |
Total long-term borrowings | | 240,851 | | 2,553 | | 4.17% | | 262,602 | | 2,771 | | 4.19% | | 309,879 | | 3,403 | | 4.32% |
Total borrowed funds | | 291,855 | | 2,615 | | 3.52% | | 311,533 | | 2,837 | | 3.62% | | 365,579 | | 3,513 | | 3.78% |
Total interest-bearing liabilities | | 1,494,444 | | 7,308 | | 1.94% | | 1,529,705 | | 7,790 | | 2.04% | | 1,577,750 | | 10,003 | | 2.51% |
Non-interest-bearing deposits | | 210,031 | | | | | | 209,602 | | | | | | 197,900 | | | | |
Other liabilities | | 15,008 | | | | | | 14,317 | | | | | | 17,952 | | | | |
Total liabilities | | 1,719,483 | | | | | | 1,753,624 | | | | | | 1,793,602 | | | | |
Preferred equity | | 38,607 | | | | | | 38,581 | | | | | | 38,506 | | | | |
Common equity | | 198,978 | | | | | | 203,901 | | | | | | 202,329 | | | | |
Total stockholders’ equity | | 237,585 | | | | | | 242,482 | | | | | | 240,835 | | | | |
Total liabilities and | | | | | | | | | | | | | | | | | | |
stockholders’ equity | | $1,957,068 | | | | | | $1,996,106 | | | | | | $2,034,437 | | | | |
Interest rate spread | | | | $15,655 | | 3.30% | | | | $15,539 | | 3.20% | | | | $15,861 | | 3.09% |
Net interest margin | | 3.58% | | | | | | 3.49% | | | | | | 3.45% |
| For the Nine Months Ended |
| September 30, 2010 | | September 30, 2009 |
| Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ |
(Dollars in thousands) | Balance | | Expense | | Rate | | Balance | | Expense | | Rate |
Short-Term Investments: | | | | | | | | | | | |
Total short-term investments | 30,671 | | 57 | | 0.25% | | $32,938 | | $61 | | 0.25% |
Investment Securities (1): | | | | | | | | | | | |
Taxable | 677,338 | | 23,516 | | 4.63% | | 653,172 | | 26,321 | | 5.37% |
Nontaxable (2) | 60,509 | | 2,846 | | 6.27% | | 68,391 | | 3,304 | | 6.44% |
Total investment securities | 737,847 | | 26,362 | | 4.76% | | 721,563 | | 29,625 | | 5.47% |
Loans (3): | | | | | | | | | | | |
Commercial (2)(4) | 689,859 | | 27,659 | | 5.36% | | 732,341 | | 30,430 | | 5.56% |
Real estate (4) | 262,742 | | 11,019 | | 5.59% | | 275,180 | | 13,174 | | 6.38% |
Consumer | 86,893 | | 5,054 | | 7.78% | | 94,516 | | 5,487 | | 7.76% |
Total loans | 1,039,494 | | 43,732 | | 5.63% | | 1,102,037 | | 49,091 | | 5.95% |
Less: Allowance for loan loss | (29,581) | | | | | | (24,320) | | | | |
Net loans | 1,009,913 | | 43,732 | | 5.79% | | 1,077,717 | | 49,091 | | 6.09% |
Total earning assets | 1,778,431 | | 70,151 | | 5.27% | | 1,832,218 | | 78,777 | | 5.74% |
Intangible assets | 65,252 | | | | | | 66,123 | | | | |
Other assets | 144,922 | | | | | | 134,756 | | | | |
Total assets | $1,988,605 | | | | | | $2,033,097 | | | | |
Deposits: | | | | | | | | | | | |
Savings accounts | $119,842 | | $144 | | 0.16% | | $125,921 | | $468 | | 0.50% |
Interest-bearing demand accounts | 235,298 | | 1,982 | | 1.13% | | 204,299 | | 2,353 | | 1.54% |
Money market accounts | 288,369 | | 1,820 | | 0.84% | | 226,912 | | 1,970 | | 1.16% |
Brokered certificates of deposit | 41,792 | | 1,201 | | 3.84% | | 38,836 | | 1,175 | | 4.05% |
Retail certificates of deposit | 521,992 | | 9,643 | | 2.47% | | 612,099 | | 14,086 | | 3.08% |
Total interest-bearing deposits | 1,207,293 | | 14,790 | | 1.64% | | 1,208,067 | | 20,052 | | 2.22% |
Borrowed Funds: | | | | | | | | | | | |
Short-term FHLB advances | 11,648 | | 10 | | 0.11% | | 5,421 | | 12 | | 0.26% |
Retail repurchase agreements | 50,249 | | 199 | | 0.52% | | 52,837 | | 376 | | 0.94% |
Total short-term borrowings | 61,897 | | 209 | | 0.45% | | 58,258 | | 388 | | 0.88% |
Long-term FHLB advances | 104,159 | | 2,761 | | 3.54% | | 145,735 | | 4,365 | | 4.00% |
Wholesale repurchase agreements | 129,469 | | 3,869 | | 3.94% | | 156,758 | | 4,835 | | 4.07% |
Other borrowings | 22,544 | | 1,485 | | 8.69% | | 22,509 | | 1,485 | | 8.70% |
Total long-term borrowings | 256,172 | | 8,115 | | 4.20% | | 325,002 | | 10,685 | | 4.36% |
Total borrowed funds | 318,069 | | 8,324 | | 3.47% | | 383,260 | | 11,073 | | 3.83% |
Total interest-bearing liabilities | 1,525,362 | | 23,114 | | 2.02% | | 1,591,327 | | 31,125 | | 2.61% |
Non-interest-bearing deposits | 207,622 | | | | | | 195,211 | | | | |
Other liabilities | 14,344 | | | | | | 17,348 | | | | |
Total liabilities | 1,747,328 | | | | | | 1,803,886 | | | | |
Preferred equity | 38,581 | | | | | | 34,396 | | | | |
Common equity | 202,696 | | | | | | 194,815 | | | | |
Total stockholders’ equity | 241,277 | | | | | | 229,211 | | | | |
Total liabilities and | | | | | | | | | | | |
stockholders’ equity | $1,988,605 | | | | | | $2,033,097 | | | | |
Interest rate spread | | | $47,037 | | 3.25% | | | | $47,652 | | 3.13% |
Net interest margin | | 3.54% | | | | | | 3.47% |
| |
(1) | Average balances are based on carrying value. |
| |
(2) | Interest income and yields are presented on a fully tax-equivalent basis using a 35% federal tax rate. |
| |
(3) | Nonaccrual and impaired loans are included in the average loan balances. Related interest income earned on nonaccrual loans prior to the loan being placed on nonaccrual is included in loan interest income. Loan fees included in interest income were immaterial for all periods presented. |
| |
(4) | 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. |
Net interest margin, which is calculated by dividing fully tax-equivalent (“FTE”) net interest income by average interest-earning assets, serves as an important measurement of the net revenue stream generated by the volume, mix and pricing of earning assets and interest-bearing liabilities. FTE net interest income is calculated by increasing interest income to convert tax-exempt income earned on obligations of states and political subdivisions to the pre-tax equivalent of taxable income using a 35% federal statutory tax rate. The following table details the calculation of FTE net interest income:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, | June 30, | September 30, | | September 30, | March 31, 2011 | December 31, 2010 | March 31, 2010 |
(Dollars in thousands) | 2010 | 2010 | 2009 | | 2010 | 2009 |
Net interest income, as reported | $15,264 | $15,136 | $15,469 | | $45,841 | $46,426 | $ | 13,495 | | $ | 14,061 | | $ | 15,441 | |
Taxable equivalent adjustments | 391 | 403 | 392 | | 1,196 | 1,226 | 299 | | 346 | | 402 | |
Fully tax-equivalent net interest income | $15,655 | $15,539 | $15,861 | | $47,037 | $47,652 | $ | 13,794 | | $ | 14,407 | | $ | 15,843 | |
The following table provides an analysis of the changes in FTE net interest income:
| | | | | | | | | Nine Months Ended | | | | | | | | | | | | | |
| Three Months Ended September 30, 2010 Compared to | | September 30, 2010 Compared to | Three Months Ended March 31, 2011 Compared to |
(Dollars in thousands) | June 30, 2010 (1) | | September 30, 2009 (1) | | September 30, 2009 (1) | December 31, 2010 | | March 31, 2010 |
Increase (decrease) in: | Rate | Volume | Total | | Rate | Volume | Total | | Rate | Volume | Total | Rate | Volume | Total (1) | | Rate | Volume | Total (1) |
INTEREST INCOME: | | | | | | | | | | | | | |
Short-term investments | $– | $11 | $11 | | $– | $10 | $10 | | $– | $(4) | $(4) | $ | (4 | ) | $ | (19 | ) | $ | (23 | ) | | $ | (1 | ) | $ | 8 | | $ | 7 | |
Investment Securities: | | | | | | | | | | | |
Investment Securities: (2) | | | | |
Taxable | 1,323 | (1,355) | (32) | | (698) | (284) | (982) | | (4,257) | 1,452 | (2,805) | (837 | ) | 873 | | 36 | | | (839 | ) | (928 | ) | (1,767 | ) |
Nontaxable | (19) | (25) | (44) | | (35) | (107) | (142) | | (86) | (373) | (459) | 68 | | (190 | ) | (122 | ) | | — | | (334 | ) | (334 | ) |
Total investment income | 1,304 | (1,380) | (76) | | (733) | (391) | (1,124) | | (4,343) | 1,079 | (3,264) | (769 | ) | 683 | | (86 | ) | | (839 | ) | (1,262 | ) | (2,101 | ) |
Loans: | | | | | | | | | | | | | |
Commercial | (67) | (191) | (258) | | (357) | (730) | (1,087) | | (1,061) | (1,710) | (2,771) | (139 | ) | (536 | ) | (675 | ) | | (595 | ) | (936 | ) | (1,531 | ) |
Real estate | 39 | (75) | (36) | | (335) | (135) | (470) | | (1,579) | (576) | (2,155) | (197 | ) | (81 | ) | (278 | ) | | (190 | ) | (228 | ) | (418 | ) |
Consumer | (4) | (3) | (7) | | 66 | (296) | (230) | | 23 | (456) | (433) | (2 | ) | (46 | ) | (48 | ) | | (78 | ) | (119 | ) | (197 | ) |
Total loan income | (32) | (269) | (301) | | (626) | (1,161) | (1,787) | | (2,617) | (2,742) | (5,359) | (338 | ) | (663 | ) | (1,001 | ) | | (863 | ) | (1,283 | ) | (2,146 | ) |
Total interest income | 1,272 | (1,638) | (366) | | (1,359) | (1,542) | (2,901) | | (6,960) | (1,667) | (8,627) | (1,111 | ) | 1 | | (1,110 | ) | | (1,703 | ) | (2,537 | ) | (4,240 | ) |
INTEREST EXPENSE: | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | |
Savings accounts | – | 1 | 1 | | (116) | (11) | (127) | | (303) | (21) | (324) | 3 | | 3 | | 6 | | | 3 | | 5 | | 8 | |
Interest-bearing demand accounts | 12 | 9 | 21 | | (696) | 544 | (152) | | (844) | 473 | (371) | (1 | ) | (9 | ) | (10 | ) | | (98 | ) | 59 | | (39 | ) |
Money market accounts | (190) | 45 | (145) | | (1,005) | 825 | (180) | | (795) | 645 | (150) | (79 | ) | (27 | ) | (106 | ) | | (495 | ) | 84 | | (411 | ) |
Brokered certificates of deposit | – | 4 | 4 | | (23) | (142) | (165) | | (86) | 112 | 26 | 103 | | (169 | ) | (66 | ) | | 120 | | (292 | ) | (172 | ) |
Retail certificates of deposit | (33) | (108) | (141) | | (650) | (523) | (1,173) | | (2,549) | (1,894) | (4,443) | (110 | ) | (62 | ) | (172 | ) | | (257 | ) | (287 | ) | (544 | ) |
Total deposit cost | (211) | (49) | (260) | | (2,490) | 693 | (1,797) | | (4,577) | (685) | (5,262) | (84 | ) | (264 | ) | (348 | ) | | (727 | ) | (431 | ) | (1,158 | ) |
Borrowed funds: | | | | | | | | | | | | | |
Short-term borrowings | (13) | 9 | (4) | | (40) | (8) | (48) | | (171) | (8) | (179) | (14 | ) | (4 | ) | (18 | ) | | (15 | ) | (30 | ) | (45 | ) |
Long-term borrowings | (27) | (191) | (218) | | (191) | (659) | (850) | | (614) | (1,956) | (2,570) | (20 | ) | (111 | ) | (131 | ) | | (216 | ) | (772 | ) | (988 | ) |
Total borrowed funds cost | (40) | (182) | (222) | | (231) | (667) | (898) | | (785) | (1,964) | (2,749) | (34 | ) | (115 | ) | (149 | ) | | (231 | ) | (802 | ) | (1,033 | ) |
Total interest expense | (251) | (231) | (482) | | (2,721) | 26 | (2,695) | | (5,362) | (2,649) | (8,011) | (118 | ) | (379 | ) | (497 | ) | | (958 | ) | (1,233 | ) | (2,191 | ) |
Net interest income | $1,523 | $(1,407) | $116 | | $1,362 | $(1,568) | $(206) | | $(1,598) | $982 | $(616) | $ | (993 | ) | $ | 380 | | $ | (613 | ) | | $ | (745 | ) | $ | (1,304 | ) | $ | (2,049 | ) |
| |
(1) | The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the dollar amounts of the change in each. |
| |
(2) | Presented on a fully tax-equivalent basis. |
ThirdIn the first quarter 2010of 2011, net interest income decreased 4% from the linked quarter, due mostly to the impact of the low interest rate environment on asset yields. The decline in asset yields during the first quarter was held stable as management’s successful effortspartially offset by actions
taken by management to reduce funding costs negatedcosts. These actions included less aggressive pricing of higher-cost deposits during the pressure on interest income from lower averagepast several quarters, which also caused modest declines in certain deposit balances, and repaying wholesale borrowings as they mature. Average loan balances a flatteningwere down 4% in the first quarter of 2011, driven by payoffs and charge-offs. However, management redeployed short-term investments into longer-term investments, which minimized the yield curve and correspondingimpact of lower reinvestment rates. Netloan balances on net interest income. This action also allowed first quarter 2011 net interest margin expansion occurred duringto remain consistent with the third quarter of 2010 primarily as a result of balance sheet deleveraging during thelinked quarter.
Compared to the prior year, first quarter net interest income was down 13%, while net interest margin compressed 9 basis points. The main driver of these reductions was the decline in average loan balances for the three and nine months ended September 30, 2010, were impacted by commercial loanexperienced as a result of payoffs and write-downs, plus lower demand for loans duecharge-offs remaining elevated over the last year. Contributing to economic conditions. In addition, increased competition for consumer and real estate loansthe declines was a greater decrease in asset yields than the reduction in funding costs. Peoples' deposit pricing strategy over the past several quarters has hindered Peoples’ ability to grow these balances. Average investment securities decreasedcaused a moderate decrease in the third quarterhigher-cost deposits, such as retail certificates of 2010 from the linked quarter, reflecting the planned reduction of the investment portfolio as part of a balance sheet deleveraging strategy executed during the third quarter. Asset yields continue to be affected by lower reinvestment rates.
During the second and third quartersremainder of 2010, Peoples lowered its pricing on certain non-core deposits, leading to a reduction in deposit costs. This pricing strategy has caused some of the change in deposit mix, as some customers have opted to reinvest maturing short-term certificates of deposit into money market accounts, which were priced competitively. Sustained deposit growth in recent quarters has enabled Peoples to reduce borrowings, while the third quarter 2010 deleveraging strategy also contributed to the linked quarter decline.
During the fourth quarter of 2010 and continuing in 2011, Peoples’Peoples' balance sheet strategies could include additional deleveraging. Demand for newwill focus on growing loans remains weak due to the lack of any real improvement inprofitably, remaining disciplined with loan and deposit pricing and maintaining good liquidity. Unfavorable economic conditions in Peoples’ markets.continue to exist within Peoples' primary market area, which has an adverse effect on new loan demand. Additionally, further reductions in investment securities could occur given the lack of current investment opportunities that satisfy management’s risk-reward criteria.to reduce funding costs will be limited, as minimal high-cost funding is scheduled to mature. As a result, management believes there will be downward pressure on net interest income and margin unless the Federal Reserve takes steps to raise short-term interest rates.
Detailed information regarding changes in the Consolidated Balance Sheets can be found under appropriate captions of the “FINANCIAL CONDITION” section of this discussion. Additional information regarding Peoples’Peoples' interest rate risk and the potential impact of interest rate changes on Peoples’Peoples' results of operations and financial condition can be found later in this discussion under the caption “Interest Rate Sensitivity and Liquidity”.
Provision for Loan Losses
The following table details Peoples’ provision for loan losses:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, | June 30, | September 30, | | September 30, | March 31, 2011 | December 31, 2010 | March 31, 2010 |
(Dollars in thousands) | 2010 | 2010 | 2009 | | 2010 | 2009 |
Provision for checking account overdrafts | $219 | $179 | $268 | | $418 | $565 | $ | 11 | | $ | 133 | | $ | 20 | |
Provision for other loan losses | 7,786 | 5,279 | 9,900 | | 19,546 | 18,400 | 5,300 | | 6,819 | | 6,481 | |
Total provision for loan losses | $8,005 | $5,458 | $10,168 | | $19,964 | $18,965 | $ | 5,311 | | $ | 6,952 | | $ | 6,501 | |
As a percentage of average | | | | | | |
gross loans (annualized) | 3.12% | 2.10% | 3.69% | | 2.57% | 2.30% | |
As a percentage of average gross loans (annualized) | | 2.24 | % | 2.75 | % | 2.47 | % |
The provision for loan losses reflects amounts needed to maintain the adequacy of the allowance for loan losses based on management’s formal quarterly analysis of the loan portfolio and procedural methodology that estimates the amount of probable credit losses. This process considers various factors that affect losses, such as changes in Peoples’ loan quality, historical loss experience and current economic conditions.
Additional information regarding changes in the allowance for loan losses and loan credit quality can be found later in this discussion under the caption “Allowance for Loan Losses”.
Non-Interest Income
Insurance income comprised the largest portion of non-interest income. The following table details Peoples’ insurance income:
|
| | | | | | | | | |
| Three Months Ended |
| March 31, 2011 | December 31, 2010 | March 31, 2010 |
(Dollars in thousands) |
Property and casualty insurance commissions | $ | 1,678 | | $ | 1,718 | | $ | 1,684 | |
Performance based commissions | 943 | | — | | 585 | |
Life and health insurance commissions | 161 | | 145 | | 121 | |
Credit life and A&H insurance commissions | 30 | | 35 | | 14 | |
Other fees and charges | 20 | | 60 | | 7 | |
Total insurance income | $ | 2,832 | | $ | 1,958 | | $ | 2,411 | |
Peoples continues to be successful at retaining insurance customers. However, growth in property and casualty insurance commission levels has been restrained by the effects of a contracting economy on commercial insurance needs. The performance based commissions typically are recorded annually in the first quarter and are based on a combination of factors, such as loss experience of insurance policies sold, production volumes, and overall financial performance of the individual insurance carriers.
Deposit account service charges also comprised the largesta significant portion of thirdfirst quarter 20102011 non-interest income. The following table details Peoples’ deposit account service charges:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, | June 30, | September 30, | | September 30, | March 31, 2011 | December 31, 2010 | March 31, 2010 |
(Dollars in thousands) | 2010 | 2010 | 2009 | | 2010 | 2009 |
Overdraft fees | $1,778 | $1,860 | $2,094 | | $5,232 | $5,816 | $ | 1,444 | | $ | 1,780 | | $ | 1,594 | |
Non-sufficient funds fees | 346 | 342 | 387 | | 1,002 | 1,073 | 274 | | 343 | | 314 | |
Other fees and charges | 291 | 255 | 222 | | 936 | 829 | 456 | | 288 | | 390 | |
Total deposit account service charges | $2,415 | $2,457 | $2,703 | | $7,170 | $7,718 | $ | 2,174 | | $ | 2,411 | | $ | 2,298 | |
The amount of deposit account service charges, particularly fees for overdrafts and non-sufficient funds, is largely dependent on the timing and volume of customer activity. As a result, the amount ultimately recognized by Peoples can fluctuate each quarter. Peoples experiences some seasonal changes in overdraft and non-sufficient funds fees, primarily in the first and fourth quarters. Typically, the volume of overdraft and non-sufficient funds fees are lower in the first quarter attributable to customers receiving income tax refunds, while volumes generally increase in the fourth quarter in connection with the holiday shopping season. While new
New regulations governing overdraft fees became effective during the third quarter of 2010, that limitedwhich limit the ability forof banks to impose overdraft fee sfees on certain transactions, the lower overdraft fees versus both the linked quarter and prior year largely reflect reduced volumes driven by customer behavior.transactions. Management has taken steps to minimizemitigate the adverse impact of thethese regulatory changes. However, it remains difficult to predict what impact these changes will have on Peoples’ deposit account service charges.
Insurance income continued to compriseAs a significant portion of non-interest income. The following table details Peoples’ insurance income:
| Three Months Ended | | Nine Months Ended |
| September 30, | June 30, | September 30, | | September 30, |
(Dollars in thousands) | 2010 | 2010 | 2009 | | 2010 | 2009 |
Property and casualty insurance commissions | $1,969 | $2,014 | $1,986 | | $5,667 | $5,854 |
Life and health insurance commissions | 173 | 141 | 153 | | 435 | 507 |
Credit life and A&H insurance commissions | 40 | 35 | 37 | | 88 | 99 |
Performance based commissions | – | – | 13 | | 585 | 828 |
Other fees and charges | 34 | 71 | 39 | | 113 | 90 |
Total insurance income | $2,216 | $2,261 | $2,228 | | $6,888 | $7,378 |
While Peoples continues to be successful at retaining existing insurance customers, property and casualty insurance commission levels have been reduced byresult, the effects of a contracting economy on commercial insurance needs and lower pricing margins due to competition within the insurance industry. The performance based commissions typically are recorded annuallyoverdraft fees in the first quarter and are based on a combination of factors, such as loss experience of insurance policies sold, production2011 compared to the same period in 2010 was mostly attributable to reduced volumes and overall financial performance of the insurance industry.driven by changes in customer behavior.
The following tables detail Peoples’ trust and investment income and related assets under management:
|
| | | | | | | | | |
| Three Months Ended |
| March 31, 2011 | December 31, 2010 | March 31, 2010 |
(Dollars in thousands) |
Fiduciary | $ | 1,039 | | $ | 1,101 | | $ | 1,318 | |
Brokerage | 286 | | 256 | | 238 | |
Total trust and investment income | $ | 1,325 | | $ | 1,357 | | $ | 1,556 | |
|
| | | | | | | | | | | | | | | |
| March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
(Dollars in thousands) |
Trust assets under management | $ | 852,972 | | $ | 836,587 | | $ | 795,335 | | $ | 742,044 | | $ | 768,189 | |
Brokerage assets under management | 260,134 | | 256,579 | | 233,308 | | 214,421 | | 229,324 | |
Total managed assets | $ | 1,113,106 | | $ | 1,093,166 | | $ | 1,028,643 | | $ | 956,465 | | $ | 997,513 | |
Quarterly average | $ | 1,105,329 | | $ | 1,055,936 | | $ | 998,307 | | $ | 986,794 | | $ | 975,836 | |
| Three Months Ended | | Nine Months Ended |
| September 30, | June 30, | September 30, | | September 30, |
(Dollars in thousands) | 2010 | 2010 | 2009 | | 2010 | 2009 |
Fiduciary | $1,006 | $971 | $903 | | $3,295 | $2,738 |
Brokerage | 220 | 238 | 286 | | 696 | 746 |
Total trust and investment income | $1,226 | $1,209 | $1,189 | | $3,991 | $3,484 |
| September 30, | June 30, | March 31, | December 31, | September 30, |
(Dollars in thousands) | 2010 | 2010 | 2010 | 2009 | 2009 |
Trust assets under management | $795,335 | $742,044 | $768,189 | $750,993 | $738,535 |
Brokerage assets under management | 233,308 | 214,421 | 229,324 | 216,479 | 210,743 |
Total managed assets | $1,028,643 | $956,465 | $997,513 | $967,472 | $949,278 |
| | | | | |
Quarter average | $989,385 | $991,448 | $964,482 | $936,082 | $895,359 |
Year-to-date average | $970,824 | $964,509 | $951,534 | $873,930 | $868,864 |
Peoples’Peoples' fiduciary and brokerage revenues are primarily driven by the value of assets under management. InThe key driver of the thirdyear-over-year decrease in first quarter fiduciary revenues was the non-recurrence of estate management fees, which totaled $256,000 in the first quarter of 2010, Peoples added nearly $20 million2010. The changes in managed assets as a result of attracting new customers. Contributing toasset values primarily reflect the increase in total managed assets has been the general recovery experienced in the financial markets since September 30, 2009. Asset values showed a modest decrease during the second quarter of 2010 due to a general declinefluctuations experienced in the financial markets as a whole. These changes in asset values were reflected in Peoples’ trust and investment income for the third
First quarter and first nine months of 2010.
Third quarter 20102011 mortgage banking income was higher than bothdeclined 47% from the linked quarter and thirdbut was 59% higher than the first quarter of 2009, reflecting higher production2010. The variances were driven mostly by lower long-term mortgage interest rates. On a year-to-date basis, mortgage banking income was down 38% through September 30, 2010. In 2010, Peoples has experienced generally slower mortgage bankingthe level of refinancing activity versus the prior year, leading to a reduction in gainsbased on loans sold to the secondary market. These conditions were attributable to lower demand for mortgage refinancing compared to a year ago, due largely to higher long-term mortgage interest rates during much ofoffered by the secondary market. In the first halfquarter of 2010. Through nine months of 2010,2011, Peoples has sold approximately $32$16 million of loans to the secondary market, down substantially from $82$32 million sold during the sa me periodlinked quarter and $9 million in the first quarter of 2009.2010.
Non-Interest Expense
Salaries and employee benefit costs remain Peoples’ largest non-interest expense, accounting for approximately 50%52% of total non-interest expense. The following table details Peoples’ salaries and employee benefit costs:
|
| | | | | | | | | |
| Three Months Ended |
| March 31, 2011 | December 31, 2010 | March 31, 2010 |
(Dollars in thousands) |
Base salaries and wages | $ | 5,276 | | $ | 5,090 | | $ | 5,056 | |
Sales-based and incentive compensation | 986 | | 886 | | 712 | |
Employee benefits | 945 | | 992 | | 1,336 | |
Stock-based compensation | 33 | | 18 | | 26 | |
Deferred personnel costs | (292 | ) | (357 | ) | (282 | ) |
Payroll taxes and other employment costs | 679 | | 488 | | 529 | |
Total salaries and employee benefit costs | $ | 7,627 | | $ | 7,117 | | $ | 7,377 | |
Full-time equivalent employees: | | | |
Actual at end of period | 543 | | 534 | | 530 | |
Average during the period | 538 | | 531 | | 532 | |
| Three Months Ended | | Nine Months Ended |
| September 30, | June 30, | September 30, | | September 30, |
(Dollars in thousands) | 2010 | 2010 | 2009 | | 2010 | 2009 |
Base salaries and wages | $5,060 | $5,063 | $5,199 | | $15,179 | $15,366 |
Sales-based and incentive compensation | 876 | 891 | 377 | | 2,479 | 2,365 |
Employee benefits | 1,156 | 1,318 | 1,242 | | 3,810 | 3,698 |
Stock-based compensation | 23 | 25 | 35 | | 74 | 113 |
Deferred personnel costs | (335) | (286) | (374) | | (903) | (1,152) |
Payroll taxes and other employment costs | 452 | 485 | 536 | | 1,466 | 1,648 |
Total salaries and employee benefit costs | $7,232 | $7,496 | $7,015 | | $22,105 | $22,038 |
| | | | | | |
Full-time equivalent employees: | | | | | | |
Actual at end of period | 532 | 527 | 544 | | 532 | 544 |
Average during the period | 529 | 530 | 545 | | 531 | 545 |
In 2010, Peoples limited salary increases for all employees, which resulted in baseBase salaries and wages remaining flat versus prior period amounts. Third quarter 2010 sales-based and incentive compensation, while consistent with the linked quarter, were higher than the prior year as a result of reduced expense for Peoples’ annual incentive award plan during the third quarter of 2009, which is partially based upon corporate results. Employee benefit costs experienced a 12% linked quarter decline, due to employee medical benefit costs, and decreased 7% versus the third quarter of 2009, reflecting the reduction in 401(k) match for 2010. On a year-to-date basis, employee benefit costs were up 3% through September 30, 2010, as 14% higher employee medical benefit costs were mostly offset by a reduced 401(k ) match beginning in the first quarter of 2010.2011, versus both the linked and year ago quarters, due to annual base salary adjustments, plus the increase in full-time equivalent employees. First quarter 2011 sales-based and incentive compensation were impacted by increased expense associated with corporate incentive plans, which are based in part on Peoples' performance. Contributing to the year-over-year increase were higher retail sales incentive payments. Peoples' employee benefit costs for the first quarter of 2011 was impacted positively by the freeze of pension benefits, which became effective on March 1, 2011. The result was Peoples recording a net pension benefit of $75,000 in the first quarter of 2011 versus net pension costs of $158,000 and $135,000 in the fourth and first quarters of 2010, respectively. In addition, first quarter employee medical benefit plan expenses were down 24% year-over-year but remained 11% higher than the linked quarter. The lower pension and employee medical plan costs were partially offset by higher 401(k) costs resulting from Peoples restoring the company match to 2009 levels. The linked quarter increase in payroll taxes and other compensation costs primarily reflect the impact of lower taxes in the fourth quarter of 2010 as a result of annual base wage limits for certain taxes being met. Peoples incurred higher payroll taxes compared to the first quarter of 2010, from the impact of higher base wages resulting from salary adjustments and a modest increase in the number of full-time equivalent employees.
Peoples’ net occupancy and equipment expense was comprised of the following:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, | June 30, | September 30, | | September 30, | March 31, 2011 | December 31, 2010 | March 31, 2010 |
(Dollars in thousands) | 2010 | 2010 | 2009 | | 2010 | 2009 |
Depreciation | $466 | $499 | $465 | | $1,456 | $1,515 | $ | 489 | | $ | 487 | | $ | 492 | |
Repairs and maintenance costs | 386 | 373 | 414 | | 1,215 | 1,194 | 416 | | 381 | | 456 | |
Net rent expense | 232 | 219 | 217 | | 673 | 611 | 225 | | 221 | | 222 | |
Property taxes, utilities and other costs | 299 | 349 | 302 | | 997 | 1,046 | 371 | | 351 | | 348 | |
Total net occupancy and equipment expense | $1,383 | $1,440 | $1,398 | | $4,341 | $4,366 | $ | 1,501 | | $ | 1,440 | | $ | 1,518 | |
Net occupancy and equipmentDepreciation expense during 2010 has been controlled due to management’swas held relatively flat as a result of management limiting capital expenditures in connection with various cost saving initiatives implemented during 2010. The variances in repairs and maintenance costs were driven primarily by seasonal variances in maintenance costs, such as snow removal costs.
In the year. Depreciation expense was lower in the thirdfirst quarter of 2010 compared to2011, professional fees decreased 18% from the linked quarter reflectingbasis but were up 15% year-over-year. The key driver of these variances was the impacttiming of various assets becoming fully depreciated in the first half of 2010.
Professional fees increased 41% in the third quarter of 2010 on a linked quarter basisexternal legal services for problem loan workouts and 14% year-over-year, due mostly to legal expensesexternal consulting services associated with problem loan workouts. Despite these increases, professional fees remained 2% lower on a year-to-date basis.
various strategic initiatives.
Foreclosed real estate and other loan expenses, representwhich include costs associated with maintaining foreclosed assets, including real estate taxes and utilities, as well as various administrative costs incurredwere lower in connection with servicing and collecting outstanding loans. These costs continue to be higher in 2010the first quarter of 2011 compared to the prior year, due mostly to costs associated with commercial properties acquired through foreclosure in the fourth quarter of 2009. Although down 40% on a linkedThese costs are anticipated to remain comparable with the amount incurred for the first quarter basis as Peoples progressed throughof 2011 during the workout process on severalremainder of 2011. However, actual costs for future quarters will continue to be dependent upon the level and nature of Peoples' problem loans, these costs could remain elevated based on the current level of foreclosed properties held.assets.
During the remainder of 2011, management expects Peoples' total non-interest expense to be comparable to the amount for the first quarter of 2011. While the change in assessment base is expected to reduce FDIC insurance costs, this benefit could be offset by expenses associated with the execution of strategic initiatives designed to position the company for future growth. The costs may include higher personnel costs from adding associates in key positions or increased marketing expenses.
Income Tax Expense
For the ninethree months ended September 30, 2010,March 31, 2011, Peoples recorded income tax expense of $653,000,$491,000, for an effective tax rate of 20.8%. This effective tax rate represents management's current estimate of the rate for the entire year. In comparison, Peoples recorded income tax expense of $111,000 for the same period in 2010, which included the entire $625,000$345,000 tax benefit associated with the first quarter 2010 investment impairment losses recognized in the first two quarters of 2010. The recorded income tax expense through nine months of 2010 representedloss, producing an effective tax rate of 11.5% versus 16.0% for the first half of 2010. This reduction in the year-to-date effective tax rate was driven by the higher provision for loan losses in the third quarter compared to the first half of 2010, plus losses on OREO and loans held-for-sale.
Management anticipates Peoples’ effective tax rate will approximate 17% for the final quarter of 2010. This effective tax rate differs from Peoples’ statutory corporate tax rate as a result of income from tax-exempt sources and tax benefits derived from investments in tax credit funds, with the respective impact of each item expected to be generally consistent with that experienced in 2009.
FINANCIAL CONDITION
Cash and Cash Equivalents
At September 30, 2010, Peoples’ cash and cash equivalentsMarch 31, 2011, Peoples' interest-bearing deposits in other banks included excess cash reserves at the Federal Reserve Bank of $43.5$2.8 million compared to $20.5$44.6 million at June 30, 2010 and $11.4 million at year-end 2009. TheseDecember 31, 2010. This decline occurred as a result of Peoples using these funds which are included in interest-bearing deposits in other banks on the Consolidated Balance Sheets,Partial TARP Redemption. The remaining decline occurred as the funds were maintained atredeployed into the Federal Reserve Bank rather than federal funds sold due to more favorable current short-term interest rates.investment portfolio.
Through ninethree months of 2010, Peoples’2011, Peoples' total cash and cash equivalents increased $32.9decreased $41.0 million, due mostly to cash used in financing activities for the Partial TARP Redemption and $15.0 million reduction in borrowed funds. Investing activities used net cash generatedof $16.1 million, primarily purchases of securities in the investment portfolio, which was mostly offset by cash from operating activities. Investing activities of $13.3 million.
In comparison, Peoples’ operating and financing activities in the first quarter of 2010 provided net cash of $111.4$11.1 million primarily proceeds from securities sales and principal runoff from the investment portfolio. These funds were$4.8 million, respectively, of which $5.6 million was used in investing activities, producing a $10.3 million increase in total cash and cash equivalents. Net cash provided by financing activities consisted of $39.1 million of net deposit growth, of which $33.1 million was used to reduce borrowed fundsfunds. New loan originations exceeded normal principal payments and loan payoffs by $104.3$6.5 million, which accountedaccounting for virtually allthe bulk of the net cash used by financinginvesting activities.
In comparison, total cash and cash equivalents increased $6.1 million for the first nine months of 2009, as the majority of net cash provided by Peoples’ operating and investing activities of $21.6 million and $7.8 million, respectively, was used in financing activities. Net cash provided by investing activities was the result of loan payments and payoffs exceeding new originations by $19.5 million, of which a portion was used for purchases of new investment securities. Financing activities consumed $23.3 million of net cash, as Peoples reduced borrowed funds $81.7 million, which was partially offset by $66.1 million of funds from net deposit growth and the TARP Capital Investment.
Further information regarding the management of Peoples’Peoples' liquidity position can be found later in this discussion under “Interest Rate Sensitivity and Liquidity.”
Investment Securities
The following table details Peoples’ available-for-sale investment portfolio:
| | September 30, | June 30, | March 31, | December 31, | September 30, | | | | | | | | | | | |
(Dollars in thousands) | 2010 | 2010 | 2010 | 2009 | 2009 | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
Fair value: | | | | | |
Obligations of: | | | | | |
U.S. Treasury and government agencies | $60 | $62 | $79 | $82 | $84 | $ | 38 | | $ | 39 | | $ | 60 | | $ | 62 | | $ | 79 | |
U.S. government sponsored agencies | 13,005 | 1,245 | 4,360 | 4,473 | 7,981 | 12,084 | | 12,262 | | 13,005 | | 1,245 | | 4,360 | |
States and political subdivisions | 51,288 | 58,682 | 61,970 | 62,953 | 67,318 | 38,401 | | 47,379 | | 51,288 | | 58,682 | | 61,970 | |
Residential mortgage-backed securities | 485,663 | 548,455 | 538,866 | 558,825 | 549,012 | 523,844 | | 507,534 | | 485,663 | | 548,455 | | 538,866 | |
Commercial mortgage-backed securities | 44,854 | 25,319 | 33,675 | 24,188 | 26,674 | 41,189 | | 30,700 | | 44,854 | | 25,319 | | 33,675 | |
U.S. government-backed student loan pools | – | 47,202 | 59,758 | 59,442 | 58,544 | — | | — | | — | | 47,202 | | 59,758 | |
Bank-issued trust preferred securities | 12,904 | 12,599 | 14,244 | 13,826 | 12,882 | 13,266 | | 12,984 | | 12,904 | | 12,599 | | 14,244 | |
Collateralized debt obligations | – | – | – | 165 | 329 | |
Equity securities | 3,009 | 2,905 | 2,834 | 2,593 | 3,074 | 3,318 | | 3,088 | | 3,009 | | 2,905 | | 2,834 | |
Total fair value | $610,783 | $696,469 | $715,786 | $726,547 | $725,898 | $ | 632,140 | | $ | 613,986 | | $ | 610,783 | | $ | 696,469 | | $ | 715,786 | |
Total amortized cost | $608,427 | $685,382 | $700,700 | $706,444 | $704,388 | $ | 635,218 | | $ | 617,121 | | $ | 608,427 | | $ | 685,382 | | $ | 700,700 | |
Net unrealized gain | $2,356 | $11,087 | $15,086 | $20,103 | $21,510 | |
Net unrealized (loss) gain | | $ | (3,078 | ) | $ | (3,135 | ) | $ | 2,356 | | $ | 11,087 | | $ | 15,086 | |
The size and composition of Peoples’Peoples' investment portfolio changed significantly since year-end 2009,March 31, 2010, primarily reflecting the deleveraging undertaken in the third quarter.quarter of 2010. While the majority of the proceeds from the third quarter 2010 investment sales were used to prepay long-term borrowings, a portion was reinvested into bonds issued by U.S. government sponsored agencies, which accounted for the increase in this segment during the third quarter of 2010. The lower investment in obligations of states and political subdivisions reflects the strategic sale of selected securities over the last two quarters.
Further changes in the size and composition of the investment portfolio may occur in future quarters, as management may reinvestmentreinvest principal runoff from mortgage-backed securities into other security types.
Peoples’Peoples' investment in residential and commercial mortgage-backed securities largely consists of securities either guaranteed by the U.S. government or issued by U.S. government-sponsored agencies, such as Fannie Mae and Freddie Mac. The remaining portion of Peoples’Peoples' mortgage-backed securities consists of securities issued by other entities, including other financial institutions, which are not guaranteed by the U.S. government. The amount of these “non-agency” securities included in the residential and commercial mortgage-backed securities totals above were as follows:
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
Residential | $ | 101,760 | | $ | 113,559 | | $ | 141,779 | | $ | 156,962 | | $ | 140,736 | |
Commercial | 2,734 | | 26,090 | | 23,749 | | 25,319 | | 33,675 | |
Total fair value | $ | 104,494 | | $ | 139,649 | | $ | 165,528 | | $ | 182,281 | | $ | 174,411 | |
Total amortized cost | $ | 102,295 | | $ | 136,997 | | $ | 162,066 | | $ | 181,727 | | $ | 173,933 | |
Net unrealized gain | $ | 2,199 | | $ | 2,652 | | $ | 3,462 | | $ | 554 | | $ | 478 | |
| September 30, | June 30, | March 31, | December 31, | September 30, |
(Dollars in thousands) | 2010 | 2010 | 2010 | 2009 | 2009 |
Residential | $141,779 | $156,962 | $140,736 | $153,621 | $164,461 |
Commercial | 23,749 | 25,319 | 33,675 | 24,188 | 26,274 |
Total fair value | $165,528 | $182,281 | $174,411 | $177,809 | $190,735 |
Total amortized cost | $162,066 | $181,727 | $173,933 | $177,370 | $193,481 |
Net unrealized gain (loss) | $3,462 | $554 | $478 | $439 | $(2,746) |
The non-agency portfolio consists entirely of first lien residential and commercial mortgages and all securities are rated AAA or equivalent by Moody’s, Standard & Poor’sPoor's and/or Fitch. Nearly all of the underlying loans in these securities were originated in 2003 or earlier and have fixed interest rates.
Loans
The following table provides information regarding outstanding loan balances:
| September 30, | June 30, | March 31, | December 31, | September 30, |
(Dollars in thousands) | 2010 | 2010 | 2010 | 2009 | 2009 |
Gross portfolio loans: | | | | | |
Commercial real estate | $454,499 | $471,046 | $501,917 | $503,034 | $478,518 |
Commercial and industrial | 178,014 | 165,916 | 165,934 | 159,915 | 160,677 |
Real estate contruction | 39,621 | 36,490 | 34,894 | 32,427 | 67,143 |
Residential real estate | 205,125 | 207,314 | 212,569 | 215,735 | 216,571 |
Home equity lines of credit | 49,435 | 50,259 | 49,444 | 49,183 | 48,991 |
Consumer | 82,894 | 83,735 | 85,231 | 90,144 | 94,374 |
Deposit account overdrafts | 1,291 | 1,346 | 1,299 | 1,620 | 1,765 |
Total portfolio loans | $1,010,879 | $1,016,106 | $1,051,288 | $1,052,058 | $1,068,039 |
| | | | | |
Percent of loans to total loans: | | | | | |
Commercial real estate | 45.0% | 46.4% | 47.7% | 47.8% | 44.8% |
Commercial and industrial | 17.6% | 16.3% | 15.8% | 15.2% | 15.0% |
Real estate contruction | 3.9% | 3.6% | 3.3% | 3.1% | 6.3% |
Residential real estate | 20.3% | 20.4% | 20.2% | 20.5% | 20.3% |
Home equity lines of credit | 4.9% | 4.9% | 4.7% | 4.7% | 4.6% |
Consumer | 8.2% | 8.3% | 8.2% | 8.5% | 8.8% |
Deposit account overdrafts | 0.1% | 0.1% | 0.1% | 0.2% | 0.2% |
Total percentage | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
| | | | | |
Residential real estate loans | | | | | |
being serviced for others | $235,538 | $234,134 | $230,183 | $227,792 | $220,605 |
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
Gross portfolio loans: | | | | | |
Commercial real estate | $ | 438,224 | | $ | 452,875 | | $ | 454,499 | | $ | 471,046 | | $ | 501,917 | |
Commercial and industrial | 147,386 | | 153,192 | | 178,014 | | 165,916 | | 165,934 | |
Real estate construction | 32,839 | | 22,478 | | 39,621 | | 36,490 | | 34,894 | |
Residential real estate | 197,513 | | 200,275 | | 205,125 | | 207,314 | | 212,569 | |
Home equity lines of credit | 47,906 | | 48,130 | | 49,435 | | 50,259 | | 49,444 | |
Consumer | 82,521 | | 81,567 | | 82,894 | | 83,735 | | 85,231 | |
Deposit account overdrafts | 1,640 | | 2,201 | | 1,291 | | 1,346 | | 1,299 | |
Total portfolio loans | $ | 948,029 | | $ | 960,718 | | $ | 1,010,879 | | $ | 1,016,106 | | $ | 1,051,288 | |
Percent of loans to total loans: | | | | | |
Commercial real estate | 46.2 | % | 47.1 | % | 45.0 | % | 46.4 | % | 47.7 | % |
Commercial and industrial | 15.5 | % | 15.9 | % | 17.6 | % | 16.3 | % | 15.8 | % |
Real estate construction | 3.5 | % | 2.3 | % | 3.9 | % | 3.6 | % | 3.3 | % |
Residential real estate | 20.8 | % | 20.8 | % | 20.3 | % | 20.4 | % | 20.2 | % |
Home equity lines of credit | 5.1 | % | 5.0 | % | 4.9 | % | 4.9 | % | 4.7 | % |
Consumer | 8.7 | % | 8.7 | % | 8.2 | % | 8.3 | % | 8.2 | % |
Deposit account overdrafts | 0.2 | % | 0.2 | % | 0.1 | % | 0.1 | % | 0.1 | % |
Total percentage | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| | | | | |
Residential real estate loans being serviced for others | $ | 258,626 | | $ | 250,630 | | $ | 235,538 | | $ | 234,134 | | $ | 230,183 | |
During 2010, Peoples actively reduced its exposurethe first quarter of 2011, new commercial loan production remained steady, driven in part by the addition of several new lenders in recent months. However, total loan balances declined during the quarter, due in large part to sizable paydowns, including the payoff of a single $10 million commercial real estate loans to enhance the overall balance sheet risk profile, resulting in lower balances at September 30, 2010 versus prior periods.and industrial loan. Contributing to the decline since year-end 2010first quarter decrease was the impact of payoffs exceeding new loan production due to lower demand stemming from currentcharge-offs remaining elevated, as discussed in greater detail later in this discussion. Unfavorable economic conditions plus charge-offscontinue to persist within Peoples' market areas, which adversely affects demand for new loans. In addition, the utilization of lines of credit by commercial borrowers remains lower than historical levels. Real estate construction loans increased during the first quarter of 2011, primarily as a result of advances on existing loans.
One of Peoples' strategic goals for the remainder of 2011, and problemfuture years, will be quality loan workouts. Peoples experienced good demand forgrowth. Given current concentrations in commercial real estate lending, the primary emphasis of future lending activity will be on commercial and industrial, loans during the third quarter of 2010, producing higher balances at quarter-end.
Residential real estatesmall business and consumer lending opportunities. However, management believes some sizable loan balances continue to be impacted by customer demand for long-term, fixed-rate mortgages,payoffs could occur in future quarters, which Peoples generally sells to the secondary market with the servicing rights retained. During 2009 and the first half of 2010, the secondary market has offered historically low long-term fixed rates producing significantly higher refinancing activity causing an increase in Peoples’ serviced loan portfolio.
could offset new production.
Loan Concentration
Peoples categorizes its commercial loans according to standard industry classifications and monitors for concentrations in a single industry or multiple industries that could be impacted by changes in economic conditions in a similar manner. Peoples’Peoples' commercial lending activities continue to be spread over a diverse range of businesses from all sectors of the economy, with no single industry comprising over 10% of Peoples’Peoples' total loan portfolio.
Loans secured by commercial real estate, including commercial construction loans, continue to comprise approximately half of Peoples’Peoples' loan portfolio. The following table provides information regarding the largest concentrations of commercial real estate loans within the loan portfolio at September 30, 2010:
March 31, 2011:
|
| | | | | | | | | | | |
(Dollars in thousands) | Outstanding Balance | Loan Commitments | Total Exposure | % of Total |
Commercial, mortgage loans: | | | | |
Lodging and lodging related | $ | 67,916 | | $ | 170 | | $ | 68,086 | | 15.3 | % |
Office buildings and complexes: | | | | |
Owner occupied | 6,876 | | 159 | | 7,035 | | 1.6 | % |
Non-owner occupied | 29,435 | | 143 | | 29,578 | | 6.6 | % |
Total office buildings and complexes | 36,311 | | 302 | | 36,613 | | 8.2 | % |
Apartment complexes | 56,038 | | 643 | | 56,681 | | 12.7 | % |
Retail facilities: | | | | |
Owner occupied | 9,917 | | 38 | | 9,955 | | 2.2 | % |
Non-owner occupied | 26,773 | | 398 | | 27,171 | | 6.1 | % |
Total retail facilities | 36,690 | | 436 | | 37,126 | | 8.3 | % |
Residential property: | | | | |
Owner occupied | 3,328 | | 511 | | 3,839 | | 0.9 | % |
Non-owner occupied | 27,024 | | 88 | | 27,112 | | 6.1 | % |
Total residential property | 30,352 | | 599 | | 30,951 | | 7.0 | % |
Light industrial facilities: | | | | |
Owner occupied | 21,860 | | 100 | | 21,960 | | 4.9 | % |
Non-owner occupied | 11,580 | | — | | 11,580 | | 2.6 | % |
Total light industrial facilities | 33,440 | | 100 | | 33,540 | | 7.5 | % |
Assisted living facilities and nursing homes | 28,667 | | — | | 28,667 | | 6.4 | % |
Land and land development | 21,343 | | 225 | | 21,568 | | 4.8 | % |
Health care facilities | 18,615 | | 26 | | 18,641 | | 4.2 | % |
Other | 108,852 | | 4,229 | | 113,081 | | 25.4 | % |
Total commercial, mortgage | $ | 438,224 | | $ | 6,730 | | $ | 444,954 | | 100.0 | % |
Real estate, construction loans: | | | | |
Assisted living facilities and nursing homes | $ | 15,813 | | $ | 3,042 | | $ | 18,855 | | 37.0 | % |
Health care facilities | 2,143 | | 10,391 | | 12,534 | | 24.6 | % |
Land and land development | 3,227 | | 906 | | 4,133 | | 8.1 | % |
Other | 11,656 | | 3,722 | | 15,378 | | 30.2 | % |
Total real estate, construction | $ | 32,839 | | $ | 18,061 | | $ | 50,900 | | 100.0 | % |
| Outstanding | Loan | Total | % of |
(Dollars in thousands) | Balance | Commitments | Exposure | Total |
Commercial real estate loans: | | | | |
Lodging and lodging related | $52,221 | $225 | $52,446 | 11.3% |
Office buildings and complexes: | | | | |
Owner occupied | 7,042 | 298 | 7,340 | 1.6% |
Non-owner occupied | 38,124 | 484 | 38,608 | 8.3% |
Total office buildings and complexes | 45,166 | 782 | 45,948 | 9.9% |
Apartment complexes | 56,321 | 1,122 | 57,443 | 12.4% |
Retail facilities: | | | | |
Owner occupied | 10,713 | 41 | 10,754 | 2.3% |
Non-owner occupied | 34,380 | 964 | 35,344 | 7.6% |
Total retail facilities | 45,093 | 1,005 | 46,098 | 9.9% |
Residential property: | | | | |
Owner occupied | 4,083 | 561 | 4,644 | 1.0% |
Non-owner occupied | 30,793 | 73 | 30,866 | 6.7% |
Total residential property | 34,876 | 634 | 35,510 | 7.7% |
Light industrial facilities: | | | | |
Owner occupied | 22,262 | 112 | 22,374 | 4.8% |
Non-owner occupied | 12,598 | – | 12,598 | 2.7% |
Total light industrial facilities | 34,860 | 112 | 34,972 | 7.5% |
Assisted living facilities and nursing homes | 33,829 | – | 33,829 | 7.3% |
Land and land development | 26,113 | 3,006 | 29,119 | 6.3% |
Health care facilities | 20,675 | 26 | 20,701 | 4.5% |
Other | 105,345 | 2,502 | 107,847 | 23.2% |
Total commercial real estate | $454,499 | $9,414 | $463,913 | 100.0% |
Real estate construction loans: | | | | |
Assisted living facilities and nursing homes | $2,314 | $6,616 | $8,930 | 17.8% |
Lodging and lodging related | 16,883 | 96 | 16,979 | 33.8% |
Land and land development | 4,632 | 476 | 5,108 | 10.2% |
Other | 15,792 | 3,353 | 19,145 | 38.2% |
Total real estate construction | $39,621 | $10,541 | $50,162 | 100.0% |
Peoples’Peoples' commercial lending activities continue to focus on lending opportunities inside its primary and secondary market areas with loans outside Peoples’ primary market areas comprising approximately 10% of total outstanding loan balances, at both September 30, 2010 and December 31, 2009. The majority of those out-of-market loans are still based inwithin Ohio, West Virginia and Kentucky, with total outstanding balances of $69.8 million and $77.9 million at September 30, 2010 and December 31, 2009, respectively.Kentucky. In all other states, the aggregate outstanding balance in each state was less than $4.0 million.million at both March 31, 2011 and December 31, 2010.
Allowance for Loan Losses
The following table presents changes in Peoples’ allowance for loan losses:
| Three Months Ended | | Nine Months Ended |
| September 30, | June 30, | September 30, | | September 30, |
(Dollars in thousands) | 2010 | 2010 | 2009 | | 2010 | 2009 |
Balance, beginning of period | $27,168 | $26,553 | $23,151 | | $27,257 | $22,931 |
Gross charge-offs: | | | | | | |
Commercial real estate | 7,557 | 4,676 | 5,980 | | 18,655 | 13,862 |
Commercial and industrial | 97 | 157 | 527 | | 1,173 | 560 |
Residential real estate | 382 | 145 | 251 | | 729 | 1,229 |
Real estate construction | – | 68 | – | | 68 | – |
Home equity lines of credit | 40 | 6 | 26 | | 58 | 67 |
Consumer | 247 | 242 | 348 | | 838 | 1,068 |
Deposit account overdrafts | 282 | 223 | 347 | | 735 | 977 |
Total gross charge-offs | 8,605 | 5,517 | 7,479 | | 22,256 | 17,763 |
Recoveries: | | | | | | |
Commercial real estate | 355 | 275 | 93 | | 1,134 | 1,122 |
Commercial and industrial | 28 | 119 | 6 | | 173 | 47 |
Residential real estate | 28 | 68 | 43 | | 114 | 192 |
Real estate construction | – | – | – | | – | – |
Home equity lines of credit | 2 | 1 | 5 | | 27 | 11 |
Consumer | 156 | 153 | 176 | | 544 | 450 |
Deposit account overdrafts | 73 | 58 | 86 | | 253 | 293 |
Total recoveries | 642 | 674 | 409 | | 2,245 | 2,115 |
Net charge-offs: | | | | | | |
Commercial real estate | 7,202 | 4,401 | 5,887 | | 17,521 | 12,740 |
Commercial and industrial | 69 | 38 | 521 | | 1,000 | 513 |
Residential real estate | 354 | 77 | 208 | | 615 | 1,037 |
Real estate construction | – | 68 | – | | 68 | – |
Home equity lines of credit | 38 | 5 | 21 | | 31 | 56 |
Consumer | 91 | 89 | 172 | | 294 | 618 |
Deposit account overdrafts | 209 | 165 | 261 | | 482 | 684 |
Total net charge-offs | 7,963 | 4,843 | 7,070 | | 20,011 | 15,648 |
Provision for loan losses | 8,005 | 5,458 | 10,168 | | 19,964 | 18,966 |
Balance, end of period | $27,210 | $27,168 | $26,249 | | $27,210 | $26,249 |
Ratio of net charge-offs to average loans (annualized): | | | | |
Commercial real estate | 2.81% | 1.70% | 2.14% | | 2.25% | 1.55% |
Commercial and industrial | 0.03% | 0.01% | 0.19% | | 0.13% | 0.06% |
Residential real estate | 0.14% | 0.03% | 0.08% | | 0.08% | 0.13% |
Real estate construction | – % | 0.03% | – % | | 0.01% | – % |
Home equity lines of credit | 0.01% | – % | 0.01% | | – % | 0.01% |
Consumer | 0.04% | 0.03% | 0.06% | | 0.04% | 0.07% |
Deposit account overdrafts | 0.08% | 0.06% | 0.09% | | 0.06% | 0.08% |
Total | 3.11% | 1.86% | 2.57% | | 2.57% | 1.90% |
During the third quarter, eight commercial loan relationships with an aggregate outstanding principal balance of $12.1 million became impaired. These loan relationships were subsequently written down by $6.1 million to the estimated net realizable value of the underlying collateral as of September 30, 2010, accounting for the higher gross charge-offs compared to the first two quarters of 2010. Gross charge-offs for the nine months ended September 30, 2010, were higher than the same period in 2009, due to ongoing workout efforts on existing impaired loans and continued declines in commercial real estate values.
The amount of the allowance for loan losses at end of each period represents management’smanagement's estimate of expected losses from existing loans based upon its formal quarterly analysis of the loan portfolio. While this process involves allocations being
made to specific loans and pools of loans, the entire allowance is available for all losses incurred within the loan portfolio. The following details management’smanagement's allocation of the allowance for loan losses:
| | September 30, | | June 30, | | March 31, | | December 31, | | September 30, | | | | | | | | | | | |
(Dollars in thousands) | 2010 | | 2010 | | 2010 | | 2009 | | 2009 | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
Commercial real estate | $21,382 | | $20,198 | | $19,388 | | $22,125 | | | $ | 19,613 | | $ | 21,806 | | $ | 21,382 | | $ | 20,198 | | $ | 19,388 | |
Commercial and industrial | 2,826 | | 3,954 | | 3,992 | | 1,586 | | | 1,734 | | 2,160 | | 2,826 | | 3,954 | | 3,992 | |
Total commercial | $24,208 | | $24,152 | | $23,380 | | $23,711 | | $23,218 | |
Residential real estate | 1,414 | | 1,359 | | 1,436 | | 1,619 | | 1,210 | 1,642 | | 1,400 | | 1,414 | | 1,359 | | 1,436 | |
Home equity lines of credit | 497 | | 534 | | 540 | | 528 | | 501 | 444 | | 431 | | 497 | | 534 | | 540 | |
Consumer | 830 | | 872 | | 960 | | 1,074 | | 995 | 790 | | 721 | | 830 | | 872 | | 960 | |
Deposit account overdrafts | 261 | | 251 | | 237 | | 325 | | 325 | 226 | | 248 | | 261 | | 251 | | 237 | |
Total allowance for loan losses | $27,210 | | $27,168 | | $26,553 | | $27,257 | | $26,249 | $ | 24,449 | | $ | 26,766 | | $ | 27,210 | | $ | 27,168 | | $ | 26,553 | |
As a percentage of total loans | 2.68% | | 2.66% | | 2.53% | | 2.59% | | 2.46% | 2.58 | % | 2.79 | % | 2.68 | % | 2.66 | % | 2.53 | % |
The significant allocations to commercial loans reflect the higher credit risk associated with this type of lending and the size of this loan category in relationship to the entire loan portfolio. The increased allowance for commercial real estate loans in the second and third quarters of 2010 primarily reflectsreflected changes to the qualitative factors used in determining the appropriate level of allowance for lodging and lodging related loans – Peoples’– Peoples' largest industrial concentration – givenconcentration. At March 31, 2011, the continued impactallowance for loan losses was lower than recent quarters, reflecting a decrease in loans rated as substandard and the utilization of general economic conditions both within Peoples’ market area and nationally on this industry. The overall higher allocations to commercial loans in prior quarters primarily reflected higher loss factorsspecific reserves for gradedcertain impaired loans due to recent elevated charge-off levels, along with continued deterioration in credit quality of various commercialthe loans based onbeing charged-down during the financial conditionfirst quarter to the estimated net realizable value of the borrowers. Another significant contributing factor was the impact of distressed commercial real estate values and general economic conditions on specific reserves for impaired loans.
underlying collateral.
The allowance allocated to the residential real estate and consumer loan categories is based upon Peoples’Peoples' allowance methodology for homogeneous pools of loans. The fluctuations in these allocations have been directionally consistent with the changes in loan quality, loss experience and changes in loan balances in each category.
The following table summarizes Peoples’ net charge-offs:
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
(Dollars in thousands) |
Gross charge-offs: | | | | | |
Commercial real estate | $ | 7,078 | | $ | 6,913 | | $ | 7,557 | | $ | 4,676 | | $ | 6,423 | |
Commercial and industrial | 835 | | 109 | | 97 | | 157 | | 919 | |
Residential real estate | 201 | | 400 | | 382 | | 145 | | 201 | |
Real estate construction | — | | — | | — | | 68 | | — | |
Home equity lines of credit | 247 | | 72 | | 40 | | 6 | | 12 | |
Consumer | 283 | | 236 | | 247 | | 242 | | 349 | |
Deposit account overdrafts | 136 | | 194 | | 282 | | 223 | | 230 | |
Total gross charge-offs | 8,780 | | 7,924 | | 8,605 | | 5,517 | | 8,134 | |
Recoveries: | | | | | |
Commercial real estate | 315 | | 187 | | 355 | | 275 | | 505 | |
Commercial and industrial | 59 | | 48 | | 28 | | 119 | | 25 | |
Residential real estate | 443 | | 111 | | 28 | | 68 | | 18 | |
Real estate construction | — | | — | | — | | — | | — | |
Home equity lines of credit | 10 | | 7 | | 2 | | 1 | | 24 | |
Consumer | 222 | | 127 | | 156 | | 153 | | 235 | |
Deposit account overdrafts | 103 | | 48 | | 73 | | 58 | | 122 | |
Total recoveries | 1,152 | | 528 | | 642 | | 674 | | 929 | |
Net charge-offs (recoveries): | | | | | |
Commercial real estate | 6,763 | | 6,726 | | 7,202 | | 4,401 | | 5,918 | |
Commercial and industrial | 776 | | 61 | | 69 | | 38 | | 894 | |
Residential real estate | (242 | ) | 289 | | 354 | | 77 | | 183 | |
Real estate construction | — | | — | | — | | 68 | | — | |
Home equity lines of credit | 237 | | 65 | | 38 | | 5 | | (12 | ) |
Consumer | 61 | | 109 | | 91 | | 89 | | 114 | |
Deposit account overdrafts | 33 | | 146 | | 209 | | 165 | | 108 | |
Total net charge-offs | $ | 7,628 | | $ | 7,396 | | $ | 7,963 | | $ | 4,843 | | $ | 7,205 | |
Ratio of net charge-offs to average loans (annualized): | | | |
Commercial real estate | 2.84 | % | 2.72 | % | 2.81 | % | 1.70 | % | 2.26 | % |
Commercial and industrial | 0.33 | % | 0.02 | % | 0.03 | % | 0.01 | % | 0.34 | % |
Residential real estate | (0.10 | )% | 0.12 | % | 0.14 | % | 0.03 | % | 0.07 | % |
Real estate construction | — | % | — | % | — | % | 0.03 | % | — | % |
Home equity lines of credit | 0.10 | % | 0.02 | % | 0.01 | % | — | % | — | % |
Consumer | 0.03 | % | 0.04 | % | 0.04 | % | 0.03 | % | 0.04 | % |
Deposit account overdrafts | 0.01 | % | 0.01 | % | 0.08 | % | 0.06 | % | 0.04 | % |
Total | 3.21 | % | 2.93 | % | 3.11 | % | 1.86 | % | 2.76 | % |
First quarter 2011 charge-offs were impacted by $4.9 million in losses on two existing impaired commercial real estate loan relationships, which became under-collateralized during the quarter as a result of continued weakness in commercial real estate values. Of this amount, $3.1 million was attributable to a relationship collateralized by undeveloped land located within Peoples' northeastern Kentucky market area, which was considered impaired and placed on nonaccrual status during the second quarter of 2010. The remaining $1.8 million was attributable to a relationship collateralized by non-owner occupied retail facilities located within central Ohio, which was considered impaired and placed on nonaccrual status in late 2009. At March 31, 2011, these relationships had an aggregate unpaid principal balance of $20.3 million and Peoples' recorded investment after the first quarter 2011 charge-offs was $9.1 million, which represented the estimated net realizable fair value of the underlying collateral. In addition, several other existing impaired loans continued to progress through the workout process, which resulted in the loans being charged-down by $1.1 million to the estimated net realizable value of their underlying collateral.
The following table details Peoples’ nonperforming assets:
| | September 30, | June 30, | March 31, | December 31, | September 30, | | | | | | | | | | | |
(Dollars in thousands) | 2010 | 2009 | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
Loans 90+ days past due and accruing: | | |
Commercial real estate | $– | $459 | $– | $164 | $– | $ | — | | $ | — | | $ | — | | $ | 459 | | $ | — | |
Commercial and industrial | 31 | – | 679 | 37 | | — | | 31 | | — | | — | |
Residential real estate | – | 22 | – | 238 | 311 | — | | 27 | | — | | 22 | | — | |
Consumer | – | 9 | 3 | |
Total | 31 | 481 | – | 411 | 993 | 37 | | 27 | | 31 | | 481 | | — | |
Nonaccrual loans: | | |
Commercial real estate | 30,083 | 29,676 | 22,706 | 25,852 | 33,326 | 27,934 | | 34,392 | | 30,083 | | 29,676 | | 22,706 | |
Commercial and industrial | 2,051 | 2,877 | 3,019 | 2,884 | 3,107 | 1,536 | | 1,714 | | 2,051 | | 2,877 | | 3,019 | |
Residential real estate | 4,481 | 4,933 | 3,567 | 4,687 | 4,125 | 2,491 | | 3,790 | | 4,481 | | 4,933 | | 3,567 | |
Home equity | 562 | 564 | 536 | 546 | 574 | 361 | | 554 | | 562 | | 564 | | 536 | |
Consumer | 7 | – | 4 | 3 | 4 | — | | — | | 7 | | — | | 4 | |
Total | 37,184 | 38,050 | 29,832 | 33,972 | 41,136 | 32,322 | | 40,450 | | 37,184 | | 38,050 | | 29,832 | |
Total nonperforming loans (NPLs) | 37,215 | 38,531 | 29,832 | 34,383 | 42,129 | 32,359 | | 40,477 | | 37,215 | | 38,531 | | 29,832 | |
Other real estate owned (OREO) | | |
Commercial | 4,305 | 4,752 | 5,857 | 6,087 | 1,062 | 4,220 | | 4,280 | | 4,305 | | 4,752 | | 5,857 | |
Residential | 30 | 140 | 176 | 226 | 176 | 180 | | 215 | | 30 | | 140 | | 176 | |
Total | 4,335 | 4,892 | 6,033 | 6,313 | 1,238 | 4,400 | | 4,495 | | 4,335 | | 4,892 | | 6,033 | |
Total nonperforming assets (NPAs) | $41,550 | $43,423 | $35,865 | $40,696 | $43,367 | $ | 36,759 | | $ | 44,972 | | $ | 41,550 | | $ | 43,423 | | $ | 35,865 | |
NPLs as a percent of total loans | 3.67% | 3.77% | 2.84% | 3.27% | 3.94% | 3.41 | % | 4.19 | % | 3.67 | % | 3.77 | % | 2.84 | % |
NPAs as a percent of total assets | 2.21% | 1.79% | 2.03% | 2.16% | 2.04 | % | 2.45 | % | 2.21 | % | 2.21 | % | 1.79 | % |
NPAs as a precent of gross loans and OREO | 4.08% | 4.23% | 3.39% | 3.85% | 4.06% | |
Allowance for loan losses as a | | |
percent of NPLs | 73.1% | 70.5% | 89.0% | 79.3% | 62.3% | |
NPAs as a percent of gross loans and OREO | | 3.85 | % | 4.64 | % | 4.08 | % | 4.23 | % | 3.39 | % |
Allowance for loan losses as a percent of NPLs | | 75.56 | % | 66.10 | % | 73.10 | % | 70.50 | % | 89.00 | % |
The decline in nonperforming assets during the first quarter of 2011 occurred primarily as a result of returning a single commercial real estate loan relationship, with total outstanding balances of $1.6 million, to accruing status. Continued weakness in the commercial real estate market resulted in third quarter 2010 write-downs totaling $447,000previously discussed charge-downs on two commercial properties held in OREO. As previously noted, during the third quarter, Peoples placed $12.1 million of commercial loans on nonaccrual status, which were written down to the estimated net realizable value of the underlying collateral of $6.1 million as of September 30, 2010.
Peoples’impaired loans. Peoples' nonaccrual commercial real estate loans primarily consist of non-owner occupied commercial properties and real estate development projects. In general, management believes repayment of these loans is dependent on the sale of the underlying collateral. As such, the carrying values of these loans are ultimately supported by management’smanagement's estimate of the net proceeds Peoples would receive upon the sale of the collateral. These estimates are based in part on market values provided by independent, licensed or certified appraisers periodically, but no less frequently than annually. Given the sustained weakness in commercial real estate values, management continues to monitor changes in real estate values from quarter-to-quarter and updates its estimates as needed based on observ ableobservable changes in market prices and/or updated appraisals for similar properties.
At September 30, 2010, Peoples’ nonaccrual commercial real estate loans included $1.5 million of loans to a single commercial borrower that were classified as held-for-sale and written down to their estimated fair value. Management will continue to market these loans during the fourth quarter, which, if sold, would remove the loans from Peoples’ nonperforming loans.
Certain nonaccrual loans are not considered impaired and not evaluated individually by Peoples. These loans consist primarily of smaller balance homogenous consumer and residential real estate loans that are collectively evaluated for impairment. The following tables summarize loans classified as impaired:
| September 30, | June 30, | March 31, | December 31, | September 30, |
(Dollars in thousands) | 2010 | 2010 | 2010 | 2009 | 2009 |
Loans with an allocated allowance for loan losses | $11,877 | $14,451 | $14,590 | $18,188 | $15,688 |
Loans with no allocated allowance for loan losses | 24,155 | 21,880 | 13,557 | 15,052 | 23,988 |
Total impaired loans | $36,032 | $36,331 | $28,147 | $33,240 | $39,676 |
Allowance for loan losses allocated to impaired loans | $2,857 | $3,815 | $3,532 | $5,738 | $5,761 |
| | | | | |
Nonaccrual loans not considered impaired | $2,252 | $2,135 | $1,924 | $1,738 | $2,561 |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(Dollars in thousands) | 2010 | 2009 | | 2010 | 2009 |
Average investment in impaired loans | $34,391 | $39,484 | | $32,542 | $39,326 |
Interest income recognized on impaired loans | $5 | $– | | $9 | $19 |
Peoples has not allocated a portion of the allowance for loan losses to certain impaired loans because those loans either have been written down previously to the amount expected to be collected or possess characteristics indicative of Peoples’ ability to collect the remaining outstanding principal from the sale of collateral and/or enforcement of guarantees by the principals.
Overall, management believes the allowance for loan losses was adequate at September 30, 2010,March 31, 2011, based on all significant information currently available. Still, there can be no assurance the allowance for loan losses will be adequate to cover future losses or that the amount of nonperforming loans will remain at current levels, especially considering the current economic uncertainty that exists and the concentration of commercial loans in Peoples’ loan portfolio.
Deposits
The following table details Peoples’ deposit balances:
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
Interest-bearing deposits: | | | | | |
Retail certificates of deposit | $ | 420,828 | | $ | 430,886 | | $ | 436,250 | | $ | 448,900 | | $ | 472,034 | |
Money market deposit accounts | 270,574 | | 289,657 | | 297,229 | | 290,477 | | 296,196 | |
Governmental/public funds | 149,961 | | 119,572 | | 139,843 | | 136,119 | | 143,068 | |
Savings accounts | 132,323 | | 122,444 | | 120,975 | | 120,086 | | 117,526 | |
Interest-bearing demand accounts | 97,561 | | 96,507 | | 92,585 | | 94,542 | | 88,425 | |
Total retail interest-bearing deposits | 1,071,247 | | 1,059,066 | | 1,086,882 | | 1,090,124 | | 1,117,249 | |
Brokered certificates of deposits | 70,522 | | 87,465 | | 95,862 | | 105,093 | | 116,464 | |
Total interest-bearing deposits | 1,141,769 | | 1,146,531 | | 1,182,744 | | 1,195,217 | | 1,233,713 | |
Non-interest-bearing deposits | 219,175 | | 215,069 | | 209,693 | | 203,559 | | 201,337 | |
Total deposits | $ | 1,360,944 | | $ | 1,361,600 | | $ | 1,392,437 | | $ | 1,398,776 | | $ | 1,435,050 | |
| September 30, | June 30, | March 31, | December 31, | September 30, |
(Dollars in thousands) | 2010 | 2010 | 2010 | 2009 | 2009 |
Interest-bearing deposits: | | | | | |
Retail certificates of deposit | $490,446 | $512,327 | $546,760 | $537,549 | $561,619 |
Money market deposit accounts | 297,229 | 290,477 | 296,196 | 263,257 | 245,621 |
Governmental/public funds | 139,843 | 136,119 | 143,068 | 147,745 | 137,655 |
Savings accounts | 120,975 | 120,086 | 117,526 | 112,074 | 113,104 |
Interest-bearing demand accounts | 92,585 | 94,542 | 88,425 | 91,878 | 87,153 |
Total retail interest-bearing deposits | 1,141,078 | 1,153,551 | 1,191,975 | 1,152,503 | 1,145,152 |
Brokered certificates of deposits | 41,666 | 41,666 | 41,738 | 45,383 | 61,412 |
Total interest-bearing deposits | 1,182,744 | 1,195,217 | 1,233,713 | 1,197,886 | 1,206,564 |
Non-interest-bearing deposits | 209,693 | 203,559 | 201,337 | 198,000 | 187,011 |
Total deposits | $1,392,437 | $1,398,776 | $1,435,050 | $1,395,886 | $1,393,575 |
During 2010,In the first quarter of 2011, management has focusedmaintained its focus on reducingchanging Peoples' deposit mix away from higher-cost, non-core deposits given recent growth in lower-cost deposits and lackas a means of attractive investment opportunities.reducing overall funding costs. This strategy has included more selective pricing of out-of-market certificates of deposit (“CDs”), governmental/public fund deposits and similar non-core deposits. These actions accounted for much of the third quarter 2010 decline in retail CDs and also led a single commercial customer to reduce its specially-priced CDs and money market accounts by $10 million eachsince year-end 2010. Also during the first quarter of 2011, Peoples experienced seasonal increases in governmental/public funds from tax collections, as well as consumer savings and non-interest-bearing deposit balances.
Since March 31, 2010, Peoples has reduced the second quarter, further contributingamount of brokered CDs due to the decreasegrowth in retail CDs since December 31, 2009. Savings and money market deposit balances were higher than in recent quarters due to customer preference for insured deposits over short-term investment alternatives.
Peoples’ retail CD balances included deposits obtained from customers outside its primary market areas, primarily school districts, government entities and credit unions located in the Midwest. These deposits totaled $54.2 million at September 30, 2010, versus $63.4 million at June 30, 2010 and $68.1 million a year ago.balances. Management expects further reductions in these balances in future quarters, as these deposits are not expected to be renewed based on Peoples’Peoples' current deposit pricing strategies.strategies and expected funding needs. Still, management continues to consider these deposits to be an alternative funding source to brokered deposits and other wholesale funding for satisfying potential future liquidity needs.
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings:
| | September 30, | June 30, | March 31, | December 31, | September 30, | | | | | | | | | | | |
(Dollars in thousands) | 2010 | 2009 | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
Short-term borrowings: | | | |
Retail repurchase agreements | $49,060 | $49,765 | $49,714 | $51,921 | $48,344 | $ | 42,283 | | $ | 51,509 | | $ | 49,060 | | $ | 49,765 | | $ | 49,714 | |
FHLB advances | – | 25,000 | – | |
Total short-term borrowings | 49,060 | 49,765 | 49,714 | 76,921 | 48,344 | |
| | |
Long-term borrowings: | | |
FHLB advances | 99,720 | 104,981 | 105,206 | 101,113 | 132,085 | 86,907 | | 92,703 | | 99,720 | | 104,981 | | 105,206 | |
National market repurchase agreements | 65,000 | 135,000 | 145,000 | 65,000 | | 65,000 | | 65,000 | | 135,000 | | 135,000 | |
Total long-term borrowings | 164,720 | 239,981 | 240,206 | 246,113 | 277,085 | 151,907 | | 157,703 | | 164,720 | | 239,981 | | 240,206 | |
Subordinated notes held | | |
by subsidiary trust | 22,557 | 22,548 | 22,539 | 22,530 | 22,522 | |
Subordinated notes held by subsidiary trust | | 22,574 | | 22,565 | | 22,557 | | 22,548 | | 22,539 | |
Total borrowed funds | $236,337 | $312,294 | $312,459 | $345,564 | $347,951 | $ | 216,764 | | $ | 231,777 | | $ | 236,337 | | $ | 312,294 | | $ | 312,459 | |
The reduction in national market repurchase agreements during the third quarter ofsince March 31, 2010 was the result of management’smanagement's planned deleveraging of the balance sheet. Peoples has repaid maturing long-term borrowings over the last several quarters, using funds generated from retail deposit growth, contributing to the decline since September 30, 2009.over the last year. The level and composition of borrowed funds may change in future quarters, as management will continue to use a combination of short-term and long-term borrowings to manage the interest rate risk of the balance sheet.
Capital/Stockholders’ Equity
At September 30, 2010,During the first quarter of 2011, Peoples' total stockholders' equity and regulatory capital measures were impacted by the Partial TARP Capital Redemption. However, at March 31, 2011, capital levels for both Peoples and Peoples Bank remained substantially higher than the minimum amounts needed to be considered well capitalized institutions under banking regulations. These higher capital levels reflect Peoples’Peoples' desire to maintain strong capital positions throughout the current credit cycle and economic downturn to provide greater flexibility to work through asset quality issues that have risen. arisen.
The following table details Peoples’Peoples' actual risk-based capital levels and corresponding ratios:
| | September 30, | June 30, | March 31, | December 31, | September 30, | | | | | | | | | | | |
(Dollars in thousands) | 2010 | 2009 | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
Capital Amounts: | | |
Tier 1 | $194,800 | $195,439 | $193,211 | $192,822 | $193,013 | $ | 174,314 | | $ | 194,407 | | $ | 194,800 | | $ | 195,439 | | $ | 193,211 | |
Tier 1 common | $133,624 | $134,298 | $132,103 | $131,747 | $131,973 | 133,891 | | 133,197 | | 133,624 | | 134,298 | | 132,103 | |
Total (Tier 1 and Tier 2) | $210,768 | $211,509 | $209,647 | $209,144 | $209,986 | |
Total capital | | 189,672 | | 209,738 | | 210,768 | | 211,509 | | 209,647 | |
Net risk-weighted assets | $1,200,754 | $1,212,816 | $1,245,770 | $1,244,707 | $1,281,318 | 1,142,758 | | 1,149,587 | | 1,200,754 | | 1,212,816 | | 1,245,770 | |
Capital Ratios: | | |
Tier 1 | 16.22% | 16.11% | 15.51% | 15.49% | 15.06% | 15.25 | % | 16.91 | % | 16.22 | % | 16.11 | % | 15.51 | % |
Tier 1 common | 11.13% | 11.07% | 10.60% | 10.58% | 10.30% | 11.72 | % | 11.59 | % | 11.13 | % | 11.07 | % | 10.60 | % |
Total (Tier 1 and Tier 2) | 17.55% | 17.44% | 16.83% | 16.80% | 16.39% | |
Total capital | | 16.60 | % | 18.24 | % | 17.55 | % | 17.44 | % | 16.83 | % |
Leverage ratio | 10.26% | 10.14% | 9.97% | 10.06% | 9.82% | 9.81 | % | 10.63 | % | 10.26 | % | 10.14 | % | 9.97 | % |
In addition to traditional capital measurements, management uses tangible capital to evaluate the adequacy of Peoples’ stockholders’Peoples' stockholders' equity. This non-GAAP financial measure and related ratios facilitate comparisons with peers since they remove the impact of intangible assets acquired through acquisitions on the Consolidated Balance Sheets. The following table reconciles the calculation of tangible capital to amounts reported in Peoples’Peoples' consolidated financial statements:
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
Tangible Equity: | | | | | |
Total stockholders' equity, as reported | $ | 210,485 | | $ | 230,681 | | $ | 233,759 | | $ | 240,280 | | $ | 240,842 | |
Less: goodwill and other intangible assets | 64,765 | | 64,870 | | 64,934 | | 65,138 | | 65,357 | |
Tangible equity | $ | 145,720 | | $ | 165,811 | | $ | 168,825 | | $ | 175,142 | | $ | 175,485 | |
| | | | | |
Tangible Common Equity: | | | | | |
Tangible equity | $ | 145,720 | | $ | 165,811 | | $ | 168,825 | | $ | 175,142 | | $ | 175,485 | |
Less: preferred stockholders' equity | 17,850 | | 38,645 | | 38,619 | | 38,593 | | 38,568 | |
Tangible common equity | $ | 127,870 | | $ | 127,166 | | $ | 130,206 | | $ | 136,549 | | $ | 136,917 | |
| | | | | |
Tangible Assets: | | | | | |
Total assets, as reported | $ | 1,801,590 | | $ | 1,837,985 | | $ | 1,883,689 | | $ | 1,967,046 | | $ | 2,003,271 | |
Less: goodwill and other intangible assets | 64,765 | | 64,870 | | 64,934 | | 65,138 | | 65,357 | |
Tangible assets | $ | 1,736,825 | | $ | 1,773,115 | | $ | 1,818,755 | | $ | 1,901,908 | | $ | 1,937,914 | |
| | | | | |
Tangible Book Value per Share: | | | | | |
Tangible common equity | $ | 127,870 | | $ | 127,166 | | $ | 130,206 | | $ | 136,549 | | $ | 136,917 | |
Common shares outstanding | 10,474,507 | | 10,457,327 | | 10,438,510 | | 10,423,317 | | 10,408,096 | |
| | | | | |
Tangible book value per share | $ | 12.21 | | $ | 12.16 | | $ | 12.47 | | $ | 13.10 | | $ | 13.15 | |
| | | | | |
Tangible Equity to Tangible Assets Ratio: | | | | |
Tangible equity | $ | 145,720 | | $ | 165,811 | | $ | 168,825 | | $ | 175,142 | | $ | 175,485 | |
Total tangible assets | $ | 1,736,825 | | $ | 1,773,115 | | $ | 1,818,755 | | $ | 1,901,908 | | $ | 1,937,914 | |
| | | | | |
Tangible equity to tangible assets | 8.39 | % | 9.35 | % | 9.28 | % | 9.21 | % | 9.06 | % |
| | | | | |
Tangible Common Equity to Tangible Assets Ratio: | | | | |
Tangible common equity | $ | 127,870 | | $ | 127,166 | | $ | 130,206 | | $ | 136,549 | | $ | 136,917 | |
Tangible assets | $ | 1,736,825 | | $ | 1,773,115 | | $ | 1,818,755 | | $ | 1,901,908 | | $ | 1,937,914 | |
| | | | | |
Tangible common equity to tangible assets | 7.36 | % | 7.17 | % | 7.16 | % | 7.18 | % | 7.07 | % |
| September 30, | | June 30, | | March 31, | | December 31, | | September 30, |
(Dollars in thousands) | 2010 | | 2010 | | 2010 | | 2009 | | 2009 |
| | | | | | | | | |
Tangible Equity: | | | | | | | | | |
Total stockholders' equity, as reported | $233,759 | | $240,280 | | $240,842 | | $243,968 | | $244,363 |
Less: goodwill and other intangible assets | 64,934 | | 65,138 | | 65,357 | | 65,599 | | 65,805 |
Tangible equity | $168,825 | | $175,142 | | $175,485 | | $178,369 | | $178,558 |
| | | | | | | | | |
Tangible Common Equity: | | | | | | | | | |
Tangible equity | $168,825 | | $175,142 | | $175,485 | | $178,369 | | $178,558 |
Less: preferred stockholders' equity | 38,619 | | 38,593 | | 38,568 | | 38,543 | | 38,518 |
Tangible common equity | $130,206 | | $136,549 | | $136,917 | | $139,826 | | $140,040 |
| | | | | | | | | |
Tangible Assets: | | | | | | | | | |
Total assets, as reported | $1,883,689 | | $1,967,046 | | $2,003,271 | | $2,001,827 | | $2,004,754 |
Less: goodwill and other intangible assets | 64,934 | | 65,138 | | 65,357 | | 65,599 | | 65,805 |
Tangible assets | $1,818,755 | | $1,901,908 | | $1,937,914 | | $1,936,228 | | $1,938,949 |
| | | | | | | | | |
Tangible Book Value per Share: | | | | | | | | | |
Tangible common equity | $130,206 | | $136,549 | | $136,917 | | $139,826 | | $140,040 |
Common shares outstanding | 10,438,510 | | 10,423,317 | | 10,408,096 | | 10,374,637 | | 10,371,357 |
| | | | | | | | | |
Tangible book value per share | $12.47 | | $13.10 | | $13.15 | | $13.48 | | $13.50 |
| | | | | | | | | |
Tangible Equity to Tangible Assets Ratio: | | | | | | | | |
Tangible equity | $168,825 | | $175,142 | | $175,485 | | $178,369 | | $178,558 |
Total tangible assets | $1,818,755 | | $1,901,908 | | $1,937,914 | | $1,936,228 | | $1,938,949 |
| | | | | | | | | |
Tangible equity to tangible assets | 9.28% | | 9.21% | | 9.06% | | 9.21% | | 9.21% |
| | | | | | | | | |
Tangible Common Equity to Tangible Assets Ratio: | | | | | | | | |
Tangible common equity | $130,206 | | $136,549 | | $136,917 | | $139,826 | | $140,040 |
Tangible assets | $1,818,755 | | $1,901,908 | | $1,937,914 | | $1,936,228 | | $1,938,949 |
| | | | | | | | | |
Tangible common equity to tangible assets | 7.16% | | 7.18% | | 7.07% | | 7.22% | | 7.22% |
The fluctuations in tangible equity and tangible common equity over the last several quarters primarily reflected the impact of changes in fair value of Peoples’Peoples' available-for-sale investment portfolio on accumulated other comprehensive income, a component of total stockholders’stockholders' equity. The reduction in tangible assets over the prior twolast several quarters occurred primarily as a result of decreased loan balances, coupled withbalances. Other contributing factors included the reduction in the investment portfolio.portfolio during the third quarter of 2010 and utilization of short-term assets for the Partial TARP Capital Redemption.
Interest Rate Sensitivity and Liquidity
While Peoples is exposed to various business risks, the risks relating to interest rate sensitivity and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature. The objective of Peoples’Peoples' asset/liability management (“ALM”) function is to measure and manage these risks in order to optimize net interest income within the constraints of prudent capital adequacy, liquidity and safety. This objective requires Peoples to focus on interest rate risk exposure and adequate liquidity through its management of the mix of assets and liabilities, their related cash flows and the rates earned and paid on those assets and liabilities. Ultimately, the ALM function is intended to guide management in the acquisitio nacquisition 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 arising in the normal course of business of financial services companies like Peoples. IRR is the potential for economic loss due to future interest rate changes that can impact both the earnings stream as well as market values of financial assets and liabilities. Peoples’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 assigned overall management of IRR to its Asset-Liability Committee (the “ALCO”), which 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 the policies or methods used by the ALCO to assess IRR from those disclosed in Peoples’ 2009Peoples' 2010 Form 10-K. In 2010, the ALCO improved its simulation modeling process by incorporating more detailed information regarding the interest rate risk characteristics of Peoples’ earning assets and interest-bearing liabilities. This refinement enhances the accuracy of modeling results and overall impact of interest rate changes to both earnings and fair value of equity.
The following table shows the estimated changes in net interest income and the economic value of equity based upon a standard, parallel shock analysis (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Increase in Interest Rate | Estimated Increase in Net Interest Income | | Estimated (Decrease) Increase in Economic Value of Equity |
(in Basis Points) | March 31, 2011 | | December 31, 2010 | | March 31, 2011 | | December 31, 2010 |
300 | $ | 8,514 | | | 16.7 | % | | $ | 8,973 | | 17.2 | % | | $ | (20,865 | ) | | (9.8 | )% | | $ | (9,005 | ) | (3.9 | )% |
200 | 6,819 | | | 13.4 | % | | 6,860 | | 13.2 | % | | (12,268 | ) | | (5.7 | )% | | (3,297 | ) | (1.4 | )% |
100 | 4,164 | | | 8.2 | % | | 4,048 | | 7.8 | % | | (1,881 | ) | | (0.9 | )% | | 1,599 | | 0.7 | % |
| | | | Estimated |
| Estimated | | Increase |
Increase in | Increase in | | in Economic |
Interest Rate | Net Interest Income | | Value of Equity |
(in Basis Points) | September 30, 2010 | | September 30, 2010 |
300 | $10,259 | 18.3 % | | $4,904 | 2.2 % |
200 | 7,596 | 13.6 % | | 8,507 | 3.8 % |
100 | 4,486 | 8.0 % | | 11,421 | 5.1 % |
At September 30, 2010, Peoples’March 31, 2011, Peoples' balance sheet remained positioned for a rising interest rate environment, as illustrated by the potential increase in net interest income shown in the above table. GivenWhile parallel interest rate shock scenarios are useful in assessing the level of IRR inherent uncertainty surroundingin Peoples' balance sheet, interest rates typically move in a non-parallel manner, with the differences in both the timing and magnitude of changes in short-term and long-term interest rates. Thus, any benefit that could occur as a result of the Federal Reserve increasing short-term interest rates in future quarters could be offset by an inverse movement in long-term interest rate changes, management’s near-term balance sheet strategies will continue to emphasize maintaining good asset liquidity and lowering overall funding costs through a combination of less aggressive pricing of non-core funding and growing low cost retail deposits.rates.
Liquidity
In addition to IRR management, another major 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’sALCO's liquidity management policy sets limits on the net liquidity position 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 interest income from loans and investment securities. Peoples also uses various wholesale funding sources to supplement funding from customer deposits. These external sources also provide Peoples with the ability to obtain large quantities of funds in a relatively short time period in the event of sudden unanticipated cash needs.
Peoples also has a contingency funding plan that serves as an action plan for management in the event of a short-term or long-term funding crisis caused by a single or series of unexpected events. The policy identifies potential triggers and early warning indicators of a funding crisis, such as unexpected deposit withdrawals, and failure of unrelated financial institutions within Peoples’Peoples' primary market area. Additionally, the policy identifies sources of liquidity that may be utilized in the event of either a either short-term or long-term funding crisis.
At September 30, 2010,March 31, 2011, Peoples had available borrowing capacity through its wholesale funding sources, primarily the Federal Home Loan Bank of Cincinnati and Federal Reserve Bank of Cleveland, and unpledged investment securities totaling approximately $259$305 million that can be used to satisfy liquidity needs, compared to $185$286 million at year-end 2009.2010. This liquidity position excludes the $43.5 million excess cash reserves at the Federal Reserve Bank of Clevelandbeing maintained and the impact of Peoples’Peoples' ability to obtain additional funding by either offering higher rates on retail deposits or issuing additional brokered deposits.deposits
Management believes the current balance of cash and cash equivalents and anticipated cash flows from the investment portfolio, along with the availability of other funding sources, will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments.
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’Peoples' normal course of business and include traditional off-balance sheet credit-related financial instruments, interest rate contracts and commitments to make additional capital contributions in low-income housing tax credit investments. Traditional off-balance sheet credit-related financial instruments continue to represent the most significant off-balance sheet exposure. The following table details the total contractual amount of loan commitments and standby letters of credit:
| | (Dollars in thousands) | September 30, | June 30, | March 31, | December 31, | September 30, | March 31, 2011 | December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 |
2010 | 2010 | 2010 | 2009 | 2009 | |
Loan Commitments: | | |
Home equity lines of credit | $39,585 | $39,650 | $40,213 | $40,169 | $41,098 | | $40,293 | | | $40,021 | | | $39,585 | | | $39,650 | | | $40,213 | |
Unadvanced construction loans | 11,954 | 14,878 | 12,921 | 12,921 | 17,529 | 16,418 | | 6,107 | | 11,954 | | 14,878 | | 12,921 | |
Other loan commitments | 103,726 | 108,281 | 109,822 | 113,072 | 100,457 | 111,720 | | 108,995 | | 103,726 | | 108,281 | | 109,822 | |
Loan commitments | 155,265 | 162,809 | 162,956 | 166,162 | 159,084 | |
Total commitments | | | $168,431 | | | $155,123 | | | $155,265 | | | $162,809 | | | $162,956 | |
| | | | | | |
Standby letters of credit | $42,158 | $43,505 | $43,628 | $44,048 | $44,661 | | $41,553 | | | $42,097 | | | $42,158 | | | $43,505 | | | $43,628 | |
| | | | | | |
Management does not anticipate Peoples’ current off-balance sheet activities will have a material impact on future results of operations and financial condition based on historical experience and recent trends.
The information called for by this Item 3 is provided under the caption “Interest Rate Sensitivity and Liquidity” under “ITEM 2.2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION” in this Form 10-Q, and is incorporated herein by reference.
Evaluation of Disclosure Controls and Procedures
Peoples’ management, with the participation of Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer, has evaluated the effectiveness of Peoples’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) as of September 30, 2010.March 31, 2011. Based upon that evaluation, Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer have concluded that:
| |
(a) | information required to be disclosed by Peoples 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’ management, including its President and Chief Executive Officer and its Executive Vice President, 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 files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and |
| |
(c) | Peoples’ disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. |
Changes in Internal Control Over Financial Reporting
There were no changes in Peoples’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Peoples’ fiscal quarter ended September 30, 2010,March 31, 2011, that have materially affected, or are reasonably likely to materially affect, Peoples’ internal control over financial reporting.
In the ordinary course of their respective businesses or operations, Peoples or one of its subsidiaries may be named as a plaintiff, a defendant, or a party to a legal proceeding or any of their respective properties may be subject to various pending and threatened legal proceedings and various actual and potential claims. In view of the inherent difficulty of predicting the outcome of such matters, Peoples 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.
There have been no material changes from those risk factors previously disclosed in “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 20092010 Form 10-K. Those risk factors are not the only risks Peoples faces. Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect Peoples’ business, financial condition and/or operating results.
The following table details repurchases by Peoples and purchases by “affiliated purchasers” as defined in Rule 10b-18(a)(3) of the Securities Exchange Act of 1934, as amended, of Peoples’ common shares during the three months ended September 30, 2010:March 31, 2011:
Period | (a) Total Number of Common Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | (d) Maximum Number of Common Shares that May Yet Be Purchased Under the Plans or Programs (1) |
July 1 – 31, 2010 | 1,496 | (2) | $14.70 | (2) | – | | – |
August 1 – 31, 2010 | 359 | (2) | $12.25 | (2) | – | | – |
September 1 – 30, 2010 | 1,331 | (2) | $13.14 | (2) | – | | – |
Total | 3,186 | | $13.77 | | – | | – |
|
| | | | | | | | | | | |
Period | (a) Total Number of Common Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1) | (d) Maximum Number of Common Shares that May Yet Be Purchased Under the Plans or Programs (1) |
January 1 – 31, 2011 | — | | | $ | — | | | — | | — | |
February 1 – 28, 2011 | 1,919 | | (2) | $ | 13.76 | | (2) | — | | — | |
March 1 – 31, 2011 | 243 | | (2) | $ | 12.30 | | (2) | — | | — | |
Total | 2,162 | | | $ | 13.59 | | | — | | — | |
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(1) | Peoples’ Board of Directors has not authorized any stock repurchase plans or programs for 2010,2011, due in part to the restrictions on stock repurchases imposed by the terms of the TARP Capital Investment. |
| |
(2) | 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 funds for the payment of the benefits under the Peoples Bancorp Inc. Second Amended and Restated Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries. |
None.
None.
6 EXHIBITS
The exhibits required to be filed with this Form 10-Q are attached hereto or incorporated herein by reference. For a list of such exhibits, see “Exhibit Index” beginning at page 44.45.
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.
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| | | | |
| | | | PEOPLES BANCORP INC. |
| | | | |
Date: October 28, 2010 | May 2, 2011 | | By: /s/ | DAVID L. MEAD CHARLES W. SULERZYSKI |
| | | David L. Mead | Charles W. Sulerzyski |
| | | | President and Chief Executive Officer |
|
| | | | |
Date: October 28, 2010 | May 2, 2011 | | By: /s/ | EDWARD G. SLOANE |
| | | | Edward G. Sloane |
| | | | Executive Vice President, |
| | | | Chief Financial Officer and Treasurer |
|
| | | | |
EXHIBIT INDEX |
|
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010MARCH 31, 2011 |
|
Exhibit Number | | Description | | Exhibit Location |
| | | | |
3.1(a) | | Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on May 3, 1993) | | Incorporated herein by reference to Exhibit 3(a) to the Registration Statement on Form 8-B of Peoples Bancorp Inc. (“Peoples”) filed July 20, 1993 (File No. 0-16772) |
| | | | |
3.1(b) | | Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 22, 1994) | | Incorporated herein by reference to Exhibit 3(a)(2) to Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-16772) (“Peoples’ 1997 Form 10-K”) |
| | | | |
3.1(c) | | Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 9, 1996) | | Incorporated herein by reference to Exhibit 3(a)(3) to Peoples’ 1997 Form 10-K |
| | | | |
3.1(d) | | Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 23, 2003) | | Incorporated herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 (File No. 0-16772) (“Peoples’ March 31, 2003 Form 10-Q”) |
| | | | |
3.1(e) | | Certificate of Amendment by Shareholders or Members to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on January 22, 2009) | | Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on January 23, 2009 (File No. 0-16772) |
| | | | |
3.1(f) | | Certificate of Amendment by Directors or Incorporators to Articles filed with the Secretary of State of the State of Ohio on January 28, 2009, evidencing adoption of amendments by the Board of Directors of Peoples Bancorp Inc. to Article FOURTH of Amended Articles of Incorporation to establish express terms of Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value, of Peoples Bancorp Inc. | | Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on February 2, 2009 (File No. 0-16772) (“Peoples’ February 2, 2009 Form 8-K”) |
| | | | |
3.1(g) | | Amended Articles of Incorporation of Peoples Bancorp Inc. (reflecting amendments through January 28, 2009) [For SEC reporting compliance purposes only – not filed with Ohio Secretary of State] | | Incorporated herein by reference to Exhibit 3.1(g) to Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 0-16772) |
| | | | |
3.2(a) | | Code of Regulations of Peoples Bancorp Inc. | | Incorporated herein by reference to Exhibit 3(b) to Peoples’ Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772) |
| | | | |
3.2(b) | | Certified Resolutions Regarding AdoptionCertificate of AmendmentsAmendment to the Code of Regulations of Peoples Bancorp Inc. regarding adoption of amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, 1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 10, 2003 | | Incorporated herein by reference to Exhibit 3(c) to Peoples’ March 31, 2003 Form 10-Q |
| | | | |
3.2(c) | | Certificate of Amendment to the Code of Regulations of Peoples Bancorp Inc. regarding adoption of amendments to Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.07, 3.08 and 3.11 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 8, 2004 | | Incorporated herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 (File No. 0-16772) |
EXHIBIT INDEX |
|
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
|
|
Exhibit
Number
| | Description
| | Exhibit Location
|
| | | | |
3.2(d) | | Certificate regarding adoption of amendments to Sections 2.06, 2.07, 3.01 and 3.04 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 13, 2006 | | Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on April 14, 2006 (File No. 0-16772) |
| | | | |
3.2(e) | | Certificate regarding adoption of amendments to Section 2.01 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 22, 2010 | | Incorporated herein by reference to Exhibit 3.2(e) to Peoples’ Quarterly Report on Form 10-Q/A for the quarterly period ended June 30, 2010 (File No. 0-16772) ("Peoples' June 30, 2010 Form 10-Q/A") |
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| | | | |
EXHIBIT INDEX |
(continued) |
Exhibit Number | | Description | | Exhibit Location |
3.2(e) | | Code of Regulations of Peoples Bancorp Inc. (reflecting amendments through April 13, 2006)[For22, 2010) [For SEC reporting compliance purposes only]
| | Incorporated herein by reference to Exhibit 3(b)3.2(f) to Peoples’ Quarterly Report onPeoples' June 30, 2010 Form 10-Q for the quarterly period ended March 31, 2006 (File No. 0-16772)10-Q/A |
| | | | |
4.1 | | Warrant to purchase 313,505 Shares of Common Stock (common shares) of Peoples Bancorp Inc., issued to the United States Department of the Treasury on January 30, 2009 | | Incorporated herein by reference to Exhibit 4.1 to Peoples’ February 2, 2009 Form 8-K |
| | | | |
4.2 | | Letter Agreement, dated January 30, 2009, including Securities Purchase Agreement – Standard Terms attached thereto as Exhibit A, between Peoples Bancorp Inc. and the United States Department of the Treasury [NOTE: Exhibit A to the Securities Purchase Agreement is not included therewith; filed as Exhibit 3.1 to Peoples’ February 2, 2009 Form 8-K and incorporated by reference at Exhibit 3.1(f) to this Quarterly Report on Form 10-Q] | | Incorporated herein by reference to Exhibit 10.1 to Peoples’ February 2, 2009 Form 8-K |
| | | | |
4.3 | | Letter Agreement, dated February 2, 2011, between Peoples Bancorp Inc. and the United States Department of the Treasury. | | Incorporated herein by reference to Exhibit 10.1 to Peoples' Current Report on Form 8-K dated and filed February 4, 2011 (File No. 0-16772) |
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10.1 | | Summary of Base Salaries for Peoples' Executive OfficersOfficers* | | Filed herewith |
| | | | |
10.2 | | Letter Agreement, dated January 18, 2011, between Peoples Bancorp Inc. and Richard W. Stafford.* | | Incorporated herein by reference to Exhibit 10.31 of Peoples' Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 0-16722)("Peoples' 2010 Form 10-K") |
| | | | |
10.3 | | Letter Agreement, dated January 18, 2011, between Peoples Bancorp Inc. and David L. Mead.* | | Incorporated herein by reference to Exhibit 10.32 of Peoples' 2010 Form 10-K |
| | | | |
10.4 | | Change in Control Agreement between Peoples Bancorp Inc. and Michael W. Hager (adopted January 27, 2011).* | | Incorporated herein by reference to Exhibit 10.33 of Peoples' 2010 Form 10-K |
| | | | |
10.5 | | Letter Agreement, dated February 23, 2011, between Peoples Bancorp Inc. and Michael W. Hager.* | | Filed herewith |
| | | | |
10.6 | | Peoples Bancorp Inc. 2011 Management Transition Bonus Plan.* | | Incorporated herein by reference to Exhibit 10.1 to Peoples' Current Report on Form 8-K dated and filed February 2, 2011 (File No. 0-16722)(“Peoples' February 2, 2011 Form 8-K”) |
| | | | |
10.7 | | Form of Award Agreement to evidence participation in the Peoples Bancorp Inc. 2011 Management Transition Bonus Plan executed by each of Michael W. Hager, Daniel K. McGill, Carol A. Schneeberger, Edward G. Sloane and Richard W. Stafford.* | | Incorporated herein by reference to Exhibit 10.2 to Peoples' February 2, 2011 Form 8-K |
| | | | |
10.8 | | Form of Peoples Bancorp Inc. 2006 Equity Plan Performance-Based Restricted Stock Agreement for employees used and to be used to evidence awards of performance-based restricted stock granted to employees of Peoples Bancorp Inc.* | | Filed herewith |
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12 | | Statements regarding Computation of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends Appearing in Quarterly Report on Form 10-Q | | Filed herewith |
| | | | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certifications [President and Chief Executive Officer] | | Filed herewith |
* Management Compensation Plan |
|
| | | | |
EXHIBIT INDEX |
(continued) |
Exhibit Number | | Description | | Exhibit Location |
31.2 | | Rule 13a-14(a)/15d-14(a) Certifications [Executive Vice President, Chief Financial Officer and Treasurer] | | Filed herewith |
| | | | |
32 | | Certifications Pursuant to Section 1350 Certificationsof Chapter 63 of Title 18 of the United States Code [President and Chief Executive Officer and Executive Vice President, Chief Financial Officer and Treasurer] | | FiledFurnished herewith |
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