FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended September 30, 1998
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: (740) 373-3155
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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 November 1, 1998: 5,731,800.
PART I - FINANCIAL INFORMATION
ITEM 1
The following Condensed Consolidated Balance Sheets, Statements
of Income, Statements of Shareholders' Equity, and 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 nine
months ended September 30, 1998, are not necessarily indicative of the
results which may be expected for the year ending December 31, 1998. Complete
audited consolidated financial statements with footnotes thereto are
included in the Company's Annual Report to Shareholders incorporated by
reference into its filing on Form 10-K for the year ended December 31, 1997.
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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(Dollars in thousands)
ASSETS
September 30 December 31
1998 1997
Cash and cash equivalents:
Cash and due from banks $ 29,502 $ 21,473
Interest-bearing deposits 2,025 7,008
in other banks
Federal funds sold 26,950 10,350
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Total cash and cash equivalents 58,477 38,831
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Available-for-sale investment
securities, at estimated fair value
(amortized cost of $231,062 and
$170,702 at September 30, 1998 and
December 31, 1997, respectively) 237,355 174,291
Loans, net of unearned interest 542,447 521,570
Allowance for loan losses (9,357) (8,356)
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Net loans 533,090 513,214
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Bank premises and equipment, net 15,051 11,971
Other assets 31,774 19,851
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Total assets $ 875,747 $ 758,158
============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
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Deposits:
Non-interest bearing $ 76,820 $ 64,229
Interest bearing 629,716 546,878
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Total deposits 706,536 611,107
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Short-term borrowings:
Federal funds purchased and
securities sold under repurchase
agreements 34,107 30,811
Federal Home Loan Bank term advances 700 1,750
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Total short-term borrowings 34,807 32,561
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Long-term borrowings 41,191 28,577
Accrued expenses and other liabilities 8,373 7,095
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Total liabilities 790,907 679,340
============================================================================
Stockholders' Equity
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Common stock, no par value, 12,000,000
shares authorized - 5,785,630 shares
issued at September 30, 1998 and
3,831,206 issued at December 31,
1997, including shares in treasury 50,688 50,001
Accumulated comprehensive income, net
of deferred income taxes 4,090 2,369
Retained earnings 31,476 26,448
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86,254 78,818
Treasury stock, at cost, 38,303
shares at September 30, 1998 and
no shares at December 31, 1997 (1,414) 0
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Total stockholders' equity 84,840 78,818
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Total liabilities and
stockholders'equity $ 875,747 $ 758,158
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Interest income $ 16,307 $ 13,639 $ 47,406 $ 39,523
Interest expense 7,921 6,443 22,772 18,467
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Net interest income 8,386 7,196 24,634 21,056
Provision for loan losses 546 676 1,788 1,905
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Net interest income after
provision for loan losses 7,840 6,520 22,846 19,151
Other income 1,647 1,528 4,855 4,408
(Loss) gain on securities
transactions (13) 0 418 (31)
Other expenses 6,043 4,851 16,901 14,277
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Income before income taxes 3,431 3,197 11,218 9,251
Income taxes 1,103 1,039 3,714 2,966
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Income before extraordinary
charges 2,328 2,158 7,504 6,285
Extraordinary charge for
early debt extinguishment,
net of tax benefit of $ 125 232 0 232 0
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Net Income $ 2,096 $ 2,158 $ 7,272 $ 6,285
===========================================================================
Basic earnings per share
Income before
extraordinary charges $0.40 $0.42 $1.30 $1.21
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Net income $0.36 $0.42 $1.26 $1.21
===========================================================================
Diluted earnings per share
Income before
extraordinary charges $0.39 $0.40 $1.26 $1.18
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Net income $0.35 $0.40 $1.22 $1.18
===========================================================================
Weighted average shares
outstanding (basic) 5,828,842 5,180,915 5,767,048 5,174,934
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Weighted average shares
outstanding (diluted) 5,990,938 5,361,400 5,951,043 5,327,977
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Cash dividends declared $750 $657 $2,245 $1,898
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Cash dividend per share $0.13 $0.13 $0.39 $0.37
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
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(Dollars in thousands, except share amounts)
Accumulated
Other
Common Stock Retained Treasury Comprehensive
Shares Amount Earnings Stock Income Total
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Balance,
December 31,
1997 3,831,206 $ 50,001 $ 26,448 $ 0 $ 2,369 $ 78,818
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Adjustment for
the effect of
3-for-2 common
stock split 1,915,603
Balance,
December 31,
1997 restated 5,746,809
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Comprehensive income:
Net income 7,272 7,272
Other comprehensive income,
net of tax:
Unrealized gains on available-
for-sale securities, net of
reclassification adjustment 1,721 1,721
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Other comprehensive income 1,721
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Comprehensive income 8,993
Exercise of
common stock
options 28,451 370 195 565
Cash dividends
declared (2,244) (2,244)
Common stock
issued under
dividend
reinvestment
plan 10,370 317 317
Purchase of
treasury stock,
38,303 shares (1,609) (1,609)
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Balance,
September 30,
1998 5,785,630 $ 50,688 $ 31,476 $ (1,414) $ 4,090 $ 84,840
==============================================================================
Comprehensive Income:
Unrealized holding gains on available-for-sale
securities arising during the period, net of income taxes 1,993
Less: reclassification adjust
realized in net income, net of income taxes 272
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Net unrealized gains on available-for-sale securities,
net of tax 1,721
==============================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Nine Months Ended
September 30
1998 1997
Cash flows from operating activities:
Net income $ 7,272 $ 6,285
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary charge for early debt extinguishment 357 0
Provision for loan losses 1,788 1,905
(Gain) loss on sale of investment securities (418) 31
Depreciation, amortization, and accretion 3,964 1,941
Increase in interest receivable (324) (203)
Increase (decrease) in interest payable 507 (228)
Deferred income taxes 644 174
Deferral of loan origination fees and costs 107 (23)
Other, net (4,873) (1,414)
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Net cash provided by operating activities 9,024 8,468
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Cash flows from investing activities:
Purchases of available-for-sale securities (125,557) (16,923)
Proceeds from sales of available-for-sale securities 20,267 5,204
Proceeds from maturities of available-for-sale
securities 45,464 15,005
Net increase in loans (13,449) (41,227)
Expenditures for premises and equipment (2,734) (975)
Proceeds from sales of other real estate owned 94 28
Business acquisitions, net of cash received 100,170 4,679
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Net cash provided by (used in) investing activities 24,255 (34,209)
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Cash flows from financing activities:
Net increase (decrease) in non-interest bearing
deposits 1,170 (5,281)
Net (decrease) increase in interest-bearing
deposits (23,164) 24,431
Net (decrease) increase in short-term borrowings (1,303) 5,057
Proceeds from long-term borrowings 17,972 5,000
Payments on long-term borrowings (5,358) (2,607)
Cash dividends paid (1,906) (1,557)
Purchase of treasury stock (1,609) (327)
Proceeds from issuance of common stock 565 163
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Net cash (used in) provided by financing
activities (13,633) 24,879
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Net increase in cash and cash equivalents 19,646 (862)
Cash and cash equivalents at beginning of period 38,831 28,517
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Cash and cash equivalents at end of period $ 58,477 $ 27,655
==============================================================================
NOTES TO FINANCIAL STATEMENTS
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Basis of Presentation
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The accounting and reporting policies of Peoples Bancorp Inc.
(the "Company") and subsidiaries 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
and manages them accordingly. 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. On April 13, 1998, the Company
declared a 3-for-2 stock split effective April 30, 1998. Accordingly, all
per share data has been restated to reflect the dividend.
1. ACQUISITIONS
The following text includes references to several acquisition
transactions which have impacted the Company's results of operations.
On June 26, 1998, one of the Company's subsidiaries, The Peoples
Banking and Trust Company ("Peoples Bank") completed the purchase of
full-service banking offices located in the communities of Point Pleasant
(two offices), New Martinsville, and Steelton, West Virginia ("West
Virginia Banking Center Acquisition") from an unaffiliated institution. In
the transaction, Peoples Bank assumed approximately $121.0 million of
deposits and purchased $8.3 million in loans.
On December 12, 1997, the Company completed the purchase of Gateway
Bancorp, Inc. and its subsidiary, Catlettsburg Federal Savings Bank
("Catlettsburg Federal"), of Catlettsburg, Kentucky, for approximately
$21.6 million in a combination of cash of $6.2 million and 365,472 shares
(before the 3-for-2 stock split issued in April 1998) of Company stock
("Gateway Bancorp Acquisition" or "Catlettsburg Federal Acquisition").
Catlettsburg Federal had total assets of $64.3 million and deposits of
$43.8 million at December 12, 1997. Management has continued to operate
Catlettsburg Federal as a federal savings bank subsidiary of the Company.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 125") which 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.
On January 1, 1998, the Company adopted the provisions of SFAS
No. 125 for securities lending, repurchase agreements, dollar rolls and
other similar secured transactions which had been delayed until after
December 31, 1997. The adoption of Statement No. 125 as it relates to
securities lending, repurchase agreements, dollar rolls, and other similar
transactions did not have a material effect on the Company's financial
statements.
On January 1, 1998, the Company also adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). SFAS No. 130 requires certain items of comprehensive income which
are reported directly within a separate component of stockholders' equity
be displayed with the same prominence as other financial statements. The
adoption of SFAS No. 130 had no impact on the financial position, results of
operations, stockholders' equity, or cash flows of the Company.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
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.
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
SIGNIFICANT RATIOS:
Income before extraordinary charge to:
Average assets* 1.07% 1.29% 1.22% 1.28%
Average equity* 11.21% 14.33% 12.31% 14.49%
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Net income to:
Average assets* 0.96% 1.29% 1.22% 1.28%
Average equity* 10.09% 14.33% 11.93% 14.49%
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Net interest margin* 4.37% 4.73% 4.50% 4.73%
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Efficiency ratio* 50.21% 51.48% 50.89% 52.02%
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Average shareholders' equity to
average assets 9.54% 8.97% 9.94% 8.85%
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Loans net of unearned interest to
deposits (end of period) 76.78% 87.12% 76.78% 87.12%
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Allowance for loan losses to loans
net of unearned interest
(end of period) 1.72% 1.60% 1.72% 1.60%
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Capital ratios:
Tier I capital ratio 10.58% 11.27% 10.58% 11.27%
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Risk-based capital ratio 11.98% 12.53% 11.98% 12.53%
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Leverage ratio 6.87% 7.80% 6.87% 7.80%
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Cash dividends to:
Income before extraordinary charge 32.23% 30.42% 29.92% 30.19%
Net Income 35.78% 30.42% 30.87% 30.19%
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Book value per share $14.76 $11.84 $14.76 $11.84
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Diluted earnings per share
Income before extraordinary charge $0.39 $0.40 $1.26 $1.18
Net income $0.35 $0.40 $1.22 $1.18
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Cash dividends per share $0.13 $0.13 $0.39 $0.37
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* 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 (less intangible
amortization and non-direct operational expenses) as a percentage of fully
tax equivalent net interest income plus non-interest income. All
nonrecurring items are removed from the calculation of the Company's
efficiency ratio.
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"); Gateway Bancorp, Inc. and its
subsidiaries, Catlettsburg Federal Savings Bank ("Catlettsburg Federal") and
Russell Federal Savings Bank ("Russell Federal"); and 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 Financial Institutions. 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"). Catlettsburg Federal and Russell Federal are members of the Federal
Home Loan Bank, and are subject to the regulation, supervision, and
examination by the Office of Thrift Supervision ("OTS"), and are also subject
to limited regulation by the Board of Governors of the Federal Reserve System.
The discussion and analysis should be read in conjunction with the prior
year-end audited consolidated financial statements and footnotes thereto and
the ratios, statistics, and discussions contained elsewhere in this Form 10-Q.
References will be found in this Form 10-Q to various acquisition
transactions which have impacted the Company's results of operations. On
June 26, 1998, Peoples Bank completed the purchase of full-service banking
offices located in the communities of Point Pleasant (two offices), New
Martinsville, and Steelton, West Virginia ("West Virginia Banking Center
Acquisition") from an unaffiliated institution. In the transaction, Peoples
Bank assumed approximately $121.0 million of deposits and purchased $8.3
million in loans.
On December 12, 1997, the Company completed the purchase of Gateway
Bancorp, Inc. and its subsidiary, Catlettsburg Federal, of Catlettsburg,
Kentucky, for approximately $21.6 million in a combination of cash of $6.2
million and 365,472 shares of Company stock ("Gateway Bancorp Acquisition"
or "Catlettsburg Federal Acquisition"). Management has continued to operate
Catlettsburg Federal as a federal savings bank subsidiary of the Company.
In January, 1998, the Company reincorporated Russell Federal as a subsidiary
of Gateway Bancorp to align the Company's business units in northeast
Kentucky.
RESULTS OF OPERATIONS
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Overview of the Income Statement
- --------------------------------
For the nine months ended September 30, 1998, the Company reported
income before extraordinary charges of $7,504,000, an increase of $1,219,000
(or 19.4%) compared to $6,285,000 for the same period in 1997. For the
quarter ended September 30, 1998, the Company's income before extraordinary
charges totaled $2,328,000, up $170,000 (or 7.9%) from $2,158,000 in the
third quarter of 1997.
The Company incurred an extraordinary pre-tax charge in the third
quarter of 1998 of $357,000 ($232,000 after taxes, or $0.04 per share)
related to prepayment penalties on $15.8 million of the Company's long-term
borrowings. The prepayments of such long-term borrowings, which had a
weighted average maturity of approximately eight years, were made in response
to declining interest rates and will reduce the future cost of the Company's
long-term borrowings.
On a diluted basis, earnings before extraordinary charges for the
quarter and nine months ended September 30, 1998, were $0.39 and $1.26,
compared to $0.40 and $1.18, respectively, for the same period a year earlier.
The Company's core earnings increased due to stronger earnings in
existing business units and additional revenue streams associated with recent
acquisitions. Due to earning asset growth, third quarter net interest income
totaled $8,386,000, up $1,190,000 (or 16.5%) compared to the same period
last year. For the nine months ended September 30, 1998, net interest income
reached $24,634,000, an increase of $3,578,000 (or 17.0%) compared to the
same period a year earlier.
For the three months ended September 30, 1998, provision for loan
losses totaled $546,000, a decrease of $130,000 (or 19.2%) compared to last
year's third quarter. In the first nine months of 1998, provision for loan
losses totaled $1,788,000 compared to $1,905,000 in 1997's first nine months,
a decrease of $117,000 (or 6.1%). Reduction in loan loss provision reflects
the improving quality of the Company's loan portfolio and recent stabilization
of loan delinquencies.
Third quarter non-interest income increased $119,000 (or 7.8%) to
$1,647,000, primarily due to incremental income generated from service charges
from the deposits acquired in the West Virginia Banking Center acquisition.
For the nine months ended September 30, 1998, non-interest income totaled
$4,855,000, up $447,000 (or 10.1%) compared to the same period in 1997.
Non-interest expense for the third quarter of 1998 totaled $6,043,000,
up $1,192,000 (or 24.6%) from last year's third quarter. For the first nine
months of 1998, non-interest expense reached $16,901,000, an increase of
$2,624,000 (or 18.4%) compared to the same period last year. Included in
non-interest expense in the third quarter of 1998 was $169,000 ($110,000 after
taxes, or $0.02 per diluted share) of nonrecurring expense related primarily
to the conversion of the West Virginia Banking Center offices acquired and
other market expansion costs.
Growth in operating expense in 1998 is due primarily to the Company's
recent acquisitions and related expenses, such as salaries and benefits
expense and amortization of intangibles. In the third quarter of 1998, the
Company's efficiency ratio (which excludes extraordinary charges and
nonrecurring items) improved to 50.21% compared to 51.47% for the same period
last year. For the nine months ended September 30, 1998, the efficiency ratio
was 50.89% compared to 52.02% for the same period in 1997.
Management believes a comparative approach to financial reporting
should include the discussion of "cash earnings", which removes the after-tax
impact of the amortization of intangibles on the Company's results of
operations and facilitates comparison of the Company with competitors making
acquisitions using pooling of interests accounting. The Company has and
will continue to supplement the discussion of its results of operations with
an analysis of cash earnings.
In the third quarter of 1998, intangible amortization expense totaled
$682,000 ($474,000 after taxes) compared to $273,000 ($177,000 after taxes)
for the same period a year earlier. After adjusting for the after-tax effect
of the amortization of intangibles, diluted cash earnings per share before
extraordinary charges for the quarter ended September 30, 1998 was $0.47, up
$0.03 (or 6.8%) from $0.44 in diluted cash earnings per share in the third
quarter of 1997.
For the nine months ended September 30, 1998, intangible amortization
expense totaled $1,424,000 ($1,019,000 after taxes) compared to $754,000
($490,000 after taxes) for the same period a year earlier. After adjusting
for the after-tax effect of the amortization of intangibles, diluted cash
earnings per share before extraordinary charges for the nine months ended
September 30, 1998 was $1.43, up $0.16 (or 12.6%) from $1.27 for the same
period a year earlier.
Management uses cash earnings as one of several ways to evaluate the
impact of acquisitions to profitability and the Company's return on its
investment. Increased amortization of intangibles for the three months and
nine months ended September 30, 1998, also impacted tangible return on assets
and equity. Recent acquisitions have increased and modestly will increase
the Company's amortization expense related to goodwill and other intangibles
and as a result, the purchase method of accounting has affected earnings per
share and other ratios.
Interest Income and Expense
- ---------------------------
Net interest income is the amount by which interest income on earning
assets exceeds interest paid on interest-bearing liabilities. Interest
earning assets include loans and investment securities. Interest-bearing
liabilities include interest-bearing deposits and borrowed funds. Net
interest income remains the primary source of revenue for the Company.
Changes in market interest rates, as well as changes in the mix and volume
of interest-earning assets and interest-bearing liabilities, impact net
interest income.
When compared to prior year, increased operating earnings for the
quarter and nine months ended September 30, 1998, can be primarily attributed
to growth of the Company's net interest income. The Company's interest
earning assets and interest-bearing liabilities were positioned to generate
increased net interest income streams in the third quarter. Also, the West
Virginia Banking Center Acquisition provided additional funding sources to
the Company, generating increased incremental net interest income through
growth in earning assets.
As a result, net interest income continued to grow in the third
quarter of 1998, reaching $8,386,000 compared to $7,196,000 in last year's
third quarter, an increase of $1,190,000 (or 16.5%). In the third quarter
of 1998, total interest income reached $16,307,000 while interest expense
totaled $7,921,00. Included in third quarter 1998 interest income is
$539,000 of tax-exempt income from investments issued by states and political
subdivisions. Since these revenues are not taxed, it is more meaningful to
analyze net interest income on a fully-tax equivalent ("FTE") basis.
Net interest margin is calculated by dividing 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.
For the three months ended September 30, 1998, net interest margin (on an FTE
basis) totaled 4.37% compared to 4.74% in the third quarter of 1997. On a
year-to-date basis through September 30, net interest margin in 1998 totaled
4.50% compared to 4.73% for the same period last year.
Several factors have contributed to net interest margin compression.
The deposits acquired in the West Virginia Banking Center Acquisition
significantly increased the Company's earning asset base in lower-yielding
assets such as federal funds sold. Management continues to analyze methods
to redeploy the acquired funds in an earning asset mix which will result in
a net interest margin similar to the Company's ratios before the West
Virginia Banking Center Acquisition. Internal loan growth has tempered in
recent periods, resulting in more earning assets being invested in other,
comparatively lower yielding, assets such as investment securities.
Net interest margin also decreased due to competitive pressures for
loans and deposits in the Company's markets. In addition, the recent thrift
acquisitions modestly changed the Company's earning asset mix and lowered
margins due to the fact the Company's thrifts have primarily invested in real
estate loans, which typically do not generate return on investment like other
loan products such as commercial and personal loans.
Recently the Company initiated actions designed to enhance net
interest income, margin and other performance ratios. The Company prepaid
$17.3 million of its Federal Home Loan Bank ("FHLB") borrowings, of which
$15.8 million were subject to prepayment penalties in the aggregate of
$357,000. The average rate on these advances was 6.09% with a weighted
average maturity of approximately 8 years. The Company replaced such
borrowings with a $17 million FHLB advance with a one year fixed rate of
4.28%. At the discretion of the FHLB, the new advance could reprice after
one year, although the Company retains the right to pay off the advance, if
it is repriced, without penalty after the initial year. The product would
reprice based on 3 month LIBOR ("London Interbank Offer Rate"). Management
estimates that, absent other changes, the prepayment penalties will be
recovered in approximately two years.
The growth of the Company's earning asset base through recent
acquisitions will continue to impact net interest margin in the fourth quarter
of 1998 and into early 1999. Management continues its focus on returning
the Company's balance sheet mix to a more appropriate balance of profitability
and risk. Management expects net interest margin to stabilize at current
levels in the fourth quarter of 1998. Recent declines in interest rates will
decrease the yields on the Company's variable rate assets such as federal
funds sold, as well as the rates on deposit products offered by the Company.
The aforementioned prepayment of certain long-term Federal Home Loan Bank
borrowings should partially offset the recent decreases in discount rates
being paid by the Federal Reserve.
Average loans grew $60.4 million (or 12.8%) from third quarter 1997
to third quarter 1998 and comprise the largest earning asset component on
the Company's balance sheet. Due to recent acquisitions and resulting
increases in funding sources, the Company's average balances of investment
securities increased $76.9 million from $147.1 million in the third quarter
of 1997 to $224.0 million in the third quarter of 1998.
Yield on earning assets totaled 8.33% in the third quarter of 1998,
compared to 8.85% for the same period a year earlier. Loan yields decreased
to 9.20% in third quarter 1998 compared to 9.34% in third quarter 1997. The
Company's investment portfolio yield dropped 52 basis points to 6.48% in the
third quarter of 1998, reflecting the reinvestment of higher-yielding,
maturing investments with lower-yielding instruments.
Compared to the third quarter of 1997, cost of interest-bearing
liabilities decreased 22 basis points to 4.47% in the third quarter of 1998.
Deposit costs decreased due to a combination of lowering time deposit rates,
the acquisition of lower interest cost funding sources from the West Virginia
Banking Center Acquisition, and the implementation of regional pricing in
selected markets served by the Company. Long-term borrowing costs have
decreased since the third quarter of 1997 as the yield curve flattened in
1998.
Management will continue to monitor the effects of net interest
margin on the performance of the Company. Please refer to the "Consolidated
Average Balance Sheet and Analysis of Net Interest Income" table included on
page 24 for a complete quantitative evaluation of the Company's net interest
margin.
Provision for Loan Losses
- -------------------------
Continued improvement in loan delinquencies and net loan losses
enabled the Company to decrease its loan loss provision to $546,000 for the
three months ended September 30, 1998, compared to $676,000 in the same
period a year earlier. On a year-to-date basis through September 30, 1998,
the Company's loan loss provision totaled $1,788,000 compared to $1,905,000
last year, a decrease of $117,000 (or 6.1%).
Management expects modest internal loan growth for the remainder of
1998 and into early 1999. Due to this anticipated slowdown in loan balances
compared 1997's strong growth, combined with stabilized levels of
delinquencies and net loan losses, management believes that 1998's fourth
quarter provision expense will remain approximately level with the provision
recorded in the third quarter of 1998. The duration of current provision
levels will be dependent on loan delinquencies, portfolio risk, overall loan
growth, and general economic conditions in the Company's markets.
Non-Interest Income
- -------------------
The Company's non-interest income is generated from four primary
sources: fiduciary activities, cost-recovery fees related to deposit
accounts, electronic banking, and the Company's insurance agency subsidiaries.
For the quarter and nine months ended September 30, 1998, all of the Company's
major sources of non-interest income increased compared to the same period a
year earlier, as a result of management's commitment to continual improvement
of the Company's operating performance from fee based revenue sources.
Third quarter non-interest income reached $1,647,000 in 1998, an
increase of $119,000 (or 7.8%) compared to the same period in 1997. For the
nine months ended September 30, 1998, non-interest income totaled $4,855,000,
up $447,000 (or 10.1%) compared to last year.
The West Virginia Banking Center and its associated $121 million in
deposits provided the base for increased fee income in the third quarter of
1998. Deposit account service charge income totaled $680,000 in the third
quarter of 1998, an increase of $123,000 (or 22.1%) compared the same period
a year earlier. Approximately $100,000 (or 81.3%) of the increase can be
directly attributed to the deposits acquired in the West Virginia Banking
Center Acquisition. On a year-to-date basis for the nine months ended
September 30, 1998, deposit account service charge income increased $219,000
(or 13.6%) compared to 1997. The Company's fee income generated from deposits
is based on cost recoveries associated with relevant services provided.
The Investment and Trust Division of Peoples Bank continues its
earnings momentum in 1998. The fee structure for fiduciary activities is
based primarily on the fair value of assets being managed, which totaled
over $525 million at September 30, 1998. In the third quarter of 1998, income
generated from fiduciary activities totaled $550,000 compared to $560,000 in
revenues in the third quarter of 1997. The modest decrease can be attributed
primarily to a significant one-time fee earned in the third quarter of 1997
as well as recent market declines in fair values of assets being managed. On
a year-to-date basis through September 30, fiduciary activities revenue
increased $141,000 (or 8.9%) to $1,733,000 in 1998 compared to the same
period a year earlier. The Investment and Trust Division continues to be
a leader in fiduciary services in the Company's market area.
Electronic banking, including ATM cards, direct deposit services, and
debit card services, is one of the many product lines offered by the Company.
The recovery of costs through fees associated with these products and services
is beginning to significantly impact the Company's non-interest income. For
the quarter ended September 30, 1998, total fees related to electronic banking
reached $140,000, up $16,000 (or 12.9%) compared to the same period last year.
For the nine months ended September 30, 1998, electronic banking revenues
totaled $431,000, an increase of $86,000 (or 24.9%) compared to the same
period a year earlier. These increases are primarily due to revenues related
to the Company's growing debit card program as well as non-customer activity
in the Company's network of ATM's, which has caused a corresponding increase
in ATM-related revenues.
First National Bank's subsidiaries, Northwest Territory Life
Insurance Agency, Inc. and Northwest Territory Property and Casualty Insurance
Agency, Inc. (the "Agencies"), are licensed by the State of Ohio to provide
full life and property insurance product lines to consumers in Ohio. In
August 1998, these agencies were licensed by Ohio-based Motorists Mutual
Insurance Company, MICO Insurance Company, and Motorists Life Insurance
Company ("Motorists"). The Agencies offer a complete line of life and
property and casualty products through Motorists, as well as investment
products through Marketing One Securities, Inc. The Agencies' insurance and
securities related operations generated revenues of $289,000 for the nine
months ended September 30, 1998, down $15,000 compared to the same period a
year earlier. Although the Agencies' results of operations did not have a
material impact on the Company's consolidated results for the first nine
months of 1998, they are anticipated to produce income growth and long-term
value to the Company through internal development as well as external
affiliation and acquisition.
Management will continue to explore new methods of enhancing
non-interest income. Both traditional and non-traditional financial service
products are continually being analyzed for inclusion in the Company's product
offerings.
Gain (Loss) on Securities Transactions
- --------------------------------------
Through the nine month period ended September 30, 1998, the
Company recognized net gains on securities of $418,000 ($272,000
after taxes, or $0.05 per share), compared to minimal net losses
in the same period a year earlier. In the second quarter of
1998, the Company had a net gain of $516,000 from an equity
investment in a company that was acquired in a merger
transaction. In addition, the Company has recognized additional
gains on securities of $7,000 and losses of $105,000 from
repositioning of the investment portfolio. Management does not
expect similar gains or losses to occur in future periods.
Non-Interest Expense
- --------------------
For the three months ended September 30, 1998, non-interest expense
totaled $6,043,000, an increase of $1,192,000 (or 24.6%) compared to the
same period last year. For the first half of 1998, total non-interest
expense reached $16,901,000, up $2,624,000 (or 18.4%) compared to 1997's
first nine months.
When comparing 1998 non-interest expense to 1997, it is important to
consider the non-interest expense related to recent acquisitions.
Acquisitions, and the related salaries and employee benefits and increased
depreciation expense, comprise the majority of the increase in non-interest
expense in 1998. Non-operational items also contributed to the increase in
non-interest expense for the quarter and nine months ended June 30, 1998. In
particular, amortization of intangibles totaled $682,000 (up $409,000) and
$1,424,000 (an increase of $670,000) for the quarter and nine months ended
September 30, 1998, respectively, compared to $273,000 and $754,000 for the
identical periods a year earlier. Third quarter 1998's amortization expense
increased primarily due to the completion of the West Virginia Banking Center
Acquisition as well as amortization expense related to December 1997's
Gateway Bancorp Acquisition. The Company considers the impact of intangible
amortization when evaluating potential acquisitions.
The Company's recent acquisitions also impacted non-interest expense
in other areas, as the Company continues to expand its services and
geographic area. Compared to 1997's third quarter, salaries and benefits
expense increased $245,000 (or 11.6%) to $2,361,000 in the third quarter of
1998. For the nine months ended September 30, salaries and benefits expense
increased $788,000 (or 12.6%) to $7,051,000 in 1998 compared to the same
period a year earlier.
Recent acquisitions have increased the number of Company employees,
primarily customer service associates in the acquired offices. At September
30, 1998, the Company had 370 full-time equivalent employees, compared to 314
full-time equivalent employees at December 31, 1997, and 304 full-time
equivalent employees at year-end 1996. While future salaries and benefit
expense have increased on a gross comparison basis due to the many customer
service associates retained in the West Virginia Banking Center acquisition
and other recent acquisitions, management believes the human resources
obtained in recent acquisitions will enable the Company to further penetrate
its new markets, thereby optimizing customer service and return to
shareholders.
Recent acquisitions also impacted net occupancy expenses, in
particular depreciation expense. For the quarter and nine months ended
September 30, 1998, furniture and equipment expenses totaled $390,000 and
$1,281,000, respectively, up $68,000 (or 21.1%) and $166,000 (or 14.9%)
compared to 1997's identical reporting periods. Net occupancy expense
totaled $445,000 in the third quarter of 1998, an increase of $117,000
(or 35.7%) compared to the same period a year earlier. On a year-to-date
basis through September 30, 1998, and compared to last year, net occupancy
expense increased $240,000 (or 25.6%) to $1,178,000. These increases can
be attributed primarily to the depreciation of the assets purchased in recent
acquisitions (in particular the West Virginia Banking Center Acquisition),
and completion of construction projects to full-service offices in Athens and
Caldwell, Ohio, as well as Ashland, Kentucky. Increases are also due to growth
in depreciation of additional expenditures on technology. The Company's
increased investment in technology and other customer-service enhancements
will also impact depreciation expense in the future.
Included in non-interest expense for the three months ended September
30, 1998, was $169,000 ($110,000 after taxes, or $0.02 per share) of
nonrecurring expense primarily related to the conversion of the West Virginia
Banking Centers. Expenses included purchase of new checks for the customers
assumed in the West Virginia Banking Center Acquisitions, education of new
associates, operational costs related to clearing items, telephone expense,
etc. Also included in the $169,000 of nonrecurring expense were one-time
costs related to market expansion in Parkersburg, West Virginia.
Maintaining acceptable levels of non-interest expense and operating
efficiency are key performance indicators for the Company. The Company and
financial services industry use the efficiency ratio (total non-interest
expense less amortization of intangibles and nonrecurring items as a
percentage of the aggregate of fully-tax equivalent net interest income and
non-interest income) as a key indicator of performance. Gains and losses on
sales of investment securities and other nonrecurring items are not included
in the calculation of the Company's efficiency ratio.
In the third quarter of 1998, the Company's efficiency ratio was
50.21% compared to 51.47% for the same period last year. For the nine months
ended September 30, 1998, the Company's efficiency ratio improved to 50.89%
compared to 52.02% for the same period in 1997. Management expects the
efficiency ratio to continue to improve modestly throughout the remainder of
1998 and into 1999.
Return on Assets
- ----------------
Excluding extraordinary charges and nonrecurring expense, the
Company's operating return on average assets ("ROA") totaled 1.12% for the
three months ended September 30, 1998, compared to 1.29% for the same period
a year earlier. For the nine months ended September 30, 1998, the Company's
operating ROA totaled 1.24%, down modestly from 1.28% for the same period a
year earlier.
The West Virginia Banking Center Acquisition significantly
increased the asset base of the Company near the end of the second quarter of
1998, and had a significant impact on average assets in the third quarter of
1998. Third quarter 1998 average assets increased $69.1 million compared to
the second quarter of 1997, while operating income streams remained stable.
The Company will be challenged to employ the acquired assets in
a manner which will produce acceptable returns on investment in a short
period of time. Management anticipates ROA will stabilize at third quarter
levels in the near future. As management is successful in transitioning the
recently acquired funds sources to an asset mix similar to that held by the
Company in previous reporting periods, ROA should return to pre-acquisition
levels.
Return on Equity
- ----------------
Excluding extraordinary charges and nonrecurring expense, the
Company's operating return on average equity in the third quarter of 1998 was
11.73% compared to 14.33% for the same period a year earlier. On a year-to-
date basis through September 30, 1998's operating ROE totaled 12.49% compared
to 14.42% in 1997.
ROE decreased in 1998 primarily due to issuance of approximately
$15.35 million of capital stock for the purchase of Gateway Bancorp, Inc. in
late 1997. As a result, the increase in total equity had a significant
impact on 1998's ROE for the quarter and nine months ended September 30, 1998.
Management expects ROE in 1998 to continue to be below prior year levels
until the Company fully leverages the additional capital issued in the
Gateway Bancorp Acquisition.
The Company is considered well-capitalized under regulatory and
industry standards of risk-based capital and has experienced growth through
retention of increased earnings over the last several quarters.
Income Tax Expense
- ------------------
The Company's effective tax rate is approximately 32.1% for the third
quarter of 1998 compared to 32.5% for the same period last year, and 33.1%
and 32.1% for the nine months ended September 30, 1998 and 1997, respectively.
Management continues to explore new methods of reducing the Company's overall
tax burden.
FINANCIAL CONDITION
- -------------------
Overview of Balance Sheet
- -------------------------
Total assets have increased steadily from $758.2 million at
December 31, 1997, to $875.7 million at September 30, 1998. Asset growth can
be attributed primarily to the assets and liabilities acquired in the West
Virginia Banking Center Acquisition.
Net cash received in the West Virginia Banking Center Acquisition was
redeployed primarily into investment securities, which increased $63.1
million (or 36.2%) from year-end 1997 to $237.4 million at September 30, 1998.
Since June 30, 1998, investment securities have grown $28.4 million as the
Company continued to invest cash proceeds from the West Virginia Banking
Center Acquisition, as well as reinvestment of approximately $8 million of
proceeds from sales of investment securities sold near the end of the second
quarter of 1998. Those securities were sold to reposition the portfolio for
enhanced future earnings.
Since June 30, 1998, total loans increased $9.2 million (or 1.7%) to
over $542 million, with growth occurring primarily in the commercial loan
area. During the same period, total deposits increased $8.4 million
(or 1.2%). Deposit growth occurred primarily in short-term, higher interest
rate time deposits.
At September 30, 1998, the Company had short-term borrowings of $34.8
million compared to $34.4 million at March 31, 1998. Long-term borrowings
decreased $2.9 million in the third quarter to $41.2 million at September 30,
1998. Total equity reached $84.8 million at September 30, 1998, compared to
$82.0 million at June 30, 1998, an increase of $2.8 million (or 3.5%).
Stockholders' equity as a percent of total assets was 9.69% at September 30,
1998, down from 10.40% at year-end 1997, as the Company continued to leverage
its capital base.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents totaled $58.5 million at September 30, 1998,
a decrease of $26.3 million since June 30, 1998. Balances at the end of 1998's
second quarter were higher than normal due to temporary investment of acquired
funds in federal funds sold, which had a quarterly decrease of $25.8 million
to $27.0 million at September 30, 1998. Management expects to slowly decrease
the Company's investment in federal funds sold over time through redeployment
of those funding sources into higher yielding assets such as loans or
investment securities.
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 which mature within one year. These sources
of funds should enable the Company to meet cash obligations and off-balance
sheet commitments as they come due.
Investment Securities
- ---------------------
All of the Company's investment securities are classified as
available-for-sale. Management believes the available-for-sale classification
provides flexibility for the Company in terms of selling securities for
liquidity needs as well as interest rate risk management opportunities.
At year-end 1997, investment securities totaled $174.3 million and
increased to $209.0 million at June 30, 1998. This growth was funded
primarily by the deposits acquired in the West Virginia Banking Center
Acquisition. At September 30, 1998, investment securities totaled $237.4
million, up $28.4 million in the third quarter. This growth can be
attributed primarily to additional investments of proceeds from the West
Virginia Banking Center Acquisition as well as reinvestment of approximately
$8 million of securities sold near the end of the second quarter of 1998 to
reposition the portfolio for enhanced future income streams.
As a direct result of growth in funding sources in recent periods,
several categories of investments within the portfolio have experienced
significant growth. At September 30, 1998, investments in US Treasury
securities and obligations of US government agencies and corporations
totaled $52.0 million, unchanged since year-end 1997. In the first nine
months of 1998, investments in mortgage-backed securities increased $29.1
million (or 38.1%) to $105.5 million at September 30, 1998. The Company's
balances in investment obligations of states and political subdivisions
totaled $45.0 million at September 30, 1998, an increase of $19.3 million
(or 75.0%) since year-end 1997. Corporate investments at September 30, 1998
totaled $34.9 million, an increase of $14.7 million (or 72.8%) since December
31, 1997.
Management monitors the earnings performance and liquidity of the
investment portfolio on a regular basis through Asset/Liability Committee
(" ALCO") meetings. The group 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. Management
believes the risk characteristics inherent in the investment portfolio are
acceptable based on these parameters.
Loans
- -----
The Company's lending is primarily focused in the mid-Ohio Valley
areas of southeastern Ohio, northern and western West Virginia, as well as
central Ohio and northeastern Kentucky markets. The Company's lending is
retail in nature and consists principally of single-family residential
mortgages and other consumer loans.
Loans totaled $542.4 million at September 30, 1998, an increase of
$9.2 million (or 1.7%) since June 30, 1998, and up $20.9 million (or 4.0%)
since year-end 1997. In the second quarter of 1998, the Company purchased
$8.3 million of primarily commercial loans in the West Virginia Banking
Center Acquisition. The following table details total outstanding loans
at the specified dates:
(dollars in thousands) September 30 June 30 March 31 December 31
1998 1998 1998 1998
------------ ------- -------- -----------
Commercial, financial,
and agricultural $ 177,168 $ 179,666 $ 163,293 $ 159,035
Real estate, construction 20,449 12,709 16,724 19,513
Real estate, mortgage 232,387 228,661 227,358 228,689
Consumer 112,443 112,228 111,459 114,333
- ------------------------------------------------------------------------------
Total loans $ 542,447 $ 533,264 $ 518,834 $ 521,570
==============================================================================
Real estate loans to the Company's retail customers (including real
estate construction loans) continue to be the largest portion of the loan
portfolio, comprising 46.6% of the total. Real estate loans totaled $252.8
million at September 30, 1998, an increase of $11.4 million (or 4.7%) since
June 30, 1998. The Company's investment in real estate construction loans
increased in the third quarter of 1998 due to financing of construction
projects outside of the Company's primary market area.
Included in real estate loans are home equity credit lines
("Equilines"), which totaled $20.4 million at September 30, 1998, an increase
of $1.3 million (or 6.8%) since June 30, 1998. The Company continues to
offer special fixed Equiline rates in its markets and specially priced
Equiline products in its new West Virginia markets. Management believes the
Equiline product is a competitive product with an acceptable return on
investment, after risk considerations, and anticipates these balances will
continue to grow from new customers and increased market penetration.
Residential real estate lending will continue to represent a major focus of
the Company due to the lower risk factors associated with these types of
loans and the opportunity to provide additional products and services to
these consumers at attractive combined returns.
Management expects commercial loan demand to continue in several of
the Company's markets in the short-term future due to strong economic
conditions in those markets. The Company continues to focus on commercial
loans as a growth area while maintaining appropriate underwriting standards.
The markets served by the Company have not suffered due to the world economic
crisis and therefore management will continue to focus on the enhancement and
growth of the commercial loan portfolio as a method of serving customer needs.
Consumer lending continues to be a vital part of the Company's core
lending. For the three months ended September 30, 1998, consumer loan
balances (excluding credit card loans) remained stable at $105.9 million.
The majority of the Company's consumer loan focus continues to be in the
indirect lending area. At September 30, 1998, the Company had indirect loan
balances of $68.0 million, compared to $70.5 million at year-end 1997.
Management is pleased with the recent performance of the Company's
consumer loan portfolio, which can be attributed to the Company's commitment
to quality customer service and the relatively stable demand for indirect
loans in the markets served by the Company. Lenders use a tiered pricing
system that enables the Company to apply interest rates based on the
corresponding risk associated with the indirect loan.
Although consumer debt delinquency is increasing in the financial
services industry (mostly due to credit card debt), management's recent
actions to reinforce the Company's pricing system and underwriting criteria
have tempered indirect lending delinquencies and recently tempered the overall
growth of the indirect loan portfolio. Management plans to continue its
focus on the use of the tiered pricing system combined with controlled growth
of the indirect lending portfolio in 1998.
Credit card balances remained relatively unchanged since year-end
1997, totaling $6.5 million at September 30, 1998. In the past, the Company
has offered several new products to better serve the credit needs of its
customers, including a no-fee credit card and increased credit limits to
qualified customers. Management will continue to evaluate new opportunities
to serve credit card customers.
The offices acquired in the West Virginia Banking Center Acquisition
have generated nearly $3 million in additional loans since the end of the
second quarter of 1998. Management is pleased with this early loan growth
and anticipates loan demand to continue to be strong in those markets in the
near future as management focuses on employing the acquired funding sources
in higher-yielding assets such as loans.
Management anticipates moderate total loan growth in the fourth
quarter of 1998. Loan demand continues to be strong in the markets served
by the Company, but management expects loan growth to be tempered by
competitive refinancing opportunities in both the commercial and consumer
loan portfolios. Management will also consider the possibility of purchasing
loans in packages or outside of the Company's core markets as a means of
providing increased returns on its funding sources.
Loan Concentrations
- -------------------
The Company does not have a concentration of its loan portfolio in
any one industry. Real estate lending (both mortgage and construction loans)
continues to be the largest component of the loan portfolio, representing
$252.8 million (or 46.6%) of total loans. At year-end 1997, these loans
comprised 47.6% of outstanding loans. At September 30, 1998, commercial,
financial, and agricultural loans totaled $177.2 million (or 32.7%) of
outstanding loans, compared to 30.5% of outstanding loans at December 31,
1997.
The Company's lending is focused primarily in the local southeastern
Ohio market and contiguous mid-Ohio Valley areas. The Company's loan mix
principally consists of retail lending, which includes single-family
residential mortgages and other consumer loan products.
The Company's largest concentration of commercial loans are credits
to lodging and lodging related companies, which comprise approximately 10%
of the Company's outstanding commercial loans at September 30, 1998. These
lending opportunities have arisen because of the recent growth in the lodging
industry and the need for additional travel related services in certain
areas in or contiguous to the Company's markets, as well as the Company's
ability to respond to the needs of customers in this segment of the economy.
The credits have been subjected to the Company's normal commercial loan
underwriting standards and do not present more than the normal amount of
risk assumed in other lending areas.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses as a percentage of loans increased from
1.60% at December 31, 1997, to 1.72% at September 30, 1998. For the quarter
and nine months ended September 30, 1998, the total dollar amount of the
allowance for loan losses increased $186,000 and $1,001,000, respectively, due
to decreased net chargeoffs compared to the same periods a year earlier.
Loan balances have increased modestly in recent periods due to
acquisition and internal loan growth. The following table presents changes
in the Company's allowance for loan losses for the three months and six months
ended June 30, 1998, and 1997, respectively:
Three Months Ended Nine Months Ended
(in thousands) September 30 September 30
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
Balance, beginning of period $ 9,171 $ 7,298 $ 8,356 $ 6,873
Allowance for loan losses acquired
in Russell Federal Acquisition 120
Chargeoffs (475) (376) (1,180) (1,529)
Recoveries 115 165 393 394
- ------------------------------------------------------------------------------
Net chargeoffs (360) (211) (787) (1,135)
- ------------------------------------------------------------------------------
Provision for loan losses 546 676 1,788 1,905
- ------------------------------------------------------------------------------
Balance, end of period $ 9,357 $ 7,763 $ 9,357 $ 7,763
==============================================================================
When comparing the third quarter of 1998 to the third quarter of 1997,
net chargeoffs increased in indirect consumer lending and the commercial loan
portfolio. Management will continue to monitor the performance of the
consumer loan portfolio and focus efforts to continue trends established in
the first half of 1998. Real estate chargeoffs and recoveries were
insignificant for the first nine months of 1998, demonstrating the quality of
this portfolio.
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 0.31% at September 30, 1998, compared to 0.33% at December 31,
1997. Nonaccrual loans and those loans 90 days past due totaled $1,173,000
and $508,000, respectively, at September 30, 1998, compared to $1,220,000
and $462,000, respectively, at year-end 1997. Management believes the current
level of nonperforming loans is below peer group levels and is a reflection
of the overall quality of the Company's loan portfolio.
At September 30, 1998, the Company had an insignificant amount of
loans that were considered impaired. Management will continue to monitor
the status of impaired loans, including performing and non-performing loans,
in order to determine the appropriate level of the allowance for loan losses.
Management continually monitors the loan portfolio through its Loan
Review Department and Loan Loss Reserve Committee to determine the adequacy
of the allowance for loan losses. Management expects fourth quarter 1998 loan
loss provision to be consistent with third quarter 1998 expense. Management
believes the current allowance for loan losses of 1.72% of total loans at
September 30, 1998, 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 $706.5
million at September 30, 1998, a quarterly increase of $8.4 million (or 1.2%).
The West Virginia Banking Center Acquisition provided the Company with
additional funding sources of $121.0 million ($11.3 million in non-interest
bearing demand deposit balances) with minimal runoff of those deposit balances
in the months following the completion of the acquisition. Management looks
forward to expanding product and service relationships with these new
customers.
In the third quarter of 1998, non-interest bearing deposit balances
grew nearly $2.3 million (or 3.2%) to $76.8 million. Average balances of
non-interest bearing deposits increased $9.9 million, primarily due to the
deposits acquired in the West Virginia Banking Center Acquisition.
Management intends to continue its focus of maintaining its recently
enlarged base of lower-costing funding sources.
In the third quarter of 1998, the Company experienced growth of
$5 million in interest bearing transaction accounts and savings deposits. The
Company's time deposit balances remained relatively unchanged for the quarter
ended September 30, 1998. The Company continues to offer special
"relationship accounts" both non-interest bearing and interest-bearing)
based on deposits in other products such as CD's or IRA's. Management
believes that the deposit base remains the most significant funding source
for the Company and will continue to concentrate on non-interest bearing
deposit growth and maintaining adequate net interest margin to meet the
Company's strategic goals.
In addition to traditional deposits, the Company accesses both
short-term and long-term borrowings to fund its operations and investments.
The Company's short-term borrowings consist of federal funds purchased,
corporate deposits held in overnight repurchase agreements, and various FHLB
borrowings. The Company's short-term borrowings at September 30, 1998,
totaled $34.8 million compared to $32.6 million at December 31, 1997.
The largest component of short-term borrowings consisted of balances
in corporate repurchase agreements, which totaled $34.1 million at September
30, 1998, compared to $30.8 million at year-end 1997. Average balances in
corporate repurchase agreements increased $2.8 million (or 9.4%) to $32.5
million for the three months ended September 30, 1998, primarily due to
funds acquired in the West Virginia Banking Center Acquisition.
Short-term FHLB borrowings decreased from $3.1 million at June 30,
1998 to $0.7 million at the end of the third quarter. In general, the
Company will continue to access short-term FHLB borrowings at various times
to meet liquidity needs as they arise.
In addition to traditional deposits and short-term borrowings, the
Company maintains long-term borrowing capacity with 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.
Long-term FHLB advances totaled $38.5 million at September 30, 1998,
a net quarterly decrease of $2.8 million (or 6.7%) since the previous
quarter-end. In order to finance a portion of the total purchase price of
the Russell Federal Acquisition, the Company obtained a $3 million loan from
an unaffiliated financial institution. The remaining funds for the Russell
Federal Acquisition were generated from internal sources. At September 30,
1998, the Company had $2.7 million in long-term debt related to the Russell
Federal Acquisition.
Capital/Stockholders' Equity
- ----------------------------
For the three months ended September 30, 1998, the Company's capital
increased $2.9 million (or 3.5%) to $84.8 million. Since year-end 1997, the
Company's total capital has grown $6.0 million (or 7.6%) from $78.8 million.
For the quarter ended September 30, 1998, the Company had net income
of $2.1 million and paid dividends of $0.8 million, a dividend payout ratio
of 35.78% of earnings. Excluding extraordinary charges, the Company's
dividend payout ratio was 32.22% of operating earnings. For the nine months
ended September 30, 1998, net income totaled $7.3 million and dividends paid
reached $2.2 million, a dividend payout ratio of 30.87% of net income,
compared to 30.20% for the same period last year. Management believes recent
dividends represent a balanced payout ratio for the Company and anticipates
similar payout ratios in future periods through quarterly dividends.
At September 30, 1998, the adjustment for the net unrealized holding
gain on available-for-sale securities, net of deferred income taxes, totaled
$4.1 million, compared to $2.4 million at June 30, 1998. Since all of the
investment securities in the Company's portfolio are 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. The
recent decreases in interest rates, combined with increased purchases of
investment securities, have caused the gap to grow between the amortized cost
and estimated fair value of the Company's investment portfolio, with a
corresponding increase to the Company's equity.
The Company also has 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 and to certain off-balance sheet commitments.
At September 30, 1998, the Company's and each of its banking
subsidiaries' risk-based capital ratios were above the minimum standards for
a well-capitalized institution. The Company's risk-based capital ratio was
11.98%, above the minimum standard of 8%. The Company's Tier 1 capital ratio
of 10.58% also exceeded the regulatory minimum of 4%. The Leverage ratio at
the end of the first quarter was 6.87% and also above the minimum standard of
4%. The Company's capital 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 and each of its banking subsidiaries as part of its
strategic decision process.
On June 15, 1998, the Company's Board of Directors announced approval
and implementation of a formal plan to purchase treasury shares for use in
its stock option plans. The announcement superseded a previously announced
stock repurchase plan and serves as the basis for treasury purchases in
anticipation of the Company's projected stock option exercises.
The stock repurchase plan is based upon specific criteria related to
market prices and the number of shares expected to be issued under the
Company's stock option plans. Subsequent to the announcement of the formal
plan, the Company has purchased 30,000 shares in the amount of $0.8 million
through September 30, 1998. In addition, the Company purchased 15,000 shares
in the amount of $0.4 million in early fourth quarter 1998.
Management expects to purchase similar share amounts in future
quarters for use in its stock option plans. Future changes, if any, to the
Company's systematic share repurchase program may be necessary to respond to
the number of shares expected to be reissued in the Company's stock option
plans. The Company intends to fund future treasury share purchases in the
short-term with internally generated sources.
During early 1998, the Company initiated the Peoples Bancorp Inc.
Deferred Compensation Plan ("DCP") for the directors of the Company and its
subsidiaries, which is designed to recognize the value to the Company of the
past and present service of its directors and encourage their continued
service through implementation of a deferred compensation plan. The DCP
allows directors to defer the fees earned for their service as Company
and subsidiary directors into deferred accounts which are either invested in
the Company's common stock or a time deposit, at the specific director's
discretion at the time of entering the DCP. As a result and in accordance
with accounting regulations, the balances invested in Company stock in such
accounts are reported as treasury stock in the Company's financial statements.
At September 30, 1998, the DCP and its participants owned $0.7 million of
Company stock, which is a reduction to the equity balance of the Company.
Management does not expect the DCP to have a material impact on future
financial statements or results of operations for the Company.
As a result of treasury stock purchases and reissuances, as well as
DCP activity, the Company had a treasury stock balance of $1.4 million at
September 30, 1998, up $0.3 million in the third quarter of 1998. Primarily
due to DCP activity, management expects the Company's treasury stock balance
to continue to modestly increase in the future.
Liquidity
- ---------
Liquidity measures an organization's ability to meet cash obligations
as they come due. During the nine months ended September 30, 1998, the
Company generated cash from operating activities and investing activities of
$9.0 million and $24.3 million, respectively. The major cash inflow was
$100.2 million generated from the West Virginia Banking Center Acquisition in
the second quarter of 1998, which offset cash used for purchase of investment
securities of $125.6 million. Proceeds from maturities and sales of
investment securities totaled $45.5 million and $20.3 million, respectively,
for the nine months ended September 30, 1998.
The Company used cash flows of $13.4 million from financing activities
in the first nine months of 1998. The major outflow of cash in the first
nine months of 1998 was $23.2 million decrease in interest bearing deposits,
mostly short-term, rate sensitive time deposits. The Consolidated Statements
of Cash Flows presented on page 6 of the Company's Consolidated Financial
Statements provides analysis of cash flow activity.
Additionally, management considers that portion of the loan portfolio
which 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
- -------------------------
Static gap analysis measures the amount of repricing risk embedded in
the balance sheet at a point in time. It does so by comparing the differences
in the repricing characteristics of assets and liabilities. A gap is defined
as the difference between the principal amount of assets and liabilities
which reprice within a specified time period.
At September 30, 1998, the Company's interest rate sensitivity
position, based on static gap analysis, was liability sensitive in the short-
term, decreasing in sensitivity for periods over one year and up to five
years. Up to one year, the Company is liability sensitive primarily due to
increases in funding sources which are short-term, such as the FHLB
borrowings and CD specials previously mentioned. The funding sources
acquired in the West Virginia Banking Center Acquisition caused the Company's
balance sheet to become less liability sensitive due to significant increases
in federal funds sold, a highly liquid and rate sensitive asset which
reprices daily.
Management believes the Company's balance sheet theoretically is
insulated from significant increases or decreases in interest rates due to
the various variable rate assets and liabilities. Management monitors the
asset and liability sensitivity through the ALCO and uses available dynamic
data to make appropriate strategic decisions.
In addition to the interest rate sensitivity schedule and asset/
liability repricing schedules, management also uses simulation modeling and
forecasting to determine the impact of a changing rate environment and
interest rate risk. This combination provides dynamic information concerning
the Company's balance sheet structure in different interest rate
environments. When using simulation modeling, assumptions based on
anticipated market pricing are applied to interest-earning assets and
interest-bearing liabilities. These adjustments more accurately indicate
the interest rate risk of the Company.
Management also considers various hedging products as a method
of minimizing the interest rate risk of the Company's balance sheet. In
August 1997, the Company entered into agreements to purchase interest rate
floors with a notional amount of $20 million. The premium paid totaled
$46,500 for these contracts. Through September 30, 1998, due to interest
rates being above the indexed "strike" rate on the new interest rate floors,
the Company has not recognized income streams related to these floors. Due
to rates declining in recent periods, management anticipates that these
floors will replace lost income streams on interest-earning assets (prime
rate based commercial loans) which have repriced to lower rates. These
agreements, which expire in August 1999 and August 2000, are not expected to
materially affect net income or other performance ratios.
Management believes the Company's current mix of assets and
liabilities provides a reasonable level of insulation from significant
fluctuations in net interest income and the resulting volatility of the
Company's earning base. The Company's management reviews interest rate risk
in relation to its effect on net interest income, net interest margin, equity
at risk, 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
- --------------
Results of operations for the quarter and nine months ended
September 30, 1998 represent enhanced financial performance through a
combination of external growth and enhanced core competencies based on
customer service and community presence. In addition, management has
identified and will continue to analyze key performance areas which
quantitatively measure the relative performance of the Company compared
to prior year results.
Loan loss provisions in 1998 will be based on loan delinquency
trends, economic conditions, and anticipated loan growth. Based on the most
recent analysis, management expects loan loss provisions in the short-term
future to approximate that recorded in the third quarter of 1998. Management
believes the Company's reserve for loan losses is adequate for the risks
inherent in the portfolio and believes the reduction in loan loss provision
is a reflection of the overall quality of the Company's loan portfolio and
market conditions. Future financial performance will depend directly on the
timing of anticipated loan growth and other factors.
Management is pleased with the recent conversion of the offices
acquired in the West Virginia Banking Center Acquisition. The geographic
expansion is a natural extension of the Company's presence in the mid-Ohio
Valley. The Company will be challenged in future periods to employ the large
inflow of cash associated with the acquisition in assets which provide
acceptable return on investment without compromising the Company's
performance and capital ratios.
The Company expects to continue its investment in the new geographic
markets through loans and other community reinvestment activities. Future
loan growth is also anticipated as the Company continues to expand its
relationship with selected customers outside traditional geographic markets.
Management plans to continue recent momentum of non-interest income
growth from various sources. The retention of the deposits acquired in
the West Virginia Banking Center Acquisition represent additional
opportunities to provide superior customer service and strengthen the
Company's position in those markets. One of the Company's top priorities
for the remainder of 1998 will be the management and direction of the
West Virginia Banking Center Acquisition offices with existing full-service
banking centers to create a united financial service provider for the
customers of Mason and Wetzel Counties in West Virginia and surrounding areas of
West Virginia and Ohio. Management expects to enhance non-interest income
streams in the fourth quarter of 1998 and into 1999 related to the acquired
deposits and associated cost-recovery fees of those deposits.
In the third quarter of 1998, the Company opened its first
full-service banking center in Parkersburg, West Virginia. For years, the
Company has provided financial products and services to the customers of
Wood County (across the Ohio River from Washington County in Ohio). The
Parkersburg office offers traditional banking services such as loans and
deposits, investment and trust services, and insurance products, and is
expected to provide strong opportunities to penetrate the Parkersburg, West
Virginia, market.
Mergers and acquisitions remain a viable strategic option for the
continued growth of the Company's operations and scope of customer service.
Future acquisitions, if they occur, may not be limited to specific geographic
location or proximity to current markets. Acquisitions will depend upon
financial service opportunities that compliment the core competencies
developed by the Company. Management considers mergers and acquisitions to
be a viable method of enhancing the Company's earnings potential and will
continue to pursue appropriate business opportunities as they develop.
In conjunction with recent acquisitions and market expansion,
management continues to focus on efficiency ratio improvement as a method of
increasing shareholder value. As a means of increasing the Company's
operating efficiency and leverage available resources, the Company intends to
merge its federal savings banks into a single unit by January 1, 1999.
Russell Federal will be merged into Catlettsburg Federal as a full-service
banking entity with nearly $100 million in total assets. The resulting
company will be named Peoples Bank FSB and operate four banking centers in
Catlettsburg, Russell, Ashland, and Grayson, Kentucky. This merger provides
an opportunity to unite the Company's Kentucky operations and optimize the
operating efficiency, profit potential, and capital positions of the resulting
entity.
In addition to operating efficiency, management focuses on increasing
future non-interest revenue streams to lessen the Company's dependency on net
interest income as the primary driver of increased future net income.
Management views the insurance capabilities of the Company as an integral
part of future earnings streams of the Company and anticipates that the
insurance operations of the Company will reach break-even levels in 2000, and
gradually increase profitability thereafter. Management will continue to
research alternative methods of enhancing income streams, such as electronic
banking revenues, low income housing tax credits, and other investments.
Management concentrates on several key performance indicators 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 leverage its recent equity growth and maintain current levels
of performance in the fourth quarter of 1998 and into 1999.
Impact of the Year 2000 Issue
- -----------------------------
Many companies across various industries have dedicated efforts
to analyze the much-publicized "Year 2000" issue, which is the result of
computer programs written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or hardware which
have date-sensitive software or embedded chips may recognize a date of "00"
as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations, including,
among other things, the inability to process transactions or engage in
similar normal business activities.
Management has implemented plans to address Year 2000 issues and the
impact to its business, operations, and relationships with customers,
suppliers, and other third parties. The Company primarily relies on third
party vendors for all critical processing systems software. Based on recent
assessments, the Company determined it will be required to modify or replace
portions of its software and work with software vendors so that those systems
will properly utilize dates beyond December 31, 1999. Management presently
believes with modifications and replacement of existing hardware and software,
the Year 2000 issue can be mitigated. However, if such modifications and
replacements are not made, or are not completed timely, the Year 2000 issue
could have a material impact on the operations of the Company.
Management plans to resolve the Year 2000 issue in five phases as
follows: awareness, assessment, renovation, validation, and implementation.
To date, the Company has completed its assessment of all material systems
which could be affected by the Year 2000 issue and addressed the extent to
which its operations are vulnerable should its software fail to be Year
2000 compliant. The completed assessment indicates most of the Company's
significant information technology systems could be affected. Banking
regulators have issued guidelines and deadlines detailing what they expect
banks to do in order to insure Year 2000 preparedness. The Company is
following these guidelines and expects to meet the deadlines defined by the
regulators. As a part of this process, the Company is also developing
contingency plans for all mission-critical systems, which it will implement
in the event any of these systems fail to function. Contingency plans for
both IT and non-IT systems include a combination of manual processes and
utilization of systems (which have already been Year 2000 validated and
implemented) that are completely independent from the Company's core
information systems.
The Company continues to assess the credit, liquidity and counterparty
trading risks which may be posed by customers who encounter Year 2000-related
problems. These problems may result from the failure of a customer to
properly remediate its own systems and from Year 2000 problems that are not
addressed by the customer's suppliers and clients. The Company has amended
credit policies to include an assessment of Year 2000-related risks for
material new customers. The initial assessment of customer-related risks for
material customers has been completed and management does not anticipate
material losses or a significant negative impact to the Company's future
results of operations or financial position. The Company will continue to
monitor these risks.
The Company's assessment process included information technology
systems ("IT") and non-information technology systems ("non-IT"). The IT
systems identified included personal computers, mainframes, local area
networks and servers, wide area network, automated teller machines ("ATM's"),
printers, copy machines, facsimile machines, telephones, and the operating
systems and softwares for these systems. Management considers these IT
systems to be compliant with Year 2000, except approximately half of the
Company's ATM's require hardware and/or software upgrades which will be
completed in the first quarter of 1999.
Non-IT systems identified included heating, air conditioning, vault
controls, alarm systems, surveillance systems, and postage meters. Contact
has been made with all outside servicers and major vendors to determine their
individual levels of Year 2000 compliance. Based on vendor responses and/or
certification of Year 2000 compliance, the Company has determined that the
Company should not be significantly impacted by the Year 2000 from the these
systems.
As of November 13, 1998, the following chart shows the current and
projected status of the Bank's Year 2000 compliance efforts relative to IT
systems:
PHASE 11/13/98 12/31/98 3/31/99 6/30/99
---------------------------------------------------------------
Awareness 100% --- --- ---
Assessment 100% --- --- ---
Renovation 80% 80% 100% ---
Validation 20% 70% 80% 100%
Implementation 20% 70% 80% 100%
Management estimates that half of its potential Year 2000 issues
originate in the Company's core banking system (software provided by a
third-party vendor). The Company's core banking system supports
approximately 50% of the information processing for the Company. This
single system software provides accounting for the Company, as well as loan
and deposit products. This core banking system has been certified as Year
2000 compliant by the vendor and the Information Technology Association of
America. To date, the Company has not completed its due diligence of the
core banking system and expects to perform a complete review by December 31,
1998. Since the software has essentially been Year 2000 compliant for
several years, management is confident that validation and implementation
will occur by year-end 1998 due to the fact the system currently supports
calculations beyond the Year 2000.
The remaining IT such as the ATM network software, document
processing and retrieval system, the accounting system for the Investment and
Trust Division software, etc., are expected to be fully validated and
implemented by June 30, 1999. The ATM network software and the Investment
and Trust Division software system have also been certified compliant by
their respective vendors. Year 2000 compliant versions of other vendor-
supported software are scheduled for release to the Company during the fourth
quarter of 1998 and the first quarter of 1999. Management is working closely
with the Company's third party vendors to ensure Year 2000 compliance in a
timely manner.
As planned, management has replaced the Company's internal operating
systems (on existing hardware) during the third quarter of 1998. The Company
has also completed the renovation phase for all internally developed software
applications. Management does not consider internal software systems to be
significant to the overall operations of the Company.
In general, for its information technology exposures, to date the
Company is 80% complete on the renovation phase for all material systems and
expects to complete software replacement no later than March, 1999. The
vendor that supplies the Company's document processing and retrieval system
postponed delivery of its Year 2000 compliant version, and therefore
installation will be delayed until the first quarter of 1999. All other
mission critical applications that were not Year 2000 compliant have been
upgraded. All reprogramming of internal software was completed in the third
quarter of 1998.
After completing the replacement of these systems, the Company's plans
call for testing and implementing its information technology systems. To date,
the Company approximates it has completed 20% of its testing and has not
implemented any renovated systems. As soon as management completes its due
diligence of the core banking system and the testing of the accounting system
for the Company's Investment and Trust Division in the first quarter of 1998,
the Company will have implemented approximately 80% of renovated systems.
Completion of the testing phase is expected by the end of the first quarter of
1999, with all renovated systems fully implemented by June 30, 1999.
The Company's systems interface with systems supported and maintained
by other third-party providers, such as ATM and Automated Clearing House (ACH)
networks. The Company has scheduled testing of significant interfaces in
November, 1998.
The Company has queried, through written and verbal communication, its
important suppliers (such as utility companies) which do not involve system
interface. To date, the Company is not aware of any problems which would
materially impact operations, although the Company has no means of ensuring
that these organizations will be Year 2000 ready. The inability of these
parties to complete their Year 2000 resolution process could materially
impact the Company, as well as other businesses and consumers.
The Company expenses Year 2000 project costs as incurred. The total
out-of-pocket cost of the Year 2000 compliance project is not expected to be
greater than $200,000 and, therefore, is immaterial to the Company's results
of operations or financial position. As of November 13, 1998, management
estimates that 48% of the Company's costs have been incurred. Included in
the cost estimate is internal human resource expense which is estimated to
approximate between $75,000 to $100,000 (and estimated to be 45% complete to
date). In addition, the Company has no pending material legal proceedings
related to Y2K.
The Company plans to complete the Year 2000 modifications are based
on management's best estimates, which were derived utilizing assumptions of
future events including the continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected
completion dates are based on costs incurred to date compared to total
expected costs. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Specific factors which might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in the
specialized area of Year 2000 compliance, the ability of vendors to deliver
Year 2000 compliant software as planned, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
"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 involving 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 technological changes, the
effect of third party or Company failures to achieve timely remediation of
Year 2000 issues, 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.
<TABLE>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------------------------------------------ -----------------------------------------
Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
Taxable $186,057 6.23% $125,136 6.78% $180,290 6.45% $125,547 6.83%
Tax-exempt <F1> 37,922 7.68% 21,937 8.26% 32,007 7.82% 22,023 8.31%
- ------------------------------------------------------------------------------------------------------------
Total 223,979 6.48% 147,073 7.00% 212,297 6.65 147,570 7.05%
Loans:
Commercial 187,473 9.20% 146,666 9.63% 181,120 9.35% 140,240 9.56%
Real estate 234,532 8.60% 211,509 8.54% 233,305 8.66% 206,409 8.48%
Consumer 111,764 10.45% 115,190 10.43% 111,716 10.49% 112,376 10.40%
- ------------------------------------------------------------------------------------------------------------
Total loans 533,769 9.20% 473,365 9.34% 526,141 9.29% 459,025 9.28%
============================================================================================================
Less:
Allowance
for loan
loss (9,333) (7,816) (9,019) (7,404)
- ------------------------------------------------------------------------------------------------------------
Net loans 524,436 9.36% 465,549 9.50% 517,122 9.45% 451,621 9.43%
Interest-
bearing
deposits 2,070 4.89% 733 3.68% 4,332 5.87% 1,160 4.17%
Federal funds
sold 43,648 5.55% 8,353 5.60% 18,891 5.55% 7,585 5.49%
- ------------------------------------------------------------------------------------------------------------
Total
earning
assets 794,133 8.33% 621,708 8.85% 752,642 8.54% 607,936 8.79%
Other assets 74,939 48,425 63,216 48,272
- -------------------------------------------------------------------------------------------------------------
Total
assets $ 869,072 $ 670,133 $ 815,858 $ 656,208
==============================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 105,496 2.84% $ 82,674 3.03% $ 96,248 2.96% $ 83,631 3.04%
Interest-
bearing
demand
deposits 192,784 3.63% 130,049 3.53% 157,349 3.60% 124,913 3.43%
Time 328,917 5.29% 278,057 5.55% 317,132 5.41% 271,036 5.53%
- -------------------------------------------------------------------------------------------------------------
Total 627,197 4.37% 490,780 4.59% 570,729 4.58% 479,580 4.55%
Borrowed funds:
Short-term 34,436 4.79% 23,756 4.78% 48,700 5.11% 21,007 4.41%
Long-term 41,506 5.79% 30,384 6.26% 38,603 5.89% 30,881 6.27%
- ----------------------------------------------------------------------------------------------------------------
Total 75,942 5.34% 54,140 5.61% 87,303 5.45% 51,888 5.52%
Total interest
bearing
liabilities 703,139 4.47% 544,920 4.69% 658,032 4.63% 531,468 4.64%
Non-interest
bearing
deposits 75,187 58,108 67,764 59,209
Other
liabilities 7,641 6,880 8,798 7,395
- -----------------------------------------------------------------------------------------------------------------
Total
liabilities 785,967 609,908 734,594 598,072
Stockholders'
equity 83,105 60,225 81,264 58,136
- ------------------------------------------------------------------------------------------------------------------
Total
liabilities
and equity $ 869,072 $ 670,133 $ 815,858 $ 656,208
===================================================================================================================
Interest income to
earning assets 8.33% 8.85% 8.54% 8.79%
Interest expense to
earning assets 3.96% 4.12% 4.04% 4.06%
- --------------------------------------------------------------------------------------------------------------------
Net interest margin 4.37% 4.73% 4.50% 4.73%
====================================================================================================================
<FN>
<F1> Interest income and yields presented on a fully tax-equivalent basis using a
35% tax rate in 1998 and a 34% tax rate in 1997.
</FN>
</TABLE>
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.
None.
ITEM 5: Other Information.
As discussed in the Company's Proxy Statement for the 1998 Annual
Meeting of Shareholders, any qualified shareholder of the Company who intends
to submit a proposal to the Company at the 1999 Annual Meeting of Shareholders
must submit such proposal to the Company not later than November 6, 1998 to
be considered for inclusion in the Company's Proxy Statement and form of
Proxy (the "Proxy Materials") relating to that Meeting. If a shareholder
intends to present a proposal at the 1999 Annual Meeting of Shareholders, but
has not sought the inclusion of such proposal in the Company's Proxy
Materials, such proposal must be received by the Company prior to January 20,
1999 or the Company's management proxies for the 1999 Annual Meeting will be
entitled to use their discretionary voting authority should such proposal
then be raised, without any discussion of the matter in the Company's Proxy
Materials.
ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:
EXHIBIT INDEX
-------------
Exhibit Exhibit
Number Description Location
- --------- ----------------------------------- ----------------
11 Computation of Earnings Per Share. *
27 Financial Data Schedule. EDGAR electronic filing only.
* Filed herewith.
b) Reports on Form 8-K: None.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant duly has caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
PEOPLES BANCORP INC.
Date: November 13, 1998 By: /s/ROBERT E. EVANS
Robert E. Evans
President and Chief Executive Officer
Date: November 13, 1998 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 SEPTEMBER 30, 1998
Exhibit Exhibit
Number Description Location
- -------------- --------------------------------- ----------------
11 Computation of Earnings Per Share. *
27 Financial Data Schedule. EDGAR electronic filing
only.
* Filed herewith.
EXHIBIT 11
----------
PEOPLES BANCORP INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(dollars in thousands, except share data)
For the Three For the Nine
Months Ended Months Ended
September 30, 1998 September 30, 1998
1997 1998 1997 1998
------ ------ ------ ------
BASIC EARNINGS PER SHARE
EARNINGS:
Income before
extraordinary charge $2,328 $2,158 $7,504 $6,285
Net income $2,096 $2,158 $7,272 $6,285
AVERAGE SHARES OUTSTANDING:
Weighted average Common
Shares outstanding 5,828,842 5,180,915 5,767,048 5,174,934
- -----------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
INCOME BEFORE
EXTRAORDIANRY CHARGE $0.40 $0.42 $1.30 $1.21
NET INCOME $0.36 $0.42 $1.26 $1.21
=============================================================================
DILUTED EARNINGS PER SHARE
EARNINGS:
Income before extraordinary
charge $2,328 $2,158 $7,504 $6,285
Net income $2,096 $2,158 $7,272 $6,285
AVERAGE SHARES OUTSTANDING:
Weighted average Common
Shares outstanding 5,828,842 5,180,915 5,767,048 5,174,934
Net effect of the assumed
exercise of stock options
based on the treasury
stock method 162,096 180,485 183,995 153,043
- -----------------------------------------------------------------------------
Total 5,990,938 5,361,400 5,951,043 5,327,977
- -----------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
INCOME BEFORE EXTRAORDINARY
CHARGE $0.39 $0.40 $1.26 $1.18
NET INCOME $0.35 $0.40 $1.22 $1.18
==============================================================================
* Adjusted for 3-for-2 stock split issued April 30, 1998, to
shareholders of record as of April 13, 1998.
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<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q filed as of September 30, 1998.
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