UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio
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(State or other jurisdiction of incorporation or organization)
31-0987416
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(I.R.S. Employer Identification No.)
138 Putnam Street, P. O. Box 738, Marietta, Ohio
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(Address of principal executive offices)
45750
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(Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Shares, No Par Value (6,554,546
outstanding at February 28, 2000)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based upon the closing price of the Common Shares of the Registrant on The
NASDAQ National Market as of February 28, 2000, the aggregate market value of
the Common Shares of the Registrant held by nonaffiliates on that date was
$92,184,777. For this purpose, certain executive officers and directors are
considered affiliates.
Documents Incorporated by Reference:
Portions of Registrant's definitive Proxy Statement relating to the Annual
Meeting to be held April 13, 2000, are incorporated by reference into Part III
of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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PART I Page
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Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 13
PART II
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Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 33
PART III
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Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners
and Management 57
Item 13. Certain Relationships and Related Transactions 57
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 58
Signatures 59
Exhibit Index 60
PART I
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ITEM 1. BUSINESS.
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Introduction
Peoples Bancorp Inc. ("Peoples") was organized as a bank holding company in
1980. At December 31, 1999, Peoples' wholly-owned subsidiaries included The
Peoples Banking and Trust Company, The First National Bank of Southeastern Ohio,
Peoples Bank FSB and The Northwest Territory Life Insurance Company. First
National Bank also owns two insurance agency subsidiaries.
On January 14, 2000, Peoples announced plans to consolidate its three banking
subsidiaries, The Peoples Banking and Trust Company, First National Bank and
Peoples Bank FSB, into a single national bank named "Peoples Bank, National
Association" and operate under the trade name "Peoples Bank." The consolidation,
expected to be completed March 10, 2000, will enhance customer service through
increased product offerings, consistent product and service delivery and access
to all of the organization's financial service centers. The actual consolidation
is contingent upon regulatory approval and other conditions. While the
consolidation is expected to provide some enhancement to future shareholder
return via added operating efficiencies, the primary focus is on customer
retention and market share growth by providing improved product and service
convenience and availability. The following discussion assumes the consolidation
will be completed with Peoples Bank as the only banking subsidiary of Peoples.
Peoples operates 38 sales offices in the states of Ohio, West Virginia and
Kentucky. At December 31, 1999, Peoples had total assets of $1.1 billion, total
loans of $659.8 million, total deposits of $728.2 million, and total
stockholders' equity of $72.9 million. At December 31, 1999, The Peoples Bank
and Trust Company held approximately $560 million of trust assets (market
value). For the year ended December 31, 1999, Peoples' return on average assets
was 1.09% and return on average stockholders' equity was 13.27%.
Peoples provides an array of financial products and services to its customers,
including checking accounts; NOW and Super NOW accounts; money market deposit
accounts; savings accounts; time certificates of deposit; commercial,
installment, and commercial and residential real estate mortgage loans; credit
and debit cards; lease financing; corporate and personal trust services; and
safe deposit rental facilities. Peoples also sells travelers checks, money
orders and cashier's checks. Services are provided through ordinary walk-in
offices, automated teller machines ("ATMs"), automobile drive-in facilities
called "Motor Banks," banking by phone, computer banking, and internet-based
banking. The insurance agencies offer a complete line of property and casualty
products. In addition, a full line of investment products are offered through an
unaffiliated registered broker dealer.
At December 31, 1999, Peoples had 385 full-time equivalent employees (including
28 full-time equivalent employees at the parent company level). The principal
executive office of Peoples is located at 138 Putnam Street, Marietta, Ohio
45750, and its telephone number is (740) 373-3155. Peoples' internet web site is
www.peoplesbancorp.com.
Over the past several years, Peoples has experienced significant growth in
assets and stockholders' equity, primarily through acquisitions as well as
purchases of full-service banking centers and associated assets and liabilities.
For the five-year period ended December 31, 1999, Peoples' assets grew at a
14.6% compound annual growth rate, while stockholders' equity grew at a compound
annual growth rate of 7.2%. Peoples' has also had a history of consistent
earnings growth, as earnings per share grew at a compound rate of 10.0% for the
five-year period ended December 31, 1999. Over that same period, Peoples' annual
return on average assets and stockholders' equity averaged 1.20% and 13.30%,
respectively.
Peoples routinely explores opportunities for additional growth and expansion of
its core financial service businesses, including the acquisition of companies
engaged in similar activities. Management also focuses on internal growth as a
method for reaching performance goals and reviews key performance indicators on
a regular basis to measure Peoples' success. There can be no assurance, however,
that Peoples will be able to grow, or if it does, that any such growth or
expansions will result in an increase in Peoples' earnings, dividends, book
value or the market value of its common shares.
Recent Acquisitions and Additions
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From April 1999 to January 2000, The Peoples Banking and Trust Company opened
three new banking offices located within Wal-Mart superstores. The first office
was opened on April 1, 1999, within the Wal-Mart superstore located at 1142
South Bridge, New Martinsville, West Virginia. The second office was opened on
July 1, 1999, within the Wal-Mart superstore located at 701 Grand Central
Avenue, Vienna, West Virginia. The third office was opened January 26, 2000,
within a newly constructed Wal-Mart superstore located at 2900 Pike Street,
Parkersburg, West Virginia. Each of the new offices is a full-service sales
office and offers ATM access.
Effective at the close of business on October 29, 1999, The Peoples Banking and
Trust Company completed the purchase of a full-service banking facility in
Huntington, West Virginia, from an unaffiliated financial institution. In the
transaction, The Peoples Banking and Trust Company assumed approximately $5
million in deposits and purchased $0.5 million in loans. The office, located at
1126 20th Street in the Southeast Hills region of Huntington, provides services
through ordinary walk-in offices and a Motor Bank.
On November 16, 1999, The Peoples Banking and Trust Company opened a loan
production office at 117 W. Main Street, Lancaster, Ohio to serve the commercial
credit needs of Fairfield County and particularly the Lancaster area. In the
next year, management plans to expand the office's service offerings to include
investment and insurance products.
Customers and Markets
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Peoples' service area has a diverse economic structure. Principal industries in
the area include metals, plastics and petrochemical manufacturing; oil, gas and
coal production; and related support industries. In addition, tourism, education
and other service-related industries are important and growing industries.
Consequently, Peoples is not dependent upon any one industry segment for its
business opportunities.
Peoples originates various types of loans, including commercial and commercial
real estate loans, residential real estate loans, home equity lines of credit,
real estate construction loans, and consumer loans (including loans to
individuals, credit card loans, and indirect loans). In general, Peoples retains
most of its originated loans and, therefore, secondary market activity has been
minimal. Loans are spread over a broad range of industrial classifications.
Management believes that it has no significant concentrations of loans to
borrowers engaged in the same or similar industries and it has no loans to
foreign entities. The lending market areas served are primarily concentrated in
southeastern Ohio and neighboring areas of Kentucky and West Virginia. In
addition, loan production offices in central Ohio provide opportunities to serve
customers in that economic region.
Legal Lending Limit
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At December 31, 1999, none of Peoples' subsidiaries had extended credit to any
one borrower in excess of its respective legal lending limit (approximately
$11.2 million, $1.3 million and $1.4 million for The Peoples Banking and Trust
Company, First National and Peoples Bank FSB, respectively) at the time the loan
was closed. Following the March 10, 2000, consolidation of Peoples' three
banking subsidiaries, Peoples Bank will have a legal lending limit of
approximately $14 million.
Commercial Loans
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At December 31, 1999, Peoples had outstanding approximately $272.2 million in
commercial loans (including commercial, financial and agricultural loans),
representing approximately 41.2% of the total aggregate loan portfolio as of
that date.
Lending Practices. Commercial lending entails significant additional risks as
compared with consumer lending (i.e., single-family residential mortgage
lending, installment lending, credit card loans and indirect lending). In
addition, the payment experience on commercial loans typically depends on
adequate cash flow of a business and thus may be subject, to a greater extent,
to adverse conditions in the general economy or in a specific industry. Loan
terms include amortization schedules commensurate with the purpose of each loan,
the source of repayment and the risk involved. Approval from board of directors
is required for loans to borrowers whose aggregate total debt, including the
principal amount of the proposed loan, exceeds $3 million. The primary analysis
technique used in determining whether to grant a commercial loan is the review
of a schedule of cash flows to evaluate whether anticipated future cash flows
will be adequate to service both interest and principal due. In addition,
collateral is reviewed to determine its value in relation to the loan.
Peoples periodically evaluates all new commercial loans greater in amount than
$250,000 and on an annual basis, all loans greater in amount than $500,000. If
deterioration has occurred, Peoples takes effective and prompt action designed
to assure repayment of the loan. Upon detection of the reduced ability of a
borrower to meet cash flow obligations, the loan is considered an impaired loan
and reviewed for possible downgrading or placement on non-accrual status.
Consumer Loans
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At December 31, 1999, Peoples had outstanding consumer loans (including indirect
loans and credit cards) in an aggregate amount of approximately $121.1 million
or approximately 18.4% of the aggregate total loan portfolio.
Lending Practices. Consumer loans generally involve more risk as to
collectibility than mortgage loans because of the type and nature of the
collateral and, in certain instances, the absence of collateral. As a result,
consumer lending collections are dependent upon the borrower's continued
financial stability, and thus are more likely to be adversely affected by
employment loss, personal bankruptcy, or adverse economic conditions. Credit
approval for consumer loans requires demonstration of sufficiency of income to
repay principal and interest due, stability of employment, a positive credit
record and sufficient collateral for secured loans. It is the policy of Peoples
to review its consumer loan portfolio monthly and to charge off loans that do
not meet its standards and to adhere strictly to all laws and regulations
governing consumer lending. A qualified compliance officer is responsible for
monitoring performance in this area and for advising and updating loan
personnel.
Peoples makes credit life insurance and health and accident insurance available
to all qualified buyers, thus reducing risk of loss when a borrower's income is
terminated or interrupted. Peoples also offers its customers credit card access
through its consumer lending department.
Real Estate Loans
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At December 31, 1999, Peoples had approximately $266.5 million ($230.2 million,
$22.2 million, and $14.1 million, respectively) of residential real estate
loans, home equity lines of credit and construction mortgages outstanding,
representing 40.4% of total loans outstanding.
Lending Practices. Peoples requires that the residential real estate loan amount
be no more than 90% of the purchase price or the appraisal value of the real
estate securing the loan, unless private mortgage insurance is obtained by the
borrower for the percentage exceeding 90%. On occasion, Peoples may lend up to
100% of the appraised value of the real estate. The risk conditions of these
loans are considered during underwriting for the purposes of establishing an
interest rate compatible with the risks inherent in mortgage lending and based
on the equity of the home. Loans made in this lending category are generally one
to five year adjustable rate, fully amortized mortgages. Peoples also generates
fixed rate real estate loans and generally retains these loans. All real estate
loans are secured by first mortgages with evidence of title in favor of Peoples
in the form of an attorney's opinion of the title or a title insurance policy.
Peoples also requires proof of hazard insurance with Peoples named as the
mortgagee and as the loss payee. Licensed appraisals are required in the case of
loans in excess of $250,000.
Home Equity Loans. Home equity lines of credit are generally made as second
mortgages by Peoples. The maximum amount of a home equity line of credit is
generally limited to 80% of the appraised value of the property less the balance
of the first mortgage. Peoples will lend up to 100% of the appraised value to
the property at higher interest rates which are considered compatible with the
additional risk assumed in these types of equilines. The home equity lines of
credit are written with ten-year terms, but are subject to review upon request
for renewal. For the past two years, Peoples has generally charged a fixed rate
on home equity loans for the first five years. At the end of the five-year
period, the equiline reverts to a variable interest rate product.
Construction Loans. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, Peoples may be required
to advance funds beyond the amount originally committed to permit completion of
the project.
Competition
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Peoples experiences significant competition in attracting depositors and
borrowers. Competition in lending activities comes principally from other
commercial banks, savings associations, insurance companies, governmental
agencies, credit unions, brokerage firms and pension funds. The primary factors
in competing for loans are interest rate and overall lending services.
Competition for deposits comes from other commercial banks, savings
associations, money market funds and credit unions as well as from insurance
companies and brokerage firms. The primary factors in competing for deposits are
interest rates paid on deposits, account liquidity, convenience of office
location and overall financial condition. Peoples believes that its size
provides flexibility, which enables the company to offer an array of banking
products and services. Peoples' financial condition also contributes to a
favorable competitive position in the markets it serves.
Peoples primarily focuses on non-major metropolitan markets in which to provide
products and services. Management believes Peoples has developed a niche and
certain level of expertise in serving these communities.
Peoples historically has operated under a "needs-based" selling approach that
management believes has proven successful in serving the financial needs of many
customers. Management anticipates that in future periods, Peoples will increase
its investment in sales training and education to assist in the development of
Peoples' associates and their identification of customer service opportunities.
It is not Peoples' strategy to compete solely on the basis of interest rate.
Management believes that a focus on customer relationships and incentives that
promote customers continued use of Peoples' financial products and services will
lead to enhanced revenue opportunities. Management believes the integration of
traditional financial products with the recent entry into insurance product
offerings will lead to enhanced revenues through complementary product offerings
that satisfy customer demands for high quality, "one-stop shopping."
Supervision and Regulation
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The following is a summary of certain statutes and regulations affecting Peoples
and its subsidiaries and is qualified in its entirety by reference to such
statutes and regulations:
General
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Bank Holding Company. Peoples is a bank holding company under the Bank Holding
Company Act of 1956, which restricts the activities of Peoples and the
acquisition by Peoples of voting stock or assets of any bank, savings
association or other company. Peoples is also subject to the reporting
requirements of, and examination and regulation by, the Federal Reserve Board.
Peoples' subsidiary bank, Peoples Bank, is subject to restrictions imposed by
the Federal Reserve Act on transactions with affiliates, including any loans or
extensions of credit to Peoples or its subsidiaries, investments in the stock or
other securities thereof and the taking of such stock or securities as
collateral for loans to any borrower; the issuance of guarantees, acceptances or
letters of credit on behalf of Peoples and its subsidiaries; purchases or sales
of securities or other assets; and the payment of money or furnishing of
services to Peoples and other subsidiaries. Peoples is prohibited from acquiring
direct or indirect control of more than 5% of any class of voting stock or
substantially all of the assets of any bank holding company without the prior
approval of the Federal Reserve Board. Peoples and its subsidiaries are
prohibited from engaging in certain tying arrangements in connection with
extensions of credit and/or the provision of other property or services to a
customer by Peoples or its subsidiaries.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (better known as the Financial Services Modernization Act of 1999) which
will, effective March 11, 2000, permit bank holding companies to become
financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature.
A bank holding company may become a financial holding company if each of its
subsidiary banks is well capitalized, is well managed and has at least a
satisfactory rating under the Community Reinvestment Act, by filing a
declaration that the bank holding company wishes to become a financial holding
company. Also effective March 11, 2000, no regulatory approval will be required
for a financial holding company to acquire a company, other than a bank or
savings association, engaged in activities that are financial in nature or
incidental to activities that are financial in nature, as determined by the
Federal Reserve Board. The Financial Services Modernization Act defines
"financial in nature" to include: securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. A national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development and real estate investment, through a
financial subsidiary of the bank, if the bank is well capitalized, well managed
and has at least a satisfactory Community Reinvestment Act rating. The specific
effects of the enactment of the Financial Services Modernization Act on the
banking industry in general and on Peoples in particular has yet to be
determined due to the fact that the Financial Services Modernization Act was
only recently adopted.
Banking Subsidiaries. Peoples Bank will be chartered as a national bank under
the National Bank Act and will be regulated by the Office of the Comptroller of
the Currency. Peoples Bank will continue to provide FDIC insurance on its
deposits and will be a member of the Federal Home Loan Bank of Cincinnati.
Federal Deposit Insurance Corporation
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The FDIC insures the deposits of Peoples Bank which is subject to the applicable
provisions of the Federal Deposit Insurance Act. Insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition enacted or imposed by the bank's regulatory agency.
Federal Home Loan Bank
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The FHLBs provide credit to their members in the form of advances. As a member
of the FHLB of Cincinnati, Peoples Bank must maintain an investment in the
capital stock of that FHLB in an amount equal to the greater of 1.0% of the
aggregate outstanding principal amount of its respective residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB.
Capital Requirements
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Federal Reserve Board. The Federal Reserve Board has adopted risk-based capital
guidelines for bank holding companies. The risk-based capital guidelines include
both a definition of capital and a framework for calculating weighted-risk
assets by assigning assets and off-balance sheet items to broad risk categories.
For further discussion regarding Peoples' risk-based capital requirements, see
Note 13 of the Notes to the Consolidated Financial Statements included in Item 8
of this Form 10-K.
Office of the Comptroller of Currency. National bank subsidiaries, such as
Peoples Bank, are subject to similar capital requirements adopted by the
Comptroller of the Currency.
Limits on Dividends
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Peoples' ability to obtain funds for the payment of dividends and for other cash
requirements largely depends on the amount of dividends declared by Peoples Bank
and Peoples' other subsidiaries. However, the Federal Reserve Board expects
Peoples to serve as a source of strength to Peoples Bank. The Federal Reserve
Board may require Peoples to retain capital for further investment in Peoples
Bank, rather than pay dividends to its shareholders. Peoples Bank may not pay
dividends to Peoples if, after paying those dividends, Peoples Bank would fail
to meet the required minimum levels under the risk-based capital guidelines and
the minimum leverage ratio requirements. Peoples Bank must have the approval
from the Office of the Comptroller of Currency if a dividend in any year would
cause the total dividends for that year to exceed the sum of the current year's
net earnings and the retained earnings for the preceding two years, less
required transfers to surplus. These provisions could limit Peoples' ability to
pay dividends on its outstanding common shares. For further discussion regarding
the payment of dividends by Peoples, see Note 13 of the Notes to the
Consolidated Financial Statements included in Item 8 of this Form 10-K.
Federal and State Laws
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Peoples Bank is subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity, fair credit reporting and
community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of a bank to open a new
branch or engage in a merger transaction. Community reinvestment regulations
evaluate how well and to what extent a bank lends and invests in its designated
service area, with particular emphasis on low-to-moderate income communities and
borrowers in such areas.
Monetary Policy and Economic Conditions
The business of financial institutions is affected not only by general economic
conditions, but also by the policies of various governmental regulatory
agencies, including the Federal Reserve Board. The Federal Reserve Board
regulates money and credit conditions and interest rates in order to influence
general economic conditions primarily through open market operations in U.S.
Government securities, changes in the discount rate on bank borrowings, and
changes in the reserve requirements against depository institutions' deposits.
These policies and regulations significantly affect the overall growth and
distribution of loans, investments and deposits, and the interest rates charged
on loans, as well as the interest rates paid on deposits and accounts.
The monetary policies of the Federal Reserve Board have had a significant effect
on the operating results of financial institutions in the past and are expected
to continue to have significant effects in the future. In view of the changing
conditions in the economy and the money markets and the activities of monetary
and fiscal authorities, Peoples can make no definitive predictions as to future
changes in interest rates, credit availability or deposit levels.
Effect of Environmental Regulation
Peoples' primary exposure to environmental risk is through its lending
activities. In cases when management believes environmental risk potentially
exists, Peoples mitigates its environmental risk exposures by requiring
environmental site assessments at the time of loan origination to confirm
collateral quality as to commercial real estate parcels posing higher than
normal potential for environmental impact, as determined by reference to present
and past uses of the subject property and adjacent sites. Environmental
assessments are typically required prior to any foreclosure activity involving
non-residential real estate collateral.
In regards to residential real estate lending, management reviews those loans
with inherent environmental risk on an individual basis and makes decisions
based on the dollar amount of the loan and the materiality of the specific
credit.
Peoples anticipates no material effect on capital expenditures, earnings or the
competitive position of itself or any subsidiary as a result of compliance with
federal, state or local environmental protection laws or regulations.
Statistical Financial Information Regarding Peoples
The following listing of statistical financial information provides comparative
data for Peoples over the past three and five years, as appropriate. These
tables should be read in conjunction with Item 7 of this Form 10-K
("Management's Discussion and Analysis of Financial Condition and Results of
Operation") and the Consolidated Financial Statements of Peoples and its
subsidiaries found at pages 34 through 54 of this Form 10-K.
Average Balances and Analysis of Net Interest Income:
(Dollars in Thousands) 1999 1998 1997
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
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Securities (1):
Taxable $ 258,924 $ 16,600 6.41% $ 183,372 $11,671 6.36% $ 126,632 $ 8,636 6.82%
Nontaxable (2) 43,805 3,287 7.50% 34,653 2,677 7.72% 22,271 1,819 8.17%
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Total 302,729 19,887 6.57% 218,025 14,348 6.58% 148,903 10,455 7.02%
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Loans (3) (4):
Commercial 247,141 21,515 8.71% 186,746 17,156 9.19% 145,971 13,939 9.55%
Real estate 242,899 20,052 8.26% 234,141 20,176 8.62% 209,330 17,863 8.53%
Consumer 113,635 11,766 10.35% 111,824 11,684 10.45% 112,928 11,739 10.40%
Valuation reserve (10,121) (9,134) (7,521)
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Total 593,554 53,333 8.83% 523,577 49,016 9.20% 460,708 43,541 9.30%
---------- -------- ------ ---------- ------- ------- ----------- -------- ------
Short-term Investments:
Interest-bearing deposits 3,390 143 4.22% 3,967 222 5.60% 1,713 93 5.41%
Federal funds sold 5,074 244 4.81% 20,671 1,104 5.34% 7,915 437 5.52%
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Total 8,464 387 4.57% 24,638 1,326 5.38% 9,628 530 5.50%
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Total earning assets 904,747 73,607 8.14% 766,240 64,690 8.45% 619,239 54,526 8.81%
Other assets 80,496 65,056 48,260
---------- ---------- ----------
Total assets $ 985,243 $ 831,296 $ 667,499
---------- ---------- ----------
Deposits:
Savings $ 95,606 $ 2,290 2.40% $ 97,262 $ 2,764 2.84% $ 83,342 $ 2,552 3.06%
Interest-bearing demand 213,342 7,560 3.54% 168,035 6,002 3.57% 126,462 4,372 3.46%
Time 321,460 16,106 5.01% 321,920 17,284 5.37% 277,559 15,358 5.53%
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Total 630,408 25,956 4.12% 587,217 26,050 4.44% 487,363 22,282 4.57%
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Borrowed Funds:
Short-term 54,394 2,655 4.88% 44,959 2,241 4.98% 22,463 1,023 4.55%
Long-term 114,388 5,647 4.94% 38,885 2,205 5.67% 30,495 1,911 6.27%
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Total 168,782 8,302 4.92% 83,844 4,446 5.30% 52,958 2,934 5.54%
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Total interest-
bearing liabilities 799,190 34,258 4.29% 671,061 30,496 4.54% 540,321 25,216 4.67%
---------- -------- ------ ---------- ------- ------- ---------- -------- ------
Noninterest-bearing
demand deposits 78,799 70,064 59,860
Other liabilities 26,474 7,904 7,248
---------- ---------- ----------
Total liabilities 904,463 749,029 607,429
Stockholders' equity 80,780 82,267 60,070
---------- ---------- ----------
Total liabilities
and stockholders'
equity $ 985,243 $ 831,296 $ 667,499
---------- ---------- ----------
Interest rate spread $ 39,349 3.85% $34,194 3.91% $ 29,310 4.14%
-------- ------ ------- ------- -------- -------
Interest income/earning assets 8.14% 8.45% 8.81%
Interest expense/earning assets 3.79% 3.98% 4.07%
------ ------- -------
Net yield on earning assets (net
interest margin) 4.35% 4.47% 4.74%
------ ------- -------
<FN>
(1) Average balances of investment securities based on carrying value.
(2) Computed on a fully tax equivalent basis using a tax rate of 35%. Interest
income was increased by $1,261, $1,046 and $690 for 1999, 1998, and 1997,
respectively.
(3) Nonaccrual and impaired loans are included in the average balances listed.
Related interest income on nonaccrual loans prior to
the loan being put on nonaccrual is included in loan interest income.
(4) Loan fees included in interest income for 1999, 1998 and 1997 were $650,
$551 and $542, respectively.
</FN>
Rate Volume Analysis:
(Dollars in Thousands)
Change in Income/Expense (1) Rate Effect Volume Effect
1999 1998 1997 1999 1998 1997 1999 1998 1997
Investment income: (2)
Taxable ................. $ 4,929 $ 3,035 $ (19) $ 86 $ (609) $ 61 $ 4,843 $ 3,644 $ (80)
Nontaxable .............. 610 858 (87) (79) (103) (58) 689 961 (29)
- ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total .......... 5,539 3,893 (106) 7 (712) 3 5,532 4,605 (109)
- ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Loan Income:
Commercial .............. 4,359 3,217 1,995 (939) (547) 6 5,298 3,764 1,989
Real estate ............. (124) 2,313 3,541 (863) 177 396 739 2,136 3,145
Consumer ................ 82 (55) 790 (130) 67 (256) 212 (122) 1,046
- ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total .......... 4,317 5,475 6,326 (1,932) (303) 146 6,249 5,778 6,180
- ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Short-term investments .. (939) 796 186 (150) (12) 17 (789) 808 169
- ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest income ... 8,917 10,164 6,406 (2,075) (1,027) 166 10,992 11,191 6,240
- ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Interest expense:
Savings ................. (474) 212 250 (427) (193) 19 (47) 405 231
Interest-bearing ........ 1,558 1,630 716 (48) 149 202 1,606 1,481 514
demand deposits
Time .................... (1,178) 1,926 2,436 (1,153) (3,570) 2,831 (25) 5,496 (395)
Short-term borrowings ... 413 1,219 (426) (48) 106 (80) 461 1,113 (346)
Long-term borrowings .... 3,442 294 274 (320) (195) 36 3,762 489 238
- ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest expense .. 3,761 5,281 3,250 (1,996) (3,703) 3,008 5,757 8,984 242
- ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
$ 5,156 $ 4,883 $ 3,156 $ (79) $ 2,676 $ (2,842) $ 5,235 $ 2,207 $ 5,998
- ------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<FN>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the
relationship of the dollar amounts of the change in each.
(2) Presented on a fully tax equivalent basis.
</FN>
Loan Maturities at December 31, 1999:
Due in
(Dollars in Thousands) One Year Due
Due in Through After
Loan Type One Year Five Five
Or Less Years Years Total
Commercial loans:
Fixed $ 25,982 $ 34,928 $ 16,760 $ 77,670
Variable 73,139 40,025 81,385 194,549
- ------------------------- ----------- ----------- ------------ -----------
99,121 74,953 98,145 272,219
- ------------------------- ----------- ----------- ------------ -----------
Real estate loans:
Fixed 11,553 37,489 54,720 103,762
Variable 49,154 61,114 52,464 162,732
- ------------------------- ----------- ----------- ------------ -----------
60,707 98,603 107,184 266,494
- ------------------------- ----------- ----------- ------------ -----------
Consumer loans:
Fixed 45,737 64,324 1,667 111,728
Variable 7,880 1,012 500 9,392
- ------------------------- ----------- ----------- ------------ -----------
53,617 65,336 2,167 121,120
- ------------------------- ----------- ----------- ------------ -----------
Total $ 213,445 $ 238,892 $ 207,496 $ 659,833
- ------------------------- ----------- ----------- ------------ -----------
Maturities of Certificates of Deposit $100,000 or More:
(Dollars in Thousands) 1999 1998 1997 1996
Under 3 months .............. $12,261 $19,121 $13,302 $16,437
3 to 6 months ............... 8,275 14,335 24,069 8,279
6 to 12 months .............. 23,174 9,189 9,520 10,309
Over 12 months .............. 11,872 9,262 10,698 8,356
- ----------------------------- ------- ------- ------- -------
Total .............. $55,582 $51,907 $57,589 $43,381
- ----------------------------- ------- ------- ------- -------
Loan Portfolio Analysis:
(Dollars in Thousands)
Year-end balances: 1999 1998 1997 1996 1995
Commercial, financial and agricultural $ 272,219 $ 212,530 $ 159,035 $ 127,927 $ 117,306
Real estate 252,427 233,550 228,689 175,505 154,469
Real estate, construction 14,067 10,307 19,513 9,944 5,919
Consumer 114,412 104,718 107,158 102,044 95,464
Credit card 6,708 6,812 7,175 6,993 6,368
- -----------------------------------------------------------------------------------------------------------------
Total $ 659,833 $ 567,917 $ 521,570 $ 422,413 $ 379,526
- -----------------------------------------------------------------------------------------------------------------
Average total loans 603,922 532,711 468,229 400,264 367,222
Average allowance for loan losses (10,121) (9,134) (7,521) (6,799) (6,719)
- -----------------------------------------------------------------------------------------------------------------
Average loans, net of allowance $ 593,801 $ 523,577 $ 460,708 $ 393,465 $ 360,503
- ----------------------------------------------------------------------------------------------------------------
Allowance for loan losses, January 1 $ 9,509 $ 8,356 $ 6,873 $ 6,726 $ 6,783
Allowance for loan losses acquired -- -- 290 -- --
Loans charged off:
Commercial, financial and agricultural 306 101 354 342 256
Real estate 77 46 42 93 82
Consumer 932 1,220 1,258 1,726 1,352
Credit card 203 278 263 168 113
- ----------------------------------------------------------------------------------------------------------------
Total 1,518 1,645 1,917 2,329 1,803
- ----------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 44 55 124 36 111
Real estate 23 13 6 75 60
Consumer 304 378 374 391 251
Credit card 24 27 17 9 9
- ----------------------------------------------------------------------------------------------------------------
Total 395 473 521 511 431
- ----------------------------------------------------------------------------------------------------------------
Net chargeoffs:
Commercial, financial and agricultural 262 46 230 306 145
Real estate 54 33 36 18 22
Consumer 628 842 884 1,335 1,101
Credit card 179 251 246 159 104
- ----------------------------------------------------------------------------------------------------------------
Total 1,123 1,172 1,396 1,818 1,372
- ----------------------------------------------------------------------------------------------------------------
Provision for loan losses, December 31 1,878 2,325 2,589 1,965 1,315
- ----------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 10,264 $ 9,509 $ 8,356 $ 6,873 $ 6,726
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
Allocation of allowance for loan losses at December 31:
Commercial $ 5,164 $ 3,757 $ 3,147 $ 2,741 $ 3,425
Real estate 1,557 1,453 1,478 1,050 1,517
Consumer 2,161 2,556 2,255 2,078 1,534
Credit card 434 628 395 131 100
Unallocated 948 1,115 1,081 873 150
- -------------------------------------------------------------------------------------------------------------
Total $ 10,264 $ 9,509 $ 8,356 $ 6,873 $ 6,726
- -------------------------------------------------------------------------------------------------------------
Percent of loans to total loans at December 31:
Commercial 41.3% 37.4% 30.5% 30.3% 30.9%
Real estate 38.3 41.1 43.8 41.5 40.7
Real estate, construction 2.1 1.9 3.8 2.3 1.5
Consumer 17.3 18.4 20.5 24.2 25.2
Credit card 1.0 1.2 1.4 1.7 1.7
- -------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------------------------------------
Ratio of net chargeoffs to average total loans:
Commercial 0.04% 0.01% 0.05% 0.08% 0.04%
Real estate 0.01 0.01 0.01 0.00 0.01
Consumer 0.11 0.16 0.19 0.33 0.30
Credit card 0.03 0.04 0.05 0.04 0.02
- -------------------------------------------------------------------------------------------------------------
Total 0.19% 0.22% 0.30% 0.45% 0.37%
- -------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Loans 90+ days past due 249 495 462 621 1,236
Renegotiated loans 747 392 -- -- --
Nonaccrual loans 1,109 687 1,220 999 482
- -------------------------------------------------------------------------------------------------------------
Total nonperforming loans 2,105 1,574 1,682 1,620 1,718
Other real estate owned 207 396 19 28 45
- -------------------------------------------------------------------------------------------------------------
Total nonperforming assets 2,312 1,970 1,701 1,648 1,763
- -------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percent of total loans 0.32% 0.28% 0.32% 0.38% 0.45%
- -------------------------------------------------------------------------------------------------------------
Nonperforming assets as a percent of total assets 0.21% 0.22% 0.22% 0.27% 0.32%
- -------------------------------------------------------------------------------------------------------------
Nonperforming loans are comprised of loans 90 days or more past due,
renegotiated loans and nonaccrual loans. Nonperforming assets are comprised of
nonperforming loans and other real estate owned.
Interest income on nonaccrual and renegotiated loans which would have been
recorded under the original terms of the loans for 1999, 1998 and 1997 was $102
(of which $66 was actually recorded), $59 (of which $30 was actually recorded)
and $41 (of which $5 was actually recorded), respectively.
ITEM 2. PROPERTIES
- ------------------
Peoples' sole banking subsidiary, Peoples Bank, generally owns its offices,
related facilities and unimproved real property. Peoples Bank operates offices
in Marietta (4 offices), Belpre (2 offices), Lowell, Reno, Nelsonville (2
offices), Athens (3 offices), The Plains, Middleport, Rutland, Pomeroy (2
offices), Gallipolis, Caldwell, Chesterhill, McConnelsville, Baltimore,
Lancaster and Granville, Ohio. In West Virginia, Peoples operates offices in
Huntington, Parkersburg (2 offices), Vienna, Point Pleasant (2 offices), New
Martinsville (2 offices) and Steelton. Office locations in Kentucky include
Catlettsburg, Grayson, Ashland and Russell.
Peoples Bank operates through 38 banking offices. Of these, 12 are leased and
the remainder are owned. Rent expense on the leased properties totaled $210,000
in 1999. The following is a list of those properties which have leases expiring
on or before June 2001:
Location Address Lease Expiration Date
- --------------------- --------------------------- ----------------------
The Plains Office 70 North Plains Road, Suite 101 June 2001
The Plains, OH, 45750
Granville Loan 1915 Newark-Granville Road September 2000
Production Office Granville, OH, 43023
Lancaster Loan 117 West Main Street October 2000
Production Office Lancaster, OH, 43130
Point Pleasant 2513 Jackson Avenue September 2000
North Office Point Pleasant, WV, 25550
Additional information concerning the property and equipment owned or leased by
Peoples and its subsidiaries is incorporated herein by reference from "Note 5.
Bank Premises and Equipment" of the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
There are no pending legal proceedings to which Peoples or any of its
subsidiaries is a party or to which any of their property is subject other than
ordinary routine litigation to which Peoples' subsidiaries are parties
incidental to their respective businesses. Peoples considers none of such
proceedings to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------------------------------------------------------------------------------
The table presented below sets forth the high and low bids for the indicated
periods, and the cash dividends declared, with respect to Peoples' common
shares.
Quarterly Market and Dividend Information
PER SHARE
High Bid Low Bid Dividend
1999
Fourth Quarter $ 24.89 $ 17.95 $ 0.13
Third Quarter 27.27 24.32 0.13
Second Quarter 25.45 18.28 0.13
First Quarter $ 21.28 $ 18.28 $ 0.12
- -------------------------------------------------------------------------
1998
Fourth Quarter $ 22.52 $ 17.77 $ 0.12
Third Quarter 25.52 20.25 0.11
Second Quarter 29.07 24.38 0.11
First Quarter $ 24.65 $ 21.63 $ 0.11
- -------------------------------------------------------------------------
1997
Fourth Quarter $ 27.00 $ 21.76 $ 0.11
Third Quarter 22.31 19.42 0.11
Second Quarter 20.25 16.12 0.10
First Quarter $ 16.67 $ 14.46 $ 0.10
- -------------------------------------------------------------------------
Peoples' common shares are traded on The Nasdaq National Market under the symbol
PEBO. Bid information has been obtained directly from The Nasdaq National
Market.
Peoples plans to continue to pay quarterly cash dividends, subject to certain
regulatory restrictions described in Note 13 to the Consolidated Financial
Statements included in Item 8.
The bid information and per share dividends have been retroactively adjusted for
a 10% stock dividend issued on March 14, 2000, a 10% stock dividend issued on
June 15, 1999, and a 3-for-2 stock split effective April 30, 1998.
Peoples Bancorp had 1,272 stockholders of record at December 31, 1999.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
The information below has been derived from Peoples' Consolidated Financial
Statements.
(Dollars in Thousands, except Ratios and Per Share Data)
1999 1998 1997 1996 1995
Operating Data For the year ended:
Total interest income $ 72,346 $ 63,645 $ 53,836 $ 47,397 $ 43,068
Total interest expense 34,258 30,497 25,216 21,966 20,777
Net interest income 38,088 33,148 28,620 25,431 22,291
Provision for loan losses 1,878 2,325 2,589 1,965 1,315
(Losses) gains on securities transactions (104) 418 (28) 48 24
Other income 7,633 6,820 5,966 5,130 4,457
Intangible amortization expense 2,639 2,093 1,138 625 210
Other expense 25,558 21,183 18,127 16,897 16,608
Net income $ 10,718 $ 10,045 $ 8,605 $ 7,651 $ 6,050
- ---------------------------------------------------------------------------------------------------------------
Balance Sheet Data
At year end:
Total assets $ 1,075,450 $ 880,284 $ 758,158 $ 616,635 $ 543,430
Total intangibles 20,154 22,117 12,796 6,433 1,158
Investment securities 328,306 235,569 174,291 147,783 131,762
Net loans 649,569 558,408 513,214 415,540 372,800
Total deposits 728,207 714,168 611,107 504,692 429,077
Long-term borrowings 150,338 40,664 28,577 29,200 23,142
Stockholders' equity 72,874 86,014 78,818 56,193 51,474
Tangible assets (1) 1,055,296 858,167 745,362 610,202 542,272
Tangible equity (2) $ 52,720 $ 63,897 $ 66,022 $ 49,760 $ 50,316
- ---------------------------------------------------------------------------------------------------------------
Significant Ratios
Cash earnings to: (3)
Average tangible assets (4) 1.30% 1.41% 1.42% 1.37% 1.17%
Average tangible equity (4) 20.96 17.82 18.00 16.58 12.93
Net income to:
Average total assets 1.09 1.20 1.29 1.29 1.15
Average stockholders' equity 13.27 12.21 14.33 14.43 12.33
Average stockholders' equity
to average total assets 8.2 9.9 9.0 8.9 9.3
Average loans to average deposits 85.1 80.9 85.5 84.0 85.2
Risk-based capital ratio 14.30 11.95 14.34 12.86 13.85
Dividend payout ratio 31.8% 30.4% 30.5% 30.5% 32.2%
- ---------------------------------------------------------------------------------------------------------------
Per Share Data
Cash earnings: (3)
Basic $ 1.83 $ 1.65 $ 1.48 $ 1.29 $ 0.98
Diluted 1.79 1.60 1.44 1.28 0.97
Net income:
Basic 1.57 1.44 1.37 1.23 0.96
Diluted 1.53 1.40 1.32 1.21 0.95
Cash dividends paid 0.50 0.44 0.41 0.36 0.31
Book value at end of period $ 11.06 $ 12.39 $ 11.33 $ 8.99 $ 8.28
Weighted average shares outstanding:
Basic 6,846,071 6,975,989 6,303,782 6,239,589 6,318,334
Diluted 7,023,921 7,186,616 6,502,386 6,324,294 6,353,501
<FN>
(1) Total assets less goodwill and core deposit intangibles.
(2) Total stockholders' equity less goodwill and core deposit intangibles.
(3) Excludes after-tax amortization of goodwill and core deposit intangibles.
(4) Defined as cash earnings as a percentage of average total assets or average
stockholders' equity minus average goodwill and core deposit intangibles.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
- -------------------------------------------------------------------------------
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' subsidiaries are The Peoples Banking and Trust
Company; The First National Bank of Southeastern Ohio ("First National Bank"),
which also owns two insurance agency subsidiaries; Peoples Bank FSB; and
Northwest Territory Life Insurance Company, an Arizona corporation that
reinsures credit life and disability insurance issued to customers of Peoples'
banking subsidiaries.
The Peoples Banking and Trust Company is chartered by the State of Ohio and
subject to regulation, supervision, and examination by the Federal Deposit
Insurance Corporation ("FDIC") and the Ohio Division of Banks. First National is
a member of the Federal Reserve System and subject to regulation, supervision,
and examination by the Office of the Comptroller of the Currency. Peoples Bank
FSB is a member of the Federal Home Loan Bank, and is subject to regulation,
supervision, and examination by the Office of Thrift Supervision, and is also
subject to limited regulation by the Board of Governors of the Federal Reserve
System.
In the first quarter of 2000, Peoples announced plans to consolidate its three
banking subsidiaries, The Peoples Banking and Trust Company, First National and
Peoples Bank FSB, into a single national bank named Peoples Bank, National
Association, which will operate under the trade name "Peoples Bank" ("Subsidiary
Bank Consolidation"). The Subsidiary Bank Consolidation, expected to be
completed March 10, 2000, is contingent upon regulatory approval and other
conditions.
This discussion and analysis should be read in conjunction with the audited
Consolidated Financial Statements and footnotes and the ratios and statistics
contained elsewhere in this Form 10-K.
References will be found in this Form 10-K 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 The Peoples Banking and Trust Company (Peoples'
largest subsidiary 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 315,000 shares) from time to time in open
market or privately negotiated transactions ("1999 Stock Repurchase Program").
The 1999 Stock Repurchase Program was completed on December 31, 1999. The
combination of the issuance of Capital Securities and the 1999 Stock Repurchase
Program 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.
On June 26, 1998, The Peoples Banking and Trust Company completed the purchase
of four full-service banking offices located in the communities of Point
Pleasant (two offices), New Martinsville, and Steelton, West Virginia ("West
Virginia Banking Center Acquisition") from an unaffiliated institution. In the
transaction, The Peoples Banking and Trust Company assumed approximately $121.0
million of deposits and purchased $8.3 million in loans.
Overview of the Income Statement
Peoples had increased net income of $673,000 or 6.7%, to $10,718,000 in 1999
from $10,045,000 in 1998. Diluted cash earnings per share for the year ended
December 31, 1999, was $1.79, up $0.19 (or 11.9%) from $1.60 in diluted cash
earnings per share in 1998. Cash earnings removes the after-tax impact of
intangible amortization expense. Return on tangible assets dropped to 1.30% in
1999 compared to 1.41% in 1998. 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 20.96% in 1999 compared to
17.82% last year. Return on tangible equity is defined as cash earnings as a
percentage of average total stockholders' equity minus goodwill and core deposit
intangibles.
On a diluted basis, earnings per share reached $1.53 in 1999, up $0.13 (or 9.3%)
compared to the previous year. Peoples' core earnings increased due to strong
net interest income and additional revenue streams associated with recent
acquisitions. Return on average equity in 1999 totaled 13.27% compared to 12.21%
in 1998. Return on average assets was 1.09% in 1999 compared to 1.20% the
previous year.
Due primarily to earning asset growth, net interest income in 1999 increased
$4,940,000 (or 14.9%) to $38,088,000. The provision for loan losses in 1999
totaled $1,878,000 compared to $2,325,000 recorded in 1998 due largely to
continued strong asset quality. Bolstered by growth in deposit account service
charges, non-interest income increased $813,000 (or 11.9%) to $7,633,000. In
1999, Peoples reported net losses on securities transactions of $104,000
compared to net gains of $418,000 in 1998. Non-interest expense increased
$4,921,000 (or 21.1%) to $28,197,000 due to a combination of costs related to
market expansion and acquisition, as well as interest expense from the issuance
of the Trust Preferred Securities recorded in other expenses.
Peoples continues to grow through acquisitions accounted for as purchase
transactions. While acquisitions using stock are continually evaluated,
management is cognizant of not diluting shareholder ownership merely for the
sake of growth. Management believes a comparative approach to financial
reporting should include the discussion of "cash earnings", which removes the
after-tax impact of the amortization of intangibles on Peoples' results of
operations and facilitates comparison of Peoples with competitors making
acquisitions using pooling of interests accounting. Management uses cash
earnings as one of several ways to evaluate the impact of acquisitions on
profitability and Peoples' return on its investment. Recent acquisitions have
increased and will modestly increase Peoples' amortization expense related to
goodwill and other intangibles and as a result, the purchase method of
accounting has affected earnings per share and other ratios. 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
1999, intangible amortization expense totaled $2,639,000 ($1,833,000 after
taxes) compared to $2,093,000 ($1,480,000 after taxes) last year. Due to recent
purchase acquisitions and related intangibles, average balance sheet intangibles
increased to $20.9 million in 1999 compared to $17.6 million in 1998.
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 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 a full year's impact of earning asset growth that
occurred through 1998's West Virginia Banking Center Acquisition generated
strong net interest income streams in 1999. Increased operating earnings in 1999
can be attributed primarily to growth of Peoples' net interest income through
the Leverage Strategy as well as strong internal loan growth. Net interest
income grew to $36,210,000 in 1999, compared to $30,823,000 in 1998, an increase
of $5,387,000 (or 17.5%). Total interest income reached $72,346,000 while
interest expense totaled $34,258,000. Included in interest income is $2,341,000
of tax-exempt income from investments issued by and loans made to states and
political subdivisions. Since these revenues are not taxed, it is more
meaningful to analyze net interest income on a fully-tax equivalent ("FTE")
basis.
Net interest margin is calculated by dividing FTE net interest income by average
interest-earning assets and serves as a measurement of the net revenue stream
generated by Peoples' balance sheet. In 1999, net interest margin was 4.35%
compared to 1998's ratio of 4.47%. The FTE yield on earning assets was 8.14% in
1999, compared to 8.45% in 1998. The ratio of interest expense to earning assets
decreased 19 basis points to 3.79% in 1999. Net interest margin compressed
slightly in 1999 due to the impact of the Leverage Strategy, which significantly
increased Peoples' earning asset base in comparatively lower-yielding assets
such as mortgage-backed investment securities and other investments. Net
interest margin also faced downward pressure due to competitive pricing of loans
and deposits in Peoples' markets. Through its Leverage Strategy, Peoples
increased net interest income by $5,156,000, of which $5,235,000 of the increase
was attributable to volume increases, while declining rates offset interest
income growth by $79,000. The compression of net interest margin was also the
result of Peoples' increase in cash reserves during the fourth quarter in
preparation for potential large Y2K cash withdrawals. In order to fund Y2K cash
reserves, Peoples accessed various short-term funding sources resulting in
additional interest cost in the fourth quarter of 1999, which decreased 1999's
net interest margin approximately 3 basis points. Management anticipates net
interest margin will decrease modestly in future periods due to continued
intense competition for loans and deposits in Peoples' markets, as well as
recent increases in the cost of funding sources from rises in interest rates.
Management continues to analyze methods to redeploy Peoples' assets to an
earning asset mix which will result in a net interest margin similar to Peoples'
ratios before the Leverage Strategy was initiated. Loan growth continues to be
strong and management anticipates that loan activity will remain strong in the
near term future, which will enable Peoples to shift a portion of its earning
asset base to these higher-yield assets as lower-yielding investment securities
mature.
Average total earning assets totaled $904.7 million in 1999, a $138.5 million
(or 18.1%) increase over 1998. Average loans grew $70.0 million (or 13.4%) in
1999 and comprise the largest earning asset component on Peoples' balance sheet.
Due to Peoples' Leverage Strategy and recent acquisitions, Peoples' average
balances of investment securities increased $84.7 million from $218.0 million in
1998 to $302.7 million in 1999.
Yield on earning assets totaled 8.14% in 1999, compared to 8.45% the prior year.
The decrease in Peoples' earning asset yield is primarily attributable to the
decrease in Peoples' loan portfolio yield, which dropped to 8.83% in 1999
compared to 9.20% in 1998. Peoples' investment portfolio yield remained stable,
decreasing one basis point to 6.57% in 1999.
Deposit costs, which comprise the largest dollar volume of interest-bearing
liabilities, decreased 32 basis points to 4.12% in 1999 due to lowering savings
and time deposit rates. The cost of borrowed funds also decreased, falling to
4.92% in 1999 from 5.30% in 1998.
Compared to 1998, the cost of interest-bearing liabilities decreased 25 basis
points to 4.29% in 1999. Interest costs on Peoples' array of traditional
interest-bearing deposit products decreased 32 basis points to 4.12% in 1999
compared to the previous year. The most significant component of interest
expense in 1999 was interest paid on time deposits (Certificates of Deposits and
Individual Retirement Accounts). In 1999, Peoples paid interest of $16,106,000,
or 5.01%, on average time deposit balances of $321.5 million. In 1998, the
average rate paid was 5.37% on average time deposit balances of $321.9 million.
Management expects deposit pricing to be increasingly competitive in 2000 and
will continue to focus its efforts to increase balances in non-interest bearing
demand deposits, which grew, on average, $8.7 million to $78.8 million in
average balances in 1999.
In 1999, Peoples continued to use a combination of short-term and long-term
borrowings as funding sources to fuel loan growth. Peoples' cash management
services (offered to a variety of business customers) have provided short-term
funding, specifically overnight repurchase agreements. In 1999, Peoples' average
balances of these overnight repurchase agreements (excluding balances of
national repurchase agreements available through wholesale funding sources)
decreased $1.3 million to $30.2 million. The average rate paid in 1999 on
overnight repurchase agreements totaled 4.29%, down 41 basis points from the
prior year's average rate of 4.70%. Average overnight repurchase agreements
comprised the largest component of Peoples' average short-term borrowings.
During 1999, Peoples accessed national market repurchase agreements in effort to
diversify Peoples' short-term funding sources as well as take advantage of
attractive short-term financing rates. Peoples did not access this particular
funding source in 1998, while average national market repurchase agreements
totaled $18.6 million in 1999 at an average rate of 5.69%.
Peoples also continued to use short-term FHLB advances as a source to fund its
operations and investments during 1999. Average short-term FHLB balances
decreased to $5.5 million in 1999, compared to $12.5 million in 1998, causing
interest costs to decrease to $296,000 (down from $712,000 last year). In 1999,
the average interest rate on short-term FHLB advances was 5.40% compared to
5.68% in 1998. Management plans to maintain access to short-term FHLB borrowings
as an appropriate funding source.
Long-term borrowing costs, which represent the largest average volume of
borrowed fund costs, decreased compared to 1998. The rate paid on average
long-term borrowings totaled 4.94% in 1999, down 73 basis points compared to
5.67% in 1998. 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.
The growth of Peoples' earning asset base through the Leverage Strategy and
recent acquisitions will continue to impact net interest margin in 2000.
Management expects interest rate pressures will continue to challenge Peoples in
2000 as financial institutions and other competitors continue to search for new
methods and products to satisfy increasing customer demand for higher yielding
interest-bearing deposits. Management will continue to monitor the effects of
net interest margin on the performance of Peoples.
Provision for Loan Losses
In 1999, Peoples recorded a provision for loan losses of $1,878,000, compared to
1998's expense of $2,325,000. The provision is based upon management's
continuing evaluation of the adequacy of the allowance for loan losses and is
reflective of the quality of the portfolio and overall management of the inherit
credit risk. Management expects continued loan growth in 2000 and believes that
future provision expense will modestly increase, dependent on loan
delinquencies, portfolio risk, overall loan growth, and general economic
conditions in Peoples' markets. Further discussion can be found later in this
discussion under "Allowance for Loan Losses."
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, electronic banking revenues, and insurance commissions. Non-interest
income (excluding securities transactions) from operations reached new levels in
1999, totaling $7,633,000, an increase of $813,000 (or 11.9%) compared to 1998.
All non-interest income categories had strong growth compared to last year,
reflecting management's focus on top-line revenue enhancement as a primary
source of cost-recovery.
Deposit account service charge income reached $3,081,000 in 1999, compared to
$2,533,000 in 1998, an increase of $548,000 (or 21.6%). In 1999, deposit account
service charge income was effected favorably by the full-year's impact of the
West Virginia Banking Center Acquisition and its associated $121 million in
deposits, which provided the base for associated increased fee income.
Approximately $387,000 of Peoples' increase in deposit account service charge
income for 1999 can be attributed to the deposits acquired in the West Virginia
Banking Center Acquisition. Other increases in service charge income resulted
from revisions in Peoples' fee structure in early 1999. Peoples' fee income
generated from deposits is based on recovery of costs associated with services
provided.
The fee structure for investment and fiduciary activities is based primarily on
the market value of assets being managed, which totaled approximately $560
million at year-end 1999, up approximately $9 million from the previous
year-end. Due primarily to growth in market values and in the number of accounts
served, income from fiduciary activities totaled $2,634,000 in 1999, an increase
of 13.3% compared to 1998. Peoples continues to build on its leadership position
in its core markets and investment and fiduciary services will be a significant
contributor to Peoples' non-interest income streams.
Electronic banking, including ATM cards, direct deposit services, and debit card
services, is one of the many product lines offered by Peoples. The fees
associated with these products and services significantly impact Peoples'
non-interest income. For the year ended December 31, 1999, electronic banking
revenues totaled $678,000, an increase of $82,000 (or 13.8%) compared to the
same period last year. These increases are due primarily to growth in the number
of debit card users as well as corresponding volume increases in debit card
usage. Management will continue to focus on electronic banking as a source of
revenue as the financial services industry develops additional methods to
provide electronic commerce.
In addition to traditional sources of non-interest income, Peoples also offers a
complete line of insurance and investment products. 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 year ended December
31, 1999, commissions on insurance and securities generated revenues totaling
$471,000, a $41,000 (or 9.5%) increase over the prior year. In the second
quarter of 1999, Peoples named Raymond James Financial Services, Inc. (member
NASD and SIPC), an unaffiliated registered broker/dealer, as its provider of
improved services to Peoples' investment customers, including, but not limited
to, asset management, corporate bonds, municipal bonds, portfolio evaluation,
asset allocation, tax shelters, unit trusts, common/preferred stocks, government
securities, mutual funds, retirement planning, estate planning, tax-exempt
securities, annuities, and financial planning services. Management believes
these services are integral to Peoples' relationship and needs-based sales
philosophy. Securities are offered exclusively through Raymond James Financial
Services, Member NASD/SIPC, an independent broker/dealer, located at many
Peoples sales offices. Investments and insurance products are not FDIC insured,
are not bank deposits, nor are they guaranteed by the financial institution,
subject to risk and may lose value. Insurance products are underwritten by
various insurance companies and are made available through licensed insurance
agency affiliates of Peoples.
Management will continue to explore new methods of enhancing non-interest
income. Other traditional and non-traditional financial service products are
analyzed regularly for potential inclusion in Peoples' product mix.
Gains (Losses) on Securities Transactions
For the year ended December 31, 1999, Peoples reported net losses on securities
transactions of $104,000 ($68,000 after taxes or $0.01 per share) compared to
net gains on securities transactions of $418,000 ($272,000 after taxes, or $0.04
per diluted share) recorded in 1998. Net losses on securities transactions in
1999 were primarily the result of Peoples' repositioning of the investment
portfolio to improve the pledging capabilities (for various deposit
relationships) of Peoples' investment securities.
For the year ended December 31, 1998, Peoples had gains of $523,000, of which
$516,000 related to an equity investment in a company that was acquired in a
merger transaction. Peoples also reported losses on sales of securities of
$105,000 from additional repositioning of the investment portfolio.
Non-Interest Expense
For the year ended December 31, 1999, total non-interest expense reached
$28,197,000, up $4,921,000 (or 21.1%) compared to 1998. When comparing 1999
non-interest expense information to 1998, it is important to consider that
several categories within non-interest expense were directly impacted by the
West Virginia Banking Center Acquisition and related growth of non-interest
expenses such as salaries and benefits, depreciation expense, and intangible
amortization. In addition, non-interest expense was impacted due to costs
(combination of debt service expenses and amortization of associated capitalized
issuance costs) associated with the Trust Preferred Securities, which totaled
$1,840,000 in 1999.
Non-operational items caused a significant increase in non-interest expense for
the year ended December 31, 1999, in particular, amortization of intangibles
totaled $2,639,000 (an increase of 26.1%) compared to $2,093,000 recorded in
1998. The additional intangible asset amortization expense arising from the West
Virginia Banking Center Acquisition was the primary reason for this increase.
Compared to 1998, salaries and benefits expense increased $1,728,000 (or 17.1%)
to $11,824,000 in 1999, reflecting Peoples continuing effort to expand both
inside and outside its geographic markets. Acquisitions and new financial
service center openings have increased the number of Peoples' employees,
primarily those associates dedicated to customer service areas in the acquired
offices and new offices recently opened by Peoples. At December 31, 1999,
Peoples had 385 full-time equivalent employees, compared to 362 full-time
equivalent employees at December 31, 1998. Management will continue to strive to
find new ways of increasing efficiencies and leveraging its resources,
effectively optimizing customer service and return to shareholders.
Recent acquisitions and investments also impacted net occupancy expenses, in
particular depreciation expense. For the year ended December 31, 1999, furniture
and equipment expenses totaled $1,787,000, up $59,000 (or 3.4%) compared to
1998. Net occupancy expense totaled $1,839,000 in 1999, an increase of $242,000
(or 15.2%) compared to the same period a year earlier. These increases can be
attributed primarily to the depreciation of the assets purchased in recent
acquisitions, completion of financial service center remodeling projects
(specifically the three Wal-Mart Financial Service Centers opened to date and
other banking center refurbishment), as well as increased depreciation of
additional expenditures on technology. Peoples increased investment in
technology and other customer-service enhancements will also impact depreciation
expense in the future.
In 1999, Peoples embarked on several educational sales programs designed to
increase associates' knowledge of relationship sales techniques and enhance
Peoples' sales culture. The educational programs are expected to continue in
2000 and have modestly increased non-interest expense compared to previous
periods. Management believes these types of investments in the future are
necessary to remain competitive in the financial services industry and
anticipates these programs will increase customer service associates perception
and understanding of the relationship sales process.
Maintaining acceptable levels of non-interest expense and operating efficiency
are key performance indicators for 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 a key indicator of performance. Gains and losses on sales of
investment securities, as well as other nonrecurring charges, are not included
in the calculation of Peoples' efficiency ratio.
In 1999, Peoples' reported an efficiency ratio of 53.94%, down from 1998's
50.38%. 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,
challenged Peoples' efficiency ratio. Management anticipates the efficiency
ratio will stabilize in 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.
Return on Assets
After removing the impact of intangibles and corresponding amortization, return
on tangible assets decreased 11 basis points to 1.30% in 1999 compared to the
previous year. For the year ended December 31, 1999, return on average assets
("ROA") was 1.09%, compared to 1.20% in 1998. Increased income streams from
recent acquisitions were offset by amortization of intangibles assumed in such
purchases, resulting in lower ROA levels compared to previous periods.
Additionally, the Leverage Strategy significantly increased the asset base of
Peoples in the second quarter of 1999 and caused a decrease in Peoples' tangible
return on equity and ROA.
Management anticipates that ROA will stabilize in 2000. Peoples will be
challenged to employ its asset base in a manner that will produce acceptable
returns on investment. Assuming Peoples is successful in transitioning the
investments purchased in the Leverage Strategy to higher-yielding loans,
management expects ROA to modestly improve. Management believes that recent
changes to Peoples' balance sheet, particularly through the Trust Preferred
Securities issuance and Leverage Strategy, will shift Peoples' strategic focus
on 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 20.96% in 1999 compared to 17.82% in 1998.
Peoples' return on average stockholders' equity ("ROE") was 13.27% in 1999
compared to 12.21% in 1998. Using a portion of the proceeds from the Trust
Preferred Securities issuance to implement Peoples' 1999 Stock Repurchase
Program, ROE was favorably impacted during 1999 with the reduction in the number
of outstanding common shares. With the implementation of the 2000 Stock
Repurchase Program, future 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 2000.
Peoples and its banking subsidiaries are considered well-capitalized under
regulatory and industry standards of risk-based capital (as discussed in Note 13
of the Notes to Peoples' Consolidated Financial Statements) and such ratios were
enhanced through the Trust Preferred Securities issuance in 1999.
Income Tax Expense
Federal income taxes increased from $4,740,000 in 1998 to $4,824,000 in 1999.
Peoples' effective tax rate for 1999 was 31.0%, compared to 32.1% in 1998. The
modest decrease can be attributed to increases in tax-exempt income compared to
the prior year and investments in low income housing tax credits ("LIHTC") and
LIHTC pools, which reduce Peoples' tax burden and lower Peoples' effective tax
rate. Management continues to explore methods in which to decrease Peoples'
burden.
Peoples has invested and plans to make additional investments in various tax
credit pools over the next several years. Total investment in these tax credit
pools is not expected to exceed $5.0 million and is expected to benefit Peoples'
future results of operations through reductions in Peoples' effective tax rate.
Overview of the Balance Sheet
Peoples' balance sheet at December 31, 1999, changed significantly in comparison
to year-end 1998 primarily due to the issuance of the Trust Preferred Securities
and the associated Leverage Strategy implemented during 1999's second quarter.
Assets totaled $1.08 billion at December 31, 1999, up $195 million (or 22.2%)
since year-end 1998. Due to the Leverage Strategy, the largest asset growth
occurred in the investment securities portfolio, which totaled $328.3 million at
December 31, 1999, an increase of $92.7 million (or 39.4%) over year-end 1998.
Compared to December 31, 1998, total loans increased $92.0 million (or 16.2%) to
$659.8 million, as growth continues to be strong in each of Peoples' loan
categories.
Total liabilities increased $179.3 million (or 22.6%) to $973.6 million for the
year ended December 31, 1999. This increase can be attributed primarily to the
Leverage Strategy and the funding needs generated from its implementation as
well as increases in short-term borrowings to fund Y2K cash reserves. Long-term
borrowings increased to $150.3 million at December 31, 1999, up $109.7 million
over year-end 1998. Short-term borrowings increased $54.9 million compared to
year-end 1998, totaling $87.4 million at December 31, 1999. Peoples' deposits
totaled $728.2 million at December 31, 1999, an increase of $14.0 million (2.0%)
in comparison to year-end 1998.
The April, 1999 issuance of the Trust Preferred Securities is presented as
"Guaranteed Preferred Beneficial Interest in Junior Subordinated Debentures".
Peoples has classified the Trust Preferred Securities as "mezzanine" equity on
its balance sheet, net of issuance costs of approximately $1.0 million.
Stockholders' equity totaled $72.9 million at December 31, 1999, compared to
$86.0 million at December 31, 1998, a decrease of $13.1 million (or 15.3%). The
decrease in equity resulted from decreases in Peoples' net unrealized losses on
available-for-sale securities, as well as the impact of the 1999 Stock
Repurchase Program. At December 31, 1999, Peoples had $7.7 million of net
unrealized losses on available for sale securities compared to $3.6 million of
unrealized gains on available for sale securities at December 31, 1998. At
December 31, 1999, Peoples had a treasury share balance of $10.8 million, an
$8.9 million increase compared to year-end 1998 due primarily to purchases under
Peoples' 1999 Stock Repurchase Plan. Other repurchases of Peoples' common shares
during 1999 funded Peoples' stock benefit plans and a deferred compensation plan
that permits Peoples' directors to acquire common shares through deferral of
directors fees.
Cash and Cash Equivalents
Peoples' cash and cash equivalents totaled $43.8 million at December 31, 1999,
an increase of $3.6 million compared to year-end 1998. At December 31, 1999,
Peoples held no federal funds sold compared to $9.7 million at December 31,
1998, due to the allocation of liquid funds into Peoples' Y2K cash reserves.
Normally, management directs liquid funds into higher-yielding assets such as
loans to meet loan demand in its markets, as well as enhance profitability.
Management believes the current balance of cash and cash equivalents adequately
serves Peoples' liquidity and performance needs. Total cash and cash equivalents
fluctuate on a daily basis due to transactions in process and other liquidity
needs. Management believes the liquidity needs of Peoples are satisfied by the
current balance of cash and cash equivalents, readily available access to
traditional and non-traditional funding sources, and the portions of the
investment and loan portfolios that mature within one year. These sources of
funds should enable Peoples to meet cash obligations and off-balance sheet
commitments as they come due.
Investment Securities
Investment securities totaled $328.3 million at year-end 1999, up $92.7 million
(or 39.4%) compared to December 31, 1998. Funds generated from the issuance of
the Trust Preferred Securities, as well as the Leverage Strategy, were used to
purchase approximately $150 million of additional investment securities during
the second quarter of 1999.
All of Peoples' investment securities are classified as available-for-sale.
Management believes the available-for-sale classification provides flexibility
for Peoples in terms of selling securities as well as interest rate risk
management opportunities. At December 31, 1999, the amortized cost of Peoples'
investment securities totaled $340.1 million, resulting in unrealized
depreciation in the investment portfolio of $11.8 million and a corresponding
decrease in Peoples' equity of $7.7 million.
As a direct result of the Leverage Strategy, several categories of investments
within the investment portfolio experienced significant growth. Investments in
US Treasury securities and obligations of US government agencies and
corporations increased $50.4 million to $100.7 million at December 31, 1999.
During the year ended December 31, 1999, investments in mortgage-backed
securities increased $42.7 million to $147.4 million, and now represent the
largest segment of Peoples' investment securities portfolio. Peoples' balances
in investment obligations of states and political subdivisions totaled $35.2
million at December 31, 1999, a decrease of $10.4 million since December 31,
1998. Corporate and other investments at December 31, 1999, totaled $45.0
million, an increase of $10.0 million over December 31, 1998.
Management anticipates continued modest reductions of investment securities in
future periods as earning assets are deployed to higher-yielding investments
such as loans. In the third quarter of 1999, Peoples sold approximately $22
million of investment securities (primarily tax-exempt securities) and
reinvested approximately $18 million, primarily in mortgage-backed securities,
while maintaining similar earning yields and approximate duration of the
investment securities portfolio. The repositioning provided Peoples with
additional securities that can be easily pledged as collateral, as well as
increased Peoples' borrowing capacity.
Management monitors the earnings performance and liquidity of the investment
portfolio on a regular basis through Asset/Liability Committee ("ALCO")
meetings. The group also monitors net interest income, sets pricing guidelines,
and manages interest rate risk for Peoples. Through active balance sheet
management and analysis of the investment securities portfolio, Peoples
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 $659.8 million at December 31, 1999, an increase of $91.9
million (or 16.2%) since year-end 1998. Retail loan growth occurred primarily in
Peoples' existing markets, while commercial lending growth also occurred to
selected customers outside Peoples' primary markets.
Peoples experienced significant loan growth during 1999 in commercial,
financial, and agricultural loans ("commercial loans"), which increased $59.7
million (or 28.1%) to $272.2 million. At December 31, 1999, commercial loans
comprised 41.3% of Peoples' total loan portfolio, comprising the largest portion
of the loan portfolio. Economic conditions in Peoples' markets have provided
quality credit opportunities, in particular, in southeastern and central Ohio.
Management will continue to focus on the enhancement and growth of the
commercial loan portfolio while maintaining appropriate underwriting standards
and risk/price balance. Management expects commercial loan demand to continue to
be strong into early 2000. In addition to the anticipated additional in-market
penetration, Peoples will continue to selectively lend to customers outside its
primary markets.
Real estate loans to Peoples' retail customers (including real estate
construction loans) account for the second largest portion of the loan
portfolio, comprising 40.4% of Peoples' total loan portfolio. Real estate
mortgage loans totaled $266.5 million at December 31, 1999, up $22.6 million (or
9.3%) since year-end 1998.
Included in real estate loans are home equity credit lines ("Equilines"), which
totaled $22.2 million at December 31, 1999, compared to $20.3 million at
December 31, 1999. During 1999, Peoples offered a specially priced Equiline
product, to qualifying customers, which contributed to the Equiline balance
increase. Management believes the Equiline loans are a competitive product with
an acceptable return on investment after risk considerations. Residential real
estate lending continues to represent a major focus of 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. Consumer lending continues to be a vital part of Peoples' core
lending. For the year ended December 31, 1999, consumer loan balances (excluding
credit card loans) increased $9.7 million (or 9.3%) to $114.4 million. The
majority of Peoples' consumer loans are in the indirect lending area, where
volume increases were experienced, combined with slower indirect loan payoffs.
At December 31, 1999, Peoples had indirect loan balances of $71.0 million,
compared to $66.3 million at December 31, 1998.
Management is pleased with the performance and quality of Peoples' consumer loan
portfolio, which can be attributed to Peoples' commitment to high level of
customer service 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 December 31, 1999, totaled $6.7 million, down
$0.1 million (or 1.5%) since year-end 1998. While management continues to
explore new opportunities to serve credit card customers, those plans do not
include the assumption of additional unnecessary risk merely for the sake of
growth.
Loan Concentration
At December 31, 1999, commercial, financial, and agricultural loans comprised
the largest component of the loan portfolio, representing $272.2 million (or
41.3%) of total loans. At year-end 1999, real estate lending (both mortgage and
construction loans) totaled $266.5 million (or 40.4%) of outstanding loans,
compared to 42.9% of outstanding loans at December 31, 1998. Peoples' lending is
primarily focused in the local southeastern Ohio market and contiguous mid-Ohio
valley areas. 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.
Peoples' largest concentration of commercial loans is in credits to lodging and
lodging related companies, which comprised approximately 12.6% of Peoples'
outstanding commercial loans at December 31, 1999, compared to 9.6% at year-end
1998. These lending opportunities have arisen due to recent growth in the
lodging industry as well as the need for additional travel-related services in
certain areas in or contiguous to Peoples' markets. In addition, Peoples was
able to selectively lend to creditors outside its market areas, applying strict
underwriting parameters to mitigate risk. Lodging and lodging related loan
growth reflect Peoples' lenders' ability to respond to the needs of customers in
this segment of the economy based on financial, strength of the underlying
credit and guarantor, and customer relationship parameters. Management believes
Peoples' lodging and lodging related loans do not present more than the normal
amount of risk assumed in other types of lending.
In addition to loans to lodging and lodging related companies, one of Peoples'
larger groups of commercial loans consists of automobile dealer floor plans,
which accounted for 6.6% of Peoples' outstanding commercial loans at December
31, 1999, compared to 7.3% at year-end 1998.
Allowance for Loan Losses
The loan portfolio analysis on pages 11 and 12 of this Form 10-K presents in
detail an analysis of Peoples' loan portfolio, the allowance for loan losses,
loan chargeoffs and recoveries by type of loan, and an allocation of the
allowance for loan losses by major loan type.
Management continually monitors the loan portfolio through its Loan Review
Department and Loan Loss Committee to determine the adequacy of the allowance
for loan losses. This formal analysis determines the appropriate level of the
allowance for loan losses, allocation of the allowance among loan types and the
adequacy of the unallocated component of the allowance. The portion of the
allowance allocated among the various loan types represents management's
estimate of expected losses based upon specific allocations for individual
lending relationships and historical loss experience for each category of loans.
The individual loan reviews are based upon specific qualitative and quantitative
criteria, including the size of the loan and loan grades below a predetermined
level. The historical experience factor is based upon historical loss
experience, trends in losses and delinquencies, the growth of loans in
particular markets and industries, and known changes in economic conditions in
the particular lending markets.
Allowances for homogeneous loans (such as residential mortgage loans, credit
cards, personal loans, etc.) are collectively evaluated upon historical loss
experience, trends in losses and delinquencies, the growth of loans in
particular markets, and known changes in economic conditions in the particular
lending markets.
The unallocated portion of the allowance is based upon management's assessment
of qualitative risk factors that may not be evident in Peoples' historical
experience, such as, but not limited to, changes in specific markets in both
competition for loans and local economies. This assessment involves a high
degree of management judgment as well as higher amounts of uncertainty.
Assessment of the adequacy of the allowance is a dynamic process that requires
management to continually refine the process as markets, economic conditions,
and the company change. Differences between actual loss experiences and
estimated events are compared on a quarterly basis, allowing management to
regularly modify loss provisions as deemed appropriate based on market
conditions and other factors previously described.
The results of this analysis at December 31, 1999, indicate an increase in the
amount allocated to the commercial category resulting from recent increases in
Peoples' commercial loans outstanding. The amount allocated to the remaining
categories and the unallocated portion reflect the growth in the portfolios and
changes in economic conditions. Management expects continued loan growth in 2000
and believes that future provision expense will modestly increase, dependent on
loan delinquencies, portfolio risk, overall loan growth, and general economic
conditions in Peoples' markets.
Peoples' consumer loan net chargeoffs continue to comprise the largest portion
total net chargeoffs, reaching $628,000 in 1999 and accounting for 55.9% of
total net chargeoffs. In comparison to 1998, consumer loan net chargeoffs
decreased $214,000 (or 25.4%) due to decreased indirect and direct personal loan
chargeoffs. Commercial loan net chargeoffs totaled $262,000 in 1999, an increase
of $216,000 over 1998. Although commercial loan net chargeoffs in 1999 grew
significantly higher in comparison to 1998, management believes 1999's results
are more reflective of Peoples' historical commercial loan chargeoff experience.
Credit card chargeoffs decreased $75,000 in comparison to 1998, resulting in
credit card net chargeoffs decrease to $179,000 in 1999. Real estate loan net
chargeoffs were insignificant in 1999, demonstrating the quality of the
portfolio.
Nonperforming assets (which include loans classified as nonaccrual, renegotiated
loans, and other real estate owned) as a percentage of outstanding loans were
0.31% at December 31, 1999, compared to 0.26% at December 31, 1998. Nonaccrual
loans and renegotiated loans totaled $1,109,000 and $747,000, respectively, at
year-end 1999, compared to $687,000 and $392,000, respectively, at year-end
1998. Other real estate owned totaled $207,000 at year-end 1999 compared to
$396,000 at December 31, 1998. Management believes the current level of
nonperforming loans is below peer group levels and is a reflection of 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 December 31, 1999, loans past due
90 days or more totaled $249,000, a decrease of $246,000 (or 50.0%) compared to
$495,000 at year-end 1998.
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 December 31, 1999,
Peoples had an insignificant amount of loans that were considered impaired.
Management will continue to monitor the status of impaired loans, including
performing and non-performing loans. The allowance for loan losses is deemed to
be adequate to absorb losses inherent in the portfolio at December 31, 1999.
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 $728.2 million, or 75.4% of Peoples' funding
sources at December 31, 1999.
Non-interest bearing deposits remain a core funding source for Peoples. At
December 31, 1999, non-interest bearing balances totaled $83.3 million, a $2.4
million (or 2.9%) increase compared to year-end 1998. Management intends to
continue to focus on maintaining its base of lower-costing funding sources,
through product offerings that benefit customers who increase their relationship
with Peoples by using multiple products and services.
Interest-bearing deposits totaled $644.9 million at December 31, 1999, an
increase of $11.7 million (or 1.8%) compared to year-end 1998. On a percentage
basis, interest-bearing transaction accounts were the largest growth component
of Peoples' deposits. Interest-bearing transaction accounts averaged $213.3
million in 1999, a $45.3 million (or 27.0%) increase over 1998's average. In the
first half of 1999, Peoples experienced attrition of maturing, short-term
certificates of deposit as rate sensitive customers looked to maximize their
investments by comparing rates offered by Peoples' competitors. In the second
half of 1999, Peoples offset this attrition by offering a "special" 15-month CD
which offered an attractive rate of return. In late 1999, Peoples replaced the
15-month CD special with an attractive 25-month CD special to lessen Peoples'
short-term interest rate sensitivity. Management will continue to emphasize
deposit-gathering in 2000 by offering special "relationship accounts" (both
non-interest bearing and interest-bearing) based on other products and services
offered by Peoples. Management will also concentrate on balancing deposit growth
with adequate net interest margin to meet Peoples' strategic goals.
Along with 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 December 31, 1999, short-term
borrowings totaled $87.4 million, an increase of $54.9 million over year-end
1998.
Increases in term repurchase agreements (utilized in Peoples' Leverage Strategy)
and short-term FHLB borrowings contributed to growth in Peoples' short-term
borrowings. At the end of 1999, Peoples had total short-term, national market
repurchase agreement balances of $34.0 million compared to no balance held at
year-end 1998. At December 31, 1999, short-term, national market repurchase
agreements comprised the largest component of Peoples' short-term borrowings. At
December 31, 1999, Peoples had $22.5 million in short-term FHLB advances
compared to $0.7 million advanced at year-end 1998. 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. In general, Peoples accesses this funding source at various
times to balance liquidity needs.
The second largest component of short-term borrowings consisted of balances in
corporate repurchase agreements, which totaled $30.5 million at December 31,
1999, compared to $31.7 million at year-end 1998. Management anticipates that
corporate repurchase agreement balances will remain relatively stable in 2000.
In addition to traditional deposits and short-term borrowings, Peoples maintains
long-term borrowing capacity with the FHLB. Long-term FHLB advances totaled
$147.9 million at December 31, 1999, compared to $38.0 million at year-end 1998.
In the second quarter of 1999, Peoples advanced $110 million in long-term FHLB
borrowings to fund investment securities purchased in the Leverage Strategy. The
FHLB advances were primarily 10-year borrowings, with fixed rate features for
periods of two, three, or four years, depending on the specific advance. Each
advance has the opportunity to reprice after its initial fixed rate period (at
the discretion of the FHLB), and Peoples has the option to prepay any repriced
advance without penalty, or allow the borrowing to reprice to a LIBOR based,
variable product. Management plans to maintain access to long-term FHLB
borrowings as an appropriate funding source.
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 December 31, 1999, the balance was $2.4
million, a decrease of $0.3 million since year-end 1998. Principal payments
began in 1998 and continue semi-annually over the next three years.
Capital/Stockholders' Equity
During the year ended December 31, 1999, stockholders' equity decreased
approximately $13.1 million (or 15.3%) to $72.9 million. This decrease resulted
primarily from the 1999 Stock Repurchase Program and increased net unrealized
holding losses on available-for-sale securities. In 1999, Peoples had net income
of $10.7 million and paid dividends of $3.4 million, a dividend payout ratio of
31.79% of earnings, compared to a ratio of 30.38% in 1998. Management believes
recent dividends represent an acceptable payout ratio for Peoples and
anticipates similar payout ratios in future periods through quarterly dividends.
At December 31, 1999, the adjustment for the net unrealized holding loss on
available-for-sale securities, net of deferred income taxes, totaled $7.6
million, a change of $11.2 million since year-end 1998. 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 either 0% (lowest risk assets), 20%, 50%, or 100% (highest
risk assets) is assigned to each asset on the balance sheet. Detailed
information concerning Peoples' risk-based capital ratios can be found in Note
13 of the Notes to the Consolidated Financial Statements. At December 31, 1999,
Peoples' and each of its banking subsidiaries' risk-based capital ratios were
above the minimum standards for a well-capitalized institution. Peoples'
risk-based capital ratio of 14.30% at December 31, 1999, is well above the
well-capitalized standard of 10%. Peoples' Tier 1 capital ratio of 12.57% also
exceeded the well-capitalized minimum of 6%. The Leverage ratio at year-end 1999
was 8.29% and was also above the well-capitalized standard of 5%.
In 1999, Peoples' enhanced its risk-based capital ratios through strategic
leveraging of the its equity base. Peoples' capital ratios provide quantitative
data demonstrating the strength and future opportunities for use of Peoples'
capital base. Management continues to evaluate risk-based capital ratios and the
capital position of Peoples and each of its banking subsidiaries as part of its
strategic decision process.
In April 1999, Peoples announced its 1999 Stock Repurchase Program, under which
it purchased 346,500 common shares (adjusted for 10% stock dividend issued March
14, 2000) during 1999 (approximately 5% of outstanding common shares) in open
market and privately negotiated transactions. These common shares were
repurchased at a weighted-average price of $24.36 per share (adjusted for 10%
stock dividend issued March 14, 2000), totaling $8.4 million.
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 ("2000 Stock Repurchase
Program"). The timing of the purchases and the actual number of common shares
purchased have depended and will depend on market conditions. The 2000 Stock
Repurchase Program will expire December 31, 2000. At February 29, 2000, Peoples
has purchased 20,516 shares under the 2000 Stock Repurchase Program at a
weighted average price of $17.28 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 1999, Peoples purchased 69,300 treasury shares at a
weighted-average price of $23.75 per share, totaling $1.6 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 its
subsidiaries. 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. The
Deferred Compensation Plan allows directors to direct the fees earned for their
services into deferred accounts that are either invested in Peoples' common
shares or a time deposit, at the specific director's discretion at the time of
entering the Plan. As a result and in accordance with accounting regulations,
the account balances invested in Peoples common shares are reported as treasury
stock in Peoples' financial statements. At December 31, 1999, the Deferred
Compensation Plan and its participants were entitled to $0.9 million of Peoples
common shares, which is a reduction to the equity balance of Peoples. Management
does not expect the Deferred Compensation Plan to have a material impact on
future financial statements or results of operations of Peoples.
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 is the potential for economic loss due to future interest
rate changes which 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 its
subsidiary banks' balance sheets and off-balance sheet transactions related to
the management of interest rate risk. 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 interest risk management policy that
sets the minimum requirements and guidelines for monitoring and controlling the
level and amount of interest rate risk. The objective of the interest rate risk
policy is to encourage management to adhere to sound fundamentals of banking
while allowing sufficient flexibility to exercise the creativity and 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 interest rate risk 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 interest rate risk do to its dynamic measure. By
employing a simulation process that measures 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 simulation process starts with a base case simulation which 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 interest rate risk
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 ALCO feels that it is beneficial to monitor interest rate risk for both the
short and long-term. Therefore, to effectively evaluate results from model
simulations, limits on changes in net interest income and the value of the
balance sheet have been established. To monitor the short-term exposure IRR, the
ALCO has determined the earnings at risk of the bank shall not decrease more
than 10% from base case for each 1% shift in interest rates. To monitor the
long-term exposure IRR, management has determined Peoples' economic value of
equity should not be negatively impacted by more than 40% when interest rates
shift 2% and 75% when rates shift 4%, respectively. For an assessment of the
current interest rate risk 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. The following table is
provided to show the earnings at risk and value at risk positions of Peoples as
of December 31, 1999.
Earnings and Value at risk at December 31, 1999:
(Dollars in Thousands)
Immediate Estimated Increase Estimated
Interest Rate Change (Decrease) in Net Increase (Decrease) in
(in Basis Points) Interest Income Economic Value of Equity
- ------------------------- ----------------------------------------------------
400 -- -- $(10,794) (11.7)%
300 $ (3,186) (7.8)% (8,673) (9.4)
200 (2,114) (5.2) (6,190) (6.7)
100 (1,004) (2.5) (3,312) (3.6)
-100 761 1.9 2,230 2.4
-200 1,514 3.7 4,832 5.3
-300 $ 2,261 5.6% 7,842 8.5
-400 -- -- $ 11,298 12.3 %
The interest risk analysis shows that Peoples is slightly liability sensitive.
This means that downward moving interest favorably impact net interest income.
The analysis also shows that for all simulations and all scenarios, Peoples is
within the interest rate risk limits that ALCO has established in the policy.
Peoples was within the policy limits at all measured points during the preceding
year.
Due to the fact that the ALCO has significantly changed the techniques and
methodologies used, a comparison to the information reported last year is
impractical. However, historical information was used to generate a gap analysis
with the assumptions similar to December 31, 1999. As of December 31, 1998
Peoples was liability sensitive by 2.72% of earning assets. The gap ratio for
December 31, 1999 was 6.44% liability sensitive. The change between year-ends
can be attributed to, in large part, short term funds secured for Y2K
contingency funding. In both instances the gap ratio was within the policy
range.
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 year ended
December 31, 1999, cash provided by financing activities totaled $190.8 million,
while outflows from investing activity totaled $201.1 million. The majority of
the increase in cash outflows from investing activities occurred as a result of
Peoples' Leverage Strategy. 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 which enables 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. As of
December 31, 1998 the net liquidity position of Peoples was $146.4 million or
16.08% of total assets. As of December 31, 1999, the net liquidity position of
Peoples was $132.8 million or 11.43% of total assets. The change between
year-ends can be attributed to maturities in the investment portfolio used to
fund loan growth. The liquidity position as of year-end was within Peoples'
policy limit of -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 Peoples' assets relate to banking and are monetary in
nature. Therefore, they are not impacted by inflation in the same manner as
companies in capital intensive industries. During a period of rising prices, a
net monetary asset position results in loss in purchasing power and conversely a
net monetary liability position results in an increase in purchasing power. In
banks, monetary assets typically exceed monetary liabilities and therefore, as
prices have increased over the past year, financial institutions experienced a
modest decline in the purchasing power of their assets.
Outlook for 2000
Financial data and performance ratios for the year ended December 31, 1999,
represent the results of key strategic initiatives implemented during 1999.
Issuance of the Trust Preferred Securities, initiation and completion of the
Leverage Strategy and the 1999 Stock Repurchase Program, combined to offer
unique opportunities to Peoples to capitalize on Peoples' financial strength.
With these recent strategic actions, management has enhanced several key
performance indicators, in particular earnings per share and return on
stockholders' equity. Peoples' future financial results will depend on the
timing of stock repurchases under the 2000 Stock Repurchase Plan and other
factors, such as the interest rate environment, loan demand, and availability of
reasonably priced funding sources. Management continues to refine strategic
plans to produce enhanced future financial performance through a combination of
external growth and a focus on internal strengths. In addition, management has
identified and will continue to analyze key performance indicators which
quantitatively measure the relative performance of Peoples compared to prior
year results.
Peoples successfully quelled any potential negative results of the
much-publicized Y2K issue, resulting from computer programs written using two
digits rather than four to define the applicable year. Peoples had no systems
failure or miscalculations causing disruptions of operations, and is able to
process transactions and engage in normal business activities. Management
believes its assessment and resulting remediation measures ensured Y2K
compliance in regards to mission-critical applications as well as Peoples'
customers and major suppliers. Peoples expensed Y2K project costs as incurred.
The total out-of-pocket cost of the Y2K compliance project did not exceed
$250,000, including human resource expense which is estimated to approximate
between $100,000 to $150,000. Although actual out-of-pocket expenses were less
than anticipated, management increased the amount of internal human resource
consumed by this project, offsetting the costs saved relative to purchases of
hardware, software, and/or consulting fees.
With the consolidation of Peoples' three banking subsidiaries into Peoples Bank,
NA, management will focus many efforts on the integration of Peoples' various
sales processes, products, and services in 2000. The transition to a unified
banking entity will enable Peoples to focus on a marketing program based on
establishing consistent brand awareness of Peoples in its markets, as well as
establishing the "connection" between customers and the many products and
services offered by Peoples. While the consolidation is expected to provide
long-term enhancement to future shareholder return via added operating
efficiencies, the primary focus of the consolidation is customer retention and
market share growth through improved product and service convenience and
availability. The consolidation will place more of Peoples' associates in
customer service positions and lessen the administrative duties experienced with
three separate banking charters. The consolidation also allows Peoples'
customers to access all 38 offices, 25 ATM's, and internet banking system, and
connects the northeastern Kentucky markets with contiguous Oho and West Virginia
markets, providing enhanced synergies and customer service opportunities in the
Huntington, West Virginia - Ashland, Kentucky greater metropolitan area.
In 1999 and extending into 2000, management has initiated multiple programs
designed to enhance the sales expertise and relationship building skills of
Peoples' customer service representatives. These and other investments in
customer service enhancements represent Peoples' strategic initiatives designed
to increase current and potential customer relationships within Peoples.
Management will continue to invest in sales training and other professional
expenses as Peoples' sales process evolves.
In addition to intensified sales and education efforts, on January 26, 2000, The
Peoples Banking and Trust Company opened its third sales facility within a West
Virginia Wal-Mart superstore in South Parkersburg. This new office will increase
Peoples' visibility in the Wood County, West Virginia market and give Peoples'
personal bankers better access to an increased number of shoppers compared to a
traditional banking center. The South Parkersburg Wal-Mart office complements
Peoples' existing full-service banking center in Parkersburg and other nearby
communities. Management is pleased with the early results of Peoples' new
Wal-Mart offices and is encouraged by the sales momentum generated in these
offices.
Continuing Peoples' emphasis on electronic product delivery and expanding
delivery choices for Peoples' customers, The Peoples Banking and Trust Company
began offering a fully integrated internet banking system ("Internet Banking
System" or "Peoples OnLine Connection") in late 1999. Peoples OnLine Connection
allows customers to perform online transactions, pay bills, view account
history, stop payment, open accounts, change address, reorder checks, purchase
savings bonds and complete other financial transactions. Peoples OnLine
Connection is an on-line service that offers real time transaction capability
and portability for the customer. Peoples intends to satisfy customer demand for
internet banking in the markets it serves while providing a link to its history
of needs-based selling and community-minded service. Peoples OnLine Connection
acts as the conduit of financial information for many of Peoples' customers and
is being offered in conjunction with Peoples' PC-based cash management/home
banking product used primarily by commercial customers. Peoples will continue to
strive to meet future customer service challenges through its wide array of
delivery channels, using technology and traditional methods in the manner that
best fits each customer. Management recognizes the importance of electronic
financial services to its customer base and continues to focus efforts designed
to enhance this process and allow customers almost unlimited banking products
and services at their convenience.
In the future, management will continue to research alternative methods of
enhancing revenue streams by reorganizing and revitalizing its sales management
process. Areas of focus will include enhancement of non-interest income streams,
including asset management fees (such as fiduciary fees, insurance revenues,
etc.), electronic banking revenues, low income housing tax credits, and other
investments. Peoples Bank, the resulting banking entity of the aforementioned
consolidation, will continue to offer a wide array of banking products and
services. Two new operating divisions will be created to allow associates to
better focus on customer needs: Peoples Investments will provide
customer-tailored solutions for fiduciary needs, investment alternatives, and
other asset management capabilities; and Peoples Insurance will provide a full
set of life, property and casualty insurance products and services.
Mergers and acquisitions remain a viable strategic option for the continued
growth of Peoples' operations and scope of customer service. Future
acquisitions, if they occur, may not be limited to specific geographic location
or proximity to current markets. Management will continue to focus its energies
on review and research of possible mergers, consolidations, banking center
purchases, or insurance agency acquisitions as a means of acquiring sales
centers that complement existing company locations and sales strategies.
Ultimately, acquisitions will depend upon financial service opportunities that
complement Peoples' core competencies and strategic intent. Management considers
mergers and acquisitions to be a viable method of enhancing Peoples' earnings
potential and will continue to pursue appropriate business opportunities as they
develop.
Management continues to position Peoples for the future of financial services
without sacrificing a compatible focus on community-based values. Since many
products and services in the financial services industry are easily copied,
Peoples focus is to deliver these products and services better, faster, and more
efficiently than competitors. One of the driving forces of Peoples is to create
and maintain multiple-product relationships with customers where Peoples is our
clients' first choice for financial services by combining the financial products
and delivery systems of tomorrow with today's service, convenience, and
commitment to our communities. Peoples' goal is to be a high-performing
community bank, focusing efforts to provide shareholders at least a 15% annual
return on their investment. In 2000 and going forward, Peoples will work to
achieve these goals by growing the relationship of existing customers 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 Peoples OnLine Connection.
Management concentrates on several key performance indicators to measure and
direct performance of Peoples. While past results are not an indication of
future earnings, management believes Peoples is poised to capitalize on its
recent growth and initiatives to reposition Peoples' balance sheet through the
combined impact of the issuance of the Trust Preferred Securities, the Leverage
Strategy, and 1999 Stock Repurchase Program. 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 customer service and increase future shareholder
value. "Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995 The statements in this Form 10-K which are not historical fact are
forward looking statements that involve risks and uncertainties, including, but
not limited to, the interest rate environment, the effect of federal and state
banking and tax regulations, the effect of technological changes, the effect of
economic conditions, the impact of competitive products and pricing, and other
risks detailed in Peoples' Securities and Exchange Commission filings. Although
management believe 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.
Comparison of 1998 to 1997
Peoples reported an increase in net income of 16.7%, to $10,045,000 in 1998 from
$8,605,000 in 1997. This increase in earnings provided basic and diluted
earnings per share of $1.44 and $1.40, respectively, for the year ended December
31, 1998, compared to $1.37 and $1.32 in 1997. Peoples' core earnings increased
due to stronger earnings in existing business units and additional revenue
streams associated with business acquisitions.
For the year ended December 31, 1998, return on average assets was 1.20%,
compared to 1.29% in 1997. Increased income streams from business acquisitions
were offset by amortization of intangibles assumed in such purchases, resulting
in lower ROA levels compared to previous periods. In 1998, return on
stockholders' equity declined to 12.21% compared to 14.33% in 1997. ROE
decreased in 1998 primarily due to issuance of approximately $15.35 million of
capital stock (548,208 shares) for the purchase of Gateway Bancorp, Inc. in
December, 1997. As a result, the increase in total equity had a significant
impact on ROE for the year ended December 31, 1998.
Total assets reached $880.3 million at December 31, 1998, up $122.1 million
compared to year-end 1997. Asset growth can be attributed primarily to the
assets and liabilities acquired in the West Virginia Banking Center Acquisition.
Net cash received in the West Virginia Banking Center Acquisition was redeployed
primarily into investment securities, which increased $61.3 million (or 35.2%)
from year-end 1997 to $235.6 million at December 31, 1998. Loan demand in
Peoples' established markets, loans acquired through the West Virginia Banking
Center Acquisition, and loans purchased from external sources combined to
increase loan balances $45.2 million (or 8.8%) to $558.4 million at year-end
1998. Loan growth occurred primarily in the commercial loan area.
Peoples recorded net interest income of $33,148,000 in 1998, an increase of
15.8% compared to 1997, as total interest income reached $63,645,000 and
interest expense totaled $30,497,000. Net interest margin decreased in 1998 to
4.47% from 4.74% in 1997. Yield on earning assets totaled 8.45% in 1998,
compared to 8.81% the prior year. A significant contributor to this decline was
the decrease in Peoples' investment portfolio yield, which dropped 44 basis
points to 6.58% in 1998, reflecting the reinvestment of higher-yielding,
maturing investments into lower-yielding instruments. Loan yields decreased to
9.21% in 1998 compared to 9.30% in 1997. Compared to 1997, cost of
interest-bearing liabilities decreased 13 basis points to 4.54% in 1998. Deposit
costs decreased due to a combination of lowering time deposit rates, the
acquisition of lower interest cost funding sources from the West Virginia
Banking Center Acquisition, and the implementation of regional pricing in
selected markets served by Peoples.
Loans continued to be the largest earning asset component for Peoples. Loans
totaled $567.9 million at December 31, 1998, an increase of $46.3 million (or
8.9%) compared to year-end 1997. During 1998, growth occurred internally in
Peoples' existing markets and also from other sources, such as $8.3 million of
loans purchased in the West Virginia Banking Center Acquisition and $11.8
million of commercial loans purchased from an unrelated financial institution in
the fourth quarter of 1998. Average loans totaled 85.5% of average deposits in
1998, up from 84.0% at year-end 1997.
Peoples' provision for loan losses totaled $2,325,000 in 1998, down $264,000
compared to 1997, a decrease of 10.2%. Overall improvement in the loan
portfolio's quality and associated credit risk combined with an adequate
allowance for loan losses provided the basis to reduce the provision for loan
losses during 1998. At December 31, 1998, Peoples' allowance for loan losses as
a percentage of total loans was 1.67%, compared to a year-end 1997 ratio of
1.60%.
Non-interest income (excluding securities transactions) from operations in 1998
totaled $6,820,000, an increase of 14.3% compared to 1997. In 1998, account
service charge income related to deposits increased $351,000 (or 15.9%) to
$2,553,000. Several factors contributed to this growth, including the West
Virginia Banking Center Acquisition and its associated $121 million in deposits,
which provided the base for increased fee income in the last six months of 1998.
Income from fiduciary activities totaled $2,325,000, an increase of 6.8%
compared to 1997. In 1998, total fees related to electronic banking reached
$596,000, up $120,000 (or 25.3%) over the prior year. These increases were
primarily due to revenues related to Peoples' growing debit card program as well
as non-customer activity in Peoples' network of ATM's, which caused a
corresponding increase in ATM-related revenues.
For the year ended December 31, 1998, non-interest expense totaled $23,276,000,
up $4,011,000 (or 20.8%) compared to 1997. When comparing 1998 non-interest
expense to 1997, it is important to consider the non-interest expense related to
business acquisitions. Acquisitions, and the related salaries and employee
benefits and increased depreciation expense, comprised the majority of the
increase in non-interest expense in 1998. Non-operational items also contributed
to the increase in non-interest expense. In particular, amortization of
intangibles totaled $2,093,000 (up $955,000) compared to $1,138,000 in 1997.
This increase is due to completion in 1998 of the West Virginia Banking Center
Acquisition as well as amortization expense related to December 1997's Gateway
Bancorp Acquisition. Compared to 1997, salaries and benefits expense increased
$957,000 (or 11.4%) to $9,315,000 in 1998. In 1998, furniture and equipment
expenses totaled $1,728,000, up $227,000 (or 15.1%) compared to 1997. Net
occupancy expense totaled $1,597,000 in 1998, an increase of $300,000 (or 23.1%)
compared to the previous year. These increases can be attributed primarily to
the depreciation of the assets purchased in business acquisitions (in particular
the West Virginia Banking Center Acquisition), and the completion of various
branch banking office construction projects during 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------------------------------------------------------------------
Please refer to pages 28 and 29 in Item 7 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
The Consolidated Financial Statements and accompanying notes, and the report of
independent auditors, are set forth immediately following Item 9 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- --------------------------------------------------------------------------
No response required.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except Share Data)
December 31,
Assets 1999 1998
Cash and cash equivalents:
Cash and due from banks .................................... $ 42,713 $ 27,048
Interest-bearing deposits in other banks ................... 1,038 3,373
Federal funds sold ......................................... -- 9,700
- ----------------------------------------------------------------------------------------------
Total cash and cash equivalents ....................... 43,751 40,121
- ----------------------------------------------------------------------------------------------
Available-for-sale investment securities, at estimated fair value
(amortized cost of $340,082 in 1999 and $230,049 in 1998) .... 328,306 235,569
- ----------------------------------------------------------------------------------------------
Loans, net of deferred fees and costs ........................... 659,833 567,917
Allowance for loan losses ....................................... (10,264) (9,509)
- ----------------------------------------------------------------------------------------------
Net loans ............................................. 649,569 558,408
- ----------------------------------------------------------------------------------------------
Bank premises and equipment, net ................................ 15,321 14,826
Other assets .................................................... 38,503 31,360
- ----------------------------------------------------------------------------------------------
Total assets ..................................... $ 1,075,450 $ 880,284
- ----------------------------------------------------------------------------------------------
Liabilities
Deposits:
Non-interest bearing ....................................... $ 83,267 $ 80,884
Interest bearing ........................................... 644,940 633,284
- ----------------------------------------------------------------------------------------------
Total deposits ........................................ 728,207 714,168
- ----------------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase ................... 64,989 31,814
Federal Home Loan Bank advances ............................ 22,450 700
- ----------------------------------------------------------------------------------------------
Total short-term borrowings ........................... 87,439 32,514
- ----------------------------------------------------------------------------------------------
Long-term borrowings ............................................ 150,338 40,664
Accrued expenses and other liabilities .......................... 7,606 6,924
- ----------------------------------------------------------------------------------------------
Total liabilities ................................ 973,590 794,270
- ----------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in
junior subordinated debentures ................... 28,986 --
Stockholders' Equity
Common stock, no par value, 12,000,000 shares
authorized, 6,387,509 shares issued in
1999 and 5,790,148 issued in 1998 including
shares in treasury ....................................... 65,043 50,807
Accumulated comprehensive income, net of deferred income taxes .. (7,654) 3,588
Retained earnings ............................................... 26,241 33,441
- ----------------------------------------------------------------------------------------------
83,630 87,836
Treasury stock, at cost, 398,662 shares in 1999
and 52,031 shares in 1998 ............................. (10,756) (1,822)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity ....................... 72,874 86,014
- ----------------------------------------------------------------------------------------------
Total liabilities, minority interests
and stockholders' equity ................... $ 1,075,450 $ 880,284
- ----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data)
Year ended December 31,
1999 1998 1997
Interest Income:
Interest and fees on loans $ 53,223 $ 48,857 $ 43,451
Interest and dividends on:
Obligations of U.S. Government and its agencies 13,450 9,500 7,255
Obligations of states and political subdivisions 2,261 1,886 1,324
Other interest income 3,412 3,402 1,806
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 72,346 63,645 53,836
- ---------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 25,956 26,051 22,282
Interest on short-term borrowings 2,655 2,241 1,023
Interest on long-term borrowings 5,647 2,205 1,911
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 34,258 30,497 25,216
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 38,088 33,148 28,620
Provision for loan losses 1,878 2,325 2,589
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 36,210 30,823 26,031
- ---------------------------------------------------------------------------------------------------------------------------
Other Income:
Service charges on deposit accounts 3,081 2,553 2,202
Income from fiduciary activities 2,634 2,325 2,176
(Loss) gain on securities transactions (104) 418 (28)
Other 1,918 1,942 1,588
- ---------------------------------------------------------------------------------------------------------------------------
Total other income 7,529 7,238 5,938
- ---------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Salaries and employee benefits 11,824 10,096 9,234
Net occupancy 1,839 1,597 1,297
Equipment 1,787 1,728 1,501
Insurance 330 293 242
Supplies 661 779 516
Taxes other than income taxes 681 705 735
Amortization of intangibles 2,639 2,093 1,138
Trust preferred expense 1,840 -- --
Other 6,596 5,985 4,602
- ---------------------------------------------------------------------------------------------------------------------------
Total other expenses 28,197 23,276 19,265
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 15,542 14,785 12,704
- ---------------------------------------------------------------------------------------------------------------------------
Income taxes:
Current 4,556 4,869 3,941
Deferred 268 (129) 158
- ---------------------------------------------------------------------------------------------------------------------------
Total income taxes 4,824 4,740 4,099
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 10,718 $ 10,045 $ 8,605
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 1.57 $ 1.44 $ 1.37
- ---------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.53 $ 1.40 $ 1.32
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding:
Basic 6,846,071 6,975,989 6,303,782
- ---------------------------------------------------------------------------------------------------------------------------
Diluted 7,023,921 7,186,616 6,502,386
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands) Accumulated
Other
Common Stock Retained Comprehensive Treasury
Shares Amount Earnings Income (1) Stock Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,445,075 $ 34,349 $ 20,470 $ 1,428 $ (54) $ 56,193
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 8,605 8,605
Other comprehensive income, net of tax:
Unrealized gains on
available-for-sale securities,
net of reclassification adjustment 941 941
---------
Total comprehensive income 9,546
Purchase of treasury stock, 10,150 shares (327) (327)
Exercise of common stock options (reissued
12,150
treasury shares) 9,173 (67) 381 314
Issuance of common stock under dividend
reinvestment plan 11,486 370 370
Cash dividends declared of $0.41 per share (2,627) (2,627)
Issuance of common stock to purchase Gateway
Bancorp, Inc. 365,472 15,349 15,349
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,831,206 50,001 26,448 2,369 0 78,818
- ---------------------------------------------------------------------------------------------------------------------------
Adjustment for the effect of 3-for-2
common stock split 1,915,603
Comprehensive income:
Net income 10,045 10,045
Other comprehensive income, net of tax:
Unrealized gains on
available-for-sale securities
net of reclassification adjustment 1,219 1,219
--------
Total comprehensive income 11,264
Purchase of treasury stock, 71,057 shares (2,059) (2,059)
Exercise of common stock options (reissued
19,026
treasury shares) 28,451 370 237 607
Issuance of common stock under dividend
reinvestment plan 14,888 436 436
Cash dividends declared of $0.44 per share (3,052) (3,052)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,790,148 50,807 33,441 3,588 (1,822) 86,014
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 10,718 10,718
Other comprehensive income, net of tax:
Unrealized losses on
available-for-sale securities
net of reclassification adjustment (11,242) (11,242)
---------
Total comprehensive income (524)
Purchase of treasury stock, 379,636 shares (10,256) (10,256)
Sale of treasury stock, 191 shares 5 5
10% stock dividend 579,505 14,512 (14,512)
Exercise of common stock options (reissued
43,368
treasury shares) (838) 1,317 479
Tax benefit from exercise of stock options 121 121
Issuance of common stock under dividend
reinvestment plan 17,856 441 441
Cash dividends declared of $0.50 per share (3,406) (3,406)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 6,387,509 $ 65,043 $ 26,241 $(7,654) $ (10,756) $ 72,874
- ---------------------------------------------------------------------------------------------------------------------------
(1) Disclosure of reclassification amount for the 1999 1998 1997
years ended:
Net unrealized (depreciation) appreciation arising during period, $ (11,310) $ 1,491 $ 923
net of tax
Less: reclassification adjustment for net (losses) gains included in net income, net (68) 272 (18)
of tax
- ---------------------------------------------------------------------------------------------------------------------------
Net unrealized (depreciation) appreciation on investment securities $ (11,242) $ 1,219 $ 941
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year ended December 31,
1999 1998 1997
Cash flows from operating activities:
Net income $ 10,718 $ 10,045 $ 8,605
Adjustments to reconcile net income to net cash provided:
Provision for loan losses 1,878 2,325 2,589
Loss (gain) on securities transactions 104 (418) 28
Depreciation, amortization, and accretion 4,997 5,095 2,648
Increase in interest receivable (1,572) (630) (811)
Increase (decrease) in interest payable 712 257 (129)
Deferred income tax expense (benefit) 268 (129) 158
Deferral of loan origination fees and costs (1) 56 (118)
Other, net (3,225) (3,325) (757)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,879 13,276 12,213
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities (174,750) (138,141) (34,035)
Proceeds from sales of available-for-sale securities 21,565 20,349 5,309
Proceeds from maturities of available-for-sale securities 43,507 58,964 26,244
Net increase in loans (92,169) (26,955) (59,026)
Purchase of loans -- (11,772) --
Expenditures for premises and equipment (2,156) (3,011) (1,184)
Proceeds from sales of other real estate owned 277 200 144
Acquisitions, net of cash received 4,010 100,170 19,844
Investment in limited partnership and tax credit funds (1,336) (2,036) --
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (201,052) (2,232) (42,704)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in non-interest bearing deposits 576 5,234 (1,749)
Net increase (decrease) in interest bearing deposits 8,331 (19,489) 32,335
Net increase (decrease) in short-term borrowings 54,925 (3,596) 13,039
Proceeds from long-term borrowings 127,000 37,973 6,000
Payments on long-term borrowings (17,326) (25,886) (6,623)
Cash dividends paid (2,926) (2,538) (2,184)
Purchase of treasury stock (10,255) (2,059) (327)
Proceeds from issuance of common stock for stock options 478 607 314
Proceeds from issuance of Trust Preferred Securities 30,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 190,803 (9,754) 40,805
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,630 1,290 10,314
Cash and cash equivalents at beginning of year 40,121 38,831 28,517
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 43,751 $ 40,121 $ 38,831
- ----------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 29,760 $ 26,831 $ 21,732
---------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 4,035 $ 5,542 $ 3,197
---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
PEOPLES BANCORP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
The accounting and reporting policies of Peoples Bancorp Inc. and
Subsidiaries ("Peoples") conform to accounting principles generally
accepted in the United States and to general practices within the banking
industry. Peoples considers all of its principal activities to be banking
related. The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States 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. Certain reclassifications have
been made to prior period amounts to conform to the 1999 presentation.
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
Principles of Consolidation:
The consolidated financial statements include the accounts of Peoples
Bancorp Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents:
Cash and cash equivalents include cash and due from banks, interest
bearing deposits in other banks, and federal funds sold, all with
original maturities of ninety days or less.
Investment Securities:
Management determines the appropriate classification of investment
securities at the time of purchase. Held-to-maturity securities are
those securities that Peoples has the positive intent and ability to
hold to maturity and are recorded at amortized cost. Available-for-sale
securities are those securities that would be available to be sold in
the future in response to Peoples' liquidity needs, changes in market
interest rates, and asset-liability management strategies, among
others. Available-for-sale securities are reported at fair value, with
unrealized holding gains and losses reported in a separate component of
other comprehensive income, net of applicable deferred income taxes.
The cost of securities sold is based on the specific identification
method.
Allowance for Loan Losses:
The allowance for loan losses is maintained at a level believed
adequate by management to absorb losses in the loan portfolio.
Management's determination of the adequacy of the allowance for loan
losses is based on a quarterly evaluation of the portfolio, historical
loan loss experience, current national and local economic conditions,
volume, growth and composition of the portfolio, and other relevant
factors. This evaluation is inherently subjective and requires
management to make estimates of the amounts and timing of future cash
flows on impaired loans, consisting primarily of non-accrual and
restructured loans. The allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans.
Bank Premises and Equipment:
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated useful lives of the related assets.
Other Real Estate:
Other real estate owned, included in other assets on the consolidated
balance sheet, represents properties acquired by Peoples' subsidiary
banks in satisfaction of a loan. Real estate is recorded at the lower
of cost or fair value based on appraised value at the date actually or
constructively received, less estimated costs to sell the property.
Intangibles:
Intangible assets representing the present value of future net income
to be earned from deposits are being amortized on an accelerated basis
over a ten year period. The excess of cost over the fair value of net
assets acquired (goodwill) is being amortized on a straight-line basis
over periods ranging from 10 to 15 years. Income Recognition: Interest
income is recognized by methods which result in level rates of return
on principal amounts outstanding. Amortization of premiums has been
deducted from and accretion of discounts has been added to the related
interest income. Nonrefundable loan fees and direct loan costs are
deferred and recognized over the life of the loan as an adjustment of
the yield. Subsidiary banks discontinue the accrual of interest when,
in management's opinion, collection of all or a portion of contractual
interest has become doubtful, which generally occurs when a loan is 90
days past due. When deemed uncollectible, previously accrued interest
recognized in income in the current year is reversed and interest
accrued in prior years is charged against the allowance for loan
losses. Interest received on non-accrual loans is included in income
only if principal recovery is reasonably assured. A non-accrual loan is
restored to accrual status when it is brought current, has performed in
accordance with contractual terms for a reasonable period of time, and
the collectibility of the total contractual principal and interest is
no longer in doubt.
Interest Rate Risk Management:
The premium paid to purchase interest rate floors is included in other
assets and amortized to interest expense over the original term of the
agreements.
Income Taxes:
Deferred income taxes (included in other assets) are provided for
temporary differences between the tax basis of an asset or liability
and its reported amount in the financial statements at the statutory
tax rate. The components of other comprehensive income included in the
Consolidated Statements of Stockholders' Equity have been computed
based upon a 35% effective tax rate.
Earnings per Share:
Basic earnings per share is determined by dividing net income by the
weighted average number of shares outstanding. Diluted earnings per
share is determined by dividing net income by the weighted
average number of shares outstanding increased by the number of shares
that would be issued assuming the exercise of stock options.
Operating Segments:
Peoples' business activities are currently confined to one segment
which is community banking. As a community banking entity, Peoples
offers its customers a full range of products through various delivery
channels.
2. Fair Values of Financial Instruments:
The following methods and assumptions were used by Peoples in estimating
its fair value disclosures for financial instruments in accordance with
SFAS No. 107:
Cash and cash equivalents:
The carrying amounts reported in the balance sheet for these captions
approximate their fair values.
Investment securities:
Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not available,
fair values are estimated using quoted market prices of comparable
securities.
Loans:
The fair value of performing variable rate loans that reprice
frequently and performing demand loans, with no significant change in
credit risk, is based on carrying value. The fair value of certain
mortgage loans is based on quoted market prices of similar loans sold
in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair value of other performing
loans (e.g., commercial real estate, commercial and consumer loans) is
estimated using discounted cash flow analyses and interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
The fair value for significant nonperforming loans is based on either
the estimated fair value of underlying collateral or estimated cash
flows, discounted at a rate commensurate with the risk. Assumptions
regarding credit risk, cash flows, and discount rates are determined
using available market information and specific borrower information.
Deposits: The carrying amounts of demand deposits, savings accounts and
certain money market deposits approximate their fair values. The fair
value of fixed maturity certificates of deposit is estimated using a
discounted cash flow calculation that applies current rates offered for
deposits of similar remaining maturities.
Short-term borrowings:
The carrying amounts of federal funds purchased, Federal Home Loan Bank
advances, and securities sold under repurchase agreements approximate
their fair values.
Long-term borrowings:
The fair value of long-term borrowings is estimated using discounted
cash flow analysis based on rates currently available to Peoples for
borrowings with similar terms.
Interest Rate Floors:
Fair values for interest rate floors are based on quoted market prices.
Financial instruments:
The fair value of loan commitments and standby letters of credit is
estimated using the fees currently charged to enter into similar
agreements taking into account the remaining terms of the agreements
and the counterparties' credit standing. The estimated fair value of
these commitments approximates their carrying value.
The estimated fair values of Peoples' financial instruments are as
follows:
1999 1998
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
Financial assets:
Cash and cash equivalents 43,751 43,751 40,121 40,121
$ $ $ $
Investment securities 328,306 328,306 235,569 235,569
Loans 649,919 650,128 567,917 574,820
Financial liabilities:
Deposits $ 728,207 $ 728,558 $ 714,168 $ 715,150
Short-term borrowings 87,439 87,439 32,514 32,514
Long-term borrowings 150,338 147,546 40,664 39,255
Off-balance sheet instruments:
Interest rate floors $ 6 $ -- $ 22 $ 104
Bank premises and equipment, customer relationships, deposit base,
banking center networks, and other information required to compute
Peoples' aggregate fair value are not included in the above
information. Accordingly, the above fair values are not intended to
represent the aggregate fair value of Peoples.
3. Investment Securities:
The estimated maturities presented in the tables below may differ from the
contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties. Rates are
calculated on a taxable equivalent basis using a 35% federal income tax
rate. The portfolio contains no single issue (excluding U.S. Government
and U.S. Agency securities) which exceeds 10% of stockholders' equity.
Securities classified as available-for-sale Gross Gross
At December 31, 1999 Amortized Unrealized Unrealized Estimated
(Dollars in Thousands) Cost Gains Losses Fair Value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 105,169 $ 200 $ (4,680) $ 100,689
Obligations of states and political subdivisions 36,805 125 (1,774) 35,156
Mortgage-backed securities 152,788 203 (5,560) 147,431
Other securities 45,320 2,711 (3,001) 45,030
- -----------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 340,082 $ 3,239 $ (15,015) $ 328,306
- -----------------------------------------------------------------------------------------------------------
Maturity distribution of available-for-sale securities
Contractual maturities at December 31, 1999
U.S. Treasury Obligations
(Dollars in Thousands) securities and of states Total
obligations of and Mortgage- available-
U.S. Government political backed Other for-sale
Agencies subdivisions securities securities securities
Within one year
Amortized cost $ 4,333 $ 1,229 $ 23,078 $ 400 $ 29,040
Fair value $ 4,346 $ 1,239 $ 22,819 $ 398 $ 28,802
Yield 5.87 % 8.16 % 6.57 % 6.36 % 6.53 %
1 to 5 years
Amortized cost 26,318 3,552 94,924 3,395 128,189
Fair value 26,140 3,481 90,890 3,227 123,738
Yield 6.22 % 6.06 % 6.24 % 6.39 % 6.23 %
5 to 10 years
Amortized cost 74,109 9,512 30,892 11,439 125,952
Fair value 69,787 9,227 29,784 10,522 119,320
Yield 6.45 % 7.25 % 6.57 % 7.52 % 6.64 %
Over 10 years
Amortized cost 409 22,512 3,894 30,086 56,901
Fair value 416 21,209 3,938 30,883 56,446
Yield 6.75 % 6.94 % 6.54 % 7.62 % 7.27 %
- ----------------------------------------------------------------------------------------------------------
Total amortized cost $ 105,169 $ 36,805 $ 152,788 $ 45,320 $ 340,082
Total fair value $ 100,689 $ 35,156 $ 147,431 $ 45,030 $ 328,306
Total yield 6.37 % 6.97 % 6.36 % 7.49 % 6.58 %
- ----------------------------------------------------------------------------------------------------------
Securities classified as available-for-sale Gross Gross
At December 31, 1998 Amortized Unrealized Unrealized Estimated
(Dollars in Thousands) Cost Gains Losses Fair Value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 49,249 $ 1,034 $ (40) $ 50,243
Obligations of states and political subdivisions 44,007 1,541 (15) 45,533
Mortgage-backed securities 104,067 811 (117) 104,761
Other securities 32,726 2,428 (122) 35,032
- -----------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 230,049 $ 5,814 $ (294) $ 235,569
- -----------------------------------------------------------------------------------------------------------
Securities classified as available-for-sale Gross Gross
At December 31, 1997 Amortized Unrealized Unrealized Estimated
(Dollars in Thousands) Cost Gains Losses Fair Value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 51,304 $ 751 $ (87) $ 51,968
Obligations of states and political subdivisions 24,679 1,030 (1) 25,708
Mortgage-backed securities 76,229 467 (288) 76,408
Other securities 18,490 1,720 (3) 20,207
- -----------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 170,702 $ 3,968 $ (379) $ 174,291
- -----------------------------------------------------------------------------------------------------------
In 1999, 1998 and 1997, gross gains of $229,000, $523,000 and $3,000 and
gross losses of $333,000, $105,000 and $31,000 were realized,
respectively. At December 31, 1999 and 1998, investment securities having
a carrying value of $112,310,000 and $105,277,000, respectively, were
pledged to secure public and trust department deposits and repurchase
agreements in accordance with federal and state requirements.
4. Loans:
Loans are comprised of the following at December 31:
(Dollars in Thousands) 1999 1998
Commercial, financial, and agricultural $ 272,219 $ 212,530
Real estate, construction 14,067 10,307
Real estate, mortgage 252,427 233,550
Consumer 121,120 111,530
- ------------------------------------------------------------------------------
Total loans $ 659,833 $ 567,917
- ------------------------------------------------------------------------------
Changes in the allowance for loan losses for each of the three years in
the period ended December 31, 1999, were as follows:
(Dollars in Thousands) 1999 1998 1997
Balance, beginning of year $ 9,509 $ 8,356 $ 6,873
Charge-offs (1,518) (1,645) (1,917)
Recoveries 395 473 521
- --------------------------------------------------------------------------------
Net charge-offs (1,123) (1,172) (1,396)
Provision for loan losses 1,878 2,325 2,589
Balances of acquired subsidiaries -- -- 290
- --------------------------------------------------------------------------------
Balance, end of year $ 10,264 $ 9,509 $ 8,356
- --------------------------------------------------------------------------------
Peoples' lending is primarily focused in the local southeastern Ohio market
and consists principally of retail lending, which includes single-family
residential mortgages and other consumer lending. Peoples' largest groups
of business loans consist of credits to lodging and lodging related
companies, as well as automobile dealer floor plans. Lodging and lodging
related loans totaled $34,379,000 and $20,365,000 at December 31, 1999 and
1998, respectively. The credits were subjected to Peoples' normal
commercial underwriting standards and did not present more than the normal
amount of risk assumed in other lending areas. Automobile dealer floor
plans totaled $17,987,000 and $15,532,000 at December 31, 1999 and 1998,
respectively. It is Peoples' policy to obtain the underlying inventory as
collateral on these loans.
Peoples does not extend credit to any single borrower or group of related
borrowers in excess of the combined legal lending limits of its subsidiary
banks. Impaired loans at December 31, 1999 and 1998, and the average
investment in impaired loans for the years then ended were immaterial to
the financial statements.
In the normal course of its business, Peoples' subsidiary banks have
granted loans to executive officers and directors of Peoples and to their
associates. Related party loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable loans with unrelated persons and did not involve more than
normal risk of collectibility. The following is an analysis of activity of
related party loans for the year ended December 31, 1999:
(Dollars in Thousands)
Balance, January 1, 1999 $ 17,389
New loans 16,265
Repayments (10,548)
Other changes (14)
- ------------------------------------------------
Balance, December 31, 1999 $ 23,092
- ------------------------------------------------
5. Bank Premises and Equipment:
The major categories of bank premises and equipment and accumulated
depreciation are summarized as follows at December 31:
(Dollars in Thousands) 1999 1998
Land $ 2,786 $ 2,556
Building and premises 16,548 15,596
Furniture, fixtures and equipment 10,380 9,740
- -----------------------------------------------------------------------
29,714 27,892
Accumulated depreciation (14,393) (13,066)
- -----------------------------------------------------------------------
Net book value $ 15,321 $ 14,826
- -----------------------------------------------------------------------
Peoples depreciates its building and premises and furniture, fixtures and
equipment over estimated useful lives ranging from 5 to 20 years and 2 to
10 years, respectively. Depreciation expense was $1,972,000, $1,745,000,
and $1,534,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Peoples leases certain banking facilities and equipment under various
agreements with original terms providing for fixed monthly payments over
periods ranging from two to ten years. The future minimum payments, by
year and in the aggregate, under noncancelable operating leases with
initial or remaining terms of one year or more consisted of the following
at December 31, 1999:
(Dollars in Thousands) Operating
Year Ending December 31 Leases
2000 $ 297
2001 268
2002 243
2003 225
2004 197
Thereafter 723
- -------------------------------------------
Total minimum lease payments $ 1,953
- -------------------------------------------
Rent expense was $306,000, $242,000 and $163,000 in 1999, 1998 and 1997,
respectively.
6. Deposits:
Included in interest-bearing deposits are various time deposit products.
The maturities of time deposits for each of the next five years and
thereafter are as follows: $258,711,000 in 2000; $55,887,000 in 2001;
$9,039,000 in 2002; $4,030,000 in 2003; $3,498,000 in 2004; and $717,000
thereafter.
Deposits from related parties approximated $13.0 million and $16.5 million
at December 31, 1999 and 1998, respectively.
7. Short-term Borrowings:
Short-term borrowings are summarized as follows:
National
Federal Retail Market Short-term
Funds Repurchase Repurchase FHLB
(Dollars in Thousands) Purchased Agreements Agreements Advances
--------- ---------- ---------- --------
1999
Ending balance $ 501 $ 30,478 $ 34,010 $ 22,450
Average balance 137 30,171 18,606 5,477
Highest month end balance 501 31,502 35,000 22,450
Interest expense - YTD 7 1,294 1,058 296
Weighted average interest
rate:
End of year 2.66 % 5.07 % 6.05 % 4.75 %
During the year 4.89 4.29 5.69 5.40
1998
Ending balance $ 131 $ 31,683 -- $ 700
Average balance 996 31,429 -- 12,534
Highest month end balance 1,725 33,457 -- 59,200
Interest expense - YTD 53 1,476 -- 712
Weighted average interest
rate:
End of year 4.18 % 4.52 % -- 5.32 %
During the year 5.45 4.70 -- 5.68
1997
Ending balance $ 82 $ 30,729 -- $ 1,750
Average balance 419 20,020 -- 2,024
Highest month end balance 1,542 20,552 -- 5,250
Interest expense - YTD 23 882 -- 118
Weighted average interest
rate:
End of year 5.69 % 5.09 % -- 5.89 %
During the year 5.49 4.40 -- 5.78
Peoples utilizes FHLB advances and repurchase agreements as sources of
funds. The advances are collateralized by mortgage-backed securities and
loans. Peoples' institutional, national market repurchase agreements are
with high quality, financially secure financial service companies.
8. Long-term Borrowings:
Long-term borrowings consisted of the following at December 31:
(Dollars in Thousands) 1999 1998
Term note payable, at LIBOR (parent company) ............. $ 2,400 $ 2,700
Federal Home Loan Bank advances, bearing interest at rates
ranging from 3.87% to 6.18% ......................... 147,938 37,964
-------- --------
Total long-term borrowings ..................... $150,338 $ 40,664
- --------------------------------------------------------------------------------
The Federal Home Loan Bank ("FHLB") advances consist of various borrowings
with maturities ranging from 10 to 20 years. The advances are
collateralized by Peoples' real estate mortgage portfolio and all of the
FHLB common stock owned by the banking subsidiaries, and other bank
assets. The most restrictive requirement of the debt agreement requires
Peoples to provide real estate mortgage loans as collateral in an amount
not less than 150% of advances outstanding.
The aggregate minimum annual retirements of long-term borrowings in the
next five years and thereafter are as follows:
(Dollars in Thousands)
2000 $ 329
2001 328
2002 329
2003 1,531
2004 32
Thereafter 147,789
- --------------------------------------------
Total long-term borrowings $ 150,338
- --------------------------------------------
9. Employee Benefit Plans:
Peoples sponsors a noncontributory defined benefit pension plan which
covers substantially all employees. The plan provides benefits based on an
employee's years of service and compensation. Peoples' funding policy is
to contribute annually an amount that can be deducted for federal income
tax purposes. Plan assets consist primarily of U.S. Government obligations
and collective stock and bond funds.
Peoples also has a contributory benefit postretirement plan for former
employees who were retired as of December 31, 1992. The plan provides
health and life insurance benefits. Peoples' policy is to fund the cost of
the benefits as they are incurred.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period
ending December 31, 1999, and a statement of the funded status as of
December 31, 1999 and 1998:
Pension Postretirement
Benefits Benefits
(Dollars in Thousands) 1999 1998 1999 1998
Change in benefit obligation:
Obligation at January 1 ................ $ 7,301 $ 6,790 $ 808 $ 809
Service cost ........................... 394 342 -- --
Interest cost .......................... 500 483 63 56
Plan participants' contributions ....... -- -- 87 75
Actuarial (gain) loss .................. (610) 337 78 (5)
Benefit payments ....................... (916) (651) (216) (127)
- --------------------------------------------------------------------------------
Obligation at December 31 .............. 6,669 7,301 820 808
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 . 6,807 6,249 -- --
Claims payable adjustment .............. -- (3) -- --
Actual return on plan assets ........... 568 737 -- --
Employer contributions ................. 840 475 129 52
Plan participants' contributions ....... -- -- 87 75
Benefit payments ....................... (917) (651) (216) (127)
- --------------------------------------------------------------------------------
Fair value of plan assets at December 31 7,298 6,807 0 0
- --------------------------------------------------------------------------------
Funded status:
Funded status at December 31 ........... 629 (494) (820) (808)
Unrecognized transition obligation ..... (24) (32) -- --
Unrecognized prior-service cost ........ (44) (54) -- --
Unrecognized net gain .................. (917) (278) 250 191
- --------------------------------------------------------------------------------
Accrued benefit cost ................... $ (356) $ (858) $ (570) $ (617)
- --------------------------------------------------------------------------------
The following table provides the components of net periodic benefit cost
for the plans:
Pension Benefits Postretirement Benefits
(Dollars in Thousands) 1999 1998 1997 1999 1998 1997
Service cost $ 394 $ 342 $ 259
Interest cost 500 483 462 $ 63 $ 56 $ 65
Expected return on plan assets (539) (514) (422) -- -- --
Amortization of transition asset (8) (8) (8) -- -- --
Amortization of prior service cost (9) (9) (9) -- -- --
Amortization of net loss -- -- -- 20 9 --
- ----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 338 $ 294 $ 282 $ 83 $ 65 $ 65
- ----------------------------------------------------------------------------------------------------------
The assumptions used in the measurement of Peoples' benefit obligation are
shown in the following table:
Pension Postretirement
Benefits Benefits
1999 1998 1999 1998
Assumptions at December 31:
Discount rate 8.00 % 7.00 % 8.00 % 7.00 %
Expected return on plan assets 9.00 9.00 n/a n/a
Rate of compensation increase 5.00 4.00 n/a n/a
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed
for 1999, grading down 1% per year to an ultimate rate of 5%. The health
care trend rate assumption does not have a significant effect on the
contributory defined benefit postretirement plan; therefore, a one
percentage point change in the trend rate is not material in the
determination of the accumulated postretirement benefit obligation or the
ongoing expense.
10. Federal Income Taxes:
The effective federal income tax rate in the consolidated statement of
income is less than the statutory corporate tax rate due to the following:
Year ended December 31
1999 1998 1997
Statutory corporate tax rate 35.0 % 35.0 % 35.0 %
Differences in rate resulting from:
Interest on obligations of state and political
subdivisions (4.5) (4.0) (3.1)
Other, net 0.5 1.1 0.4
- --------------------------------------------------------------------------------
Effective federal income tax rate 31.0 % 32.1 % 32.3 %
- --------------------------------------------------------------------------------
The significant components of Peoples' deferred tax assets and liabilities
consisted of the following at December 31:
(Dollars in Thousands) 1999 1998
Deferred tax assets:
Allowance for loan losses $ 3,499 $ 3,163
Accrued employee benefits 487 724
Deferred loan fees and costs 242 323
Available-for-sale securities 4,121 --
Other 22 120
--------------------------------------------------------------------
Total deferred tax assets 8,371 4,330
--------------------------------------------------------------------
Deferred tax liabilities:
Bank premises and equipment 689 673
Available-for-sale securities -- 1,931
Deferred Income 258 244
Investments 1,158 933
Other 531 598
--------------------------------------------------------------------
Total deferred tax liabilities 2,636 4,379
--------------------------------------------------------------------
Net deferred tax asset(liability)$ 5,735 $ (49)
--------------------------------------------------------------------
The related federal income tax (benefit) expense on securities
transactions approximated ($36,000) in 1999, $146,000 in 1998, and
($10,000) in 1997.
11. Financial Instruments with Off-Balance Sheet Risk:
In the normal course of business, Peoples is party to financial
instruments with off-balance sheet risk necessary to meet the financing
needs of customers and to manage its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, standby letters of credit, and interest rate floors. The
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheets. The
contract or notional amounts of these instruments express the extent of
involvement Peoples has in these financial instruments.
Loan Commitments and Standby Letters of Credit:
Loan commitments are made to accommodate the financial needs of Peoples'
customers. Standby letters of credit commit Peoples to make payments on
behalf of customers when certain specified future events occur.
Historically, most loan commitments and standby letters of credit expire
unused. Peoples' exposure to credit loss in the event of nonperformance by
the counter-party to the financial instrument for loan commitments and
standby letters of credit is represented by the contractual amount of
those instruments. Peoples uses the same underwriting standards in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained is based on management's
credit evaluation of the customer. Collateral held varies, but may include
accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties. The total amounts of loan
commitments and standby letters of credit are summarized as follows at
December 31:
Contract Amount
(Dollars in Thousands) 1999 1998
Loan commitments $ 92,320 $ 69,568
Standby letters of credit 1,301 1,430
Unused credit card limits 19,071 18,968
Interest Rate Floors:
Peoples has entered into an interest rate floor contract with an
unaffiliated financial institution as a means of managing the risk of
changing interest rates. The interest rate floor is an agreement to
receive payments for interest rate differentials between an index rate and
a specified floor rate, computed on notional amounts of approximately $10
million. The interest rate floor subjects Peoples to the risk that the
counter-parties may fail to perform. In order to minimize such risk,
Peoples deals only with high-quality, financially secure financial
institutions. The contract expires in September, 2000. Unrealized gains
and losses at December 31, 1999 and 1998 and the contribution to net
interest income for each of the three years in the period end December 31,
1999 were not material.
12. Corporation-Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trusts Holding Solely Debentures of the Corporation:
December 31,
(Dollars in thousands) 1999 1998
8.62% capital securities of PEBO Capital Trust I,
due May 1, 2029 net of unamortized issuance costs $ 28,986 $ --
Total capital securities qualifying for Tier 1 capital 26,842 --
The corporation-obligated mandatorily redeemable capital securities (the
"Capital Securities") of subsidiary trusts holding solely junior
subordinated debt securities of the Corporation (the "debentures") were
issued by a statutory business trust -- PEBO Capital Trust I, of which
100% of the common equity in the trust is owned by the Corporation. The
trust was formed for the purpose of issuing the capital securities and
investing the proceeds from the sale of such capital securities in the
debentures. The debentures held by the trust are the sole assets of that
trust. Distributions on the capital securities issued by the trust are
payable semi-annually at a rate per annum equal to the interest rate being
earned by the trust on the debentures held by that trust and are recorded
as non-interest expense by the Corporation. The capital securities are
subject to mandatory redemption, in whole or in part, upon repayment of
the debentures. The Corporation has entered into agreements which, taken
collectively, fully and unconditionally guarantee the capital securities
subject to the terms of each of the guarantees.
The debentures held by PEBO Capital Trust I are first redeemable, in whole
or in part, by the Corporation on May 1, 2009.
13. Regulatory Matters:
The primary source of funds for the dividends paid by Peoples is dividends
received from its banking subsidiaries. The payment of dividends by
banking subsidiaries is subject to various banking regulations. The most
restrictive provision requires regulatory approval if dividends declared
in any calendar year exceed the total net profits of that year plus the
retained net profits of the preceding two years. At December 31, 1999,
approximately $15 million of retained net profits plus retained net
profits through the dividend date of the banking subsidiaries was
available for the payment of dividends to Peoples Bancorp Inc. without
regulatory approval.
Peoples and its banking subsidiaries are subject to various regulatory
capital requirements administered by the banking regulatory agencies.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Peoples and each of its banking subsidiaries must meet
specific capital guidelines that involve quantitative measures of each
entity's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. Peoples' and each of its
banking subsidiaries' capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Peoples and each of its banking subsidiaries to maintain minimum
amounts and ratios of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Peoples and each of its
banking subsidiaries met all capital adequacy requirements at December 31,
1999.
As of December 31, 1999, the most recent notifications from the banking
regulatory agencies categorized Peoples and each of its banking
subsidiaries as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Peoples and each
of its banking subsidiaries must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since these notifications that
management believes have changed Peoples' or any of its banking
subsidiaries' category.
Peoples' and its significant banking subsidiary's, The Peoples Banking and
Trust Company ("Peoples Banking and Trust"), actual capital amounts and
ratios are also presented in the following table.
Well Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Action Provision
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1999:
Total capital (1)
Peoples 99,213 14.3 % 55,495 8 % 69,369 10 %
Peoples Banking and Trust 73,461 12.2 48,108 8 60,135 10
- ----------------------------- -------- ---- -------- --- -------- ---
Tier 1 (2)
Peoples 87,216 12.6 27,748 4 41,621 6
Peoples Banking and Trust 65,930 11.0 24,054 4 36,081 6
- ----------------------------- -------- ---- -------- --- -------- ---
Tier 1 (3)
Peoples 87,216 8.3 42,060 4 52,576 5
Peoples Banking and Trust 65,930 7.4 35,519 4 44,399 5
- ----------------------------- -------- --- -------- --- -------- ---
As of December 31, 1998:
Total capital (1)
Peoples 68,359 12.0 % 45,766 8 % 57,207 10 %
Peoples Banking and Trust 51,865 10.8 38,380 8 47,975 10
- ----------------------------- -------- ---- ------- --- ------- ---
Tier 1 (2)
Peoples 60,310 10.5 22,883 4 34,324 6
Peoples Banking and Trust 45,846 9.6 19,190 4 28,785 6
- ----------------------------- -------- ---- ------- --- ------- ---
Tier 1 (3)
Peoples 60,310 7.1 34,083 4 42,604 5
Peoples Banking and Trust 45,846 6.8 26,986 4 33,732 5
- ----------------------------- -------- ---- ------- --- ------- ---
(1) Ratio represents total capital to net risk-weighted assets.
(2) Ratio represents Tier 1 capital to net risk-weighted assets.
(3) Ratio represents Tier 1 capital to average assets.
14. Federal Reserve Requirements:
The subsidiary banks are required to maintain average reserve balances
with the Federal Reserve Bank. The Reserve requirement is calculated on a
percentage of total deposit liabilities and averaged $12,615,000 for the
year ended December 31, 1999.
15. Acquisitions:
On November 2, 1999, Peoples acquired the Lambert Insurance Agency in
Meigs County, Ohio, for $500,000 in a cash transaction that was structured
as a purchase acquisition. The excess of the purchase price over the
identifiable tangible and intangible assets of $400,000 is being amortized
on a straight-line basis over 15 years. The agreement provides for 20% of
the purchase price to be paid at the end of three years, if certain
conditions are satisfied. The Lambert Insurance Agency is a full-service
agency and seller of health, life, property, and casualty insurance and
now operates as a division of Northwest Territory Property & Casualty
Agency, Inc.
On November 1, 1999, Peoples acquired approximately $5.0 million in
deposit liabilities and $0.5 million of loan balances from an unaffiliated
institution. On June 26, 1998, Peoples acquired the deposits
(approximately $121 million) and total loans (approximately $8 million) of
four full-service offices in the communities of Point Pleasant (two
offices), New Martinsville, and Steelton, West Virginia, from an
unaffiliated financial institution.
On December 12, 1997, Peoples acquired Gateway Bancorp, Inc. and its
subsidiary, Catlettsburg Federal Savings Bank, for total consideration of
$21.6 million ($6.2 million in cash and $15.4 million in common stock). At
the date of acquisition, Gateway Bancorp operated two full service offices
in northeastern Kentucky, and had total assets of $61.2 million, deposits
of $43.9 million and shareholders' equity of $15.3 million. This
acquisition was accounted for under the purchase method of accounting.
The prices of the purchase acquisitions were allocated to the identifiable
tangible and intangible assets acquired based upon their fair value at the
acquisition date. Goodwill and deposit intangibles, included in other
assets, approximated $20,154,000 and $22,116,000, net of accumulated
amortization of $7,208,000 and $4,569,000, at December 31, 1999 and 1998.
The balances and operations of these acquisitions are included in the
financial statement of Peoples from the dates of acquisition and do
materially impact Peoples' financial position, results of operations or
cash flows for any period presented.
16. Stock Options:
Peoples' stock option plans provide for the granting of both incentive
stock options and non-qualified stock options of up to 909,523 shares of
common stock. Under the provisions of the plans, the option price per
share shall not be less than the fair market value of the common stock on
the date of grant of such option, therefore no compensation expense is
recognized. All granted options vest in periods ranging from six months to
eight years and expire 10 years from the date of grant. The following
summarizes Peoples' stock options as of December 31, 1999, 1998 and 1997,
and the changes for the years then ended:
1999 1998 1997
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
------------------------ ------------------------ ------------------------
Outstanding at 531,708 $ 14.94 573,815 $ 13.96 433,522 $ 10.06
beginning of year
Granted 108,262 19.06 34,640 24.33 195,988 21.59
Exercised 56,897 10.84 57,997 10.57 47,092 10.14
Canceled 8,532 20.37 18,750 15.83 8,603 12.50
- ----------------------------------------------------------------------------------------------------------
Outstanding at
end of year 574,541 16.05 531,708 14.94 573,815 13.96
- ----------------------------------------------------------------------------------------------------------
Exercisable at
end of year 351,626 12.83 293,039 11.53 253,868 10.61
- ----------------------------------------------------------------------------------------------------------
Weighted average fair
value of options granted
during the year $ 4.38 $ 5.07 $ 5.46
- ----------------------------------------------------------------------------------------------------------
The following summarizes information concerning Peoples' stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted
Average Weighted Weighted
Option Remaining Average Average
Range of Shares Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
------------------------------------------------ ------------------------------
$7.97 to $11.65 269,859 4.7 years $ 10.15 266,849 $ 10.16
$14.81 to $18.95 138,068 8.6 years 18.11 30,731 16.25
$19.63 to $23.14 24,114 8.8 years 21.32 13,009 21.40
$23.76 to $27.06 142,500 8.0 years 24.30 41,037 24.89
Peoples has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options. Under APB
25, because the exercise price of Peoples' stock options granted is equal
to the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Peoples utilized the Black-Scholes
option pricing model for purposes of providing pro forma disclosures as if
Peoples had used the fair value method for computing compensation expense
for its stock-based compensation plans. The following weighted average
assumptions were used in the pricing model for 1999, 1998 and 1997
respectively: risk-free interest rate of 5.88%, 5.25%, and 6.40%; dividend
yield of 2.56%, 2.40%, and 1.90%; volatility factor of the expected market
price of Peoples' stock of 0.19, 0.15, and 0.12, and a weighted average
expected life of the options of 5 years, 7 years, and 7 years.
Had compensation expense for Peoples' stock based compensation plans been
determined using the fair value method, net income and earnings per share
would have been as summarized below:
(Dollars in Thousands, except
Per Share Data) 1999 1998 1997
Net Income:
As Reported $ 10,718 $ 10,045 $ 8,605
Pro forma 10,432 9,811 8,458
Basic Earnings Per Share:
As Reported $ 1.57 $ 1.44 $ 1.37
Pro forma 1.52 1.41 1.34
Diluted Earnings Per Share:
As Reported $ 1.53 $ 1.40 $ 1.32
Pro forma 1.49 1.37 1.30
17. Parent Company Only Financial Information:
(Dollars in Thousands) December 31,
Condensed Balance Sheets 1999 1998
Assets:
Cash $ 50 $ 50
Interest bearing deposits in subsidiary bank 6,186 116
Receivable from subsidiary bank 1,560 1,769
Investment securities: Available-for-sale (amortized cost of $1,528 and
$1,164 at December 31, 1999 and 1998, respectively) 4,109 3,094
Investments in subsidiaries:
Banks 92,175 84,909
Non-banks 1,210 1,197
Other assets 1,963 919
- --------------------------------------------------------------------------------------------------------------
Total assets $ 107,253 $ 92,054
- --------------------------------------------------------------------------------------------------------------
Liabilities:
Accrued expenses and other liabilities $ 2,148 $ 2,533
Dividends payable 845 807
Long-term borrowings 2,400 2,700
- --------------------------------------------------------------------------------------------------------------
Total liabilities 5,393 6,040
- --------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in junior subordinated debentures 28,986 --
Stockholders' equity 72,874 86,014
- --------------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and stockholders' equity $ 107,253 $ 92,054
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year ended December 31,
Consolidated Statements of Income 1999 1998 1997
Income:
Dividends from subsidiary banks $ 3,680 $ 13,157 $ 12,990
Dividends from other subsidiaries 80 40 50
Interest 454 179 72
Management fees from subsidiaries 947 909 903
Other 34 548 77
- --------------------------------------------------------------------------------------------------------------
Total income 5,195 14,833 14,092
- --------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and benefits 1,240 1,175 1,220
Interest 158 186 217
Trust Preferred Securities expense 1,840 -- --
Other 873 749 818
- --------------------------------------------------------------------------------------------------------------
Total expenses 4,111 2,110 2,255
- --------------------------------------------------------------------------------------------------------------
Income before federal income taxes and equity in undistributed
earnings of (excess dividends from) subsidiaries 1,084 12,723 11,837
Applicable income tax benefit (599) (75) (250)
Equity in undistributed earnings of
(excess dividends from) subsidiaries 9,035 (2,753) (3,482)
- --------------------------------------------------------------------------------------------------------------
Net income $ 10,718 $ 10,045 $ 8,605
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year ended December 31,
Statements of Cash Flows 1999 1998 1997
Cash flows from operating activities:
Net income $ 10,718 $ 10,045 $ 8,605
Adjustment to reconcile net income to cash provided by operations:
Amortization and depreciation 208 223 230
(Equity in undistributed earnings of) excess dividends from subsidiaries (9,035) 2,753 3,482
Gain on securities transactions -- (517) --
Other, net (1,480) 1,165 (48)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 411 13,669 12,269
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Purchases of) proceeds from sales of investment securities (364) 693 (44)
Expenditures for premises and equipment (73) (36) (33)
Investment in subsidiaries (9,910) (9,819) (15,436)
Repayment of capital note receivable from subsidiary -- -- 3,000
Investment in tax credit funds (1,200) -- --
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,547) (9,162) (12,513)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term borrowings -- -- 3,000
Proceeds from issuance of Trust Preferred Securities 30,000 -- --
Payments on long-term borrowings (300) (300) --
Purchase of treasury stock (10,255) (2,059) (327)
Change in receivable from subsidiary 209 (601) (268)
Proceeds from issuance of common stock 478 607 314
Cash dividends paid (2,926) (2,538) (2,184)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 17,206 (4,891) 535
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 6,070 (384) 291
Cash and cash equivalents at the beginning of the year 166 550 259
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ 6,236 $ 166 $ 550
- ----------------------------------------------------------------------------------------------------------------
The parent company paid interest totaling $158,000, $186,000 and $217,000 during
the years ended December 31, 1999, 1998 and 1997, respectively.
18. Summarized Quarterly Information (Unaudited):
A summary of selected quarterly financial information for 1999 and 1998
follows:
(Dollars in Thousands, except Per Share Data)
1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $ 15,985 $ 17,622 $ 19,104 $ 19,635
Interest expense 7,242 8,162 9,049 9,805
Net interest income 8,743 9,460 10,055 9,830
Provision for possible loan losses 537 447 447 447
Investment securities gains (losses) -- 1 (115) 10
Other income 1,844 1,820 1,924 2,045
Other expenses 6,236 7,084 7,329 7,548
Income taxes 1,184 1,201 1,330 1,109
Net income 2,630 2,549 2,758 2,781
Earnings per share:
Basic 0.38 0.37 0.41 0.42
Diluted $ 0.37 $ 0.36 $ 0.39 $ 0.41
Weighted average shares outstanding:
Basic 6,979,409 6,943,855 6,799,034 6,665,949
Diluted 7,140,949 7,121,186 7,013,027 6,824,486
1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $ 15,364 $ 15,735 $ 16,307 $ 16,239
Interest expense 7,320 7,531 7,921 7,725
Net interest income 8,044 8,204 8,386 8,514
Provision for possible loan losses 696 546 546 537
Investment securities gains (losses) 4 427 (13) --
Other income 1,618 1,590 1,647 1,965
Other expenses 5,414 5,444 6,400 6,018
Income taxes 1,180 1,431 978 1,151
Net income 2,376 2,800 2,096 2,773
Earnings per share:
Basic 0.34 0.40 0.30 0.40
Diluted $ 0.33 $ 0.39 $ 0.29 $ 0.39
Weighted average shares outstanding:
Basic 6,967,607 6,989,505 6,975,010 6,971,800
Diluted 7,196,139 7,232,888 7,171,146 7,146,259
Report of Independent Auditors
To the Stockholders and Board of Directors:
We have audited the accompanying consolidated balance sheets of Peoples
Bancorp Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of Peoples' management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Peoples Bancorp Inc. and Subsidiaries at December 31, 1999 and
1998 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United
States.
/S/ ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
Charleston, West Virginia
February 7, 2000
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
Directors and Executive Officers of Peoples include those persons identified
under "Election of Directors" on pages 5 through 8 of Peoples' definitive Proxy
Statement relating to Peoples' Annual Meeting of Shareholders to be held April
13, 2000, which section is expressly incorporated by reference. Other Executive
Officers are David B. Baker (53), Executive Vice President; John (Jack) W.
Conlon (54), Chief Financial Officer and Treasurer; Larry E. Holdren (52),
Executive Vice President; Carol A. Schneeberger (43), Executive Vice
President/Operations; Joseph S. Yazombek (46), Executive Vice President/Chief
Lending Officer; and Mark F. Bradley (30), Controller.
Mr. Baker became Executive Vice President of Peoples in February, 1999. In
February, 2000, Mr. Baker was appointed President of Peoples Bank's Investment
and Insurance Services, as Peoples reorganized its sales management structure to
enhance financial product and service delivery. Prior thereto, he was President
of Peoples Bank's Investment and Business Division since January, 1998, and was
President and of the Investment and Trust Division of Peoples Bank, a position
he held since 1991. Mr. Baker has held various positions in the Investment and
Trust Division for Peoples Bank since 1974.
Mr. Conlon has been Chief Financial Officer of Peoples since April, 1991. He
became Treasurer of Peoples in April, 1999. He has also been Chief Financial
Officer and Treasurer of Peoples Bank for more than five years.
Mr. Holdren became Executive Vice President of Peoples in February, 1999. He has
also been President of the Retail and Banking Division for Peoples Bank since
January, 1998. Prior thereto, he was Executive Vice President of Human Resources
for Peoples Bank since 1987.
Ms. Schneeberger became Executive Vice President/Operations of Peoples in April,
1999. Prior thereto, she was Vice President/Operations of Peoples since October,
1988. Prior thereto, she was Auditor of Peoples from August, 1987 to October,
1988, and Auditor of Peoples Bank from January, 1986 to October, 1988.
Mr. Yazombek was appointed Executive Vice President/Chief Lending Officer of
Peoples in January, 2000. Mr. Yazombek has also held the position of Executive
Vice President and Chief Lending Officer of Peoples Bank since October, 1998. He
was an Executive Vice President of Peoples Bank's Consumer and Mortgage Lending
areas from May, 1996, to October, 1998, where he also directly managed Peoples
Bank's collections efforts. Mr. Yazombek joined Peoples Bank in 1983 and served
as a real estate lender until May, 1996.
Mr. Bradley became Controller of Peoples in January, 1997. Prior thereto, he was
Manager of Accounting and External Reporting for Peoples from February, 1995 to
January, 1997. He has been Controller for Peoples Bank since March, 1997. He was
Manager of Accounting and External Reporting for Peoples Bank from February,
1995 to January, 1997. Prior to February 1995, Mr. Bradley served as a staff
accountant of Peoples beginning in 1991.
The information required to be disclosed under Item 405 of Regulation S-K is
included under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 5 of Peoples' definitive Proxy Statement, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------
See "Compensation of Executive Officers and Directors" on pages 10 through 14 of
Peoples' definitive Proxy Statement relating to Peoples' Annual Meeting of
Shareholders to be held April 13, 2000, which is incorporated herein by
reference.
Neither the report of the Compensation Committee of the Board of Directors on
executive compensation nor the performance graph included in Peoples' definitive
Proxy Statement relating to Peoples' Annual Meeting of Shareholders to be held
on April 13, 2000, shall be deemed to be incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
See "Security Ownership of Certain Beneficial Owners and Management" on pages 2
through 5 of Peoples' definitive Proxy Statement relating to Peoples' Annual
Meeting of Shareholders to be held April 13, 2000, which section is expressly
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
See "Transactions Involving Management" on page 8 of Peoples' definitive Proxy
Statement relating to Peoples' Annual Meeting of Shareholders to be held April
13, 2000, which section is expressly incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
(a)(1) Financial Statements:
---------------------
The following consolidated financial statements of Peoples Bancorp
Inc. and subsidiaries are included in Item 8:
Page
Report of Independent Auditors (Ernst & Young LLP) 55
Consolidated Balance Sheets as of December 31, 1999 and 1998 34
Consolidated Statements of Income for each of the three years ended
December 31, 1999 35
Consolidated Statements of Stockholders' Equity for each of the
three years ended December 31, 1999 36
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1999 37
Notes to the Consolidated Financial Statements 38
Peoples Bancorp Inc.: (Parent Company Only Financial Statements are
included in Note 17 of the Notes to the Consolidated Financial
Statements) 52
(a)(2) Financial Statement Schedules
-----------------------------
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and,
therefore, have been omitted.
(a)(3) Exhibits
--------
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Exhibit Index" beginning at
page 60. The Exhibit Index specifically identifies each management
contract or compensatory plan required to be filed as an exhibit to
this Form 10-K.
(b) Reports on Form 8-K:
--------------------
Peoples filed the following reports on Form 8-K during the three
months ended December 31, 1999:
1) Filed October 18, 1999 - News release announcing Peoples' earnings
for the third quarter ended September 30, 1999, reported under Item
5.
2) Filed November 2, 1999 - News release announcing that The
Peoples Banking and Trust Company, a subsidiary of Peoples, had
completed the acquisition of a full-service facility in Huntington,
West Virginia, reported under Item 5.
3) Filed November 4, 1999 - News release announcing the acquisition
by Northwest Territory Property and Casualty Insurance Agency, Inc.,
a subsidiary of Peoples, of Lambert Insurance Agency of Pomeroy,
Ohio, reported under Item 5.
4) Filed November 12, 1999 - News
release announcing the declaration of a $0.14 per share quarterly
dividend by the Board of Directors of Peoples, reported under Item 5.
5) Filed November 17, 1999 - News release announcing the opening of a
loan production office by The Peoples Banking Trust Company, a
subsidiary of Peoples, in Lancaster, Ohio, reported under Item 5.
6) Filed December 13, 1999 - News release announcing the adoption of
a resolution authorizing Peoples to repurchase up to 150,000 of its
common shares, reported under Item 5.
(c) Exhibits
--------
Exhibits filed with Annual Report on Form 10-K are attached hereto.
For a list of such exhibits, see "Exhibit Index" beginning at page
60.
(d) Financial Statement Schedules
-----------------------------
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEOPLES BANCORP INC.
Date: February 29, 2000 By: /s/ ROBERT E.EVANS
--------------------------
Robert E. Evans, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ ROBERT E. EVANS President and Chief Executive February 29, 2000
- ------------------------- Officer and Director
Robert E. Evans
/s/ CARL BAKER, JR. Director February 29, 2000
- -------------------------
Carl Baker, Jr.
/s/ GEORGE W. BROUGHTON Director February 29, 2000
- -------------------------
George W. Broughton
Director February 29, 2000
- -------------------------
Frank L. Christy
/s/ WILFORD D. DIMIT Director February 29, 2000
- -------------------------
Wilford D. Dimit
/s/ BARTON S. HOLL Director February 29, 2000
- -------------------------
Barton S. Holl
/s/ REX E. MAIDEN Director February 29, 2000
- -------------------------
Rex E. Maiden
/s/ PAUL T. THEISEN Director February 29, 2000
- -------------------------
Paul T. Theisen
/s/ THOMAS C. VADAKIN Director February 29, 2000
- -------------------------
Thomas C. Vadakin
/s/ JOSEPH H. WESEL Chairman of the Board and Director February 29, 2000
- -------------------------
Joseph H. Wesel
/s/ JOHN W. CONLON Chief Financial Officer February 29, 2000
- ------------------------- and Treasurer
John W. Conlon (Principal Accounting Officer)
/s/ MARK F. BRADLEY Controller February 29, 2000
- -------------------------
Mark F. Bradley
EXHIBIT INDEX
PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
Exhibit
Number Description Exhibit Location
- ----------- ------------------------------------------------------- -----------------------------------------------------
3(a)(1) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit 3(a)
Inc. (as filed with the Ohio Secretary of State on to Peoples' Registration Statement on Form 8-B
May 3, 1993) filed July 20, 1993 (File No. 0-16772).
3(a)(2) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit
Peoples Bancorp Inc. (as filed with the Ohio 3(a)(2) to Peoples' Annual Report on Form 10-K for
Secretary of State on April 22, 1994) fiscal year ended December 31, 1997 (File No.
0-16772) (the "1997 Form 10-K").
3(a)(3) Certificate of Amendment to the Amended Articles of Incorporated herein by reference to Exhibit
Peoples Bancorp Inc. (as filed with the Ohio 3(a)(3) to Peoples' 1997 Form 10-K.
Secretary of State on April 9, 1996)
3(a)(4) Amended Articles of Incorporation of Peoples Bancorp Incorporated herein by reference to Exhibit
Inc. (reflecting amendments through April 9, 1996) 3(a)(4) to Peoples' 1997 Form 10-K.
[For SEC reporting compliance purposes only -- not
filed with Ohio Secretary of State]
3(b) Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b)
to Peoples' Registration Statement on Form 8-B
filed July 20, 1993 (File No. 0-16772).
4(a) Agreement to furnish instruments and agreements Filed with Peoples' Annual Report on Form 10-K for
defining rights of holders of long-term debt the fiscal year ended December 31, 1999.
4(b) Indenture, dated as of April 20, 1999, between Incorporated herein by reference to Exhibit 4.1 to
Peoples Bancorp Inc. and Wilmington Trust Company, the Registration Statement on Form S-4
as Debenture Trustee, relating to Junior (Registration No. 333-81251) filed on June 22,
Subordinated Deferrable Interest Debentures. 1999 by Peoples Bancorp Inc. and PEBO Capital
Trust I (the "1999 Form S-4").
4(c) Form of Certificate of Series B 8.62% Junior Incorporated herein by reference to Exhibit 4.2
Subordinated Deferrable Interest Debenture of to the 1999 Form S-4.
Peoples Bancorp Inc.
4(d) Form of Certificate of Series A 8.62% Junior Incorporated herein by reference to Exhibit 4.3
Subordinated Deferrable Interest Debenture of to the 1999 Form S-4.
Peoples Bancorp Inc.
4(e) Certificate of Trust of PEBO Capital Trust I. Incorporated herein by reference to Exhibit 4.4
to the 1999 Form S-4.
4(f) Amended and Restated Declaration of Trust of PEBO Incorporated herein by reference to Exhibit 4.5
Capital Trust I, dated as of April 20, 1999. to the 1999 Form S-4.
4(g) Form of Common Security of PEBO Capital Trust I. Incorporated herein by reference to Exhibit 4.6
to the 1999 Form S-4.
4(h) Form of Series B 8.62% Capital Security Certificate Incorporated herein by reference to Exhibit 4.7
of PEBO Capital Trust I. to the 1999 Form S-4.
4(i) Series B Capital Securities Guarantee Agreement, Filed herewith.
dated as of September 23, 1999, between Peoples
Bancorp Inc. and Wilmington Trust Company, as
Guarantee Trustee, relating to Series B 8.62%
Capital Securities.
10(a) Deferred Compensation Agreement dated November 16, Incorporated herein by reference to Exhibit 6(g)
1976 between Robert E. Evans and The Peoples Banking to Peoples' Registration Statement No. 2-68524 on
and Trust Company, as amended March 13, 1979.* Form S-14 of Peoples Delaware, Peoples'
predecessor.
10(b)(1) Peoples Bancorp Inc. Deferred Compensation Plan for Incorporated herein by reference to Exhibit 10(a)
Directors of Peoples Bancorp Inc. and Subsidiaries of Peoples' Registration Statement on Form S-8
(Amended and Restated Effective January 2, 1998.)* filed December 31, 1997 (Registration No.
333-43629).
10(b)(2) Amendment No. 1 to Peoples Bancorp Inc. Deferred Incorporated herein by reference to Exhibit 10(b)
Compensation Plan for Directors of Peoples Bancorp of the Peoples' Post-Effective Amendment No. 1 to
Inc. and Subsidiaries effective January 2, 1998.* Form S-8 filed September 4, 1998 (Registration No.
333-43629).
10(c) Summary of the Performance Compensation Plan for Incorporated herein by reference to Exhibit 10(f)
Peoples Bancorp Inc. effective for calendar year of Peoples' Annual Report on Form 10-K for fiscal
beginning January 1, 1997.* year ended December 31, 1996 (File No. 0-16772).
10(d) Peoples Bancorp Inc. Amended and Restated 1993 Stock Incorporated herein by reference to Exhibit 4 of
Option Plan.* Peoples' Registration Statement on Form S-8 filed
August 25, 1993 (Registration Statement No.
33-67878).
10(e) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(g)
with grant of non-qualified stock options under of Peoples' Annual Report on Form 10-K for fiscal
Peoples Bancorp Inc. Amended and Restated 1993 Stock year ended December 31, 1995 (File No. 0-16772).
Option Plan.*
10(f) Form of Stock Option Agreement dated May 20, 1993, Incorporated herein by reference to Exhibit 10(h)
used in connection with grant of incentive stock of Peoples' Annual Report on Form 10-K for fiscal
options under Peoples Bancorp Inc. Amended and year ended December 31, 1995 (File No. 0-16772).
Restated 1993 Stock Option Plan.*
10(g) Form of Stock Option Agreement dated November 10, Incorporated herein by reference to Exhibit 10(i)
1994, used in connection with grant of incentive of Peoples' Annual Report on Form 10-K for fiscal
stock options under Peoples Bancorp Inc. Amended and year ended December 31, 1995 (File No. 0-16772).
Restated 1993 Stock Option Plan.*
10(h) Peoples Bancorp Inc. 1995 Stock Option Plan.* Incorporated herein by reference to Exhibit 4 of
Peoples' Form S-8 filed May 24, 1995 (Registration
Statement No. 33-59569).
10(i) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(k)
with grant of non-qualified stock options to of Peoples' Annual Report on Form 10-K for fiscal
non-employee directors of Peoples under Peoples year ended December 31, 1995 (File No. 0-16772).
Bancorp Inc. 1995 Stock Option Plan.*
10(j) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(l)
with grant of non-qualified stock options to of Peoples' Annual Report on Form 10-K for fiscal
non-employee directors of Peoples' subsidiaries year ended December 31, 1995 (File No. 0-16772).
under Peoples Bancorp Inc. 1995 Stock Option Plan.*
10(k) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(m)
with grant of incentive stock options under Peoples of Peoples' Annual Report on Form 10-K for fiscal
Bancorp Inc. 1995 Stock Option Plan.* year ended December 31, 1998 (File No. 0-16772).
10(l) Peoples Bancorp Inc. 1998 Stock Option Plan.* Incorporated herein by reference to Exhibit 10 of
Peoples' Form S-8 filed September 4, 1998
(Registration Statement No. 333-62935).
10(m) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(o)
with grant of non-qualified stock options to of Peoples' Annual Report on Form 10-K for fiscal
non-employee directors of Peoples under Peoples year ended December 31, 1998 (File No. 0-16772).
Bancorp Inc. 1998 Stock Option Plan.*
10(n) Form of Stock Option Agreement used in connection Incorporated herein by reference to Exhibit 10(p)
with grant of non-qualified stock options to of Peoples' Annual Report on Form 10-K for fiscal
consultants/advisors of Peoples under Peoples year ended December 31, 1998 (File No. 0-16772).
Bancorp Inc. 1998 Stock Option Plan.*
10(o) Form of Stock Option Agreement used in connection Filed herewith.
with grant of incentive stock options under Peoples
Bancorp Inc. 1998 Stock Option Plan.*
10(p) Registration Rights Agreement, dated April 20, Incorporated herein by reference to Exhibit 4.11
1999, among Peoples Bancorp Inc., PEBO Capital to the 1999 Form S-4.
Trust I and Sandler O'Neill & Partners, L.P.
12 Statements of Computation of Ratios. Filed herewith.
21 Subsidiaries of Peoples Bancorp Inc. Filed herewith.
23 Consent of Independent Auditors - Ernst & Young LLP. Filed herewith.
27 Financial Data Schedule. Filed herewith.
- --------------------------------------------------------------------------------------------------------------------------
*Management Compensation Plan