FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio 31-0987416
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614) 373-3155
--------------------
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the
issuer's class of Common Stock, as of May 1, 1997: 3,451,709.
PART I - FINANCIAL INFORMATION
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ITEM 1
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The following Condensed Consolidated Balance Sheets,
Consolidated Statements of Income, and Consolidated Statements
of Cash Flows of Peoples Bancorp Inc. (the "Company") and
subsidiaries, reflect all adjustments (which include normal
recurring accruals) necessary to present fairly such information
for the periods and dates indicated. Since the following
condensed unaudited financial statements have been prepared in
accordance with instructions to Form 10-Q, they do not contain
all information and footnotes necessary for a fair presentation
of financial position in conformity with generally accepted
accounting principles. Operating results for the three months
ended March 31, 1997, are not necessarily indicative of the
results that may be expected for the year ending December 31,
1997. Complete audited consolidated financial statements with
footnotes thereto are included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
PEOPLES BANCORP INC. AND SUBSIDIARIES
-------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, December 31,
1997 1996
ASSETS
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Cash and cash equivalents:
Cash and due from banks $ 23,329,000 $ 26,200,000
Interest-bearing deposits in other banks 1,200,000 217,000
Federal funds sold 15,000,000 2,100,000
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Total cash and cash equivalents 39,529,000 28,517,000
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Available-for-sale investment securities,
at estimated fair value (amortized cost
of $146,584,000 and $145,619,000 at
March 31, 1997 and December 31, 1996,
respectively) 146,912,000 147,783,000
Loans, net of unearned interest 448,860,000 422,413,000
Allowance for loan losses (7,152,000) (6,873,000)
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Net loans 441,708,000 415,540,000
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Bank premises and equipment, net 11,530,000 11,508,000
Other assets 15,474,000 13,287,000
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Total assets $655,153,000 $616,635,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
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Deposits:
Non-interest bearing $ 62,498,000 $ 63,410,000
Interest bearing 480,186,000 441,282,000
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Total deposits 542,684,000 504,692,000
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Short-term borrowings:
Federal funds purchased and securities
sold under repurchase agreements 17,959,000 17,022,000
Federal Home Loan Bank term advances 0 2,500,000
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Total short-term borrowings 17,959,000 19,522,000
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Long-term borrowings 31,363,000 29,200,000
Accrued expenses and other liabilities 6,688,000 7,028,000
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Total liabilities 598,694,000 560,442,000
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Stockholders' Equity
- --------------------
Common stock, no par value, 12,000,000
shares authorized - 3,448,425 shares
issued at March 31, 1997 and 3,445,075
issued at December 31, 1996, including
shares in treasury 34,438,000 34,349,000
Net unrealized holding gain on
available-for-sale securities, net of
deferred income taxes 206,000 1,428,000
Retained earnings 21,853,000 20,470,000
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56,497,000 56,247,000
Treasury stock, at cost, 607 shares
at March 31, 1997 and 2,000 shares
at December 31, 1996 (38,000) (54,000)
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Total stockholders' equity 56,459,000 56,193,000
------------ ------------
Total liabilities and
stockholders' equity $655,153,000 $616,635,000
============ ============
PEOPLES BANCORP INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended
March 31,
1997 1996
Interest income $12,762,000 $11,316,000
Interest expense 5,918,000 5,367,000
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Net interest income 6,844,000 5,949,000
Provision for loan losses 588,000 360,000
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Net interest income after provision
for loan losses 6,256,000 5,589,000
Other income 1,418,000 1,162,000
Gain (loss) on sale of securities (29,000) 26,000
Other expenses 4,705,000 4,013,000
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Income before income taxes 2,940,000 2,764,000
Federal income taxes 938,000 883,000
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Net income $ 2,002,000 $ 1,881,000
=========== ===========
Earnings per share $0.57 $0.54
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Weighted average shares
outstanding (primary) 3,522,650 3,461,055
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Cash dividends declared $620,000 $530,000
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Cash dividend per share $0.18 $0.15
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PEOPLES BANCORP INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended
March 31,
1997 1996
Cash flows from operating activities:
- -------------------------------------
Net income $ 2,002,000 $ 1,881,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 588,000 360,000
Loss (gain) on sale of investment securities 29,000 (26,000)
Depreciation, amortization, and accretion 651,000 440,000
Increase in interest receivable (113,000) (171,000)
Decrease in interest payable (13,000) (239,000)
Deferred income tax benefit 209,000 (40,000)
Deferral of loan origination fees and costs 24,000 33,000
Other, net (97,000) (223,000)
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Net cash provided by operating activities 3,280,000 2,015,000
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Cash flows from investing activities:
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Purchases of available-for-sale securities (4,591,000) (37,099,000)
Proceeds from sales of available-for-sale
securities 2,995,000 4,528,000
Proceeds from maturities of available-for-sale
securities 3,921,000 5,432,000
Net increase in loans (5,245,000) (4,546,000)
Expenditures for premises and equipment (146,000) (242,000)
Proceeds from sales of other real estate owned 28,000 0
Business acquisitions, net of cash received 4,679,000 0
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Net cash provided by (used in) investing
activities 1,641,000 (31,927,000)
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Cash flows from financing activities:
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Net (decrease) increase in non-interest
bearing deposits (3,480,000) 1,916,000
Net increase in interest-bearing deposits 9,451,000 4,846,000
Net (decrease) increase in short-term borrowings (1,563,000) 34,247,000
Proceeds from long-term borrowings 3,000,000 0
Payments on long-term borrowings (837,000) (747,000)
Cash dividends paid (496,000) (481,000)
Purchase of treasury stock (31,000) (58,000)
Proceeds from issuance of common stock 47,000 154,000
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Net cash provided by financing activities 6,091,000 39,877,000
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Net increase in cash and cash equivalents 11,012,000 9,965,000
Cash and cash equivalents at beginning of period 28,517,000 20,994,000
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Cash and cash equivalents at end of period $39,529,000 $30,959,000
=========== ===========
NOTES TO FINANCIAL STATEMENTS
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Basis of Presentation
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The accounting and reporting policies of Peoples Bancorp Inc.
and Subsidiaries (the "Company") conform to generally accepted
accounting principles and to general practices within the
banking industry. The Company considers all of its principal
activities to be banking related. The preparation of the
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
1. Acquisitions
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On February 28, 1997, The Peoples Banking and Trust Company
("Peoples Bank"), one of the Company's subsidiaries, acquired
one full-service banking office located in Baltimore, Ohio from
an unrelated financial institution. In the transaction, Peoples
Bank assumed approximately $12.5 million in deposits. This
office is located in Fairfield County in central Ohio and
currently operates a full-service banking office with an ATM.
On January 1, 1997, the Company purchased Russell Federal
Savings Bank ("Russell Federal") in Russell, Kentucky for
approximately $9.25 million in cash. At December 31, 1996,
Russell Federal had total assets of $28.0 million, loans of
$21.5 million (primarily real estate loans), deposits of $19.5
million (interest bearing deposits including savings accounts
and certificates of deposit), and shareholders' equity of $8.0
million. Management plans to continue Russell Federal's
operations as a federal savings bank subsidiary of the Company
with continuity of management, officers, and directors.
Russell Federal serves the financial needs of customers in
northeast Kentucky, in particular Greenup and Boyd Counties, its
primary market area. Its principal products include savings
accounts, time certificates of deposit and commercial and
residential real estate loans. With one office located on Ferry
Street in the city of Russell, services are provided by a
walk-in office and a Motor Bank.
On April 26, 1996, Peoples Bank acquired three full-service
banking offices and assumed approximately $73.9 million in
deposits from an unaffiliated institution. The offices are
located in southeastern Ohio in the cities of Gallipolis,
Pomeroy, and Rutland, Ohio, and serve the counties of Meigs
(Ohio), Gallia (Ohio) and Mason (West Virginia). The Gallipolis
office is located downtown in Gallipolis and currently operates
a full-service office, Motor Bank, and an automated teller
machine. A full-service office and separate Motor Bank are
located in downtown Pomeroy. An automated teller machine is
also located in Pomeroy outside a local convenience store. The
Rutland office is a full-service and Motor Bank facility.
2. New Accounting Pronouncements
- ---------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement on Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125") that provides
accounting and reporting standards for transfers of financial
assets and extinguishments of liabilities. SFAS No. 125
significantly changes the accounting rules for determining
whether a transfer represents a sale or secured borrowing
transaction. Portions of SFAS No. 125 were applicable for the
Company effective January 1, 1997 and did not have a material
impact on the Company's financial statements.
In December 1996, the FASB agreed to defer the effective date
for one year for the following transactions: securities
lending, repurchase agreements, dollar rolls and other similar
secured transactions. In general, these are the transactions
addressed by SFAS No. 125 that apply specifically to the
Company's current operations but will not be effective for
transfers of assets until beginning after December 31, 1997.
The adoption of Statement No. 125 as it relates to securities
lending, repurchase agreements, dollar rolls, and other similar
transactions is not expected to have a material effect on the
Company's future financial statements.
ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
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OF OPERATIONS AND FINANCIAL CONDITION
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SELECTED FINANCIAL DATA
-----------------------
The following data should be read in conjunction with the
unaudited consolidated financial statements and the management
discussion and analysis that follows.
For the Three Months Ended
March 31,
SIGNIFICANT RATIOS 1997 1996
- ------------------
Net income to:
- --------------
Average assets* 1.24% 1.34%
Average shareholders' equity* 14.12% 14.44%
Net interest margin* 4.72% 4.67%
Efficiency ratio* 52.94% 54.41%
Average shareholders' equity to
average assets 8.80% 9.27%
Loans net of unearned interest to
deposits (end of period) 82.71% 88.04%
Allowance for loan losses to loans
net of unearned interest (end
of period) 1.59% 1.76%
Capital ratios:
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Tier I capital ratio 11.20% 12.62%
Risk-based capital ratio 12.45% 13.87%
Leverage ratio 7.53% 8.48%
Cash dividends to net income 30.97% 28.18%
PER SHARE DATA
- --------------
Book value per share $16.38 $14.84
Earnings per share $0.57 $0.54
Cash dividends per share $0.18 $0.15
* Net income to average assets, net income to average
shareholders' equity, net interest margin, and efficiency ratio
are presented on an annualized basis.
Net interest margin is calculated using fully tax equivalent net
interest income as a percentage of average earning assets.
Efficiency ratio is a ratio of non-interest expense as a
percentage of fully tax equivalent net interest income plus
non-interest income.
Introduction
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The following discussion and analysis of the consolidated
financial statements of the Company is presented to provide
insight into management's assessment of the financial results.
The Company's subsidiaries, The Peoples Banking and Trust
Company ("Peoples Bank"), The First National Bank of
Southeastern Ohio ("First National Bank"), Russell Federal
Savings Bank ("Russell Federal"), and The Northwest Territory
Life Insurance Company ("Northwest Territory"), provide
financial services to individuals and businesses within the
Company's market area.
Peoples Bank is chartered by the state of Ohio and subject to
regulation, supervision, and examination by the Federal Deposit
Insurance Corporation ("FDIC") and the Ohio Division of Banks.
First National is a member of the Federal Reserve System and
subject to regulation, supervision, and examination by the
Office of the Comptroller of the Currency ("OCC"). Russell
Federal is a member of the Federal Home Loan Bank, and is
subject to the regulation, supervision, and examination by the
Office of Thrift Supervision, and is also subject to limited
regulation by the Board of Governors of the Federal Reserve
System.
References will be found in this Form 10-Q to three separate
acquisition transactions that have impacted the Company's
results of operations. In April 1996, Peoples Bank completed
the acquisition of three full-service banking centers and
approximately $73.9 million in deposits from an unaffiliated
financial institution. The three full-service branches are
located in the cities of Pomeroy, Gallipolis, and Rutland, Ohio
(referred hereafter as "Banking Center Acquisition"). On
January 1, 1997, the Company purchased Russell Federal Savings
Bank ("Russell Federal") in Russell, Kentucky, for $9.25 million
in cash (referred hereafter as "Russell Federal Acquisition").
At December 31, 1996, Russell Federal had total assets of $28.0
million, loans of $21.5 million (primarily real estate loans),
deposits of $19.5 million (interest bearing deposits including
savings accounts and certificates of deposit), and shareholders'
equity of $8.0 million. On February 28, 1997, Peoples Bank
acquired one full-service banking office located in Baltimore,
Ohio, from an unaffiliated financial institution (referred
hereafter as "Baltimore Banking Center Acquisition"). In the
transaction, Peoples Bank assumed approximately $12 million in
deposits. This office is located in Fairfield County in central
Ohio and currently operates a full-service banking office with
an ATM.
The Banking Center Acquisition, the Russell Federal
Acquisition, and the Baltimore Banking Center Acquisition will
be referred to hereafter in the aggregate as "Acquisitions".
RESULTS OF OPERATIONS
---------------------
Overview of the Income Statement
- --------------------------------
For the quarter ended March 31, 1997, the Company earned
$2,002,000 in net income, a 6.4% increase from $1,881,000 in
first quarter 1996. First quarter earnings per share increased
5.6% from $0.54 last year to $0.57 in first quarter 1997. All
references to per share amounts have been adjusted to reflect a
10% stock dividend issued to shareholders of record on July 15,
1996.
Net income increased in the first three months for several
reasons. Net interest income totaled $6,844,000, up $895,000
(or 15.0%) compared to last year. The increase is due primarily
to growth in the Company's earning asset base through the
Acquisitions and enhanced net interest margin. First quarter
provision for loan losses totaled $588,000 compared to $360,000
in 1995's first quarter, due primarily to strong loan growth in
the Company's markets.
Non-interest income increased $256,000 (or 22.0%) to
$1,418,000. Non-interest expense for the first quarter totaled
$4,705,000, up $692,000 (or 17.2%) from last year. Increases in
non-interest income and non-interest expense are related to the
Company's Acquisitions in second quarter 1996 and first quarter
1997.
Interest Income and Expense
- ---------------------------
When compared to prior year, increased profits in first quarter
1997 can be attributed primarily to growth of the Company's net
interest income and enhanced net interest margin. The Company's
interest earning assets and interest-bearing liabilities were
positioned to generate strong first quarter net interest income
streams. In addition the Acquisitions provided additional
earning assets to the Company, generating increased incremental
net interest income.
As a result, net interest income continued its growth in first
quarter 1997, reaching $6,844,000 compared to $5,949,000 last
year, up $895,000 or 15.0%. Continued growth in higher-yielding
assets, such as loans, boosted interest income. Loan growth was
achieved through internal demand as well as in the Russell
Acquisition, where the Company acquired approximately $21
million of primarily real estate loans. In general, the Banking
Center Acquisition and Baltimore Banking Center Acquisition
provided the Company with a source of funds having lower
interest costs than current deposits and borrowings. The
Company will continue to focus on placing the funds acquired in
the Baltimore Banking Center Acquisition in higher-yielding
assets such as loans in the near future, emphasizing enhancement
of net interest margin and increasing the Company's revenue
streams.
Net interest margin is calculated by dividing fully-tax
equivalent ("FTE") net interest income by average
interest-earning assets and serves as a performance measurement
of the net interest revenue stream generated by the Company's
balance sheet. Due to the continued investment in
higher-yielding assets, net interest margin reached 4.72% in
first quarter 1997, up from 4.67% for the same period last year.
Average loan balances grew nearly $64 million from first
quarter 1996 to first quarter 1997 and is the largest earning
asset component on the Company's balance sheet. Yield on
earning assets totaled 8.73% in 1997, compared to 8.78% in first
quarter 1996. Cost of earning assets decreased 10 basis points
in first quarter 1997 to 4.01%. This combination provided the
Company with increased incremental net interest income and
improved net interest margin in first quarter 1997.
Please refer to the "Consolidated Average Balance Sheet and
Analysis of Net Interest Income" table included on page 19 for a
complete quantitative evaluation of the Company's net interest
margin.
Opportunities to satisfy loan demand continue in many of the
markets the Company serves, and as a result, management will
continue to analyze several funding sources to finance the
demand, including the deposits acquired in the Baltimore Banking
Center Acquisition and borrowings from the Federal Home Loan
Bank.
The Federal Reserve discount rate increased slightly in early
1997 due to actions by the Federal Reserve Board. As a result,
the national prime rate moved up 25 basis points. During the
first and second quarters of 1997, the Company adjusted its base
loan rates to reflect the increase in the national prime rate.
This adjustment may have a positive impact on future net
interest income and net interest margin, although deposit
pricing in the Company's markets remains competitive.
Management has established internal deposit growth as one of its
key performance indicators for 1997 and future years. The
combination of loan growth and expected continued pricing
pressures on deposits contributes to management's opinion that
net interest margin will remain relatively stable for the
remainder of 1997. Management will continue to monitor the
effects of net interest margin on the performance of the Company.
Provision for Loan Losses
- -------------------------
In the first quarter, the Company recorded a provision for loan
losses of $588,000, up from $360,000 in first quarter 1995.
Average loan growth in the first quarter of 1997 compared to the
first quarter of 1996 (excluding the loans acquired in the
Russell Federal Acquisition) totaled approximately $43 million.
Increased loan volume and continued pressure from consumer loan
delinquencies prompted the increase in the provision for loan
losses in recent quarters.
Management may modestly increase the Company's provision for
loan losses in future periods due to anticipated loan growth and
related levels of loan delinquencies.
Non-Interest Income
- -------------------
The Company's non-interest income is generated from four
primary areas of concentration: income derived from fiduciary
activities, cost-recovery fees related to deposit accounts,
electronic banking revenues, and income generated by the
Company's insurance agency subsidiaries. In the first quarter
of 1997, all of the Company's major sources of non-interest
income increased compared to the first quarter of 1996,
exemplifying management's commitment to continual improvement of
the Company's operating performance through strong non-interest
income sources.
The Company's Investment and Trust Division of Peoples Bank
significantly contributes to the Company's non-interest income
streams and continued its strong earnings trend in 1997. The
fee structure for fiduciary activities is based primarily on the
fair value of assets being managed, which totaled approximately
$450 million at March 31, 1997. As a result of growth in market
values and in the number of accounts served, first quarter
income generated from fiduciary activities increased $32,000 (or
6.8%) to $504,000. The Investment and Trust Division continues
to be a leader in fiduciary services for the Company's market
area.
Deposit account service charge income has also increased in the
first quarter of 1997, due primarily to the additional deposits
acquired in the Banking Center Acquisition in the second quarter
of 1996. The Company's fee income generated from deposits is
based on cost recoveries associated with services provided. In
the first three months of 1997 account service charge income
reached $512,000, up $118,000 (or 30.0%) over the same period
last year.
Electronic banking has been a service offered to the Company's
customer's for several years, including ATM cards, direct
deposit services, and debit card services. The cost-recovery
fees associated with these products and services are beginning
to significantly impact the Company's non-interest income. In
first quarter 1997, total fees related to electronic banking
reached $107,000, up $34,000 (or 46.7%) compared to last year's
first quarter. This increase is due primarily to revenues
related to the debit card program launched in late 1996. Future
electronic banking revenues will be positively impacted by an
increase in the cost-recovery fee associated with foreign
transactions (i.e. non-customers) in the Company's ATM machines.
In late 1995, First National Bank's subsidiaries, Northwest
Territory Life Insurance Agency, Inc. and Northwest Territory
Property and Casualty Insurance Agency, Inc. (the "Agencies"),
were awarded insurance agency powers in the State of Ohio. The
Agencies received Certificates of Qualification to provide full
life and property insurance product lines to consumers in Ohio.
Although the Agencies' results of operations did not have a
material impact on results of first quarter, they are
anticipated to produce income growth and long-term value to the
Company through internal development as well as external
affiliation and acquisition. Currently the Agencies are
generating fee income on sales of annuities, mutual funds, and
other similar investment products, as well as life insurance
policies. Management intends to develop the Agencies' property
and casualty insurance product lines through both internal
development and acquisition of existing independent agencies.
In addition to traditional deposit products generating
non-interest income for the Company, an agreement with an
unaffiliated securities dealer has also generated non-interest
income through the receipt of lease payments. Management
expects this non-traditional revenue source to continue to
provide incremental earnings for the Company in the future.
Non-Interest Expense
- --------------------
Maintaining acceptable levels of non-interest expense and
operating efficiency are important performance objectives for
the Company. For the three months ended March 31, 1997,
non-interest expense was $4,705,000, an increase of $692,000 (or
17.2%) compared to the same period last year. Management
expected this increase and has initiated steps to leverage
non-interest expense.
When comparing 1997 to 1996, it is important to note the
changes to the Company's non-interest expense levels related to
the Acquisitions. Non-operational items contributed to the
increase in first quarter non-interest expense. In particular,
amortization of intangibles totaled $240,000 in first quarter
1997, compared to $44,000 for the same period last year, an
increase of $196,000. Amortization expense related to the
Acquisitions should remain at first quarter levels for the
remainder of 1997.
The aggregate impact of the Company's recent acquisitions also
impacted non-interest expense in other areas. For the quarter
ended March 31, 1997, salaries and benefits expense increased
$343,000 (or 19.2%) to $2,129,000 compared to 1996's first
quarter. The Acquisitions increased the number of employees due
to the retention of many customer service associates. At March
31, 1997, the Company had 304 full-time equivalent employees, up
from 288 employees at year-end 1996. At March 31, 1996, the
Company had 261 employees. Management will continue to strive
to find new ways of increasing efficiencies and leveraging its
resources while concentrating on maximizing customer service.
The Acquisitions also impacted net occupancy expenses, in
particular depreciation expense. For the quarter ended March
31, 1997, furniture and equipment expenses totaled $418,000, up
$114,000 (or 37.5%) from last year's first quarter. This
increase can be attributed primarily to the depreciation of the
assets purchased in the Acquisitions as well as increased
depreciation of additional expenditures on technology acquired
in 1996. The Company's increased investment in technology and
other customer-service enhancements will also impact
depreciation expense in the future.
Several categories within non-interest expense remained at
levels comparable to last year's first quarter. Management
believes that non-interest expense was leveraged in first
quarter 1997 and will continue to focus on the Company's
efficiency ratio as a key indicator of performance. In the
first quarter of 1997, the efficiency ratio was 52.94% compared
to 54.41% for the same period in 1996. Management expects the
efficiency ratio to continue to modestly improve throughout the
remainder of 1997.
Return on Assets
- ----------------
For the quarter ended March 31, 1997, return on average assets
("ROA") totaled 1.24%, down from 1.34% in the same period a year
earlier. Decreased ROA in 1997 can be attributed to the
Acquisitions, which impacted average assets by approximately $83
million (a 14.7% growth rate), without a corresponding increase
in earnings.
In addition, the Company's Russell Federal Acquisition (a
thrift subsidiary) caused ROA to decrease slightly in first
quarter 1997. In general, the thrift industry has historically
performed at lower ROA levels than commercial banks due to the
core competencies usually associated with the thrift industry.
Management anticipates that ROA levels will remain relatively
stable for the remainder of 1997.
Return on Equity
- ----------------
Management believes return on average stockholders' equity
("ROE") is an important indicator of an organization's financial
strength and continues to monitor the performance of the Company
relative to this ratio. The Company's ROE in the first quarter
was 14.12%, down modestly from 14.44% for the same period last
year.
The Company's capital is adequate under regulatory and industry
standards and has experienced growth through retention of
increased earnings over the last several quarters, increasing
over $4.6 million since first quarter 1996. As a result, the
Company's ROE has been tempered in first quarter 1997.
Management will emphasize improvement in ROE through the
remainder of 1997 and into 1998.
Federal Income Tax Expense
- --------------------------
Federal income taxes increased from $938,000 in first quarter
1997 to $883,000 in 1996, an increase of $55,000 (or 6.2%)
compared to the same period a year earlier. This increase can
be attributed to the Company's higher pre-tax income and a
modest decrease in tax-exempt income. The Company's effective
tax rate is approximately 31.9%.
FINANCIAL CONDITION
-------------------
Overview of Balance Sheet
- -------------------------
The Company continued to leverage its capital base through
acquisition. Total assets increased from $616,635,000 at
December 31, 1996 to $655,153,000 at March 31, 1997, a growth
rate of 6.2%. The increase in assets can be attributed
primarily to the assets acquired in the Russell Federal
Acquisition and the Baltimore Banking Center Acquisition.
The Russell Federal Acquisition boosted the Company's loan
balances by $21.5 million at March 31, 1997. Internal loan
growth also continued its upward trend in the first quarter as
the Company employed more assets into higher-yielding products.
Total deposits increased $37,992,000 (or 7.5%) in the first
three months of 1997. The Russell Federal Acquisition and the
Baltimore Banking Center Acquisition comprised the majority of
deposit growth for the Company, totaling nearly $33 million in
total deposits at March 31, 1997.
In the first quarter, total borrowings increased $600,000 (or
1.2%) to $49,322,000, while stockholders' equity increased
$266,000 (or 0.5%) to $56,459,000. The Company purchased
$31,000 of treasury shares in the first quarter of 1997 and also
reissued treasury shares through exercised stock options,
resulting in a total balance of treasury stock of $38,000 at
March 31, 1997.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents totaled $39,529,000 at March 31,
1997, up $11,012,000 from year-end 1996, a direct result of the
funds acquired in the Baltimore Banking Center Acquisition.
Federal funds sold were up nearly $13 million for the three
months ended March 31, 1997, reflecting the additional funds
acquired late in the first quarter. Management expects cash and
cash equivalent balances (in particular, federal funds sold) to
decrease in the near future as the acquired funds are shifted
into loan products designed to satisfy the strong loan demand in
the Company's markets.
The Company's balance sheet growth essentially dictated the
need for increased Federal Reserve deposit requirements. Total
cash and cash equivalents fluctuate on a daily basis due to
transactions in process and other liquidity needs. Management
believes the liquidity needs of the Company are satisfied by the
current balance of cash and cash equivalents, readily available
access to traditional and non-traditional funding sources, and
the portion of the investment and loan portfolios that matures
within one year. These sources will enable the Company to meet
funding obligations and off-balance sheet commitments as they
come due.
Investment Securities
- ---------------------
Total investment securities decreased $887,000 since year-end
1996, as the increase in the Federal Reserve discount rates
caused the market value of the Company's investment securities
to decrease compared to year-end levels. The majority of the
Company's investment portfolio is classified as
available-for-sale for liquidity purposes. As a result,
changes in interest rates have more impact to the total balance
of investment securities. However, management believes
securities classified as available-for-sale provide greater
flexibility in meeting liquidity needs, management of this
portfolio, and other funding obligations as they arise.
The Company's balances in investment categories remained
relatively unchanged from year-end 1996. The majority of the
volume in the investment portfolio is comprised of $74,394,000
investment in US. Agencies and other mortgage-backed securities,
a decrease of approximately $2.8 million since December 31,
1996. The Company continues its strong investment in US.
Treasuries, which totaled $29,301,000 at March 31, 1997, up
nearly $3.3 million since December 31, 1996. Tax-exempt
investments totaled $21,924,000 at the end of the first quarter,
a decrease of $711,000 since year-end 1996.
The Russell Federal Acquisition provided the Company with
additional investment securities of $3,266,000 at March 31,
1997. Upon consummation of the Russell Federal Acquisition, the
Company reclassified all of Russell Federal's investment
portfolio to available-for-sale securities to conform to the
Company's classification policy for the consolidated investment
portfolio. The majority of Russell Federal's portfolio is
invested in US Treasury securities and US Agencies.
Several maturities of investment securities occurred during the
first three months of 1997. The funds from certain maturing
securities were not reinvested in the investment portfolio but
shifted to higher-yielding assets such as loans.
Management monitors the earnings performance and the
effectiveness of the liquidity of the investment portfolio on a
regular basis through Asset/Liability Committee ("ALCO")
meetings. The ALCO also monitors net interest income, sets
pricing guidelines, and manages interest rate risk for the
Company. Through active balance sheet management and analysis
of the investment securities portfolio, the Company maintains
sufficient liquidity to satisfy depositor requirements and the
various credit needs of its customers.
In the first quarter of 1997, management also implemented a
strategy designed to reposition a sector of the investment
portfolio for enhanced future yields. Management repositioned
$2 million of the portfolio into higher-yielding US. Agencies by
selling $2 million of collateralized mortgage obligations. A
$29,000 loss on the sale of securities was generated which is
expected to be recovered in 1997 through an enhanced income
stream. Management will continue to review opportunities for
repositioning of the portfolio.
Loans
- -----
The Company's loan volume grew in early 1997 from existing
market demand and through the Russell Federal Acquisition. In
the first quarter of 1997, the Company's loans increased
$26,447,000 to $448,860,000 at March 31, 1997. The Russell
Federal Acquisition added approximately $20.5 million in real
estate loans and $1 million in consumer loans. The remainder of
the Company's loan growth occurred through existing channels and
reflects the additional credit opportunities in the markets
served.
The Company's lending is primarily focused in the southeastern
Ohio and northern West Virginia markets, and consists
principally of retail lending, which includes single-family
residential mortgages and other consumer lending. Since 1993,
the Company has generated additional loans in central Ohio
(Licking County) through its loan production office. In 1997,
the Company expanded its loan markets to northeastern Kentucky
through the Russell Federal Acquisition. Management expects the
new market to continue to provide future loan growth.
The following table details total outstanding loans at the
specified dates:
March 31, December 31,
1997 1996
Commercial, financial, and agricultural $128,268,000 $127,927,000
Real estate, construction 10,311,000 9,944,000
Real estate, mortgage 199,732,000 175,505,000
Consumer 110,549,000 109,037,000
------------ ------------
Total loans $448,860,000 $422,413,000
============ ============
In the first quarter, mortgage loan balances grew 13.8% from
$175,505,000 at December 31, 1996 to $199,732,000. The Russell
Federal Acquisition boosted loan volume while other markets also
experienced increased loan activity. Significant growth
occurred in 1 to 4 family residential loans. Home equity credit
line ("Equiline") balances increased $257,000 to a total balance
of $15,710,000 at March 31, 1997, and continue to be a strong
product that demonstrates the Company's commitment for quality
loan programs designed to meet the needs of the customer.
Commercial, financial, and agricultural loan balances remained
relatively stable in the first quarter of 1997. The respective
economies in the Company's markets have provided quality credit
opportunities and, in particular, through the business
production office located in Licking County, Ohio. The recent
Baltimore Banking Acquisition should complement the existing
Licking County office for future loan growth in this growing
sector of central Ohio. Management will continue to focus on
the enhancement and growth of the loan portfolio while
maintaining high underwriting standards.
The financial services industry continues to experience growth
in consumer debt. In the first quarter of 1997, the Company's
total consumer loans increased $1,512,000 (or 1.4%) to
$110,549,000. The majority of the Company's consumer loans are
in the indirect lending area. At March 31, 1997, the Company
had indirect loan balances of $69,093,000, up $760,000 (or 1.1%)
since year-end 1996. Management is pleased with the recent
performance and growth of the indirect segment of the Company's
loan portfolio. Lenders use a tiered pricing system that
enables the Company to apply an interest rate commensurate with
the inherent risk of a loan. Management's recent actions to
reinforce the use of this tiered system has tempered chargeoffs
and overall growth of the portfolio. Management expects the
indirect lending portfolio to remain an integral part of the
Company's loan portfolio in future quarters.
Loan Concentration
- ------------------
The Company does not have a concentration of its loan portfolio
in any one industry. The Russell Acquisition bolstered the
Company's already strong loan balances in real estate lending
(both mortgage and construction loans), which continues to be
the largest component of the loan portfolio. At March 31, 1997,
real estate lending represented $210,043,000 (or 46.8%) of total
loans, while commercial, financial, and agricultural loans
totaled $128,268,000 (or 28.6%). The remaining loans are
comprised of loans to individuals totaling $110,549,000 at March
31, 1997, or 24.6% of the loan portfolio.
The Company's lending is primarily focused in the local
southeastern Ohio market and consists principally of retail
lending, which includes single-family residential mortgages and
other consumer loan products. Recent market penetrations
occurred in the northeast Kentucky real estate market in the
form of the Russell Federal Acquisition. One of the Company's
largest group of commercial loans consists of automobile dealer
floor plans, which totaled $15,072,000 at March 31, 1997. It
is the Company's policy to obtain the underlying inventory as
collateral on these loans.
The Company does not extend credit to any single borrower in
excess of the combined legal lending limits of its subsidiary
banks.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses as a percentage of loans modestly
decreased from 1.63% at December 31, 1996, to 1.59% at the end
of the first quarter of 1997. The total dollar amount of the
allowance for loan losses increased $279,000 while total loans
grew over $26 million in the first three months of 1997, causing
a decrease in the allowance as a percentage of total loans.
In the first quarter of 1997, the provision for loan losses
totaled $588,000 compared to $360,000 for the same period last
year. The Company's provision for loan losses has increased
steadily through recent quarters due to the combination of
overall loan growth and loan delinquencies (particularly in the
consumer loan portfolio).
Over the past several years, the Company has been very active
in indirect lending and other personal loans. In late 1996 and
early 1997, management implemented initiatives designed to
refocus the indirect lending goals of the Company, including
tighter underwriting standards and more aggressive collection of
past due accounts, and as a result, the Company's consumer loan
delinquencies have modestly decreased. Management will continue
to monitor the entire loan portfolio to maintain loan quality
and high underwriting standards and expects future quarterly
provisions to modestly increase due mostly to anticipated loan
growth.
Chargeoffs in the first quarters of 1997 outpaced the same
period last year. Consumer credit problems have recently
increased credit concerns of the financial services industry and
the Company has experienced the majority of its chargeoffs in
the consumer loan portfolio. The following table presents
changes in the Company's allowance for loan losses for the three
months ended March 31, 1997, and 1996, respectively:
Three Months Ended
March 31,
1997 1996
---------- ----------
Allowance for loan losses, January 1 $6,873,000 $6,726,000
Allowance for loan losses acquired in
Russell Federal Acquisition 120,000
Chargeoffs 511,000 431,000
Recoveries 82,000 88,000
---------- ----------
Net chargeoffs 429,000 343,000
---------- ----------
Provision for loan losses 588,000 360,000
---------- ----------
Allowance for loan losses $7,152,000 $6,743,000
========== ==========
Recent industry reports indicate outstanding consumer credit
has increased, and consequently, consumer credit delinquencies
are on the rise. Unlike many other financial institutions,
where consumer credit problems have occurred in the credit card
segment, a significant portion of the Company's recent
chargeoffs have occurred in the consumer loan category and in
particular, indirect lending. In the first quarter of 1997, the
Company had gross chargeoffs in the consumer loan category of
$493,000 and recoveries of $53,000. Management expects consumer
net chargeoffs to stabilize in the second quarter due to
improved underwriting standards and quality of the consumer loan
portfolio, as well as recent changes in the Company's collection
process of personal loans.
Net chargeoffs in both the real estate and commercial loan
categories were lower than expected and demonstrate the quality
of these segments of the loan portfolio. Management will
continue to monitor the entire loan portfolio to determine the
adequacy of the allowance.
Nonperforming loans (those loans classified as nonaccrual, 90
days or more past due, and other real estate owned) as a
percentage of outstanding loans were 0.44% at March 31, 1997,
compared to 0.39% at year-end 1996 and 0.63% at March 31, 1996.
Nonaccrual loans and those loans 90 days past due totaled
$1,204,000 and $776,000 at the end of the first quarter,
compared to $999,000 and $621,000, respectively, at December 31,
1996. The Company had no balance in other real estate owned at
March 31, 1997, down from year-end's total of $28,000.
Management believes the current nonperforming loan ratio is
acceptable and reflects the overall quality of the Company's
loan portfolio.
At March 31, 1997, the Company had an insignificant amount of
loans that were considered impaired under Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114"), as amended by SFAS No.
118. Management will continue to monitor the status of impaired
loans, as well as performing loans, in order to determine the
appropriate level of the allowance for loan losses. Management
believes the allowance for loan losses of 1.59% of total loans
at March 31, 1997, to be adequate to absorb inherent losses in
the portfolio.
Funding Sources
- ---------------
The Company considers deposits, short-term borrowings, and
long-term borrowings when evaluating funding sources.
Traditional deposits continue to be the most significant source
of funds for the Company, reaching $542,684,000 at March 31,
1997, a quarterly increase of nearly $38 million (or 7.5%).
Deposit growth in 1997 occurred primarily through the Russell
Federal Acquisition and the Baltimore Banking Center
Acquisition. At March 31, 1997, the Company's total deposits
were impacted by the deposits assumed in the Russell Federal
Acquisition, which totaled $21.1 million (approximately $5.0
million in savings deposits and $16.1 million in balances of
certificates of deposit).
The Baltimore Banking Center Acquisition contributed $11.7
million to deposit growth at March 31, 1997. The majority of
the deposits are interest-bearing certificates of deposits
("CD's") and Individual Retirement Accounts ("IRA's").
Non-interest bearing transaction account balances assumed in the
Baltimore Banking Center Acquisition totaled approximately $1.3
million at March 31, 1997. On the date the definitive agreement
was signed, the Baltimore Banking Center had approximately $17
million in deposits. On the date of consummation, deposits
totaled approximately $12.5 million. Management has indications
that the majority of the runoff that occurred prior to the date
of consummation was a result of customers transferring balances
to other financial institutions more conveniently located near
their home or work. The premium paid for the deposits included in
the Baltimore Banking Center Acquisition was based on the
average total deposits of the 30 days prior to consummation.
In addition to funds acquired in the Russell Federal
Acquisition and the Baltimore Banking Center Acquisition, the
Company also experienced internal deposit growth in
interest-bearing transaction accounts and savings accounts.
Balances in non-interst bearing deposit accounts dropped
slightly as many customers shifted deposits into
interest-bearing products. The Company promoted several
"relationship accounts" during the first quarter that provided
incentives for new and existing customers to open deposit
accounts (both non-interest bearing and interest-bearing) if
they had deposits in other products such as CD's or IRA's. The
program was successful and as a result, management intends to
promote other products in a similar manner. Management feels
the deposit base remains the most significant funding source for
the Company and will continue to concentrate on deposit growth
and maintaining adequate net interest margin to meet the
Company's strategic goals.
Short-term borrowings remained relatively unchanged for the
three months ended March 31, 1997. Total short-term borrowings
were $17,959,000, a decrease of $1,563,000 for the first
quarter. The funding sources acquired in the Baltimore Banking
Acquisition provided adequate funding sources to reduce the
amount of short-term borrowings previously held. The Company
will continue to access short-term FHLB borrowings as necessary.
In addition to traditional deposits, the Company continues to
maintain long-term borrowings from the FHLB. This allows the
Company to obtain reliable funds at fixed and indexed rates for
longer periods of time than other traditional deposit products,
creating the opportunity to match longer term fixed rate
mortgages and other extended-maturity asset commitments against
a similar funding source. Total long-term FHLB advances were
$28,363,000 at March 31, 1997, a net decrease of $837,000 since
year-end 1996 as a result of scheduled principal paydowns.
Management plans to maintain access to long-term FHLB borrowings
as an appropriate funding source.
In order to finance the purchase of the Russell Federal
Acquisition, the Company obtained a $3 million capital note from
an unaffiliated financial institution. The remaining funds for
the Russell Federal Acquisition were generated from internal
sources.
Capital/Stockholders' Equity
- ----------------------------
The Company's capital continues to provide a strong base for
profitable growth. Total stockholders' equity was $56,459,000
at March 31, 1997, compared to $56,193,000 at year-end 1996, an
increase of $266,000 (or 0.5%).
Since the Company's investment portfolio is classified as
available-for-sale, both the investment and equity sections of
the Company's balance sheet are more sensitive to the changing
market values of investments. As a result of the increase in
the Federal Reserve discount rate, equity growth was tempered in
the first quarter of 1997 by the adjustment for the net
unrealized holding gain on available-for-sale securities, net of
deferred income taxes, which decreased $1,222,000 to a net gain
of $206,000 at March 31, 1997.
In the first quarter of 1997, the Company earned $2,002,000 and
declared dividends of $620,000, a dividend payout ratio of
30.97% of net income, compared to first quarter 1996's ratio of
28.18%. Management feels this is an acceptable payout ratio for
the Company and anticipates similar payout ratios in future
periods.
The Company has also complied with the standards of capital
adequacy mandated by the banking industry. Bank regulators have
established "risk-based" capital requirements designed to
measure capital adequacy. Risk-based capital ratios reflect the
relative risks of various assets banks hold in their portfolios.
A weight category of either 0% (lowest risk assets), 20%, 50%,
or 100% (highest risk assets) is assigned to each asset on the
balance sheet. The Company's risk-based capital ratio of 12.45%
at March 31, 1997 is well above the minimum standard of 8%. The
Company's Tier 1 capital ratio of 11.20% also exceeded the
regulatory minimum of 4%. The Leverage ratio at March 31, 1997
was 7.53% and also above the minimum standard of 3%. These
ratios provide quantitative data demonstrating the strength and
future opportunities for use of the Company's capital base.
Management continues to evaluate risk-based capital ratios and
the capital position of the Company as part of its strategic
decision process.
On December 12, 1996, the Company's Board of Directors
authorized the purchase of 10,000 treasury shares at market
prices for use in conjunction with employee benefit plans.
During the first quarter, the Company purchased 1,150 treasury
shares and at March 31, 1997, had 607 shares remaining in
treasury for use in its employee benefit plans. At May 1, 1997,
6,850 shares were available to be purchased as treasury shares
under the Board's December 12, 1996 authorization.
Liquidity
- ---------
Liquidity measures an organization's ability to meet cash
obligations as they come due. During the quarter ended March
31, 1997, the Company generated cash from operating and
investing activities of $3,280,000 and investing activities of
$1,641,000. The Company also generated cash flows of $6,091,000
from financing activities. The major cash inflow was the net
cash received in the Baltimore Banking Center Acquisition. The
net cash received from the Acquisitions during the first quarter
of 1997 was $4,679,000. Major outlays of cash in the first
quarter included $5,245,000 in loans. The Consolidated
Statements of Cash Flows presented on page 5 of the Company's
Consolidated Financial Statements provides analysis of cash flow
activity.
Additionally, management considers that portion of the loan
portfolio that matures within one year and the maturities within
one year in the investment portfolio as part of the Company's
liquid assets. The Company's liquidity is monitored by the
ALCO, which establishes and monitors ranges of acceptable
liquidity. Management feels the Company's current liquidity
position is acceptable.
Interest Rate Sensitivity
- -------------------------
At March 31, 1997, the Company's interest rate sensitivity
position, based on static gap analysis, was liability sensitive
in the short-term and asset sensitive for periods longer than
one year. In general, the Company is in a net asset sensitive
position and in theory, this means if interest rates increase,
the Company's net interest income will increase over time.
Management uses simulation modeling and forecasting to determine
the impact of a changing interest rate environment. These tools
provide dynamic information concerning the Company's balance
sheet structure in different rate environments. Management
believes the Company's current mix of assets and liabilities
provides a reasonable level of insulation to significant
fluctuations in net interest income and the resulting volatility
of the Company's earnings base.
In the future, management intends to analyze interest rate risk
utilizing a complete risk management model. Currently the ALCO
reviews interest rate risk parameters using in-house technology,
which provides simulation modeling and assists the ALCO in terms
of balance sheet structure and interest rate risk management.
Management considers various hedging products as a method of
minimizing the interest rate risk of the Company's balance
sheet. The Company's management reviews interest rate risk in
relation to its effect on net interest income, net interest
margin, and the volatility of the earnings base of the Company.
Effects of Inflation on Financial Statements
- --------------------------------------------
Substantially all of the Company's assets relate to banking and
are monetary in nature. Therefore they are not impacted by
inflation to the same degree as companies in capital intensive
industries in a replacement cost environment. During a period
of rising prices, a net monetary asset position results in loss
in purchasing power and conversely a net monetary liability
position results in an increase in purchasing power. In the
banking industry, typically monetary assets exceed monetary
liabilities. Therefore as prices have recently increased,
financial institutions experienced a decline in the purchasing
power of their net assets.
Future Outlook
- --------------
First quarter results represent management's commitment to
improved financial performance through a combination of enhanced
core competencies in combination with external acquisitions.
The consistent earnings record should enable the Company to
achieve established goals and enhance investor return.
Management feels the current combination of people and
technology has positioned the Company to meet future customer
service challenges. Investments in technology provide the
opportunity to compete at higher levels than other financial
institutions of similar size.
The Acquisitions in 1996 and 1997 have provided increased
funding sources as well as new markets for the Company. As
expected, the transition of combining the new offices purchased
in the Baltimore Banking Center Acquisition went smoothly and
customers in these markets responded favorably to the change.
The Company assumed approximately $12 million in deposits.
Management looks forward to continuing the development of the
Baltimore office as it complements the existing Licking County
loan production office, establishing a deposit source for many
of the Company's customers in central Ohio. Management is
confident the performance of the new offices is an enhancement
to the performance of the Company.
The Russell Federal Acquisition during the first quarter
provides the Company with its first thrift subsidiary and an
exciting entry into the Kentucky market. Russell Federal has
retained nearly all of its deposits and has exceeded early
management expectations. Russell Federal has initiated
strategic steps to leverage its substantial capital base (as a
recently converted mutual savings bank) and increase earnings
potential. The tri-state markets of southern Ohio, northeastern
Kentucky, and western West Virginia offer many growth
opportunities.
As discussed in detail in Part II of this Form 10-Q, Item 5, on
April 25, 1997, the Company announced the signing of a
non-binding letter of intent with Gateway Bancorp, Inc.
("Gateway"), a Kentucky corporation headquartered in
Catlettsburg, Kentucky, providing for the acquisition of
Gateway. On May 2, 1997, the Company received approval from the
Office of Thrift Supervision permitting the execution of a
definitive agreement between the two companies. Terms of the
acquisition will be more fully detailed in the definitive
agreement being negotiated. The aggregate purchase price will
approximate $20.2 million, or $18.75 per share. The acquisition
is subject to approval of Gateway shareholders, the signing of a
definitive agreement by and between the Company and Gateway, and
appropriate Federal regulators. This purchase would represent
the second acquisition of a thrift subsidiary for the Company,
and would expand the Company's presence in northeastern
Kentucky. As of March 31, 1997, Gateway had approximately $66
million in total assets.
Management continues to view a combination of external growth
and internal development as strategic goals in enhancing
shareholder return. First quarter results show that the
Company's earning assets were positioned to provide strong net
interest income, and the interest rate environment will play an
important role in the future earnings of the Company.
Management is pleased with the improvement in net interest
margin in the first quarter of 1997 but expects pressures on net
interest income and net interest margin to intensify in the
future. Management is considering implementation of several
pricing strategies to generate new deposits and effectively
retain the new deposits assumed through the Acquisitions. These
special CD's will be designed to price the Company's products at
competitive rates in the markets served by the Company.
Management continues to use simulation data in its analysis of
the earnings potential of the Company and how it relates to
changes in interest rates. Simulation data indicates the
Company is asset sensitive and therefore net interest income and
net interest margin should increase in the near future.
Management believes the balance sheet is well-insulated from
adverse interest rate movements due to the mix in earning assets
and interest-bearing liabilities.
The Company's balance sheet growth continues to be a focus of
management. In addition to the Acquisitions, internal loan
growth in the first quarter reflects the Company's ability to
serve both the Company's markets and selected customers outside
those traditional geographic areas. Management also expects
commercial loan activity to provide additional income sources
for the Company for the remainder of 1997. Management is
comfortable with the current loan to deposit ratio of 82.71% and
expects the loan to deposit ratio to increase slightly in the
future due to continued loan demand.
The recent increase in loan balances has also spurred increases
in the provision for loan losses and credit delinquencies.
Consumer loan chargeoffs in the first quarter of 1997 continued
to comprise the majority of the Company's recent chargeoffs, but
management believes consumer chargeoffs have stabilized.
Management feels the current allowance for loan losses is
adequate to absorb losses inherent in the loan portfolio at
March 31, 1997. Future provision for loan losses are affected
by the delinquencies in all loan categories, and as a result,
may increase in future quarters as anticipated loan growth
occurs.
Enhanced non-interest income and controlled non-interest
expense are critical to the success of the Company and is
primarily measured in the financial services industry by the
efficiency ratio, calculated according to the following:
non-interest expense (less goodwill amortization) as a
percentage of fully tax equivalent net interest income and
non-interest income (less any gains or non-recurring income).
The efficiency ratio is one of the key performance indicators
for the Company and totaled 52.94% for the first three months of
1997, compared to 54.41% for the same period last year.
Management analyzes salaries and benefits expense on a regular
basis to identify greater possible efficiencies and concentrates
on how these expenses impact the efficiency ratio, as well as
profitability and return on equity. Management is pleased with
the Company's recent improvement in its operating efficiency
ratio and will continue to strive to increase future
efficiencies through income growth and leveraging of technology
and existing delivery resources.
Judging on the recent success of the Company's debit cards, the
Company's recent forays into electronic banking services have
been well-received by many customers. In 1997, the Company
plans to make an investment into a cash management product that
will be offered for both consumer and commercial customers.
Management recognizes the importance of electronic banking to
its customer base and continues to focus efforts designed to
enhance this process and allow customers unlimited banking
products and services at their convenience.
Management will continue to evaluate a wide variety of
alternative methods as means of leveraging capital, enhancing
profitability, and increasing return to shareholders.
Management continues to strive for both traditional and
non-traditional methods to increase the Company's earnings. In
recent quarters, Peoples Bank has entered into an agreement to
fund a low-income housing project in a historic district of
Marietta, Ohio. As a part of the agreement, Peoples Bank agreed
to fund the construction of the project (expected to be
completed in late 1997) and participate as an equity contributor
to the project. In general terms, the Company can anticipate
historic tax credits in 1997 once the structure is certified as
a historically rehabilitated building. In addition, low-income
housing tax credits can be expected over future periods. This
project may significantly lower the Company's effective tax rate
in 1997. Management will continue to evaluate tax credit
opportunities as a source of enhanced profitability.
A strong customer focus has been identified as a key to the
continued future growth, and the Company continues to build a
"Sales and Service" delivery process in 1997, representing a
renewed commitment to emphasizing our existing strength in
serving our customers. The new emphasis is designed to provide
the Company's staff of associates with the ability to serve the
changing needs of our customers over their lifetimes. In order
to reward employees for enhanced performance of the Company and
increased shareholder return, management has adopted a
performance-based compensation program designed to focus all
associates on the earnings potential of the Company and
increasing shareholder wealth based on several growth and
efficiency measurements. In theory, the program creates an
environment where each employee has a personal stake in the
overall performance of the Company. Management is excited with
the unlimited potential of the new incentive program and the
corresponding benefits to the shareholders and employees.
Management concentrates on return on equity and earnings per
share objectives, plus other methods, to measure and direct the
performance of the Company. While past results are not an
indication of future earnings, management feels the Company is
positioned to maintain current levels of performance through the
remainder of 1997.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
- ---------------------------------------------------------------
The statements in this Form 10-Q which are not historical fact
are forward looking statements that involve risks and
uncertainties, including, but not limited to, the interest rate
environment, the effect of federal and state banking and tax
regulations, the effect of economic conditions, the impact of
competitive products and pricing, and other risks detailed in
the Company's Securities and Exchange Commission filings.
PEOPLES BANCORP INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
----------------------------------------------------------------------
For the Three Months Ended March 31,
1997 1996
Average Yield/ Average Yield/
Balance Rate Balance Rate
ASSETS
- ------
Securities:
Taxable $125,898 6.82% $120,522 6.71%
Tax-exempt 22,499 8.35% 23,363 8.34%
-------- ------ -------- ------
Total 148,397 7.06% 143,885 6.98%
Loans:
Commercial 134,726 9.52% 119,200 9.68%
Real estate 201,395 8.40% 160,475 8.66%
Consumer (net) 109,199 10.43% 101,759 10.11%
-------- ------ -------- ------
Total 445,320 9.23% 381,434 9.36%
Less: Allowance for loan losses (7,119) (6,750)
-------- ------ -------- ------
Net loans 438,201 9.39% 374,684 9.53%
Interest-bearing deposits 2,081 4.56% 966 4.96%
Federal funds sold 8,127 5.35% 5,947 5.40%
-------- ------ -------- ------
Total earning assets 596,806 8.73% 525,482 8.78%
Other assets 47,868 36,501
-------- --------
Total assets $644,674 $561,983
======== ========
LIABILITIES AND EQUITY
- ----------------------
Interest-bearing deposits:
Savings $ 83,022 3.05% $ 69,856 3.05%
Interest-bearing demand deposits 119,609 3.43% 96,804 3.43%
Time 266,720 5.62% 212,495 5.66%
-------- ------ -------- ------
Total 469,351 4.58% 379,155 4.61%
Borrowed funds:
Short-term 19,572 5.31% 51,097 5.31%
Long-term 31,421 6.05% 22,880 6.05%
-------- ------ -------- ------
Total 50,993 5.53% 73,977 5.53%
Total interest bearing
liabilities 520,344 4.74% 453,132 4.76%
Non-interest bearing deposits 59,343 48,873
Other liabilities 8,270 7,872
-------- --------
Total liabilities 587,957 509,877
Stockholders' equity 56,717 52,106
-------- --------
Total liabilities and equity $644,674 $561,983
======== ========
Interest income to earning assets 8.73% 8.78%
Interest expense to earning assets 4.01% 4.11%
------ ------
Net interest margin 4.72% 4.67%
====== ======
Interest income and yields presented on a fully tax-equivalent
basis using a 34% tax rate.
PART II
-------
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities.
None.
ITEM 3: Defaults upon Senior Securities.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
On April 10, 1997, the Peoples Bancorp Inc. Annual Meeting of
Shareholders was held in The Peoples Banking and Trust Company
Conference Room in Marietta, Ohio. The meeting was
well-attended and over 84% of the outstanding common shares were
represented by proxy. No votes were placed in person. All
items of business on the agenda were approved by the
shareholders and the results are as follows:
Three Directors of the Company were re-elected to serve terms
of three years each (expiring in 2000): George W. Broughton,
Wilford D. Dimit, and Barton S. Holl. In addition, James B.
Stowe retired as a Director of the Company after serving for 17
years and as a Director of Peoples Bank for over 26 years.
Directors of the Company who continue to serve after the 1997
Annual Meeting include Dennis D. Blauser, Robert E. Evans, Rex
E. Maiden, Norman J. Murray, Paul T. Theisen, Thomas C. Vadakin,
and Joseph H. Wesel (Chairman of the Board).
SHAREHOLDER VOTING RESULTS
--------------------------
BROKER
NON-
ISSUE FOR WITHHELD AGAINST ABSTAIN VOTES
- -------------------- --------- -------- ------- ------- ------
George W. Broughton 2,891,367 14,055 287 0 N/A
Wilford D. Dimit 2,902,912 2,684 113 0 N/A
Barton S. Holl 2,903,025 2,684 0 0 N/A
ITEM 5: Other Information.
On April 25, 1997, Peoples Bancorp Inc. (the "Company") and
Gateway Bancorp, Inc. ("Gateway"), a Kentucky corporation
headquartered in Catlettsburg, Kentucky, signed a non-binding
letter of intent ("Letter of Intent") providing for the
acquisition of Gateway by the Company. Gateway is a savings and
loan holding company with one thrift subsidiary, Catlettsburg
Federal Savings Bank (Catlettsburg Federal"), a federally
chartered stock savings bank with its main office in
Catlettsburg, Kentucky. On May 2, 1997, pursuant to 12 CFR
563b.3(i)(3), the Company received approval from the Office of
Thrift Supervision to enter into a definitive agreement with
Gateway and thereby acquire Catlettsburg Federal. Terms of the
acquisition will be more fully detailed in the definitive
agreement being negotiated.
In the proposed transaction, the Company will form an Ohio
corporation, a wholly-owned subsidiary of the Company, to
acquire 100% of the issued and outstanding common stock of
Gateway, and Gateway will be merged with and into the
subsidiary. The name of the resulting corporation, which will
be an Ohio Corporation, will be Gateway Bancorp, Inc.
The Letter of Intent anticipates that consideration will
consist of approximately 32% cash and 68% in shares of Company
stock, resulting in an aggregate purchase price of $20,170,388,
or $18.75 per share. All outstanding options to purchase
Gateway common stock will be extinguished at the closing of the
proposed transaction, with the consideration paid to the
optionee (based on the difference between the Purchase Price per
share of Gateway common stock and the applicable exercise price
thereof) be paid by Peoples to each optionee 32% in cash and 68%
in Peoples common stock. The aggregate Purchase Price for
payment of the consideration of the Gateway stock options is
approximately $383,250.
The acquisition is subject to approval of Gateway shareholders;
the signing of a definitive agreement by and between the Company
and Gateway; and appropriate Federal regulators.
As of March 31, 1997, Gateway had approximately $66 million in
assets.
ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:
EXHIBIT INDEX
-------------
Exhibit Number Description Exhibit Location
- -------------- ---------------------------------- ----------------
11 Computation of Earnings Per Share. Page 24.
27 Financial Data Schedule. EDGAR electronic
filing only.
b) Reports on Form 8-K: None.
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 thereunder duly authorized.
PEOPLES BANCORP INC.
Date: May 14, 1997 By: /s/ ROBERT E. EVANS
Robert E. Evans
President and Chief Executive Officer
Date: May 14, 1997 By: /s/ JOHN W. CONLON
John W. Conlon
Chief Financial Officer
EXHIBIT INDEX
-------------
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------
FOR PERIOD ENDED MARCH 31, 1997
-------------------------------
Exhibit Number Description Exhibit Location
- -------------- ---------------------------------- ----------------
11 Computation of Earnings Per Share. Page 24.
27 Financial Data Schedule. EDGAR electronic
filing only.
EXHIBIT 11
----------
PEOPLES BANCORP INC. AND SUBSIDIARIES
-------------------------------------
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
For the Three Months Ended
March 31,
1997 1996*
PRIMARY EARNINGS PER SHARE
- --------------------------
EARNINGS:
Net income $2,002,000 $1,881,000
AVERAGE SHARES OUTSTANDING:
Weighted average Common Shares outstanding 3,445,870 3,428,657
Net effect of the assumed exercise of stock
options based on the treasury stock method 76,780 32,398
---------- ----------
Total 3,522,650 3,461,055
PRIMARY EARNINGS PER SHARE $0.57 $0.54
========== ==========
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------
EARNINGS:
Net income $2,002,000 $1,881,000
AVERAGE SHARES OUTSTANDING:
Weighted average Common Shares outstanding 3,445,870 3,428,657
Net effect of the assumed exercise of stock
options based on the treasury stock method 88,118 35,346
---------- ----------
Total 3,533,988 3,464,003
FULLY DILUTED EARNINGS PER SHARE $0.57 $0.54
========== ==========
* Adjusted for 10% stock dividend issued August 1, 1996, to
shareholders of record as of July 15, 1996.
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This schedule contains summary financial information extracted from the
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