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
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
138 Putnam Street, P. O. Box 738, Marietta, Ohio
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(Address of principal executive offices)
31-0987416
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(I.R.S. Employer Identification No.)
45750
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(Zip Code)
(740) 373-3155
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Registrant's telephone number, including area code:
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 classes
of Common Stock, as of November 1, 1999: 6,032,310.
Page 1 of 34 Pages
Exhibit Index Appears on Page 33
PART I - FINANCIAL INFORMATION
ITEM 1
The following unaudited Condensed Consolidated Balance Sheets,
Consolidated Statements of Income, Consolidated Statements of Stockholders'
Equity, and Consolidated Statements of Cash Flows of Peoples Bancorp Inc. (the
"Company") and subsidiaries, reflect all adjustments (which include normal
recurring accruals) necessary to present fairly such information for the periods
and dates indicated. Since the following condensed unaudited financial
statements have been prepared in accordance with instructions to Form 10-Q, they
do not contain all information and footnotes necessary for a fair presentation
of financial position in conformity with generally accepted accounting
principles. Operating results for the nine months ended September 30, 1999, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. Complete audited consolidated financial statements
with footnotes thereto are included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1999 1998
<S> <C> <C>
ASSETS Cash and cash equivalents:
Cash and due from banks $ 36,095 $ 27,048
Interest-bearing deposits in other banks 1,038 3,373
Federal funds sold -- 9,700
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Total cash and cash equivalents 37,133 40,121
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $342,267 and $230,049 at September 30, 1999 and
December 31, 1998, respectively) 333,434 235,569
Loans, net of unearned interest 631,140 567,917
Allowance for loan losses (10,392) (9,509)
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Net loans 620,748 558,408
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Bank premises and equipment, net 14,811 14,826
Other assets 37,971 31,360
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Total assets $ 1,044,097 $ 880,284
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LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 77,776 $ 80,884
Interest bearing 636,251 633,284
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Total deposits 714,027 714,168
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Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 65,456 31,814
Federal Home Loan Bank term advances 2,100 700
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Total short-term borrowings 67,556 32,514
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Long-term borrowings 150,344 40,664
Accrued expenses and other liabilities 7,978 6,924
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Total liabilities 939,905 794,270
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Guaranteed preferred beneficial interests in junior subordinated debentures 28,989 --
Stockholders' Equity
Common stock, no par value, 12,000,000 shares authorized - 6,384,116 shares
issued at September 30, 1999 and 5,790,148 issued
at December 31, 1998, including shares in treasury 64,963 50,807
Accumulated comprehensive (loss) income, net of deferred income taxes (5,741) 3,588
Retained earnings 24,305 33,441
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83,527 87,836
Treasury stock, at cost, 303,974 shares at September 30, 1999 and
52,031 shares at December 31, 1998 (8,324) (1,822)
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Total stockholders' equity 75,203 86,014
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Total liabilities, minority interests and stockholders' equity $ 1,044,097 $ 880,284
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</TABLE>
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income $ 19,104 $ 16,307 $ 52,711 $ 47,406
Interest expense 9,049 7,921 24,453 22,772
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Net interest income 10,055 8,386 28,258 24,634
Provision for loan losses 447 546 1,431 1,788
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Net interest income after
provision for loan losses 9,608 7,840 26,827 22,846
Other income 1,924 1,647 5,588 4,855
(Loss) gain on securities transactions (115) (13) (114) 418
Other expenses 7,329 6,400 20,649 17,258
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Income before income taxes 4,088 3,074 11,652 10,861
Income taxes 1,330 978 3,715 3,589
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Net income $ 2,758 $ 2,096 $ 7,937 $ 7,272
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Basic earnings per share $0.45 $0.33 $1.27 $1.15
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Diluted earnings per share $0.43 $0.32 $1.24 $1.11
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Basic cash earnings per share (a) $0.52 $0.41 $1.49 $1.31
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Diluted cash earnings per share (a) $0.51 $0.40 $1.45 $1.27
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Weighted average shares
outstanding (basic) 6,148,492 6,315,498 6,247,907 6,322,345
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Weighted average shares
outstanding (diluted) 6,343,031 6,493,804 6,415,442 6,524,785
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Cash dividends declared $860 $750 $2,562 $2,245
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Cash dividend per share $0.14 $0.12 $0.41 $0.35
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<FN>
(a) Excludes after-tax impact of intangible amortization expense.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share amounts)
Accumulated
Other
Comprehensive
Common Stock Retained Treasury Income
Shares Amount Earnings Stock (Loss) Total
<S> <C> <C> <C> <C> <C> <C>
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Balance, December 31, 1998 5,790,148 $ 50,807 $ 33,441 $ (1,822) $ 3,588 $ 86,014
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Comprehensive income:
Net income 7,937 7,937
Other comprehensive income,
net of tax:
Unrealized losses on available-
for-sale securities (9,329) (9,329)
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Comprehensive income (1,392)
Exercise of common stock options
(reissued 37,576 treasury shares) (704) 1,141 437
Cash dividends declared (2,561) (2,561)
10% stock dividend 579,505 14,512 (14,512)
Common stock issued under dividend
reinvestment plan 14,463 348 348
Purchase of 279,075 treasury shares (7,643) (7,643)
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Balance, September 30, 1999 6,384,116 $ 64,963 $ 24,305 $ (8,324) $ (5,741) $ 75,203
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Comprehensive Income:
Net unrealized depreciation arising during period, net of tax (9,255)
Less: reclassification adjustment for net losses included in net income, (74)
net of tax
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Net unrealized depreciation on investment securities (9,329)
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</TABLE>
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 7,937 $ 7,272
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses .............................. 1,431 1,788
Loss (gain) on securities transactions ................. 114 (418)
Depreciation, amortization, and accretion .............. 3,759 3,964
Increase in interest receivable ........................ (2,050) (324)
(Decrease) increase in interest payable ................ (14) 507
Deferred income tax (benefit) expense .................. (515) 644
Deferral of loan origination fees and costs ............ (173) 107
Other, net ............................................. (451) (2,481)
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Net cash provided by operating activities ......... 10,038 11,059
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Cash flows from investing activities:
Purchases of available-for-sale securities ....................... (168,843) (125,557)
Proceeds from sales of available-for-sale securities ............. 19,523 20,267
Proceeds from maturities of available-for-sale securities ........ 36,900 45,464
Net increase in loans ............................................ (63,282) (13,449)
Expenditures for premises and equipment .......................... (1,656) (2,734)
Proceeds from sales of other real estate owned ................... 251 94
Business acquisitions, net of cash received ...................... -- 100,170
Investment in limited partnership and tax credit funds ........... (1,200) (2,035)
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Net cash (used in) provided by investing activities (178,307) 22,220
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Cash flows from financing activities:
Net (decrease) increase in non-interest bearing deposits ......... (3,108) 1,170
Net increase (decrease) in interest-bearing deposits ............. 3,033 (23,164)
Net increase (decrease) in short-term borrowings ................. 35,042 (1,303)
Proceeds from long-term borrowings ............................... 110,000 17,972
Payments on long-term borrowings ................................. (320) (5,358)
Cash dividends paid .............................................. (2,160) (1,906)
Purchase of treasury stock ....................................... (7,643) (1,609)
Proceeds from issuance of common stock ........................... 437 565
Proceeds from issuance of Capital Securities ..................... 30,000 --
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Net cash provided by (used in) financing activities 165,281 (13,633)
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Net (decrease) increase in cash and cash equivalents ............. (2,988) 19,646
Cash and cash equivalents at beginning of period ................. 40,121 38,831
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Cash and cash equivalents at end of period ....................... $ 37,133 $ 58,477
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</TABLE>
NOTES TO FINANCIAL STATEMENTS
Basis of Presentation
The accounting and reporting policies of Peoples Bancorp Inc. and
Subsidiaries (the "Company") conform to generally accepted accounting principles
and to general practices within the banking industry. The Company considers all
of its principal activities to be banking related. The preparation of the
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. The consolidated financial statements include
the accounts of the Company's parent company and its wholly-owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
On May 13, 1999, the Company declared a 10% stock dividend to be issued
June 15, 1999, to shareholders of record at May 28, 1999. Accordingly, all per
share data reflects the dividend.
1. Acquisitions
On November 1, 1999, the Company completed the acquisition of Lambert
Insurance Agency in a cash transaction that was structured as a purchase
transaction by the Company. Located in Pomeroy, Ohio, the Lambert Insurance
Agency is a full service agency and seller of health, life, property and
casualty insurance, and has served the Meigs County area since 1986. Lambert
Insurance Agency will retain its name and operate as a division of Northwest
Territory Property and Casualty, which provides a complete line of high quality,
competitively priced, auto, home, business, life and mortgage protection
products to consumers in Ohio and West Virginia.
On October 29, 1999, The Peoples Banking and Trust Company ("Peoples
Bank") completed the purchase of a full-service banking facility in Huntington,
West Virginia ("Huntington Banking Center Acquisition") from an unaffiliated
financial institution. In the agreement (structured as a purchase transaction),
Peoples Bank assumed approximately $5 million in deposits and $0.5 million in
loans.
On June 26, 1998, Peoples Bank completed the purchase of four
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.
The following text will include references to these acquisitions and
their impact on the Company's results of operations.
2. Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which requires that all derivatives be recorded on the
balance sheet at fair value. SFAS 133, as amended, is effective for the Company
for the year beginning after January 1, 2000.
The exact impact of adopting SFAS 133 has not been determined at this
time. Management does not anticipate the adoption of SFAS 133 will have a
material impact to the Company's future results of operations or financial
condition.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
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.
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
SIGNIFICANT RATIOS 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income to:
Average assets (a) (b) 1.07% 0.96% 1.10% 1.19%
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Average stockholders' equity (a) (b) 14.37% 10.09% 12.74% 11.93%
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Net interest margin (b) 4.38% 4.37% 4.42% 4.50%
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Efficiency ratio (b) (c) 54.02% 50.21% 53.57% 50.89%
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Average stockholders' equity to average assets 7.42% 9.56% 8.64% 9.96%
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Loans net of unearned interest to deposits (end of period) 88.39% 76.78% 88.39% 76.78%
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Allowance for loan losses to loans net of
unearned interest (end of period) 1.65% 1.72% 1.65% 1.72%
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Capital ratios:
Tier I capital ratio 13.15% 10.58% 13.15% 10.58%
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Risk-based capital ratio 14.86% 11.98% 14.86% 11.98%
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Leverage ratio 8.58% 6.87% 8.58% 6.87%
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Cash dividends to net income 31.18% 35.78% 32.28% 30.38%
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PER SHARE DATA
Book value per share $12.37 $13.42 $12.37 $13.42
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Diluted earnings per share $0.43 $0.32 $1.24 $1.11
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Cash dividends per share $0.14 $0.12 $0.41 $0.35
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<FN>
(a) Certain ratios and statistics include the following nonrecurring items:
* Pretax losses on securities transactions of $115,000 ($75,000 after
taxes or $0.01 per share) in the third quarter of 1999 and pretax losses of
$114,000 ($74,000 after taxes or $0.01 per share) in the nine months ended
September 30, 1999.
* Pretax costs of $526,000 ($342,000 after taxes, or $0.05 per share) in
the third quarter of 1998 resulting from long-term debt prepayment penalties,
acquisition conversion costs and other market expansion activities.
* Pretax gains on securities transactions of $427,000 ($278,000 after taxes or $0.04 per share) in the
second quarter of 1998.
(b) Net income to average assets, net income to average stockholders' 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.
(c) 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 non-recurring items
are removed from the calculation of the Company's efficiency ratio.
</FN>
</TABLE>
Introduction
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 are The Peoples
Banking and Trust Company ("Peoples Bank"); The First National Bank of
Southeastern Ohio ("First National Bank"), which also owns two insurance agency
subsidiaries, Northwest Territory Life Insurance Agency, Inc. and Northwest
Territory Property and Casualty Insurance Agency, Inc.; Peoples Bank FSB; and
The Northwest Territory Life Insurance Company, an Arizona corporation that
reinsures credit life and disability insurance issued to customers of the
Company's banking subsidiaries.
The Company provides an array of financial products and services to its
customers, including investment and insurance products, deposit accounts,
lending products, credit and debit cards, corporate and personal trust services,
cash management services, and safe deposit rental facilities. The Company
provides services through ordinary walk-in offices, automated teller machines,
automobile drive-in facilities, banking by phone, and internet-based banking.
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"). Peoples Bank FSB is a member of the Federal Home Loan Bank, and is
subject to the regulation, supervision, and examination by the Office of Thrift
Supervision ("OTS"), and is 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 transactions that have
impacted or will impact the Company's results of operations. On April 20, 1999,
the Company sold, through PEBO Capital Trust I (a newly-formed subsidiary) $30.0
million of 8.62% Capital Securities ("Capital Securities" or "Trust Preferred
Securities"). The proceeds were used by the Trust to purchase, from the Company,
Junior Subordinated Deferrable Interest Debentures due May 1, 2029. In late
April, 1999, the Company invested $10.0 million in Peoples Bank (the Company's
largest subsidiary bank) with a portion of the net proceeds. The remaining
proceeds have been used for general corporate purposes, including the repurchase
of a portion of the Company's outstanding common shares. On April 22, 1999, the
Company announced intentions to repurchase 5% of the Company's outstanding
common shares (or 315,000 shares) from time to time in open market or privately
negotiated transactions ("Stock Repurchase Program"). The timing of the
purchases and the actual number of common shares purchased have depended and
will depend on market conditions. The Stock Repurchase Program will continue
through December 31, 1999. The combination of the issuance of Capital Securities
and the Stock Repurchase Program has impacted and will continue to impact
several key performance indicators of the Company's future financial results.
The impact, where significant, is discussed in the applicable sections of
Management's Discussion and Analysis.
On June 26, 1998, Peoples Bank completed the purchase of four
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.
RESULTS OF OPERATIONS
Overview of the Income Statement
Operating earnings for the nine months ended September 30, 1999,
totaled $8,011,000, a 9.2% increase over 1998 results of $7,336,000. Third
quarter operating earnings totaled $2,833,000, a 16.2% increase over 1998 third
quarter operating earnings of $2,438,000. Operating earnings per diluted share
reached $1.25 at September 30, 1999, compared to $1.12 for the same period last
year. For the third quarter of 1999, operating earnings per diluted share
increased 18.4% to $0.45, compared to 1998's third quarter operating earnings of
$0.38 per diluted share.
Operating earnings are provided to enhance the comparability of the
Company's financial data and exclude the following nonrecurring items: in the
third quarter of 1999, the Company reported losses from sales of investment
securities of $115,000 ($75,000 after taxes or $0.01 per share); in the third
quarter of 1998, the Company incurred pretax charges of $526,000 ($342,000 after
taxes or $0.05 per share) related to long-term debt prepayment penalties,
acquisition conversion costs and other market expansion activities; and in the
second quarter of 1998, the Company reported net pretax gains of $427,000
($278,000 after taxes or $0.04 per share) on investment activity, primarily from
the exchange of certain domestic equity securities, as well as losses from
repositioning of the investment portfolio.
Including the above nonrecurring items, net income totaled $2,758,000
for the third quarter of 1999, an increase of $662,000 (or 31.6%) compared to
the same period a year earlier. On a diluted per share basis, 1999's third
quarter net income reached $0.43, up 34.4% compared to $0.32 for the third
quarter of 1998.
Management believes that a comparative approach to financial reporting
should include the discussion of results using a "cash earnings" method, 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 entities
that make acquisitions using pooling of interests accounting. Management uses
cash earnings and cash basis performance ratios as methods to evaluate the
impact of acquisitions on profitability and return on the Company's investment.
Recent acquisitions have increased the Company's amortization expense related to
goodwill and other intangibles and as a result, the purchase method of
accounting has impacted earnings per share and other ratios.
In the third quarter of 1999, intangible amortization expense totaled
$657,000 ($456,000 after taxes) compared to $682,000 ($474,000 after taxes) for
the same period a year earlier. For the nine months ended September 30, 1999,
intangible amortization expense totaled $1,970,000 ($1,369,000 after taxes), an
increase of $546,000 compared to $1,424,000 ($1,019,000 after taxes) recorded
for the same period in 1998. This increase was due to the Peoples Bank's
completion of the West Virginia Banking Center Acquisition at the end of 1998's
second quarter and amortization of associated intangibles which began in the
third quarter of 1998.
Diluted cash basis operating earnings per share for the quarter ended
September 30, 1999, reached $0.52, up $0.07 (or 15.6%) from $0.45 in the third
quarter of 1998. On a cash earnings operating basis, return on average tangible
assets was 1.30% for the third quarter of 1999, a decrease of 7 basis points
from last year's third quarter figure of 1.37%. Cash operating earnings as a
percentage of average tangible equity grew to 23.38% at September 30, 1999, up
from 1998's third quarter return on average tangible equity of 19.19%.
Third quarter net interest income totaled $10,055,000, up $1,669,000
(or 19.9%) compared to the same period last year. For the nine months ended
September 30, 1999, net interest income reached $28,258,000, an increase of
$3,624,000 (or 14.7%) compared to the same period a year earlier.
The Company's provision for loan losses totaled $447,000 in the third
quarter of 1999, down $99,000 (or 18.1%) compared to $546,000 in 1998's third
quarter. For the nine months ended September 30, 1999, provision for loan losses
totaled $1,431,000, a decrease of $357,000 (or 20.0%) compared to $1,788,000
recorded for the same period in 1998. Decreases in the Company's provision for
loan losses were due to continued strong asset quality.
Third quarter non-interest income increased $277,000 (or 16.8%) to
$1,924,000, due primarily to growth of deposit account service charges,
fiduciary fees from the Company's Investment and Trust activity, commissions on
insurance and securities sales, and increased electronic banking fees. For the
nine months ended September 30, 1999, non-interest income totaled $5,588,000, up
$733,000 (or 15.1%) compared to the same period in 1998.
Non-interest expense for the third quarter of 1999 totaled $7,329,000,
up $929,000 (or 14.5%) from last year, due primarily to costs incurred on the
Trust Preferred Securities in the early part of 1999. For the nine months ended
September 30, 1999, non-interest expense totaled $20,649,000, up $3,391,000 (or
19.6%) compared to the same period a year earlier. Growth in non-interest
expense on a year-to-date basis also occurred due to the Company's recent
acquisitions and related expenses, such as salaries and benefits expense and
amortization of intangibles.
The Company's efficiency ratio was 54.02% in the third quarter of 1999,
compared to 50.21% for the same period last year. For the nine months ended
September 30, 1999, the Company's efficiency ratio totaled 53.57% compared to
50.89% for the same period in 1998. The decline in this performance ratio was
due primarily to increased costs related to the Trust Preferred Securities,
which are included in non-interest expense, while the related benefits enhance
other performance ratios such as return on equity and earnings per share.
Interest Income and Expense
Net interest income is the amount by which interest income on
interest-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.
During the second quarter of 1999, the Company initiated an asset
growth strategy to offset the costs to service the Trust Preferred Securities,
thereby leveraging the Company's increased capital levels ("Leverage Strategy").
The Leverage Strategy increased the Company's earnings asset base approximately
$150 million and was funded primarily by Federal Home Loan Bank ("FHLB")
borrowings and other wholesale funding sources. The Leverage Strategy was
implemented throughout the second quarter of 1999 and was completed on June 30,
1999.
The Leverage Strategy and the earning asset growth that occurred
through 1998's West Virginia Banking Center Acquisition generated strong third
quarter net interest income streams in 1999. Net interest income reached
$10,055,000 in the third quarter of 1999, compared to $8,386,000 in the third
quarter of 1998, an increase of $1,669,000 (or 19.9%). For the third quarter of
1999, total interest income reached $19,104,000 while interest expense totaled
$9,049,000. Included in second quarter 1999 interest income is $683,000 of
tax-exempt income from investments issued by states and political subdivisions.
Since these revenues are not taxed, it is more meaningful to analyze the impact
of 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, 1999, net interest margin (on an FTE basis)
totaled 4.38% compared to 4.37% in the third quarter of 1998. On a year-to-date
basis through September 30, net interest margin in 1999 totaled 4.42% compared
to 4.50% for the same period last year. Net interest margin has compressed
slightly in 1999 due to the impact of the Leverage Strategy, which significantly
increased the Company's earning asset base in comparatively lower-yielding
assets such as mortgage-backed investment securities and other investments.
Management continues to analyze methods to redeploy the Company's
assets to an earning asset mix which will result in a net interest margin
similar to the Company's ratios before the Leverage Strategy was initiated. Loan
growth continues to be strong and management anticipates that loan activity will
remain strong in the near term future, which will enable to Company to shift a
portion of its earning asset base to these higher-yield assets as lower-yielding
investment securities mature.
Average loans grew $79.5 million (or 14.9%) from third quarter 1998 to
third quarter 1999 and comprise the largest earning asset component on the
Company's balance sheet. Due to the Leverage Strategy, as well as increased
competition for loans, total yield on earning assets dropped to 8.16% in the
third quarter of 1999, compared to 8.33% for the same period a year earlier.
Compared to the third quarter of 1998, cost of interest-bearing
liabilities decreased 20 basis points in the third quarter of 1999 to 4.27%, due
primarily to decreases in costs of the Company's core funding sources as well as
prepayments of long-term FHLB advances in October, 1998. These funding sources
were replaced with lower-costing deposits and other FHLB advances.
In the fourth quarter of 1999 and into early 2000, management
anticipates net interest margin will decrease modestly due to increasing costs
of funding sources. In addition, the Company's preparation for upcoming
potential Year 2000 cash withdrawals will likely cause compressed net interest
margin in the fourth quarter of 1999 due to growth of the Company's cash
reserves. Management does not expect material changes in the Company's results
of operations or financial position as a result of Year 2000 preparations.
Please refer to the "Consolidated Average Balance Sheet and Analysis of
Net Interest Income" table included on page 30 for a complete quantitative
evaluation of the Company's net interest margin.
Provision for Loan Losses
The provision for loan losses is based upon management's continuing
evaluation of the adequacy of the allowance for loan losses and is reflective of
the quality of the portfolio and overall management of the inherent credit risk.
Due to continued strong asset quality, management anticipates the Company's loan
loss provision for the year ending December 31, 1999, will be less than 1998's
total provision for loan losses of $2,325,000. In the third quarter of 1999, the
Company recorded a provision for loan losses of $447,000, a decrease of $99,000
(or 18.1%) from $546,000 in the third quarter of 1998. On a year-to-date basis
through September 30, loan loss provision totaled $1,431,000 in 1999 compared to
$1,788,000 last year. Any changes in the provision for loan losses will be
dependent on loan delinquencies, portfolio risk, and general economic conditions
in the Company's markets.
Non-Interest Income
The Company's non-interest income is generated from four primary
sources: cost-recovery based fees related to customer deposit accounts, income
from fiduciary activities, electronic banking revenue, and insurance
commissions. For the quarter and nine months ended September 30, 1999, all of
the Company's major sources of non-interest income increased compared to the
same period a year earlier, reflecting management's focus on top-line revenue
enhancement as a primary source of cost-recovery.
Third quarter non-interest income reached $1,924,000 in 1999, an
increase of $277,000 (or 16.8%) compared to the same period in 1998. For the
nine months ended September 30, 1999, non-interest income totaled $5,588,000, up
$733,000 (or 15.1%) compared to last year.
Deposit account service charge income reached $774,000 in the third
quarter of 1999, compared to $681,000 for the quarter ended September 30, 1998,
an increase of $93,000 (or 13.7%). On a year-to-date basis through September 30,
1999, deposit account service charge income totaled $2,252,000, a $424,000 (or
23.2%) increase compared to the same period last year. For the nine months ended
September 30, 1999, deposit account service charge income was impacted favorably
by the West Virginia Banking Center Acquisition and its associated $121 million
in deposits, which provided the base for associated increased fee income.
Approximately $284,000 of the Company's increase in deposit account service
charge income for 1999 can be attributed to the deposits acquired in the West
Virginia Banking Center Acquisition. Other increases in service charge income
resulted from revisions in the Company's fee structure in early 1999. The
Company's fee income generated from deposits is based on recovery of costs
associated with services provided.
The fee structure for fiduciary activities is based primarily on the
fair value of assets being managed, which totaled over $572 million at September
30, 1999, compared to $551 million at year-end 1998. As a result of recent
growth in market values and in the number of accounts served, income from
fiduciary activities in the third quarter of 1999 increased $130,000 (or 23.6%)
compared to $551,000 reported in the same period a year earlier. The Company
also collected a one-time fiduciary fee in the third quarter of 1999 which
boosted revenues. On a year-to-date basis through September 30, revenue from
fiduciary activities increased $227,000 (or 13.1%) to $1,960,000 in 1999
compared to 1998. The Company continues to build on its leadership position in
its markets and management believes asset management services will be a
significant contributor to the Company's non-interest income streams.
Electronic banking, including ATM cards, direct deposit services, and
debit card services, is one of the many product lines offered by the Company.
The fees associated with these products and services significantly impact the
Company's non-interest income. In the third quarter of 1999, revenues related to
electronic banking totaled $163,000, up $23,000 (or 16.4%) compared to the
previous year's third quarter. For the nine months ended September 30, 1999,
electronic banking revenues totaled $482,000, an increase of $51,000 (or 11.8%)
compared to the same period a year earlier. These increases are due primarily to
growth in the number of debit card users as well as corresponding volume
increases in debit card usage. Management will continue to focus on electronic
banking as a source of revenue as the financial services industry develops
additional methods to provide electronic commerce.
In addition to traditional sources of non-interest income, the Company
also offers a complete line of insurance and investment products. The Company's
product offerings include credit life and disability insurance, as well as life
and property insurance to consumers in Ohio and West Virginia. Commissions on
insurance and securities generated revenues of $127,000 in the third quarter of
1999, up $46,000 (or 56.8%) in comparison to the revenues recognized for the
same period in 1998. For the nine months ended September 30, 1999, commissions
on insurance and securities generated revenues totaling $370,000, an $81,000 (or
28.0%) increase over the same period last year.
In the second quarter of 1999, the Company named Raymond James
Financial Services, Inc. (member NASD and SIPC), an unaffiliated registered
broker/dealer, as its provider of improved services to the Company's investment
customers, including, but not limited to, asset management, corporate bonds,
municipal bonds, portfolio evaluation, asset allocation, tax shelters, unit
trusts, common/preferred stocks, government securities, mutual funds, retirement
planning, estate planning, tax-exempt securities, annuities, and financial
planning services. Management believes these services are integral to the
Company's relationship and needs-based sales philosophy.
Management will continue to explore new methods of enhancing
non-interest income. Other traditional and non-traditional financial service
products are analyzed regularly for potential inclusion in the Company's product
mix.
Investment Securities Transactions
In the third quarter of 1999, the Company generated net losses on
securities transactions of $115,000 compared to net losses of $13,000 incurred
in the third quarter of 1998. Securities transaction losses generated in the
third quarter of 1999 were primarily the result of the Company's repositioning
of the investment portfolio to improve the pledging capabilities of the
Company's investment securities.
For the quarter ended September 30, 1999, the Company reported net
losses of $115,000 ($74,000 after taxes or $0.01 per share) compared to net
losses on securities transactions of $13,000 ($8,000 after taxes) reported in
the third quarter of 1998. For the nine months ended September 30, 1999, the
Company reported net losses of $114,000 ($74,000 after taxes or $0.01 per share)
compared to net gains on securities transactions of $418,000 ($272,000 after
taxes, or $0.04 per diluted share) recorded for the same period in 1998.
Net gains on securities transactions recognized in 1998 were primarily
the result of a net gain of $516,000 ($336,000 after taxes or $0.05 per share)
from an equity investment in a company that was acquired in a merger
transaction. In addition, during the second quarter of 1998, the Company
recognized losses of $89,000 ($58,000 after taxes or $0.01 per share) from sales
of investment securities due to investment portfolio repositioning.
Non-Interest Expense
For the three months ended September 30, 1999, non-interest expense
totaled $7,329,000, an increase of $929,000 (or 14.5%) compared to the same
period last year. For the nine months ended September 30, 1999, total
non-interest expense reached $20,649,000, up $3,391,000 (or 19.6%) compared to
the same period in 1998. When comparing year-to-date 1999 non-interest expense
information to 1998, it is important to consider that several categories within
non-interest expense were directly impacted by the West Virginia Banking Center
Acquisition and related growth of non-interest expenses such as salaries and
benefits, depreciation expense, and intangible amortization. In addition,
non-interest expense was impacted due to costs associated with the Trust
Preferred Securities, which totaled $663,000 in the third quarter of 1999 and
$1,180,000 on a year-to-date basis.
Non-operational items caused a significant increase in non-interest
expense for the nine months ended September 30, 1999, in particular,
amortization of intangibles totaled $1,970,000 (an increase of 38.3%) for the
nine months ended September 30, 1999, respectively, compared to $1,424,000 for
the identical period a year earlier. The additional intangible asset
amortization expense arising from the West Virginia Banking Center Acquisition
was the primary reason for this increase.
Compared to 1998's third quarter, salaries and benefits expense
increased $276,000 (or 11.7%) to $2,637,000 in the third quarter of 1999,
reflecting the Company's continuing effort to expand both inside and outside its
geographic markets. For the nine months ended September 30, 1999, salaries and
benefits expense increased $866,000 (or 12.3%) to $7,918,000 compared to same
period in 1998. Acquisitions and new financial service center openings have
increased the number of the Company's employees, primarily those associates
dedicated to customer service areas in the acquired offices and new offices
recently opened by the Company. At September 30, 1999, the Company had 377
full-time equivalent employees, compared to 362 full-time equivalent employees
at December 31, 1998. Management will continue to strive to find new ways of
increasing efficiencies and leveraging its resources, effectively optimizing
customer service and return to shareholders.
Recent acquisitions and investments also impacted net occupancy
expenses, in particular depreciation expense. For the quarter and nine months
ended September 30, 1999, furniture and equipment expenses totaled $410,000 and
$1,346,000, respectively, up $20,000 (or 5.1%) and $65,000 (or 5.1%) compared to
1998's identical reporting periods. Net occupancy expense totaled $457,000 in
the third quarter of 1999, an increase of $12,000 (or 2.7%) compared to the same
period a year earlier. On a year-to-date basis through September 30 and compared
to last year, net occupancy expense increased $173,000 (or 14.7%) to $1,351,000
in 1999. These increases can be attributed primarily to the depreciation of the
assets purchased in recent acquisitions, completion of financial service center
remodeling projects (specifically the two Wal*Mart Financial Service Centers
opened to date and other banking center refurbishment), as well as increased
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.
In 1999, the Company embarked on several educational sales programs
designed to increase associates' knowledge of relationship sales techniques and
enhance the Company's sales culture. The educational programs are expected to
continue through the remainder of 1999 and have modestly increased non-interest
expense compared to previous periods. Management believes these types of
investments in the future are necessary to remain competitive in the financial
services industry and anticipates these programs will increase customer service
associates perception and understanding of the relationship sales process.
Maintaining acceptable levels of non-interest expense and operating
efficiency are key performance indicators for the Company in its strategic
initiatives. The financial services industry uses the efficiency ratio (total
non-interest expense less amortization of intangibles and non-recurring 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, as well as other nonrecurring charges, are not
included in the calculation of the Company's efficiency ratio.
In the third quarter of 1999, the Company's efficiency ratio was 54.02%
compared to 50.21% for the same period last year. For the nine months ended
September 30, 1999, the efficiency ratio was 53.57% compared to 50.89% for the
same period in 1998. The second quarter of 1999 was a period of transition for
the Company due to the Trust Preferred Securities being issued and the
implementation of the Leverage Strategy. As anticipated, the Company's third
quarter 1999 efficiency ratio improved 124 basis points in comparison to the
second quarter 1999 efficiency ratio of 55.26%. Management anticipates that the
efficiency ratio will continue to modestly improve throughout the remainder of
1999 as additional incremental interest income generated by the Leverage
Strategy counterbalances debt service costs associated with the Capital
Securities.
Return on Assets
For the quarter ended September 30, 1999, operating return on average
assets ("ROA") totaled 1.10% compared to 1.12% for the same period a year
earlier. For the nine months ended September 30, 1999, the Company's operating
ROA totaled 1.11%, compared to 1.20% for the same period a year earlier.
Including all nonrecurring items, ROA for the quarter and nine months
ended September 30, 1999, reached 1.07% and 1.10%, respectively, while ROA for
the quarter and nine months ended September 30, 1998, totaled 0.96% and 1.19%,
respectively. When comparing third quarter 1999 ROA to 1998 ROA, it is important
to consider that third quarter 1998 ROA was significantly impacted by pretax
charges of $526,000 ($342,000 after taxes) related to long-term debt prepayment
penalties, acquisition conversion costs and other market expansion activities.
The Leverage Strategy significantly increased the asset base of the
Company in the second quarter of 1999 and has pressured the Company's ROA. In
addition, ROA and other performance ratios may be enhanced in the future through
interest income increases as a result of funds involved in the Leverage Strategy
being redirected into a mix of earning assets more similar to the Company's
earning asset base before the Leverage Strategy was initiated.
Management anticipates that ROA will stabilize for the remainder of
1999. In the future, the Company will be challenged to employ its asset base in
a manner that will produce acceptable returns on investment. As the Company is
successful in transitioning the investments purchased in the Leverage Strategy
to higher-yielding loans, management expects ROA to modestly improve. Management
believes that recent changes to the Company's balance sheet, particularly
through the Trust Preferred Securities issuance and Leverage Strategy, will
shift the Company's strategic focus on ratios such as return on equity and
earnings per share.
Return on Equity
The Company's operating return on average equity ("ROE") in the third
quarter of 1999 was 14.76%, compared to 11.73% for the same period last year.
For the nine months ended, September 30, 1999, operating ROE totaled 12.86%
compared to 12.04% for the same period in 1998. Including all nonrecurring
items, ROE for the quarter and nine months ended September 30, 1999, reached
14.37% and 12.74%, respectively, while ROE for the quarter and nine months ended
September 30, 1998, totaled 10.09% and 11.93%, respectively. Third quarter 1998
ROE was also significantly impacted by the aforementioned charges related to
long-term debt prepayment penalties, acquisition conversion costs and other
market expansion activities.
Using a portion of the proceeds from the Trust Preferred Securities
issuance to implement the Company's Stock Repurchase Program, management
anticipates enhanced ROE for the Company in future periods. The Stock Repurchase
Program was initiated on April 22, 1999 and is 93% complete at November 5, 1999.
Future enhancements to ROE depend on the timing of common stock repurchases and
the availability of the Company's shares. Management views the issuance of the
Trust Preferred Securities as an opportunity to leverage the Company's equity
position and expects ROE improvement for the remainder of 1999 and into 2000.
The Company and all of its banking subsidiaries are considered
well-capitalized under regulatory and industry standards of risk-based capital.
Income Tax Expense
The Company's effective tax rate was 32.5% and 31.8% for the three
months ended September 30, 1999 and 1998. For the nine months ended September
30, 1999 and 1998, the Company's effective tax rate was 31.8% and 33.0%.
The Company is exploring several initiatives to educe its effective tax
rate. One such initiative finalized in late 1998 is tax credit investments.
These tax credits will reduce the Company's tax burden and lower the Company's
effective tax rate.
With the funds generated from the Trust Preferred Securities, the
Company has invested and plans to make additional investments in various tax
credit pools over the next several years. Total investment in these tax credit
pools is not expected to exceed $5.0 million and is expected to benefit the
Company's future results of operations through reductions in the Company's
effective tax rate.
FINANCIAL CONDITION
Overview of Balance Sheet
The Company's balance sheet at September 30, 1999, changed
significantly in comparison to the previous year due primarily to the issuance
of the Trust Preferred Securities and the associated Leverage Strategy during
1999's second quarter. The Company's assets totaled $1.04 billion at September
30, 1999, up $164 million (or 18.6%) since year end 1998. Due to the Leverage
Strategy, the largest asset growth occurred in the investment securities
portfolio, which totaled $333.4 million at September 30, 1999, an increase of
$97.9 million (or 41.5%) over year-end 1998. Compared to December 31, 1998,
total loans increased $63.2 million (or 11.1%) to $631.1 million, as growth
continues to be strong in each of the Company's loan categories.
Total liabilities increased $145.6 million (or 18.3%) to $939.9 million
for the nine months ended September 30, 1999. This increase can be attributed
primarily to the Leverage Strategy and the funding needs generated from its
implementation. Long-term borrowings increased to $150.3 million at September
30, 1999, up $109.7 million over year-end 1998. Short-term borrowings increased
$35.0 million compared to year-end 1998, totaling $67.6 million at September 30,
1999. The Company's deposits totaled $714.0 million at September 30, 1999,
unchanged in comparison to year-end 1998.
The April, 1999 issuance of the Trust Preferred Securities is presented
as "Guaranteed Preferred Beneficial Interest in Junior Subordinated Debentures".
The Company has classified the Trust Preferred Securities as "mezzanine" equity
on its balance sheet, net of issuance costs of approximately $1.0 million.
Stockholders' equity totaled $75.2 million at September 30, 1999,
compared to $86.0 million at December 31, 1998, a decrease of $10.8 million (or
12.6%). The decrease in equity resulted from decreases in the Company's net
unrealized losses on available-for-sale securities, combined with the impact of
the Stock Repurchase Program. At September 30, 1999, the Company had $5.7
million of net unrealized losses on available for sale securities, which
represents a $9.3 million decrease compared to $3.6 million of unrealized gains
on available for sale securities at December 31, 1998. At September 30, 1999,
the Company had a treasury share balance of 303,974 shares, up 251,943 shares
compared to year-end 1998 due primarily to purchases under the Company's Stock
Repurchase Plan. The Company's treasury share balance at September 30, 1999,
totaled $8.3 million, a $6.5 million increase compared to year-end 1998. Other
repurchases of the Company's common shares during 1999 funded the Company's
stock benefit plans and a deferred compensation plan that permits the Company's
directors to purchase common shares through an established trust. Please see the
Consolidated Statements of Stockholders' Equity found on page 5 in this Form
10-Q for additional information regarding the Company's changes in stockholders'
equity.
Cash and Cash Equivalents
Cash and cash equivalents totaled $37.1 million at September 30, 1999,
up $9.9 million from June 30, 1999. At September 30, 1999 and June 30, 1999, the
Company held no federal funds sold compared to $9.7 million at December 31,
1998, which reflects management's focus to direct liquid funds into
higher-yielding assets such as loans to meet loan demand in its markets, as well
as enhance profitability.
Management believes the current balance of cash and cash equivalents
adequately serves the Company's liquidity and performance needs. Total cash and
cash equivalents fluctuate on a daily basis due to transactions in process and
other liquidity needs. Management believes the liquidity needs of the Company
are satisfied by the current balance of cash and cash equivalents, readily
available access to traditional and non-traditional funding sources, and the
portions of the investment and loan portfolios that 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
At September 30, 1999, investment securities totaled $333.4 million, an
increase of $97.9 million (or 41.5%) compared to year-end 1998. Funds generated
from the issuance of the Trust Preferred Securities, as well as the Leverage
Strategy, were used to purchase approximately $150 million of additional
investment securities during the second quarter of 1999.
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 as well as
interest rate risk management opportunities. At September 30, 1999, the
amortized cost of the Company's investment securities totaled $342.3 million,
resulting in unrealized depreciation in the investment portfolio of $8.8 million
and a corresponding after tax decrease in the Company's equity of $5.7 million.
As a direct result of the Leverage Strategy, several categories of
investments within the investment portfolio experienced significant growth in
the nine months ended September 30, 1999. The majority of the Company's
investment security variances occurred during the second quarter of 1999,
therefore comparisons between year-end 1998 and September 30, 1999, provide more
meaningful information. Investments in US Treasury securities and obligations of
US government agencies and corporations increased $52.6 million (or 104.6%) to
$102.8 million at September 30, 1999. During the nine months ended September 30,
1999, investments in mortgage-backed securities increased $43.0 million (or
41.1%) to $147.8 million, and now represent the largest segment of the Company's
investment securities portfolio. The Company's balances in investment
obligations of states and political subdivisions totaled $37.0 million at
September 30, 1999, a decrease of $8.6 million (or 18.8%) since December 31,
1999. Corporate investments at September 30, 1999 totaled $45.9 million, an
increase of $10.8 million (or 30.9%) over December 31, 1999.
In the third quarter of 1999, the Company's amortized cost of total
investment securities decreased approximately $14.8 million, due to sales and
maturities of $29.2 million, which were offset by third quarter purchases of
$14.4 million. Management anticipates continued modest reductions of investment
securities in future periods as earning assets are deployed to higher-yielding
investments such as loans. The Company sold approximately $22 million of
investment securities (primarily tax-exempt securities) in the third quarter and
reinvested approximately $18 million, primarily in mortgage-backed securities,
while maintaining similar earning yields and approximate duration of the
investment securities portfolio. The repositioning provided the Company with
additional securities that can be easily pledged as collateral, as well as
increasing the Company's borrowing capacity.
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
region of central and southeastern Ohio, northern West Virginia, and
northeastern Kentucky. These are principally retail lending markets, which
include single-family residential and other consumer lending.
Gross loans totaled $631.1 million at September 30, 1999, an increase
of $30.6 million (or 5.1%) since June 30, 1999, and up $63.2 million (or 11.1%)
since year-end 1998. Retail loan growth occurred primarily in the Company's
existing markets, while commercial lending growth occurred to selected customers
outside the Company's primary markets.
The following table details total outstanding loans at the specified
dates:
(dollars in thousands) September 30, June 30, March 31, December 31,
1999 1999 1999 1998
--------- -------- -------- --------
Commercial, financial, and $254,486 $240,006 $223,169 $212,530
agricultural................
Real estate, construction .... 12,135 12,952 10,362 10,307
Real estate, mortgage ........ 246,191 234,826 230,610 233,550
Consumer ..................... 118,328 112,802 110,419 111,530
- -------------------------------------------------------------------------------
Total loans ............. $631,140 $600,586 $574,560 $567,917
- -------------------------------------------------------------------------------
Real estate loans (including real estate construction loans) continue
to be the largest portion of total loans, comprising 40.9% of the total loan
portfolio. Real estate loans totaled $258.3 million at September 30, 1999, an
increase of $10.5 million (or 4.3%) since June 30, 1999.
Included in real estate loans are home equity credit lines
("Equilines"), which totaled $21.9 million at September 30, 1999, compared to
$20.7 million at June 30, 1999. During the second and third quarters of 1999,
the Company offered a specially priced Equiline product, to qualifying
customers, which contributed to the Equiline balance increase. Management
believes the Equiline loans are a competitive product with an acceptable return
on investment after risk considerations. Residential real estate lending
continues to represent a major focus of the Company's lending due to the lower
risk factors associated with this type of loan and the opportunity to provide
additional products and services to these consumers at reasonable yields to the
Company.
Lending activity in the Company's northeastern Kentucky markets has
historically focused on real estate loans. Peoples Bank FSB continues to offer
special programs designed to increase its penetration of those local markets and
increase opportunities to sell additional lending and deposit products. Mortgage
lending will remain a vital part of the Company's lending operations due to the
programs offered to customers, who continue to seek quality real estate loan
products in a competitive environment.
The Company experienced significant loan growth in the third quarter of
1999 in commercial, financial, and agricultural loans ("commercial loans"),
which increased $14.5 million (or 6.0%) to $254.5 million. At September 30,
1999, commercial loans comprised 40.3% of the Company's total loan portfolio.
Economic conditions in the Company's markets have provided quality credit
opportunities, in particular, in southeastern and central Ohio. Management will
continue to focus on the enhancement and growth of the commercial loan portfolio
while maintaining appropriate underwriting standards and risk/price balance.
Management expects commercial loan demand to continue to be strong for the
remainder of 1999 and into early 2000. In addition to the anticipated additional
in-market penetration, the Company will continue to selectively lend to
customers outside its primary markets.
Consumer lending continues to be a vital part of the Company's core
lending. For the three months ended September 30, 1999, consumer loan balances
(excluding credit card loans) increased $5.6 million (or 5.3%) to $112.1
million. The majority of the Company's consumer loans are in the indirect
lending area, where volume increases were experienced, combined with slower
indirect loan run-off. At September 30, 1999, the Company had indirect loan
balances of $68.9 million, compared to $65.6 million at June 30, 1999.
Management is pleased with the performance and quality of the Company's
consumer loan portfolio, which can be attributed to the Company's commitment to
high level of customer service and the continued 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 has
increased in the financial services industry (due mostly to credit card debt),
management's actions to reinforce the Company's pricing system and underwriting
criteria have tempered indirect lending delinquencies. Management plans to
continue its focus on the use of this tiered pricing system in the future,
combined with controlled growth of the indirect lending portfolio if economic
conditions remain strong.
The Company's credit card balances at September 30, 1999, totaled $6.3
million, down $0.5 million (or 8.0%) since year-end 1998. While management
continues to explore new opportunities to serve credit card customers, those
plans do not include the assumption of additional unnecessary risk merely for
the sake of growth.
Loan Concentration
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 $258.3
million (or 40.9%) of total loans. At year-end 1998, these loans comprised 42.9%
of outstanding loans. At September 30, 1999, commercial, financial, and
agricultural loans totaled $254.5 million (or 40.3%) of outstanding loans,
compared to 37.4% of outstanding loans at December 31, 1998.
The Company's lending is primarily focused in the local southeastern
Ohio market and contiguous mid-Ohio valley areas. The Company's loan mix of
retail lending, which includes single-family residential mortgages and other
consumer loan products, is periodically reviewed for appropriate changes in mix.
The Company's largest concentration of commercial loans is in credits
to lodging and lodging related companies, which comprised approximately 13% of
the Company's outstanding commercial loans at September 30, 1999, compared to
10% at December 31, 1998. Management does not anticipate additional loan growth
in the lodging and lodging related industry loan concentration. These lending
opportunities have arisen both 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, and 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 types of
lending.
In addition to loans to lodging and lodging related companies, one of
the Company's larger groups of commercial loans consists of automobile dealer
floor plans, which accounted for 6% of the Company's outstanding commercial
loans at September 30, 1999, compared to 7% at the end of the second quarter of
1999.
Allowance for Loan Losses
The allowance for loan losses as a percentage of loans decreased from
1.67% at December 31, 1998, to 1.65% at September 30, 1999. For the quarter and
nine months ended September 30, 1999, net chargeoffs modestly decreased compared
to the same periods a year earlier, as a result of the Company's continued
monitoring of the loan portfolio and enhanced asset quality.
The following table presents changes in the Company's allowance for
loan losses for the three months and nine months ended September 30, 1999, and
1998, respectively:
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Balance, beginning of period ... $ 10,119 $ 9,171 $ 9,509 $ 8,356
Chargeoffs ..................... (274) (475) (848) (1,180)
Recoveries ..................... 100 115 300 393
- --------------------------------------------------------------------------------
Net chargeoffs ............ (174) (360) (548) (787)
- --------------------------------------------------------------------------------
Provision for loan losses ...... 447 546 1,431 1,788
- --------------------------------------------------------------------------------
Balance, end of period $ 10,392 $ 9,357 $ 10,392 $ 9,357
- --------------------------------------------------------------------------------
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 0.24% at September 30, 1999, compared to 0.28% at December 31, 1998.
Nonaccrual loans and those loans 90 days past due totaled $474,000 and $702,000,
respectively, at September 30, 1999, compared to $687,000 and $495,000,
respectively, at year-end 1998. Management believes the current level of
nonperforming loans is better than peer group levels and is a reflection of the
quality of the Company's loan portfolio.
At September 30, 1999, 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.
The third quarter of 1999's provision for loan losses was lower in
comparison to the same period a year earlier due to management's evaluation of
the adequacy of the allowance for loan losses, satisfactory loan portfolio
quality, current loan delinquency, forecasted chargeoff trends, and reduced
overall inherent credit risk. The most significant portion of the Company's
chargeoffs continue to occur in the consumer loan portfolio, although compared
to the third quarter of 1998, consumer loan net chargeoffs decreased for the
three months ended September 30, 1999.
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 and considers it to be adequate at September 30,
1999. Management expects 1999's fourth quarter loan loss provision to be less
than 1998's provision due to general improvements in loan delinquencies and the
overall quality of the loan portfolio. The allowance for loan losses of 1.65% of
total loans at September 30, 1999, is deemed to be adequate to absorb losses
inherent in the portfolio.
Funding Sources
The Company considers a number of alternatives, including but not
limited to 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, totaling $714.0 million, or 76.6%
of the Company's funding sources at September 30, 1999.
Non-interest bearing deposits remain a core funding source for the
Company, and balances modestly increased for the three months ended September
30, 1999. Management intends to continue to focus on maintaining its base of
lower-costing funding sources, through product offerings that benefit customers
who increase their relationship with the Company by using multiple products and
services.
Interest bearing deposits totaled $636.3 million at September 30, 1999,
an increase of $3.0 million (or 0.5%) compared to year end 1998, and a $19.4
million (or 3.1%) increase compared to June 30, 1999. In the first half of 1999,
the Company experienced attrition of maturing, short-term certificates of
deposit as rate sensitive customers looked to maximize their investments by
comparing rates offered by the Company's competitors. During the third quarter
of 1999, the Company offset this attrition by offering a "special" 15-month CD
which offered an attractive rate of return and has continued to offer the 15
month special in the fourth quarter of 1999. Management will continue to
emphasize deposit-gathering in fourth quarter of 1999 by offering special
"relationship accounts" (both non-interest bearing and interest-bearing) based
on other products and services offered by the Company. Management will also
concentrate on balancing deposit growth with adequate net interest margin to
meet the Company's strategic goals.
Along with 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, term repurchase agreements, and various
FHLB borrowings. At September 30, 1999, short-term borrowings totaled $67.6
million, a quarterly increase of $5.9 million (or 9.6%).
Increases in term repurchase agreements (utilized in the Company's
Leverage Strategy) and short-term FHLB borrowings contributed to growth in the
Company's borrowings. At the end of the third quarter of 1999, the Company had
total short-term, national market repurchase agreement balances of $34.0
million, up $11.0 million compared to the previous quarter ending balance of
$23.0 million. With this increase, short-term, national market repurchase
agreements comprised the largest component of the Company's short-term
borrowings. At September 30, 1999, the Company had $2.1 million in short-term
FHLB advances compared to $0.7 million advanced at year-end 1998. In general,
the Company accesses this funding source at various times to balance liquidity
needs.
The second largest component of short-term borrowings consisted of
balances in corporate repurchase agreements, which totaled $31.2 million at
September 30, 1999, compared to $31.7 million at year-end 1998. Management
anticipates that corporate repurchase agreement balances will remain generally
stable for the remainder of 1999.
In addition to traditional deposits and short-term borrowings, the
Company maintains long-term borrowing capacity with the FHLB. Long-term FHLB
advances totaled $147.9 million at September 30, 1999, compared to $38.0 million
at year-end 1998. In the second quarter of 1999, the Company advanced $110
million in long-term FHLB borrowings to fund investment securities purchased in
the Leverage Strategy. The FHLB advances were primarily 10-year borrowings, with
fixed rate features for periods of two, three, or four years, depending on the
specific advance. Each advance has the opportunity to reprice after its initial
fixed rate period (at the discretion of the FHLB), and the Company has the
option to prepay any repriced advance without penalty, or allow the borrowing to
reprice to a LIBOR based, variable product. Management plans to maintain access
to long-term FHLB borrowings as an appropriate funding source.
The Company also has a long-term note with an unaffiliated financial
institution. The original principal balance of the note was $3.0 million and was
used to finance an acquisition in early 1997. At September 30, 1999, the balance
was $2.4 million, a decrease of $0.3 million since year-end 1998. Principal
payments began in 1998 and continue semi-annually over the next three years.
Capital/Stockholders' Equity
For the three months ended September 30, 1999, the Company had net
income of $2.8 million and paid dividends of $0.9 million, a dividend payout
ratio of 31.18% of earnings. For the nine months ended September 30, 1999, net
income totaled $7.9 million and dividends paid were $2.6 million, a dividend
payout ratio of 32.28% of net income, compared to 30.38% 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, 1999, the adjustment for the net unrealized holding
loss on available-for-sale securities, net of deferred income taxes, totaled
$5.7 million, a change of $9.3 million since year-end 1998. Since all 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 changes in market value of the Company's investment portfolio directly
impacted the Company's stockholders' equity. For the quarter ended September 30,
1999, stockholders' equity decreased approximately $4.2 million (or 5.3%) to
$75.2 million. Since year-end 1998, stockholders' equity decreased $10.8 million
(or 12.6%). Management believes the Company's capital continues to provide a
strong base for profitable growth.
The Company has also complied with the standards of capital adequacy
mandated by the banking industry. Bank regulators have established "risk-based"
capital requirements designed to measure capital adequacy. Risk-based capital
ratios reflect the relative risks of various assets banks hold in their
portfolios. A weight category of either 0% (lowest risk assets), 20%, 50%, or
100% (highest risk assets) is assigned to each asset on the balance sheet and to
certain off-balance sheet commitments.
At September 30, 1999, the Company's and each of the banking
subsidiaries' risk-based capital ratios were above the minimum standard for a
well-capitalized institution. The Company's risk-based capital ratio was 14.86%,
well above the 10% minimum standard for well-capitalized institutions. The
Company's Tier 1 capital ratio of 13.15% also exceeded the 6% minimum standard
for well-capitalized institutions. The leverage ratio at the end of the third
quarter of 1999 was 8.58%, also above the minimum standard of 5% for
well-capitalized institutions. 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 the banking
subsidiaries as part of its strategic decision process.
In April 1999, the Company announced its Stock Repurchase Program,
under which the Company will purchase up to 5% of its outstanding common shares
(or approximately 315,000 shares) in open market or privately negotiated
transactions. At November 5, 1999, the Company had purchased over 291,000
treasury shares and is 93% complete with the Stock Repurchase Program. The
timing of the purchases and the actual number of common shares purchased depends
on market conditions. The Stock Repurchase Program, established in late April,
1999, will continue through December 31, 1999. During the third quarter of 1999,
the Company purchased 153,776 treasury shares at a weighted-average price of
$28.13 per share, totaling $4.3 million. From the inception of the Stock
Repurchase Program through September 30, 1999, the Company has purchased 228,276
treasury shares at a weighted-average price of $27.73 per share, totaling $6.3
million.
In June, 1998, the Company implemented a formal plan to purchase
treasury shares for use in its stock option plans. The formal plan serves as the
basis for treasury purchases in anticipation of the Company's projected stock
option exercises and is based upon specific criteria related to market prices,
as well as the number of common shares expected to be reissued under the
Company's stock option plans. During the third quarter of 1999, the Company
purchased 16,500 treasury shares at a weighted-average price of $28.39 per
share, totaling $0.5 million. 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 for the Company's stock
option plans. Management intends to continue its systematic quarterly treasury
share program.
The Company also maintains the Peoples Bancorp Inc. Deferred
Compensation Plan ("Deferred Compensation Plan") for the directors of the
Company and its subsidiaries. The Deferred Compensation Plan 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 Deferred Compensation Plan allows directors to
direct the fees earned for their service as Company and subsidiary directors
into deferred accounts that are either invested in the Company's common shares
or a time deposit, at the specific director's discretion at the time of entering
the Plan. 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, 1999, the Deferred
Compensation Plan and its participants owned $0.8 million of Company common
shares, which is a reduction to the equity balance of the Company. Management
does not expect the Deferred Compensation Plan to have a material impact on
future financial statements or results of operations of the Company.
Liquidity and Interest Rate Sensitivity
The objective of the Company's Asset/Liability Management function is
to maintain consistent growth in net interest income through management of the
Company's balance sheet liquidity and interest rate risk exposure based on
changes in economic conditions, interest rate levels, and customer preferences.
Liquidity measures an organization's ability to meet cash obligations
as they come due. During the nine months ended September 30, 1999, the Company
generated net cash from operating and financing activities of $9.2 million and
$165.3 million, respectively. Net cash used in investing activities for the nine
months ended September 30, 1999, totaled $177.5 million. The major cash inflows
from financing activities were from $110.0 million in long-term borrowings, $35
million in short-term borrowings and $30.0 million from the issuance of the
Trust Preferred Securities. The purchase of treasury stock accounted for a $7.6
million cash outflow from financing activities.
Significant outlays of cash from investing activities resulted from the
$63.3 million net increase in loans and total purchases of investment securities
of $168.8 million. Major inflows of cash from investing activities during the
nine months ended September 30, 1999, included the maturity of investment
securities and the proceeds from sales of investment securities totaling $36.9
million and $19.5 million, respectively.
The Consolidated Statements of Cash Flows presented on page 6 of this
Form 10-Q provides analysis of cash flow activity. Additionally, management
considers that portion of the loan portfolio that matures within one year and
the maturities within one year in the investment portfolio as part of the
Company's liquid assets. The Company's liquidity is monitored by the ALCO, which
establishes and monitors ranges of acceptable liquidity. Management feels the
Company's current liquidity position is acceptable.
The Company has implemented a strategic plan to address the contingency
for extraordinary demands on liquidity due to the Year 2000 ("Y2K") phenomena.
The plan is designed to ensure the adequacy and availability of a variety of
sources of liquidity. A primary part of the plan involves securing the
availability of the Federal Reserve Bank Discount Borrowings for the
subsidiaries of the Company. Also, the Company plans, as much as is reasonably
possible, to accumulate cash and near cash assets to meet the potential need of
additional liquidity. Additionally, the Company intends to review current
correspondent relationships, as well as seek additional relationships to provide
diverse sources of liquidity. The Company has also implemented a proactive
campaign to allay customer Y2K concerns which complements the Y2K liquidity
contingency plan.
The Company manages interest rate risk to minimize the impact of
fluctuating interest rates on earnings. The Company uses simulation techniques
which attempt to measure the volatility of changes in the level of interest
rates, basic banking interest rate spreads, the shape of the yield curve, and
the impact of changing product growth patterns. The primary method of measuring
the sensitivity of earnings to changing market interest rates is to simulate
expected cash flows using varying assumed interest rates while also adjusting
the timing and magnitude of non-contractual deposit repricing to more accurately
reflect anticipated pricing behavior. These simulations include adjustments for
the lag in prime loan repricing and the spread and volume elasticity of
interest-bearing deposit accounts, regular savings, and money market deposit
accounts.
The principal function of interest rate risk management is to maintain
an appropriate relationship between those assets and liabilities that are
sensitive to changing market interest rates. The Company closely monitors the
sensitivity of its assets and liabilities on an ongoing basis and projects the
effect of various interest rate changes on its net interest margin. Interest
sensitive assets and liabilities are defined as those assets or liabilities that
mature or reprice within a designated time-frame. The difference between rate
sensitive assets and rate sensitive liabilities for a specified period of time
is known as "gap".
At September 30, 1999, the Company's interest rate sensitivity
position, based on static gap analysis, was liability sensitive in the
short-term (one year or less) and decreasing in sensitivity for periods over one
year and up to five years. Up to one year, the Company is liability sensitive
due primarily to increases in funding sources which are short-term, such as the
FHLB borrowings and CD specials. Management believes the Company's balance sheet
is theoretically 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 regular meetings of the
Company's ALCO and uses available dynamic data to make appropriate strategic
decisions.
To aid in interest rate management, the Company uses FHLB advances as a
lower risk means of matching maturities of earning assets with interest bearing
funds to achieve a desired interest rate spread over the life of the earning
assets. Additionally, the Company considers the use of certain off-balance sheet
instruments such as interest rate caps, floors, and swaps, to further aid
interest rate risk management. As shown in the table below, the Company
currently has two such off-balance sheet instruments. These instruments, known
as interest rate floors, will provide income to the Company should a selected
market interest rate decline below a preset level specified in the transaction
agreement.
The intent of this type of instrument is to provide additional income
stability to the Company should there be a dramatic decline in interest rate.
Off-balance sheet instruments are an important tool for effective interest rate
risk management. The Company continuously evaluates the current off-balance
sheet positions and the need for additional interest rate management tools. As
demonstrated in the past, the Company will use these instruments whenever
appropriate.
In addition to gap analysis, management also analyzes the impact of
maturing assets and liabilities relative to the interest rates on those
products. The following table provides information about the Company's
derivative financial instruments and other financial instruments that are
sensitive to changes in interest rates. For loans, investment securities, and
liabilities with contractual maturities, the table presents principal cash flows
and related weighted average interest rates by contractual maturities as well as
estimated prepayments of residential mortgages and mortgage-backed securities.
For core deposits (non-interest bearing demand deposits, interest-bearing
checking accounts, and savings accounts) that have no contractual maturity, the
following table presents principal cash flows, and, as applicable, related
weighted average interest rates based on the Company's historical experience and
statistical analysis. For interest rate floors, the table presents notional
amounts (as described in previous sections) and weighted average interest rates
by contractual maturity date. A fundamental difference between the following
table and traditional "static gap" analysis is that the following table presents
the financial instruments based on the date of expected cash flows while a
static gap analysis only focuses on the repricing characteristics of the
financial instruments.
The following tables present the various maturities and fair values of
the Company's interest-earning assets and interest-bearing liabilities at
September 30, 1999, and September 30, 1998:
<TABLE>
<CAPTION>
Principal/Notional Amount Maturities at September 30, 1999:
Maturing Maturing Maturing Maturing Maturing Maturing Total Fair Value
(Dollars in Thousands) Within Within Within Within Within in 9/30/99
12 13-24 25-36 37-48 49-60 61+
Months Months Months Months Months Months
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $65,232 $49,871 $37,802 $28,011 $19,128 $84,239 $284,283 $287,076
Average interest rate 9.40% 9.40% 9.33% 9.57% 9.40% 8.68% 9.19%
Variable interest rate loans $103,727 $21,100 $14,574 $14,723 $14,460 $178,273 $346,857 $346,857
Average interest rate 9.37% 8.20% 8.24% 8.21% 8.20% 7.91% 8.40%
Total loans $631,140
Fixed interest rate securities $15,802 $2,149 $3,734 $3,931 $1,240 $285,870 $312,726 $312,726
Average interest rate 6.07% 5.67% 6.16% 5.59% 5.58% 6.06% 6.05%
Variable interest rate securities $2,690 $5,271 $584 $3,391 $1,615 $7,157 $20,708 $20,708
Average interest rate 6.06% 6.23% 5.49% 6.63% 6.45% 6.45% 6.35%
Total securities $333,434
Other interest-earning assets $1,038 $1,038 $1,038
Average interest rate 4.35% 4.35%
- ---------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
Non-interest bearing checking $21,777 $12,444 $9,333 $3,111 $8,322 $22,789 $77,776 $77,776
Average interest rate
Savings $14,981 $7,490 $7,490 $11,236 $5,618 $46,816 $93,631 $93,631
Average interest rate 2.40% 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%
Interest bearing checking $26,854 $67,241 $26,854 $8,951 $21,931 $71,952 $223,783 $223,783
Average interest rate 3.48% 4.11% 3.48% 3.48% 3.48% 3.48% 3.67%
Time deposits $213,324 $88,906 $7,894 $4,029 $3,909 $775 $318,837 $320,822
Average interest rate 4.86% 5.43% 5.11% 5.41% 4.81% 4.06% 5.03%
Total deposits $714,027
Fixed interest rate borrowings $290 $28 $29 $30 $32 $147,796 $148,205 $147,220
Average interest rate 5.12% 4.06% 4.06% 4.06% 4.06% 4.90% 4.90%
Variable interest rate borrowings $69,695 $69,695 $69,695
Average interest rate 4.78% 4.78%
Total borrowings $217,900
- ---------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial instruments:
Interest rate floors purchased $10,000 $10,000 $2
Average strike rate 5.25%
Forward rate 6.08%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal/Notional Amount Maturities at September 30, 1998:
Maturing Maturing Maturing Maturing Maturing Maturing Total Fair Value
(Dollars in Thousands) Within Within Within Within Within in 9/30/98
12 13-24 25-36 37-48 49-60 61+
Months Months Months Months Months Months
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $67,817 $44,166 $30,925 $19,914 $12,127 $47,454 $222,403 $226,312
Average interest rate 9.76% 9.81% 9.60% 10.15% 10.14% 9.48% 9.74%
Variable interest rate loans $91,176 $35,213 $29,205 $25,444 $22,283 $116,723 $320,044 $320,044
Average interest rate 9.23% 8.23% 8.24% 8.26% 8.28% 8.30% 8.55%
Total loans $542,447
Fixed interest rate securities $31,977 $15,189 $15,594 $15,167 $13,808 $121,885 $213,620 $213,620
Average interest rate 6.01% 6.03% 5.97% 6.01% 6.03% 6.00% 6.00%
Variable interest rate securities $2,342 $3,753 $3,489 $1,465 $658 $12,028 $23,735 $23,735
Average interest rate 6.86% 6.41% 6.50% 7.13% 6.94% 7.22% 6.94%
Total securities $237,355
Other interest-bearing assets $28,975 $28,975 $28,975
Average interest rate 5.47% 5.47%
- ---------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
Non-interest bearing checking $21,510 $12,291 $9,218 $3,073 $8,220 $22,508 $76,820 $76,820
Average interest rate
Savings $16,660 $8,330 $8,330 $12,495 $6,248 $52,065 $104,128 $104,128
Average interest rate 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80%
Interest bearing checking $23,426 $58,840 $23,426 $7,809 $19,131 $62,583 $195,215 $195,215
Average interest rate 3.42% 4.44% 3.42% 3.42% 3.42% 3.42% 3.73%
Time deposits $255,378 $49,226 $16,519 $4,295 $3,964 $991 $330,373 $331,711
Average interest rate 5.38% 5.48% 5.53% 5.65% 5.32% 4.45% 5.40%
Total deposits $706,536
Fixed interest rate borrowings $7,017 $3,747 $2,831 $2,929 $1,852 $20,765 $39,141 $39,007
Average interest rate 5.89% 6.15% 6.03% 6.02% 5.99% 5.38% 5.67%
Variable interest rate borrowings $36,857 $36,857 $36,857
Average interest rate 4.81% 4.81%
Total borrowings $75,998
- ---------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial instruments:
Interest rate floors purchased $10,000 $10,000 $20,000 $170
Average strike rate 5.50% 5.25%
Forward rate 5.31% 5.31%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The preceding tables represent the Company's best estimates of future
cash flows from rate sensitive assets and liabilities. While this table
represents several significant changes in cash flow estimates for assets and
liabilities in maturity periods exceeding five years, the increases in fixed
rate loan and fixed rate investment securities maturing in 2004 and beyond
reflect investment decisions that were driven by simulation modeling which
indicated an asset sensitive balance sheet. Consequently, additional emphasis
was placed on adding fixed rate assets, which also resulted in extended cash
flow cycles to reduce the potential earnings impact of a declining rate
environment. In addition, several fixed rate liability categories also reflect
increases in extended cash flow characteristics. While the underlying
instruments have longer contractual maturities, certain repricing options, if
exercised by the creditor, would result in a corresponding option to the Company
to repay the borrowing. Management intends to actively manage the corresponding
impact of these extended cash flow characteristics as a part of the regular
review and actions of the ALCO.
The Company employs a variety of measurement techniques to identify and
manage its interest rate risk exposure. In addition to the interest rate
sensitivity and asset/liability repricing schedules, management also uses
simulation modeling and forecasting capability to determine the impact of
changing rate environments and to assess 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 modeling results are more
reasonable indications of the Company's interest rate risk. Evaluation and
review of the techniques, tools, and assumptions used in assessing the Company's
interest rate risk is an ongoing process.
Management believes the Company's current mix of assets and liabilities
provides a reasonable level of risk related to 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, 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
Financial data and performance ratios for the quarter and nine months
ended September 30, 1999, represent the results of key strategic initiatives
implemented in the second quarter of 1999. Issuance of the Trust Preferred
Securities, initiation and completion of the Leverage Strategy, and Stock
Repurchase Program offered unique opportunities to the Company to capitalize on
the Company's financial strength and favorable long-term interest rate market.
With these recent strategic actions, management has enhanced key performance
indicators, in particular earnings per share and return on stockholders' equity.
The Company's future financial results will depend on the timing of stock
repurchases and other factors, such as the interest rate environment and loan
demand.
The third quarter of 1999 was the first full quarter of financial
results that included the Leverage Strategy and Stock Repurchase Program, and
management is pleased with enhancements to operating results and shareholder
return. Management continues to refine strategic plans to produce enhanced
future financial performance through a combination of external growth and a
focus on core competencies. Management continues to challenge its associates to
identify critical banking processes and re-engineer services to provide the
customer with the highest quality products and services. In addition, management
has identified and will continue to analyze key performance indicators which
quantitatively measure the relative performance of the Company compared to prior
year results.
In 1999, management initiated multiple programs designed to enhance the
sales expertise and relationship building skills of the Company's customer
service representatives. These and other investments in customer service
enhancements represent the Company's strategic initiatives designed to increase
current and potential customer relationships within the Company. Management will
continue to invest in sales training and other professional expenses as the
Company's sales process evolves.
In addition to intensified sales and education efforts, in the first
quarter of 2000, Peoples Bank will open its third sales facility within a West
Virginia Wal*Mart superstore in South Parkersburg. This new office will increase
the Company's visibility in its West Virginia markets and give the Company's
personal bankers better access to an increased number of shoppers compared to a
traditional banking center. The South Parkersburg Wal*Mart will complement the
Company's existing full-service banking centers in Wood County, West Virginia,
as well as provide additional locations to Peoples Bank's customers in the
greater Parkersburg area, particularly through the Vienna Wal*Mart location.
Management believes these new sales centers are catalysts for future sales and
customer service efforts and a focal point for one-stop financial service
centers. Rather than traditional banking offices, the Wal*Mart locations are
full-service `electronic' sales centers, with an emphasis on selling products
that meet the customers' financial needs combined with electronic transaction
capabilities and access to customer accounts. Management is pleased with the
early results of the new Wal*Mart offices and is encouraged by the sales
momentum generated in these offices.
In the fourth quarter of 1999, Peoples Bank completed its acquisition
of a full-service banking facility in Huntington, West Virginia ("Huntington
Banking Center Acquisition") from an unaffiliated financial institution. In the
agreement, Peoples Bank assumed approximately $5 million in deposits and $0.5
million in loans. The Huntington office is a natural extension of the Company's
presence in this segment of the Ohio River Valley, and management looks forward
to continuing the development of this region as it complements the Company's
northeastern Kentucky operations. The tri-state markets of southern Ohio,
northeastern Kentucky, and western West Virginia offer many growth
opportunities, and management looks forward to meeting the financial service
needs of the customers in the Huntington, West Virginia - Ashland, Kentucky
greater metropolitan area.
Continuing the Company's emphasis on electronic product delivery, the
Company began offering a fully integrated internet banking system ("Internet
Banking System") in the third quarter of 1999. The Internet Banking System
("Peoples OnLine Connection") allows customers to perform online transactions,
pay bills, view account history, stop payment, open accounts, change address,
reorder checks, purchase savings bonds and complete other financial
transactions. Peoples OnLine Connection is an on-line service that offers real
time transaction capability and portability for the customer. The Company's
intends to satisfy customer demand for internet banking in the markets it serves
while providing a link to its history of needs-based selling and
community-minded service. Peoples OnLine Connection acts as the conduit of
financial information for many of the Company's customers in future periods.
Peoples OnLine Connection is being offered in conjunction with the
Company's current PC-based cash management/home banking product that has been
used primarily by commercial customers. The Company will continue to strive to
meet future customer service challenges through its wide array of delivery
channels, using technology and traditional methods in the manner that best fits
each customer. Management recognizes the importance of electronic financial
services to its customer base and continues to focus efforts designed to enhance
this process and allow customers almost unlimited banking products and services
at their convenience.
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 future net income. In 1998, net
interest income increased as a percentage of total revenues due to the West
Virginia Banking Center Acquisition. In future periods, management will focus on
methods to enhance earnings potential by optimizing customer relationships
through an integrated sales process.
Integration of the Company's many sales processes, products, and
services will be the primary focus for the remainder of 1999. The Company will
continue to focus on a marketing program based on establishing brand awareness
of the Company in its markets, as well as establishing the "connection" between
customers and the many products and services offered by the Company. Peoples
OnLine Connection will strengthen the Company's goal to be the leader in the
markets it serves.
Management will continue to research alternative methods of enhancing
non-interest income streams, such as electronic banking revenues, low income
housing tax credits, and other investments. In addition to traditional banking
products, the Company's insurance capabilities are an integral part of future
earnings streams. On November 1, 1999, the Company completed its first agency
acquisition when one of its insurance subsidiaries, Northwest Territory Property
and Casualty Insurance Agency, Inc. ("Northwest Territory Property and
Casualty") completed the purchase of Lambert Insurance Agency in a cash
transaction. Located in Pomeroy, Ohio, the Lambert Insurance Agency is a full
service agency and seller of health, life, property and casualty insurance, and
has served the Meigs County area since 1986. Lambert Insurance Agency will
retain its name and operate as a division of Northwest Territory Property and
Casualty, which provides a complete line of high quality, competitively priced,
auto, home, business, life and mortgage protection products to consumers in Ohio
and West Virginia.
Management looks forward to leveraging the financial service offerings
of the Lambert Insurance Agency with the Company's existing Meigs County (Ohio)
and Mason County (West Virginia) full-service banking offices. The addition of
the Lambert Insurance Agency to the Company's current insurance activity is an
exciting step in the growth of Northwest Territory Property and Casualty's
insurance operation and fits well in the Company's mid-Ohio Valley markets. The
acquisition also increased the Company's number of insurance carriers. Increased
access to additional carriers provides the opportunity to bring added value to
current and future client relationships.
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. Management will continue to focus its
energies on review and research of possible mergers, consolidations, or banking
center purchases as a means of acquiring sales centers that complement existing
Company locations and sales strategies. Ultimately, acquisitions will depend
upon financial service opportunities that complement the Company's core
competencies and strategic intent. 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.
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 believes the Company is poised to
capitalize on its recent growth and initiatives to reposition the Company's
balance sheet through the combined impact of the issuance of the Trust Preferred
Securities, the Leverage Strategy, and Stock Repurchase Program. Management
believes that the Company can produce enhanced future performance levels through
integrated sales techniques and commitment to the strategic initiatives outlined
in this section, which are designed to enhance customer service and increase
future shareholder value.
Impact of the Year 2000 Issue
The Company intends this information to constitute notice under the
Year 2000 Information and Readiness Disclosure Act as a "Year 2000 Readiness
Disclosure". Many companies across various industries have dedicated efforts to
analyze the much-publicized "Year 2000" issue (or "Y2K"), which is the result of
computer programs written using two digits rather than four to define the
applicable year. 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.
As discussed further below and based on assessments completed by the
Company, portions of the Company's software and hardware systems have been
modified, updated, or replaced so that those systems will properly utilize dates
beyond December 31, 1999. Management believes its assessment and resulting
remediation measures have mitigated the Y2K issue and ensured Y2K compliance in
regards to mission-critical applications, including customer service related
hardware and software systems.
Management has implemented plans to address Y2K issues and the impact
to the Company's 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 management's
assessments, the Company replaced certain portions of its software and worked
with software vendors so that those systems would properly utilize dates beyond
December 31, 1999. Management presently believes with these recent
modifications, the Y2K issue will be mitigated. Since the Company offers
fiduciary services, management has conducted a review of these services to
identify potential liabilities. Management continues to take appropriate action
to manage identified exposure in order to fulfill its responsibilities to
fiduciary clients and to observe the standards of prudence set forth in
applicable laws and regulations.
Management has addressed the Y2K issue in five phases as follows:
awareness, assessment, renovation, validation, and implementation. The Company
has completed its assessment of all material systems which could be affected by
the Y2K issue and addressed the extent to which its operations are vulnerable
should its software fail to be Y2K 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 financial institutions to do in order to ensure Y2K preparedness.
The Company is following these guidelines and has met all deadlines defined by
banking regulators. The Company intends to meet requirements of any additional
guidance issued by banking regulators.
The Company's assessment process included IT and non-IT systems. 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. Based on the results of its assessment process,
management considers these IT systems to be compliant with Y2K. 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 Y2K
compliance. Based on vendor responses and/or certification of Y2K compliance,
the Company has determined that it should not be significantly impacted by Y2K
in respect of these systems.
The following chart shows the progression of the Company's Y2K
compliance efforts relative to IT systems:
Nov. 13, Dec. 31, Feb. 12, Mar. 31, May 10, June 30,
PHASE 1998 1998 1999 1999 1999 1999
- ---------------- --------- -------- -------- -------- ------- -------- ---------
Awareness 100% --- --- --- --- --- complete
Assessment 100% --- --- --- --- --- complete
Renovation 80% 80% 100% --- --- --- complete
Validation 20% 70% 75% 80% 90% 100% complete
Implementation 20% 70% 75% 80% 90% 100% complete
Management estimates that half of its potential Y2K issues originate in
the Company's core banking system (software provided by a third-party vendor),
which supports approximately 50% of the Company's information processing. This
single system software provides accounting for the Company, as well as loan and
deposit products. This core banking system has been certified as Y2K compliant
by the vendor and the Information Technology Association of America. This
software has essentially been Y2K compliant for several years (it was designed
with a four-digit year field) and supports calculations beyond the year 2000.
The Company has completed 100% of its due diligence review of the proxy testing
of the core banking system. Additionally, the Company has conducted testing in
its own environment and has validated the proxy tests. The Company has also
successfully tested all its mission critical interfaces into its core banking
system.
The Company has replaced the central processing unit (hardware) that
supports the accounting system for Investment and Trust. The Company has also
upgraded the accounting system software, which has been certified compliant by
its vendor. These replacements and upgrades enabled the Company to test the
software and the related network and computer hardware, in its own environment.
This testing has been completed and management believes the results were
successful.
The ATM network software has also been certified compliant by its
vendor and has been tested in the Company's operational environment. The
remaining mission critical IT system, the Company's document processing and
retrieval system, was fully validated and implemented during the second quarter
of 1999, as planned.
Also as planned, management replaced the Company's internal operating
systems (on existing hardware) during the second half of 1998. The internal
operating system for the mainframe computer has been successfully tested and
proven to be Y2K compliant. 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. All mission critical applications that were not Y2K compliant have been
upgraded and all reprogramming of internal software was completed in 1998.
The Company completed 100% of its testing in the third quarter of 1999
and has implemented all of the renovated systems that have been tested.
Throughout the remainder of 1999, the Company will continue to update hardware
and software in conjunction with its normal business plan. All systems will be
tested for Y2K compliance prior to the integration into the Company's network.
The Company has also developed contingency plans for all
mission-critical systems, which it will implement in the event any of these
systems fail to function properly. The Company has completed the four phases of
business resumption contingency planning process, as outlined by the banking
regulators, which include the following: establishing organizational planning
guidelines, completing a business impact analysis, developing the business
resumption contingency plan, and designing a method of validation so that the
business resumption contingency plan can be tested for viability. Contingency
plans for both information technology systems ("IT") and non-information
technology systems ("non-IT") include a combination of manual processes and
utilization of systems (which have already been Y2K 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 Y2K related
problems. These problems may result from the failure of a customer to properly
remediate its own systems and from Y2K 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 has queried, through written and verbal communication, its
important suppliers (such as utility companies) which have no 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 Y2K ready. The inability of these parties to complete
their Y2K resolution processes could materially impact the Company, as well as
other businesses and consumers.
The Company expenses Y2K project costs as incurred. The total
out-of-pocket cost of the Y2K compliance project is not expected to be greater
than $200,000 and, therefore, is immaterial to the Company's results of
operations and financial position. As of November 8, 1999, management estimates
that 92% of the Company's costs have been incurred. Included in the cost
estimate is internal human resource expense which is estimated to approximate
between $100,000 to $150,000. Although actual out-of-pocket expenses have been
less than anticipated, management has increased the amount of internal human
resource expected to be consumed by this project, offsetting the costs saved
relative to purchases of hardware, software, and/or consulting fees. Management
anticipates the unused portion of the budget will be consumed by ongoing
customer contacts to further determine risks related to users and providers of
funds, as well as other customer communication programs, additional internal
audit testing of the Company's Y2K efforts, further enhancement of contingency
plans, and continued project management. The Company has no pending material
legal proceedings related to Y2K.
Due to the positive progress of the Company relative to remediation of
the Y2K issue, management has continued the Company's comprehensive marketing
program designed to communicate to its customers the Company's preparedness
regarding Y2K. Throughout the remainder of 1999, the Company plans to increase
its efforts to communicate its Y2K readiness in the market areas it serves.
The foregoing discussion of the Company's plans to address the Y2K
issues contains forward-looking statements for purposes of the Private
Securities Litigation Reform Act of 1995 and is 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 Y2K compliance, the ability of
vendors to deliver Y2K 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 that involve risks and uncertainties, including, but
not limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of 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. Although we believe that the expectations in these
forward-looking statements are based on reasonable assumptions within the bounds
of management's knowledge of the Company's business and operations, it is
possible that actual results may differ materially from these projections.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption
"Liquidity and Interest Rate Sensitivity" under Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations in this Form 10-Q,
and is incorporated herein by reference.
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended September 30, For the Nine Months Ended September 30,
1999 1998 1999 1998
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 $ 295,930 6.28% $ 186,057 6.23% $ 245,412 6.31% $ 180,290 6.45%
Tax-exempt 50,209 7.80% 37,922 7.68% 47,023 7.49% 32,007 7.82%
- -------------------------------------------------------------------------------------------------------------------------
Total 346,139 6.74% 223,979 6.48% 292,435 6.35% 212,297 6.65%
Loans:
Commercial 253,948 8.69% 187,473 9.20% 240,151 8.66% 181,120 9.35%
Real estate 244,666 8.20% 234,532 8.60% 238,716 8.30% 233,305 8.66%
Consumer 114,692 10.50% 111,764 10.45% 111,806 10.41% 111,716 10.49%
- -------------------------------------------------------------------------------------------------------------------------
Total loans 613,306 8.83% 533,769 9.20% 590,673 8.84% 526,141 9.29%
Less: Allowance for loan
loss (10,285) (9,333) (10,008) (9,019)
- -------------------------------------------------------------------------------------------------------------------------
Net loans 603,021 8.98% 524,436 9.36% 580,665 8.99% 517,122 9.45%
Interest-bearing deposits 1,854 4.19% 2,070 4.89% 4,140 4.19% 4,332 5.87%
Federal funds sold 580 4.93% 43,648 5.55% 6,463 4.78% 18,891 5.55%
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets 951,594 8.16% 794,133 8.33% 883,703 8.12% 752,642 8.54%
Other assets 82,990 74,939 77,131 63,216
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,034,584 $ 869,072 $ 960,834 $ 815,858
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 95,434 2.39% $ 105,496 2.84% $ 97,383 2.40% $ 96,248 2.96%
Interest-bearing
demand deposits 217,405 3.53% 192,784 3.63% 212,029 3.48% 157,349 3.60%
Time 309,904 4.90% 328,917 5.29% 317,041 5.00% 317,132 5.41%
- -------------------------------------------------------------------------------------------------------------------------
Total 622,743 4.04% 627,197 4.37% 626,453 4.08% 570,729 4.58%
Borrowed funds:
Short-term 69,449 4.81% 34,436 4.79% 46,834 4.54% 48,700 5.11%
Long-term 150,347 4.97% 41,506 5.79% 102,583 4.86% 38,603 5.89%
- -------------------------------------------------------------------------------------------------------------------------
Total 219,796 4.92% 75,942 5.34% 149,417 4.76% 87,303 5.45%
Total interest
bearing liabilities 842,539 4.27% 703,139 4.47% 775,870 4.21% 658,032 4.63%
Non-interest bearing deposits 78,663 75,187 77,524 67,764
Other liabilities and
minority interests 36,618 7,641 24,394 8,798
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and
minority interests 957,820 785,967 877,788 734,594
Stockholders' equity 76,764 83,105 83,046 81,264
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities,
minority interests
and equity $ 1,034,584 $ 869,072 $ 960,834 $ 815,858
- -------------------------------------------------------------------------------------------------------------------------
Interest income to earning assets 8.16% 8.33% 8.12% 8.54%
Interest expense to earning assets 3.78% 3.96% 3.70% 4.04%
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.38% 4.37% 4.42% 4.50%
- -------------------------------------------------------------------------------------------------------------------------
<FN>
Interest income and yields presented on a fully tax-equivalent basis using a 35%
tax rate.
</FN>
</TABLE>
PART II
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities and Use of Proceeds.
None.
ITEM 3: Defaults upon Senior Securities.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None.
ITEM 5: Other Information.
Effective as of September 23, 1999, the holders of all $30 million
aggregate liquidation amount of the Series A 8.62% Capital Securities (the
"Original Capital Securities") issued by PEBO Capital Trust I (the "Trust") on
April 20, 1999, had tendered their Original Capital Securities for exchange and
were issued in exchange $30 million aggregate liquidation amount of the Series B
8.62% Capital Securities (the "Exchange Capital Securities") of the Trust.
Contemporaneously, Peoples Bancorp Inc. exchanged its guarantee (the
"Exchange Guarantee") of the obligations of the Trust under the Exchange Capital
Securities for a similar guarantee (the "Original Guarantee") of the obligations
of the Trust under the Original Capital Securities. Peoples Bancorp Inc. also
exchanged $30 million aggregate principal amount of its Series B 8.62% Junior
Subordinated Deferrable Interest Debentures due May 1, 2029 (the "Exchange
Debentures"), for a like aggregate principal amount of its Series A 8.62% Junior
Subordinated Deferrable Interest Debentures due May 1, 2029 (the "Original
Debentures") which had been held by the Trust. The Exchange Capital Securities,
the Exchange Guarantee and the Exchange Debentures are registered under the
Securities Act of 1933. The Original Capital Securities, the Original Guarantee
and the Original Debentures were not registered under the Securities Act of
1933.
ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
- ------------ ----------------------------------- -----------------------------
11 Computation of Earnings Per Share. *
27 Financial Data Schedule. EDGAR electronic filing only.
* Filed herewith.
ITEM 6: Exhibits and Reports on Form 8-K (continued).
b) Reports on Form 8-K: The Company filed the following reports on Form 8-K
during the three months ended September 30, 1999:
1) Filed July 1, 1999 - News release announcing the Company's
opening of a sales center by subsidiary The Peoples Banking and Trust Company's
in a Wal*Mart superstore located in Vienna, West Virginia.
2) Filed July 19, 1999 - News release announcing the Company's
earnings for the second quarter ended June 30, 1999.
3) Filed July 27, 1999 - Sample report filed to test Y2K
readiness.
4) Filed August 16, 1999 - News release announcing the declaration
of a $0.14 per share quarterly dividend by the Board of Directors of the
Company.
5) Filed September 17, 1999 - News release announcing the
consummation of an agreement by subsidiary The Peoples Banking and Trust Company
to acquire a full-service banking facility in Huntington, West Virginia.
6) Filed September 20, 1999 - News release announcing plans by
subsidiary The Peoples Banking and Trust Company to introduce Peoples OnLine
Connection, and internet-based electronic banking system.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORP INC.
Date: November 15, 1999 By:/s/ ROBERT E. EVANS
Robert E. Evans
President and Chief Executive Officer
Date: November 15, 1999 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, 1999
Exhibit
Number Description Exhibit 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
<TABLE>
<CAPTION>
(dollars in thousands, except share data) For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
EARNINGS:
Net income ........................................ $ 2,758 $ 2,096 $ 7,937 $ 7,272
AVERAGE SHARES OUTSTANDING:
Weighted average Common Shares outstanding ........ 6,148,492 6,315,498 6,247,907 6,322,345
- -------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE ................... $ 0.45 $ 0.33 $ 1.27 $ 1.15
- -------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
EARNINGS:
Net income ........................................ $ 2,758 $ 2,096 $ 7,937 $ 7,272
AVERAGE SHARES OUTSTANDING:
Weighted average Common Shares outstanding ........ 6,148,492 6,315,498 6,247,907 6,322,345
Net effect of the assumed exercise of stock options
based on the treasury stock method ........... 194,539 178,306 167,535 202,440
- -------------------------------------------------------------------------------------------------------
Total ................................... 6,343,031 6,493,804 6,415,442 6,524,785
- -------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE ................. $ 0.43 $ 0.32 $ 1.24 $ 1.11
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted for 10% stock dividend issued June 15, 1999, to shareholders of
record as of May 28, 1999.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
* LEGEND: This schedule contains summary financial information extracted
from the Form 10-Q filed as of September 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 36,095
<INT-BEARING-DEPOSITS> 1,038
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 333,434
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 631,140
<ALLOWANCE> 10,392
<TOTAL-ASSETS> 1,044,097
<DEPOSITS> 714,027
<SHORT-TERM> 67,556
<LIABILITIES-OTHER> 7,978
<LONG-TERM> 150,344
0
0
<COMMON> 64,963
<OTHER-SE> 10,240
<TOTAL-LIABILITIES-AND-EQUITY> 1,044,097
<INTEREST-LOAN> 39,023
<INTEREST-INVEST> 13,327
<INTEREST-OTHER> 361
<INTEREST-TOTAL> 52,711
<INTEREST-DEPOSIT> 19,124
<INTEREST-EXPENSE> 24,453
<INTEREST-INCOME-NET> 28,258
<LOAN-LOSSES> 1,431
<SECURITIES-GAINS> (115)
<EXPENSE-OTHER> 20,649
<INCOME-PRETAX> 11,652
<INCOME-PRE-EXTRAORDINARY> 7,937
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,937
<EPS-BASIC> 1.27
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 4.42
<LOANS-NON> 474
<LOANS-PAST> 702
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,809
<CHARGE-OFFS> 848
<RECOVERIES> 300
<ALLOWANCE-CLOSE> 10,392
<ALLOWANCE-DOMESTIC> 10,392
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 903
</TABLE>
