UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 31-0987416
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (740) 373-3155
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Securities registered pursuant
to Section 12(b) of the Act: None
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Securities registered pursuant to
Section 12(g) of the Act: Common Shares, No Par Value (5,7333,617
outstanding at March 4, 1999)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Based upon the closing price of the Common Shares of the Registrant on The
NASDAQ National Market as of March 4, 1999, the aggregate market value of
the Common Shares of the Registrant held by nonaffiliates on that date was
$123,520,116. For this purpose, certain executive officers and directors
are considered affiliates.
Documents Incorporated by Reference:
1) Portions of Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1998, are incorporated by reference
into Parts I and II of this Annual Report on Form 10-K.
2) Portions of Registrant's definitive Proxy Statement relating to the
Annual Meeting to be held April 15, 1999, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
Exhibit Index Appears on Pages 21 through 24
PART I
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ITEM 1. BUSINESS.
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Introduction
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Peoples Bancorp Inc. ("Peoples Delaware") was incorporated under the laws of
the State of Delaware on April 1, 1980. Effective April 6, 1993, Peoples
Delaware was merged into Peoples Bancorp Inc., an Ohio corporation (the
"Company"), for the purpose of changing the Company's state of incorporation
from Delaware to Ohio. The Company's principal business is to act as a
multi-bank holding company. Its wholly-owned subsidiaries are The Peoples
Banking and Trust Company ("Peoples Bank"), The First National Bank of
Southeastern Ohio ("First National Bank"), Peoples Bank FSB and The Northwest
Territory Life Insurance Company, an Arizona corporation ("Northwest
Territory").
The Company's subsidiaries provide an array of financial products and
services to their customers, including traditional banking products such as
deposit accounts, lending products, credit and debit cards, corporate and
personal trust services, and safe deposit rental facilities. The Company's
insurance agency subsidiaries also offer investment and insurance products.
The Company's banking subsidiaries provide services through ordinary walk-in
offices, automated teller machines, and automobile drive-in facilities,
banking by phone, and also provide limited cash management services through
computer banking.
The Company's subsidiaries operate 34 sales offices in the states of Ohio,
West Virginia, and Kentucky. At December 31, 1998, the Company had total
assets of $880.3 million, total loans of $567.9 million, total deposits of
$714.2 million, and total shareholders' equity of $86.0 million. For the
year ended December 31, 1998, the Company's return on average assets was
1.20% and return on average stockholders' equity was 12.21%.
At December 31, 1998, the Company and its subsidiaries had 362 full-time
equivalent employees (including 27 full-time equivalent employees at the
parent company level). The principal executive office of the Company is
located at 138 Putnam Street, Marietta, Ohio 45750, and its telephone
number is (740) 374-6136.
Over the past several years, the Company has experienced significant growth
in assets and shareholders' equity, primarily through acquisitions as well
as banking center purchases. For the five-year period ended December 31,
1998, the Company's assets grew at a 12.1% compound annual growth rate,
while stockholders' equity grew at a compound annual growth rate of 13.5%.
The Company has also had a history of consistent earnings growth, as net
income per share grew at a compound rate of 9.9% for the five-year period
ended December 31, 1998. Over that same period, the Company's annual return
on average assets and equity were 1.23% and 13.24%, respectively.
The Company routinely explores opportunities for additional growth and
expansion of its core financial service businesses, including the acquisition
of companies engaged in similar activities. Management also focuses on
internal growth as a method for reaching performance goals and reviews key
performance indicators on a regular basis to measure the Company's success.
There can be no assurance, however, that the Company will be able to grow,
or if it does, that any such growth or expansions will result in an increase
in the Company's earnings, dividends, book value, or market value of its
common stock.
The Peoples Banking and Trust Company
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General
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Peoples Bank, a full-service commercial bank, was chartered as an Ohio
banking corporation under its present name in Marietta, Ohio, in 1902. It
provides the following products to its customers: checking accounts; NOW and
Super NOW accounts; money market deposit accounts; savings accounts; time
certificates of deposit; commercial, installment, and commercial and
residential real estate mortgage loans; credit and debit cards; lease
financing; corporate and personal trust services; and safe deposit rental
facilities. Peoples Bank also sells travelers checks, money orders and
cashier's checks. Peoples Bank provides services through ordinary walk-in
offices, automated teller machines ("ATMs"), automobile drive-in facilities
called "Motor Banks," and banking by phone, and provides limited cash
management services through computer banking.
With offices located in Ohio and West Virginia, Peoples Bank serves
principally Washington, Athens, Meigs, Fairfield, and Gallia Counties in
Ohio and Wood, Wetzel, and Mason Counties in West Virginia, together with
portions of Hocking, Perry, Lawrence, Licking, and Vinton Counties in Ohio
and Tyler, Pleasants, and Jackson Counties in West Virginia. At December
31, 1998, Peoples Bank had assets of $694.0 million, deposits of $582.3
million, net loans of $455.7 million and 279 full-time equivalent employees.
Also at December 31, 1998, the Investment and Trust Division of Peoples Bank
held approximately $535 million of assets (market value) in trust and
custodial accounts apart from the assets of the Bank.
Recent Acquisitions and Additions
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Effective at the close of business 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, from an unaffiliated financial institution. In the transaction,
Peoples Bank assumed approximately $121.0 million in deposits and purchased
$8.3 million in loans. The Point Pleasant offices, located in Mason County,
and the New Martinsville office, located in Wetzel County, currently operate
full-service banking offices and Motor Banks while the Steelton office, also
located in Wetzel County, operates a full-service banking office, Motor Bank,
and an ATM.
On August 17, 1998, a new banking facility was opened at 2107 Pike Street in
Parkersburg, West Virginia. The facility, located in the South Gate Shopping
Center, is a full-service office with an attached Motor Bank, and offers
loan, insurance, investment, and trust services along with traditional
deposit products.
In addition, Peoples Bank will operate a new ATM on leased property in
Nelsonville, Ohio. The lease expires four years from the ATM's delivery
date, which is expected to be in late March, 1999.
Banking Facilities
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Peoples Bank provides services to its customers through the various banking
facilities and ATMs throughout Ohio. In Marietta, Peoples Bank has four
facilities and ATMs: its principal banking office and ATM in downtown
Marietta; a full-service office, Motor Bank and ATM located at the Frontier
Shopping Center and at Second and Scammel Streets; and a full-service office
and ATM located inside a grocery store at Pike and Acme Streets. In Belpre,
Peoples Bank operates a full-service office, two Motor Banks and an ATM.
Other offices in Washington County include full-service offices with Motor
Banks located in Lowell and Reno. Peoples Bank provides services to its
Athens County customers through a full-service office and ATM located at One
North Court Street in downtown Athens, Ohio; a full-service office, Motor
Bank and ATM located at the Athens Mall on East State Street and at the HDL
Center on West Union Street in Athens; three ATMs located on the campus of
Ohio University, also in Athens; and a full service office with a Motor Bank
in Nelsonville, Ohio. In Meigs County, a full-service office and separate
Motor Bank are located in downtown Pomeroy, together with an ATM located
outside a local convenience store; and full-service offices located at
Middleport, and Rutland, Ohio. A full-service office and Motor Bank in
Gallipolis, Ohio, serve customers in neighboring Gallia County. A full-
service office in Baltimore, Ohio, complements a loan production office in
Granville, Ohio, both serving parts of Licking and Fairfield Counties.
Future Sales Offices
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In January 1999, Peoples Bank announced its intention to open three sales
offices in Wal-Mart stores located in the communities of New Martinsville,
Vienna, and Parkersburg, West Virginia. These sales offices will be located
in the front of each Wal-Mart store near the customer service area and will
offer new deposit accounts, loans, insurance products, investment services,
Internet access, ATM access, and more. Peoples Bank anticipates opening its
New Martinsville Wal-Mart sales office on April 1, 1999. The Vienna Wal-Mart
and Parkersburg (south) Wal-Mart sales offices are scheduled to open in the
third quarter and late fourth quarter of 1999, respectively, coinciding with
the grand opening of each store.
The First National Bank of Southeastern Ohio
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General
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First National Bank is a national banking association chartered in 1900. It
provides banking services and products that are substantially the same as
those of Peoples Bank. First National Bank's market area is comprised of
Caldwell, Chesterhill, McConnelsville and the surrounding area in Noble and
Morgan Counties, Ohio. At December 31, 1998, it had assets of $87.8 million,
deposits of $65.4 million, net loans of $58.0 million and 27 full-time
equivalent employees.
First National Bank also owns two insurance agency subsidiaries, Northwest
Territory Life Insurance Agency, Inc. and Northwest Territory Property and
Casualty Insurance Agency, Inc. (the "Agencies"). The Agencies were created
in compliance with federal regulations allowing insurance powers to national
banks in communities with populations of 5,000 people or less. On December
22, 1995, each Agency received a Certificate of Qualification (license) to
operate the Agency from the Ohio Department of Insurance, thereby allowing
the Agencies to engage in the insurance agency business, subject to the
regulations of the Ohio Department of Insurance and the Comptroller of the
Currency. These were the first insurance agencies in Ohio associated with a
financial institution to receive licenses to conduct a broad-based insurance
business. In August 1998, these agencies were licensed by Ohio-based
Motorists Mutual Insurance Company, MICO Insurance Company and Motorists
Life Insurance Company ("Motorists"). The Agencies offer a complete line of
life and property and casualty products through Motorists. At December 31,
1998, the Agencies had 8 full-time employees.
In addition, a full line of investment products are offered at the Company
through Marketing One Securities, Inc., a unaffiliated registered broker
dealer, member NASD and SIPC. The Company has 16 registered representatives
and one registered principal.
Banking Facilities
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First National Bank operates a full-service office and Motor Bank at one
location at 415 Main Street, Caldwell, Ohio. It also operates a full-
service office and Motor Bank on Marion Street in Chesterhill, Ohio, as well
as a full-service office on Kennebec Street, McConnelsville, Ohio.
The Agencies' principal office is located within the First National Bank
office at 415 Main Street in Caldwell, Ohio. The Agencies also use office
space within the various offices of Peoples Bank and First National Bank as
necessary to serve their customers.
Peoples Bank FSB
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General
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On January 1, 1997, the Company acquired Russell Federal Savings Bank
("Russell Federal"), and continued its operation as a federal savings bank.
Russell Federal was originally chartered as a mutual association in 1914,
but later converted to a stock corporation on October 6, 1994.
On December 12, 1997, the Company acquired Gateway Bancorp, Inc. ("Gateway")
and its subsidiary, Catlettsburg Federal Savings Bank ("Catlettsburg
Federal"). Catlettsburg Federal was originally chartered as a mutual savings
and loan association in 1935, and converted to a federally-chartered stock
savings bank in 1994 with Gateway as its sole shareholder.
On January 1, 1998, Russell Federal became a subsidiary of Gateway to begin
the process of aligning the Company's business units in northeast Kentucky.
Effective January 1, 1999, the Company merged Russell Federal and
Catlettsburg Federal to form a single thrift and renamed it "Peoples Bank
FSB". In addition, the Company dissolved Gateway. These actions were
designed to align the Company's Kentucky operations and optimize its focus
on sales and service in its markets. At January 1, 1999, Peoples Bank FSB
had total assets of $97.5 million, deposits of $66.8 million, net loans of
$44.7 million and 20 full-time equivalent employees.
Peoples Bank FSB's principal products include savings accounts, time
certificates of deposit and commercial and residential real estate loans.
Peoples Bank FSB's primary market area consists of Catlettsburg, Ashland,
Grayson, Russell and the contiguous areas of Greenup, Carter, and Boyd
Counties in Kentucky.
Recent Additions
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In 1998, Peoples Bank FSB expanded its products and services to include
non-interest bearing transaction accounts; NOW and Super NOW accounts;
commercial and consumer loans; debit cards; and ATM services. It also
completed the renovation of a new walk-in office and attached Motor Bank
located in Boyd County at 1410 Eagle Drive in Ashland, Kentucky in March,
1998. Peoples Bank FSB added its first ATM as part of the renovation.
Banking Facilities
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In addition to the Ashland office, Peoples Bank FSB serves the financial
needs of customers through a walk-in office located at 2717 Louisa Street in
Catlettsburg, Kentucky. Peoples Bank FSB also has a full-service, walk-in
office and adjacent Motor Bank at 380 South Carol Malone Boulevard in
Grayson, Kentucky and a full-service, walk-in office and Motor Bank on Ferry
Street in Russell, Kentucky.
The Northwest Territory Life Insurance Company
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Northwest Territory was organized under Arizona law in 1983 and was issued a
Certificate of Authority to act as a reinsurance company by the State of
Arizona on February 8, 1984. Northwest Territory reinsures credit life and
disability insurance issued to customers of banking subsidiaries of the
Company by the issuing insurance company. At fiscal year end November 30,
1998, Northwest Territory had total assets of $1.5 million and had gross
premium income of $208,000 in 1998, $218,000 in 1997 and $201,000 in 1996.
Northwest Territory reinsures risks (currently not exceeding $15,000 per
insured on a present value basis) within limits established by governmental
regulations and management policy. Northwest Territory has no employees.
Customers and Markets
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The Company's service area has a diverse economic structure. Principal
industries in the area include metals, plastics and petrochemical
manufacturing; oil, gas and coal production; and related support industries.
In addition, tourism, education and other service-related industries are
important and growing industries. Consequently, the Company is not dependent
upon any one industry segment for its business opportunities.
Each of the Company's banking subsidiaries originates various types of loans,
including commercial and commercial real estate loans, residential real
estate loans, home equity lines of credit, real estate construction loans,
and consumer loans (including loans to individuals, credit card loans, and
indirect loans). In general, the Company retains most of its originated
loans and, therefore, secondary market activity has been minimal. The loans
of each of the Company's subsidiaries are spread over a broad range of
industrial classifications. The Company believes that its subsidiaries have
no significant concentrations of loans to borrowers engaged in the same or
similar industries and its subsidiaries have no loans to foreign entities.
The lending market areas served by the Company's subsidiaries are primarily
concentrated in southeastern Ohio and neighboring areas of Kentucky and West
Virginia. In addition, a loan production office in central Ohio provides
opportunities to serve customers in that economic region.
Commercial Loans
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At December 31, 1998, the Company's subsidiaries had outstanding
approximately $212.5 million in commercial loans (including commercial,
financial and agricultural loans), representing approximately 37.4% of the
total aggregate loan portfolio as of that date.
Legal Lending Limit. At December 31, 1998, none of the Company's
subsidiaries had extended credit to any one borrower in excess of its
respective legal lending limit (approximately $10.4 million, $1.2 million
and 1.1 million for Peoples Bank, First National and Peoples Bank FSB,
respectively) at the time the loan was closed.
Lending Practices. Commercial lending entails significant additional risks
as compared with consumer lending (i.e., single-family residential mortgage
lending, installment lending, credit card loans and indirect lending). In
addition, the payment experience on commercial loans typically depends on
adequate cash flow of a business and thus may be subject to a greater extent,
to adverse conditions in the general economy or in a specific industry.
Loan terms include amortization schedules commensurate with the purpose of
each loan, the source of repayment and the risk involved. Approval is
required from each respective banking subsidiary's Board of Directors for
loans to borrowers whose aggregate total debt, including the principal
amount of the proposed loan, exceeds $2 million, $275,000 and $1 million for
Peoples Bank, First National and Peoples Bank FSB, respectively. However,
the Company's Loan Committee approval is required for loans by Peoples Bank
FSB to borrowers whose aggregate total debt exceeds $300,000. The primary
analysis technique used in determining whether to grant a commercial loan is
the review of a schedule of cash flows to evaluate whether anticipated
future cash flows will be adequate to service both interest and principal
due. In addition, collateral is reviewed to determine its value in relation
to the loan.
Peoples Bank periodically evaluates all new commercial loans greater in
amount than $250,000 and on an annual basis, all loans greater in amount
than $500,000. First National and Peoples Bank FSB periodically evaluate
all commercial loans greater in amount than $100,000. If deterioration has
occurred, the lender subsidiary takes effective and prompt action designed
to assure repayment of the loan. Upon detection of the reduced ability of a
borrower to meet cash flow obligations, the loan is considered an impaired
loan and reviewed for possible downgrading or placement on non-accrual
status.
Consumer Loans
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At December 31, 1998, the Company's subsidiaries had outstanding consumer
loans (including indirect loans and credit cards) in an aggregate amount of
approximately $111.5 million (approximately 19.6% of the aggregate total
loan portfolio).
Lending Practices. Consumer loans generally involve more risk as to
collectibility than mortgage loans because of the type and nature of the
collateral and, in certain instances, the absence of collateral. As a
result, consumer lending collections are dependent upon the borrower's
continued financial stability, and thus are more likely to be adversely
affected by employment loss, personal bankruptcy, or adverse economic
conditions. Credit approval for consumer loans requires demonstration of
sufficiency of income to repay principal and interest due, stability of
employment, a positive credit record and sufficient collateral for secured
loans. It is the policy of each of the Company's subsidiaries to review its
consumer loan portfolio monthly and to charge off loans that do not meet
that subsidiary's standards and to adhere strictly to all laws and
regulations governing consumer lending. A qualified compliance officer is
responsible for monitoring the Company's performance in this area and for
advising and updating loan personnel.
The Company's subsidiaries make credit life insurance and health and
accident insurance available to all qualified buyers, thus reducing their
risk of loss when a borrower's income is terminated or interrupted. Each
subsidiary also offers its customers credit card access through the consumer
lending department of Peoples Bank.
Real Estate Loans
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At December 31, 1998, there were approximately $243.9 million ($213.3
million, $20.3 million, and $10.3 million, respectively) in residential real
estate, home equity lines of credit and construction mortgages outstanding,
representing 43.0% of total loans outstanding.
Lending Practices. The Company's subsidiaries require that the residential
real estate loan amount be no more than 90% of the purchase price or the
appraisal value of the real estate securing the loan, unless private mortgage
insurance is obtained by the borrower with respect to the percentage
exceeding such 90%. On occasion, the subsidiaries may lend up to 100% of
the appraised value of the real estate. The risk conditions of these loans
are considered during underwriting for the purposes of establishing an
interest rate compatible with the risks inherent in such home equity loans.
Loans made for each subsidiary's portfolio in this lending category are
generally one to five year adjustable rate, fully amortized mortgages. The
subsidiaries also generate fixed rate real estate loans and generally retain
these loans. All real estate loans are secured by first mortgages with
evidence of title in favor of the subsidiary in the form of an attorney's
opinion of the title or a title insurance policy. The subsidiaries also
require proof of hazard insurance with the subsidiary named as the mortgagee
and as the loss payee. Licensed appraisals are required in the case of
loans in excess of $250,000 for Peoples Banks and $75,000 for First National
and Peoples Bank FSB.
Home Equity Loans. Home equity lines of credit are generally made as second
mortgages by the Company's subsidiaries. The maximum amount of a home
equity line of credit is generally limited to 80% of the appraised value of
the property less the balance of the first mortgage. The Company's
subsidiaries will lend up to 100% of the appraised value to the property at
higher interest rates which are considered compatible with the additional
risk assumed in these types of equilines. The home equity lines of credit
are written with ten-year terms but are subject to review upon request for
renewal. For the past two years, the Company's subsidiaries have generally
charged a fixed rate on their home equity loans for the first five years.
At the end of the five-year period, the equiline reverts to a variable
interest rate product.
Construction Loans. Construction financing is generally considered to
involve a higher degree of risk of loss than long-term financing on improved,
occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction and the estimated cost (including interest) of
construction. If the estimate of construction cost proves to be inaccurate,
the subsidiary making the loan may be required to advance funds beyond the
amount originally committed to permit completion of the project.
Competition
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The banking subsidiaries of the Company experience significant competition
in attracting depositors and borrowers. Competition in lending activities
comes principally from other commercial banks, savings associations,
insurance companies, governmental agencies, credit unions, brokerage firms
and pension funds. The primary factors in competing for loans are interest
rate and overall lending services. Competition for deposits comes from
other commercial banks, savings associations, money market funds and credit
unions as well as from insurance companies and brokerage firms. The primary
factors in competing for deposits are interest rates paid on deposits,
account liquidity, convenience of office location and overall financial
condition. The Company believes that its size provides flexibility, which
enables the Company to offer an array of banking products and services. The
Company's financial condition also contributes to a favorable competitive
position in the markets it serves.
Northwest Territory operates in the highly competitive industry of credit
life and disability insurance. The principal methods of competition in the
credit life and disability insurance industry are the availability of
coverages and premium rates. The Company believes Northwest Territory has a
competitive advantage due to the fact that the business of Northwest
Territory is limited to the accepting of life and disability reinsurance
ceded in part to Northwest Territory from the credit life and disability
insurance purchased by loan customers of primarily Peoples Bank and First
National Bank.
The Agencies operate in the extremely competitive life insurance and property
and casualty insurance industries, due mostly to the large number of
companies and agents located within the Company's markets. The Agencies
provide several insurance product options to consumers including traditional
life insurance as well as property and casualty insurance products. The
Agencies' future competitive advantage will be based on their ability to
provide products to consumers efficiently with sensitivity to customer
service and cost price issues.
The Company primarily focuses on non-major metropolitan markets in which to
provide products and services. Management believes the Company has developed
a niche and certain level of expertise in serving these communities.
The Company historically has operated under a "needs-based" selling approach
that management believes has proven successful in serving the financial
needs of many customers. Management anticipates that in future periods, the
Company will increase its investment in sales training and education to
assist in the development of the Company's associates and their
identification of customer service opportunities.
It is not the Company's strategy to compete solely on the basis of interest
rate. Management believes that a focus on customer relationships and
incentives that promote customers' continued use of the Company's financial
products and services will lead to enhanced revenue opportunities.
Management believes the integration of traditional financial products with
the recent entry into insurance product offerings will lead to enhanced
revenues through complementary product offerings that satisfy customer demands
for high quality, "one-stop shopping".
Supervision and Regulation
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The following is a summary of certain statutes and regulations affecting the
Company and its subsidiaries and is qualified in its entirety by reference
to such statutes and regulations:
General
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Bank Holding Company. The Company is a bank holding company under the Bank
Holding Company Act of 1956, which restricts the activities of the Company
and the acquisition by the Company of voting stock or assets of any bank,
savings association or other company. The Company is also subject to the
reporting requirements of, and examination and regulation by, the Federal
Reserve Board. The Company's subsidiary banks are subject to restrictions
imposed by the Federal Reserve Act on transactions with affiliates, including
any loans or extensions of credit to the Company or its subsidiaries,
investments in the stock or other securities thereof and the taking of such
stock or securities as collateral for loans to any borrower; the issuance of
guarantees, acceptances or letters of credit on behalf of the Company and its
subsidiaries; purchases or sales of securities or other assets; and the
payment of money or furnishing of services to the Company and other
subsidiaries. The Company is prohibited from acquiring direct or indirect
control of more than 5% of any class of voting stock or substantially all of
the assets of any bank holding company without the prior approval of the
Federal Reserve Board. The Company and its subsidiaries are prohibited from
engaging in certain tying arrangements in connection with extensions of
credit and/or the provision of other property or services to a customer by
the Company or its subsidiaries. In addition, any savings association
acquired by the Company must conform its activities to those permissible for
a bank holding company under the Bank Holding Company Act.
Savings and Loan Holding Company. The Company is also a savings and loan
holding company due to its ownership of Peoples Bank FSB. However, since
the Company is a bank holding company regulated by the Federal Reserve Board,
it is not subject to any separate regulation as a savings and loan holding
company. Transactions between a savings association subsidiary of a savings
and loan holding company and an affiliate thereof are subject to the same
restrictions imposed by the Federal Reserve Act on subsidiary banks of a bank
holding company.
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulations of savings associations.
Pursuant to this legislation, Congress may eliminate the Office of Thrift
Supervision (the "OTS") and Peoples Bank FSB may be regulated under federal
law as a bank or be required to change its charter. Such change in
regulation or charter would likely change the range of activities in which
Peoples Bank FSB may engage and would probably subject Peoples Bank FSB to
more regulation by the Federal Deposit Insurance Corporation ("FDIC"). At
this time, the Company cannot predict when or whether Congress may actually
pass legislation regarding the Company's and Peoples Bank FSB's regulatory
requirements or charter. Although such legislation, if enacted, may change
the activities in which Peoples Bank FSB may engage, it is not anticipated
that the current activities of either the Company or Peoples Bank FSB will
be materially affected by those activity limits.
Banking Subsidiaries. Peoples Bank is an Ohio state-chartered bank
supervised and regulated by the Ohio Division of Financial Institutions and
the FDIC. First National Bank is a national bank, supervised and regulated
by the Comptroller of the Currency. Peoples Bank FSB is a federally-
chartered savings bank subject to regulation, supervision, and examination
by the OTS and as a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati subject to limited regulation by the Federal Reserve Board.
Insurance Subsidiaries. Northwest Territory is chartered by the State of
Arizona and is subject to regulation, supervision and examination by the
Arizona Department of Insurance. The powers of regulation and supervision
of the Arizona Department of Insurance relate generally to such matters as
minimum capitalization, the grant and revocation of certificates of
authority to transact business, the nature of and limitations on investments,
the maintenance of reserves, the form and content of required financial
statements, reporting requirements and other matters pertaining to life and
disability insurance companies. The Agencies are incorporated in the State
of Ohio and licensed by the Ohio Department of Insurance, which regulates,
supervises and has authority to examine the Agencies.
Federal Deposit Insurance Corporation
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The FDIC insures the deposits of Peoples Bank, First National Bank, and
Peoples Bank FSB and those entities are subject to the applicable provisions
of the Federal Deposit Insurance Act. A subsidiary of a bank holding company
or savings and loan holding company can be liable to reimburse the FDIC if
the FDIC incurs or anticipates a loss because of a default of another FDIC-
insured subsidiary of the bank holding company or savings and loan holding
company or in connection with FDIC assistance provided to the subsidiary in
danger of default. In addition, the holding company of any insured financial
institution that submits a capital plan under the federal banking agencies'
regulations on prompt corrective action is required to guarantee a portion of
the institution's capital shortfall.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the Bank Insurance Fund ("BIF") and of the
Savings Association Insurance Fund ("SAIF"). Peoples Bank and First National
Bank are BIF members. Peoples Bank FSB is a SAIF member. Insurance
premiums for BIF and SAIF members are determined during each semi-annual
assessment period based upon the members' respective categorization as (1)
well capitalized, (2) adequately capitalized or (3) under capitalized. An
institution is also assigned by the FDIC to one of these supervisory
subgroups within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC be the institution's primary federal regulator and information which
the FDIC determines to be relevant to the institution's financial condition
and the risk posed to the deposit insurance funds (which may include, if
applicable, information provided by the institution's state supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned.
Office of Thrift Supervision
- ----------------------------
Peoples Bank FSB must file periodic reports with the OTS concerning its
activities and financial condition. Examinations are conducted periodically
by the OTS to determine whether Peoples Bank FSB is in compliance with
various regulatory requirements and is operating in a safe and sound manner.
The enforcement authority of the OTS includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
OTS. Except under specific circumstances, public disclosure of final
enforcement actions by the OTS is required.
Federal Home Loan Bank
- ----------------------
The FHLBs provide credit to their members in the form of advances. As a
member of the FHLB of Cincinnati, Peoples Bank FSB must maintain an
investment in the capital stock of that FHLB in an amount equal to the
greater of 1.0% of the aggregate outstanding principal amount of its
respective residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the
FHLB. Peoples Bank FSB is in compliance with this requirement with an
investment in stock of the FHLB of Cincinnati of $1.4 million at December
31, 1998. In addition, Peoples Bank and First National Bank also hold an
investment in FHLB of Cincinnati stock of $6.7 million and $0.6 million,
respectively, at December 31, 1998.
Capital Requirements
- --------------------
Federal Reserve Board. The Federal Reserve Board has adopted risk-based
capital guidelines for bank holding companies and for state member banks.
The risk-based capital guidelines include both a definition of capital and a
framework for calculating weighted-risk assets by assigning assets and
off-balance sheet items to broad risk categories. The minimum ratio of
total capital to weighted-risk assets (including off-balance sheet items,
such as standby letters of credit) is 8%. At least 4% must be comprised of
common stockholders' equity (including retained earnings but excluding
treasury stock), qualifying noncumulative perpetual preferred stock, a
limited amount of qualifying cumulative perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets ("Tier 1 capital"). The
remainder ("Tier 2 capital") may consist of mandatory convertible debt
securities, a limited amount of subordinated debt, other preferred stock and
a limited amount of allowance for loan and lease losses. The Federal Reserve
Board also imposes a minimum leverage ratio (Tier 1 capital to total assets)
of 3% for bank holding companies and state member banks that meet specified
conditions, including no operational, financial or supervisory deficiencies,
and having the highest regulatory rating. The minimum leverage ratio is 4%
to 5% for other bank holding companies and state member banks based on their
particular circumstances and risk profiles and those experiencing or
anticipating significant growth.
Office of the Comptroller of Currency. National bank subsidiaries, such as
First National Bank, are subject to similar capital requirements adopted by
the Comptroller of the Currency.
Office of Thrift Supervision. The OTS has established capital standards,
including a tangible capital requirement, a leverage ratio (or core capital)
requirement and a risk-based capital requirement applicable to savings
associations such as Peoples Bank FSB. The framework provided by the OTS to
define capital and calculate risk-weighted assets is much the same as the
framework provided by the Federal Reserve Board for bank holding companies
and for state member banks. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The
capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital is defined in OTS
regulations as core capital minus any intangible assets. The capital
standards also require core capital of at least 3% of adjusted total assets.
Core capital generally consists of tangible capital plus certain intangible
assets, including a limited amount of purchased credit card relationships.
The OTS risk-based requirement requires saving associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of
core capital and supplementary capital. Supplementary capital consists of
certain permanent and maturing capital instruments that do not qualify as
core capital and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit
risk and the risk of non-traditional activities.
The OTS has adopted an interest rate risk component to the risk-based capital
requirement, though the implementation of that component has been delayed.
Pursuant to that requirement, a savings association would have to measure
the effect of an immediate 200 basis point change in interest rates on the
value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. In general, an association with less than $300 million
in assets and a risk-based capital ratio of greater than 12% will not be
subject to the interest rate risk component. (Peoples Bank FSB currently
qualifies for such exemption.) Pending implementation of the interest rate
risk component, the OTS has the authority to impose a higher individualized
capital requirement on any savings association it deems to have excess
interest rate risk. The OTS also may adjust the risk-based capital
requirement on an individual basis for any association to take into account
risks due to concentrations of credit and nontraditional activities.
Compliance. The Company and its subsidiaries currently satisfy all capital
requirements. Failure to meet applicable capital guidelines could subject a
banking institution to a variety of enforcement remedies available to federal
and state regulatory authorities, including the termination of deposit
insurance by the FDIC. Federal regulations require prompt corrective action
to resolve capital deficient banks and savings associations. Under these
regulations, institutions which become undercapitalized become subject to
mandatory regulatory scrutiny and limitations, which increase as capital
continues to decrease. Such institutions are also required to file capital
plans with their primary federal regulator, and their holding companies must
guarantee the capital shortfall up to 5% of the assets of the capital
deficient institution at the time it becomes undercapitalized. As of
December 31, 1998, the most recent notification from the banking regulatory
agencies categorized the Company and each of its banking subsidiaries as well
capitalized under the regulatory framework for prompt corrective action.
The Company's ability to obtain funds for the payment of dividends and for
other cash requirements largely depends on the amount of dividends declared
by its subsidiary banks and other subsidiaries. However, the Federal Reserve
Board expects the Company to serve as a source of strength to its subsidiary
banks. The Federal Reserve Board may require the Company to retain capital
for further investment in its subsidiaries, rather than for dividends for
shareholders. Peoples Bank, First National Bank, and Peoples Bank FSB may
not pay dividends to the Company if, after paying such dividends, they would
fail to meet the required minimum levels under the risk-based capital
guidelines and the minimum leverage ratio requirements. Peoples Bank and
First National Bank must have the approval of their respective regulatory
authorities if a dividend in any year would cause the total dividends for
that year to exceed the sum of the current year's net earnings and the
retained earnings for the preceding two years, less required transfers to
surplus. Peoples Bank FSB may make capital distributions during any
calendar year equal to the greater of 100% of net income for the year-to-date
plus 50% of the amount by which the lesser of its tangible, core or risk-
based capital exceeds its capital requirement for such capital component, as
measured at the beginning of the calendar year, or 75% of its net income for
the most recent four-quarter period. If the current minimum capital
requirements following a proposed capital distribution are not met, Peoples
Bank FSB must obtain prior approval from the OTS. Payment of dividends by a
banking subsidiary may be restricted at any time at the discretion of the
appropriate regulator if it deems the payment to constitute an unsafe and/or
unsound banking practice or necessary to maintain adequate capital. These
provisions could limit the Company's ability to pay dividends on its
outstanding common shares.
Federal and State Laws
- ----------------------
Various requirements and restrictions under the laws of the United States
and the States of Ohio, West Virginia and Kentucky affect the operations of
Peoples Bank, First National Bank and Peoples Bank FSB. Included are
requirements to maintain reserves against deposits, restrictions on the
nature and amount of loans made and the interest charged thereon,
restrictions relating to investments and other activities, limitations on
credit exposure to correspondent banks, limitations on activities based on
capital and surplus, limitations on payment of dividends, and limitations on
branching. Since June 1997, pursuant to federal legislation, First National
Bank and Peoples Bank have been authorized to branch across state lines.
Peoples Bank, as an Ohio chartered banking corporation, has done so in West
Virginia, operating branches in that State under West Virginia consumer
banking law. Peoples Bank FSB has had unlimited branching authority across
state lines for some time but has not chosen, as yet, to do so.
The Company's financial institution subsidiaries are subject to regulatory
oversight under various consumer protection and fair lending laws. These
laws govern, among other things, truth-in-lending disclosure, equal credit
opportunity, fair credit reporting and community reinvestment. Failure to
abide by federal laws and regulations governing community reinvestment could
limit the ability of a financial institution to open a new branch or engage
in a merger transaction. Community reinvestment regulations evaluate how
well and to what extent an institution lends and invests in its designated
service area, with particular emphasis on low-to-moderate income communities
and borrowers in such areas. First National has received a "satisfactory"
examination rating under those regulations while Peoples Bank has received
an "outstanding" examination rating. Peoples Bank FSB has not received a
rating since its creation in January; however, Catlettsburg Federal and
Russell Federal both had "satisfactory" ratings prior to merging.
Prior to the enactment of the Small Business Jobs Protection Act (the "1996
Act") which was signed into law on August 21, 1996, earnings appropriated to
bad debt reserves and deducted for federal income tax purposes could not be
used by Peoples Bank FSB to pay cash dividends to the Company without the
payment of federal income taxes by the Company at the then current income
tax rate on the amount deemed distributed, which would include the amount of
any federal income taxes attributable to the distribution. The Company does
not contemplate any distribution by Peoples Bank FSB in a manner which would
create the above-mentioned federal tax liabilities.
Monetary Policy and Economic Conditions
- ---------------------------------------
The business of commercial banks and savings associations is affected not
only by general economic conditions, but also by the policies of various
governmental regulatory agencies, including the Federal Reserve Board. The
Federal Reserve Board regulates money and credit conditions and interest
rates in order to influence general economic conditions primarily through
open market operations in U.S. Government securities, changes in the discount
rate on bank borrowings, and changes in the reserve requirements against bank
and savings association deposits. These policies and regulations
significantly affect the overall growth and distribution of bank and savings
association loans, investments and deposits, and the interest rates charged
on loans, as well as the interest rates paid on deposits and accounts.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of commercial banks and savings associations
in the past and are expected to continue to have significant effects in the
future. In view of the changing conditions in the economy and the money
markets and the activities of monetary and fiscal authorities, the Company
can make no definitive predictions as to future changes in interest rates,
credit availability or deposit levels.
Statistical Financial Information Regarding the Company
- -------------------------------------------------------
The following listing of statistical financial information, which is included
in the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1998, (the "Company's 1998 Annual Report") and incorporated
herein by reference, provides comparative data for the Company over the past
three and five years, as appropriate. These tables should be read in
conjunction with "Management's Discussion and Analysis" and the Consolidated
Financial Statements of the Company and its subsidiaries found at pages 38
through 58 and 12 through 33, respectively, of the Company's 1998 Annual
Report.
Average Balances and Analysis of Net Interest Income:
Please refer to page 34 of the Company's 1998 Annual Report.
Rate Volume Analysis:
Please refer to page 35 of the Company's 1998 Annual Report.
Loan Maturities:
Please refer to page 35 of the Company's 1998 Annual Report.
Average Deposits:
Please refer to page 34 of the Company's 1998 Annual Report.
Maturities Schedule of Large Certificates of Deposit:
Please refer to page 35 of the Company's 1998 Annual Report.
Loan Portfolio Analysis:
Please refer to pages 36 and 37 of the Company's 1998 Annual Report.
Securities Analysis:
Please refer to pages 19 and 20 and page 51 and 52 of the Company's 1998
Annual Report.
Return Ratios:
Please refer to page 9 of the Company's 1998 Annual Report.
Effect of Environmental Regulation
- ----------------------------------
Compliance with federal, state and local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection
of the environment, has not had a material effect upon the capital
expenditures, earnings or competitive position of the Company and its
subsidiaries. The Company believes that the nature of the operations of its
subsidiaries has little, if any, environmental impact. The Company,
therefore, anticipates no material capital expenditures for environmental
control facilities for its current fiscal year or for the foreseeable future.
The Company's subsidiaries may be required to make capital expenditures for
environmental control facilities related to properties they acquire in the
future through foreclosure proceedings; however, the amount of such capital
expenditures, if any, is not currently determinable.
ITEM 2. PROPERTIES
===================
Peoples Bancorp Inc.
- --------------------
The Company's principal office is located at 138 Putnam Street, Marietta,
Ohio. This location is also the principal location for the Company's
largest subsidiary, Peoples Bank.
The Peoples Banking and Trust Company
- -------------------------------------
The principal office of Peoples Bank is located in Washington County at 138
Putnam Street, Marietta, Ohio. This location consists of a five-story
building and another smaller building attached by interior corridors. In
1993, Peoples Bank completed construction of a five-story addition to the
primary facility in downtown Marietta that was originally constructed in
1924. Peoples Bank also owns several nearby vacant lots for parking.
Other Washington County offices operated by Peoples Bank include property
owned at Second and Scammel Streets in downtown Marietta on which an
additional Motor Bank exists, and leases property in the Frontier Shopping
Center near downtown Marietta on which a full-service branch is located.
In addition, Peoples Bank leases another full-service branch located inside
a supermarket in Washington Center near downtown Marietta. In Belpre,
Peoples Bank owns a full-service branch at 1902 Washington Boulevard and a
nearby Motor Bank. Peoples Bank also owns a full-service branch in Lowell,
Ohio, and a Motor Bank in Reno, Ohio.
In Athens County, Peoples Bank owns a two-story building on the Public
Square in Nelsonville, Ohio, along with a nearby Motor Bank. Peoples Bank
owns an office consisting of a two-story structure at One North Court Street,
Athens, Ohio. Also in Athens, Peoples Bank owns a full-service office on
real property it leases in the Athens Mall on East State Street and leases a
full-service office located in the HDL Center on West Union Street. The
leases for the East State Street and the West Union Street offices expire
in June, 2002 and March, 2008, respectively. Peoples Bank also leases a
full-service office in The Plains, Ohio, which lease expires in June, 2001.
In Meigs County, Peoples Bank owns full-service offices in Middleport and
Rutland along with a full service office and Motor Bank in Pomeroy, Ohio.
In nearby Gallia County, Peoples Bank also owns a full-service office,
currently under renovation, and Motor Bank in Gallipolis, Ohio.
In Fairfield County, the Company owns a recently renovated full-service
office located in Baltimore, Ohio. In adjacent Licking County, Peoples Bank
leases a loan production office in the Newark-Granville area, which lease
expires in September, 2000.
In Mason County, West Virginia, Peoples Bank owns a two-story, full-service
office and nearby Motor Bank located on Main Street in Point Pleasant and
leases a two-story, full-service office and nearby Motor Bank on Jackson
Avenue also in Point Pleasant. The Jackson Avenue office lease expires
September, 2000.
In Wood County, Peoples Bank leases a two-story, full-service office located
in the South Gate Shopping Center in Parkersburg, West Virginia, which lease
expires in April, 2004.
In Wetzel County, Peoples Bank owns a two-story full-service office located
on Main Street in New Martinsville, West Virginia, along with a full-service
office located in the nearby community of Steelton in New Martinsville, West
Virginia.
The First National Bank of Southeastern Ohio
- --------------------------------------------
First National Bank owns a three-story office building located in Noble
County at 415 Main Street in Caldwell, Ohio. The Agencies headquarters are
also located in the Caldwell office on Main Street. In Morgan County, First
National Bank owns a one-story located on Marion Street in Chesterhill, Ohio,
together with a two-story structure located on Kennebec Street in
McConnelsville, Ohio.
Peoples Bank FSB
- ----------------
Peoples Bank FSB owns a two-story building located in Boyd County on Louisa
Street in Catlettsburg, Kentucky. An additional one-story building was
renovated and opened on Eagle Drive in Ashland, Kentucky in March, 1998. In
Carter County, Peoples Bank FSB owns a single-story building located on Carol
Malone Boulevard in Grayson, Kentucky. In Greenup County, Peoples Bank FSB
also owns a two-story office building with adjoining land and parking lot at
404 Ferry Street as well as adjacent property located at 408 Ferry Street in
Russell, Kentucky.
Other Properties
- ----------------
All other properties occupied by the Company and its subsidiaries are owned
by the Company or its subsidiaries, including a two-story building at 223
Second Street in Marietta, Ohio. This location is used as general office
space for certain operating units within the Company. The Company and its
subsidiaries own other real property which, when considered in the aggregate,
is not material to their operations.
Property Condition
- ------------------
Management believes all of the properties described above are in satisfactory
condition for their intended use.
ITEM 3. LEGAL PROCEEDINGS.
===========================
There are no pending legal proceedings to which the Company or any of its
subsidiaries is a party or to which any of their property is subject other
than ordinary routine litigation to which the Company's subsidiaries are
parties incidental to their respective banking businesses. The Company
considers none of such proceedings to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
=============================================================
Not applicable.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
======================================================================
Please refer to pages 10 and 11 of the Company's 1998 Annual Report, which
are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
=================================
The table of Selected Financial Data on page 9 of the Company's 1998 Annual
Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
========================================================================
Please refer to pages 38 through 58 of the Company's 1998 Annual Report,
which are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
=====================================================================
Please refer to pages 51 through 53 of the Company's 1998 Annual Report,
which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
=====================================================
The Consolidated Financial Statements of Peoples Bancorp Inc. and it
subsidiaries, included on pages 12 through 32 of the Company's 1998 Annual
Report, and the Report of Ernst & Young LLP included therein at page 33 are
incorporated herein by reference. Following is an index to the financial
statements included in the Company's 1998 Annual Report:
1998
Annual
Report
Pages
Peoples Bancorp Inc. and Subsidiaries: ------
Report of Independent Auditors (Ernst & Young LLP) 33
Consolidated Balance Sheets as of December 31, 1998 and 1997 12
Consolidated Statements of Income for each of the three years
ended December 31, 1998 13
Consolidated Statements of Stockholders' Equity for each of the
three years ended December 31, 1998 14
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1998 15
Notes to the Consolidated Financial Statements 16-32
Peoples Bancorp Inc.: (Parent Company Only Financial
Statements are included in Note 16 of the Notes to the
Consolidated Financial Statements) 30-31
Quarterly Financial Data on page 32 of the Company's 1998 Annual Report are
also incorporated herein be reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
=========================================================================
No response required.
PART III
---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
=============================================================
Directors and Executive Officers of the Company include those persons
identified under "Election of Directors" on pages 5 through 8 of the
Company's definitive Proxy Statement relating to the Company's Annual
Meeting of Shareholders to be held April 15, 1999, which section is
expressly incorporated by reference. Other Executive Officers are David B.
Baker (52), Vice President; John (Jack) W. Conlon (53), Chief Financial
Officer; Larry E. Holdren (51), Vice President; Carol A. Schneeberger (42),
Vice President/Operations; Jeffrey D. Welch (44), Treasurer; and Mark F.
Bradley (29), Controller.
Mr. Baker became Vice President in February, 1999. In January, 1998, Mr.
Baker was named President of Peoples Bank's Investment and Business Division
and he is also President of the Investment and Trust Division of Peoples
Bank, a position he has held since 1991. Mr. Baker has held various
positions in the Investment and Trust Division for Peoples Bank since 1974.
Mr. Conlon has been Chief Financial Officer of the Company since April, 1991.
He has also been Chief Financial Officer and Treasurer of Peoples Bank for
more than five years.
Mr. Holdren became Vice President in February, 1999. He has been President
of the Retail and Banking Division for Peoples Bank since January, 1998.
Prior thereto, he was Executive Vice President of Human Resources for Peoples
Bank since 1987.
Ms. Schneeberger became Vice President/Operations of the Company in October,
1988. Prior thereto, she was Auditor of the Company from August, 1987 to
October, 1988, and Auditor of Peoples Bank from January, 1986 to October,
1988. She was Assistant Auditor of Peoples Bank from January, 1979 to
January, 1986.
Mr. Welch has been Treasurer of the Company since 1985. Mr. Welch also
serves as a Vice President of Peoples Bank's Investment and Trust Division.
Mr. Bradley became Controller of the Company in January, 1997. Prior
thereto, he was Manager of Accounting and External Reporting for the Company
from February, 1995 to January, 1997. He has been Controller for Peoples
Bank since March, 1997. He was Manager of Accounting and External Reporting
for Peoples Bank from February, 1995 to January, 1997. Prior to February
1995, Mr. Bradley served as a staff accountant of the Company beginning in
1991.
There was no disclosure required under Item 405 of Regulation S-K for the
year ended December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
=================================
See "Compensation of Executive Officers and Directors" on pages 11 through 15
of the Company's definitive Proxy Statement relating to the Company's Annual
Meeting of Shareholders to be held April 15, 1999, which is incorporated by
reference.
Neither the report on executive compensation nor the performance graph
included in the Company's definitive Proxy Statement relating to the
Company's Annual Meeting of Shareholders to be held on April 15, 1999, shall
be deemed to be incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
=========================================================================
See "Security Ownership of Certain Beneficial Owners and Management" on
pages 2 through 4 of the Company's definitive Proxy Statement relating to
the Company's Annual Meeting of Shareholders to be held April 15, 1999, which
section is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
=========================================================
See "Transactions Involving Management" on page 8 of the Company's definitive
Proxy Statement relating to the Company's Annual Meeting of Shareholders to
be held April 15, 1999, which section is incorporated by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
===========================================================================
(a) (1) Financial Statements
--------------------
For a list of all financial statements included in this Annual
Report on Form 10-K, see "Index to Financial Statements" at Page 20.
(a) (2) Financial Statement Schedules
-----------------------------
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable
and, therefore, have been omitted.
(a) (3) Exhibits
--------
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Exhibit Index" beginning
at page 21. The following table provides information concerning
executive compensation plans and arrangements required to be filed
as exhibits to this Annual Report on Form 10-K.
Executive Compensation Plans and Arrangements
---------------------------------------------
Exhibit
Number Description Location
------- ----------- --------
10(a) Deferred Compensation Incorporated herein
Agreement dated November 16, by reference to
1976 between Robert E. Evans Exhibit 6(g) to
and The Peoples Banking and Registration Statement
Trust Company, as amended No. 2-68524 on Form
March 13, 1979. S-14 of Peoples
Delaware, the Company's
predecessor.
10(b) Peoples Bancorp Inc. Incorporated herein by
Retirement Savings Plan. reference to Exhibit
(Amended and Restated 10(b) of the Company's
Effective January 1, 1996). Annual Report on Form
10-K for fiscal year
ended December 31, 1995
(File No. 0-16772)
("the 1995 Form 10-K").
10(c)(1) Peoples Bancorp Inc. Deferred Incorporated herein by
Compensation Plan for Directors reference to Exhibit
of Peoples Bancorp Inc. and 10(a) of the Company's
Subsidiaries (Amended and Registration Statement
Restated Effective January 2, on Form S-8 filed
1998.) December 31, 1997
(Registration No.
333-43629)
10(c)(2) Amendment No. 1 to Peoples Incorporated herein by
Bancorp Inc. Deferred reference to Exhibit
Compensation Plan for Directors 10(b) of the Company's
of Peoples Bancorp Inc. and Post-Effective
Subsidiaries effective January Amendment No. 1
2, 1998. to Form S-8 filed
September 4, 1998
(Registration No.
333-43629)
10(d) Peoples Bancorp Inc. Incorporated herein by
Retirement Plan and Trust. reference to Exhibit
(Amended and Restated 10(d) of the Company's
Effective January 1, 1989.) 1995 Form 10-K.
10(e) Summary of the Performance Incorporated herein by
Compensation Plan of Peoples reference to Exhibit
Bancorp Inc. effective for 10(f) of the Company's
calendar year beginning Annual Report on Form
January 1, 1997. 10-K for fiscal year
ended December 31, 1996
(File No. 0-16772).
10(f) Peoples Bancorp Inc. Amended Incorporated herein by
and Restated 1993 Stock Option refrence to Exhibit 4
Plan. of the Company's
Registration Statement
on Form S-8 filed
August 25, 1993
(Registration Statement
No. 33-67878).
10(g) Form of Stock Option Agreement Incorporated herein by
used in connection with grant reference to Exhibit
of non-qualified stock options 10(g) of the Company's
under Peoples Bancorp Inc. 1995 Form 10-K.
Amended and Restated 1993
Stock Option Plan.
10(h) Form of Stock Option Agreement Incorporated herein by
dated May 20, 1993, used in reference to Exhibit
connection with grant of 10(h) of the Company's
incentive stock options under 1995 Form 10-K.
Peoples Bancorp Inc. Amended
and Restated 1993 Stock Option
Plan.
10(i) Form of Stock Option Agreement Incorporated herein by
dated November 10, 1994, used reference to Exhibit
in connection with grant of 10(i) of the Company's
incentive stock options under 1995 Form 10-K.
Peoples Bancorp Inc. Amended and
Restated 1993 Stock Option Plan.
10(j) Peoples Bancorp Inc. 1995 Stock Incorporated herein by
Option Plan. reference to Exhibit 4
of the Company's Form
S-8 filed May 24, 1995
(Registration Statement
No. 33-59569).
10(k) Form of Stock Option Agreement Incorporated herein by
used in connection with grant reference to Exhibit
of non-qualified stock options 10(k) of the Company's
to non-employee directors of 1995 Form 10-K.
the Company under Peoples Bancorp
Inc. 1995 Stock Option Plan.
10(l) Form of Stock Option Agreement Incorporated herein by
used in connection with grant reference to Exhibit
of non-qualified stock options 10(l) of the Company's
to non-employee directors of 1995 Form 10-K.
the Company's subsidiaries under
Peoples Bancorp Inc. 1995 Stock
Option Plan.
10(m) Form of Stock Option Agreement *
dated used in connection with
grant of incentive stock options
under Peoples Bancorp Inc. 1995
Stock Option Plan.
10(n) Peoples Bancorp Inc. 1998 Stock Incorporated herein by
Option Plan. reference to Exhibit
10 of the Company's
Form S-8 filed
September 4, 1998
(Registration Statement
No. 333-62935).
10(o) Form of Stock Option Agreement *
used in connection with grant
of non-qualified stock options
to non-employee directors of
the Company under Peoples
Bancorp Inc. 1998 Stock Option
Plan.
10(p) Form of Stock Option Agreement *
used in connection with grant
of non-qualified stock options
to consultants/advisors of the
Company under Peoples Bancorp
Inc. 1998 Stock Option Plan.
(b) Reports on Form 8-K
-------------------
There were no current reports on Form 8-K filed during the
fiscal quarter ended December 31, 1998.
(c) Exhibits
--------
Exhibits filed with Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Exhibit Index"
beginning at page 21.
(d) Financial Statement Schedules
-----------------------------
None.
* Filed herewith
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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: March 25, 1999 By: /s/ ROBERT E. EVANS
Robert E. Evans, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ ROBERT E. EVANS President and Chief Executive March 25, 1999
Robert E. Evans Officer and Director
/s/ GEORGE W. BROUGHTON Director March 25, 1999
George W. Broughton
Director March 25, 1999
- ---------------------
Frank L. Christy
/s/ WILFORD D. DIMIT Director March 25, 1999
Wilford D. Dimit
Director March 25, 1999
- ---------------------
Barton S. Holl
/s/ REX E. MAIDEN Director March 25, 1999
Rex E. Maiden
/s/ NORMAN J. MURRAY Director March 25, 1999
Norman J. Murray
/s/ PAUL T. THEISEN Director March 25, 1999
Paul T. Theisen
/S/ THOMAS C. VADAKIN Director March 25, 1999
Thomas C. Vadakin
/S/ JOSEPH H. WESEL Chairman of the Board and Director March 25, 1999
Joseph H. Wesel
/s/ JOHN W. CONLON Chief Financial Officer March 25, 1999
John W. Conlon (Principal Accounting Officer)
/s/ MARK F. BRADLEY Controller March 25, 1999
Mark F. Bradley
PEOPLES BANCORP INC.
INDEX TO FINANCIAL STATEMENTS
1998
Annual
Report
Financial Statements: Pages
- --------------------- ------
Peoples Bancorp Inc. and Subsidiaries:
Report of Independent Auditors (Ernst & Young LLP) 33
Consolidated Balance Sheets as of December 31, 1998 and 1997 12
Consolidated Statements of Income for each of the three years
ended December 31, 1998 13
Consolidated Statements of Stockholders' Equity for each of the
three years ended December 31, 1998 14
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1998 15
Notes to the Consolidated Financial Statements 16-32
Peoples Bancorp Inc.: (Parent Company Only Financial Statements
are included in Note 16 of the Notes to the Consolidated
Financial Statements) 30-31
EXHIBIT INDEX
PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
Exhibit
Number Description Exhibit Location
- ------- ----------- ----------------
2(a) Office Purchase and Assumption Agreement Incorporated herein
between The Peoples Banking and Trust by reference to
Company and Community Trust Bank of West Exhibit 2 to the
Virginia, NA dated January 26, 1998; and Company's Quarterly
Letter Agreement between The Peoples Report on Form 10-Q
Banking and Trust Company and Community filed August 14, 1998
Trust Bank of West Virginia, NA dated (File No. 0-16772).
June 4, 1998.
2(b) Agreement of Merger, dated October 13, *
1998, between Russell Federal Savings
Bank and Catlettsburg Federal Savings
Bank.
3(a)(1) Amended Articles of Incorporation of Incorporatd herein by
Peoples Bancorp Inc. (as filed with the reference to Exhibit
Ohio Secretary of State on May 3, 1993) 3(a) to the Company's
Registration Statement
on Form 8-B filed July
20, 1993 (File No.
0-16772).
3(a)(2) Certificate of Amendment to the Amended Incorporated herein by
Articles of Peoples Bancorp Inc. (as reference to Exhibit
filed with the Ohio Secretary of State 3(a)(2) to the
on April 22, 1994) Company's Annual
Report on Form 10-K
for fiscal year ended
December 31, 1997
(File No. 0-16772)
(the "1997 Form 10-K).
3(a)(3) Certificate of Amendment to the Amended Incorporated herein by
Articles of Peoples Bancorp Inc. (as reference to Exhibit
filed with the Ohio Secretary of State 3(a)(3) to the Company's
on April 9, 1996) 1997 Form 10-K.
3(a)(4) Amended Articles of Incorporation of Incorporated herein by
Peoples Bancorp Inc. (reflecting reference to Exhibit
amendments through April 9, 1996) 3(a)(4) to the Company's
[For SEC reporting compliance purposes Company's 1997 Form
only -- not filed with Ohio Secretary 10-K.
of State]
3(b) Regulations of Peoples Bancorp Inc. Incorporated herein by
reference to Exhibit
3(b) to the Company's
Registration Statement
on Form 8-B filed July
20, 1993 (File No.
0-16772).
4(a) Pledge Agreement, dated March 18, 1997, Incorporated herein by
between Peoples Bancorp Inc. and reference to Exhibit 4
Fountain Square Commercial Funding Corp. of the Company's
Registration Statement
on Form S-4 (File No.
333-37261) effective
October 2, 1997.
4(b) Master Note Agreement, dated May 11, *
1998, between Peoples Bancorp Inc. and
The Fifth Third Bank.
10(a) Deferred Compensation Agreement dated Incorporated herein by
November 16, 1976 between Robert E. Evans reference to Exhibit
and The Peoples Banking and Trust 6(g) to the Company's
Company, as amended March 13, 1979. Registration Statement
No. 2-68524 on Form
S-14 of Peoples
Delaware, the
Company's predecessor.
10(b) Peoples Bancorp Inc. Retirement Savings Incorporated herein by
Plan. (Amended and Restated Effective reference to Exhibit
January 1, 1996.) 10(b) of the Company's
Annual Report on Form
10-K for fiscal year
ended December 31,
1995 (File No.
0-16772).
10(c)(1) Peoples Bancorp Inc. Deferred Incorporated herein by
Compensation Plan for Directors of reference to Exhibit
Peoples Bancorp Inc. and Subsidiaries 10(a) of the Company's
(Amended and Restated Effective January Registration Statement
2, 1998.) on Form S-8 filed
December 31, 1997
(Registration No.
333-43629)
10(c)(2) Amendment No. 1 to Peoples Bancorp Inc. Incorporated herein by
Deferred Compensation Plan for Directors referene to Exhibit
of Peoples Bancorp Inc. and Subsidiaries 10(b) of the Company's
effective January 2, 1998. Post-Effective
Amendment No. 1 to
Form S-8 filed
September 4, 1998
(Registration No.
333-43629)
10(d) Peoples Bancorp Inc. Retirement Plan Incorporated herein by
and Trust. (Amended and Restated reference to Exhibit
Effective January 1, 1989.) 10(d) of the Company's
Annual Report on Form
10-K for fiscal year
ended December 31,
1995 (File No.
0-16772).
10(e) Summary of the Performance Compensation Incorporated herein by
Plan for Peoples Bancorp Inc. effective reference to Exhibit
for calendar year beginning January 1, 10(f) of the Company's
1997. Annual Report on Form
10-K for fiscal year
ended December 31,
1996 (File No.
0-16772).
10(f) Peoples Bancorp Inc. Amended and Incorporated herein by
Restated 1993 Stock Option Plan. reference to Exhibit 4
of the Company's
Registration Statement
on Form S-8 filed
August 25, 1993
(Registration Statement
No. 33-67878).
10(g) Form of Stock Option Agreement used in Incorporated herein by
connection with grant of non-qualified reference to Exhibit
stock options under Peoples Bancorp Inc. 10(g) of the Company's
Amended and Restated 1993 Stock Option Annual Report on Form
Plan. 10-K for fiscal year
ended December 31, 1995
(File No. 0-16772).
10(h) Form of Stock Option Agreement dated Incorporated herein by
May 20, 1993, used in connection with reference to Exhibit
grant of incentive stock options under 10(h) of the Company's
Peoples Bancorp Inc. Amended and Annual Report on Form
Restated 1993 Stock Option Plan. 10-K for fiscal year
ended December 31, 1995
(File No. 0-16772)
10(i) Form of Stock Option Agreement dated Incorporated herein by
November 10, 1994, used in connection reference to Exhibits
with grant of incentive stock options 10(i) of the Company's
under Peoples Bancorp Inc. Amended and Annual Report on Form
Restated 1993 Stock Option Plan. 10-K for fiscal year
ended December 31, 1995
(File No. 0-16772).
10(j) Peoples Bancorp Inc. 1995 Stock Option Incorporated herein by
Plan. reference to Exhibit
4 of the Company's
Form S-8 filed May 24,
1995 (Registration
Statement No.
33-59569).
10(k) Form of Stock Option Agreement used in Incorporated herein by
connection with grant of non-qualified reference to Exhibit
stock options to non-employee directors 10(k) of the Company's
of the Company under Peoples Bancorp Inc. Annual Report on Form
1995 Stock Option Plan. 10-K for fiscal year
ended December 31,
1995 (File No.
0-16772).
10(l) Form of Stock Option Agreement used in Incorporated herein by
connection with grant of non-qualified reference to Exhibit
stock options to non-employee directors 10(l) of the Company's
of the Company's subsidiaries under Annual Report on Form
Peoples Bancorp Inc. 1995 Stock Option 10-K for fiscal year
Plan. ended December 31,
1995 (File No.
0-16772).
10(m) Form of Stock Option Agreement dated *
used in connection with grant of
incentive stock options under Peoples
Bancorp Inc. 1995 Stock Option Plan.
10(n) Peoples Bancorp Inc. 1998 Stock Option Incorporated herein by
Plan. reference to Exhibit
10 of the Company's
Form S-8 filed
September 4, 1998
(Registration
Statement No.
333-62935).
10(o) Form of Stock Option Agreement used in *
connection with grant of non-qualified
stock options to non-employee directors
of the Company under Peoples Bancorp
Inc. 1998 Stock Option Plan.
10(p) Form of Stock Option Agreement used in *
connection with grant of non-qualified
stock options to consultants/advisors
of the Company under Peoples Bancorp
Inc. 1998 Stock Option Plan.
11 Computation of Earnings Per Share. *
12 Statements of Computation of Ratios. *
13 Peoples Bancorp Inc. Annual Report to Pages 59 through 119.
Shareholders for the fiscal year ended
December 31, 1998 (not deemed filed
except for portions thereof which are
specifically incorporated by reference
into this Annual Report on Form 10-K).
21 Subsidiaries of Peoples Bancorp Inc. *
23 Consent of Independent Auditors - *
Ernst & Young LLP.
27 Financial Data Schedule. *
* Filed herewith
EXHIBIT 11
----------
PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31,
1998 1997 1996
BASIC EARNINGS PER SHARE
EARNINGS:
- ------------------------
Net income $10,045,000 $8,605,000 $7,651,000
AVERAGE SHARES OUTSTANDING:
Weighted average Common Shares
outstanding 5,744,943 5,209,737 5,156,685
========= ========= =========
BASIC EARNINGS PER SHARE $1.75 $1.65 $1.48
========= ========= =========
DILUTED EARNINGS PER SHARE
EARNINGS:
- --------------------------
Net income $10,045,000 $8,605,000 $7,651,000
AVERAGE SHARES OUTSTANDING:
Weighted average Common Shares
outstanding 5,744,943 5,209,737 5,156,685
Net effect of the assumed
exercise of stock options based
on the treasury stock method 174,072 164,136 70,004
--------- --------- ---------
Total 5,919,015 5,373,873 5,226,689
========= ========= =========
DILUTED EARNINGS PER SHARE $1.70 $1.60 $1.46
========= ========= =========
EXHIBIT 12
----------
PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
COMPUTATION OF RATIOS
---------------------
CASH DIVIDENDS PER SHARE Cash dividends paid/common shares
outstanding at date of declaration
BOOK VALUE PER SHARE Total stockholders' equity/common
shares outstanding at year-end
RETURN ON AVERAGE ASSETS Net income/average assets
RETURN ON AVERAGE STOCKHOLDERS'
EQUITY Net income/average stockholders'
equity
NET INTEREST MARGIN Fully-tax equivalent net interest
income/average earning assets
NON-INTEREST EXPENSE TO AVERAGE Non-interest expense/average assets
ASSETS
EFFICIENCY RATIO (Non-interest expenses less
intangible non-recurring,
non-operational items)/(fully-tax
equivalent net interest income plus
non-interest income)
AVERAGE LOANS TO AVERAGE DEPOSITS Average gross loans/average deposits
DIVIDEND PAYOUT RATIO Dividends declared/Net income
AVERAGE STOCKHOLDERS' EQUITY TO Average stockholders' equity/average
AVERAGE ASSETS assets
PRIMARY CAPITAL TO PERIOD END TOTAL (Stockholders' equity plus allowance
ASSETS for loan losses less intangible
assets/(Period end total assets plus
allowance for loan losses less
intangible assets)
TIER 1 CAPITAL RATIO Stockholders' equity less intangible
assets less securities mark-to-
market capital reserve ("Tier 1
Capital")/Risk adjusted assets
TOTAL CAPITAL RATIO Tier 1 capital plus allowance for
loan losses/Risk adjusted assets
TIER 1 LEVERAGE RATIO Tier 1 capital/Qyarterly average
assets
NET CHARGE-OFFS TO AVERAGE LOANS (Gross chargeoffs less recoveries)/
Average net loans
NONPERFORMING LOANS AS A PERCENTAGE (Nonaccrual loans plus loans past due
OF PERIOD END LOANS 90 days or greater plus other real
estate owned)/Gross loans net of
unearned interest
ALLOWANCE FOR LOAN LOSSES TO PERIOD Allowance for loan losses/Gross loans
END TOTAL LOANS net of unearned interest
A LETTER TO OUR SHAREHOLDERS:
=============================
Nineteen ninety eight was a significant year in the history of Peoples
Bancorp: net income topped $10 million, marking the 25th consecutive year
of increased earnings for your Company. Earnings were bolstered by strong
asset growth and enhanced results of operations in key performance areas.
Consistent earnings growth has provided Peoples Bancorp shareholders with a
10-year compound average annual return of 19.7% and a 5-year compound average
annual return of 19.0% (both measures assume quarterly dividend reinvestment).
Consistent earnings growth and our commitment to increased shareholder return
are basic tenets of our strategic plan. As you can see by the financial
highlights on page 10, it was a good year for your Company in terms of
growth and profitability, as earnings per share reached record highs.
Peoples Bancorp reported total net income of $10,045,000, an increase of
16.7% compared to 1997. Earnings per share totaled $1.70, up 10 cents over
the previous year. Dividends per share continued to grow, reaching $0.53 per
share in 1998, an increase of 8.2% compared to 1997.
Peoples Bancorp's earnings growth can be attributed to a combination of
increased revenues related to recent acquisitions and modest enhancements to
the Company's operating efficiency. In 1998, we were challenged to employ
funds acquired in the purchase of our Point Pleasant, New Martinsville, and
Steelton banking centers. I am pleased to report we successfully completed
transition of the acquired funding sources to an asset mix similar to that
held by Peoples Bancorp in previous periods by shifting assets into higher-
yielding assets (such as loans).
Peoples Bancorp is committed to providing quality financial products and
services through many delivery systems. In particular, our sales offices
are an integral part of that delivery process, with local leadership and a
strong community-minded perspective. In 1998, we successfully added four
West Virginia banking centers to Peoples Bancorp's growing number of
locations without compromising customer service. I commend our associates
for their hard work and dedication during this transition period.
In an effort to serve our growing customer base and boost our market presence,
we opened additional full-service banking centers in Athens, Ohio, and
Parkersburg, West Virginia. Also, we recently combined operating systems in
our four Kentucky banking offices to provide customers consistent full-
service banking throughout northeast Kentucky and surrounding areas. These
actions are part of Peoples Bancorp's ongoing efforts to enhance customer
service and optimize the efficiency of our operations.
We believe our future is exciting and full of opportunities to provide
financial solutions for our customers' product and service needs. Our focus
for 1999 includes changes in how we sell our products and the introduction
of a new marketing program that emphasizes the "connections" customers have
through Peoples Bancorp.
To be "connected" is to be joined or linked together. Our professional
relationships and electronic access connect our customers to Peoples
Bancorp's array of products and services. As we transfer our financial
information to the customer, a value-added relationship is created and
maintained. Your Company's sales and management teams are focused on
continuous enhancement of customer relationships for a purpose: to be the
leading financial services provider to the customers and markets we serve.
Peoples Bancorp's professional staff is dedicated to customer service and
to the communities in which we live, work, and invest. Our associates have
developed and will continue to sharpen their abilities to serve customers in
a manner that best fits the customer's needs, whether it's 24-hour banking
through our TeleBank office, or one-on-one relationships. We realize that
customers have different needs and our ability to recognize those subtle
variations differentiates Peoples Bancorp from our competitors.
Our basic goal is to develop and deliver quality products which meet customer
needs. Our vision is to make it easy to do business with Peoples Bancorp
through a dedicated team of associates committed to community-based
fundamentals and speedy service. We have learned that customers want
choices, especially when choosing their preferred method of product delivery.
In 1998, we began offering electronic banking through our pcPAL software
program. During 1999, we will be offering Internet banking access for our
customers after testing security and reliability.
I am pleased to report the addition of Frank L. Christy as a director of
Peoples Bancorp Inc. in February. Mr. Christy is a successful real estate
developer and business executive with knowledge of the markets served by
Peoples Bancorp. Frank and his family are long-term stockholders and he
brings experience from previous directorships in financial companies. He is
also a nominee for election to a three year term at the Annual Meeting.
By now you have probably heard about the "Year 2000" computer issue and
related gloomy predictions of computers not being able to work properly.
This complex issue, also known as "Y2K", arises in computer programs written
using two digits rather than four to define the applicable year, causing
date-sensitive software or embedded chips to recognize a date of "00" as the
year 1900 rather than the year 2000. Peoples Bancorp and many other
businesses across various industries are investing resources to make sure
their computer systems will work properly in the Year 2000.
Peoples Bancorp has made the Y2K project a top priority and we will
successfully meet the challenges of the Y2K issue. We have evaluated
potential impacts and have implemented a comprehensive plan to test and
ensure that all aspects of our business are prepared. As a shareholder,
you can be assured that we are working hard to make sure our financial
systems will be operating on a "business as usual" basis on January 1, 2000,
and beyond. Your Company has weathered storms, floods, financial
disruptions, and economic change for nearly 100 years. We are overcoming
the Y2K issue in the usual hardworking manner. Now that most of the work is
done, I am prepared to guarantee that our vaults will be open and our people
will be "doing business as usual" on the first business day of 2000.
Recently we announced a partnership with retail giant Wal-Mart, in which
Peoples Bank will open three sales centers in certain mid-Ohio valley
Wal-Mart stores. Our sales centers will complement existing full-service
offices and serve as a catalyst for increasing sales volume by putting
capable sales professionals in those offices where customers can easily take
advantage of the many products and services available at Peoples Bancorp.
I want to give special recognition to Norman J. Murray, who will retire from
our Board of Directors upon completion of his current term at the Annual
Meeting on April 15, 1999. Mr. Murray and his family have been leaders in
our community for many years. He first joined the Peoples Bancorp
organization in 1967 as a Director of Peoples Bank and is also one of the
original group of Peoples Bancorp directors when the Company was chartered
in 1980.
Over the years Norm has contributed generously and unceasingly to the success
of your Company as a Director, customer, and stockholder. Norm's integrity,
commitment, and competitive fire are core values at Peoples Bancorp, and
Norm's leadership over the past 32 years have helped instill these
characteristics into the way we do business. Norm's leadership and
contributions during his long tenure as a Director will continue to benefit
the Company. We will certainly miss his insight, integrity, and presence in
the Board room.
The 1999 Annual Meeting of Shareholders will be held at the Historic
Lafayette Hotel beginning at 9:30 AM in the Mississippi Delta Room. Our
recent growth has absorbed the meeting space in our banking offices. We
hope you are able to join us.
The financial reports and analyses found throughout this report reflect the
achievements of your Company in 1998. We are already working to make your
investment more valuable in 1999. If you have any questions concerning
Peoples Bancorp stock, please contact our Investor Relations Department at
(740) 374-6136, or learn more by visiting our web site at
www.peoplesbancorp.com.
/s/ ROBERT E. EVANS
---------------
Robert E. Evans
President and Chief Executive Officer
SELECTED FINANCIAL DATA
=======================
The information below under the captions "Operating Data", "Balance Sheet
Data" and "Per Share Data" for each of the five years in the period ended
December 31, 1998 has been derived from the Consolidated Financial Statements
of the Company.
(Dollars in Thousands, except Ratios and Per Share Data)
1998 1997 1996 1995 1994
Operating Data
For the year ended:
Total interest income $ 63,645 $ 53,836 $ 47,397 $ 43,068 $ 35,801
Total interest expense 30,497 25,216 21,966 20,777 15,424
Net interest income 33,148 28,620 25,431 22,291 20,377
Provision for loan losses 2,325 2,589 1,965 1,315 765
Other income 7,238 5,938 5,178 4,481 4,141
Other expenses 23,276 19,265 17,522 16,818 15,672
Net income 10,045 8,605 7,651 6,050 5,748
- -----------------------------------------------------------------------------
BALANCE SHEET DATA
At year end:
Total assets $880,284 $758,158 $616,635 $543,430 $498,006
Investment securities 235,569 174,291 147,783 131,762 99,419
Net loans 558,408 513,214 415,540 372,800 354,570
Total deposits 714,168 611,107 504,692 429,077 403,819
Long-term borrowings 40,664 28,577 29,200 23,142 23,787
Stockholders' equity 86,014 78,818 56,193 51,474 45,635
- -----------------------------------------------------------------------------
SIGNIFICANT RATIOS
Net income to:
Average total assets 1.20% 1.29% 1.29% 1.15% 1.20%
Average stockholders'
equity 12.2 14.3 14.4 12.3 12.9
Average stockholders'
equity to average
total assets 9.9 9.0 8.9 9.3 9.3
Average loans to average
deposits 80.9 85.5 84.0 85.2 85.5
Risk-based capital ratio 11.95 14.34 12.86 13.85 14.13
Dividend payout ratio 30.4 30.5 30.5 32.2 29.3
- -----------------------------------------------------------------------------
PER SHARE DATA
Net income:
Basic $ 1.75 $ 1.65 $ 1.48 $ 1.16 $ 1.09
Diluted 1.70 1.60 1.46 1.15 1.09
Weighted average
shares outstanding:
Basic 5,744,943 5,209,737 5,156,685 5,221,764 5,263,412
Diluted 5,919,015 5,373,873 5,226,689 5,250,827 5,280,974
Cash dividends paid 0.53 0.49 0.43 0.37 0.32
Book value at end of period 14.99 13.71 10.88 10.03 8.67
- ------------------------------------------------------------------------------
COMMON STOCK
============
Return to Investors
- -------------------
The Company's mission is to become the financial services leader in the
communities we serve. Execution of this basic objective will lead to
consistent earnings growth and increased shareholder return. Peoples
Bancorp's capital structure provides a base for continued growth and
expansion. Shareholder return on investment continues to be a top priority,
through both dividends and growth in the market value of the Company's stock.
Our associates are committed to enhancing the total return to our
shareholders.
Management focuses on several key ratios that define our dedication to
shareholder return. We concentrate on earnings per share, return on
shareholders' equity, and dividends per share. Enhancement of net income
and profitability through increased efficiencies is a major Company goal,
as well as positioning the Company for increased future profits. Under
normal circumstances, as earnings per share increase, the dividends paid per
share should follow with a similar increase and have a positive effect on
the market value of the Company's common stock.
In the last five years, the Company's earnings per share has grown by a
compound annual average rate of 9.3%. Diluted earnings per share reached
$1.70 in 1998. Through balance sheet growth and investments in technology,
the Company has gained efficiencies and enhanced overall performance.
Increases in non-interest income have also contributed to the profitability
of the Company.
In addition to increasing shareholder wealth through rowth in stock value,
we believe a competitive dividend rate is also important to the overall
return to our shareholders. In the last five years, the compound annual
average growth rate of the Company's per share dividend is 10.6%. The
Company has paid cash dividends on its common stock for over 42 consecutive
years and has increased the annual dividend in each of the last 33 years.
The Company plans to continue to pay quarterly cash dividends, subject to
certain regulatory restrictions described in Note 12 to the audited financial
statements.
In recent years, the financial services industry has emphasized return on
shareholders' equity (or "ROE") as a means of measuring an entity's
performance. In 1998, the Company's ROE was challenged due to a significant
issuance of equity for the Gateway Bancorp acquisition in December, 1997.
The graph to the right shows recent ROE performance for the Company.
Management will continue to focus on enhancements to ROE as a means of
increasing the value of shareholder investment and is researching methods to
enhance ROE in 1999.
Earnings Dividends Return on Average
per share per share Shareholders' Equity
--------- --------- --------------------
1994 $1.09 $0.32 12.94%
1995 1.15 0.37 12.33%
1996 1.46 0.43 14.43%
1997 1.60 0.49 14.33%
1998 1.70 9.53 12.21%
Since February 9, 1993, the Company's common stock has traded on the Nasdaq
National Stock Market (National Association of Securities Dealers Automated
Quotation) under the symbol PEBO. Nasdaq provides brokers and others with
immediate access to the best stock price for the Company and thousands of
other companies across the world. The Company's information can also be
accessed electronically through the Company's web site at
www.peoplesbancorp.com. In 1998, there were 1,378,883 shares traded through
the Nasdaq system, an average daily volume of 5,472 shares.
The table on page 11 sets forth the high and low bid quotations for the
indicated periods, and the cash dividends declared, with respect to the
Company's common stock. Currently, four companies serve as market makers
on the Nasdaq National Stock Market on behalf of the Company. Market prices
have been obtained directly from the Nasdaq quotation system. The bid
quotations and per share dividends have been retroactively adjusted for a
3-for-2 stock split effective April 30, 1998 , and a 10% stock dividend
issued on July 15, 1996. Peoples Bancorp had 1,281 stockholders of record
at December 31, 1998.
COMMON STOCK
============
Quarterly Market and Dividend Information
(Adjusted for stock splits and stock dividends)
PER SHARE
High Bid Low Bid Dividend
1998
Fourth Quarter $ 27.25 $ 21.50 $ 0.14
Third Quarter 30.88 24.50 0.13
Second Quarter 35.17 29.50 0.13
First Quarter 29.83 26.17 0.13
1997
Fourth Quarter $ 2.67 $ 26.33 $ 0.13
Third Quarter 27.00 23.50 0.13
Second Quarter 24.50 19.50 0.12
First Quarter 20.17 17.50 0.12
1996
Fourth Quarter $ 18.67 $ 15.83 $ 0.11
Third Quarter 16.00 14.01 0.11
Second Quarter 14.24 13.94 0.10
First Quarter 14.39 13.94 0.10
The following table presents the closing stock price of the Company's
common stock for each of the last five years (adjusted for stock splits and
stock dividends):
Closing Stock Price
-------------------
1994 $13.23
1995 14.32
1996 17.67
1997 27.83
1998 24.38
Stockholders are cordially invited to attend the Annual Meeting of
Stockholders of Peoples Bancorp Inc. to be held April 15, 1999, at 9:30 A.M.
in the Mississippi Delta Room at the Hotel Lafayette in Marietta, Ohio.
On written request, a copy of our Annual Report to the Securities and
Exchange Commission on Form 10-K is available to interested Stockholders.
Requests should be addressed to Ruth Otto, Corporate Secretary, Peoples
Bancorp Inc., P.O. Box 738, Marietta, Ohio 45750.
CONSOLIDATED BALANCE SHEETS
===========================
(Dollars in Thousands)
December 31,
Assets 1998 1997
Cash and cash equivalents:
Cash and due from banks $ 27,048 $ 21,473
Interest-bearing deposits in other banks 3,373 7,008
Federal funds sold 9,700 10,350
- -----------------------------------------------------------------------------
Total cash and cash equivalents 40,121 38,831
- -----------------------------------------------------------------------------
Available-for-sale investment securities, at
estimated fair value (amortizedcost of
$230,049 in 1998 and $170,702 in 1997) 235,569 174,291
- -----------------------------------------------------------------------------
Loans, net of deferred fees and costs 567,917 521,570
Allowance for loan losses (9,509) (8,356)
- -----------------------------------------------------------------------------
Net loans 558,408 513,214
- -----------------------------------------------------------------------------
Bank premises and equipment, net 14,826 11,971
Other assets 31,360 19,851
- -----------------------------------------------------------------------------
Total assets $880,284 $758,158
=============================================================================
Liabilities
- -----------
Deposits:
Non-interest bearing $ 80,884 $ 64,229
Interest bearing 633,284 546,878
- -----------------------------------------------------------------------------
Total deposits 714,168 611,107
- -----------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase agreements 31,814 30,811
Federal Home Loan Bank advances 700 1,750
- -----------------------------------------------------------------------------
Total short-term borrowings 32,514 32,561
- -----------------------------------------------------------------------------
Long-term borrowings 40,664 28,577
Accrued expenses and other liabilities 6,924 7,095
- -----------------------------------------------------------------------------
Total liabilities 794,270 679,340
=============================================================================
Stockholders' Equity
Common stock, no par value, 12,000,000
shares authorized - 5,790,148 shares
issued in 1998 and 3,831,206 issued
in 1997 including shares in treasury 50,807 50,001
Accumulated comprehensive income, net
of deferred income taxes 3,588 2,369
Retained earnings 33,441 26,448
- -----------------------------------------------------------------------------
87,836 78,818
Treasury stock, at cost, 52,031 shares
in 1998 and no shares in 1997 (1,822)
- -----------------------------------------------------------------------------
Total stockholders' equity 86,014 78,818
- -----------------------------------------------------------------------------
Total liabilities and stockholders'
equity $880,284 $758,158
=============================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
=================================
(Dollars in Thousands, except Per Share Data)
Year ended December 31,
1998 1997 1996
Interest Income:
- ----------------
Interest and fees on loans $ 48,857 $ 43,451 $ 37,140
Interest and dividends on:
Obligations of U.S. Government
and its agencies 9,500 7,255 7,205
Obligations of states and
political subdivisions 1,886 1,324 1,402
Other interest income 3,402 1,806 1,650
- -----------------------------------------------------------------------------
Total interest income 63,645 53,836 47,397
- -----------------------------------------------------------------------------
Interest Expense:
- -----------------
Interest on deposits 26,051 22,282 18,880
Interest on short-term borrowings 2,241 1,023 1,449
Interest on long-term borrowings 2,205 1,911 1,637
- -----------------------------------------------------------------------------
Total interest expense 30,497 25,216 21,966
- -----------------------------------------------------------------------------
Net interest income 33,148 28,620 25,431
Provision for loan losses 2,325 2,589 1,965
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 30,823 26,031 23,466
- -----------------------------------------------------------------------------
Other Income:
- -------------
Income from fiduciary activities 2,325 2,176 1,897
Service charges on deposit accounts 2,553 2,202 1,937
Gain (loss) on securities
transactions 418 (28) 48
Other 1,942 1,588 1,296
- -----------------------------------------------------------------------------
Total other income 7,238 5,938 5,178
- -----------------------------------------------------------------------------
Other Expenses:
- ---------------
Salaries and employee benefits 9,315 8,358 7,514
Net occupancy 1,597 1,297 1,193
Equipment 1,728 1,501 1,329
Insurance 293 242 175
Supplies 779 516 713
Taxes other than income taxes 622 709 833
Amortization of intangibles 2,093 1,138 625
Other 6,849 5,504 5,140
- -----------------------------------------------------------------------------
Total other expenses 23,276 19,265 17,522
- -----------------------------------------------------------------------------
Income before income taxes 14,785 12,704 11,122
- -----------------------------------------------------------------------------
Income taxes:
Current 4,869 3,941 3,303
Deferred (129) 158 168
- -----------------------------------------------------------------------------
Total income taxes 4,740 4,099 3,471
- -----------------------------------------------------------------------------
Net income $ 10,045 $ 8,605 $ 7,651
=============================================================================
Earnings per share:
- -------------------
Basic $1.75 $1.65 $1.48
- -----------------------------------------------------------------------------
Diluted $1.70 $1.60 $1.46
- -----------------------------------------------------------------------------
Weighted average number of shares outstanding:
- ----------------------------------------------
Basic 5,744,943 5,209,737 5,156,685
- -----------------------------------------------------------------------------
Diluted 5,919,015 5,373,873 5,226,689
- -----------------------------------------------------------------------------
See notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
===============================================
<CAPTION> Accumulated
Other
Common Stock Retained Comprehensive Treasury
<S> (Dollars in Thousands) Shares Amount Earnings Income (1) Stock Total
<C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,332,598 $30,898 $ 21,786 $ 2,469 $ (3,679) $ 51,474
- -----------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 7,651 7,651
Other comprehensive income,
net of tax:
Unrealized losses on
available-for-sale
securities, net of
reclassification adjustment (1,041) (1,041)
--------
Comprehensive income 6,610
Purchase of treasury stock,
14,000 shares (332) (332)
10% stock dividend (reissued
226,989 treasury shares) 85,468 2,871 (6,727) 3,856
Exercise of common stock options
(reissued 5,417 treasury shares) 16,434 330 101 431
Issuance of common stock under
dividend reinvestment plan 10,575 250 250
Cash dividends declared of $0.43
per share (2,240) (2,240)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,445,075 34,349 20,470 1,428 (54) 56,193
- -----------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 8,605 8,605
Other comprehensive income,
net of tax:
Unrealized gains on
available-for-sale securities,
net of reclassification adjustment 941 941
--------
Comprehensive income 9,546
Purchase of treasury stock,
10,150 shares (327) (327)
Exercise of common stock options
(reissued 12,150 treasury shares) 9,173 (67) 381 314
Issuance of common stock under
dividend reinvestment plan 11,486 370 370
Cash dividends declared of $0.49
per share (2,627) (2,627)
Issuance of common stock to
purchase Gateway Bancorp, Inc. 365,472 15,349 15,349
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,831,206 50,001 26,448 2,369 0 78,818
- -----------------------------------------------------------------------------------------------------------
Adjustment for the effect
of 3-for-2 common stock split 1,915,603
Comprehensive income:
Net income 10,045 10,045
Other comprehensive income,
net of tax:
Unrealized gains on
available-for-sale securities
net of reclassification
adjustment 1,219 1,219
--------
Comprehensive income 11,264
Purchase of treasury stock,
71,057 shares (2,059) (2,059)
Exercise of common stock options
(reissued 19,026 treasury
shares) 28,451 370 237 607
Issuance of common stock
under dividend reinvestment
plan 14,888 436 436
Cash dividends declared of
$0.53 per share (3,052) (3,052)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,790,148 $ 50,807 $ 33,441 $ 3,588 $ (1,822) $ 86,014
===========================================================================================================
(1) Disclosure of reclassification amount for the years ended: 1998 1997 1996
Net unrealized appreciation (depreciation) arising during
period, net of tax $ 1,491 $ 923 $ (1,009)
Less: reclassification adjustment for net gains (losses)
included in net income, net of tax 272 (18) 32
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) on investment securities $ 1,219 $ 941 $ (1,041)
===========================================================================================================
See notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
(Dollars in Thousands) Year ended December 31,
1998 1997 1996
Cash flows from operating activities:
- -------------------------------------
Net income $ 10,045 $ 8,605 $ 7,651
Adjustments to reconcile net income
to net cash provided:
Provision for loan losses 2,325 2,589 1,965
(Gain) loss on securities transactions (418) 28 (48)
Depreciation, amortization, and accretion 5,095 2,648 2,068
Increase in interest receivable (630) (811) (31)
Increase (decrease) in interest payable 257 (129) 486
Deferred income tax (benefit) expense (129) 158 168
Deferral of loan origination fees and costs 56 (118) 73
Other, net (3,325) (757) (820)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 13,276 12,213 11,512
- -----------------------------------------------------------------------------
Cash flows from investing activities:
- -------------------------------------
Purchases of available-for-sale
securities (138,141) (34,035) (45,240)
Proceeds from sales of
available-for-sale securities 20,349 5,309 5,522
Proceeds from maturities of
available-for-sale securities 58,964 26,244 22,034
Net increase in loans (26,955) (59,026) (44,504)
Purchase of loans (11,772)
Expenditures for premises and equipment (3,011) (1,184) (1,773)
Proceeds from sales of other real
estate owned 200 144
Acquisitions, net of cash received 100,170 19,844 68,004
Investment in limited partnership (2,036)
- -----------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (2,232) (42,704) 4,043
- -----------------------------------------------------------------------------
Cash flows from financing activities:
- -------------------------------------
Net increase (decrease) in non-interest
bearing deposits 5,234 (1,749) 8,393
Net (decrease) increase in interest
bearing deposits (19,489) 32,335 (6,894)
Net (decrease) increase in short-term
borrowings (3,596) 13,039 (13,754)
Proceeds from long-term borrowings 37,973 6,000 10,500
Payments on long-term borrowings (25,886) (6,623) (4,442)
Cash dividends paid (2,538) (2,184) (1,934)
Purchase of treasury stock (2,059) (327) (332)
Proceeds from issuance of common
stock for stock options 607 314 431
- -----------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (9,754) 40,805 (8,032)
- -----------------------------------------------------------------------------
Net increase in cash and cash
equivalents 1,290 10,314 7,523
Cash and cash equivalents at beginning
of year 38,831 28,517 20,994
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 40,121 $ 38,831 $ 28,517
=============================================================================
Supplemental cash flow information:
- -----------------------------------
Interest paid $ 26,831 $ 21,732 $ 21,757
- -----------------------------------------------------------------------------
Income taxes paid $ 5,542 $ 3,197 $ 3,832
- -----------------------------------------------------------------------------
See notes to consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
==============================================
1. SUMMARY OF SIGNIGICANT ACCOUNTING POLICIES:
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.
On April 13, 1998, the Company declared a 3-for-2 stock split effective
April 30, 1998.
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
Principles of Consolidation:
- ----------------------------
The consolidated financial statements include the accounts of Peoples Bancorp
Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents:
- --------------------------
Cash and cash equivalents include cash and due from banks, interest bearing
deposits in other banks, and federal funds sold, all with original maturities
of ninety days or less.
Investment Securities:
- ----------------------
Management determines the appropriate classification of investment securities
at the time of purchase. Held-to-maturity securities are those securities
that the Company has the positive intent and ability to hold to maturity and
are recorded at amortized cost. Available-for-sale securities are those
securities that would be available to be sold in the future in response to
the Company's liquidity needs, changes in market interest rates, and
asset-liability management strategies, among others. Available-for-sale
securities are reported at fair value, with unrealized holding gains and
losses reported in a separate component of other comprehensive income, net
of applicable deferred income taxes. The cost of securities sold is based
on the specific identification method.
Allowance for Loan Losses:
- --------------------------
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance for loan losses is based on a
quarterly evaluation of the portfolio, historical loan loss experience,
current national and local economic conditions, volume, growth and
composition of the portfolio, and other relevant factors. This evaluation
is inherently subjective and requires management to make estimates of the
amounts and timing of future cash flows on impaired loans, consisting
primarily of non-accrual and restructured loans. The allowance for loan
losses related to impaired loans is based on discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral
for certain collateral dependent loans.
Bank Premises and Equipment:
- ----------------------------
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated
useful lives of the related assets.
Other Real Estate:
- ------------------
Other real estate owned, included in other assets on the consolidated balance
sheet, represents properties acquired by the Company's subsidiary banks in
satisfaction of a loan. Real estate is recorded at the lower of cost or
fair value based on appraised value at the date actually or constructively
received, less estimated costs to sell the property.
Intangibles:
- ------------
Intangible assets representing the present value of future net income to be
earned from deposits are being amortized on an accelerated basis over a ten
year period. The excess of cost over the fair value of net assets acquired
(goodwill) is being amortized on a straight-line basis over periods ranging
from 10 to 15 years.
Income Recognition:
- -------------------
Interest income is recognized by methods which result in level rates of
return on principal amounts outstanding. Amortization of premiums has been
deducted from and accretion of discounts has been added to the related
interest income. Nonrefundable loan fees and direct loan costs are deferred
and recognized over the life of the loan as an adjustment of the yield.
Subsidiary banks discontinue the accrual of interest when, in management's
opinion, collection of all or a portion of contractual interest has become
doubtful, which generally occurs when a loan is 90 days past due. When
deemed uncollectible, previously accrued interest recognized in income in
the current year is reversed and interest accrued in prior years is charged
against the allowance for loan losses. Interest received on non-accrual
loans is included in income only if principal recovery is reasonably assured.
A non-accrual loan is restored to accrual status when it is brought current,
has performed in accordance with contractual terms for a reasonable period of
time, and the collectibility of the total contractual principal and interest
is no longer in doubt.
Interest Rate Risk Management:
- ------------------------------
The premium paid to purchase interest rate floors is included in other assets
and amortized to interest expense over the original term of the agreements.
Income Taxes:
- -------------
Deferred income taxes (included in other assets) are provided for temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements at the statutory tax rate. The components
of other comprehensive income included in the Consolidated Statements of
Stockholders' Equity have been computed based upon a 35% effective tax rate.
Stockholders' Equity:
- ---------------------
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Statement
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components. The Statement requires that certain financial
activity previously recorded directly in stockholders' equity be reported as
an adjustment to net income in determining comprehensive income. The
adoption of this standard had no impact on the Company's financial position,
results of operations, or cash flows.
Earnings per Share:
- -------------------
Basic earnings per share is determined by dividing net income by the weighted
average number of shares outstanding. Diluted earnings per share is
determined by dividing net income by the weighted average number of shares
outstanding increased by the number of shares that would be issued assuming
the exercise of stock options.
Operating Segments:
- -------------------
In June, 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Statement requires disclosure about an enterprise's
operating segments in annual and interim financial reports issued to
shareholders. The Statement defines an operating segment as a component of
an enterprise that engages in business activities that generate revenue and
incur expense, and the operating results of which are reviewed by the chief
operating decision maker in the determination of resource allocation and
performance. The Company's business activities are currently confined to
one segment which is community banking.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments in accordance with SFAS
No. 107:
Cash and cash equivalents:
- --------------------------
The carrying amounts reported in the balance sheet for these captions
approximate their fair values.
Investment securities:
- ----------------------
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
estimated using quoted market prices of comparable securities.
Loans:
- ------
The fair value of performing variable rate loans that reprice frequently and
performing demand loans, with no significant change in credit risk, is based
on carrying value. The fair value of certain mortgage loans is based on
quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair
value of other performing loans (e.g., commercial real estate, commercial
and consumer loans) is estimated using discounted cash flow analyses and
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
The fair value for significant nonperforming loans is based on either the
estimated fair value of underlying collateral or estimated cash flows,
discounted at a rate commensurate with the risk. Assumptions regarding
credit risk, cash flows, and discount rates are determined using available
market information and specific borrower information.
Deposits:
- ---------
The carrying amounts of demand deposits, savings accounts and certain money
market deposits approximate their fair values. The fair value of fixed
maturity certificates of deposit is estimated using a discounted cash flow
calculation that applies current rates offered for deposits of similar
remaining maturities.
Short-term borrowings:
- ----------------------
The carrying amounts of federal funds purchased, Federal Home Loan Bank
advances, and securities sold under repurchase agreements approximate their
fair values.
Long-term borrowings:
- ---------------------
The fair value of long-term borrowings is estimated using discounted cash
flow analysis based on rates currently available to the Company for
borrowings with similar terms.
Interest Rate Floors:
- ---------------------
Fair values for interest rate floors are based on quoted market prices.
Financial instruments:
- ----------------------
The fair value of loan commitments and standby letters of credit is estimated
using the fees currently charged to enter into similar agreements taking
into account the remaining terms of the agreements and the counterparties'
credit standing. The estimated fair value of these commitments approximates
their carrying value.
The estimated fair values of the Company's financial instruments are as
follows:
(Dollars in Thousands)
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
- -----------------
Cash and cash
equivalents $ 40,121 $ 40,121 $ 38,831 $ 38,831
Investment securities 235,569 235,569 174,291 174,291
Loans 567,917 574,820 521,570 523,893
Financial liabilities:
- ----------------------
Deposits 714,168 715,150 611,107 611,775
Short-term borrowings 32,514 32,514 32,561 32,561
Long-term borrowings 40,664 39,255 28,577 28,677
Off-balance sheet instruments:
- ------------------------------
Interest rate floors $ 22 $ 104 $ 46 $ 101
Bank premises and equipment, customer relationships, deposit base, banking
center networks, and other information required to compute the Company's
aggregate fair value are not included in the above information. Accordingly,
the above fair values are not intended to represent the aggregate fair value
of the Company.
3. INVESTMENT SECURITIES:
The estimated maturities presented in the tables below may differ from the
contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties. Rates are
calculated on a taxable equivalent basis using a 35% federal income tax
rate. The portfolio contains no single issue (excluding U.S. Government and
U.S. Agency securities) which exceeds 10% of stockholders' equity.
Securities classified as available-for-sale
At December 31, 1998:
- -------------------------------------------
(Dollars in Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Value
U.S. Treasury securities Cost Gains Losses
and obligations of U.S.
government agencies and
corporations $ 49,249 $ 1,034 $ (40) $ 50,243
Obligations of states and
political subdivisions 44,007 1,541 (15) 45,533
Mortgage-backed securities 104,067 811 (117) 104,761
Other securities 32,726 2,428 (122) 35,032
- ----------------------------------------------------------------------------
Total available-for-sale
securities $ 230,049 $ 5,814 $ (294) $ 235,569
============================================================================
<TABLE>
Maturity distribution of available-for-sale securities
- ------------------------------------------------------
Contractual maturities at December 31, 1998
<CAPTION>
(Dollars in Thousands)
U.S. Treasury Obligations
securities and of states
obligations of and Mortgage Total
U.S. Government political backed Other available-for-sale
Agencies subdivisions securities securities securities
<S> <C> <C> <C> <C> <C>
Within one year
- ---------------
Amortized cost $ 6,795 $ 2,473 $ 9,734 $ 2,259 $ 21,261
Fair value $ 6,876 $ 2,512 $ 9,872 $ 2,270 $ 21,530
Yield 7.16% 8.65% 6.64% 6.66% 7.04%
1 to 5 years
- ------------
Amortized cost 30,102 6,098 80,654 8,062 124,916
Fair value 30,660 6,296 81,111 8,084 126,151
Yield 6.11% 7.87% 6.49% 6.26% 6.45%
5 to 10 years
- -------------
Amortized cost 12,352 16,055 7,451 7,008 42,866
Fair value 12,707 16,762 7,484 7,179 44,132
Yield 6.47% 7.42% 6.40% 6.94% 6.89%
Over 10 years
- -------------
Amortized cost 19,381 6,228 15,397 41,006
Fair value 19,963 6,294 17,499 43,756
Yield 7.28% 6.46% 6.79% 6.97%
- ------------------------------------------------------------------------------------------
Total amortized
cost $49,249 $44,007 $104,067 $ 32,726 $ 230,049
Total fair value $50,243 $45,533 $104,761 $ 35,032 $ 235,569
Total yield 6.35% 7.49% 6.5 6.68% 6.68%
===========================================================================================
</TABLE>
Securities classified as available-for-sale
At December 31, 1997
- -------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government agencies and
corporations $ 51,304 $ 751 $ (87) $ 51,968
Obligations of states and
political subdivisions 24,679 1,030 (1) 25,708
Mortgage-backed securities 76,229 467 (288) 76,408
Other securities 18,490 1,720 (3) 20,207
- ------------------------------------------------------------------------------
Total available-for-sale
securities $170,702 $ 3,968 $(379) $174,291
==============================================================================
Securities classified as available-for-sale
At December 31, 1996
- -------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government agencies and
corporations $ 41,855 $ 742 $(126) $ 42,471
Obligations of states and
political subdivisions 23,949 743 (36) 24,656
Mortgage-backed securities 61,197 280 (697) 60,780
Other securities 18,618 1,277 (19) 19,876
- ------------------------------------------------------------------------------
Total available-for-sale
securities $145,619 $ 3,042 $(878) $147,783
==============================================================================
In 1998, 1997 and 1996, gross gains of $523,000, $3,000 and $48,000 and
gross losses of $105,000, $31,000 and $0 were realized, respectively. At
December 31, 1998 and 1997, investment securities having a carrying value
of $105,277,000 and $89,843,000, respectively, were pledged to secure public
and trust department deposits and repurchase agreements in accordance with
federal and state requirements.
4. LOANS:
Loans are comprised of the following at December 31:
- ----------------------------------------------------
(Dollars in Thousands) 1998 1997
Commercial, financial, and agricultural $212,530 $159,035
Real estate, construction 10,307 19,513
Real estate, mortgage 233,550 228,689
Consumer 111,530 114,333
- ------------------------------------------------------------------------
Total loans $567,917 $521,570
========================================================================
Changes in the allowance for loan losses for each of the three years in the
period ended December 31, 1998, were as follows:
(Dollars in Thousands) 1998 1997 1996
Balance, beginning of year $ 8,356 $ 6,873 $ 6,726
Charge-offs (1,645) (1,917) (2,329)
Recoveries 473 521 511
Net charge-offs (1,172) (1,396) (1,818)
Provision for loan losses 2,325 2,589 1,965
Balances of acquired subsidiaries 290
- --------------------------------------------------------------------------
Balance, end of year $ 9,509 $ 8,356 $ 6,873
==========================================================================
The Company's lending is primarily focused in the local southeastern Ohio
market and consists principally of retail lending, which includes single-
family residential mortgages and other consumer lending. The Company's
largest groups of business loans consist of credits to lodging and lodging
related companies, as well as automobile dealer floor plans. Lodging and
lodging related loans totaled $20,365,000 and $12,585,000 at December 31,
1998 and 1997, respectively. The credits have been subjected to the
Company's normal commercial underwriting standards and do not present more
than the normal amount of risk assumed in other lending areas. Automobile
dealer floor plans totaled $15,532,000 and $18,769,000 at December 31, 1998
and 1997, respectively. It is the Company's policy to obtain the underlying
inventory as collateral on these loans.
The Company does not extend credit to any single borrower or group of related
borrowers in excess of the combined legal lending limits of its subsidiary
banks. Impaired loans at December 31, 1998 and 1997, and the average
investment in impaired loans for the years then ended were immaterial to the
financial statements.
In the normal course of its business, the Company's subsidiary banks have
granted loans to executive officers and directors of the Company and to their
associates. Related party loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable loans with unrelated persons and did not involve more than normal
risk of collectibility. The following is an analysis of activity of related
party loans for the year ended December 31, 1998:
(Dollars in Thousands)
Balance, January 1, 1998 $ 16,578
New loans 17,982
Repayments 16,928
Other changes (243)
- -----------------------------------------
Balance, December 31, 1998 $ 17,389
=========================================
5. BANK PREMISES AND EQUIPMENT:
The major categories of bank premises and equipment and accumulated
depreciation are summarized as follows at December 31:
(Dollars in Thousands) 1998 1997
Land $ 2,556 $ 2,146
Building and premises 15,596 12,290
Furniture, fixtures and equipment 9,740 8,817
- --------------------------------------------------------------------
27,892 23,253
Accumulated depreciation (13,066) (11,282)
- --------------------------------------------------------------------
Net book value $ 14,826 $ 11,971
====================================================================
The Company depreciates its building and premises and furniture, fixtures
and equipment over estimated useful lives ranging from 5 to 20 years and 2
to 10 years, respectively. Depreciation expense was $1,745,000, $1,534,000,
and $1,358,000 for the years ended December 31, 1998, 1997 and 1996
respectively.
The Company leases certain banking facilities and equipment under various
agreements with original terms providing for fixed monthly payments over
periods ranging from two to ten years. The future minimum payments, by year
and in the aggregate, under noncancelable operating leases with initial or
remaining terms of one year or more consisted of the following at
December 31, 1998:
(Dollars in Thousands)
Year Ending December 31 Operating Leases
1999 $ 227
2000 200
2001 180
2002 154
2003 140
Thereafter 795
-----------------------------------------------
Total minimum lease payments $ 1,696
================================================
Rent expense was $242,000, $163,000 and $150,000 in 1998, 1997 and 1996,
respectively.
6. DEPOSITS:
Included in interest-bearing deposits are various time deposit products. The
maturities of time deposits for each of the next five years and thereafter
are as follows: $265,487,000 in 1999; $44,962,000 in 2000; $14,331,000 in
2001; $3,923,000 in 2002; $3,881,000 in 2003; and $1,237,000 thereafter.
Deposits from related parties approximated $16.5 million and $17.0 million
at December 31, 1998 and 1997, respectively.
7. SHORT-TERM BORROWINGS:
Short-term borrowings consisted of the following at December 31:
- ----------------------------------------------------------------
Federal Short-term Other
Funds Repurchase FHLB Short-term
(Dollars in Thousands) Purchased Agreements Advances Borrowings
1998
Ending balance $ 131 $ 31,683 $ 700
Average balance 996 31,429 12,534
Highest month end balance 1,725 33,457 59,200
Weighted average interest rate:
End of year 4.18% 4.52% 5.32%
During the year 5.45% 4.70% 5.68%
Interest expense - YTD 54 1,476 712
1997
Ending balance 82 30,729 1,750
Average balance 419 20,020 2,024
Highest month end balance 1,542 20,552 5,250
Weighted average interest rate:
End of year 5.69% 5.09% 5.89%
During the year 5.49% 4.40% 5.78%
Interest expense - YTD 23 881 117
1996
Ending balance 37 16,985 2,500
Average balance 331 13,134 12,294 $ 4,206
Highest month end balance 1,154 16,985 34,266 18,820
Weighted average interest rate:
End of year 6.46% 4.56% 6.10%
During the year 5.09% 3.82% 5.68% 5.52%
Interest expense - YTD $ 17 $ 502 $ 698 $ 232
8. LONG-TERM BORROWINGS:
Long-term borrowings consisted of the following at December 31:
(Dollars in Thousands) 1998 1997
Term note payable, at LIBOR
(parent company) $ 2,700 $ 3,000
Federal Home Loan Bank advances,
bearing interest at rates ranging
from 3.87% to 5.43% 37,964 25,577
- -----------------------------------------------------------------------------
Total long-term borrowings $ 40,664 $ 28,577
=============================================================================
The Federal Home Loan Bank ("FHLB") advances consist of various borrowings
with maturities ranging from 10 to 20 years. The advances are collateralized
by the Company's real estate mortgage portfolio and all of the FHLB common
stock owned by the banking subsidiaries, and other bank assets. The most
restrictive requirement of the debt agreement requires the Company to
provide real estate mortgage loans as collateral in an amount not less than
150% of advances outstanding.
The aggregate minimum annual retirements of long-term borrowings in the next
five years and thereafter are as follows:
(Dollars in Thousands)
1999 $ 28
2000 27
2001 28
2002 29
2003 31
Thereafter (includes parent company debt 40,521
-------------------------------------------------
Total long-term borrowings $ 40,664
==================================================
9. EMPLOYEE BENEFIT PLANS:
The Company sponsors a noncontributory defined benefit pension plan which
covers substantially all employees. The plan provides benefits based on an
employee's years of service and compensation. The Company's funding policy
is to contribute annually an amount that can be deducted for federal income
tax purposes. Plan assets consist primarily of U.S. Government obligations
and collective stock and bond funds.
The Company also has a contributory benefit postretirement plan for former
employees who were retired as of December 31, 1992. The plan provides health
and life insurance benefits. The Company's policy is to fund the cost of the
benefits as they are incurred.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ending
December 31, 1998, and a statement of the funded status as of December 31,
1998 and 1997:
Pension Postretirement
Benefits Benefits
(Dollars in Thousands) 1998 1997 1998 1997
Change in benefit obligation:
Obligation at January 1 $ 6,790 $ 5,868 $ 809 $ 831
Service cost 342 259
Interest cost 483 462 56 65
Plan participants' contributions 0 0 75 69
Actuarial loss (gain) 337 640 (5) 239
Benefit payments (651) (439) (127) (395)
- ----------------------------------------------------------------------------
Obligation at December 31 7,301 6,790 808 809
- ----------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
January 1 6,249 5,034
Claims payable adjustment (3)
Actual return on plan assets 737 904
Employer contributions 475 750 52 326
Plan participants' contributions 75 69
Benefit payments (651) (439) (127) (395)
- ----------------------------------------------------------------------------
Fair value of plan assets at
December 31 6,807 6,249 0 0
- ----------------------------------------------------------------------------
Funded status:
Funded status at December 31 (494) (541) (808) (809)
Unrecognized transition obligation (32) (40)
Unrecognized prior-service cost (54) (63)
Unrecognized net gain (278) (395) 191 205
- ----------------------------------------------------------------------------
Accrued benefit cost $ (858) $(1,039) $(617) $(604)
============================================================================
The following table provides the components of net periodic benefit cost for
the plans:
Pension Postretirement
Benefits Benefits
(Dollars in Thousands) 1998 1997 1996 1998 1997 1996
Service cost $ 342 $ 259 $ 248
Interest cost 483 462 416 $ 56 $ 65 $ 62
Expected return on plan
assets (514) (422) (369)
Amortization of transition
asset (8) (8) (3)
Amortization of prior
service cost (9) (9) (9)
Settlement gain (34)
Amortization of net loss 9
- -----------------------------------------------------------------------------
Net periodic benefit cost $ 294 $ 282 $ 249 $ 65 $ 65 $ 62
=============================================================================
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table:
Pension Postretirement
Benefits Benefits
1998 1997 1998 1997
Assumptions at December 31:
Discount rate 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets 9.00% 9.00% n/a n/a
Rate of compensation increase 4.00% 4.00% n/a n/a
For measurement purposes, a 6% annual rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) was assumed for
1998, grading down 1% per year to an ultimate rate of 5%. The health care
trend rate assumption does not have a significant effect on the contributory
defined benefit postretirement plan, therefore, a one percentage point change
in the trend rate is not material in the determination of the accumulated
postretirement benefit obligation or the ongoing expense.
10. FEDERAL INCOME TAXES:
The effective federal income tax rate in the consolidated statement of
income is less than the statutory corporate tax rate due to the following:
Year ended December 31
1998 1997 1996
Statutory corporate tax rate 35.0% 35.0% 34.0%
Differences in rate resulting from:
Interest on obligations of state
and political subdivisions (4.0) (3.1) (3.7)
Other, net 1.1 0.4 0.9
- --------------------------------------------------------------------------
Effective federal income tax rate 32.1% 32.3% 31.2%
==========================================================================
The significant components of the Company's deferred tax assets and
liabilities consisted of the following at December 31:
(Dollars in Thousands) 1998 1997
Deferred tax assets:
Allowance for loan losses $ 3,163 $ 2,447
Accrued employee benefits 724 1,046
Deferred loan fees and costs 323 441
Other 120 170
- ---------------------------------------------------------------------
Total deferred tax assets 4,330 4,104
- ---------------------------------------------------------------------
Deferred tax liabilities:
Available-for-sale securities 1,931 1,220
Bank premises and equipment 673 764
Deferred Income 244 515
Investments 933 725
Other 598 347
- ---------------------------------------------------------------------
Total deferred tax liabilities 4,379 3,571
- ---------------------------------------------------------------------
Net deferred tax (liability) asset $ (49) $ 533
=====================================================================
The related federal income tax expense (benefit) on securities transactions
approximated $146,000 in 1998, ($10,000) in 1997, and $16,000 in 1996.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the normal course of business, the Company is party to financial
instruments with off-balance sheet risk necessary to meet the financing
needs of customers and to manage its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit,
standby letters of credit, and interest rate floors. The instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The contract or
notional amounts of these instruments express the extent of involvement the
Company has in these financial instruments.
Loan Commitments and Standby Letters of Credit:
- -----------------------------------------------
Loan commitments are made to accommodate the financial needs of the Company's
customers. Standby letters of credit commit the Company to make payments
on behalf of customers when certain specified future events occur.
Historically, most loan commitments and standby letters of credit expire
unused. The Company's exposure to credit loss in the event of nonperformance
by the counter-party to the financial instrument for loan commitments and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same underwriting standards in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained is based on management's
credit evaluation of the customer. Collateral held varies, but may include
accounts receivable, inventory, property, plant, and equipment, and income-
producing commercial properties. The total amounts of loan commitments and
standby letters of credit are summarized as follows at December 31:
(Dollars in Thousands) Contract Amount
1998 1997
Loan commitments $ 69,568 $ 53,682
Standby letters of credit 1,430 1,973
Unused credit card limits 18,968 18,132
Interest Rate Floors:
- ---------------------
The Company has entered into interest rate floor contracts with an
unaffiliated financial institution as a means of managing the risk of
changing interest rates. Interest rate floors are agreements to receive
payments for interest rate differentials between an index rate and a
specified floor rate, computed on notional amounts of approximately $20
million. These interest rate floors subject the Company to the risk that the
counter-parties may fail to perform. In order to minimize such risk, the
Company deals only with high-quality, financially secure financial
institutions. The contracts expire as follows: $10 million in September,
1999, and $10 million in September, 2000.
12. REGULATORY MATTERS:
The primary source of funds for the dividends paid by the Company is
dividends received from its banking subsidiaries. The payment of dividends
by banking subsidiaries is subject to various banking regulations. The most
restrictive provision requires regulatory approval if dividends declared in
any calendar year exceed the total net profits of that year plus the retained
net profits of the preceding two years. At December 31, 1998, approximately
$12 million of retained net profits plus retained net profits through the
dividend date of the banking subsidiaries were available for the payment of
dividends to Peoples Bancorp Inc. without regulatory approval.
The Company and its banking subsidiaries are subject to various regulatory
capital requirements administered by the banking regulatory agencies. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and each of its banking subsidiaries must
meet specific capital guidelines that involve quantitative measures of each
entity's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and each of
its banking subsidiaries' capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and each of its banking subsidiaries to maintain minimum
amounts and ratios of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined)
to average assets (as defined). The Company and each of its banking
subsidiaries met all capital adequacy requirements at December 31, 1998.
As of December 31, 1998, the most recent notifications from the banking
regulatory agencies categorized the Company and each of its banking
subsidiaries as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Company and
each of its banking subsidiaries must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since these notifications that management
believes have changed the Company's or any of its banking subsidiaries'
category.
The Company's and its significant banking subsidiary's, The Peoples Banking
and Trust Company ("Peoples Bank"), actual capital amounts and ratios are
also presented in the table below.
Well Capitalized
For Under Prompt
Capital Action Provision
(Dollars in Thousands) Actual Adequacy
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
Total capital (to
risk-weighted assets)
The Company $ 68,359 12.0% $ 45,766 8% $ 57,207 10%
Peoples Bank 51,865 10.8% 38,380 8% 47,975 10%
- -----------------------------------------------------------------------------
Tier 1 (to
risk-weighted assets)
The Company 60,310 10.5% 22,883 4% 34,324 6%
Peoples Bank 45,846 9.6% 19,190 4% 28,785 6%
- -----------------------------------------------------------------------------
Tier 1 (to
average assets)
The Company 60,310 7.1% 34,083 4% 42,604 5%
Peoples Bank 45,846 6.8% 26,986 4% 33,732 5%
- -----------------------------------------------------------------------------
As of December 31, 1997:
Total capital (to
risk-weighted assets)
The Company $ 69,760 14.3% $ 38,904 8% $ 48,630 10%
Peoples Bank 44,703 11.1% 32,095 8% 40,119 10%
- -----------------------------------------------------------------------------
Tier 1 (to
risk-weighted assets)
The Company 63,653 13.1% 19,452 4% 29,178 6%
Peoples Bank 39,665 9.9% 16,048 4% 24,071 6%
- -----------------------------------------------------------------------------
Tier 1 (to average assets)
The Company 63,653 9.3% 27,401 4% 34,251 5%
Peoples Bank 39,665 7.1% 22,427 4% 28,034 5%
- -----------------------------------------------------------------------------
13. FEDERAL RESERVE REQUIREMENTS:
The subsidiary banks are required to maintain average reserve balances with
the Federal Reserve Bank. The Reserve requirement is calculated on a
percentage of total deposit liabilities and averaged $10,484,000 for the year
ended December 31, 1998.
14. ACQUISITIONS:
On June 26, 1998, the Company acquired the deposits (approximately $121
million) and total loans (approximately $8 million) of four full-service
offices in the communities of Point Pleasant (two offices), New Martinsville,
and Steelton, West Virginia, from an unaffiliated financial institution. This
acquisition was accounted for under the purchase method of accounting.
Accordingly, consolidated results include the operations of the acquired
full-service banking offices from the date of acquisition.
On December 12, 1997, the Company acquired Gateway Bancorp, Inc. and its
subsidiary, Catlettsburg Federal Savings Bank, for total consideration of
$21.6 million ($6.2 million in cash and $15.4 million in common stock). At
the date of acquisition, Gateway Bancorp operated two full service offices
in northeastern Kentucky, and had total assets of $61.2 million, deposits of
$43.9 million and shareholders' equity of $15.3 million. This acquisition
was accounted for under the purchase method of accounting.
In February 1997, the Company assumed approximately $12.5 million in deposit
liabilities from an unaffiliated institution. In the agreement, the Company
also acquired one full-service banking office in the community of Baltimore,
Ohio. This acquisition was accounted for under the purchase method of
accounting.
On January 1, 1997, the Company acquired Russell Federal Savings Bank
("Russell Federal") for a cash consideration of approximately $9.25 million.
At the date of acquisition, Russell Federal had one full service office
located in Russell, Kentucky, and had total assets of $28.0 million, deposits
of $19.5 million and shareholders' equity of $8.0 million at December 31,
1996. This acquisition was accounted for under the purchase method of
accounting.
On April 26, 1996, the Company acquired three full-service banking offices
in the cities of Pomeroy, Gallipolis, and Rutland, Ohio, and assumed
approximately $74 million in deposit liabilities from an unaffiliated
institution for a cash consideration of approximately $5.4 million.
Accordingly, consolidated results include the operations of the three
full-service banking offices subsequent to the acquisition date.
The prices of the purchase acquisitions were allocated to the identifiable
tangible and intangible assets acquired based upon their fair value at the
acquisition date. Deposit intangibles, included in other assets,
approximated $5,817,000 and $2,682,000, net of accumulated amortization of
$1,409,000 and $583,000, at December 31, 1998 and 1997. Goodwill, included
in other assets, approximated $16,299,000 and $10,114,000, net of accumulated
amortization of $3,160,000 and $1,874,000, at December 31, 1998 and 1997.
The following summarizes the unaudited pro forma results of operations for
the years ended December 31, 1997 and 1996, assuming the acquisitions
accounted for under the purchase method had been consummated at the beginning
of each year presented.
(Dollars in Thousands) 1997 1996
Total interest income $ 57,993 $ 53,125
Net income 8,888 7,600
Diluted earnings per share 1.49 1.45
15. STOCK OPTIONS:
The Company's stock option plans provide for the granting of both incentive
stock options and non-qualified stock options of up to 751,672 shares of
common stock. Under the provisions of the plans, the option price per
share shall not be less than the fair market value of the common stock on
the date of grant of such option, therefore no compensation expense is
recognized. All granted options vest in periods ranging from six months to
eight years and expire 10 years from the date of grant. The weighted average
remaining contractual life of options outstanding at December 31, 1998 was
7.0 years.
1998 1997
Number Option Number Option
of shares price of shares price
Non-qualified stock options
- ---------------------------
Outstanding at beginning
of year 121,374 $10.75-28.00 83,244 $10.75-14.10
Granted 11,400 28.75-32.75 57,718 17.92-28.00
Exercised 25,446 10.99-20.34 14,568 11.30-20.34
Canceled 5,020 10.99-20.34
- -----------------------------------------------------------------------------
Outstanding at end of year 107,328 10.75-32.75 121,374 10.75-28.00
=============================================================================
Exercisable at end of year 77,463 $10.75-32.75 73,948 $10.75-20.34
=============================================================================
Weighted average fair value
of options granted during
the year $ 5.97 $ 6.56
=============================================================================
Incentive stock options
Outstanding at beginning
of year 352,837 $ 9.65-29.17 272,938 $ 9.65-12.88
Granted 17,224 25.50-28.75 104,250 29.17
Exercised 22,482 9.65-12.88 24,351 9.65-12.88
Canceled 12,379 12.88-29.17
- ------------------------------------------------------------------------------
Outstanding at end of year 335,200 9.65-29.17 352,837 9.65-29.17
==============================================================================
Exercisable at end of year 164,697 $ 9.65-12.88 135,840 $ 9.65-12.88
==============================================================================
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's stock options granted is equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. The Company utilized the Black-Scholes option pricing
model for purposes of providing pro forma disclosures as if the Company had
used the fair value method for computing compensation expense for its stock-
based compensation plans. The following weighted average assumptions were
used in the pricing model for 1998, 1997, and 1996 respectively: risk-free
interest rates of 5.25%, 6.40%, and 6.40%; dividend yields of 2.40%, 1.90%,
and 1.90%; volatility factors of the expected market price of the Company's
stock of 0.15, 0.12, and 0.12, and a weighted average expected life of the
option of 7 years.
Had compensation expense for the Company's stock based compensation plans
been determined using the fair value method, net income and earnings per
share would have been as summarized below:
(Dollars in Thousands, except Per Share Data)
1998 1997 1996
Net Income:
As Reported $ 10,045 $ 8,605 $ 7,651
Pro forma 9,811 8,458 7,637
Basic Earnings Per Share:
As Reported $ 1.75 $ 1.65 $ 1.48
Pro forma 1.71 1.62 1.48
Diluted Earnings Per Share:
As Reported $ 1.70 $ 1.60 $ 1.46
Pro forma 1.66 1.57 1.42
16. PARENT COMPANY ONLY FINANCIAL INFORMATION:
(Dollars in Thousands)
December 31,
Condensed Balance Sheets 1998 1997
Assets:
- -------
Cash $ 50 $ 20
Interest bearing deposits in subsidiary bank 116 530
Receivable from subsidiary bank 1,769 1,168
Investment securities: Available-for-sale
(amortized cost of $1,164 and $1,341 at
December 31, 1998 and 1997, respectively) 3,094 2,960
Investments in subsidiaries:
Banks 84,909 76,869
Non-banks 1,197 1,138
Other assets 919 1,274
- -------------------------------------------------------------------------
Total assets $92,054 $83,959
=========================================================================
Liabilities:
- ------------
Accrued expenses and other liabilities $ 2,533 $ 1,412
Dividends payable 807 729
Long-term borrowings 2,700 3,000
- -------------------------------------------------------------------------
Total liabilities 6,040 5,141
=========================================================================
Stockholders' equity 86,014 78,818
- -------------------------------------------------------------------------
Total liabilities and stockholders'
equity $92,054 $83,959
=========================================================================
(Dollars in Thousands) Year ended December 31,
Consolidated Statements of Income 1998 1997 1996
Income:
- -------
Dividends from subsidiary banks $13,157 $12,990 $ 4,010
Dividends from other subsidiaries 40 50 40
Interest 179 72 346
Management fees from subsidiaries 909 903 902
Other 548 77 64
- --------------------------------------------------------------------------
Total income 14,833 14,092 5,362
- --------------------------------------------------------------------------
Expenses:
- ---------
Salaries and benefits 1,175 1,220 1,156
Interest 186 217 118
Other 749 818 784
- --------------------------------------------------------------------------
Total expenses 2,110 2,255 2,058
- --------------------------------------------------------------------------
Income before federal income taxes
and (excess dividends from) equity
in undistributed earnings of
subsidiaries 12,723 11,837 3,304
Applicable income tax benefit (75) (250) (190)
(Excess dividends from) equity in
undistributed earnings of subsidiaries (2,753) (3,482) 4,157
- --------------------------------------------------------------------------
Net income $10,045 $ 8,605 $ 7,651
==========================================================================
(Dollars in Thousands) Year ended December 31,
Statements of Cash Flows 1998 1997 1996
Cash flows from operating activities:
- -------------------------------------
Net income $10,045 $ 8,605 $ 7,651
Adjustment to reconcile net income
to cash provided by operations:
Amortization and depreciation 223 230 208
Excess dividends from (equity
in undistributed earnings of)
subsidiaries 2,753 3,482 (4,157)
Gain on securities transactions (517)
Other, net 1,165 (48) (382)
- --------------------------------------------------------------------------
Net cash provided by operating
activities 13,669 12,269 3,320
==========================================================================
Cash flows from investing activities:
- -------------------------------------
Proceeds from sales (purchases) of
investment securities 693 (44) (199)
Expenditures for premises and equipment (36) (33) (89)
Investment in subsidiaries (9,819) (15,436)
Repayment of capital note receivable
from subsidiary 3,000
- --------------------------------------------------------------------------
Net cash used in investing activities (9,162) (12,513) (288)
- --------------------------------------------------------------------------
Cash flows from financing activities:
- -------------------------------------
Proceeds from long-term borrowings 3,000
Payments on long-term borrowings (300) (1,560)
Purchase of treasury stock (2,059) (327) (332)
Change in receivable from subsidiary (601) (268) 69
Proceeds from issuance of common stock 607 314 431
Cash dividends paid (2,538) (2,184) (1,934)
- --------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (4,891) 535 (3,326)
- --------------------------------------------------------------------------
Net (decrease) increase in cash (384) 291 (294)
Cash and cash equivalents at the
beginning of the year 550 259 553
- --------------------------------------------------------------------------
Cash and cash equivalents at
the end of the year $ 166 $ 550 $ 259
==========================================================================
The parent company paid interest totaling $186,000, $217,000 and $118,000
during the years ended December 31, 1998, 1997, and 1996, respectively.
17. SUMMARIZED QUARTERLY INFORMATION (UNAUDITED):
A summary of selected quarterly financial information for 1998 and 1997
follows:
(Dollars in Thousands, except Per Share Data)
1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $15,364 $15,735 $16,307 $16,239
Interest expense 7,320 7,531 7,921 7,725
Net interest income 8,044 8,204 8,386 8,514
Provision for possible loan losses 96 546 546 537
Investment securities gains (losses) 4 427 (13)
Other income 1,618 1,590 1,647 1,965
Other expenses 5,414 5,444 6,400 6,018
Income taxes 1,180 1,431 978 1,151
Net income 2,376 2,800 2,096 2,773
Earnings per share:
Basic 0.41 0.49 0.37 0.48
Diluted $ 0.40 $ 0.47 $ 0.36 $ 0.47
Average shares outstanding:
Basic 5,746,684 5,754,541 5,741,362 5,737,102
Diluted 5,935,553 5,955,684 5,903,458 5,881,283
1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $12,762 $13,122 $13,639 $14,313
Interest expense 5,918 6,106 6,443 6,749
Net interest income 6,844 7,016 7,196 7,564
Provision for possible loan losses 588 641 676 684
Investment securities (losses) gains (29) (2) 3
Other income 1,418 1,462 1,528 1,558
Other expenses 4,705 4,721 4,851 4,988
Income taxes 938 989 1,039 1,133
Net income 2,002 2,125 2,158 2,320
Earnings per share:
Basic 0.39 0.41 0.42 0.44
Diluted $ 0.38 $ 0.40 $ 0.40 $ 0.42
Average shares outstanding:
Basic 5,168,804 5,174,951 5,180,915 5,313,012
Diluted 5,292,567 5,329,832 5,361,400 5,513,401
REPORT OF INDEPENDENT AUDITORS
==============================
To the Stockholders and Board of Directors:
- -------------------------------------------
We have audited the accompanying consolidated balance sheets of Peoples
Bancorp Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Peoples Bancorp Inc. and Subsidiaries at December 31, 1998 and 1997 and
the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG, LLP
Ernst & Young, LLP
Charleston, West Virginia
February 8, 1999
<TABLE>
AVERAGE BALANCES AND ANALYSIS OF NET INTEREST INCOME
====================================================
<CAPTION>
(Dollars in Thousands)
1998 1997 1996
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities (1):
- ---------------
Taxable $183,372 $11,671 6.36% $126,632 $ 8,636 6.82% $127,815 $ 8,655 6.77%
Nontaxable (2) 34,653 2,677 7.72% 22,271 1,819 8.17% 22,621 1,906 8.42%
Total 218,025 14,348 6.58% 148,903 10,455 7.02% 150,436 10,561 7.02%
Loans (3) (4):
Commercial 186,746 17,156 9.19% 145,971 13,939 9.55% 125,138 11,944 9.54%
Real estate 234,141 20,176 8.62% 209,330 17,863 8.53% 172,367 14,322 8.31%
Consumer 111,824 11,684 10.45% 112,928 11,739 10.40% 102,759 10,949 10.66%
Valuation reserve (9,134) (7,521) (6,799)
- --------------------------------------------------------------------------------------------------------------------------
Total 523,577 49,016 9.20% 460,708 43,541 9.30% 393,465 37,215 9.46%
- --------------------------------------------------------------------------------------------------------------------------
Short-term Investments:
- -----------------------
Interest-bearing deposits 3,967 222 5.60% 1,713 93 5.41% 622 29 4.64%
Federal funds sold 20,671 1,104 5.34% 7,915 437 5.52% 5,900 315 5.35%
- --------------------------------------------------------------------------------------------------------------------------
Total 24,638 1,326 5.38% 9,628 530 5.50% 6,522 344 5.28%
- --------------------------------------------------------------------------------------------------------------------------
Total earning assets 766,240 64,690 8.45% 619,239 54,526 8.81% 550,423 48,120 8.74%
Other assets 65,056 48,260 42,021
-------- -------- --------
Total assets $831,296 $667,499 $592,444
-------- -------- --------
Deposits:
- ---------
Savings $ 97,262 $ 2,764 2.84% $ 83,342 $ 2,552 3.06% $ 75,805 $ 2,302 3.04%
Interest-bearing demand 168,035 6,002 3.57% 126,462 4,372 3.46% 111,376 3,656 3.28%
Time 321,920 17,284 5.37% 277,559 15,358 5.53% 234,550 12,922 5.51%
- --------------------------------------------------------------------------------------------------------------------------
Total 587,217 26,050 4.44% 487,363 22,282 4.57% 421,731 18,880 4.48%
- --------------------------------------------------------------------------------------------------------------------------
Borrowed Funds:
- ---------------
Short-term 44,959 2,242 4.99% 22,463 1,023 4.55% 29,965 1,449 4.84%
Long-term 38,885 2,205 5.67% 30,495 1,911 6.27% 26,692 1,637 6.13%
- --------------------------------------------------------------------------------------------------------------------------
Total 83,844 4,447 5.30% 52,958 2,934 5.54% 56,657 3,086 5.45%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 671,061 30,497 4.54% 540,321 25,216 4.67% 478,388 21,966 4.59%
- --------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing
demand deposits 70,064 59,860 54,923
Other liabilities 7,904 7,248 6,114
------- ------- -------
Total liabilities 749,029 607,429 539,425
Stockholders' equity 82,267 60,070 53,019
------- ------- -------
Total liabilities and
stockholders' equity $831,296 $667,499 $592,444
------- ------- -------
Interest rate spread $34,193 3.91% $29,310 4.14% $26,154 4.15%
------- ----- ------- ----- ------- -----
Interest income/earning assets 8.45% 8.81% 8.74%
Interest expense/earning assets 3.98% 4.07% 3.99%
----- ----- -----
Net yield on earning assets
(net interest margin) 4.47% 4.74% 4.75%
===== ===== =====
<FN>
(F1) Average balances of investment securities based on carrying value.
(F2) Computed on a fully tax equivalent basis using a tax rate of 35% in 1998
and 1997 and 34% in 1996. Interest income was increased by $1,045,000,
$690,000 and $723,000 for 1998, 1997, and 1996, respectively.
(F3) Nonaccrual and impaired loans are included in the average balances
listed. Related interest income on nonaccrual loans prior to
the loan being put on nonaccrual is included in loan interest income.
(F4) Loan fees included in interest income for 1998, 1997 and 1996 were
$551,000, $542,000 and $460,000, respectively.
</FN>
</TABLE>
<TABLE>
RATE VOLUME ANALYSIS/MATURITIES TABLES
======================================
<CAPTION>
(Dollars in Thousands)
Change in Income/Expense (1) Rate Effect Volume Effect
1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income: (2)
Taxable $ 3,035 $ (19) $ 1,988 $ (609) $ 61 $ (237) $ 3,644 $ (80) $ 2,225
Nontaxable 858 (87) (211) (103) (58) (112) 961 (29) (99)
- ----------------------------------------------------------------------------------------------------------
Total 3,893 (106) 1,777 (712) 3 (349) 4,605 (109) 2,126
- ----------------------------------------------------------------------------------------------------------
Loan Income:
Commercial 3,217 1,995 674 (547) 6 (397) 3,764 1,989 1,071
Real estate 2,313 3,541 659 177 396 (672) 2,136 3,145 1,331
Consumer (55) 790 1,644 67 (256) 1,028 (122) 1,046 616
- ----------------------------------------------------------------------------------------------------------
Total 5,475 6,326 2,977 (303) 146 (41) 5,778 6,180 3,018
- ----------------------------------------------------------------------------------------------------------
Short-term investments 796 186 (467) (12) 17 (75) 808 169 (392)
- ----------------------------------------------------------------------------------------------------------
Total interest income 10,164 6,406 4,287 (1,027) 166 (465) 11,191 6,240 4,752
==========================================================================================================
Interest expense:
Savings 212 250 (5) (193) 19 (226) 405 231 221
Interest-bearing demand
deposits 1,630 716 428 149 202 (208) 1,481 514 636
Time 1,926 2,436 73 (3,570) 2,831 (583) 5,496 (395) 656
Short-term borrowings 1,219 ( 426) 398 106 (80) (182) 1,113 (346) 580
Long-term borrowings 294 274 295 (195) 36 240 489 238 55
- ----------------------------------------------------------------------------------------------------------
Total interest expense 5,281 3,250 1,189 (3,703) 3,008 (959) 8,984 242 2,148
- ----------------------------------------------------------------------------------------------------------
$ 4,883 $ 3,156 $ 3,098$ 2,676 $(2,842) $ 494 $ 2,207 $ 5,998 $ 2,604
==========================================================================================================
<FN>
(F1) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
dollar amounts of the change in each.
(F2) Presented on a fully tax equivalent basis.
</FN>
</TABLE>
LOAN MATURITIES AT DECEMBER 31, 1998
====================================
Due in
One Year Due
Due in Through After
Loan Type One Year Five Five Total
Or Less Years Years
Commercial loans:
Fixed $ 19,588 $ 28,960 $ 11,996 $ 60,544
Variable 56,503 32,154 63,333 151,990
- -----------------------------------------------------------------------------
76,091 61,114 75,329 212,534
=============================================================================
Real estate loans:
- ------------------
Fixed 9,038 29,105 40,025 78,168
Variable 32,046 81,136 52,502 165,684
- -----------------------------------------------------------------------------
41,084 110,241 92,527 243,852
=============================================================================
Consumer loans:
- ---------------
Fixed 42,404 57,786 1,626 101,816
Variable 8,198 1,234 283 9,715
- -----------------------------------------------------------------------------
50,602 59,020 1,909 111,531
=============================================================================
Total $ 167,777 $ 230,375 $ 169,765 $ 567,917
=============================================================================
MATURITIES OF CERTIFICATES OF DEPOSIT $100,000 AND OVER AT DECEMBER 31:
=======================================================================
1998 1997 1996 1995
Under 3 months $ 19,121 $ 13,302 $ 16,437 $ 18,662
3 to 6 months 34,636 24,069 8,279 9,319
6 to 12 months 9,189 9,520 10,309 5,140
Over 12 months 9,262 10,698 8,356 8,266
- --------------------------------------------------------------------
Total $ 72,208 $ 57,589 $ 43,381 $ 41,387
====================================================================
LOAN PORTFOLIO ANALYSIS
=======================
(Dollars in Thousands)
1998 1997 1996 1995 1994
Year-end balances:
- ------------------
Commercial, financial
and agricultural $212,530 $159,035 $127,927 $117,306 $117,015
Real estate 233,550 228,689 175,505 154,469 150,289
Real estate,
construction 10,307 19,513 9,944 5,919 2,528
Consumer 104,718 107,158 102,044 95,464 86,098
Credit card 6,812 7,175 6,993 6,368 5,423
- -----------------------------------------------------------------------------
Total $567,917 $521,570 $422,413 $379,526 $361,353
=============================================================================
Average total loans 532,711 468,229 400,264 367,222 337,500
Average allowance
for loan losses (9,134) (7,521) (6,799) (6,719) (6,680)
- -----------------------------------------------------------------------------
Average loans, net of
allowance $523,577 $460,708 $393,465 $360,503 $330,820
=============================================================================
Allowance for loan
losses, January 1 $ 8,356 $ 6,873 $ 6,726 $ 6,783 $ 6,370
Allowance for loan
losses acquired 290
Loans charged off:
- ------------------
Commercial, financial
and agricultural 101 354 342 256 39
Real estate 46 42 93 82 189
Consumer 1,220 1,258 1,726 1,352 842
Credit card 278 263 168 113 54
- -----------------------------------------------------------------------------
Total 1,645 1,917 2,329 1,803 1,124
- -----------------------------------------------------------------------------
Recoveries:
- -----------
Commercial, financial
and agricultural 55 124 36 111 392
Real estate 13 6 75 60 61
Consumer 378 374 391 251 304
Credit card 27 17 9 9 15
- -----------------------------------------------------------------------------
Total 473 521 511 431 772
- -----------------------------------------------------------------------------
Net chargeoffs:
- ---------------
Commercial, financial
and agricultural 46 230 306 145 (353)
Real estate 33 36 18 22 128
Consumer 842 884 1,335 1,101 538
Credit card 251 246 159 104 39
- -----------------------------------------------------------------------------
Total 1,172 1,396 1,818 1,372 352
- -----------------------------------------------------------------------------
Provision for loan
losses, December 31 2,325 2,589 1,965 1,315 765
- -----------------------------------------------------------------------------
Allowance for loan
losses, December 31 $ 9,509 $ 8,356 $ 6,873 $ 6,726 $ 6,783
=============================================================================
Allocation of allowance for loan losses at December 31:
- -------------------------------------------------------
Commercial $ 3,757 $ 3,147 $ 2,741 $ 3,440 $ 3,281
Real estate 1,453 1,478 1,050 1,517 1,828
Consumer 2,556 2,255 2,078 1,519 1,096
Credit card 628 395 131 100 89
Unallocated 1,115 1,081 873 150 489
- -----------------------------------------------------------------------------
Total $ 9,509 $ 8,356 $ 6,873 $ 6,726 $ 6,783
=============================================================================
Percent of loans to total loans at December 31:
- -----------------------------------------------
Commercial 37.4% 30.5% 30.3% 30.9% 32.4%
Real estate 41.1 43.8 41.5 40.7 41.6
Real estate, construction 1.9 3.8 2.3 1.5 0.7
Consumer 18.4 20.5 24.2 25.2 23.8
Credit card 1.2 1.4 1.7 1.7 1.5
- -----------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=============================================================================
Ratio of net chargeoffs to average total loans:
- -----------------------------------------------
Commercial 0.01% 0.05% 0.08% 0.04% (0.11)%
Real estate 0.01 0.01 0.00 0.01 0.04
Consumer 0.16 0.19 0.33 0.30 0.16
Credit card 0.04 0.05 0.04 0.02 0.01
- -----------------------------------------------------------------------------
Total 0.22% 0.30% 0.45% 0.37% 0.10%
=============================================================================
Nonperforming loans:
- --------------------
Nonaccrual loans $ 687 $ 1,220 $ 999 $ 482 $ 902
Loans 90+ days past due 495 462 621 1,236 1,082
Other real estate owned 396 19 28 45 97
- -----------------------------------------------------------------------------
Total $1,578 $ 1,701 $ 1,648 $ 1,763 $ 2,081
=============================================================================
Nonperforming loans as a
percent of total loans 0.28% 0.33% 0.39% 0.46% 0.58%
=============================================================================
Interest income on nonaccrual loans which would have been recorded under
the original terms of the loans for 1998, 1997 and 1996 was $33,000 (of
which $5,000 was actually recorded), $41,000 (of which $5,000 was actually
recorded) and $78,000 (of which $11,000 was actually recorded), respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS
====================================
INTRODUCTION
- ------------
The following discussion and analysis of the consolidated financial
statements is presented to provide insight into management's assessment of
the financial results of Peoples Bancorp Inc. (the "Company"). It also
recaps the significant events that led to the results. The Company's
business activities are currently confined to one operating segment which
is community banking. The Company's subsidiaries, The Peoples Banking and
Trust Company ("Peoples Bank"), The First National Bank of Southeastern Ohio
("First National"), Peoples Bank FSB, and The Northwest Territory Life
Insurance Company, provide financial services to individuals and businesses
within the Company's market area.
Peoples Bank is chartered by the State of Ohio and subject to regulation,
supervision, and examination by the Federal Deposit Insurance Corporation
("FDIC") and the Ohio Division of Banks. First National is a member of the
Federal Reserve System and subject to regulation, supervision, and
examination by the Office of the Comptroller of the Currency. Peoples Bank
FSB is a member of the Federal Home Loan Bank, and is subject to regulation,
supervision, and examination by the Office of Thrift Supervision, and is
also subject to limited regulation by the Board of Governors of the Federal
Reserve System.
This discussion and analysis should be read in conjunction with the audited
consolidated financial statements and footnotes and the ratios, statistics,
and discussions contained elsewhere in this Annual Report.
The following text will include references to several acquisition
transactions that have affected or will affect the Company's results of
operations. On December 12, 1997, the Company completed the purchase of
Gateway Bancorp, Inc. and its subsidiary, Catlettsburg Federal Savings Bank
("Catlettsburg Federal"), of Catlettsburg, Kentucky, for approximately $21.6
million in a combination of cash of $6.2 million and 548,208 shares of
Company stock ("Gateway Bancorp Acquisition"). Catlettsburg Federal had
total assets of $64.3 million and deposits of $43.8 million at December 12,
1997. Management operated Catlettsburg Federal as a federal savings bank
subsidiary of the Company until December 31, 1998, when it merged Catlettsburg
Federal and Russell Federal Savings Bank ("Russell Federal") into a single
thrift and renamed the company "Peoples Bank FSB".
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.
OVERVIEW OF THE INCOME STATEMENT
- --------------------------------
The Company had increased net income of $1,440,000 or 16.7%, to $10,045,000
in 1998 from $8,605,000 in 1997. On a diluted basis, earnings per share
reached $1.70 in 1998, up $0.10 (or 6.3%) compared to the previous year.
The Company's core earnings increased due to stronger earnings in existing
business units and additional revenue streams associated with recent
acquisitions. Return on average equity in 1998 totaled 12.21% compared to
14.33% in 1997. Return on average assets was 1.20% in 1998 compared to 1.29%
the previous year.
Due primarily to earning asset growth, net interest income in 1998 increased
$4,528,000 (or 15.8%) to $33,148,000. The provision for loan losses in 1998
was comparable to the 1997 amount and reflective of the quality of the
portfolio and management of the inherent credit risks therein. Bolstered by
strong fourth quarter performance, non-interest income increased $854,000
(or 14.3%) to $6,820,000. In 1998, the Company reported net gains on
securities transactions of $418,000 compared to nominal losses in 1997.
Non-interest expense increased $4,011,000 (or 20.8%) to $23,276,000 due to
a combination of costs related to market expansion and acquisition, as well
as expenses related to refinancing of long-term debt. After considering
one-time charges, the Company's efficiency ratio improved to 50.38% for the
year ended December 31, 1998, compared to 51.06% in 1997.
The Company continues to grow through purchase acquisitions.
While acquisitions using stock are continually evaluated, management is
cognizant of not diluting shareholder ownership merely for the sake of
growth. Management believes a comparative approach to financial reporting
should include the discussion of "cash earnings", which removes the after-tax
impact of the amortization of intangibles on the Company's results of
operations and facilitates comparison of the Company with competitors making
acquisitions using pooling of interests accounting. The Company has
supplemented and will continue to supplement the discussion of its results
of operations with an analysis of cash earnings. Management uses cash
earnings as one of several ways to evaluate the impact of acquisitions on
profitability and the Company's return on its investment. Recent
acquisitions have increased and will modestly increase the Company's
amortization expense related to goodwill and other intangibles and as a
result, the purchase method of accounting has affected earnings per share and
other ratios.
In 1998, intangible amortization expense totaled $2,093,000 ($1,360,000
after taxes) compared to $1,138,000 ($740,000 after taxes) last year. After
adjusting for the after-tax effect of the amortization of intangibles,
diluted cash earnings per share for the year ended December 31, 1998 was
$1.95, up $0.21 (or 12.1%) from $1.74 in diluted cash earnings per share
in 1997. Return on tangible assets was 1.41% in 1998 compared to 1.42% in
1997. Return on tangible equity dropped to 17.82% in 1998 compared to
18.00% last year.
INTEREST INCOME AND EXPENSE
- ---------------------------
Net interest income is the amount by which interest income on earning assets
exceeds interest paid on interest-bearing liabilities. Interest earning
assets include loans and investment securities. Interest-bearing liabilities
include interest-bearing deposits and borrowed funds such as Federal Home
Loan Bank ("FHLB") borrowings. Net interest income remains the primary
source of revenue for the Company. Changes in market interest rates, as
well as adjustments in the mix of interest-earning assets and interest-
bearing liabilities, impact net interest income.
When compared to the previous year, increased operating earnings in 1998 can
be attributed primarily to growth of the Company's net interest income.
The West Virginia Banking Center Acquisition and the Gateway Bancorp
Acquisition provided increased funding sources for the Company to grow its
earning asset base, generating incremental interest income streams.
As a result, net interest income grew significantly in 1998, up $4,528,000
(or 15.8%) to $33,148,000 compared to 1997. Total interest income reached
$63,645,000 while interest expense totaled $30,497,000. Included in
interest income is $1,967,000 of tax-exempt income from investments issued
by and loans made to states and political subdivisions. Since these revenues
are not taxed, it is more meaningful to analyze net interest income on a
fully-tax equivalent ("FTE") basis.
Net interest margin is calculated by dividing FTE net interest income by
average interest-earning assets and serves as a measurement of the net
revenue stream generated by the Company's balance sheet. In 1998, net
interest margin was 4.47% compared to 1997's ratio of 4.74%. The FTE yield
on earning assets was 8.45% in 1998, compared to 8.81% in 1997. The cost of
earning assets decreased 9 basis points to 3.98% in 1998.
In late 1998, the Federal Reserve Board modestly decreased the discount rate
and, as a result, the national prime rate decreased 25 basis points. The
Company adjusted its loan and deposit rates downward to reflect the decrease
in the national prime rate. This rate adjustment, combined with the "flat"
yield curve (i.e. little or no difference in short-term and long-term
interest rates) in effect for interest rates in general, combined to produce
decreased net interest margins for the Company in 1998.
Several other factors also contributed to net interest margin compression.
The deposits acquired in the West Virginia Banking Center Acquisition
significantly increased the Company's earning asset base in comparatively
lower-yielding assets such as federal funds sold. In 1998, average balances
in federal funds sold were $20.7 million, up $12.8 million compared to 1997.
By the end of 1998, the Company had redeployed recently acquired funds to an
earning asset mix that had a more appropriate balance of profitability, risk,
and characteristics similar in nature to the Company's allocation before the
West Virginia Banking Center Acquisition.
Net interest margin also decreased due to competitive pressures for loans
and deposits in the Company's markets. In addition, the recent thrift
acquisitions modestly changed the Company's earning asset mix and lowered
margins, due to the fact the Company's thrifts have primarily invested in
real estate loans, which typically do not generate return on investment like
other loan products such as commercial and personal loans.
In late 1998, the Company initiated actions designed to enhance net interest
income, margin and other performance ratios. The Company prepaid $20.3
million of its long-term FHLB borrowings at a one time cost of $402,000
($261,000 after tax). The average rate on these advances was 6.13% with a
weighted average maturity of approximately 7 years. The Company replaced
these borrowings with $20 million of FHLB advances with a one year weighted
average cost of 4.28%. At the FHLB's option, the product may reprice to a
LIBOR-based ("London Interbank Offer Rate") rate. Management estimates that,
absent other changes, the one time cost of refinancing will be recovered in
approximately two years. Recent declines in interest rates decreased yields
on the Company's variable rate assets such as federal funds sold, as well as
the rates on deposit products offered by the Company. The prepayment of
certain long-term FHLB borrowings should partially offset the recent
decreases in discount rates being paid by the Federal Reserve.
Average loans grew $62.8 million (or 13.7%) in 1998 and comprise the largest
earning asset component on the Company's balance sheet. Due to recent
acquisitions and resulting increases in funding sources, the Company's
average balances of investment securities increased $69.1 million from
$148.9 million in 1997 to $218.0 million in 1998. Management is continuously
evaluating alternative investment and loan products to maximize return at an
appropriate level of risk.
Yield on earning assets totaled 8.45% in 1998, compared to 8.81% the prior
year. Loan yields decreased to 9.21% in 1998 compared to 9.30% in 1997.
Net interest margin was negatively impacted by decreases in the Company's
investment portfolio yield, which dropped 44 basis points to 6.58% in 1998,
reflecting the reinvestment of higher-yielding, maturing investments into
lower-yielding instruments.
Compared to 1997, cost of interest-bearing liabilities decreased 13 basis
points to 4.54% in 1998. Deposit costs decreased due to a combination of
lowering time deposit rates, the acquisition of lower interest cost funding
sources from the West Virginia Banking Center Acquisition, and the
implementation of regional pricing in selected markets served by the Company.
Interest costs on the Company's array of traditional interest-bearing
deposit products decreased 13 basis points to 4.44% in 1998 compared to the
previous year. The most significant component of interest expense in 1998
was interest paid on time deposits (i.e. Certificates of Deposits and
Individual Retirement Accounts). In 1998, the Company paid interest of
$17,285,000, or 5.37%, on average time deposit balances of $321.9 million.
In 1997, the average rate paid was 5.53% on average time deposit balances
of $277.6 million. Growth in this type of funding source was generated
primarily from acquisitions. This combination increased interest expense
costs by $715,000. Management expects deposit pricing to be increasingly
competitive in 1999 and will continue to focus its efforts to increase
balances in non-interest bearing demand deposits, which grew $10.2 million
to $70.1 million in average balances in 1998.
In 1998, the Company continued to use a combination of short-term and
long-term borrowings as a funding source. The Company's cash management
services (offered to a variety of business customers) have provided
short-term funding, specifically overnight repurchase agreements. In 1998,
the Company's average balances of overnight repurchase agreements increased
$11.4 million to $31.4 million, due primarily to growth in balances from
existing customers and increased market penetration. Due to product
redesign of the Company's overnight repurchase agreements, the average rate
paid in 1998 on overnight repurchase agreements totaled 4.70%, up 29 basis
points from the prior year's average rate of 4.40%.
In 1998, the Company used short-term FHLB advances as a funding source for
a pre-investment strategy related to the West Virginia Banking Center
Acquisition. As a direct result, average short-term FHLB balances increased
to $12.5 million in 1998, compared to $2.0 million in 1997, causing interest
costs to increase to $712,000 (up from $117,000 last year). In 1998, the
average interest rate on short-term FHLB advances was 5.68% compared to
5.78% in 1997. Management plans to maintain access to short-term FHLB
borrowings as an appropriate funding source.
Long-term borrowing costs decreased compared to last year due to flattening
of the yield curve. The rate paid on average long-term borrowings totaled
5.67% in 1998, down 60 basis points compared to 6.27% in 1997. The majority
of the Company's long-term borrowings are fixed rate FHLB borrowings.
The growth of the Company's earning asset base through recent acquisitions
will continue to impact net interest margin in 1999. Although net interest
margin compression has recently stabilized, management expects interest rate
pressures will continue to challenge the Company in 1999 as financial
institutions and other competitors continue to search for new methods and
products to satisfy increasing customer demand for higher yielding
interest-bearing deposits. Management will continue to monitor the effects
of net interest margin on the performance of the Company. Please refer to
the "Consolidated Average Balance Sheet and Analysis of Net Interest Income"
table included on page 34 for a complete quantitative evaluation of the
Company's net interest margin.
PROVISION FOR LOAN LOSSES
- -------------------------
In 1998, the Company recorded a provision for loan losses of $2,325,000,
compared to 1997's expense of $2,589,000. The provision 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 inherit credit risk. Management expects modest internal
loan growth in 1999 and believes that 1999's provision expense will remain
approximately level with the 1998 provision. The duration of current
provision levels will be dependent on loan delinquencies, portfolio risk,
overall loan growth, and general economic conditions in the Company's markets.
NON-INTEREST INCOME
- -------------------
The Company's non-interest income is generated from four primary sources:
cost-recovery fees related to deposit accounts, income derived from fiduciary
activities, electronic banking revenues, and insurance commissions.
Non-interest income (excluding securities transactions) from operations
reached record levels in 1998, totaling $6,820,000, an increase of 14.3%
compared to 1997. All non-interest income categories had strong growth
compared to last year. Management continues to focus on non-interest
income as a primary source of cost-recovery.
In 1998, account service charge income related to deposits increased
$351,000 (or 15.9%) to $2,553,000. Several factors contributed to this
growth, including the West Virginia Banking Center Acquisition and its
associated $121 million in deposits, which provided the base for increased
fee income in the last six months of 1998. Approximately $255,000 (or 72.6%)
of the Company's increase can be directly attributed to the deposits acquired
in the West Virginia Banking Center Acquisition. The Company's fee income
generated from deposits is based on the cost associated with relevant
services provided.
The fee structure for investment and fiduciary activities is based primarily
on the market value of assets being managed, which totaled approximately $535
million at year-end 1998, up approximately $30 million from the previous
year-end. Income from fiduciary activities totaled $2,325,000, an increase
of 6.8% compared to 1997. The Company continues to build on its leadership
position in its markets and investment and fiduciary 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 recovery of costs through fees associated with these products and
services is beginning to significantly impact the Company's non-interest
income. For the year ended December 31, 1998, total fees related to
electronic banking reached $596,000, up $120,000 (or 25.3%) compared to the
same period last year. These increases are primarily due to revenues related
to the Company's growing debit card program as well as non-customer activity
in the Company's network of ATM's, which has caused a corresponding increase
in ATM-related revenues.
In addition to traditional sources of non-interest income, the Company also
has the capability to provide customer service through a complete line of
insurance products. The Company's insurance subsidiaries, Northwest
Territory Life Insurance Agency, Inc. and Northwest Territory Property and
Casualty Insurance Agency, Inc. (the "Agencies"), which are part of First
National Bank, provide full life and property insurance product lines to
consumers in Ohio. In August 1998, these agencies were licensed by
Ohio-based Motorists Mutual Insurance Company, MICO Insurance Company, and
Motorists Life Insurance Company ("Motorists"). The Agencies offer a
complete line of life and property and casualty products through Motorists,
as well as investment products through Marketing One Securities, Inc.
Commissions on insurance and securities operations generated revenues of
$430,000 in 1998, up $91,000 (or 27.0%) compared to 1997, representing the
Company's largest percentage non-interest income increase.
Management will continue to explore new methods of enhancing non-interest
income in the future. Both traditional and nontraditional financial service
products are being analyzed for inclusion in the product mix currently being
offered by the Company.
GAINS (LOSSES) ON SECURITIES TRANSACTIONS
- -----------------------------------------
In 1998, the Company recognized net gains on securities activity of
$418,000 ($272,000 after taxes, or $0.05 per share), compared to a net loss
on securities transactions of $28,000 a year earlier. For the year ended
December 31, 1998, the Company had gains of $523,000, of which $516,000
related to an equity investment in a company that was acquired in a merger
transaction. The Company reported losses on sales of securities of $105,000
from repositioning of the investment portfolio. Management does not
expect similar gains or losses in 1999.
NON-INTEREST EXPENSE
- --------------------
Several categories within non-interest expense were directly impacted by
recent acquisitions and the related growth of non-interest expenses such as
salaries and benefits, depreciation expense, intangible amortization, etc.
Maintaining acceptable levels of non-interest expense and operating
efficiency are key performance indicators for the Company in its strategic
initiatives. For the year ended December 31, 1998, non-interest expense
totaled $23,276,000, up $4,011,000 (or 20.8%) compared to 1997.
When comparing 1998 non-interest expense to 1997, it is important to consider
the non-interest expense related to recent acquisitions. Acquisitions, and
the related salaries and employee benefits and increased depreciation
expense, comprise the majority of the increase in non-interest expense in
1998. Non-operational items also contributed to the increase in non-interest
expense. In particular, amortization of intangibles totaled $2,093,000
(up $955,000) compared to $1,138,000 in 1997. This increase is due to
completion in 1998 of the West Virginia Banking Center Acquisition as well
as amortization expense related to December 1997's Gateway Bancorp
Acquisition. The Company considers the impact of intangible amortization
when evaluating potential acquisitions.
The Company's recent acquisitions also impacted non-interest expense in
other areas, as the Company continues to expand its services and geographic
areas served. Compared to 1997, salaries and benefits expense increased
$957,000 (or 11.4%) to $9,315,000 in 1998. Recent acquisitions have
increased the number of Company employees, primarily customer service
associates in the acquired offices. At December 31, 1998, the Company had
362 full-time equivalent employees, compared to 314 full-time equivalent
employees at year-end 1997. While salaries and benefit expense has increased
on a gross comparison basis due to the many customer service associates
retained in the West Virginia Banking Center acquisition and other recent
acquisitions, management believes the human resources obtained in recent
acquisitions will enable the Company to further penetrate its new markets,
thereby optimizing customer service and return to shareholders.
Net occupancy expense, depreciation in particular, was impacted by recent
acquisitions. In 1998, furniture and equipment expenses totaled $1,728,000,
up $227,000 (or 15.1%) compared to 1997. Net occupancy expense totaled
$1,597,000 in 1998, an increase of $300,000 (or 23.1%) compared to the
previous year. These increases can be attributed primarily to the
depreciation of the assets purchased in recent acquisitions (in particular
the West Virginia Banking Center Acquisition), and completion of construction
projects to full-service offices in Athens and Caldwell, Ohio; Ashland,
Kentucky; and Parkersburg, West Virginia. Management believes the increased
investment in these offices enhances customer service capabilities in those
markets, and will provide additional opportunities for increased market
penetration. Increases are also due to growth in depreciation of additional
expenditures on technology. The Company's increased investment in
technology and other customer-service enhancements will also impact
depreciation expense in the future.
Included in non-interest expense for year ended December 31, 1998, were one
time expenses that management excludes from its assessment of operational
efficiency. In late 1998, the Company prepaid approximately $20.3 million
of FHLB borrowings to enhance net interest income, margin and other
performance ratios, at a cost of $402,000 ($261,000 after taxes). In
addition, the Company incurred $169,000 ($110,000 after taxes) of one time
expense related to the conversion of the West Virginia Banking Centers.
Expenses included purchase of new checks for the customers assumed in the
West Virginia Banking Center Acquisitions, education of new associates,
operational costs related to clearing items, telecommunications expense,
etc. Also included in the $169,000 of nonrecurring expense were one-time
costs related to market expansion in Parkersburg, West Virginia.
The Company and financial services industry use the efficiency ratio
(total non-interest expense less amortization of intangibles and nonrecurring
items as a percentage of the aggregate of fully-tax equivalent net interest
income and non-interest income) as a key indicator of performance. Gains
and losses on sales of investment securities and other nonrecurring and/or
one-time charges are not included in the calculation of the Company's
efficiency ratio. In 1998, the Company reported an efficiency ratio of
50.38%, an improvement of 68 basis points compared to 1997's 51.06%.
Management expects the efficiency ratio to continue to improve modestly in
1999 due to recent strategic initiatives to leverage non-interest expense
associated with market expansion.
RETURN ON ASSETS
- ----------------
For the year ended December 31, 1998, return on average assets ("ROA") was
1.20%, compared to 1.29% in 1997. Increased income streams from recent
acquisitions were offset by amortization of intangibles assumed in such
purchases, resulting in lower ROA levels compared to previous periods. The
Company's recent thrift acquisitions also affected ROA. In general, the
thrift industry has historically performed at lower ROA levels than
commercial banks.
The Company's ROA was challenged in 1998 due to the West Virginia Banking
Center Acquisition and the Gateway Bancorp Acquisition, and its corresponding
impact to the Company's balance sheet. Due primarily to recent acquisitions,
the Company's average assets grew approximately $164 million to over $830
million for the year ended December 31, 1998, while net income did not
proportionately increase.
In late 1998, the Company successfully employed recently acquired funds to
an asset mix similar to the Company's mix before the West Virginia Banking
Center Acquisition, in a manner consistent with acceptable return on
investment. Management anticipates ROA will stabilize in 1999 and could be
enhanced as the Company continues to shift the acquired funds into
higher-yielding assets such as loans.
RETURN ON EQUITY
- ----------------
The Company's return on average stockholders' equity ("ROE") was 12.21% in
1998 compared to 14.33% in 1997. ROE decreased in 1998 primarily due to
issuance of approximately $15.35 million of capital stock (548,208 shares)
for the purchase of Gateway Bancorp, Inc. in December, 1997. As a result,
the increase in total equity had a significant impact on ROE for the year
ended December 31, 1998. Management expects ROE in 1999 to improve as the
Company continues to leverage the additional capital issued in the Gateway
Bancorp Acquisition.
The Company and its banking subsidiaries are considered well-capitalized
under regulatory and industry standards of risk-based capital (as discussed
in Note 12 of the Notes to the Company's Consolidated Financial Statements)
and has experienced growth through retention of increased earnings over the
last several quarters.
INCOME TAX EXPENSE
- ------------------
Federal income taxes increased from $4,099,000 in 1997 to $4,740,000 in 1998.
The Company's effective tax rate for 1998 was 32.1%, compared to 32.3% in
1997. The modest decrease can be attributed to increases in tax-exempt
income compared to the prior year. Management continues to explore new
methods of reducing the Company's overall tax burden and has finalized an
investment that should help manage the Company's tax burden.
OVERVIEW OF THE BALANCE SHEET
- -----------------------------
Total assets reached $880.3 million at December 31, 1998, up $122.1 million
compared to year-end 1997. Asset growth can be attributed primarily to the
assets and liabilities acquired in the West Virginia Banking Center
Acquisition. Net cash received in the West Virginia Banking Center
Acquisition was redeployed primarily into investment securities, which
increased $61.3 million (or 35.2%) from year-end 1997 to $235.6 million
at December 31, 1998. Loan demand in the Company's established markets,
loans acquired through the West Virginia Banking Center Acquisition, and
loans purchased from external sources combined to increase loan balances
$45.2 million (or 8.8%) to $558.4 million at year-end 1998. Loan growth
occurred primarily in the commercial loan area.
Total liabilities increased $114.9 million (or 16.9%) to $794.3 million at
December 31, 1998. The majority of this growth occurred in the Company's
total deposits, which increased $103.1 million (or 16.9%) to $714.2 million
at December 31, 1998. Growth of the Company's funding sources occurred
primarily due to funds acquired in the West Virginia Banking Center
Acquisition. Increases in deposits for the Company occurred primarily in
interest-bearing deposits, while non-interest bearing deposit balances grew
$16.7 million (or 25.9%) to $80.9 million. Short-term borrowings totaled
$32.5 million at December 31, 1998, a modest decrease from the previous
year-end. Long-term borrowings, comprised primarily of FHLB borrowings
with maturities greater than one year, increased $12.1 million (or 42.3%)
to $40.7 million at December 31, 1998, due to strategic initiatives designed
to leverage Peoples Bank FSB's strong equity position.
Stockholders' equity increased $7.2 million (or 9.1%) to $86.0 million at
December 31, 1998. Equity growth occurred primarily through retention of
earnings, as well as increases in the Company's net unrealized gain on
available for sale securities. At December 31, 1998, the Company had a
treasury stock balance of 52,031 shares, or $1.8 million, due to purchases
in 1998 and the adoption of a deferred compensation plan that permits the
Company's directors to purchase the Company's stock through an established
trust. At December 31, 1997, the Company had no treasury shares.
Stockholders' equity as a percent of total assets was 9.77% at year-end 1998,
down from 10.40% at December 31, 1997, as the Company leveraged its capital
base through the West Virginia Banking Center Acquisition. Please see the
Consolidated Statements of Stockholders' Equity found on page 14 in this
Report for additional information regarding the changes in stockholders'
equity.
CASH AND CASH EQUIVALENTS
- -------------------------
The Company's cash and cash equivalents totaled $40.1 million at December 31,
1998, an increase of $1.3 million compared to year-end 1997. The Company's
balances of cash and cash equivalents, particularly federal funds sold, were
higher than normal during the last six months of 1998 due to excess funds
acquired in the West Virginia Banking Center Acquisition. By year-end 1998,
the Company had successfully employed those excess funds into higher-yielding
assets such as loans and investments.
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
- ---------------------
Investment securities totaled $235.6 million at year-end 1998, up $61.3
million (or 35.2%) compared to December 31, 1997. Growth was funded in 1998
primarily by the deposits acquired in the West Virginia Banking Center
Acquisition.
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
December 31, 1998, the amortized cost of the Company's investment securities
totaled $230.0 million, resulting in unrealized appreciation in the
investment portfolio of $5.5 million and a corresponding increase in the
Company's equity of $3.6 million.
As a direct result of growth in funding sources in recent periods, several
categories of investments within the portfolio have experienced significant
growth. Investments in mortgage-backed securities increased $28.4 million
(or 37.1%) to $104.8 million at December 31, 1998. Due primarily to
investments in trust preferred securities with attractive yields, investments
in corporate and other securities totaled $35.0 million, up $14.8 million
(or 73.4%) since December 31, 1997. Investments in obligations of states
and political subdivisions totaled $45.5 million at year-end 1998, an
increase of $19.8 million (or 77.1%) since year-end 1997. The Company's
balances in US Treasury securities and obligations of US government agencies
and corporations remained relatively unchanged since year-end 1997.
Management expects current balances of investment securities to modestly
shrink in 1999 due to anticipated loan demand and the shifting of maturing
investments to higher-yielding assets.
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 central and southeastern Ohio,
northern West Virginia, and northeastern Kentucky markets, and consists
principally of retail lending, which includes single-family residential
mortgages and other consumer lending.
Loans totaled $567.9 million at December 31, 1998, an increase of $46.3
million (or 8.9%) compared to year-end 1997. Growth occurred internally in
the Company's existing markets and also from other sources, such as $8.3
million of loans purchased in the West Virginia Banking Center Acquisition
and $11.8 million of commercial loans purchased from an unrelated financial
institution in the fourth quarter of 1998.
Real estate loans to the Company's retail customers continue to be the
largest portion of the loan portfolio, comprising 41.1% of the Company's
total loan portfolio. Real estate mortgage loans totaled $233.6 million at
December 31, 1998, up $4.9 million (or 2.1%) since year-end 1997. As the
Company blends its recent acquisitions into its core operations, certain
changes in loan mix will naturally occur. The Company experienced growth in
the home equity credit lines ("Equilines"). At December 31, 1998, Equiline
balances totaled $20.3 million, up $3.2 million (or 18.7%) since year-end
1997. The Company's Equiline growth was due primarily to special fixed
Equiline rate offers in its markets. Management believes the Equiline
product is a competitive product with an acceptable return on investment,
after risk considerations. Residential real estate lending continues to
represent a significant focus of the lending activities due to the lower
risk factors associated with these types of loans and the opportunity to
provide additional products and services to these consumers at attractive
combined returns.
Lending activity in the Company's northeastern Kentucky markets has
historically centered on real estate loans. Management expects to continue
to penetrate those local markets in 1999, seeking opportunities to sell
additional lending and deposit products. Mortgage lending will remain a
vital part of the Company's lending operation due to the programs offered to
customers, who continue to seek quality real estate loan products in a
competitive environment.
The largest loan growth category for the Company in 1998 was commercial,
financial, and agricultural loans ("commercial loans"), which increased
$53.5 million (or 33.6%) to $212.5 million. Economic conditions in the
Company's markets have provided quality credit opportunities, in particular,
southeastern Ohio and central Ohio. Management will continue to focus on
the enhancement and growth of the commercial loan portfolio while maintaining
appropriate underwriting standards. Management expects commercial loan
demand to continue to be strong in several of the Company's markets
throughout 1999.
In an effort to redeploy acquired funding sources and reallocate the
Company's mix of earning assets to an allocation similar to previous
reporting periods, the Company purchased $11.8 million of commercial loans
in the fourth quarter of 1998. The majority of these loans are
collateralized by real estate and are outside of the Company's geographic
markets.
Consumer lending also continues to be a vital part of the core lending of
the Company. In 1998, consumer loan balances decreased $2.8 million
(or 2.5%) to $111.5 million. The majority of the Company's consumer loans
are indirect loans to consumers who purchase vehicles and similar items at
sales locations in the Company's market areas. At December 31, 1998, the
Company had indirect loan balances of $65.3 million, a decrease of $5.0
million since year-end 1997, as pressures to grow this segment of the
business continue to increase in the highly competitive market for indirect
lending. Management is pleased with the recent performance of the Company's
indirect loan portfolio, which can be attributed to the Company's commitment
to quality customer service and a tiered pricing system that enables the
Company to apply interest rates based on the corresponding risk associated
with the indirect loan. Although consumer debt delinquency is increasing
in the financial services industry (due mostly to credit card debt),
management's recent actions to reinforce the Company's pricing system and
underwriting criteria have tempered delinquencies and caused a modest
decrease in new indirect loan generation. Management plans to continue its
focus on usage of this tiered system combined with controlled growth of the
indirect lending portfolio in 1999.
The Company's credit card balances at year-end 1998 were $6.8 million,
a decrease of $0.4 million compared to December 31, 1997. The credit card
industry is highly competitive, which has caused modest declines in the
Company's credit card balances. Management will continue to evaluate new
opportunities to serve our credit card customers, but will not assume
additional unnecessary risk for the sake of growth.
The offices acquired in the West Virginia Banking Center have generated
nearly $6 million in additional loan balances since the end of the second
quarter of 1998. Management is pleased with the loan growth momentum in
these new offices and expects loan activity to continue to be strong in
those markets in 1999.
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
$243.9 million (or 42.9%) of total loans, compared to $248.2 million at
year-end 1997. At December 31, 1998, commercial, financial, and agricultural
loans totaled $212.5 million (or 37.4%) of outstanding loans, up from
$159.0 million (or 30.5% of loans) at year-end 1997.
The Company's lending is primarily focused in the local southeastern Ohio
market and contiguous mid-Ohio valley areas. The Company's loan mix
principally consists of retail lending, which includes single-family
residential mortgages and other consumer loan products.
The Company's largest concentration of commercial loans are credits to
lodging and lodging related companies, which comprise approximately 10%
of the Company's outstanding commercial loans at December 31, 1998 and 8%
at December 31, 1997. These lending opportunities have arisen because of
the recent growth in the lodging industry and the need for additional travel
related services in certain areas in or contiguous to the Company's markets,
as well as the Company's ability to respond to the needs of customers in
this segment of the economy. The credits have been subjected to the
Company's normal commercial loan underwriting standards and do not present
more than the normal amount of risk assumed in other types of lending. In
addition to loans to lodging and lodging related companies, one of the
Company's largest groups of commercial loans consists of automobile dealer
floor plans, which totaled 7% of the Company's outstanding commercial loans
at December 31, 1998 and 12% at December 31, 1997.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The loan portfolio analysis on pages 36 and 37 presents in detail an
analysis of the Company's loan portfolio, the allowance for loan losses,
loan chargeoffs and recoveries by type of loan, and an allocation of the
allowance for loan losses by major loan type.
Management continually monitors the loan portfolio through its Loan Review
Department and Loan Loss Committee to determine the adequacy of the
allowance for loan losses. This formal analysis determines the appropriate
level of the allowance for loan losses, allocation of the allowance among
loan types and the adequacy of the unallocated component of the allowance.
The portion of the allowance allocated among the various loan types
represents management's estimate of expected losses based upon specific
allocations for individual lending relationships and historical loss
experience for each category of loans. The individual loan reviews are
based upon specific qualitative and quantitative criteria, including the
size of the loan and loan grades below a predetermined level. The historical
experience factor is based upon historical loss experience, trends in losses
and delinquencies, the growth of loans in particular markets and industries,
and known changes in economic conditions in the particular lending markets.
Allowances for homogeneous loans (such as residential mortgage loans, credit
cards, personal loans, etc.) are collectively evaluated upon historical
loss experience, trends in losses and delinquencies, the growth of loans
in particular markets, and known changes in economic conditions in the
particular lending markets.
The unallocated portion of the allowance is based upon management's
assessment of qualitative risk factors that may not be evident in the
Company's historical experience, such as, but not limited to, changes in
specific markets in both competition for loans and local economies. This
assessment involves a high degree of management judgment as well as higher
amounts of uncertainty. Assessment of the adequacy of the allowance is a
dynamic process that requires management to continually refine the process
as markets, economic conditions, and the Company change. Differences
between actual loss experiences and estimated events are compared on a
quarterly basis, allowing management to regularly modify loss provisions as
deemed appropriate based on market conditions and other factors previously
described.
The results of this analysis at December 31, 1998 indicate allocations to
specific lending categories that are not significantly different from the
prior year. The increase in the amount allocated to the commercial category
results from recent increases in the Company's commercial loans outstanding.
The amount allocated to the remaining categories and the unallocated portion
reflect the growth in the portfolios and changes in economic conditions.
Management expects 1999's quarterly loan loss provision to be consistent
with recent quarters.
The Company's consumer loan chargeoffs decreased $0.2 million (or 1.5%)
to $1.6 million in 1998 due to decreased credit card chargeoffs and direct
personal loan chargeoffs. Management will continue to monitor the
performance of the consumer loan portfolio and focus efforts on improving
experience and reducing losses. Real estate and commercial loan net
chargeoffs were insignificant in 1998, demonstrating the quality of the
portfolios.
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 0.28% at December 31, 1998, compared to 0.33% at December 31, 1997.
Nonaccrual loans and those loans 90 days past due totaled $687,000 and
$495,000, respectively, at year-end 1998, compared to $1,220,000 and
$462,000, respectively, at year-end 1997. Other real estate owned totaled
$396,000 at year-end 1998 compared to $19,000 at December 31, 1997.
Management believes the current level of nonperforming loans is below peer
group levels and is a reflection of the overall quality of the Company's
loan portfolio.
A loan is considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. The measurement of potential impaired loan
losses is generally based on the present value of expected future cash
flows discounted at the loan's historical effective interest rate, or the
fair value of the collateral if the loan is collateral dependent. If
foreclosure is probable, impairment loss is measured based on the fair
value of the collateral. At December 31, 1998, the Company had an
insignificant amount of loans that were considered impaired. Management
will continue to monitor the status of impaired loans, including performing
and non-performing loans. The allowance for loan losses is deemed to be
adequate to absorb losses inherent in the portfolio at December 31, 1998.
FUNDING SOURCES
- ---------------
The Company considers deposits, short-term borrowings, and long-term
borrowings when evaluating funding sources. Traditional deposits continue
to be the most significant source of funds for the Company and the expansion
of the deposit base through acquisition in 1998 sustained the asset growth
of the Company. In 1998, total deposits grew $103.1 million (or 16.9%) to
$714.2 million, with the majority of the growth occurring in interest-
bearing deposits. The West Virginia Banking Center Acquisition provided
the Company with additional funding sources of $121.0 million ($11.3 million
in non-interest bearing demand deposit balances) and experienced minimal
runoff of those deposit balances following the completion of the acquisition.
In 1998, the Company implemented regional pricing among its Peoples Bank
banking centers, which permitted management to maintain interest cost
structures in the markets entered via the West Virginia Banking Center
Acquisition. Management believes regional pricing has provided the
opportunity to maintain and improve results of operations.
In 1998, the Company's average time deposit balances increased $44.4
million (or 16.0%) to $321.9 million. The Company continues to offer
time deposit "specials" to customers in its established markets. In 1998,
a 7-month time deposit special was offered to retain maturing short-term
time deposits as well as provide a competitive product in the Company's
markets. In late 1998 and early 1999, the Company began offering a 15-month
time deposit special. Management expects CD's to continue to be a vital
funding source for the Company in the future.
On a percentage basis, the largest growth component for the Company in 1998
occurred in interest-bearing transaction accounts, which increased $41.6
million (or 32.9%) to $168.0 million. The Company continues to offer
special "relationship accounts" (both non-interest bearing and
interest-bearing) based on deposits in other products such as CD's or IRA's.
Management believes that the deposit base remains the most significant
funding source for the Company and will continue to concentrate on
non-interest bearing deposit growth and maintaining adequate net interest
margin to meet the Company's strategic goals.
In addition to traditional deposits, the Company accesses both short-term
and long-term borrowings to fund its operations and investments. The
Company's short-term borrowings consist of federal funds purchased,
corporate deposits held in overnight repurchase agreements, and various FHLB
borrowings. Short-term borrowings at December 31, 1998, totaled $32.5
million compared to $32.6 million at year-end 1997. The largest component
of short term borrowings at year-end 1998 was balances in corporate deposits
in repurchase agreements, which totaled $31.7 million compared to $30.7
million at year-end 1997.
At December 31, 1998, the Company had a balance of $0.7 million in
short-term FHLB borrowings, down $1.0 million compared to prior year-end.
In general, the Company accesses this funding source at various times to
meet liquidity needs as they arise, and will continue to access short-term
FHLB borrowings as necessary in the future.
In addition to traditional deposits and short-term borrowings, the Company
continues to maintain long-term borrowings from the FHLB. This allows the
Company to obtain reliable funds at fixed and indexed rates for longer
periods of time than other traditional deposit products, creating the
opportunity to match longer term fixed rate mortgages and other
extended-maturity asset commitments against a similar funding source.
Total long-term FHLB advances were $38.0 million at year-end 1998, a net
increase of $12.4 million (or 48.4%) since year-end 1997. The increase in
funds was used primarily to fund growth strategies designed to leverage the
strong capital position of Peoples Bank FSB. In the second half of 1998,
the Company prepaid $20.3 million of its long-term FHLB borrowings, of
which $18.8 million were subject to prepayment penalties. The Company
replaced $20 million of the prepaid FHLB advances with borrowings designed
to enhance future performance. Management plans to maintain access to
long-term FHLB borrowings as an appropriate funding source.
The Company also has a long-term borrowing with an unaffiliated financial
institution. The original borrowing was $3.0 million and was used to finance
an acquisition in early 1997. At December 31, 1998, the balance was $2.7
million. Principal payments began in 1998 and continue semi-annually over
the next three years.
CAPITAL/STOCKHOLDERS' EQUITY
- ----------------------------
During the year-ended December 31, 1998, the capital position of the Company
grew approximately $7.2 million (or 9.1%) to $86.0 million. In 1998, the
Company had net income of $10.0 million and paid dividends of $3.1 million, a
dividend payout ratio of 30.38% of earnings, compared to a ratio of 30.53%
in 1997. Management believes recent dividends represent an acceptable
payout ratio for the Company and anticipates similar payout ratios in future
periods through quarterly dividends.
Equity growth was affected in 1998 by the adjustment for the net unrealized
holding gain on available-for-sale securities which increased $1.2 million,
net of deferred income taxes, (or 51.5%) to a net gain of $3.6 million at
year-end 1998. Recent decreases in interest rates, combined with increased
purchases of investment securities in early 1998, have combined to cause the
gap to grow between the amortized cost and estimated fair value of the
Company's investment portfolio, resulting in a corresponding increase to the
Company's equity. Since all of the investment securities in the Company's
portfolio are classified as available-for-sale, both the investment and
equity sections of the Company's balance sheet are more sensitive to the
changing market values of investments.
The 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. Detailed information concerning the Company's
risk-based capital ratios can be found in Note 12 of the Notes to the
Consolidated Financial Statements. At December 31, 1998, the Company's and
each of its banking subsidiaries' risk-based capital ratios were above the
minimum standards for a well-capitalized institution. The Company's
risk-based capital ratio of 11.95% at December 31, 1998, is well above the
well-capitalized standard of 10%. The Company's Tier 1 capital ratio of
10.54% also exceeded the well-capitalized minimum of 6%. The Leverage ratio
at year-end 1998 was 7.08% and was also above the well-capitalized standard
of 5%.
In 1998, the Company's risk-based capital ratios dipped slightly due to
strategic leveraging of the Company's equity base, which increased
significantly in late 1997 related to the Gateway Bancorp Acquisition. The
Company's capital ratios provide quantitative data demonstrating the
strength and future opportunities for use of the Company's capital base.
Management continues to evaluate risk-based capital ratios and the capital
position of the Company and each of its banking subsidiaries as part of its
strategic decision process.
In June, 1998, the Company implemented a formal plan to purchase treasury
shares for use in its stock option plans. The announcement superseded a
previously announced stock repurchase plan and serves as the basis for
treasury purchases in anticipation of the Company's projected stock option
exercises.
The stock repurchase plan is based upon specific criteria related to market
prices and the number of shares expected to be issued under the Company's
stock option plans. In each of the second, third, and fourth quarters of
1998, the Company purchased 15,000 treasury shares at an average price of
$29.50 per share. Purchases totaled $1.3 million in 1998.
Management expects to purchase similar share amounts in future quarters for
use in its stock option plans. Future changes, if any, to the Company's
systematic share repurchase program may be necessary to respond to the
number of shares expected to be reissued for the Company's stock option
plans. The Company intends to fund future treasury share purchases with
internally generated sources in the short-term or external borrowings as
needed.
In early 1998, the Company initiated the Peoples Bancorp Inc. Deferred
Compensation Plan ("DCP") for the directors of the Company and its
subsidiaries, which is designed to recognize the value to the Company of
the past and present service of its directors and encourage their continued
service through implementation of a deferred compensation plan. The DCP
allows directors to defer the fees earned for their service as Company and
subsidiary directors into deferred accounts which are either invested in
the Company's common stock or a time deposit, at the specific director's
discretion at the time of entering the DCP. As a result and in accordance
with accounting regulations, the balances invested in Company stock in such
accounts are reported as treasury stock in the Company's financial
statements. At December 31, 1998, the Company owned $0.7 million of
Company stock related to the DCP, which reduces the equity balance of
the Company. Management does not expect the DCP to have a material impact
on future financial statements or results of operations for the Company.
As a result of treasury stock purchases net of reissuances, as well as DCP
activity, the Company had a treasury stock balance of $1.8 million at
year-end 1998. At December 31, 1997, the Company owned no treasury shares.
Primarily due to DCP activity, management expects the Company's treasury
stock balance to continue to modestly increase in the future.
LIQUIDITY AND INTEREST RATE SENSITIVITY
- ---------------------------------------
The objective of the Company's Asset/Liability Management function is to
maintain consistent growth in net interest income within the Company's
policy guidelines. This objective is accomplished 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.
The goal of liquidity management is to provide adequate funds to meet
changes in loan demand, normal deposit balance fluctuations, or any
potential unexpected deposit withdrawals. This goal is accomplished
primarily by maintaining sufficient liquid assets in the form of investment
securities along with consistent core deposit growth, and the availability
of unused capacity to purchase funds in the national money markets. At
December 31, 1998, the Company had $45 million in securities and other
short-term investments maturing within one year compared to $57 million at
year-end 1997. Additional asset liquidity is provided by the remainder of
the securities portfolio and securitizable loan assets. Cash provided by
operating activities of $13.3 million during the year ended December 31,
1998 was offset by outflows from net investing activity of $2.2 million and
from financing activity of $9.8 million. The Company employs a practice of
maintaining core deposits as the primary means of funding interest-earning
assets. This emphasis results in the majority of interest earning assets
being funded by core deposit liabilities. As a matter of strategy rather
than policy, the Company prefers to maintain a position of excess funds to
sell in the open market.
As a supplement to deposit funding, the Company has access to a variety of
other short-term and long-term funding sources. The Company utilizes the
Federal Home Loan Bank as a funding source, taking advantage of the
attractive funding alternatives offered when appropriate. The Company
maintains relationships with other correspondent institutions that can
serve as a funding source as well.
The Company has a strategic plan to address the contingency for extraordinary
demands on liquidity due to the Year 2000 ("Y2K") phenomena. The essence of
the plan will be to ensure the adequacy and availability of a variety of
sources of liquidity. Securing the availability of the Federal Reserve Bank
Discount Borrowings for the subsidiaries of the Company will be a primary
part of the plan. Also, the Company plans, as much as is reasonably
possible, to accumulate cash and near cash assets to meet or exceed the
potential need of additional liquidity. Additionally, the Company intends
to review current correspondent relationships, as well as seek additional
such relationships to provide diverse sources of liquidity. A proactive
campaign to allay concerns customers may have for potential problems arising
from the century date change will complement 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
on-going 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".
To aid in interest rate management, the Company uses FHLB advances as a low
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, 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.
<TABLE>
PRINCIPAL/NOTIONAL AMOUNT MATURITIES AT DECEMBER 31, 1998:
==========================================================
<CAPTION> Fair
(Dollars in Thousands) There- Value
1999 2000 2001 2002 2003 after Total 12/31/98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
- ----------------------
Fixed interest rate loans $ 71,030 $ 49,379 $ 32,824 $ 20,529 $ 13,119 $ 53,647 $240,528 $247,431
Average interest rate 9.66% 9.64% 9.45% 9.99% 9.92% 9.26% 9.58%
Variable interest rate loans $ 96,747 $ 35,737 $ 30,532 $ 25,379 $ 22,876 $116,118 $327,389 $327,389
Average interest rate 9.03% 8.07% 8.10% 8.13% 8.15% 8.11% 8.38%
Total loans $567,917
Fixed interest rate securities $ 28,446 $ 12,893 $ 14,211 $ 16,248 $ 13,847 $121,538 $207,183 $207,183
Average interest rate 6.04% 6.07% 5.90% 6.05% 6.01% 5.95% 5.98%
Variable interest rate securities $ 2,937 $ 5,478 $ 3,890 $ 370 $ 1,198 $ 14,513 $ 28,386 $ 28,386
Average interest rate 6.34% 6.06% 6.68% 7.04% 6.73% 7.08% 6.74%
Total securities $235,569
Other interest-bearing assets $ 14,050 $ 14,050 $ 14,050
Average interest rate 3.83% 3.83%
- -----------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ---------------------------
Non-interest bearing checking $ 22,648 $ 12,941 $ 9,706 $ 3,235 $ 8,655 $ 23,699 $ 80,884 $ 80,884
Average interest rate
Savings $ 15,847 $ 7,924 $ 7,924 $ 11,885 $ 5,943 $ 49,521 $ 99,044 $ 99,044
Average interest rate 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42%
Interest bearing checking $ 24,049 $ 51,960 $ 24,050 $ 8,017 $ 19,641 $ 72,702 $200,419 $200,419
Average interest rate 3.45% 4.22% 3.45% 3.45% 3.45% 3.45% 3.65%
Time deposits $265,487 $ 44,962 $ 14,331 $ 3,923 $ 3,881 $ 1,237 $333,821 $334,803
Average interest rate 5.26% 5.29% 5.51% 5.49% 5.23% 4.51% 5.27%
Total deposits
$714,168
Fixed interest rate borrowings $ 159 $ 27 $ 28 $ 29 $ 31 $ 37,821 $ 38,095 $ 36,686
Average interest rate 4.70% 4.06% 4.06% 4.06% 4.06% 4.86% 4.86%
Variable interest rate borrowings $ 35,083 $ 35,083 $ 35,083
Average interest rate 4.77% 4.77%
Total borrowings $ 73,178
- -----------------------------------------------------------------------------------------------------------------------
Rate sensitivity liabilities:
- -----------------------------
Interest rate floors purchased $ 10,000 $ 10,000 $ 20,000 $ 104
Average strike rate 5.50% 5.25%
Forward rate 5.06% 5.06%
========================================================================================================================
</TABLE>
<TABLE>
PRINCIPAL/NOTIONAL AMOUNT MATURITIES AT DECEMBER 31, 1997:
==========================================================
<CAPTION> Fair
There- Value
(Dollars in Thousands) 1998 1999 2000 2001 2002 after Total 12/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
- ----------------------
Fixed interest rate loans $ 68,336 $ 39,449 $ 27,989 $ 18,117 $ 11,045 $ 41,245 $206,181 $208,504
Average interest rate 9.35% 9.78% 9.49% 9.87% 9.76% 9.23% 9.48%
Variable interest rate loans $104,969 $ 31,063 $ 25,710 $ 21,797 $ 18,660 $113,190 $315,389 $315,389
Average interest rate 10.11% 8.43% 8.39% 8.44% 8.39% 8.59% 9.04%
Total loans $521,570
Fixed interest rate securities $ 39,252 $ 13,407 $ 14,471 $ 6,292 $ 12,213 $ 74,683 $160,318 $160,318
Average interest rate 6.12% 6.61% 6.28% 6.30% 6.56% 6.62% 6.45%
Variable interest rate securities $ 202 $ 2,412 $ 590 $ 5,861 $ 505 $ 4,403 $ 13,973 $ 13,973
Average interest rate 6.31% 7.65% 7.76% 6.94% 7.34% 7.07% 7.07%
Total securities $174,291
Other interest-bearing assets $ 17,358 $ 17,358 $ 17,358
Average interest rate 6.50% 6.50%
- -----------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ---------------------------
Non-interest bearing checking $ 17,984 $ 10,277 $ 7,707 $ 7,129 $ 5,010 $ 16,122 $ 64,229 $ 64,229
Average interest rate
Savings $14,489 $7,244 $7,244 $ 7,878 $ 6,339 $ 47,360 $ 90,554 $ 90,554
Average interest rate 3.10% 3.10% 3.10% 3.10% 3.10% 3.10% 3.10%
Interest bearing checking $ 15,829 $ 37,395 $ 15,829 $ 12,003 $ 10,684 $ 40,166 $131,906 $131,906
Average interest rate 3.38% 4.29% 3.38% 3.38% 3.38% 3.38% 3.54%
Time deposits $224,715 $ 78,199 $ 10,638 $ 6,496 $ 3,740 $ 630 $324,418 $325,086
Average interest rate 5.49% 5.81% 5.62% 6.00% 5.46% 4.60% 5.58%
Total deposits $611,107
Fixed interest rate borrowings $ 9,886 $ 3,681 $ 3,752 $ 2,837 $ 2,818 $ 4,185 $ 27,159 $ 27,259
Average interest rate 6.04% 6.14% 6.17% 6.05% 6.05% 6.46% 6.12%
Variable interest rate borrowings $ 33,979 $ 33,979 $ 33,979
Average interest rate 5.05% 5.05%
Total borrowings $ 61,138
- -----------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial instruments:
- ------------------------------------------------
Interest rate floors purchased $ 20,000 $ 10,000 $ 10,000 $40,000 $101
Average strike rate 7.00% 5.50% 5.25%
Forward rate 5.81% 5.81% 5.81%
=======================================================================================================================
</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. Evaluation and review of the
techniques, tools, and assumptions used in assessing the Company's interest
rate risk is an ongoing process.
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 in the same manner
as companies in capital intensive industries. 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 banks, monetary assets typically exceed monetary
liabilities and therefore, as prices have increased over the past year,
financial institutions experienced a modest decline in the purchasing power
of their assets.
OUTLOOK FOR 1999
================
Recent financial data reflects enhanced operational results achieved through
a combination of external growth and optimization of core competencies of
customer service and community presence. In addition, management has
identified and will continue to analyze key performance areas which
quantitatively measure the relative performance of the Company compared to
prior year results.
Management is pleased with the recent conversion of the offices acquired in
the West Virginia Banking Center Acquisition. The successful transition of
these offices bolstered loan activity with minimal loss of deposits. The new
offices are a natural extension of the Company's presence in the mid-Ohio
Valley and leverage the Company's equity position for 1999 and beyond. The
Company expects to continue its investment in the new geographic markets
through loans and other community reinvestment activities. Future loan
growth is also anticipated as the Company continues to expand its
relationship with selected customers outside traditional geographic markets.
Management plans to continue recent momentum of non-interest income growth
from various sources. The retention of the deposits acquired in the West
Virginia Banking Center Acquisition represents an additional opportunity to
provide superior customer service and strengthen the Company's position in
those markets. One of the Company's priorities in 1999 will be the
management and direction of the West Virginia Banking Center Acquisition
offices with existing full-service banking centers to create a united
financial service provider for the customers of Mason and Wetzel Counties in
West Virginia and surrounding areas of West Virginia and Ohio. Management
expects to enhance non-interest income streams in 1999 related to the
acquired deposits and associated cost-recovery fees of those deposits.
In January 1999, Peoples Bank announced intentions to open three sales
offices in Wal-Mart stores located in West Virginia (in the communities of
New Martinsville, Vienna, and Parkersburg). The Peoples Bank sales offices
will be located in the front of each Wal-Mart store near the customer service
area and will offer new deposit accounts, loans, insurance products,
investment services, Internet access, ATM access, and more. Peoples Bank
will open its New Martinsville Wal-Mart sales office in April, 1999; the
Vienna (near Parkersburg) Wal-Mart is scheduled to open in the third quarter
of 1999; and the south Parkersburg Wal-Mart is scheduled to be completed
near the end of 1999. It is anticipated that the Peoples Bank sales office
openings in the Vienna and Parkersburg Wal-Marts will coincide with the
grand opening of each store.
The three new offices will increase Peoples Bank's visibility in its West
Virginia markets and give the Company's team of personal bankers better
access to an increased number of shoppers compared to a traditional banking
center. The new Wal-Mart locations will complement the Company's existing
full-service banking centers in New Martinsville and Parkersburg, as well as
provide additional locations to Peoples Bank's customers in the greater
Parkersburg area, particularly through the Vienna store. Management believes
these new sales centers will be catalysts for 1999's sales and customer
service efforts and a focal point for future banking centers. Rather than
traditional banking offices, the Wal-Mart locations will be 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.
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 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
Peoples Bancorp 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.
In conjunction with recent acquisitions and market expansion, management
continues to focus on operational efficiency as a method of increasing
shareholder value. As a means of increasing the Company's operating
efficiency and leverage available resources, the Company merged its federal
savings banks into a single unit effective January 1, 1999. The merger
provided an opportunity to unite the Company's Kentucky operations and
optimize the operating efficiency, profit potential, and capital positions
of the resulting entity. In 1999, management will continue to focus efforts
to enhance profitability of its southernmost operations through increased
product offerings, commitment to development of a non-interest bearing
deposit base, and other customer service possibilities.
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 through optimization of
customer relationships through an integrated sales process.
Integration of the Company's many sales processes, products, and services
will be the cornerstone of 1999's focus. Management will concentrate on a
marketing program based on establishing brand awareness of the Company in
its markets. The Company's insurance capabilities are an integral part of
future earnings streams and should reach break-even levels in 2000, and
gradually increase profitability thereafter. 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.
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 positioned
to capitalize on its recent growth and enhance future performance levels
through integrated sales techniques and commitment to strategic initiatives
designed to increase 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 (except certain ATM's, which are to be
updated in April, 1999).
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, combined with replacement of certain existing ATM
hardware and software, 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 plans to resolve the Y2K issue in five phases as follows:
awareness, assessment, renovation, validation, and implementation. To date,
the Company has completed its assessment of all material systems which could
be affected by the 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 insure Y2K preparedness. The Company is following these guidelines and
expects to meet the deadlines defined by the regulators. As a part of this
process, the Company is also developing contingency plans for all mission-
critical systems, which it will implement in the event any of these systems
fail to function. Contingency plans for both 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 Year 2000-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'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, except approximately half of the Company's ATM's require hardware
and/or software upgrades which will be completed in the second quarter of
1999. The remaining ATM's have been certified compliant by the vendors.
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 from these systems.
As of February 12, 1999, the following chart shows the current and projected
status of the Company's Y2K compliance efforts relative to IT systems:
Nov. 13, Dec. 31, Feb. 12, March 31, June 30,
PHASE 1998 1998 1999 1999 1999
- ----------------------------------------------------------------------------
Awareness 100% --- --- --- ---
Assessment 100% --- --- --- ---
Renovation 80% 80% 100% --- ---
Validation 20% 70% 75% 80% 100%
Implementation 20% 70% 75% 80% 100%
Management estimates that half of its potential Y2K issues originate in the
Company's core banking system (software provided by a third-party vendor).
The Company's core banking system supports approximately 50% of the
information processing for the Company. This single system software
provides accounting for the Company, as well as loan and deposit products.
This core banking system has been certified as Y2K compliant by the vendor
and the Information Technology Association of America. This software has
essentially been Y2K compliant for several years, as 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 plans to complete the validation of the proxy
tests through testing of mission critical interfaces into its core banking
system. Approximately 25% of the interface testing has been successfully
completed and the Company plans to complete the testing of the remaining
critical interfaces by the end of the first quarter of 1999.
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 environment. The remaining mission critical
IT system, the Company's document processing and retrieval system, is
expected to be fully validated and implemented by June 30, 1999. The vendor
has supplied its Y2K certified version of its software and it has been
installed in the Company's current environment. Management is working
closely with the Company's third party vendors to ensure Y2K compliance in a
timely manner.
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. All reprogramming of internal software was completed in the third
quarter of 1998.
After completing the replacement of certain systems in January, 1999, the
Company's plans include testing and implementing its information technology
systems. As of February 12, 1999, the Company approximates it has completed
75% of its testing and has implemented all of the renovated systems that have
been tested. Completion of the testing phase is expected by the end of the
first quarter of 1999, with all renovated systems fully implemented by June
30, 1999.
The Company has queried, through written and verbal communication, its
important suppliers (such as utility companies) which do not involve system
interface. To date, the Company is not aware of any problems which would
materially impact operations, although the Company has no means of ensuring
that these organizations will be Y2K ready. The inability of these parties
to complete their Year 2000 resolution process could materially impact the
Company, as well as other businesses and consumers.
The Company expenses 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
or financial position. As of February 12, 1999, management estimates that
60% 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. Actual out-of-pocket expenses have been less than
anticipated, however, 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. In
addition, 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 recently launched a comprehensive marketing program to
its customers designed to communicate the Company's preparedness regarding
Y2K. Throughout 1999, the Company plans to increase its efforts to
communicate its preparedness in the market area it serves.
The foregoing discussion of the Company's plans to complete the Y2K
modifications 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.
COMPARISON OF 1997 TO 1996
==========================
The Company reported an increase in net income of 12.5%, to $8,605,000 in
1997 from $7,651,000 in 1996. This increase in earnings provided basic and
diluted earnings per share of $1.65 and $1.60, respectively, for the year
ended December 31, 1997, compared to $1.48 and $1.46 in 1996. Strong
internal loan growth and loans acquired in the Russell Federal acquisition,
coupled with enhanced operational efficiencies, were the driving forces
behind the increase in net income.
For the year ended December 31, 1997, return on average assets was unchanged
from 1996's ratio of 1.29%. In 1997, return on stockholders' equity
declined slightly to 14.33% compared to 14.43% in 1996, a decline of 10
basis points. Asset growth also contributed to incremental increases in net
income in 1997 compared to 1996. In 1997, the Company grew its balance
sheet through a combination of acquisition and internal growth. Total assets
increased $141.5 million (or 23.0%) to $758.2 million at year-end 1997. For
the year ended December 31, 1997, the Company's asset growth primarily
occurred in earning assets such as loans and investments securities. Loans
grew $99.2 million (or 23.5%) to $521.6 million and investment securities
grew $26.5 million (or 17.9%) to $174.3 million.
The Company recorded net interest income of $28,620,000 in 1997, an increase
of 12.5% compared to 1996, as total interest income reached $53,836,000 and
interest expense totaled $25,216,000. Net interest margin modestly decreased
in 1997 to 4.74% from 4.75% in 1996. The interest cost on the Company's
array of traditional interest-bearing deposit products (demand and time
deposit accounts) increased nine basis points, with the most significant
cost being interest paid on time deposits (CDs and IRAs). The largest rate
increase occurred in average interest-bearing demand deposits, which
increased 18 basis points to 3.46% on average deposit balances of $126.5
million. The increases in interest expense were offset by increased interest
income, as the Company experienced loan growth in 1997 of nearly $68 million
compared to the prior year, which produced an additional incremental
interest income of over $1 million.
Loans continued to be the largest earning asset component for the Company.
Loans averaged 84.0% of deposits in 1997, up from 82.3% at year-end 1996.
The fully-tax equivalent (FTE) yield on earnings assets increased slightly,
from 8.74% in 1996 to 8.81% in 1997. Interest costs as a percentage of
earning assets increased 8 basis points to 4.07% in 1997 due primarily to
the competitive rates paid on interest bearing deposits and minimal growth
in non-interest bearing deposits.
The Company's loan loss provision totaled $2,589,000 in 1997, up $624,000
compared to 1996, an increase of 31.8%. The growth was due primarily to
loan growth and a rise in loan delinquencies in 1997. At December 31, 1997,
the Company's allowance for loan losses as a percentage of total loans was
1.60%, compared to a year-end 1996 ratio of 1.63%.
Non-interest income (excluding securities transactions) continued its
positive growth trend in 1997, reaching $5,966,000, an increase of 16.3%
compared to 1996. Several categories had strong growth compared to 1996,
including income from fiduciary activities, which reported $2,176,000 in
revenues in 1997, an increase of 14.7% compared to 1996. Income related to
account service charges increased $265,000 (or 13.7%) to $2,202,000 in 1997,
due primarily to the full-year impact of increased deposit base acquired in
the acquisition of the Pomeroy, Rutland and Gallipolis offices in April,
1996. In 1997, electronic banking fee income increased $357,000 (or 33.4%)
compared to prior year due to increased revenues from the Company's growing
debit card program.
In 1997, non-interest expense totaled $19,265,000, an increase of 9.9% over
the prior year, due primarily to the Company's 1996 acquisitions and the
associated increased levels of non-interest expense such as salaries and
benefits, depreciation expense, and intangible amortization. Even though
salaries and employee benefits continued to be the largest source of
non-interest expense for the Company, totaling $8,358,000 in 1997, an
increase of $844,000 (or 11.2%) from 1996, increase in expense for
non-operational items also caused 1997's non-interest expense levels to rise.
Amortization of intangibles totaled $1,138,000 in 1997 compared to $625,000
or the same period in the prior year, an increase of $513,000 (or 82.1%).
Despite significant increases in major non-interest expense areas, the
Company leveraged its increased operational expenses due to market share
growth and enhanced revenue streams, causing the Company's efficiency ratio
to improve to 51.06% in 1997 compared to 53.76% in 1996.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
==========================================================================
The statements in this Annual Report which are not historical fact are
forward looking statements that involve risks and uncertainties, including,
but not limited to, the interest rate environment, the effect of federal and
state banking and tax regulations, the effect of economic conditions, the
Company's ability to execute its plan to address the Y2K issue and the
ability of third parties to effectively address their Y2K issues, the impact
of competitive products and pricing, and other risks detailed in the
Company's Securities and Exchange Commission filings.
EXHIBIT 21
----------
PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
Subsidiaries of Peoples Bancorp Inc.
- -----------------------------------
The following are the only subsidiaries of Peoples Bancorp Inc.:
Jurisdiction
of
Name of Subsidiary Incorporation
- ---------------------------------------------- -------------
The Peoples Banking and Trust Company Ohio
The First National Bank of Southeastern Ohio United States
("First National Bank")
Northwest Territory Life Insurance Agency, Inc. Ohio
(Subsidiary of First National Bank)
Northwest Territory Property & Casualty Life Ohio
Insurance Agency, Inc.
(Subsidiary of First National Bank)
Peoples Bank FSB United States
Northwest Territory Life Insurance Company Arizona
EXHIBIT 23
----------
PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Peoples Bancorp Inc. of our report dated February 8, 1999, included
in the 1998 Annual Report to Shareholders of Peoples Bancorp Inc.
We also consent to the incorporation by reference in the Registration
Statements pertaining to the Peoples Bancorp Inc. Retirement Savings Plan
(Form S-8, No. 33-1803), the Amended and Restated 1993 Stock Option Plan of
Peoples Bancorp Inc. (Form S-8, No. 33-67878), the 1995 Stock Option Plan of
Peoples Bancorp Inc. (Form S-8, No. 33-59569), the Deferred Compensation Plan
for Directors of Peoples Bancorp Inc. and Subsidiaries (Form S-8, No.
333-43629), the 1998 Stock Option Plan of Peoples Bancorp Inc. (Form S-8, No.
333-62935), the Russell Federal Savings Bank 1995 Stock Option and Incentive
Plan (Form S-8, No. 333-63039), and the Peoples Bancorp Inc. Dividend
Reinvestment Plan (Form S-3, No. 33-54003) of our report dated February 8,
1999, with respect to the consolidated financial statements of Peoples
Bancorp Inc. and Subsidiaries incorporated by reference in the Annual Report
on Form 10-K for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Charleston, West Virginia
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-K filed as of December 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,048
<INT-BEARING-DEPOSITS> 3,373
<FED-FUNDS-SOLD> 9,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 235,569
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 567,917
<ALLOWANCE> 9,509
<TOTAL-ASSETS> 880,284
<DEPOSITS> 714,168
<SHORT-TERM> 32,514
<LIABILITIES-OTHER> 6,924
<LONG-TERM> 40,664
0
0
<COMMON> 50,807
<OTHER-SE> 35,207
<TOTAL-LIABILITIES-AND-EQUITY> 880,284
<INTEREST-LOAN> 48,857
<INTEREST-INVEST> 11,386
<INTEREST-OTHER> 3,402
<INTEREST-TOTAL> 63,645
<INTEREST-DEPOSIT> 26,051
<INTEREST-EXPENSE> 30,497
<INTEREST-INCOME-NET> 33,148
<LOAN-LOSSES> 2,325
<SECURITIES-GAINS> 418
<EXPENSE-OTHER> 23,276
<INCOME-PRETAX> 14,785
<INCOME-PRE-EXTRAORDINARY> 10,045
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,045
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 4.47
<LOANS-NON> 687
<LOANS-PAST> 495
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,356
<CHARGE-OFFS> 1,645
<RECOVERIES> 473
<ALLOWANCE-CLOSE> 9,509
<ALLOWANCE-DOMESTIC> 9,509
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,115
</TABLE>
Agreement of Merger
between
Russell Federal Savings Bank of Russell, Kentucky
and
Catlettsburg Federal Savings Bank of Catlettsburg, Kentucky
under the Charter of
Catlettsburg Federal Savings Bank
under the title of
Peoples Bank FSB
This Agreement of Merger ("Agreement"), made this 13th day of October,
1998, by and between Russell Federal Savings Bank, a federal savings bank,
the principal office of which is 404 Ferry Street, Russell, Kentucky,
(hereinafter called "Russell Federal Savings Bank"), and Catlettsburg Federal
Savings Bank, a federal savings bank, the principal office of which is 2717
Louisa Street, Catlettsburg, Kentucky, (hereinafter called "Catlettsburg
Federal Savings Bank"), said banking corporations being together hereinafter
sometimes called the "Constituent Federal Savings Banks".
RECITALS
--------
1) The amended Federal Stock Charter of the Russell Federal Savings
Bank was originally filed in the Office of Thrift Supervision effective
on January 1, 1997. The Russell Federal Savings Bank is authorized to
issue 10,000 common shares with no par value, of which 10,000 shares
are now issued and outstanding.
2) The amended Federal Stock Charter of Catlettsburg Federal Savings
Bank was originally filed in the Office of Thrift Supervision effective
on January 18, 1995. Catlettsburg Federal Savings Bank is authorized
to issue 1,000,000 common shares with par value of $.01, of which 100
shares are now issued and outstanding.
3) The respective Boards of Directors of the Constituent Federal
Savings Banks deem it advisable that the Constituent Federal Savings
Banks be merged and the respective Boards of Directors at meetings duly
called and held have approved this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements and promises set forth below, the Constituent Federal Savings
Banks do hereby agree that Russell Federal Savings Bank be merged with and
into Catlettsburg Federal Savings Bank, hereinafter sometimes called the
"Resulting Federal Savings Bank"; and that the terms and conditions of the
merger, the mode of the carrying it into effect and the manner and basis of
converting the respective shares into shares of the Resulting Federal
Savings Bank are and shall be as follows:
FIRST. The name of the Resulting Federal Savings Bank shall be Peoples
Bank FSB, and its principal office shall be at 1410 Eagle Drive, Ashland,
Kentucky, 41102.
SECOND. At the Effective Time, as defined below, the amount of capital
of the Resulting Federal Savings Bank shall be at least $14,900,000.
THIRD. The Bylaws of Catlettsburg Federal Savings Bank shall be amended
at the Effective Time as attached hereto as Exhibit "A", and shall be the
Bylaws of the Resulting Federal Savings Bank until changed or repealed
according to the provisions of Article XI.
FOURTH. The Federal Stock Charter of Catlettsburg Federal Savings Bank
shall be amended at the Effective Time as attached hereto as Exhibit "B",
and shall be the Federal Stock Charter of the Resulting Federal Savings Bank.
FIFTH. RobRoy Walters, a natural person, whose address is Rt. 1, Box 266,
Flatwoods, KY 41139, is hereby appointed as the Statutory Agent of the
Resulting Federal Savings Bank on whom any process, notice or demand against
Catlettsburg Federal Savings Bank or either of the Constituent Federal
Savings Banks may be served.
SIXTH. The names and addresses of the members of the Board of Directors
of the Resulting Federal Savings Bank, as of the Effective Time and until the
next annual meeting or until such time as their successors have been elected
and qualified, shall be as listed on the attached Exhibit "C" hereto.
SEVENTH. The mode of carrying into effect the merger and the manner and
basis of converting the shares of Russell Federal Savings Bank into shares
of Catlettsburg Federal Savings Bank shall be as follows:
The capital stock of the Resulting Federal Savings Bank shall be
divided into 10,000 shares of common stock, each of no par value, and
at the Effective Time the Resulting Federal Savings Bank shall have a
surplus of at least $29,035,000, and undivided profits, including capital
reserves, which, when combined with the capital and surplus, will be equal
to the combined capital structures of the Constituent Federal Savings
Banks as stated in the preamble of this Agreement, adjusted, however, for
normal earnings and expenses (and, if applicable, purchase accounting
adjustments) between December 31, 1997, and the effective time of the
merger.
All assets as they exist at the Effective Time shall pass to and vest
in the Resulting Federal Savings Bank without any conveyance or other
transfer. The Resulting Federal Savings Bank shall be responsible for all
of the liabilities of every kind and description, including liabilities
arising from the operation of a trust department of each of the
Constituent Federal Savings Banks existing as of the effective time of
the merger. A committee of examiners, three to be appointed by the Board
of Directors of each federal savings bank at the time of the merger,
shall have satisfied themselves that the Statement of Condition of each
federal savings bank as of December 31, 1997, and subsequent quarterly
statements, fairly presents its financial condition and since such date
there has been no material adverse change in the financial condition or
business of either federal savings bank.
Russell Federal Savings Bank shall contribute to the Resulting
Federal Savings Bank acceptable assets having a book value, over and
above its liability to its creditors, of at least $4,100,000, and having
an estimated fair value, over and above its liability to its creditors,
of at least $4,300,000, or 28.0% of the estimated fair value of excess
acceptable assets, over and above liabilities to creditors, to the
Resulting Federal Savings Bank adjusted, however, for normal earnings and
expenses between December 31, 1997, and the Effective Time , and for
allowances of cash payments, if any, permitted under this Agreement.
At the Effective Time, Catlettsburg Federal Savings Bank shall have
on hand acceptable assets having book value of at least $10,700,000, over
and above its liabilities to its creditors, and having a fair value, over
and above its liability to its creditors, of at least $11,050,000, or
72.0% of the estimated fair value of excess acceptable assets, over and
above its liabilities to its creditors, of the Resulting Federal Savings
Bank, adjusted, however, for normal earnings and expenses between December
31, 1997, and the Effective Time, and for allowances of cash payments, if
any, permitted under this Agreement.
Of the capital stock of the Resulting Federal Savings Bank, the Sole
Shareholder shall be entitled to receive 10,000 shares of common stock to
be issued upon consummation of the transaction, each of no par value, with
contribution to be allocated according the the percentages referenced
above and representing 100% of the total outstanding common stock of the
Resulting Federal Savings Bank.
EIGHTH. The merger shall become effective upon the filing of the Articles
of Combination in the Office of Thrift Supervision, or at other such date as
specified by the Office (the "Effective Time"), but not earlier than the
close of business on December 31, 1998.
NINTH. The amount of the earned surplus of the Resulting Federal Savings
Bank shall be the combined total of the earned surplus of the Constituent
Federal Savings Banks as of the Effective Time.
TENTH. This Agreement may be signed in any number of duplicate copies,
and all signed duplicate copies shall be deemed to constitute an original
instrument.
ELEVENTH. This Agreement may be terminated at any time prior to the
merger becoming effective by mutual agreement of the Boards of Directors of
the Constituent Federal Savings Banks.
IN WITNESS WHEREOF, the Constituent Federal Savings Banks have caused this
Agreement to be signed in their respective corporate names by their
respective Presidents and Secretaries thereunto duly authorized by their
respective Boards of Directors and Shareholders.
CATLETTSBURG FEDERAL RUSSELL FEDERAL
SAVINGS BANK SAVINGS BANK
By /s/ REBECCA R. JACKSON By /s/ ROBROY WALTERS
------------------ --------------
Rebecca R. Jackson RobRoy Walters
President & CEO President & CEO
By /s/ ROBROY WALTERS By /s/ RONALD L. FRALEY
------------------- ----------------
RobRoy Walters Ronald L. Fraley
Secretary/Treasurer Secretary/Treasurer
MASTER NOTE
-----------
NOTE NO. _____________
________________, 1998
$3,500,000 (Effective Date)
Cincinnati, Ohio
On or before the Due below, PEOPLES BANCORP, INC., an Ohio corporation
(hereinafter referred to as "Borrower") for value received, promises to pay
the order of THE FIFTH THIRD BANK, an Ohio banking corporation, whose address
is 38 Fountain Square Plaza, Cincinnati, Ohio 45263 (hereinafter referred
to as "Bank") the sum of THREE MILLION FIVE HUNDRED THOUSAND AND NO/100
DOLLARS ($3,500,000) (hereinafter referred to as the "Maximum Amount") plus
interest as provided herein, or such lesser amount as may be advanced by Bank
and as may be outstanding hereunder, less such amounts as shall have been
repaid in accordance with this note. The outstanding balance of this note
will appear on supplemental records of the Bank and is not necessarily the
face amount of this note. Such record shall be conclusive as to the balance
of this note at any time.
Reducing Revolving Credit Loans.
- --------------------------------
On the date hereof, subject to the terms and conditions hereof, Bank hereby
extends to Borrower a committed reducing revolving line of credit facility
(the "Facility") under which Bank shall make loans (the "Revolving Loans")
to Borrower at Borrower's request from time to time during the term of this
Note in amounts not exceeding the Maximum Amount. The Maximum Amount
available to Borrower under the Facility shall be reduced by the amount of
$87,500 on July 1, 1998 and on the first day of each October, January, April
and July thereafter during the term hereof. If the aggregate amount of
Revolving Loans outstanding at any time under the Facility exceeds the limits
set forth above on any such date, Borrower will immediately pay the amount of
such excess to Bank in cash. Provided no Event of Default has occurred and is
continuing, Borrower may borrow, repay, and reborrow under the Facility,
provided that the principal amount of all Revolving Loans outstanding at any
one time under the Facility will not exceedthe Maximum Amount, as reduced
from time to time during the term hereof.
In the event Borrower fails to pay such excess, Bank may, in their discretion,
setoff such amount against Borrower's accounts at Bank. In addition to the
foregoing, Borrower agrees that at no time during the term hereof, the
aggregate outstanding principal amount of all Revolving Loans hereunder shall
not be less than the Maximum Amount then applicable at such time as set forth
on Exhibit A attached hereto.
At Borrower's request from time to time Bank shall make Revolving Loans to
Borrower for LIBOR Interest Periods and at interest rates agreed to between
Bank and Borrower as more fully set forth herein.
Interest Rates:
- ---------------
Borrower will pay interest to Bank on the principal amount outstanding under
the Facility at a rate of per annum equal to the interest rates set forth
below. Any principal amount not paid when due (at maturity, by acceleration
or otherwise) will bear interest thereafter until paid at the Default Rate;
this provision does not constitute a waiver of any Events of Default or an
agreement by Bank to permit any late payments whatsoever.
Notwithstanding any other provision set forth in the Note, the principal
balance outstanding will bear interest at a rate per annum equal to (a) the
Prime Rate floating, as in effect from time to time or (b) the LIBOR Rate
plus 100 basis points (the "Note Rate"). Interest will be payable in
immediately available funds at the principal office of Bank. Interest shall
be calculated based on a 360-day year and charged for the actual number of
days elapsed, and will be payable (i) on the first (1st) day of each calendar
month for Revolving Loans accruing interest at an interest rate based upon
the LIBOR Rate. When interest is accruing at a rate based upon the LIBOR
Rate, each date the interest rate is adjusted, the interest rate will remain
at such rate for the remainder of the LIBOR Interest Period.
On or before the date of any advance hereunder, and on or before the
expiration of any LIBOR Interest Period, Borrower shall notify Bank (a) which
interest rate Borrower has elected, (b) which LIBOR Interest Period Borrower
has elected regarding each Borrowing hereunder, (c) the amount of such
Borrowing and (d) the commencement date of each LIBOR Interest Period (a
"LIBOR Election"). If at any time during the term hereof, Borrower fails to
designate a LIBOR Interest Period and Borrower has not elected another LIBOR
Interest Period, Bank may assume that Borrower has elected the Prime Rate.
In addition, notwithstanding anything herein contained to the contrary, if,
prior to or during with respect tot he LIBOR Rate, any change in any law,
regulation or official directive, or in the interpretation thereof, by any
governmental body charged with the administration thereof, shall make it
unlawful for the Bank to find or maintain its funding Eurodollars of any
portion of the Borrowings subject to the LIBOR Rate or otherwise to give
effect to Bank's obligations as contemplated hereby: (i) Bank may, by written
notice to Borrower, declare Bank's obligations in respect of the LIBOR Rate
to be terminated forthwith, and (ii) the LIBOR Rate with respect to Bank
shall forthwith cease to be in effect, and interest shall from and after
such date be calculated at the Prime Rate, and interest shall be paid on the
first (1st) day of each calendar month. Borrower hereby agrees to reimburse
and indemnify Bank from all increased costs or fees incurred by Bank
subsequent to the date hereof relating to the offering of interest rates
based upon the LIBOR Rate.
Provisions Relating to the Facility.
- ------------------------------------
Borrower shall have the right to select the interest rate and the LIBOR
Interest Period for each Revolving Loan on or before the first day of each
LIBOR Interest Period. Each request by Borrower for a Revolving Loan under
the Facility will be made by telephone prior to 11:00 A.M., Cincinnati, Ohio
time on any Business Day on which a Revolving Loan is requested. Bank will,
if Revolving Loans are then available to Borrower under the Facility, quote
Borrower the interest rate based on the maturity requested by Borrower as of
the date of such request. Borrower shall, at the time of quote, either accept
or reject the quote, and if accepted, Bank will credit Borrower's account for
the amount of the Revolving Loan or otherwise disburse the proceeds as agreed
upon between Borrower and Bank. The amount of the interest rate on and the
maturity date of each Loan shall be evidenced by the ledgers and records
(including computer records) of Bank, which, in the case of a dispute, shall
be conclusive except for manifest error.
Each Revolving Loan funded by Bank shall be in the minimum principal sum
equal to the Maximum Amount available on such date. Borrower agrees to repay
Bank on the date then due each Revolving Loan now or hereafter made by Bank
to Borrower, together with interest thereon at the agreed rate.
Borrower shall have no right to prepay any Revolving Loan made by Bank prior
to the agreed maturity date of such Revolving Loan. If any Revolving Loan is
repaid prior to the last day of the applicable LIBOR Interest Period,
Borrower agrees to reimburse bank for all damages and losses incurred by
Bank as a result of such prepayment.
The Borrower shall provide Bank with a list of those persons authorized to
orally request Revolving Loan advances under this Note. Bank may rely on
such list until amended in writing by Borrower.
Each Revolving Loan accruing interest at the LIBOR Rate shall be for a LIBOR
Interest Period agreed to between Bank and Borrower, however, each Revolving
Loan shall have a minimum term of at least 7 days and shall have a maturity
no greater than 90 days. Each Revolving Loan, together with interest thereon,
shall be repaid in immediately available funds at the main office of Bank on
the date agreed by Bank and Borrower. All outstanding principal and all
accrued and unpaid interest shall be paid in full on the maturity date of
the Revolving Loan. In the event Borrower shall fail to pay any Revolving
Loan when due, all Revolving Loans outstanding to Borrower shall, at the
option of the Bank, become immediately due and payable without presentment,
demand, protest or notice of any kind.
All payments of principal and interest made by Borrower to Bank shall be
made no later than 2:00 P.M., Cincinnati, Ohio time, on the Business Day
such payments are due. All amounts paid after such time will be credited on
the following date.
Borrower will pay to Bank its fees, costs and expenses (including, without
limitation, reasonable attorney's fees, other professionals' fees, appraisal
fees, environmental assessment fees, expert fees, court costs, litigation
and other expense (collectively, "Costs") incurred or paid by bank in
connection with the negotiating, documenting, administering and enforcing the
Facility, the Loans and the defense, preservation and protection of Bank's
rights and remedies thereunder, including without limitation, any security
interest in any collateral or any other property pledged to secure the Loans,
whether incurred in bankruptcy, insolvency, foreclosure or other litigation
or Costs when upon such demand, Bank is entitled to disburse such sums as an
advance under the Facility. Thereafter, the Costs will bear interest from
the date incurred or disbursed at the highest rate set forth in the Note.
This provision will survive the termination of this Agreement and/or the
repayment of any amounts due or the performance of any Obligation.
Due Date.
- ---------
In addition to the dates agreed to between Bank and Borrower relating to
advances under the Facility, all outstanding amounts of principal and all
accrued and unpaid interest owed to Bank shall be due and payable in full
on December 31, 1998 (the "Due Date").
To secure repayment of this note and all modifications, extensions and
renewals thereof, and all other Obligations (as herein defined) the Borrower
to Bank, the Borrower grants Bank a continuing security interest in all of
the Borrower's, now owned or hereafter acquired interests in all property in
which Bank are at any time, granted a lien for any Obligation, and all
property in possession of either Bank including, without limitation, money,
securities, instruments, documents, letters of credit, chattel paper, or
other property delivered to Bank in transit, for safekeeping, or for
collection or exchange for other property, all distributions, dividends,
warrants, securities and other rights in addition to such property, all
rights to payment from and claims against Bank and all proceeds thereof, and
all real and personal property described below ("Collateral"). The Borrower
agrees to immediately deliver such additional dividends, warrants, securities
or other property or rights thereto to Bank immediately upon receipt as
additional Collateral and until delivery to hold same in trust for Bank. The
Borrower agrees that the Bank may, at any time, call for additional
Collateral satisfactory to it. All documents executed in connection with
this note and all Collateral, including without limitation the following,
further secure the Obligations:
100% of the outstanding common capital stock of First National Bank of
Southeastern Ohio and a pledge of the securities as more particularly
described in the Pledge Agreements.
The Obligations secured by the Collateral shall include this note and each
and every liability of the Borrower jointly or severally to Bank and all
affiliates of Fifth Third Bancorp however created, direct or contingent, due
or to become due, whether now existing or hereafter arising, participated in
whole or in part, created by trust agreement, lease, overdraft, agreement.
Or otherwise in any manner acquired by the Borrower. Said security interest
shall not be enforced to the extent prohibited by the Truth in Lending Act
as implemented by Federal Reserve Regulation Z.
The Borrower certifies that the proceeds of this loan are to be used for
business purposes. If this note is a renewal, in whole or in part, of a
previous Obligation, the acceptance by Bank of this note shall not effectuate
a payment but rather a continuation of the previous Obligation.
Bank may charge and the Borrower agrees to pay on the above Effective Date,
a note processing fee in an amount determined by Bank.
Events of Default.
- ------------------
This note, and all other Obligations of the Borrower of Bank, shall be and
become immediately due and payable at the option of the Bank, without any
demand or notice whatsoever, upon the occurrence of any of the following
described events, each of which shall constitute an Event of Default:
1) Any failure to make any payment when due of the principal or interest
on this note, the occurrence of any event of default as therein defined
on any other Obligations of the Borrower, or a default in the Obligations
under any security documents or in performing any covenants set forth in
the Addendum attached hereto.
2) The death or dissolution of the Borrower, of any endorser or guarantor,
or if the Borrower is a partnership, the death or dissolution of a
general partner.
3) Any failure to submit to Bank current financial information upon request.
4) The creation of any lien (except liens to Bank) or the issuance of an
attachment against or seizure of any of the property of, or the entry of
judgment against, the Borrower.
5) In the judgment of Bank, and adverse change occurs in the ability of the
Borrower to repay the Obligations, or the Bank deem themselves insecure.
6) An assignment for the benefit of the creditors of, or the commencement of
any bankruptcy, receivership, insolvency, reorganization, or liquidation
proceedings by or against the Borrower or any endorser or guarantor
hereof.
7) The institution of any garnishment proceedings by attachment, levy or
otherwise, against any Collateral, any deposit balance maintained or any
property deposited with the Bank by the Borrower or any endorser or
guarantor hereof.
8) The occurrence of an Event of Default under any indebtedness of any kind
of Borrower owed to Bank or any wholly-owned subsidiaries of Fifth Third
Bancorp.
Upon the occurrence of an Event of Default herein described Bank may, at
their option, cease making advances hereunder, declare this note and all
other Obligations of the Borrower, to be fully due and payable in their
aggregate amount together with accrued interest plus any applicable fees,
and charges.
In addition to any other remedy permitted by law, the Bank may at any time,
without notice, apply the Collateral to this note or such other Obligations,
whether due or not, and Bank may, at its option, proceed to enforce and
protect its rights by an action at law or in equity or by any other
appropriate proceedings. Notwithstanding any other legal or equitable rights
of Bank, Bank, in the Event of Default, are (a) hereby irrevocably appointed
and constituted attorney-in-fact, with full power of substitution, to
exercise all rights of ownership with respect to Collateral including, but
not limited to, the right to collect all income of other distributions
arising therefrom and to exercise all voting rights connected with
Collateral; and (b) hereby given full power to collect, sell, assign,
transfer and deliver all of said Collateral or any part thereof, or any
substitutes therefore, or any additions thereto, through any private or
public sale without either demand or notice to the Borrower, or any
advertisement, the same being hereby expressly waived, at which sale Bank is
authorized to purchase said property or any part thereof, free from any
right of redemption on the part of the Borrower, which is hereby expressly
waived and released. In case of sale for any cause, after deducting all costs
and expenses of every kind, Bank may apply, at they shall deem proper, the
residue of the proceeds of such sale toward the payment of any one or more
or all of the Obligations of the Borrower, whether due or not due, to Bank;
after such application and the return of any surplus, the Borrower agrees to
be and remains liable to Bank for any and every deficiency after application
as aforesaid upon this and any other Obligations. The Borrower shall pay all
costs of collection, whether or not payment is obtained before entry of
judgment, which costs and fees are Obligations secured by the Collateral.
If any payment is not paid when due (whether by acceleration or otherwise)
or within 10 days thereafter, Borrower agrees to pay to Bank a late payment
fee as provided for in any loan agreement or 5% of the payment amount, which
ever is greater with a minimum fee of $20.00. After an Event of Default, the
Borrower agrees to pay to Bank a fixed charge of $25.00, or the Borrower
agrees that bank may, without notice, increase the above stated interest
rate by 6%, whichever is greater. Under no circumstances shall said interest
rate be raised to a rate which shall be in excess of the maximum rate of
interest allowable under the state and/or federal usury laws in force at the
time of such change.
Representations and Warranties.
- -------------------------------
Borrower hereby warrants and represents to Bank the following:
(a) Organization and Qualification. Borrower is a duly organized,
validly existing corporation in good standing under the laws of the
State of Ohio, its state of incorporation, has the power and
authority (corporate and otherwise) to carry on its business and to
enter into and perform this Note and is qualified and licensed to
do business in each jurisdiction in which such qualifications or
licensing is required. All information provided to Bank with respect
to Borrower and its operations is true and correct.
(b) Due Authorization. The execution, delivery and performance
by Borrower of this Agreement, the Pledge Agreements, this Note and
the other Loan Documents have been duly authorized by all necessary
corporate action, and will not contravene any law or any governmental
rule or order binding on Borrower, or the articles of incorporation,
code of regulations or bylaws of Borrower, nor violate any agreement
or instrument by which Borrower is bound nor result in the creation
of a Lien or any assets of Borrower except the Lien on any assets of
Borrower except the Lien granted to Bank herein. Borrower had duly
executed and delivered this Agreement, the Pledge Agreement, this
Note and the other Loan Documents and they are valid and binding
obligations of Borrower enforceable according to their respective
terms except as limited by equitable principles and by bankruptcy,
insolvency or similar laws affecting rights of creditors generally.
No notice to or consent by any governmental body is needed in
connection with this transaction.
(c) Margin Stock. No part of the Loans will be used to purchase
or carry, or to reduce or retire or refinance any credit incurred to
purchase or carry, any margin stock (within the meaning of Regulations U
and X of the Board of Governors of the Federal Reserve System) or to
extend credit to others for the purpose of purchasing or carrying any
margin stock. If requested by Bank, Borrower will furnish to Bank
statements in conformity with the requirements of Federal Reserve
Form U-1.
(d) Financial Condition. All financial information relating to
Borrower which has been or may hereafter be delivered by Borrower or
on its behalf to Bank is true and correct and has been prepared in
accordance with generally accepted accounting principles consistently
applied. Borrower has no material obligations or liabilities of any
kind not disclosed in that financial information, and there has been
no material adverse change in the financial condition of Borrower nor
has Borrower suffered any damage, destruction or loss which has
adversely affected its business or assets since the submission of the
most recent financial information to Bank.
Affirmative Covenants:
- ----------------------
(a) Books and Records.
------------------
Borrower will maintain proper books of account and records and enter
therein complete and accurate entries and records of all its
transactions in accordance with generally accepted accounting
principles and give representatives of Bank access thereto all
reasonable times, including permission to examine, copy and make
abstracts from any such books and records and such other information
which might be helpful to Bank in evaluating the status of the Loans
as it may reasonably request from time to time. Borrower will give
Bank reasonable access to the Collateral and the other property
securing the Obligations for the purpose of performing examinations
thereof and to verify its condition or existence.
(b) Financial Statements.
---------------------
Borrower will maintain a standard and modern system for accounting
and will furnish to Bank:
(i) Within thirty (30) days after the end of each quarter, a
copy of Borrower's consolidated financial statements for that
quarter and for the year to date in a form reasonably acceptable
to Bank, prepared and certified as complete and correct, subject
to changes resulting from year-end adjustments, by the principal
financial officer Borrower;
(ii) Within ninety (90) days after the end of each fiscal year,
a copy of Borrower's consolidated financial statements for that
year audited by a firm of independent certified public accountants
acceptable to Bank (which acceptance will not be unreasonably
withheld), and accompanied by a standard audit opinion of such
accountants without qualifications;
(iii) All of the statements referred to in (i) and (ii) above
shall be in conformance with generally accepted accounting
principles;
(iv) Prior to the end of each fiscal year, a projected balance
sheet, projected income statement and projected statement of cash
flow for the subsequent fiscal year prepared in accordance with
generally accepted accounting principles consistently applied;
(v) Immediately upon any officer of Borrower obtaining
knowledge of any condition or event which constitutes or, after
notice or lapse of time or both, constitutes an Event of Default,
a certificate of such person specifying the nature and period of
the existence thereof, and what action Borrower has taken or is
taking or proposes to take in respect thereof;
If at any time Borrower has any additional subsidiaries which
have financial statements that could be consolidated with those of
Borrower under generally accepted accounting principles, the financial
statements required by subsections (i) and (ii) above will be the
financial statements of Borrower and all such subsidiaries prepared
on a consolidated consolidating basis.
(c) Condition and Repair.
---------------------
Borrower will maintain its assets in good repair and working order
and will make all appropriate repairs and replacements thereof.
(d) Existence; Business.
--------------------
Borrower will (a) maintain its exercise, (b) engage primarily in
business of the same general character as that now conducted, and (c)
refrain from entering into any lines of business substantially
different from the business or activities in which Borrower is
presently engaged.
(e) Compliance with Laws.
---------------------
Borrower will comply with all federal, state and local laws,
regulations and orders applicable to Borrower or its assets including
but not limited to all Environmental Laws, in all respects material to
Borrower's business, assets or prospects and will immediately notify
Bank of any violation of any rule, regulation, statue, ordinance,
order or law relating to the public health or the environment and of
any complaint or notifications received by Borrower regarding to any
environmental or safety and health rule, regulation, statue, ordinance
or law.
(f) Notice of Default.
------------------
Borrower will, within three (3) days of its knowledge thereof, give
written notice to Bank of: (i) the occurrence of any event or the
existence of any condition which would be, after notice or lapse of
applicable grace periods, an Event of Default, and (ii) the occurrence
of any event or the existence of any condition which would prohibit
Borrower from continuing to make the representations set forth in this
Agreement.
(g) Other Amounts Deemed Loans.
---------------------------
If Borrower fails to pay any tax, assessment, governmental charge or
levy or to maintain insurance within the time permitted or required
by this Agreement, or to discharge any Lien prohibited hereby, or to
comply with any other Obligations, Bank may, but shall not be
obligated to pay, satisfy, discharge or bond the same for the account
of Borrower, and to the extent permitted by law and at the option of
Bank, all monies so paid by Bank on behalf of Borrower will be deemed
Loans and Obligations.
Negative Covenants.
- -------------------
(a) Merger; Disposition of Assets.
------------------------------
Borrower will not, without the prior written consent of Bank, which
consent shall not be unreasonably withheld (i) change its capital
structure, (ii) merge or consolidate with any other corporation where
borrower is not surviving entity, (iii) amend or change its Articles
of Incorporation or Code of Regulations or (iv) sell, transfer or
otherwise dispose of all or any substantial part of its assets,
whether now owned or hereafter acquired.
(b) Minimum Tangible Net Worth.
---------------------------
Borrower will not permit its Tangible Net Worth, on a consolidated
basis, to be less than $50,000,000 as of the date hereof which shall
be increased as of the first day of each fiscal quarter (commencing
with the first fiscal quarter commencing subsequent to the date of
this Note) by an amount equal to 40% of Borrower's cumulative earnings
for each prior fiscal quarter of Borrower.
(c) Loan Loss Reserve to Non-Performing Assets.
-------------------------------------------
Borrower will not permit the ratio of (i) its Minimum Loan Loss
Reserve, on a consolidated basis (as shown on Borrower's quarterly
and annual financial statements delivered to Bank), to (ii) its Non-
Performing Assets (as shown on Borrower's quarterly and annual
financial statements delivered to Bank), to (ii) its Non-Performing
Assets (as shown on Borrower's quarterly and annual financial
statements delivered to Bank) to be less than 1.50 to 1.00 at any
time during the term hereof.
(d) Adequate Capitalization.
------------------------
Borrower will not permit its Capitalization Ratios as required by 12
U.S.C. Section 1831 (and any regulations issued thereunder) to be
less that the minimums required by such statute at any time during
the term hereof.
Definitions.
- ------------
"Collateral" shall mean all shares of common capital stock of First
National Bank of Southeastern Ohio and the other securities described in the
Pledge Agreement.
"Default Rate" means six percent (6%) in excess of the interest rate
otherwise in effect under amounts outstanding under the Note. In no event
will the interest rate accruing under such Note be increased to be in excess
of the maximum interest rate permitted by applicable state or federal usury
laws then in effect.
"LIBOR Rate" means the rate (adjusted for reserves if Bank is
required to maintain reserves with respect to relevant advances) being asked
on an amount of Eudodollar deposits equal to the amount of Borrowings subject
to a LIBOR Rate Election on the first day of a LIBOR Interest Period and
which has a maturity corresponding to the maturity of the LIBOR Interest
Period, as reported by the TELERATE rate reporting system (or any successor)
as determined by Bank by noon on the Effective Date of the LIBOR Interest
Period. Each determination by Bank of the LIBOR Rate shall be conclusive in
the absence of manifest error.
"LIBOR Interest Period" mans, will respect to a Borrowing elected to
accrue interest at the LIBOR Rate, periods of 30, 60, or 90 days, at
Borrower's election, commencing on a business day selected by the Borrower
pursuant to this Note. Such LIBOR Interest Period shall end on the day in
the succeeding calendar month which corresponds numerically to the beginning
day of such succeeding month, such LIBOR Interest period shall end on the
last business day of such succeeding month. If a LIBOR Interest Period would
otherwise end on a day which is not a business day, such LIBOR Interest
Period shall end on the next succeeding business day, provided, however,
that if said next succeeding business day falls in a new month, such LIBOR
Interest Period shall end on the immediately preceding business day.
"Lien" means any security interest, mortgage, pledge, assignment,
lien or other encumbrance of any kind, including interests of vendors or
lessors under conditional sale contracts and capitalized leases.
"Loan Documents" means this Note, the Pledge Agreement, and every
other document or agreement executed by any party evidencing, guarantying or
securing any of the Obligations; and "Loan Document" means any one of the
Loan Documents.
"Obligation(s) means all loans, advances, indebtedness, liabilities
and obligations of Borrower owed to each of Bank and the Affiliates of Fifth
Third Bancorp of every kind and description whether now existing or hereafter
arising including without limitations, those owed by Borrower to others and
acquired by bank or any Affiliate of Fifth Third Bancorp, by purchase,
assignment or otherwise, and whether direct or indirect, primary or as
guarantor or surety, absolute or contingent, liquidated or unliquidated,
matured or unmatured, whether or not secured by additional collateral, and
including without limitation all liabilities, obligations to perform or
forbear from performing acts, all amounts represented by letters of credit
now or hereafter issued by Bank for the benefit of or at the request of
Borrower, and all expenses and attorneys' fees incurred by bank and any
Affiliate of Fifth Third Bancorp under this Note or any other document or
instrument related to any of the foregoing.
"Pledge Agreement" means the Pledge Agreement date _________________,
199 ___, between Borrower and Bank, securing the Obligations.
"Prime Rate" means the rate of interest per annum announced to be its
prime rate from time to time by bank at its principal office in Cincinnati,
Ohio whether or not Bank will at times lend to borrowers at lower rates of
interest or, if there is no such prime rate, then its base rate or such
other rate as may be substituted by Bank for the prime rate.
"Tangible Net Worth" means the total of the capital stock (less
treasury stock), paid-in surplus, general contingency reserves and retained
earnings (deficit) of Borrower and any Subsidiary as determined on a
consolidated basis in accordance with generally accepted accounting
principles, after eliminating all inter-company items and all amounts
properly attributable to minority interests, if any, in the stock and
surplus of any Subsidiary, minus the following items (without duplication of
deductions) if any, appearing on the consolidated balance sheet of Borrower:
(i) all deferred charges (less amortization, unamortized debt
discount and expense and corporate organization expenses);
(ii) the book amount of all assets which would be treated as
intangibles under generally accepted accounting principles,
including, without limitation, such items as good-will, trademark
applications, trade names, service marks, brand names, copyrights,
patents, patent applications and licenses, and rights with respect
to the foregoing;
(iii) the amount by which aggregate inventories or aggregate
securities appearing on the asset side of such consolidated balance
sheet exceed the lower of cost or Market value (at the date of such
balance sheet) thereof; and
(iv) any subsequent write-up in the book amount of any asset
resulting from a Revaluation thereof from the book amount entered
upon acquisition of such asset.
ENTIRE AGREEMENT: The Borrower agrees that there are no conditions or
understandings which are not expressed in this note and the documents
referred to herein.
WAIVER: No failure on the part of Bank to exercise any of its rights
hereunder shall be deemed a waiver of any such rights or of any default.
Demand, presentment, protest and notice of dishonor, notice of default are
hereby waived. Borrower and all co-makers and accommodation makers of this
note, hereby waives all suretyship defenses including but not limited to all
defenses based upon impairment of Collateral and all suretyship defenses
described in Section 3-605 of the Uniform Commercial Code, as revised in 1990
(the "UCC"). Such waiver is entered to the full extent permitted by Section
3-05 (i) of the UCC.
JURY WAIVER: THE BORROWER AND ANY CO-MAKERS, ACCOMMODATION MAKERS, ENDORSERS
OR GUARANTORS HEREOF, WAIVE THE RIGHT TO A TRIAL BY JURY OF ANY MATTERS
ARISING OUT OF THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY. The
declaration of invalidity of any provision of this note shall not affect any
part of the remainder of the provisions.
This note is supplemented by the terms and conditions of an Addendum and
Note dated of even date herewith between the Borrower and Bank.
Warrant of attorney: The Borrower, jointly and severally, authorize any
attorney-at-law to appear in any court of record after maturity of this
note, whether acceleration or otherwise, to waive the issuance and service
of process and to confess judgment against them in favor of the Bank for the
principal sum due herein together with interest, charges, court costs and
attorney's fees, and to waive and release all errors, rights of appeal,
exemptions and stays of execution. The Borrower also agrees that the attorney
acting for the Borrower as set forth in this paragraph may be compensated by
bank for such services, and the Borrower waives any conflict of interest
caused by such representation and compensation arrangement. This warrant of
attorney to confess judgment shall be construed under the laws of the State
of Ohio.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER
FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE
AGREEMENT, OR ANY OTHER CAUSE.
DATE DUE: December 31, 1999 PEOPLES BANCORP, INC.
ADDRESS: P.O. Box 738 By: /s/ JOHN W. CONLON
-------------------- ------------------
Marietta, Ohio 45750 Its: Chief Financial Officer & Treasurer
-------------------- -----------------------------------
Accepted and agreed this 11th day of May , 1998.
------ -------- -----
THE FIFTH THIRD BANK
By: /s/ MICHAEL N. WALTER
------------------------
Its: Assistant Vice President
------------------------
STOCK OPTION AGREEMENT
PEOPLES BANCORP INC.
1995 Peoples Bancorp Inc. Stock Option Plan
(Incentive Stock Options)
THIS AGREEMENT is made to be effective as of ______________, by and
between Peoples Bancorp Inc., an Ohio corporation (the "COMPANY"),
and ______________, (the "OPTIONEE").
WITNESSETH:
-----------
WHEREAS, the Board of Directors of the COMPANY adopted the Peoples
Bancorp Inc. 1995 Stock Option Plan (the "PLAN") on January 19, 1995; and
WHEREAS, the stockholders of the COMPANY, upon the recommendation of
the COMPANY's Board of Directors, approved the PLAN at the Annual Meeting of
Shareholders held on April 4, 1995; and
WHEREAS, pursuant to the provisions of the PLAN, the Board of
Directors of the COMPANY has appointed a Stock Option Committee (the
"COMMITTEE") to administer the PLAN and the COMMITTEE has determined that an
option to acquire common shares, without par value (the "COMMON SHARES"), of
the COMPANY should be granted to the OPTIONEE under the terms and conditions
set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises, the parties hereto
make the following agreements, intending to be legally bound thereby:
1. Grant of OPTION.
----------------
The COMPANY hereby grants to the OPTIONEE an option (the "OPTION")
to purchase ____________________COMMON SHARES of the COMPANY. The OPTION is
intended to qualify as an incentive stock option under Section 422 of the
Internal Revenue Code of 1986, as amended (the "CODE").
2. Terms and Conditions of the OPTION.
-----------------------------------
(A) OPTION PRICE. The purchase price (the "OPTION PRICE") to be
paid by the OPTIONEE to the COMPANY upon the exercise of the OPTION shall be
$_____ per share (being 100% of the Fair Market Value (as that term is
defined in the PLAN) for the COMMON SHARES of the COMPANY on the date of this
Agreement), subject to adjustment as provided herein.
(B) Exercise of the OPTION. The OPTION may not be exercised until
the OPTIONEE shall have_______________________________________. Thereafter,
the OPTION may be exercised as follows:
i) at any time after _________________________________________
of the COMMON SHARES subject to the OPTION;
ii) at any time after _________________________________________
of the COMMON SHARES subject to the OPTION;
iii) at any time after ________________________________________
of the COMMON SHARES subject to the OPTION; and
iv) at any time after _______________________________________
of the COMMON SHARES subject to the OPTION.
Subject to the other provisions of this Agreement, if the OPTION
becomes exercisable as to certain COMMON SHARES, it shall remain exercisable
as to those COMMON SHARES until the date of expiration of the OPTION term.
The COMMITTEE may, but shall not be required to (unless otherwise provided
in this Agreement), accelerate the schedule of the time or times when the
OPTION may be exercised.
The grant of this OPTION shall not confer upon the OPTIONEE any right
to continue as an employee of the COMPANY or of any subsidiary of the COMPANY
nor limit in any way the right of the COMPANY or of any such subsidiary to
terminate the status of the OPTIONEE as an employee in accordance with law
or the COMPANY's or the subsidiary's, as appropriate, governing corporate
documents.
(C) OPTION Term. The OPTION shall in no event be exercisable after
the expiration of ten (10) years from the date of this Agreement.
(D) Method of Exercise. To the extent that it is exercisable, the
OPTION may be exercised by mailing or delivering to the COMMITTEE a written
notice of exercise, signed by the OPTIONEE, or in the event of the death of
the OPTIONEE, by such other person as is entitled to exercise the OPTION.
The notice of exercise shall state the number of COMMON SHARES in respect of
which the OPTION is being exercised, and shall either be accompanied by the
payment of the full OPTION PRICE of such COMMON SHARES, or shall fix a date
(not more than ten business days from the date of the notice) for the payment
of the full OPTION PRICE of the COMMON SHARES being purchased. The OPTION
PRICE may be paid in cash, or by the transfer by the OPTIONEE to the COMPANY
of free and clear COMMON SHARES already owned by the OPTIONEE having a Fair
Market Value (as that term is defined in the PLAN) on the exercise date equal
to the OPTION PRICE, or by a combination of cash and COMMON SHARES already
owned by the OPTIONEE equal in the aggregate to the OPTION PRICE for the
COMMON SHARES being purchased.
3. Adjustments and Changes in the COMMON SHARES subject to the OPTION.
-------------------------------------------------------------------
In the event there is any change in the COMMON SHARES resulting from stock
splits, stock dividends, combinations or exchanges of shares, or other
similar capital adjustments, the number of COMMON SHARES subject to the
OPTION and the OPTION PRICE of the optioned COMMON SHARES shall be
appropriately adjusted to reflect such change.
4. Vesting Acceleration of OPTIONS in an Acquisition Transaction.
--------------------------------------------------------------
(A) In the event the COMPANY shall consolidate with, merge into, or
transfer all or substantially all of its assets (an "ACQUISITION TRANSACTION")
to another corporation or corporations (herein referred to as "SUCCESSOR
EMPLOYER CORPORATION"), then each OPTION outstanding under the PLAN shall
become exercisable in full, whether or not then exercisable by its terms,
immediately upon consummation of the ACQUISITION TRANSACTION. As a condition
of any such ACQUISITION TRANSACTION, the COMPANY shall require that the
successor employer corporation obligate itself to continue this PLAN and to
assume all obligations under the PLAN in a manner consistent with the
provisions of Section 424(a) of the CODE. In the event that such SUCCESSOR
EMPLOYER CORPORATION terminates for any reason the employment of any OPTIONEE
who is a Key Employee, as defined by the PLAN, within the one year period
immediately following the consummation of the ACQUISITION TRANSACTION, such
OPTIONEE shall have the right to exercise his then unexercised OPTIONS during
the period ending on the earlier of the expiration of the term of the OPTIONS
or three months following the date of the OPTIONEE's termination of
employment.
(B) The grant of the OPTION shall not affect in any way the right of
the COMPANY to consolidate with, merge into, or transfer all or substantially
all of its assets to, another corporation or corporations.
5. Non-Assignability of the OPTION.
--------------------------------
The OPTION shall not be assignable or transferable except, in the
event of the death of the OPTIONEE, by the will of the OPTIONEE, or by the
laws of descent and distribution. The OPTION shall be exercisable, during the
OPTIONEE's lifetime, only by the OPTIONEE.
6. Exercise After OPTIONEE Ceases to be an Employee.
-------------------------------------------------
If an OPTIONEE's employment with the COMPANY and its subsidiaries terminates
for any reason other than (i) death of the OPTIONEE, (ii) the disability of
the OPTIONEE within the meaning of Section22(e)(3) of the CODE, (iii) the
retirement of the OPTIONEE under the provisions of any retirement plan of
the COMPANY and its subsidiaries, or (iv) any reason (other than for an act
of fraud or intentional misrepresentation, or embezzlement, misappropriation
or conversion of assets or opportunities of the COMPANY or any subsidiary,
hereafter referred as "CAUSE") after the OPTIONEE has been employed by the
COMPANY and/or its subsidiaries for at least 10 consecutive years prior to
the OPTIONEE's termination of employment, the portion of the OPTION which
has not yet become exercisable in accordance with Section2(B), shall
immediately terminate.
If the termination of employment of the OPTIONEE was due to
retirement under the provisions of any retirement plan of the COMPANY or any
subsidiary or if the termination of employment was due to a reason other than
for CAUSE and the OPTIONEE had been employed by the COMPANY and/or one or
more subsidiaries for at least 10 consecutive years prior to the OPTIONEE's
termination of employment, all of such OPTIONEE's OPTIONS may be exercised
in full, whether or not then exercisable in accordance with Section 2(B),
and the right of the OPTIONEE to exercise the OPTIONS shall terminate upon
the earlier to occur of the expiration of the term of the OPTIONS or three
months after the date of termination of employment.
If the termination of employment was due to the death of an OPTIONEE
who was an employee of the COMPANY and/or any subsidiary at the time of
death, such OPTIONS may be exercised in full, whether or not then exercisable
in accordance with Section 2(B), and the right of the representative or
representatives of the OPTIONEE's estate (or the person or persons who
acquire by bequest or inheritance) the right to exercise the OPTIONEE's
OPTIONS) to exercise the OPTIONS shall terminate upon the earlier to occur
of the expiration of the term of the OPTIONS or one year after the date of
death of the OPTIONEE.
If the termination of employment was due to the disability of the
OPTIONEE within the meaning of Section22(e)(3) of the CODE, such OPTIONS may
be exercised in full, whether or not then exercisable in accordance with
Section 2(B), and the right of the OPTIONEE to exercise the OPTIONS shall
terminate upon the earlier to occur of the expiration of the term of the
OPTIONS or one year after the date of termination of employment.
If the termination of employment of the OPTIONEE was due to reasons
other than for CAUSE and the OPTIONEE had not been employed by the COMPANY
and/or one or more subsidiaries for at least 10 consecutive years prior to
the OPTIONEE's termination of employment, the OPTIONEE's OPTIONS may be
exercised only to the extent then exercisable under Section 2(B) on the date
of termination of employment, and the right of the OPTIONEE to exercise the
OPTIONS shall terminate upon the earlier to occur of the expiration of the
term of the OPTIONS or three months after the date of termination of
employment.
If the termination of employment of the OPTIONEE was for CAUSE, all
OPTIONS which have not been exercised as of the date of termination of
employment shall terminate immediately as of the date of termination of
employment.
7. Restrictions on Exercise.
-------------------------
Anything contained in this Agreement or elsewhere to the contrary
notwithstanding:
(A) The OPTION shall not be exercisable for the purchase of any
COMMON SHARES subject thereto except for:
i) COMMON SHARES subject thereto which at the time of such
exercise and purchase are registered under the Securities Act of 1933, as
amended (the "ACT"); and
ii) COMMON SHARES subject thereto which at the time of such
exercise and purchase are exempt or are the subject matter of an exempt
transaction or are registered by description, by coordination or by
qualification, or at such time are the subject matter of a transaction which
has been registered by description, all in accordance with Chapter 1707 of
the Ohio Revised Code, as amended; and
iii) COMMON SHARES subject thereto in respect of which the
laws of any state applicable to such exercise and purchase have been
satisfied.
(B) If any COMMON SHARES subject to the OPTION are sold or issued
upon the exercise thereof to a person who (at the time of such exercise or
thereafter) is an affiliate of the COMPANY for purposes of Rule144
promulgated under the ACT, or are sold and issued in reliance upon exemptions
under the securities laws of any state, then upon such sale and issuance:
i) Such COMMON SHARES shall not be transferable by the
holder thereof, and neither the COMPANY nor its transfer agent or registrar,
if any, shall be required to register or otherwise to give effect to any
transfer thereof and may prevent any such transfer, unless the COMPANY shall
have received an opinion from its counsel to the effect that any such
transfer would not violate the ACT or the applicable laws of any state;
and
ii) The COMPANY may cause each share certificate evidencing
such COMMON SHARES to bear a legend reflecting the applicable restrictions on
the transfer thereof.
(C) Any share certificate issued to evidence COMMON SHARES as to
which the OPTION has been exercised may bear such legends and statements as
the COMPANY shall deem advisable to insure compliance with applicable
federal and state laws and regulations.
(D) Nothing contained in this Agreement or elsewhere shall be
construed to require the COMPANY to take any action whatsoever to make the
OPTION exercisable or to make transferable any COMMON SHARES purchased and
issued upon the exercise of the OPTION.
8. Rights of the OPTIONEE as a Shareholder.
----------------------------------------
The OPTIONEE shall have no rights or privileges as a shareholder of
the COMPANY with respect to any COMMON SHARES of the COMPANY covered by the
OPTION until the date of issuance and delivery of a certificate to the
OPTIONEE evidencing such COMMON SHARES.
9. PLAN as Controlling.
--------------------
All terms and conditions of the PLAN applicable to the OPTION which
are not set forth in this Agreement shall be deemed incorporated herein by
reference. In the event that any term or condition of this Agreement is
inconsistent with the terms and conditions of the PLAN, the PLAN shall be
deemed controlling.
10. Governing Law.
--------------
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Ohio.
11. Rights and Remedies Cumulative.
-------------------------------
All rights and remedies of the COMPANY and of the OPTIONEE enumerated
in this Agreement shall be cumulative and, except as expressly provided
otherwise in this Agreement, none shall exclude any other rights or remedies
allowed by law or in equity, and each of said rights or remedies may be
exercised and enforced concurrently.
12. Captions.
---------
The captions contained in this Agreement are included only for
convenience of reference and do not define, limit, explain or modify this
Agreement or its interpretation, construction or meaning and are no way to
be construed as a part of this Agreement.
13. Notices and Payments.
---------------------
All payments required or permitted to be made under the provisions of
this Agreement, and all notices and communications required or permitted to
be given or delivered under this Agreement to the COMPANY or to the OPTIONEE,
which notices or communications must be in writing, shall be deemed to have
been given if delivered by hand, or mailed by first-class mail (postage
prepaid), addressed as follows:
(A) If to the COMPANY, to:
Peoples Bancorp Inc.
Attn: Stock Option Committee
138 Putnam Street
P. O. Box 738
Marietta, Ohio 45750-0738
(B) If to the OPTIONEE, to the address of the OPTIONEE
set forth at the conclusion of this Agreement.
The COMPANY or the OPTIONEE may, by notice given to the other in accordance
with this Agreement, designate a different address for making payments
required or permitted to be made, and for the giving of notices or other
communications, to the party designating such new address. Any payment,
notice or other communication required or permitted to be given in accordance
with this Agreement shall be deemed to have been given on the date of the
postmark stamped on the envelope by the U.S. Postal Service, metered dates
not being acceptable, when placed in the U.S. Mail, addressed and mailed as
provided in this Agreement.
14. Severability.
-------------
If any provision of this Agreement, or the application of any
provision hereof to any person or any circumstance shall be determined to be
invalid or unenforceable, then such determination shall not affect any other
provision of this Agreement or the application of said provision to any other
person or circumstance, all of which other provisions shall remain in full
force and effect, and it is the intention of each party to this Agreement
that if any provision of this Agreement is susceptible of two or more
constructions, one of which would render the provision enforceable and the
other or others of which would render the provision unenforceable, then the
provision shall have the meaning which renders it enforceable.
15. Number and Gender.
------------------
When used in this Agreement, the number and gender of each pronoun
shall be construed to be such number and gender as the context, circumstances
or its antecedent may require.
16. Entire Agreement.
-----------------
This Agreement constitutes the entire agreement between the COMPANY
and the OPTIONEE in respect of the subject matter of this Agreement, and this
Agreement supersedes all prior and contemporaneous agreements between the
parties hereto in connection with the subject matter of this Agreement. No
change, termination or attempted waiver of any of the provisions of this
Agreement shall be binding upon any party hereto unless contained in a
writing signed by the party to be charged.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed to be effective as of the date first written above.
COMPANY:
Peoples Bancorp Inc.,
an Ohio corporation
By: ____________________________________
Its: Secretary, Stock Option Committee
---------------------------------
OPTIONEE:
________________________________________
Optionee Name
_________________
Street Address
_______________________
City, State and Zip Code
______________________
Social Security Number
STOCK OPTION AGREEMENT
PEOPLES BANCORP INC. NON-EMPLOYEE DIRECTOR
1998 Peoples Bancorp Inc. Stock Option Plan
(Non-Qualified Stock Options)
THIS AGREEMENT is made to be effective as of ____________, by and
between Peoples Bancorp Inc., an Ohio corporation (the "COMPANY"),
and ____________ (the "OPTIONEE").
WITNESSETH:
-----------
WHEREAS, the Board of Directors of the COMPANY adopted the Peoples
Bancorp Inc. 1998 Stock Option Plan (the "PLAN") on December 11, 1997; and
WHEREAS, the shareholders of the COMPANY, upon the recommendation of
the COMPANY's Board of Directors, approved the PLAN at the Annual Meeting of
Shareholders held on April 9, 1998; and
WHEREAS, pursuant to the provisions of the PLAN, directors of the
COMPANY who are not also employees of the COMPANY (the "NON-EMPLOYEE
DIRECTORS") are to be granted options to acquire common shares (the "COMMON
SHARES") of the COMPANY in accordance with the provisions of the PLAN; and
WHEREAS, pursuant to the provisions of the PLAN, the OPTIONEE, who is
a NON-EMPLOYEE DIRECTOR, is to be granted an option to acquire ___________
COMMON SHARES of the COMPANY, effective on ____________ (converted
to ____________ COMMON SHARES of the COMPANY on and after April 13, 1998,
pursuant to a 3-for-2-stock split), upon the terms and conditions set forth
in this Agreement;
NOW, THEREFORE, in consideration of the premises, the parties hereto
make the following agreements, intending to be legally bound thereby:
SECTION 1 Grant of Option.
----------------
The COMPANY hereby grants to the OPTIONEE an option (the "OPTION")
to purchase ____________ COMMON SHARES of the COMPANY (converted to
________________________ COMMON SHARES of the COMPANY on and after April 13,
1998, pursuant to a 3-for-2-stock split). The OPTION is not intended to
qualify as an incentive stock option under Section 422 of the Internal
Revenue Code of 1986, as amended (the "CODE").
SECTION 2 Terms and Conditions of the OPTION.
-----------------------------------
(A) OPTION Price. The purchase price (the "OPTION PRICE") to be
paid by the OPTIONEE to the COMPANY upon the exercise of the OPTION shall
be $______ per share (converted to $_____ per share on and after April 13,
1998, pursuant to a 3-for-2-stock split), subject to further adjustment as
provided herein.
(B) Exercise of the OPTION. The OPTION may be exercised no earlier
than six months from the date of this Agreement.
In the event the COMPANY shall consolidate with, merge into, or
transfer all or substantially all of its assets (an "ACQUISITION TRANSACTION")
to another corporation or corporations, then the OPTION shall become
exercisable in full, whether or not then exercisable by its terms,
immediately upon consummation of the ACQUISITION TRANSACTION.
Subject to the other provisions of this Agreement, if the OPTION
becomes exercisable as to certain COMMON SHARES, it shall remain exercisable
as to those COMMON SHARES until the date of expiration of the OPTION term.
The grant of this OPTION shall not confer upon the OPTIONEE any right
to continue as a director of any subsidiary of the COMPANY nor limit in any
way the right of the COMPANY or the shareholders of the COMPANY to terminate
his status as a director in accordance with law or the COMPANY's governing
corporate documents.
(C) OPTION Term. The OPTION shall in no event be exercisable after
the expiration of ten (10) years from the date of this Agreement.
(D) Method of Exercise. To the extent that it is exercisable, the
OPTION may be exercised by mailing or delivering to the Stock Option
Committee of the Board of Directors of the COMPANY (the "COMMITTEE") a
written notice of exercise, signed by the OPTIONEE, or in the event of the
death of the OPTIONEE, by such other person as is entitled to exercise the
OPTION. The notice of exercise shall state the number of COMMON SHARES in
respect of which the OPTION is being exercised, and shall either be
accompanied by the payment of the full OPTION PRICE of such COMMON SHARES,
or shall fix a date (not more than 10 business days from the date of the
notice) for the payment of the full OPTION PRICE of the COMMON SHARES being
purchased. The OPTION PRICE may be paid in cash, or by the transfer by the
OPTIONEE to the COMPANY of free and clear COMMON SHARES already owned by the
OPTIONEE having a Fair Market Value (as that term is defined in the PLAN) on
the exercise date equal to the OPTION PRICE, or by a combination of cash and
COMMON SHARES already owned by the OPTIONEE equal in the aggregate to the
OPTION PRICE for the COMMON SHARES being purchased.
SECTION 3 Adjustments and Changes in the COMMON SHARES subject to the OPTION.
-------------------------------------------------------------------
In the event there is any change in the COMMON SHARES resulting from stock
splits, stock dividends, combinations or exchanges of shares, or other
similar capital adjustments, the number of COMMON SHARES subject to the
OPTION and the OPTION PRICE of the optioned COMMON SHARES shall be
appropriately adjusted to reflect such change.
SECTION 4 Assignability of the OPTION.
----------------------------
With the permission of the Committee, the OPTIONEE may transfer this
OPTION to a revocable inter-vivos trust as to which the OPTIONEE is the
settlor, or may transfer this OPTION to a "Permissible Transferee." A
Permissible Transferee is defined as any member of the immediate family of
the OPTIONEE, any trust, whether revocable or irrevocable, solely for the
benefit of members of the OPTIONEE's immediate family, or any partnership
whose only partners are members of the OPTIONEE's immediate family. Any
such Permissible Transferee shall remain subject to all of the terms and
conditions applicable to this OPTION and subject to the rules and regulations
prescribed by the Committee. This OPTION may not be retransferred by a
Permissible Transferee except by will or the laws of descent and distribution,
and then only to another Permissible Transferee. Other than described above,
this OPTION may not be transferred except by will or the laws of descent and
distribution and, during the lifetime of an OPTIONEE to whom granted, may be
exercised only by him, his guardian or legal representative.
SECTION 5 Exercise After OPTIONEE Ceases to be a Director.
------------------------------------------------
Except as otherwise provided in this Section5, if the OPTIONEE ceases
to be a director of the COMPANY for any reason other than the OPTIONEE's
death or due to an act of (i) fraud or intentional misrepresentation, or
(ii) embezzlement, misappropriation or conversion of assets or opportunities
of the COMPANY or any subsidiary ("Cause"), the OPTION granted to the
OPTIONEE under this Agreement may be exercised in full, whether or not then
exercisable by its terms, on or before the expiration of the term of the
OPTION; provided, however, that if the OPTIONEE shall die prior to the
expiration of the term of the OPTION, the OPTION may only be exercised on or
before the earlier of the expiration of the OPTION term or two years
following the date of death. If the OPTIONEE ceases to be a director of the
COMPANY because of death, the OPTION may be exercised in full, whether or
not then exercisable by its terms, by the representative or representatives
of the OPTIONEE's estate, or the person or persons who acquired (by bequest
or inheritance) the rights to exercise the OPTION, only on or before the
earlier of the expiration of the term of the OPTION or two years following
the date of death. If the OPTIONEE ceases to be a director of the COMPANY
and/or any subsidiary of the COMPANY due to Cause, all of then unexercised
OPTIONS shall immediately terminate.
SECTION 6 Restrictions on Exercise.
-------------------------
Anything contained in this Agreement or elsewhere to the contrary
notwithstanding:
(A) The OPTION shall not be exercisable for the purchase of any
COMMON SHARES subject thereto except for:
(i) COMMON SHARES subject thereto which at the time of such
exercise and purchase are registered under the Securities Act of 1933, as
amended (the "ACT"); and
(ii) COMMON SHARES subject thereto which at the time of such
exercise and purchase are exempt or are the subject matter of an exempt
transaction or are registered by description, by coordination or by
qualification, or at such time are the subject matter of a transaction which
has been registered by description, all in accordance with Chapter 1707 of
the Ohio Revised Code, as amended; and
(iii) COMMON SHARES subject thereto in respect of which the
laws of any state applicable to such exercise and purchase have been
satisfied.
(B) If any COMMON SHARES subject to the OPTION are sold or issued
upon the exercise thereof to a person who (at the time of such exercise or
thereafter) is an affiliate of the COMPANY for purposes of Rule144
promulgated under the ACT, or are sold and issued in reliance upon
exemptions under the securities laws of any state, then upon such sale and
issuance:
(i) Such COMMON SHARES shall not be transferable by the
holder thereof, and neither the COMPANY nor its transfer agent or registrar,
if any, shall be required to register or otherwise to give effect to any
transfer thereof and may prevent any such transfer, unless the COMPANY shall
have received an opinion from its counsel to the effect that any such
transfer would not violate the ACT or the applicable laws of any state; and
(ii) The COMPANY may cause each share certificate evidencing
such COMMON SHARES to bear a legend reflecting the applicable restrictions
on the transfer thereof.
(C) Any share certificate issued to evidence COMMON SHARES as to
which the OPTION has been exercised may bear such legends and statements as
the COMPANY shall deem advisable to insure compliance with applicable
federal and state laws and regulations.
(D) Nothing contained in this Agreement or elsewhere shall be
construed to require the COMPANY to take any action whatsoever to make the
OPTION exercisable or to make transferable any COMMON SHARES purchased and
issued upon the exercise of the OPTION.
SECTION 7 Rights of the OPTIONEE as a Shareholder.
----------------------------------------
The OPTIONEE shall have no rights or privileges as a shareholder of
the COMPANY with respect to any COMMON SHARES of the COMPANY covered by the
OPTION until the date of issuance and delivery of a certificate to the
OPTIONEE evidencing such COMMON SHARES.
SECTION 8 PLAN as Controlling.
--------------------
All terms and conditions of the PLAN applicable to the OPTION which
are not set forth in this Agreement shall be deemed incorporated herein by
reference. In the event that any term or condition of this Agreement is
inconsistent with the terms and conditions of the PLAN, the PLAN shall be
deemed controlling.
SECTION 9 Governing Law.
--------------
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Ohio.
SECTION 10 Rights and Remedies Cumulative.
-------------------------------
All rights and remedies of the COMPANY and of the OPTIONEE enumerated
in this Agreement shall be cumulative and, except as expressly provided
otherwise in this Agreement, none shall exclude any other rights or remedies
allowed by law or in equity, and each of said rights or remedies may be
exercised and enforced concurrently.
SECTION 11 Captions.
---------
The captions contained in this Agreement are included only for
convenience of reference and do not define, limit, explain or modify this
Agreement or its interpretation, construction or meaning and are no way to
be construed as a part of this Agreement.
SECTION 12 Notices and Payments.
---------------------
All payments required or permitted to be made under the provisions
of this Agreement, and all notices and communications required or permitted
to be given or delivered under this Agreement to the COMPANY or to the
OPTIONEE, which notices or communications must be in writing, shall be deemed
to have been given if delivered by hand, or mailed by first-class mail
(postage prepaid), addressed as follows:
(A) If to the COMPANY, to:
Peoples Bancorp Inc.
Attn.: Stock Option Committee
138 Putnam Street
P. O. Box 738
Marietta, Ohio 45750-0738
(B) If to the OPTIONEE, to the address of the OPTIONEE set forth
at the conclusion of this Agreement.
The COMPANY or the OPTIONEE may, by notice given to the other in
accordance with this Agreement, designate a different address for making
payments required or permitted to be made, and for the giving of notices or
other communications, to the party designating such new address. Any payment,
notice or other communication required or permitted to be given in accordance
with this Agreement shall be deemed to have been given on the date of the
postmark stamped on the envelope by the U.S. Postal Service, metered dates
not being acceptable, when placed in the U.S. Mail, addressed and mailed as
provided in this Agreement.
SECTION 13 Severability.
-------------
If any provision of this Agreement, or the application of any
provision hereof to any person or any circumstance shall be determined to be
invalid or unenforceable, then such determination shall not affect any other
provision of this Agreement or the application of said provision to any other
person or circumstance, all of which other provisions shall remain in full
force and effect, and it is the intention of each party to this Agreement
that if any provision of this Agreement is susceptible of two or more
constructions, one of which would render the provision enforceable and the
other or others of which would render the provision unenforceable, then the
provision shall have the meaning which renders it enforceable.
SECTION 14 Number and Gender.
------------------
When used in this Agreement, the number and gender of each pronoun
shall be construed to be such number and gender as the context, circumstances
or its antecedent may require.
SECTION 15 Entire Agreement.
-----------------
This Agreement constitutes the entire agreement between the COMPANY
and the OPTIONEE in respect of the subject matter of this Agreement, and this
Agreement supersedes all prior and contemporaneous agreements between the
parties hereto in connection with the subject matter of this Agreement. No
change, termination or attempted waiver of any of the provisions of this
Agreement shall be binding upon any party hereto unless contained in a
writing signed by the party to be charged.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed to be effective as of the date first written above.
COMPANY:
PEOPLES BANCORP INC.,
an Ohio corporation
By: ____________________________________
Charles R. Hunsaker
Its: General Counsel and Secretary to the Stock Option
Committee
Date: __________________________________
OPTIONEE:
___________________________________________
Date: __________________________________
STOCK OPTION AGREEMENT
PEOPLES BANCORP INC. CONSULTANT/ADVISOR
1998 Peoples Bancorp Inc. Stock Option Plan
(Non-Qualified Stock Options)
THIS AGREEMENT is made to be effective as of __________, by and
between Peoples Bancorp Inc., an Ohio corporation (the "COMPANY"),
and _____________ (the "OPTIONEE").
WITNESSETH:
-----------
WHEREAS, the Board of Directors of the COMPANY adopted the Peoples
Bancorp Inc. 1998 Stock Option Plan (the "PLAN") on December 11, 1997; and
WHEREAS, the shareholders of the COMPANY, upon the recommendation of
the COMPANY's Board of Directors, approved the PLAN at the Annual Meeting of
Shareholders held on April 9, 1998; and
WHEREAS, pursuant to the provisions of the PLAN, a Consultant/Advisor
("CONSULTANT/ADVISOR") may be identified by the Stock Option Committee of
the Board of Directors of the COMPANY (the "COMMITTEE") and granted options
to acquire common shares (the "COMMON SHARES") of the COMPANY in accordance
with the provisions of the PLAN; and
WHEREAS, pursuant to the provisions of the PLAN, the OPTIONEE, who
has been identified by the COMMITTEE as a CONSULTANT/ADVISOR for the purpose
of this grant of an option to acquire ___________ COMMON SHARES of the
COMPANY, effective on __________;
NOW, THEREFORE, in consideration of the premises, the parties hereto
make the following agreements, intending to be legally bound thereby:
SECTION 1 Grant of Option.
----------------
The COMPANY hereby grants to the OPTIONEE an option (the "OPTION")
to purchase ___________ COMMON SHARES of the COMPANY. The OPTION is not
intended to qualify as an incentive stock option under Section 422 of the
Internal Revenue Code of 1986, as amended (the "CODE").
SECTION 2 Terms and Conditions of the OPTION.
-----------------------------------
(A) OPTION Price. The purchase price (the "OPTION PRICE") to be
paid by the OPTIONEE to the COMPANY upon the exercise of the OPTION
shall be $______ per share, subject to further adjustment as provided
herein.
(B) Exercise of the OPTION. The OPTION may be exercised no earlier
than twenty-four months from the effective date of this Agreement.
Thereafter, the OPTION may be exercised as follows:
i) at any time after such twenty-four-month period, as to
twenty-five percent (25%) of the COMMON SHARES subject to the OPTION;
ii) at any time after thirty-six months from the date of this
Agreement, as to an additional twenty-five percent (25%) of the COMMON SHARES
subject to the OPTION;
iii) at any time after forty-eight months from the date of
this Agreement, as to an additional twenty-five percent (25%) of the COMMON
SHARES subject to the OPTION; and
iv) at any time after sixty months from the date of this
Agreement, as to an additional twenty-five percent (25%) of the COMMON SHARES
subject to the OPTION.
Subject to the other provisions of this Agreement, if the OPTION
becomes exercisable as to certain COMMON SHARES, it shall remain exercisable
as to those COMMON SHARES until the date of expiration of the OPTION term.
The grant of this OPTION shall not confer upon the OPTIONEE any right
to continue as a CONSULTANT/ADVISOR of the COMPANY limit in any way the
right of the COMPANY to terminate the status of the OPTIONEE as a
CONSULTANT/ADVISOR.
In the event the COMPANY shall consolidate with, merge into, or
transfer all or substantially all of its assets (an "ACQUISITION TRANSACTION")
to another corporation or corporations, then the OPTION shall become
exercisable in full, whether or not then exercisable by its terms,
immediately upon consummation of the ACQUISITION TRANSACTION.
(C) OPTION Term. The OPTION shall in no event be exercisable after
the expiration of ten (10) years from the date of this Agreement.
(D) Method of Exercise. To the extent that it is exercisable, the
OPTION may be exercised by mailing or delivering to COMMITTEE a written
notice of exercise, signed by the OPTIONEE, or in the event of the death of
the OPTIONEE, by such other person as is entitled to exercise the OPTION.
The notice of exercise shall state the number of COMMON SHARES in respect of
which the OPTION is being exercised, and shall either be accompanied by the
payment of the full OPTION PRICE of such COMMON SHARES, or shall fix a date
(not more than 10 business days from the date of the notice) for the payment
of the full OPTION PRICE of the COMMON SHARES being purchased. The OPTION
PRICE may be paid in cash, or by the transfer by the OPTIONEE to the COMPANY
of free and clear COMMON SHARES already owned by the OPTIONEE having a Fair
Market Value (as that term is defined in the PLAN) on the exercise date equal
to the OPTION PRICE, or by a combination of cash and COMMON SHARES already
owned by the OPTIONEE equal in the aggregate to the OPTION PRICE for the
COMMON SHARES being purchased.
SECTION 3 Adjustments and Changes in the COMMON SHARES subject to the
OPTION.
-----------------------------------------------------------
In the event there is any change in the COMMON SHARES resulting from
stock splits, stock dividends, combinations or exchanges of shares, or other
similar capital adjustments, the number of COMMON SHARES subject to the
OPTION and the OPTION PRICE of the optioned COMMON SHARES shall be
appropriately adjusted to reflect such change.
SECTION 4 Assignability of the OPTION.
----------------------------
With the permission of the Committee, the OPTIONEE may transfer this
OPTION to a revocable inter-vivos trust as to which the OPTIONEE is the
settlor, or may transfer this OPTION to a "Permissible Transferee." A
Permissible Transferee is defined as any member of the immediate family of
the OPTIONEE, any trust, whether revocable or irrevocable, solely for the
benefit of members of the OPTIONEE's immediate family, or any partnership
whose only partners are members of the OPTIONEE's immediate family. Any such
Permissible Transferee shall remain subject to all of the terms and
conditions applicable to this OPTION and subject to the rules and regulations
prescribed by the Committee. This OPTION may not be retransferred by a
Permissible Transferee except by will or the laws of descent and
distribution, and then only to another Permissible Transferee. Other than
described above, this OPTION may not be transferred except by will or the
laws of descent and distribution and, during the lifetime of an OPTIONEE to
whom granted, may be exercised only by him, his guardian or legal
representative.
SECTION 5 Exercise After OPTIONEE Ceases to be a CONSULTANT/ADVISOR.
----------------------------------------------------------
Except as otherwise provided in this Section5, if the OPTIONEE ceases
to be a CONSULTANT/ADVISOR to the COMPANY for any reason other than the
OPTIONEE's death or due to an act of (i) fraud or intentional
misrepresentation, or (ii) embezzlement, misappropriation or conversion of
assets or opportunities of the COMPANY or any subsidiary ("Cause"), the
OPTION granted to the OPTIONEE under this Agreement may be exercised in full,
whether or not then exercisable by its terms, on or before the expiration of
the term of the OPTION; provided, however, that if the OPTIONEE shall die
prior to the expiration of the term of the OPTION, the OPTION may only be
exercised on or before the earlier of the expiration of the OPTION term or
two years following the date of death. If the OPTIONEE ceases to be a
CONSULTANT/ADVISOR to the COMPANY because of death, the OPTION may be
exercised in full, whether or not then exercisable by its terms, by the
representative or representatives of the OPTIONEE's estate, or the person or
persons who acquired (by bequest or inheritance) the rights to exercise the
OPTION, only on or before the earlier of the expiration of the term of the
OPTION or two years following the date of death. If the OPTIONEE ceases to
be a CONSULTANT/ADVISOR to the COMPANY and/or any subsidiary of the COMPANY
due to Cause, all of then unexercised OPTIONS shall immediately terminate.
SECTION 6 Restrictions on Exercise.
-------------------------
Anything contained in this Agreement or elsewhere to the contrary
notwithstanding:
(A) The OPTION shall not be exercisable for the purchase of any
COMMON SHARES subject thereto except for:
(i) COMMON SHARES subject thereto which at the time of
such exercise and purchase are registered under the Securities Act of 1933,
as amended (the "ACT"); and
(ii) COMMON SHARES subject thereto which at the time of
such exercise and purchase are exempt or are the subject matter of an exempt
transaction or are registered by description, by coordination or by
qualification, or at such time are the subject matter of a transaction which
has been registered by description, all in accordance with Chapter 1707 of
the Ohio Revised Code, as amended; and
(iii) COMMON SHARES subject thereto in respect of which the
laws of any state applicable to such exercise and purchase have been
satisfied.
(B) Nothing contained in this Agreement or elsewhere shall be
construed to require the COMPANY to take any action whatsoever to make the
OPTION exercisable or to make transferable any COMMON SHARES purchased and
issued upon the exercise of the OPTION.
SECTION 7 Rights of the OPTIONEE as a Shareholder.
----------------------------------------
The OPTIONEE shall have no rights or privileges as a shareholder of
the COMPANY with respect to any COMMON SHARES of the COMPANY covered by the
OPTION until the date of issuance and delivery of a certificate to the
OPTIONEE evidencing such COMMON SHARES.
SECTION 8 PLAN as Controlling.
--------------------
All terms and conditions of the PLAN applicable to the OPTION which
are not set forth in this Agreement shall be deemed incorporated herein by
reference. In the event that any term or condition of this Agreement is
inconsistent with the terms and conditions of the PLAN, the PLAN shall be
deemed controlling.
SECTION 9 Governing Law.
--------------
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Ohio.
SECTION 10 Rights and Remedies Cumulative.
-------------------------------
All rights and remedies of the COMPANY and of the OPTIONEE enumerated
in this Agreement shall be cumulative and, except as expressly provided
otherwise in this Agreement, none shall exclude any other rights or remedies
allowed by law or in equity, and each of said rights or remedies may be
exercised and enforced concurrently.
SECTION 11 Captions.
---------
The captions contained in this Agreement are included only for
convenience of reference and do not define, limit, explain or modify this
Agreement or its interpretation, construction or meaning and are no way to
be construed as a part of this Agreement.
SECTION 12 Notices and Payments.
---------------------
All payments required or permitted to be made under the provisions
of this Agreement, and all notices and communications required or permitted
to be given or delivered under this Agreement to the COMPANY or to the
OPTIONEE, which notices or communications must be in writing, shall be
deemed to have been given if delivered by hand, or mailed by first-class mail
(postage prepaid), addressed as follows:
(A) If to the COMPANY, to:
Peoples Bancorp Inc.
Attn.: Stock Option Committee
138 Putnam Street
P. O. Box 738
Marietta, Ohio 45750-0738
(B) If to the OPTIONEE, to the address of the OPTIONEE set forth
at the conclusion of this Agreement.
The COMPANY or the OPTIONEE may, by notice given to the other in
accordance with this Agreement, designate a different address for making
payments required or permitted to be made, and for the giving of notices or
other communications, to the party designating such new address. Any
payment, notice or other communication required or permitted to be given in
accordance with this Agreement shall be deemed to have been given on the
date of the postmark stamped on the envelope by the U.S. Postal Service,
metered dates not being acceptable, when placed in the U.S. Mail, addressed
and mailed as provided in this Agreement.
SECTION 13 Severability.
-------------
If any provision of this Agreement, or the application of any
provision hereof to any person or any circumstance shall be determined to be
invalid or unenforceable, then such determination shall not affect any other
provision of this Agreement or the application of said provision to any
other person or circumstance, all of which other provisions shall remain in
full force and effect, and it is the intention of each party to this
Agreement that if any provision of this Agreement is susceptible of two or
more constructions, one of which would render the provision enforceable and
the other or others of which would render the provision unenforceable, then
the provision shall have the meaning which renders it enforceable.
SECTION 14 Number and Gender.
------------------
When used in this Agreement, the number and gender of each pronoun
shall be construed to be such number and gender as the context, circumstances
or its antecedent may require.
SECTION 15 Entire Agreement.
-----------------
This Agreement constitutes the entire agreement between the COMPANY
and the OPTIONEE in respect of the subject matter of this Agreement, and this
Agreement supersedes all prior and contemporaneous agreements between the
parties hereto in connection with the subject matter of this Agreement. No
change, termination or attempted waiver of any of the provisions of this
Agreement shall be binding upon any party hereto unless contained in a
writing signed by the party to be charged.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed to be effective as of the date first written above.
COMPANY:
PEOPLES BANCORP INC.,
an Ohio corporation
By: ____________________________________
Charles R. Hunsaker
Its: General Counsel and Secretary to the Stock
Option Committee
Date: __________________________________
OPTIONEE:
________________________________________
Optionee Name
________________________________________
Street Address
________________________________________
City, State and Zip Code
________________________________________
Social Security Number
Date: _________________________________
