FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
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
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, at November 1, 2000: 6,500,419.
Page 1 of 29 Pages
Exhibit Index Appears on Page 28
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1
The following Condensed Consolidated Balance Sheets, Consolidated
Statements of Income, Consolidated Statements of Stockholders' Equity, and
Consolidated Statements of Cash Flows of Peoples Bancorp Inc. ("Peoples") and
subsidiaries, reflect all adjustments (which include normal recurring accruals)
necessary to present fairly such information for the periods and dates
indicated. Since the following condensed unaudited financial statements have
been prepared in accordance with instructions to Form 10-Q, they do not contain
all information and footnotes necessary for a fair presentation of financial
position in conformity with generally accepted accounting principles. Operating
results for the nine months ended September 30, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. Complete audited consolidated financial statements with footnotes thereto
are included in Peoples' Annual Report on Form 10-K for the year ended December
31, 1999.
The consolidated financial statements include the accounts of Peoples
and its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
<PAGE>
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
ASSETS 2000 1999
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 25,878 $ 42,713
Interest-bearing deposits in other banks 184 1,038
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Total cash and cash equivalents 26,062 43,751
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Available-for-sale investment securities, at estimated fair value (amortized
cost of $340,865 and $340,082 at September 30, 2000 and
December 31, 1999, respectively) 329,421 328,306
Loans, net of unearned interest 724,328 659,833
Allowance for loan losses (11,206) (10,264)
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Net loans 713,122 649,569
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Bank premises and equipment, net 15,776 15,321
Other assets 38,224 38,503
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Total assets $ 1,122,605 $ 1,075,450
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LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 80,749 $ 83,267
Interest bearing 673,926 644,940
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Total deposits 754,675 728,207
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Short-term borrowings:
Federal funds purchased and securities sold under repurchase agreements 56,995 64,989
Federal Home Loan Bank term advances 58,136 22,450
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Total short-term borrowings 115,131 87,439
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Long-term borrowings 138,518 150,338
Accrued expenses and other liabilities 8,205 7,606
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Total liabilities 1,016,529 973,590
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Guaranteed preferred beneficial interests in junior subordinated debentures 29,012 28,986
Stockholders' Equity
Common stock, no par value, 12,000,000 shares authorized - 6,672,875 shares
issued at September 30, 2000 and 6,387,509 issued
at December 31, 1999, including shares in treasury 66,279 65,043
Accumulated comprehensive income, net of deferred income taxes (7,439) (7,654)
Retained earnings 21,614 26,241
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80,454 83,630
Treasury stock, at cost, 176,149 shares at September 30, 2000 and
398,662 shares at December 31, 1999 (3,390) (10,756)
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Total stockholders' equity 77,064 72,874
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Total liabilities, minority interests and stockholders' equity $ 1,122,605 $ 1,075,450
================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest income $ 21,799 $ 19,104 $ 62,835 $ 52,711
Interest expense 11,804 9,049 32,511 24,453
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Net interest income 9,995 10,055 30,324 28,258
Provision for loan losses 600 447 1,722 1,431
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Net interest income after
provision for loan losses 9,395 9,608 28,602 26,827
Gain (loss) on securities transactions 66 (115) 10 (114)
Gain (loss) on asset disposals 36 14 (109) 9
Non-interest income:
Service charges on deposits 835 690 2,380 1,993
Trust revenues 648 681 1,974 1,960
Insurance commissions 415 130 945 378
Electronic banking revenues 294 247 886 741
Other non-interest income 135 149 503 484
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Total non-interest income 2,327 1,897 6,688 5,556
Non-interest expense:
Salaries and benefits 3,393 2,981 9,987 8,762
Occupancy and equipment 963 868 2,957 2,697
Trust preferred 656 663 1,961 1,180
Amortization of intangibles 571 657 1,713 1,970
Other non-interest expense 2,167 2,147 6,479 6,017
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Total non-interest expense 7,750 7,316 23,097 20,626
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Income before income taxes 4,074 4,088 12,094 11,652
Income taxes 1,192 1,330 3,650 3,715
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Net income $ 2,882 $ 2,758 $ 8,444 $ 7,937
=====================================================================================================================
Basic earnings per share $ 0.44 $ 0.41 $ 1.29 $ 1.15
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Diluted earnings per share $ 0.44 $ 0.40 $ 1.28 $ 1.13
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Weighted average shares outstanding (basic) 6,518,187 6,763,341 6,532,434 6,872,698
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Weighted average shares outstanding (diluted) 6,583,143 6,977,334 6,616,546 7,056,986
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Cash dividends declared $ 916 $ 860 $ 2,764 $ 2,562
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Cash dividend per share $ 0.14 $ 0.13 $ 0.42 $ 0.37
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share amounts)
Accumulated
Other
Common Stock Retained Treasury Comprehensive
Shares Earnings Stock Income Total
Amount
<S> <C> <C> <C> <C> <C> <C>
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Balance, December 31, 1999 6,387,509 $ 65,043 $ 26,241 $ (10,756) $ (7,654) $ 72,874
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Comprehensive income:
Net income 8,444 8,444
Other comprehensive income,
net of tax:
Unrealized losses on available-
for-sale securities 215 215
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Comprehensive income 8,659
Exercise of common stock options
(reissued 39,057 treasury shares) (552) 941 389
Tax benefit from exercise of
stock options 57 57
Distribution of treasury shares from
deferred compensation plan 113 113
Cash dividends declared (2,764) (2,764)
10% stock dividend 269,597 1,468 (10,307) 8,839
Common stock issued under dividend
reinvestment plan 15,769 263 263
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Purchase of treasury stock, 176,149 shares (2,527) (2,527)
=======================================================================================================================
Balance, September 30, 2000 6,672,875 $ 66,279 $ 21,614 $ (3,390) $ (7,439) $ 77,064
=======================================================================================================================
Comprehensive Income:
Net unrealized depreciation arising during period, net of tax 222
Less: reclassification adjustment for losses included in net income, net 7
of tax
=======================================================================================================================
Net unrealized depreciation on investment securities 215
=======================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Nine Months Ended
September 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,444 $ 7,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,722 1,431
(Gain) loss on securities transactions (10) 114
Loss (gain) on asset disposals 109 (9)
Depreciation, amortization, and accretion 3,476 3,759
Increase in interest receivable (1,276) (2,050)
Increase (decrease) in interest payable 81 (14)
Deferred income tax expense (benefit) 268 (515)
Deferral of loan origination fees and costs (225) (173)
Other, net 239 (442)
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Net cash provided by operating activities 12,828 10,038
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Cash flows from investing activities:
Purchases of available-for-sale securities (23,940) (168,843)
Proceeds from sales of available-for-sale securities 3,220 19,523
Proceeds from maturities of available-for-sale securities 19,697 36,900
Net increase in loans (64,827) (63,282)
Expenditures for premises and equipment (2,099) (1,656)
Proceeds from sales of other real estate owned 50 251
Investment in limited partnership and tax credit funds (400) (1,200)
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Net cash used in investing activities (68,299) (178,307)
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Cash flows from financing activities:
Net decrease in non-interest bearing deposits (2,518) (3,108)
Net increase in interest-bearing deposits 28,996 3,033
Net increase in short-term borrowings 27,692 35,042
Proceeds from long-term borrowings -- 110,000
Payments on long-term borrowings (11,820) (320)
Cash dividends paid (2,430) (2,160)
Purchase of treasury stock (2,527) (7,643)
Proceeds from issuance of common stock 389 437
Proceeds from issuance of Capital Securities -- 30,000
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Net cash provided by financing activities 37,782 165,281
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Net decrease in cash and cash equivalents (17,689) (2,988)
Cash and cash equivalents at beginning of period 43,751 40,121
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Cash and cash equivalents at end of period $ 26,062 $ 37,133
==============================================================================================
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Basis of Presentation
The accounting and reporting policies of Peoples Bancorp Inc. and
Subsidiaries ("Peoples") conform to generally accepted accounting principles and
to general practices within the banking industry. Peoples considers all of its
principal activities to be financial services related. The preparation of the
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. The consolidated financial statements include
the accounts of Peoples' parent company and its wholly-owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
On January 13, 2000, Peoples declared a 10% stock dividend issued March
14, 2000, to common shareholders of record at February 22, 2000. On May 13,
1999, Peoples declared a 10% stock dividend issued June 15, 1999, to
shareholders of record at May 28, 1999. Accordingly, all per share data reflects
the dividends.
1. Mergers and Acquisitions
In October, Peoples and Lower Salem Commercial Bank of Lower Salem,
Ohio announced that Lower Salem Commercial Bank entered into a definitive
agreement with Peoples providing for the acquisition of Lower Salem Commercial
Bank by Peoples. In the transaction which will be accounted for under the
purchase method of accounting, Peoples proposes to use a combination of cash and
common shares as consideration for all issued and outstanding shares of Lower
Salem Commercial Bank common stock with the expected aggregate value not to
exceed $2.4 million. The acquisition is contingent on regulatory approval as
well as the approval of Lower Salem Commercial Bank's shareholders. Peoples
expects to complete the acquisition during the first quarter of 2001 and does
not expect the acquisition to be significant to its financial position, results
of operations, or cash flows. After the merger, Lower Salem Commercial Bank will
operate as a full-service banking office of Peoples Bank. At September 30, 2000,
Lower Salem Commercial Bank had total assets of $25 million and loans totaling
$18 million.
2. Accounting Pronouncements
In June 1998, Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), as amended by SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133
("SFAS No. 137"), which requires derivative instruments be carried at fair value
on the balance sheet. The statement continues to allow derivative instruments to
be used to hedge various risks and sets forth specific criteria to be used to
determine when hedge accounting can be used. The statement also provides for
offsetting changes in fair value or cash flows of both the derivative and the
hedged asset or liability to be recognized in earnings in the same period;
however, any changes in fair value or cash flow that represent the ineffective
portion of a hedge are required to be recognized in earnings and cannot be
deferred. For derivative instruments not accounted for as hedges, changes in
fair value are required to be recognized in earnings.
Peoples plans to adopt the provisions of this statement, as amended,
for its quarterly and annual reporting beginning January 1, 2001, the
statement's effective date. The impact of adopting the provisions of this
statement on Peoples' financial position, results of operations and cash flow
subsequent to the effective date is not currently estimable and will depend on
the financial position of Peoples as well as the nature and purpose of the
derivative instruments in use at that time.
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the unaudited
consolidated financial statements and the management discussion and analysis
that follows.
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
SIGNIFICANT RATIOS 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net Income to:
Average assets 1.04% 1.07% 1.04% 1.10%
Average stockholders' equity 15.33% 14.37% 15.38% 12.74%
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Cash earnings to: (a)
Average tangible assets (b) 1.21% 1.27% 1.21% 1.32%
Average tangible equity (b) 23.26% 22.84% 23.87% 20.04%
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Net interest margin (c) 3.99% 4.38% 4.14% 4.41%
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Efficiency ratio (d) 56.80% 54.03% 56.60% 53.61%
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Average stockholders' equity to average assets 6.81% 7.44% 6.78% 8.65%
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Loans net of unearned interest to deposits (end of period) 95.98% 88.39% 95.98% 88.39%
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Allowance for loan losses to loans net of
unearned interest (end of period) 1.55% 1.65% 1.55% 1.65%
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Capital ratios:
Tier I capital ratio 12.58% 13.15% 12.58% 13.15%
Risk-based capital ratio 14.03% 14.86% 14.03% 14.86%
Leverage ratio 8.54% 8.58% 8.54% 8.58%
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Cash dividends to net income 31.78% 31.18% 32.73% 32.28%
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PER SHARE DATA
Net income per share:
Basic $0.44 $0.41 $1.29 $ 1.15
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Diluted 0.44 0.40 1.28 1.13
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Cash basis earnings - diluted (a) 0.50 0.46 1.46 1.32
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Cash dividends per share 0.14 0.13 0.42 0.37
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Book value per share $11.86 $ 12.37 $11.86 $ 12.37
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<FN>
(a) Excludes after-tax impact of amortization of intangible assets acquired
through the use of purchase accounting for acquisitions.
(b) Cash earnings as a percentage of average total assets or average
stockholders' equity minus average intangibles.
(c) Calculated using fully tax equivalent net interest income as a percentage
of average earning assets.
(d) Non-interest expense (less intangible amortization and non-direct
operational expenses) as a percentage of fully tax equivalent net interest
income plus non-interest income. All non-recurring items are removed from
this calculation.
</FN>
</TABLE>
<PAGE>
Introduction
------------
The following discussion and analysis of the consolidated financial
statements of Peoples is presented to provide insight into management's
assessment of the financial results. Peoples' wholly-owned subsidiaries are
Peoples Bank, National Association ("Peoples Bank") and Northwest Territory Life
Insurance Company ("Northwest Territory"). Peoples Bank also operates Peoples
Insurance Agency, Inc. ("Peoples Insurance"), which offers a full set of life,
property, and casualty insurance products to customers in Peoples' markets.
Peoples Bank is a member of the Federal Reserve System and subject to
regulation, supervision, and examination by the Office of the Comptroller of the
Currency ("OCC"). Peoples Bank offers complete financial products and services
through 38 financial service locations and 25 ATM's in the states of Ohio, West
Virginia, and Kentucky. Peoples Bank's e-banking service is Peoples OnLine
Connection, and can be found on the Internet at www.peoplesbancorp.com. Peoples
Bank provides an array of financial products and services to 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. Peoples Insurance also offers investment and
insurance products. Peoples provides services through ordinary walk-in offices
and automobile drive-in facilities, automated teller machines, banking by phone,
and the Internet.
Peoples Bank also makes available other financial services via Peoples
Investments, which provides customer-tailored solutions for fiduciary needs,
investment alternatives, and asset management needs (securities are offered
exclusively through Raymond James Financial Services, member NASD/SIPC, an
independent broker/dealer located at Peoples Bank). Peoples common stock is
traded through the NASDAQ National Market System under the symbol PEBO.
The discussion and analysis should be read in conjunction with the
prior year-end audited consolidated financial statements and footnotes thereto
and the ratios, statistics, and discussions contained elsewhere in this Form
10-Q. References will be found in this Form 10-Q to transactions that have
impacted or will impact Peoples' results of operations.
On April 20, 1999, Peoples sold, through PEBO Capital Trust I (a
newly-formed subsidiary) $30.0 million of 8.62% Capital Securities ("Capital
Securities" or "Trust Preferred Securities"). The proceeds were used by the
Trust to purchase, from Peoples, Junior Subordinated Deferrable Interest
Debentures due May 1, 2029. In late April 1999, Peoples invested $10.0 million
in Peoples Bank. The remaining proceeds were used for general corporate
purposes, including the repurchase of a portion of Peoples' outstanding common
shares.
On April 22, 1999, Peoples announced intentions to repurchase 5% of
Peoples' outstanding common shares (or 346,500 shares) from time to time in open
market or privately negotiated transactions ("1999 Stock Repurchase Program").
The 1999 Stock Repurchase Program was completed at December 31, 1999.
On December 10, 1999, Peoples announced intentions to repurchase 2.5%
of Peoples' outstanding common shares (or 165,000 shares) from time to time in
open market or privately negotiated transactions ("2000 Stock Repurchase
Program"). At October 20, 2000, Peoples had purchased approximately 93,000
treasury shares under the 2000 Stock Repurchase Plan (56% complete).
The combination of the issuance of Capital Securities and the stock
repurchase programs has impacted and will continue to impact several key
performance indicators of Peoples' future financial results. The impact, where
significant, is discussed in the applicable sections of this Management's
Discussion and Analysis.
RESULTS OF OPERATIONS
Overview of the Income Statement
--------------------------------
Net income increased by $124,000 (or 4.5%), to $2,882,000 in the third
quarter of 2000 from $2,758,000 in the third quarter of 1999. Diluted cash
earnings per share for the quarter ended September 30, 2000, were $0.50, up
$0.04 (or 8.7%) from $0.46 in diluted cash earnings per share a year ago. Cash
earnings removes the after-tax impact of intangible amortization expense. On a
year-to-date basis, net income totaled $8,444,000 and diluted cash earnings were
$1.46, an increase of $507,000 (or 6.4%) and $0.14 (or 10.6%), respectively,
compared to the first nine months last year.
On January 13, 2000, Peoples declared a 10% stock dividend issued March
14, 2000, to common shareholders of record at February 22, 2000. On May 13,
1999, Peoples declared a 10% stock dividend issued June 15, 1999, to
shareholders of record at May 28, 1999. Accordingly, all per share data reflects
the dividends.
Return on tangible assets was 1.21% in the third quarter of 2000
compared to 1.27% for the same period a year ago and was 1.21% for the first
nine months of 2000 versus 1.32% in 1999. Return on tangible assets is defined
as cash earnings as a percentage of average total assets minus goodwill and core
deposit intangibles. Return on tangible equity improved to 23.26% in the third
quarter of 2000 compared to 22.84% in the third quarter of 1999 and on a
year-to-date basis improved to 23.87% compared to 20.04% a year ago. Return on
tangible equity is defined as cash earnings as a percentage of average total
stockholders' equity minus goodwill and core deposit intangibles.
<PAGE>
Diluted earnings per share reached $1.28 for the first nine months of
2000, up $0.15 (or 13.3%) compared to the previous year and for the three months
ended September 30, totaled $0.44 in 2000 versus $0.40 in 1999, an increase of
$0.04 (or 10.8%). Peoples' core earnings increased due to strong net interest
income growth and additional revenue streams from market expansion and insurance
revenues. Return on average equity reached 15.38% for the first nine months of
2000 compared to 12.74% for the same period a year earlier. Return on average
assets was 1.04% for the nine months ended September 30, 2000, compared to 1.10%
a year earlier, due to significant asset growth in mid-1999.
Net interest income for the third quarter of 2000 decreased $60,000 (or
0.6%) to $9,995,000, due primarily to competitive pricing of loans and deposits.
The provision for loan losses for the third quarter totaled $600,000 in 2000
compared to $447,000 in 1999. Bolstered by growth in investment and insurance
commissions, non-interest income increased $430,000 (or 22.7%) to $2,327,000.
Non-interest expense increased $434,000 (or 5.9%) to $7,750,000 due to a
combination of costs related to market expansion and acquisition.
Peoples has grown through acquisitions accounted for as purchase
transactions which has increased the amortization expense related to intangibles
and affected earnings per share as well as other performance ratios. Because of
the impact of purchase accounting and the related intangible amortization
expense on Peoples' results of operation, Management uses "cash earnings", which
removes the after-tax impact of intangible amortization expense, to evaluate the
impact of acquisitions on profitability and Peoples' return on its investment.
The discussion of cash earnings is also included in financial reporting
to facilitate the comparison of Peoples' results of operations to competitors
making acquisitions using pooling of interests accounting. Return on tangible
assets and return on tangible equity removes the after-tax impact of intangible
amortization expense and the balance sheet impact of average intangibles. In the
third quarter of 2000, intangible amortization expense totaled $571,000
($371,000 after taxes) compared to $657,000 ($427,000 after taxes) for the same
period a year earlier. Due to amortization, average balance sheet intangibles
decreased to $18.7 million in the third quarter of 2000 compared to $20.5
million in the third quarter of 1999.
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, borrowed funds such as Federal Home Loan Bank
("FHLB") borrowings and other wholesale funding sources such as national market
repurchase agreements. Net interest income remains the primary source of revenue
for Peoples. Changes in market interest rates, as well as adjustments in the mix
of interest-earning assets and interest-bearing liabilities, impact net interest
income.
During the second quarter of 1999, Peoples initiated an asset growth
strategy to offset the costs to service the Trust Preferred Securities, thereby
leveraging Peoples' increased regulatory capital levels ("Leverage Strategy").
The Leverage Strategy increased Peoples' earnings asset base approximately $150
million and was funded primarily by FHLB borrowings and other wholesale funding
sources. The Leverage Strategy was implemented throughout the second quarter of
1999 and was completed on June 30, 1999.
The Leverage Strategy and continued strong internal loan growth
generated additional net interest income through the first nine months of 2000.
Net interest income grew to $30,324,000 for the nine months ended September 30,
2000, compared to $28,258,000 for the same period a year earlier, an increase of
$2,066,000 (or 7.3%). For the third quarter of 2000, net interest income totaled
$9,995,000, a decrease of $60,000 (or 0.6%) compared to the third quarter last
year as interest expense increased $2,755,000 (or 30.5%) versus the increase in
interest income of $2,695,000 (or 14.1%).
Included in year-to-date interest income is $1,432,000 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 and net interest margin on a fully-tax equivalent
("FTE") basis. In the third quarter of 2000, net interest margin was 3.99%
compared to 1999's third quarter ratio of 4.38% while year-to-date was 4.14%
versus 4.41% in 1999. 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 Peoples' balance sheet.
The FTE yield on earning assets was 8.56% in the third quarter of 2000
and 8.47% year-to-date, compared to 8.15% and 8.11% for the same periods a year
earlier. The ratio of interest expense to earning assets increased 79 basis
points to 4.57% for the three months ended September 30, 2000 while on a
year-to-date basis increased 63 basis points to 4.33% in 2000. These increases
are primarily the result of the recent increases in short-term interest rates by
the Federal Reserve, which significantly increased Peoples' cost of funding
earning assets.
In addition to interest rate increases, net interest margin also faced
downward pressure due to competitive pricing of loans and deposits in Peoples'
markets. Loan growth continues to be strong and management anticipates that loan
activity will remain strong in the near term and enable Peoples to continue
expansion of its earning asset base in these higher-yield assets. However,
management believes that any enhancement to net interest margin through loan
growth will be offset by increased interest costs as result of the competitive
pressure for deposits and recent rises in interest rates.
<PAGE>
Average total earning assets reached $1.0 billion in the third quarter
of 2000, a $76.6 million (or 8.0%) increase over 1999's third quarter. For the
first nine months of 2000, average earning assets totaled $1.0 billion, an
increase of $118.3 million (or 13.4%) compared to same period a year ago.
Average loans were $687.0 million for the nine months ended September 30, 2000,
in comparison to $590.7 million during the same period in 1999 and comprise the
largest earning asset component on Peoples' balance sheet. Due primarily to
Peoples' Leverage Strategy acquisitions, Peoples' average balances of investment
securities increased $32.4 million from $292.4 million in 1999 to $324.8 million
in 2000.
Deposit costs increased 85 basis points to 4.92% in the third quarter
of 2000 and through the first nine months of 2000 increased 54 basis points to
4.61%. The increased deposit costs in 2000 resulted from the large dollar volume
of Peoples' interest-bearing liabilities in customer funding sources such as
certificates of deposit, as well as higher yielding money market accounts.
Management expects deposit pricing to be increasingly competitive and will
continue to focus its efforts to increase balances in non-interest bearing
demand deposits, which grew, on average, $3.6 million to $81.1 million in
average balances for the nine months ended September 30, 2000.
In addition to core deposit growth, Peoples continued to use a
combination of short-term and long-term borrowings as funding sources to fuel
loan growth in the third quarter of 2000. The cost of borrowed funds increased
to 5.52% for the first nine months of 2000 in comparison to 4.76% a year ago.
For the third quarter of 2000, the cost of borrowed funds cost was up 83 basis
points to 5.76% in 2000 versus 4.93% in 1999. Costs of borrowed funds have
increased due to recent rises in interest rates as well as repricing of certain
Peoples' long-term FHLB borrowings that are fixed rate borrowings for a
specified period of time, and can reprice to current market rates at the
discretion of the FHLB. Rather than allow certain borrowings to reprice to a
variable rate advance, Peoples prepaid $11.5 million of these long-term FHLB
advances in June 2000. Peoples used short-term repo-based FHLB advances to
replace the $11.5 million of advances and to optimize short-term borrowing
costs.
Peoples' cash management services (offered to a variety of business
customers) have provided short-term funding, specifically from overnight
repurchase agreements. In the third quarter of 2000, Peoples' average balances
of these overnight repurchase agreements (excluding balances of national
repurchase agreements available through wholesale funding sources) totaled $32.3
million, an increase of $1.5 million from 1999's average balance of $30.8
million. On a year-to-date basis, average balances increased $0.8 million to
$30.8 million at September 30, 2000. The average rate paid in the third quarter
of 2000 on overnight repurchase agreements totaled 5.62%, up 133 basis points
from the prior year's third quarter average rate of 4.28%. For the nine months
ended September 30, 2000, the average rate paid on overnight repurchase
agreements was 5.27% versus 4.17% for the same period in 1999, an increase of
110 basis points.
In late 1999 and continuing through the third quarter of 2000, Peoples
accessed national market repurchase agreements to diversify short-term funding
sources. During the third quarter of 2000, average national market repurchase
agreements totaled $25.8 million at an average rate of 6.72% down from the third
quarter of 1999's average balance of $31.9 million at an average rate of 5.23%.
Peoples also continued to use short-term FHLB advances as a source to
fund its operations and investments during the third quarter of 2000. Average
short-term FHLB balances increased from $6.7 million in the third quarter of
1999 to $59.4 million for the three months ended September 30, 2000 and for the
year-to-date increased $31.5 million in 2000 from 1999's average balances of
$3.2 million. As previously stated, a portion of this increase is the result of
prepaying $11.5 million long-term FHLB advances using short-term, repo-based
FHLB advances. Interest costs on these short-term borrowings grew $926,000
(rate: 6.82%) compared to $92,000 (rate: 5.46%) in the third quarter of 1999
while on a year-to-date basis, interest costs totaled $1.7 million (rate: 6.64%)
in 2000, an increase of $1.6 million from the first nine months of 1999's total
of $128,000 (rate: 5.30%). Management will continue to use short-term FHLB
borrowings, as appropriate, for a funding source.
Long-term borrowing costs, which represent the largest average volume
of borrowed fund costs, also increased compared to 1999. The rate paid on
average long-term borrowings totaled 5.16% for the nine months ended September
30, 2000, compared to 4.86% for the same nine months in 1999. The majority of
Peoples' long-term borrowings are fixed rate FHLB borrowings. Management plans
to maintain access to long-term FHLB borrowings as an appropriate funding
source.
Any additional interest rate increases would be expected to cause net
interest margin to compress in the short-term. Management expects interest rate
pressures on funding sources will continue to challenge Peoples' net interest
margin in 2000 as financial institutions and other competitors continue to
search for new methods and products to satisfy increasing customer demand for
higher yields on their invested funds. Management will continue to monitor the
effects of net interest margin on the performance of Peoples.
<PAGE>
Provision for Loan Losses
-------------------------
In the third quarter of 2000, Peoples recorded a provision for loan
losses of $600,000, compared to $447,000 for the same period a year earlier. For
the nine months ended September 30, provision for loan losses amounted to
$1,722,000 in 2000, an increase of $291,000 over 1999's provision of $1,431,000.
The provision is based upon management's continuing evaluation of the adequacy
of the allowance for loan losses and is reflective of the volume concentrations,
quality of the portfolio, and overall management of the inherit credit risk.
Management anticipates future provision expense will remain stable for
the remainder of 2000 based on current loan volumes and other factors affecting
expected future loan loss provision, such as loan delinquencies, portfolio risk,
overall loan growth, and general economic conditions in Peoples' markets.
Further information can be found later in this discussion under "Allowance for
Loan Losses."
Gain (Loss) on Securities Transactions
--------------------------------------
Peoples reported net gains on securities transactions of $66,000 for
the third quarter 2000 compared to net losses of $115,000 recorded in 1999. On a
year-to-date basis, Peoples recorded net gains on securities transactions of
$10,000 in 2000 compared to net losses of $114,000 the previous year. The net
gains during the third quarter of 2000 were the result of normal portfolio
management while the net losses in 1999 were due to Peoples repositioning its
investment portfolio to improve pledging capabilities.
(Loss) Gain on Asset Disposals
------------------------------
Losses on asset disposals, net of disposal gains, totaled $109,000 for
first nine months of 2000 compared to net gains of $9,000 in the same period
last year. For the three months ended September 30, 2000, net gains on asset
disposals were $36,000 versus $14,000 in 1999. During the second quarter of
2000, Peoples invested in a larger central processing unit causing the increased
net losses on asset disposals. Management believes the investment will enhance
Peoples' processing capabilities and better support the integrated sales
processes and improve client service though speedier delivery of products and
services.
Non-Interest Income
-------------------
Peoples' non-interest income is generated from four primary sources:
cost-recovery fees related to deposit accounts, income derived from fiduciary
activities, investment and insurance commissions, and electronic banking
revenues. Non-interest income from operations totaled $2,327,000 for the third
quarter of 2000 and $6,688,000 for the first nine months, increases of $430,000
(or 22.7%) and $1,132,000 (or 20.4%), respectively, compared to the same periods
in 1999. All non-interest income categories had strong growth compared to last
year, reflecting management's focus on top-line revenue enhancement.
Deposit account service charge income increased $387,000 (or 19.4%) to
$2,380,000 for the nine months ended September 30, 2000. For the third quarter,
service charge income increased $145,000 (or 21.0%) in 2000 from 1999's total of
$690,000. Most of the increases are attributable to volume increases of standard
fees such as overdraft and non-sufficient fund fees, as well as growth in
Peoples' deposit service income generated from business customers. Peoples' fee
income generated from deposits is based on recovery of costs associated with
services provided.
Income from fiduciary activities totaled $648,000 in the third quarter
of 2000, down $33,000 (or 4.8%) and $1,974,000 for the year-to-date, up $14,000
(or 0.7%) over the same periods a year earlier. The fee structure for investment
and fiduciary activities is based primarily on the market value of assets being
managed, which totaled approximately $508 million at September 30, 2000,
compared to $560 million at year-end 1999. This decrease is due mainly to
decreases in relative market values of many equity investments. Peoples
continues to focus on strengthening its position in its core markets in order to
increase the number of clients served. Management believes fiduciary revenues
will continue to be significant contributors to Peoples' non-interest income in
the future.
In addition to traditional sources of non-interest income, Peoples also
offers a complete line of insurance and investment products through Peoples
Insurance and Peoples Investments. Peoples' product offerings include credit
life and disability insurance, as well as life and property insurance to
consumers in Ohio and West Virginia. For the quarter ended September 30, 2000,
commissions on insurance and securities sales generated revenues of $415,000, a
$285,000 (or 219%) increase over the same period a year earlier. On a
year-to-date basis through September 30, 2000, insurance and securities sales
generated revenues of $945,000, up $567,000 (or 150%) from 1999's total of
$378,000 for the first nine months. Peoples' life insurance and annuity sales
accounted for a majority of the revenue growth with property and casualty
insurance commission revenues also increasing during the third quarter of 2000
as Peoples Insurance client service teams continue to expand the number of
clients served.
Peoples Investments offers clients asset management services, corporate
bonds, municipal bonds, portfolio evaluation, asset allocation, tax shelters,
unit trusts, common/preferred stocks, government securities, mutual funds,
retirement planning, estate planning, tax-exempt securities, annuities, and
financial planning services. Management believes these services are integral to
Peoples' relationship and needs-based sales philosophy. Securities are offered
exclusively through Raymond James Financial Services, Member NASD/SIPC and an
independent broker/dealer, located at many of Peoples' sales offices. Insurance
products are underwritten by various insurance companies and are made available
through licensed insurance agency affiliates of Peoples.
<PAGE>
Electronic banking, including ATM and debit card services, direct
deposit services, and Internet banking, is one of the many delivery channels
offered by Peoples to provide products and services to customers. For the three
months ended September 30, 2000, electronic banking revenues totaled $294,000,
an increase of $47,000 (or 19.0%) compared to the same period last year. On a
year-to-date basis, electronic banking income increased $145,000 (or 19.6%) in
2000 compared to the same nine months in 1999. These increases are due primarily
to growth in the number of debit card users as well as corresponding volume
increases in debit card usage. Management will continue to focus on electronic
banking as a source of revenue as the financial services industry develops
additional e-commerce capabilities.
Management believes the recent growth in non-interest income reflects
the success of Peoples' representatives in professionally and quickly serving
client needs. Management expects non-interest income will increase modestly in
fourth quarter of 2000 and continue into the first quarter of 2001 due to
sustained insurance and investment revenue growth. Other traditional and
non-traditional financial service products and delivery channels are analyzed
regularly for potential inclusion in Peoples' product mix as management
continues to explore new methods of enhancing non-interest income.
Non-Interest Expense
--------------------
For the nine months ended September 30, 2000, total non-interest
expense reached $23,097,000, up $2,471,000 (or 12.0%) compared to 1999.
Non-interest expense for the third quarter of 2000 totaled $7,750,000 versus
$7,316,000 in 1999, an increase of $434,000 (or 5.9%). Peoples continued its
investment in enhanced client service initiatives in the third quarter of 2000,
which contributed to increased non-interest expense. One of Peoples' strategies
is to make financial services more convenient, flexible, and speedy for clients,
including Internet banking and other means of electronic banking. Management
believes current investments in and expansion of client service efforts helps
Peoples accomplish that goal. Recent increases in non-interest expense are also
due to commission expense related to investment and insurance sales.
When comparing year-to-date non-interest expense information to 1999's
results, a significant portion of the increase is due to the costs associated
with the Trust Preferred Securities (combination of debt service expenses and
amortization of associated capitalized issuance costs) and the timing of its
issuance in 1999. Costs relating to the Trust Preferred Securities through nine
months totaled $1,961,000 in 2000 versus $1,180,000 in 1999, an increase of
$781,000 (or 66.2%). For the third quarter of 2000, total costs related to the
Trust Preferred Securities were $656,000 compared to $663,000 in 1999, a
decrease of $7,000 (or 1.1%).
Salaries and benefits expense totaled $3,393,000 for the three months
ended September 30, 2000 and $9,987,000 for the first nine months 2000,
increases of $412,000 (or 13.8%) and $1,225,000 (14.0%), respectively, compared
to a year ago. Commissions paid to insurance and investment associates as well
as adding to the number of Peoples' client service associates contributed to the
increased expense. At September 30, 2000, Peoples had 383 full-time equivalent
employees versus 377 at September 30, 1999. Peoples continues to expand both
inside and outside its geographic markets, as reflected in acquisitions and new
financial service center openings, and add client service associates for
investment and insurance services. Management will continue to leverage its
resources while retaining key associates, effectively optimizing customer
service and return to shareholders.
Acquisitions and investments designed to enhance client service
processes also impacted net occupancy and furniture and equipment expenses, in
particular depreciation expense. For the three months ended September 30, 2000,
these expenses totaled $963,000, an increase of $95,000 (or 10.9%) compared to
the same period a year earlier and year-to-date 2000 expenses totaled
$2,957,000, up $260,000 (or 9.6%) from $2,697,000 a year ago. These increases
can be attributed primarily to the depreciation of assets acquired through
recent market expansion and construction projects at several of Peoples Bank's
financial service centers (specifically three Wal-Mart Financial Service Centers
opened in 1999 and early 2000, as well as other banking center refurbishments),
and increased depreciation of additional expenditures on technology. Peoples
increased investment in technology and other customer-service enhancements,
designed to add convenience and speed to product delivery, will also impact
depreciation expense in the future.
Maintaining acceptable levels of non-interest expense and operating
efficiency are key performance indicators for Peoples in its strategic
initiatives. The financial services industry uses the efficiency ratio (total
non-interest expense less amortization of intangibles and non-recurring items as
a percentage of the aggregate of fully-tax equivalent net interest income and
non-interest income) as an important indicator of performance. Gains and losses
on sales of investment securities, as well as other nonrecurring charges, are
not included in the calculation of Peoples' efficiency ratio. In 2000, Peoples
reported an efficiency ratio of 56.80% for the third quarter and 56.60% for the
first nine months compared to 54.03% and 53.61% for the same periods in 1999.
Peoples experienced a period of transition in 1999 due to the Trust
Preferred Securities issuance and the implementation of the Leverage Strategy.
As anticipated, these events coupled with increased operational costs,
negatively impacted Peoples' efficiency ratio. Management believes the cost
associated with the 8.62%, 30-year fixed rate Trust Preferred Securities is
attractive low cost funding, considering the current interest rate environment
and provides Peoples with strong long-term funding. Management anticipates the
efficiency ratio will stabilize near 57% in the fourth quarter of 2000 as
Peoples leverages non-interest expense associated with market expansion,
continues to shift earning assets to higher-yielding assets such as loans, and
refines its sales processes to increase customer satisfaction and revenues.
<PAGE>
Return on Assets
----------------
After removing the impact of intangibles and corresponding
amortization, return on tangible assets was 1.21% in the third quarter of 2000
versus 1.27% in 1999 and through nine months was 1.21% in 2000 versus 1.32% in
the previous year. Return on average assets ("ROA") was 1.04% for the quarter
ended September 30, 2000, compared to 1.07% in 1999's third quarter. On a
year-to-date basis, ROA was 1.04% in 2000 compared to 1.10% a year ago.
The Leverage Strategy implemented in the third quarter of 1999
significantly increased the Peoples' asset base and caused a reduction in
Peoples' tangible return on assets and ROA. Additional net interest income from
the Leverage Strategy was offset primarily by the Trust Preferred Securities
costs, resulting in lower ROA levels than previous periods. Earnings through
nine months in 2000 were also impacted by net losses on sales of investment
securities and disposals of capital assets that totaled $99,000 ($64,000 after
taxes). These losses also contributed to the reduction of ROA in the third
quarter 2000.
Management anticipates that ROA will remain at third quarter levels in
the fourth quarter of 2000. Peoples will be challenged to employ its asset base
in a manner that will produce higher returns on assets. Management believes that
recent changes to Peoples' balance sheet, particularly through the Trust
Preferred Securities issuance and Leverage Strategy, will direct Peoples'
strategic focus to ratios such as return on tangible equity, return on equity,
cash earnings per share, and earnings per share.
Return on Equity
----------------
After removing the impact of intangibles and corresponding
amortization, return on tangible equity increased to 23.26% in the third quarter
of 2000 compared to 22.84% in the third quarter of 1999. For the nine months
ended September 30, 2000, return on tangible equity was 23.87% compared to
20.04% the previous year. Peoples' return on average stockholders' equity
("ROE") was 15.33% for the three months ended September 30, 2000 and 15.38% for
the first nine months of 2000 compared to 14.37% and 12.74% for the same periods
a year earlier.
Using a portion of the proceeds from the Trust Preferred Securities
issuance to implement Peoples' 1999 Stock Repurchase Program and continuing in
early 2000 with the 2000 Stock Repurchase Plan, ROE was favorably impacted
through the reduction in the number of outstanding common shares and the
corresponding reduction in equity through repurchases. Similar enhancements to
ROE will depend on the timing of common share repurchases and the availability
of Peoples' common shares. Management views the issuance of the Trust Preferred
Securities as an opportunity to leverage Peoples' equity position and expects
continued ROE improvement into the latter part of 2000 and into 2001.
Peoples and its banking subsidiary, Peoples Bank, are considered
well-capitalized under regulatory and industry standards of risk-based capital
(as detailed in the Capital/Stockholders' Equity section of this Form 10-Q).
Such ratios were enhanced through the Trust Preferred Securities issuance in
mid-1999.
Income Tax Expense
------------------
Peoples' effective tax rate was 29.3% in the third quarter of 2000
compared to 32.5% for the same period last year. For the nine months ended
September 30, Peoples' effective tax rate was 30.2% compared to 31.9% in 1999.
Peoples has implemented tax reduction strategies, including investments in low
income housing and historic tax credits to reduce tax burden and lower the
effective tax rate reflected in the third quarter of 2000 and going forward. At
September 30, 2000, Peoples' cumulative investment in these types of projects
approximated $3.5 million. Peoples plans to make additional investments in
various tax credit pools over the next several years with the total investment
not expected to exceed $7 million. These investments are expected to benefit
Peoples' future results of operations by reducing Peoples' effective tax rate.
Management continues to explore methods in which to decrease Peoples' tax
burden.
FINANCIAL CONDITION
Overview of Balance Sheet
-------------------------
Total assets were $1.1 billion at September 30, 2000, an increase of
$47.2 million compared to year-end 1999. Loan volumes increased $64.5 million
(or 9.8%) to $724.3 million, with most of the growth occurring in real estate
and commercial loans.
Total liabilities increased $42.9 million (or 4.4%) since year-end 1999
to $1.0 billion at September 30, 2000. Due to growth of Peoples' interest
bearing deposits, particularly money market accounts, Peoples' total deposits
increased $26.5 million (or 3.6%) to $754.7 million at September 30, 2000.
Peoples' total short-term borrowings increased $27.7 million (or 31.7%) to
$115.1 million at September 30, 2000.
The April 1999 issuance of the Trust Preferred Securities is presented
as "Guaranteed Preferred Beneficial Interest in Junior Subordinated Debentures".
Peoples has classified the Trust Preferred Securities as "mezzanine" equity on
its balance sheet, net of amortized issuance costs of approximately $1.0
million.
Stockholders' equity totaled $77.1 million at September 30, 2000, an
increase of $4.2 million (or 5.7%) since December 31, 1999. At December 31,
1999, Peoples had $7.7 million of net unrealized losses on available for sale
securities compared to $7.4 million of unrealized losses on available-for-sale
securities at September 30, 2000. At year-end 1999, Peoples had a treasury share
balance of $10.8 million, compared to $3.4 million at September 30, 2000. This
reduction is due to Peoples' reissuance of treasury shares in connection with a
10% stock dividend issued to shareholders in the first quarter of 2000. Peoples
will continue to purchase treasury shares through the 2000 Stock Repurchase
Plan, as appropriate, and stock benefit plans, as well as the deferred
compensation plan that permits Peoples' directors to acquire common shares
through deferral of director fees.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents totaled $26.1 million at September 30, 2000,
down $17.7 million from year-end 1999. At September 30, 2000, the Company's
balance of cash and due from banks dropped $16.8 million to $25.9 million. At
year-end 1999, Peoples retained additional cash reserves for potential customer
withdrawals related to the Y2K date change; however, management reduced cash
balances to normal operating levels in January 2000 directing these funds into
higher-yielding assets such as loans to meet loan demand in its markets.
Total cash and cash equivalents fluctuate on a daily basis due to
transactions in process and other liquidity needs. Management believes 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 adequately serves
Peoples' liquidity needs and should enable Peoples to meet cash obligations and
off-balance sheet commitments as they come due. The level of cash and cash
equivalents is continually monitored by management to ensure that all excess
funds are shifted to higher-yielding assets while not compromising liquidity
needs.
Investment Securities
---------------------
Investment securities totaled $329.4 million at September 30, 2000, up
$1.1 million (or 0.3%) compared to year-end 1999 due to modest increases in
market value of the investment portfolio. All of Peoples' investment securities
are classified as available-for-sale, which provides flexibility for Peoples in
terms of selling securities as well as interest rate risk management
opportunities. At September 30, 2000, the amortized cost of Peoples' investment
securities totaled $340.9 million, resulting in unrealized depreciation in the
investment portfolio of $11.5 million and a corresponding decrease in Peoples'
equity of $7.4 million. The difference in amortized cost and market value can be
attributed to recent rises in interest rates.
At September 30, 2000, investments in US Treasury securities and
obligations of US government agencies and corporations totaled $103.7 million,
up $3.0 million (or 3.0%) since year-end 1999. In the third quarter of 2000,
investments in mortgage-backed securities decreased $2.6 million (or 1.7%) to
$144.9 million at September 30, 2000, due primarily to maturities and
prepayments. Peoples' balances in investment obligations of states and political
subdivisions totaled $37.8 million at September 30, 2000, a nine-month increase
of $2.6 million (or 7.4%). Other investments at September 30, 2000, totaled
$43.0 million, a decrease of $2.0 million (or 4.4%) since year-end 1999.
Management may reduce investment securities in future periods as a
mechanism to fund higher-yielding investments such as loans. 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
-----
Peoples' 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. Gross loans totaled $724.3 million at
September 30, 2000, an increase of $22.9 million (or 3.3%) since June 30, 2000
and $64.5 million (or 9.8%) since year-end 1999. Retail and commercial loan
growth occurred primarily in Peoples' existing markets, while some commercial
lending activity continues with selected customers outside Peoples' primary
markets. The following table details total outstanding loans:
<TABLE>
<CAPTION>
(dollars in thousands) September 30, June 30, March 31, December 31,
2000 2000 2000 1999
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 290,308 $ 283,157 $ 271,077 $ 272,219
Real estate, construction 27,344 20,243 18,419 14,067
Real estate, mortgage 280,206 271,274 259,928 252,427
Consumer 126,470 126,739 123,312 121,120
------------------------------------------------------------------------------------------------------------------
Total loans $ 724,328 $ 701,413 $ 672,736 $ 659,833
==================================================================================================================
</TABLE>
Peoples experienced loan growth in the third quarter of 2000 primarily
in real estate loans, which grew $16.0 million (or 5.5%) to $307.6 million
(including construction loans) at September 30, 2000. Real estate loans
(including construction loans) account for the largest portion of the loan
portfolio, comprising 42.5% of Peoples' total loan portfolio, and a majority of
the loan growth, increasing $41.1 million (or 15.4%) since December 31, 1999.
Included in real estate loans are home equity credit lines ("Equilines"), which
totaled $25.5 million at September 30, 2000, compared to $23.9 million at June
30, 2000. Management believes the Equiline loans are a competitive product with
an acceptable return on investment after risk considerations. Residential real
estate loans continue to represent a major focus of Peoples' lending due to the
lower risk factors associated with this type of loan, and the opportunity to
provide additional products and services to these consumers, at reasonable
yields to Peoples.
At September 30, 2000, commercial, financial, and agricultural loans
("commercial loans") increased $7.2 million (or 2.5%) from June 30, 2000, to
$290.3 million, or 40.1% of Peoples' total loan portfolio. Commercial loan
activity continued to be strong in the third quarter of 2000. Economic
conditions in Peoples' markets have provided quality credit opportunities,
particularly in southeastern and central Ohio. Management will continue to focus
on the enhancement and growth of the commercial loan portfolio while maintaining
appropriate underwriting standards and risk/price balance. Management expects
commercial loan demand to remain strong in the fourth quarter of 2000. In
addition to the anticipated in-market penetration, Peoples will continue to
selectively lend to customers outside its primary markets.
Consumer lending continues to be a vital part of Peoples' core lending.
At September 30, 2000, consumer loan balances (excluding credit card loans)
decreased $0.3 million (or 0.3%) since June 30, 2000 to $120.1 million. The
majority of Peoples' consumer loans are in the indirect lending area, where
volume increases were experienced, along with reduced indirect loan payoffs. At
September 30, 2000, Peoples had indirect loan balances of $74.8 million,
compared to $74.6 million at June 30, 2000.
Management is pleased with the performance and quality of Peoples'
consumer loan portfolio, which can be attributed to a commitment of high
customer service levels and the continued demand for indirect loans in the
markets served by Peoples. Lenders use a tiered pricing system that enables
Peoples to apply interest rates based on the corresponding risk associated with
the indirect loan. Although consumer debt delinquency has increased in the
financial services industry (due mostly to credit card debt), management's
actions to reinforce Peoples' pricing system and underwriting criteria have
tempered indirect lending delinquencies. Management plans to continue its focus
on the use of this tiered pricing system in the future, combined with controlled
growth of the indirect lending portfolio if economic conditions remain strong.
Peoples' credit card balances at September 30, 2000, totaled $6.4
million, unchanged since June 30, 2000. While management continues to explore
new opportunities to serve credit card customers, those plans do not include the
assumption of additional unnecessary risk merely for the sake of growth.
<PAGE>
Loan Concentration
------------------
At September 30, 2000, real estate lending (including both mortgage and
construction loans) totaled $307.6 million (or 42.5%) of total loans. Peoples'
lending is primarily focused in the Mid-Ohio Valley as well as central Ohio
through Peoples' loan production offices in Fairfield and Licking Counties.
Peoples' loan mix of retail lending, which includes single-family residential
mortgages and other consumer loan products, is periodically reviewed for
appropriate changes in mix.
At September 30, 2000, commercial loans totaled $290.3 million (or
40.1%) of gross loans. Peoples' largest concentration of commercial loans is in
credits to assisted living facilities/nursing homes, which comprised
approximately 11.0% of Peoples' outstanding commercial loans at September 30,
2000. These lending opportunities have arisen due to recent industry growth in
certain markets or contiguous areas. Management believes Peoples' assisted
living facilities/nursing homes loans do not present more than the normal amount
of risk assumed in other types of lending. In addition to assisted living
facilities/nursing homes, another of Peoples' larger groups of commercial loans
consists of lodging and lodging related companies, which accounted for 10.8% of
commercial loans at September 30, 2000.
Allowance for Loan Losses
-------------------------
The allowance for loan losses as a percentage of loans was 1.55% at the
end of the third quarter of 2000 compared to 1.56% at year-end 1999. The balance
in the allowance for loan losses increased $942,000, due primarily to loan
growth.
The following table presents changes in the Company's allowance for
loan losses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 10,913 $ 10,120 $ 10,264 $ 9,509
Chargeoffs (422) (274) (1,063) (848)
Recoveries 115 99 283 300
----------------------------------------------------------------------------------------
Net chargeoffs (307) (175) (780) (548)
Provision for loan losses 600 447 1,722 1,431
----------------------------------------------------------------------------------------
Balance, end of period $ 11,206 $ 10,392 $ 11,206 $ 10,392
========================================================================================
</TABLE>
Management expects modest loan growth in the fourth quarter of 2000 and
believes that future provision expense will remain stable in the fourth quarter
of 2000 and modestly increase in 2001. Such increases will be dependent on loan
delinquencies, portfolio risk, overall loan growth, general economic conditions
in Peoples' markets and other factors management considers in evaluating the
adequacy of the allowance.
Peoples' consumer loan net chargeoffs continue to comprise the largest
portion of total net chargeoffs. For the nine months ended September 30, 2000,
consumer loan net chargeoffs totaled $589,000, an increase of $100,000 (or
20.4%) in comparison to the same period a year ago. This increase is due
primarily to increased direct personal loan chargeoffs. Commercial loan net
chargeoffs totaled $119,000 for the first nine months of 2000 compared to $4,000
a year earlier. Peoples had insignificant real estate loan chargeoffs in the
third quarter of 2000, demonstrating the quality of the portfolio.
Nonperforming assets (which include loans 90 days or more past due,
those loans classified as nonaccrual loans, renegotiated loans, and other real
estate owned) as a percentage of outstanding assets were 0.31% at September 30,
2000, compared to 0.21% at year-end 1999. Nonaccrual loans and renegotiated
loans totaled $1,946,000 and $945,000 at September 30, 2000, compared to
$1,109,000 and $747,000, respectively, at year-end 1999. Other real estate owned
totaled $283,000 at September 30, 2000, compared to $207,000 at year-end 1999.
Nonaccrual loan balances increased primarily due to the adjustment of an
automobile dealer floor plan loan relationship to nonaccrual status. Despite
this increase, management believes Peoples' allowance for loan losses as a
percentage of nonperforming loans remains better than peer groups and reflects
the overall quality of Peoples' loan portfolio.
Management also evaluates Peoples' loan portfolio quality by monitoring
the amount of loans past due 90 days or more. At September 30, 2000, loans past
due 90 days or more totaled $610,000, compared to $249,000 at year-end 1999.
Management believes the balances of loans 90 days or more past due are
reasonable and acceptable.
<PAGE>
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. A loan is considered impaired when, based on current
information and events, it is probable that Peoples 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 September 30, 2000, the recorded investment in loans that were
considered to be impaired under Statement of Financial Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended
by SFAS No. 118, was $10.4 million of which $9.1 million were accruing interest,
and $1.3 million were nonaccrual loans. Included in this amount are $8.5 million
of impaired loans for which the related allowance for loan losses is $2.0
million. The remaining impaired loan balances of $1.8 million do not have a
related allocation of the allowance for loan losses as a result of write-downs,
being well-secured, or possessing characteristics demonstrating ability to repay
the loan. The average recorded investment in impaired loans during the nine
months ended September 30, 2000, was approximately $8.7 million. For the nine
months ended September 30, 2000, Peoples recognized interest income on impaired
loans of $746,000, or 1.2% of Peoples' total interest income in the same period.
Funding Sources
---------------
Peoples considers a number of alternatives, including but not limited
to deposits, short-term borrowings, and long-term borrowings when evaluating
funding sources. Traditional deposits continue to be the most significant source
of funds for Peoples, totaling $754.7 million, or 75.1% of Peoples' funding
sources at September 30, 2000.
Non-interest bearing deposits are a core funding source for Peoples. At
September 30, 2000, non-interest bearing balances totaled $80.7 million, a $2.5
million (or 3.0%) decrease compared to year-end 1999. Management intends to
continue to focus on maintaining its base of lower-costing funding sources,
through product offerings that benefit customers who enhance their relationship
with Peoples by using multiple products and services.
Interest-bearing deposits totaled $673.9 million at September 30, 2000,
an increase of $29.0 million (or 4.5%) compared to year-end 1999.
Interest-bearing transaction accounts were the largest growth component of
Peoples' deposits, increasing $24.3 million (or 10.5%) to $255.5 million at
September 30, 2000, due primarily to growth in Peoples' money market account
balances. Peoples' money market accounts offer variable, competitive rates that
allow clients some flexibility of transactions and the opportunity to optimize
investment yields.
In addition to growth of balances in money market accounts, Peoples
continues to offer a 17-month "special" CD, which provides an attractive rate of
return for customers and increases Peoples' competitive position to retain and
grow deposits. Peoples continued to offer this product during the third quarter
and into the fourth quarter of 2000 to fund loan growth. Management will
continue to emphasize deposit-gathering in the future by offering special
"relationship accounts" (both non-interest bearing and interest-bearing) based
on other products and services offered while balancing deposit growth with
adequate net interest margin to meet Peoples' strategic goals.
In addition to traditional deposits, Peoples accesses both short-term
and long-term borrowings to fund its operations and investments. Peoples'
short-term borrowings consist of federal funds purchased, corporate deposits
held in overnight repurchase agreements, wholesale funds such as term repurchase
agreements, and various FHLB borrowings. At September 30, 2000, short-term
borrowings totaled $115.1 million, an increase of $27.7 million (or 31.7%) over
year-end 1999. The largest component of Peoples' short-term borrowing at
September 30, 2000, was FHLB advances of $58.1 million, a nine month increase of
$35.7 million (or 159%), of which $11.5 million of the increase can be
attributed to prepayments of certain long-term, callable FHLB advances using
short-term, repo-based FHLB advances. Growth in borrowings such as FHLB advances
was due primarily to loan growth.
In addition to short-term FHLB advances, Peoples had total short-term,
national market repurchase agreement balances of $25.8 million at September 30,
2000, a decrease of $8.2 million (or 24.1%) compared to year-end 1999. Peoples
also had $31.0 million of retail overnight repurchase agreement balances with
its customers at September 30, 2000, a nine-month increase of $0.6 million (or
1.8%). Short-term FHLB advances and short-term, national market repurchase
agreements were accessed heavily at the end of 1999 to fund Peoples' Y2K cash
reserves for potentially large customer deposit withdrawals. Such borrowings
were repaid in the early weeks of January 2000. In general, Peoples accesses
these funding sources at various times to balance liquidity needs.
<PAGE>
Peoples also maintains long-term borrowing capacity with the FHLB.
Long-term FHLB advances decreased $11.5 million (or 7.8%) since year-end 1999,
totaling $136.4 million at September 30, 2000. Peoples' long-term FHLB advances
are primarily 10-year borrowings, with fixed rate features for periods of two,
three, or four years, depending on the specific advance. Each advance has the
opportunity, at the discretion of the FHLB, to reprice after its initial fixed
rate period, and Peoples has the option to prepay any repriced advance without
penalty, or allow the borrowing to reprice to a LIBOR based, variable product.
In June 2000, management opted to prepay those long-term FHLB advances that
would have repriced to current market rates of interest to take advantage of
potential cost savings using other available short-term advances. Management
plans to maintain access to long-term FHLB borrowings as an appropriate funding
source.
Peoples also has a long-term note with an unaffiliated financial
institution. The original principal balance of the note was $3.0 million and was
used to finance an acquisition in early 1997. At September 30, 2000, the balance
was $2.1 million, a decrease of $0.3 million since year-end 1999. Principal
payments began in 1998 and continue semi-annually over the next three years.
Capital/Stockholders' Equity
----------------------------
At September 30, 2000, stockholders' equity was $77.1 million, an
increase of $4.2 million (or 5.8%) since December 31, 1999. In the third quarter
of 2000, Peoples had net income of $2.9 million and paid dividends of $0.9
million, a dividend payout ratio of 31.78% of earnings, compared to a ratio of
32.73% for the same period a year earlier. Management believes recent dividends
represent an acceptable payout ratio for Peoples and anticipates similar payout
ratios in future periods through quarterly dividends.
At September 30, 2000, the adjustment for the net unrealized holding
loss on available-for-sale securities, net of deferred income taxes, totaled
$7.4 million, down $0.2 million since year-end 1999. Since all the investment
securities in Peoples' portfolio are classified as available-for-sale, both the
investment and equity sections of Peoples' balance sheet are more sensitive to
the changing market values of investments. The changes in market value of
Peoples' investment portfolio directly impacted Peoples' stockholders' equity.
Management believes Peoples' capital continues to provide a strong base for
profitable growth.
Peoples 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 0% (lowest risk assets), 20%, 50%, or 100%
(highest risk assets) is assigned to each asset on the balance sheet. At
September 30, 2000, Peoples' and Peoples Bank's risk-based capital ratios were
above the minimum standards for a well-capitalized institution. Peoples'
risk-based capital ratio of 14.03% at September 30, 2000, is well above the
well-capitalized standard of 10%. Peoples' Tier 1 capital ratio of 12.58% also
exceeded the well-capitalized minimum of 6%. The Leverage ratio at September 30,
2000, was 8.54% and also above the well-capitalized standard of 5%.
On December 10, 1999, Peoples announced intentions to repurchase 2.5%
of Peoples' outstanding common shares (or 165,000 common shares) from time to
time in open market or privately negotiated transactions under the 2000 Stock
Repurchase Program. The timing of the purchases and the actual number of common
shares purchased has depended and will depend on market conditions and other
business factors. The 2000 Stock Repurchase Program will expire December 31,
2000. At November 6, 2000, Peoples had purchased approximately 93,000 treasury
shares under the 2000 Stock Repurchase Plan (56% complete) at a weighted average
price of $16.78 per share.
In June 1998, Peoples implemented a formal plan to purchase treasury
shares for use in its stock option plans. The formal plan serves as the basis
for treasury purchases in anticipation of Peoples' projected stock option
exercises and is based upon specific criteria related to market prices, as well
as the number of common shares expected to be reissued under Peoples' stock
option plans. Under the plan, Peoples is currently authorized to repurchase
18,150 common shares each quarter. During the third quarter of 2000, Peoples
purchased 18,150 treasury shares at a weighted-average price of $14.875 per
share, totaling $0.3 million. Management expects to purchase similar share
amounts in future quarters for use in its stock option plans. Future changes, if
any, to Peoples' systematic share repurchase program may be necessary to respond
to the number of common shares expected to be reissued for Peoples' stock option
plans. Management intends to continue its systematic quarterly treasury share
program.
Peoples also maintains the Peoples Bancorp Inc. Deferred Compensation
Plan ("Deferred Compensation Plan") for the directors of Peoples and Peoples
Bank. The Deferred Compensation Plan is designed to recognize the value to
Peoples of the past and present service of its directors and encourage their
continued service through implementation of a deferred compensation plan. As a
result and in accordance with accounting requirements, the account balances
invested in Peoples common shares are reported as treasury stock in Peoples'
financial statements. At September 30, 2000, there was $0.8 million of treasury
stock attributed to the Deferred Compensation Plan and its participants.
Management does not expect the Deferred Compensation Plan to have a material
impact on future financial statements or results of operations of Peoples.
<PAGE>
Liquidity and Interest Rate Sensitivity
---------------------------------------
The objective of Peoples' asset/liability management function is to
maintain consistent growth in net interest income within Peoples' policy
guidelines. This objective is accomplished through management of Peoples'
balance sheet liquidity and interest rate risk exposure based on changes in
economic conditions, interest rate levels, and customer preferences.
Interest Rate Risk
------------------
The most significant market risk resulting from Peoples' normal course
of business, extending loans and accepting deposits, is interest rate risk.
Interest rate risk ("IRR") is the potential for economic loss due to future
interest rate changes that can impact both the earnings stream as well as market
values of financial assets and liabilities. Peoples' management has charged the
Asset/Liability Committee ("ALCO") with the overall management of Peoples' and
Peoples Bank's balance sheets and off-balance sheet transactions related to the
management of IRR. The ALCO strives to keep Peoples focused on the future,
anticipating and exploring alternatives, rather than simply reacting to change
after the fact.
To this end, the ALCO has established an IRR management policy that
sets the minimum requirements and guidelines for monitoring and controlling the
level and amount of IRR. The objective of the IRR policy is to encourage
management to adhere to sound fundamentals of banking while allowing sufficient
flexibility to exercise creativity and adopt innovations necessary to meet the
challenges of changing markets. The ultimate goal of these policies is to
optimize net interest income within the constraints of prudent capital adequacy,
liquidity, and safety.
The ALCO relies on different methods of assessing IRR including
simulating net interest income, monitoring the sensitivity of the net present
market value of equity or economic value of equity, and monitoring the
difference or gap between maturing or rate-sensitive assets and liabilities over
various time periods. The ALCO places emphasis on simulation modeling as the
most beneficial measurement of IRR to do to its dynamic measure. By employing a
simulation process that projects the impact of potential changes in interest
rates and balance sheet structures and by establishing limits on changes in net
income and net market value, the ALCO is better able to evaluate the possible
risks associated with alternative strategies.
The following table is provided to show the earnings at risk and value
at risk positions of Peoples at September 30, 2000 (dollars in thousands):
Immediate Estimated Estimated
Interest Rate Increase (Decrease) Increase (Decrease) in
Change In Net Interest Economic Value
(in Basis Points) Income of Equity
------------------- ------------------------ --------------------------
300 $ (4,783) (11.9) % $ (16,241) (16.0) %
200 (3,189) (7.9) (11,291) (11.1)
100 (1,614) (4.0) (5,890) (5.8)
(100) 1,518 3.8 5,366 5.3
(200) 3,021 7.5 11,209 11.0
(300) $ 4,508 11.2 % $ 17,570 17.3 %
The simulation process starts with a base case simulation that
represents projections of current balance sheet growth trends. Base case
simulation results are prepared under a flat interest rate forecast and at least
two alternative interest rate forecasts, one rising and one declining, assuming
parallel yield curve shifts. Comparisons showing the earnings variance from the
flat rate forecast illustrate the risks associated with the current balance
sheet strategy. When necessary, additional balance sheet strategies are
developed and simulations prepared. These additional simulations are run with
the same interest rate forecasts used with the base case simulation and/or using
non-parallel yield curve shifts. The additional strategies are used to measure
yield curve risk, prepayment risk, basis risk, and index lag risk inherent in
the balance sheet. Comparisons showing the earnings and equity value variance
from the base case provide the ALCO with information concerning the risks
associated with implementing the alternative strategies. The results from model
simulations are reviewed for indications of whether current IRR strategies are
accomplishing their goal and, if not, suggest alternative strategies that could.
The policy calls for periodic review by the ALCO of assumptions used in the
modeling.
The interest risk analysis shows that Peoples is liability sensitive.
This means that downward moving interest rates favorably impact net interest
income while upward rate movements have a negative effect. Inherent within the
risk analysis are a large number of interrelated assumptions. As with all
estimates, actual performance could vary; however, management believes that the
analysis is reasonable in the aggregate.
<PAGE>
Peoples' ALCO believes it is beneficial to monitor IRR for both the
short and long-term. Therefore, to effectively evaluate and act on projections
from model simulations, management through its ALCO established limits on
changes in net interest income and the value of the balance sheet. To monitor
the short-term IRR exposure, the ALCO has limited the earnings at risk to no
more than 10% from base case for each 1% shift in interest rates. To monitor the
long-term IRR exposure, management has limited the negative impact to Peoples'
economic value of equity to not more than 40% when interest rates shift 2% and
75% when rates shift 4%, respectively.
For an assessment of the current IRR position, the ALCO reviews static
gap measures for specific time periods focusing on one-year cumulative gap.
Based on historical trends and performance, the ALCO has determined that the
ratio of the one-year cumulative gap should be within 15% of earning assets. At
September 30, 2000, both the earnings at risk and the change in economic value
of equity were within policy limits.
While interest rates have trended higher and this could potentially
have a negative impact to net interest income, the magnitude of this impact is
expected to be substantially less than demonstrated in the above table. The rate
shock scenarios are used in the modeling process as a stress test to net
interest revenue. Management believes that actual changes in interest rates will
occur more gradually, allowing for appropriate adjustments in ALCO strategies.
Through periodic ALCO meetings, management continues to explore methods to
reduce Peoples' interest rate sensitivity through a variety of traditional and
off-balance sheet methods.
Liquidity
---------
Maintenance of a sufficient level of liquidity is a primary objective
of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet
anticipated and unanticipated operating cash needs, loan demand, and deposit
withdrawals, without incurring a sustained negative impact on profitability. It
is Peoples' policy to manage liquidity so that there is no need to make
unplanned sales of assets or to borrow funds under emergency conditions. The
ALCO's policy for liquidity management sets limits on the net liquid position of
Peoples and the concentration of non-core funding sources.
The main source of liquidity for Peoples comes through deposit growth.
Liquidity is also provided from cash generated from assets such as maturities,
principal payments and income from loans and investment securities. During the
nine months ended September 30, 2000, cash provided by financing activities
increased $37.8 million due to the growth of short-term borrowings and
interest-bearing deposit growth, while outflows from investing activity totaled
$68.3 million. The majority of the increase in cash outflows from investing
activities occurred as a result of the growth in Peoples' loan portfolio. When
appropriate, Peoples takes advantage of external sources of funds such as
advances from the FHLB, national market repurchase agreements, and brokered
funds. These external sources often provide attractive interest rates and
flexible maturity dates that enable Peoples to match funding with contractual
maturity dates of assets. Securities in the investment portfolio that are
available for sale can be utilized as an additional source of liquidity.
The net liquidity position of Peoples is calculated by subtracting
volatile liabilities, non-core deposits and brokered funds, from liquid assets,
short-term investments and unpledged available-for-sale securities. At year-end
1999, the net liquidity position of Peoples was $105.2 million or 9.81% of total
assets. At September 30, 2000, the net liquidity position of Peoples was $105.4
million or 9.41% of total assets. The change can be attributed to modest
increases in the market value of Peoples' investment portfolio. The liquidity
position at September 30, 2000 and year-end 1999 were within Peoples' policy
limit of negative 10% of total assets. The ALCO believes Peoples has sufficient
liquidity to meet current obligations to borrowers, depositors, debt holders,
and others.
Effects of Inflation on Financial Statements
--------------------------------------------
Substantially all of the Company's assets relate to banking and are
monetary in nature. Therefore they are not impacted by inflation to the same
degree as companies in capital-intensive industries in a replacement cost
environment. During a period of rising prices, a net monetary asset position
results in loss in purchasing power and conversely a net monetary liability
position results in an increase in purchasing power. In the banking industry,
typically monetary assets exceed monetary liabilities. Therefore as prices have
recently increased, financial institutions experienced a decline in the
purchasing power of their net assets.
Future Outlook
--------------
Third quarter results of operations reflect the success of various
strategic initiatives and the achievement of key goals during the first nine
months of 2000. These strategic initiatives and goals include a commitment to
product diversity, revenue growth through various business lines (especially
those not interest rate dependent), and client service enhancement. Management
expects that these initiatives and goals will continue to improve return on
shareholders' equity and Peoples' long-term financial performance in future
periods. Management will continue to integrate Peoples' sales processes and
analyze key performance areas that quantitatively measure the relative
performance of Peoples compared to prior years and others in the financial
services industry.
The transition to a unified financial services entity continues as a
result of the March 2000 consolidation of Peoples' three banking subsidiaries
into Peoples Bank, NA. The consolidation focused on client retention and market
share growth to be achieved by improving the convenience and availability of
Peoples' diverse products and services; placing more of Peoples' associates in
client service positions; and providing clients to access all 38 offices, 25
ATM's, and Internet banking system. By connecting the northeastern Kentucky
markets with contiguous Ohio and West Virginia markets, the consolidation also
provided enhanced synergies and client service opportunities in the Huntington,
West Virginia - Ashland, Kentucky metropolitan area. Management expects to reap
additional efficiency benefits of the consolidation in the future through
reduced administrative duties associated with maintaining three separate banking
charters.
<PAGE>
Management strives to enhance revenue streams by reorganizing and
revitalizing its client relationship management process. Areas of focus will
include enhancement of revenue streams, especially those independent of interest
rates. These revenue streams include asset management fees (such as fiduciary
fees, insurance revenues, etc.) and electronic banking revenues. Peoples Bank
will continue to offer a wide array of banking products and services, while
Peoples Investments and Peoples Insurance focus on non-traditional products.
Peoples Investments provides customer-tailored solutions for fiduciary needs,
investment alternatives, and other asset management capabilities; and Peoples
Insurance provides a full set of life, property and casualty insurance products
and services. Peoples is committed to providing diversified, integrated
financial products and services while fulfilling its clients' needs. Management
plans to continue Peoples' investment in sales expertise and relationship
building skills of all client service representatives as the sales process
evolves.
Peoples continues to expand and penetrate existing markets making
financial service more convenient for existing clients. In December 2000,
Peoples anticipates the opening of its fourth sales office in Wood County at
3411 Emerson Avenue in Parkersburg, West Virginia. The Emerson Avenue office
complements the existing sales office in the nearby Vienna Wal-Mart Supercenter.
The Emerson office will be a blend between a traditional banking office and
Peoples' Wal-Mart sales offices in that it will be more sales oriented than a
traditional banking office while maintaining many traditional banking aspects
such as a teller line for clients to transact business. The Emerson office will
be very client-friendly: it will offer an Internet cafe and an "investment
center" with a large screen television, financial magazines, and newspapers as
well as a "home resource center" where current and prospective clients can
retrieve information from various sources regarding homes to buy or rent, or
tips for making home improvements. Within these lounges will be sales areas for
associates to assist clients with all their banking, insurance, and investment
needs.
Peoples also announced in October 2000, the planned acquisition of
Lower Salem Commercial Bank in Washington County, Ohio. At September 30, 2000,
Lower Salem Bank had total assets of $25 million and loans totaling $18 million.
In the transaction, which will be accounted for under the purchase method of
accounting, Peoples proposes to use a combination of cash and common shares as
consideration for all issued and outstanding shares of Lower Salem Commercial
Bank common stock with the expected aggregate value not to exceed $2.4 million.
The acquisition is contingent on regulatory approval as well as the approval of
Lower Salem Commercial Bank's shareholders. Management anticipates completing
the acquisition during the first quarter of 2001. After the merger, Lower Salem
Commercial Bank will operate as a full-service banking office of Peoples Bank.
Management will continue to pursue appropriate business opportunities
and focus its energies on possible mergers, consolidations, banking center
purchases, or insurance agency acquisitions as a means of acquiring sales
centers and revenue opportunities that complement existing company locations and
revenue growth strategies. Mergers and acquisitions remain a viable strategic
option for continuing growth of operations and scope of client service as well
as a viable method of enhancing Peoples' earnings potential. Future
acquisitions, if they occur, may not be limited to specific geographic location
or proximity to current market but ultimately will depend upon financial service
opportunities that complement Peoples' core competencies and strategic intent.
Management recognizes the importance of electronic financial services
to its client base and focuses efforts to provide clients electronic access to
banking products and services at their convenience. Since late 1999, Peoples
Bank has offered a fully integrated Internet banking system ("Internet Banking
System" or "Peoples OnLine Connection") and recently adopted a portal concept
which allows clients to perform on-line banking, read current headlines, see
sport scores, weather conditions, and much more. Peoples OnLine Connection
currently has over 2,700 clients using the system and an estimated 7% of
Peoples' clients transacting business through peoplesbancorp.com. In the first
quarter of 2001, management expects to roll out "local shopping" links on
peoplesbancorp.com which will offer local vendors who otherwise might not
display or sell their products through the Internet a virtual place to transact
e-business. This concept is yet another way Peoples can solidify its connection
to the many communities it serves.
In addition to the e-commerce initiatives at peoplesbancorp.com,
management is currently analyzing other new products and services that would
further enhance Peoples' electronic financial services available to clients. In
the future, Peoples intends to expand debit card services to include cards that
improve clients' ability to purchase goods and services via the Internet. These
cards will utilize new technology that encrypts client sensitive account number
information until it is necessary to complete the Internet-based purchase.
Management is also exploring the possibility of "web-enabled" ATMs at some of
Peoples' walk-up ATMs. This enhancement would allow both current and prospective
clients to use Peoples' ATMs to purchase items such as phone cards, and airline
tickets. Peoples OnLine Connection clients would also have a quick link to
Peoples' financial services at peoplesbancorp.com through these types of ATMs.
These initiatives reflect management's commitment to technology that makes
Peoples' financial products and service even more accessible and speedy for its
clients.
<PAGE>
Management continues to position Peoples for the future of financial
services without sacrificing a compatible focus on community-based values.
Peoples' goal is to be a high-performing financial services company, committed
to community leadership, while focusing efforts to provide shareholders at least
a 15% annual return on their investment. Because products and services are
easily copied in the financial services industry, management focuses on
delivering Peoples' products and services better, faster, and more efficiently
than competitors.
Going forward, Peoples will work to achieve its strategic goals by
growing the relationship of existing clients to optimize the client's
full-service connection, increasing market share in markets where Peoples does
not have significant presence; continuing to create a business environment where
clients can access traditional banking products and services, investment
services, and insurance products in the most convenient manner possible; working
to create a model that identifies new ways to fill customers' investment and
insurance needs; and expanding Peoples' e-commerce capabilities through
peoplesbancorp.com. Management believes that Peoples can produce enhanced future
performance levels through integrated sales techniques and commitment to the
strategic initiatives outlined in this section, which are designed to enhance
client service and increase future shareholder value.
Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
--------------------------------------------------------------
The statements in this Form 10-Q which are not historical fact are
forward looking statements that involve a number of risks and uncertainties,
including, but not limited to, the interest rate environment, the effect of
federal and state banking and tax regulations, the effect of technological
changes, the effect of economic conditions, the impact of competitive products
and pricing, and other risks detailed in Peoples' Securities and Exchange
Commission filings. Although management believes that the expectations in these
forward-looking statements are based on reasonable assumptions within the bounds
of management's knowledge of Peoples' business and operations, it is possible
that actual results may differ materially from these projections.
<PAGE>
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption
"Liquidity and Interest Rate Sensitivity" under Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations in this Form 10-Q,
and is incorporated herein by reference.
<PAGE>
<TABLE>
<CAPTION>
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2000 1999 2000 1999
Average Yield/ Average Yield/ Average Yield/ Average Yield/
(dollars in thousands) Balance Rate Balance Rate Balance Rate Balance Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Taxable $ 291,523 6.88% $ 295,930 6.57% $ 290,367 6.88% 245,412 6.31%
Tax-exempt 36,364 7.50% 50,209 7.69% 34,447 7.61% 47,023 7.37%
--------------------------------------------------------------------------------------------------------------------------
Total securities 327,887 6.95% 346,139 6.73% 324,814 6.95% 292,435 6.48%
Loans:
Commercial 304,387 9.38% 253,948 8.76% 292,150 9.20% 240,151 8.64%
Real estate 280,203 8.38% 244,666 8.20% 270,601 8.25% 238,716 8.30%
Consumer 126,604 10.62% 114,692 10.59% 124,238 10.44% 111,806 10.38%
--------------------------------------------------------------------------------------------------------------------------
Total loans 711,194 9.20% 613,306 8.88% 686,989 9.05%% 590,673 8.83%
Less: Allowance for loan loss (11,161) (10,285) (10,824) (10,008)
--------------------------------------------------------------------------------------------------------------------------
Net loans 700,033 9.35% 603,021 9.03% 676,165 9.20% 580,665 8.98%
Interest-bearing deposits 324 4.94% 1,854 4.23% 554 4.62% 4,140 4.17%
Federal funds sold -- -- 573 5.03% 190 5.75% 6,203 4.77%
--------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,028,244 8.56% 951,587 8.15% 1,001,723 8.47% 883,443 8.11%
Other assets 75,953 79,834 78,151 77,118
--------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,104,197 $ 1,031,421 $ 1,079,874 $ 960,561
==========================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing deposits:
Savings $ 81,109 2.37% $ 95,434 2.41% $ 85,555 2.36% $ 97,383 2.39%
Interest-bearing
demand deposits 241,879 4.53% 205,000 3.48% 228,041 4. 25% 203,001 3.46%
Time 336,625 5.82% 322,309 4.94% 340,388 5.41% 326,069 4.95%
--------------------------------------------------------------------------------------------------------------------------
Total 659,613 4.92% 622,743 4.07% 653,984 4.61% 626,453 4.07%
interest-bearing deposits
Borrowed funds:
Short-term 117,531 6.49% 69,441 4.85% 93,584 6.10% 46,570 4.52%
Long-term 138,527 5.14% 150,347 4.97% 145,866 5.16% 102,583 4.86%
--------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 256,058 5.76% 219,788 4.93% 239,450 5.52% 149,153 4.76%
Total interest
bearing liabilities 915,671 5.16% 842,531 4.30% 893,434 4.85% 775,606 4.20%
Non-interest bearing 80,298 78,663 81,067 77,529
deposits
Other liabilities 3,3041 33,224 32,186 24,141
--------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,029,010 954,418 1,006,687 877,276
Stockholders' equity 75,187 77,003 73,187 83,285
--------------------------------------------------------------------------------------------------------------------------
Total liabilities and $ 1,104,197 $ 1,031,421 $ 1,079,874 $ 960,561
equity
==========================================================================================================================
Interest income to earning assets 8.56% 8.15% 8.47% 8.11%
Interest expense to earning assets 4.57% 3.78% 4.33% 3.70%
--------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.99% 4.37% 4.14% 4.41%
==========================================================================================================================
</TABLE>
Interest income and yields presented on a fully tax-equivalent basis using a 35%
tax rate.
<PAGE>
PART II
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities and Use of Proceeds.
None.
ITEM 3: Defaults upon Senior Securities.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None.
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:
EXHIBIT INDEX
Exhibit
Number Description Exhibit Location
---------- ---------------------------------- ----------------------------
11 Computation of Earnings Per Share. Page 29.
27 Financial Data Schedule. EDGAR electronic filing only.
b) Reports on Form 8-K:
Peoples filed the following reports on Form 8-K during the three
months ended September 30, 2000:
1) Filed July 24, 2000 - News release announcing Peoples' earnings
for the second quarter ended June 30, 2000.
2) Filed July 26, 2000 - News release containing selected unaudited
financial data and other operating information for the period
ended June 30, 2000.
3) Filed September 6, 2000 - News release announcing the election
of Robert W. Price as a director of Peoples.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORP INC.
Date: November 14, 2000 By:/s/ ROBERT E. EVANS
-------------------------------------
Robert E. Evans
President and Chief Executive Officer
Date: November 14, 2000 By:/s/ JOHN W. CONLON
-------------------------------------
John W. Conlon
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR PERIOD ENDED SEPTEMBER 30, 2000
Exhibit
Number Description Exhibit Location
---------- ---------------------------------- ----------------------------
11 Computation of Earnings Per Share. Page 29
27 Financial Data Schedule. EDGAR electronic filing only.
