PRESIDENT'S LETTER TO SHAREHOLDERS
This report presents Peoples Bancorp's 1996 results. As you
can see by the financial highlights on page 13, it was a record
year for your Company in terms of growth and profitability.
During 1996, we reinforced our commitment to total shareholder
return and as a direct result, earnings per share reached record
highs.
At Peoples Bancorp, we value consistency. 1996 marks the 23rd
consecutive year of increased earnings, with total net income of
$7,651,000, an increase of 26.5% compared to 1995. Earnings per
share reached $2.18, up $0.46 over 1995's $1.72. Dividends per
share continued to grow, reaching $0.65 per share in 1996, an
increase of $0.09 per share (or 16.1%) compared to 1995.
Peoples Bancorp also declared a 10% stock dividend to
shareholders of record on July 15, 1996.
Earnings in 1995 were affected by expenses related to a
voluntary early retirement program offered to qualified
employees. Our existing employees accepted the challenge to
remain the financial services leader in our markets despite the
loss of many valued, experienced associates. Our workforce
should be commended for a job well done.
www.peoplesbancorp.com
The language of business has certainly changed over the past
several years. Financial products and their delivery systems
have revolutionized the banking industry. Peoples Bancorp's
web site attracts many information seekers each day.
The "Information Age" has arrived. A variety of industries
have discovered their customers want products or information
readily accessible when it's convenient for the customer.
Banking is no different. 24-hour banking could become an
industry standard and electronic banking is certainly the wave
of the future. Who could have predicted that Peoples Bancorp
could be accessed worldwide from your telephone? From a
computer? From your own home? Regardless of the method of
communication, one key remains: to be successful, we must be
able to understand our customer's diversified needs and provide
financial services or products to satisfy those needs. Peoples
Bancorp must provide communication systems that enable prompt
professional delivery of information that meets customer needs.
We have learned many things over the years, but one principle
remains constant: change. The ability to adapt to shifting
customer needs and preferences provides the base for consistent
return to investors. Peoples Bancorp has come a long way from
the origin of the Company in 1902, capitalized for $100,000 and
serving a handful of customers from a single location. That
initial investment by the founders of The Peoples Banking and
Trust Company in Marietta, Ohio, has blossomed into Peoples
Bancorp, a multi-bank holding company with 19 locations and over
$600 million in assets, $56 million in equity, and thousands of
customers in locations both near and far.
In effect, Peoples Bancorp is striving towards operation of a
"multi-tiered business" offering "traditional" banking products
such as deposits, loans, trust services, etc., and
"non-traditional" products, including annuities, life insurance,
property and casualty insurance, etc. In time, all of these
products will become traditional banking products, but today, we
recognize the importance of managing this delicate balance as
our markets change.
In order to provide competitive shareholder return, Peoples
Bancorp must be an efficient financial service provider. We
must partner with our customers to provide distinct financial
services through committed, highly-trained, educated resources.
We strive to be both revolutionary in our thinking and reactive
in our methods.
Revolutionary thinking can be defined as "bringing about a
major or fundamental change" and Peoples Bancorp has broadened
our financial service offering through insurance products and
electronic delivery methods.
In order to be reactive, one must have an ear to the ground.
Peoples Bancorp strives to be aware of customer needs through an
open line of communication (TeleBank, the Internet, etc.) and
work to recognize opportunities to be a full-service financial
institution. We realize that customer satisfaction is never a
finished job and that we must communicate this special
relationship to customers.
Recently we initiated a strategy to increase shareholder return
through enhanced operating efficiency. I am pleased to report
Peoples Bancorp achieved substantial improvement in 1996, as the
Company's efficiency ratio totaled 53.89% compared to 57.62% in
1995. We will surely be challenged by our shareholders and
competitors to continue to improve operating efficiency in
1997 and beyond. It is not Peoples Bancorp's strategy
to be simply efficient, because improved operational
effectiveness is not enough in a highly competitive industry
such as banking. Continuous improvement is needed and our
associates are committed to enhanced operating efficiency
through investments in technology and education.
In addition to enhanced operating efficiencies, Peoples Bancorp
obtained significant growth in 1996 through the acquisition of
three full-service offices in Pomeroy, Gallipolis, and Rutland.
In addition to providing nearly $75 million in deposits, these
offices provided many bankers with strong experience and
extended our market penetration in southeastern Ohio.
In addition to deposit growth, loan demand continues to be
strong in the markets we serve. Total loans grew nearly $43
million in 1996 to over $422 million. Our lenders believe
investment in our communities is an integral part of the role of
today's financial institution.
Effective January 1, 1997, we completed the acquisition of
Russell Federal Savings Bank in northeast Kentucky.
Russell Federal represents our first whole-bank acquisition
since 1987 (First National Bank of Chesterhill, now under our
First National Bank of Southeastern Ohio subsidiary) and Peoples
Bancorp's first ever purchase of a federally chartered savings
bank. At the time of purchase, Russell Federal owned
approximately $28 million in assets and had over $8 million in
equity. We are excited by the many customer service
opportunities in the tri-state areas of Ohio, Kentucky, and West
Virginia, and proud to have Russell Federal affiliated with
Peoples Bancorp.
More recently we announced intentions to acquire a full-service
branch office in Baltimore, Ohio, from an unaffiliated financial
institution. This central Ohio location will complement the
existing loan production office in neighboring Licking County
and provide Peoples Bank with approximately $17 million in
deposits. The transaction is expected to be completed in the
first quarter and extend market penetration by Peoples Bank in
central Ohio, one of the fastest growing economic sectors in the
state.
Peoples Bancorp's strategy evolves from the expansion of our
current markets, penetrating Ohio, West Virginia, and Kentucky
with our wide variety of financial products. Peoples Bancorp
will continue to make acquisitions in markets that complement
our existing markets and expanding product mix. With the rise
in electronic banking services, banking has no geographical
boundaries, but it remains important to take care of those
markets where we have developed long-term relationships.
In 1997, we adopted an incentive plan specifically designed to
reward our associates for increasing shareholder value. We
believe our associates are stakeholders in the Company and
should share the same competitive goals as our owners. Peoples
Bancorp is committed to the growth and development of our
customers and their communities. Through this incentive plan,
we will strive to position ourselves as the financial services
leader in the markets we serve with our wide variety of
products, concentrating on delivering needed services at a fair
return for our shareholders.
The increased use of technology will allow our associates to
identify creative methods to serve our customers. Our
Company-wide electronic communication network increases the
power of shared information and leverages our associates to
efficiently serve customers. Our homepage on the Internet
provides instant information to customers and investors from the
convenience of a computer. We welcome your comments and
appreciate any feedback you may provide concerning our available
information - both financial services/products and investor
relations.
We want to give special recognition to James B. Stowe, who
joins our Emeritus Director group upon completion of his active
director term at the Annual Meeting. Jim has been a Director of
Peoples Bancorp continuously since its organization in 1980. He
has also served the Company as a Chairman of the Audit Committee
for many years. Mr. Stowe is also a Director of The Peoples
Banking and Trust Company, having served for more than 26 years.
His attention to customer service and business development has
continually kept us focused on satisfying our customers' needs.
His contribution as a Director, customer, stockholder, and
friend continues to benefit us all.
We remain committed to positioning the Company for future
growth through continuous improvements in operating efficiency,
growth through internal means or acquisition, investments in
technology designed to enhance the customer service process, and
continued sales and marketing activities. We invite you to
enjoy the benefits of Peoples Bancorp's many financial services.
Sincerely,
/s/ ROBERT E. EVANS
Robert E. Evans
President and Chief Executive Officer
SELECTED FINANCIAL DATA
The information below under the captions "Operating
Data", "Balance Sheet Data" and "Per Share Data" for each of the
five years in the period ended December 31, 1996 has been
derived from the Consolidated Financial Statements of the
Company.
(Dollars in thousands, except ratios and per share data)
1996 1995 1994 1993 1992
OPERATING DATA <1>
FOR THE YEAR ENDED:
Total interest income $ 47,397 $ 43,068 $ 35,801 $ 35,086 $ 37,505
Total interest expense 21,966 20,777 15,424 15,263 17,887
Net interest income 25,431 22,291 20,377 20,048 19,820
Provision for loan losses 1,965 1,315 765 1,592 2,387
Other income 5,178 4,481 4,141 4,177 3,716
Other expenses 17,522 16,818 15,672 15,124 14,945
Net income 7,651 6,050 5,748 5,071 4,550
- --------------------------------------------------------------------------
BALANCE SHEET DATA
AT YEAR END:
Total assets $616,635 $543,430 $498,006 $465,373 $468,562
Investment securities 147,783 131,762 99,419 103,349 112,556
Net loans 415,540 372,800 354,570 315,305 285,448
Total deposits 504,692 429,077 403,819 385,639 401,623
Long-term borrowings 29,200 23,142 23,787 20,331 15,506
Stockholders' equity 56,193 51,474 45,635 42,778 38,497
- --------------------------------------------------------------------------
SIGNIFICANT RATIOS <1>,<2>
Net income to:
Average total assets 1.29% 1.15% 1.20% 1.09% 1.01%
Average stockholders'
equity 14.4 12.3 12.9 11.9 11.8
Average stockholders'
equity to average
total assets 8.9 9.3 9.3 8.8 7.5
Average loans to
average deposits 84.0 85.2 85.5 78.4 70.2
Primary capital to
period end total assets 9.2 10.4 10.1 10.1 8.9
Dividend payout ratio 29.3 32.2 29.3 29.8 28.0
- --------------------------------------------------------------------------
PER SHARE DATA <1>,<2>,<3>
Net income:
Primary $ 2.20 $ 1.73 $ 1.63 $ 1.50 $ 1.41
Fully diluted <4> 2.18 1.72 1.63 1.48 1.32
Cash dividends paid 0.65 0.56 0.48 0.43 0.40
Book value at
end of period 16.32 15.04 13.01 12.15 11.42
- --------------------------------------------------------------------------
Notes:
<1> 1993 net income and per share information based upon net
income after adjustment for cumulative effect of accounting
changes of $314,000 or $0.09 per share.
<2> Adjusted to reflect a 10% stock dividend issued July 15,
1996, a 10% dividend issued October 25, 1995, a two-for-one
stock split issued April 29, 1994, and a 10% stock
dividend issued April 15, 1993.
1996 1995 1994 1993 1992
<3> Primary shares
outstanding 3,480,999 3,498,955 3,520,337 3,384,796 3,223,079
Fully diluted shares
outstanding 3,506,996 3,519,124 3,523,812 3,438,808 3,557,184
<4> Fully diluted net income per share for 1993 and 1992 is
calculated as if the Subordinated Convertible Debenture were
converted as of the issue date, with a corresponding increase
from the after-tax reduction in interest expense.
COMMON STOCK
Return to Investors
- -------------------
The Company's goal is to become the financial services leader in
all the communities we serve. Achieving this objective will
lead to increases in shareholder value, the most important
measure of our financial success. Peoples Bancorp's strong
capital base ensures the Company's safety and allows opportunity
for growth and expansion. Shareholder return on this investment
continues to be a top priority, through both dividends and
growth in the market value of the Company's stock.
Management focuses on several key ratios that define our
dedication to shareholder return. We concentrate on earnings
per share, return on shareholders' equity, and dividends per
share. Enhancement of net income and profitability through
increased efficiencies are major Company goals, as well as
positioning the Company for increased future profits. Under
normal circumstances, as earnings per share increase, the
dividends paid per share should follow with a similar increase
and have a positive effect on the market value of the Company's
common stock. Our associates are committed to enhancing the
total return to our shareholders and the following graphs
illustrate our commitment.
In the last five years, the Company's earnings per share have
grown by a compound annual average rate of 10.6%. Net income
per share reached $2.18 in 1996. Through investments in
technology, the Company has gained efficiencies to enhance
overall performance. Increases in net interest income and other
income streams (such as income generated in our Investment and
Trust Division) have also contributed to the profitability of
the Company.
In addition to increasing shareholder wealth through growth in
stock price, we believe a competitive dividend rate is also
important to the overall return to our shareholders. In the
last five years, the compound annual average growth rate of the
Company's per share dividend was 10.2%. The Company has paid
cash dividends on its Common Stock for over 40 consecutive years
and has increased the annual dividend in each of the last 31
years. The Company plans to continue to pay quarterly cash
dividends, subject to certain regulatory restrictions as
described in Note 11 to the audited financial statements.
In recent years the financial services industry has emphasized
return on shareholders' equity (or "ROE") as a means of
measuring an entity's performance. Recently the Company has
implemented several strategic initiatives designed to increase
ROE. The graph to the right shows the significant increase in
ROE in 1996 for the Company. Management will continue to
emphasize this ratio in the future as a method of maximizing the
return on our shareholders' investment.
Earnings Dividends Return on Average
per share per share Shareholders' Equity
--------- --------- --------------------
1992 $1.32 $0.40 12.77%
1993 1.48 0.43 12.45
1994 1.63 0.48 12.94
1995 1.72 0.56 12.33
1996 2.18 0.65 14.43
Since February 9, 1993, the Company's common stock has traded on
the Nasdaq National Stock Market (National Association of
Securities Dealers Automated Quotation). Nasdaq provides
brokers and others with immediate access to the best stock price
for the Company and thousands of other companies across the
world. The Company's symbol is PEBO. In 1996, the Company also
created a web site at address www.peoplesbancorp.com., where the
Company's information can be accessed electronically. In 1996,
there were 309,076 shares traded through the Nasdaq system, an
average daily volume of 1,206 shares. The table below sets forth
the high and low bid quotations for the indicated periods, and the
cash dividends declared, with respect to the Company's Common Stock.
Currently seven companies serve as market makers on the Nasdaq
National Stock Market on behalf of the Company. Market prices
have been obtained directly from the Nasdaq quotation system.
The bid quotations and per share dividends have been
retroactively adjusted for a 10% stock dividend issued on July
15, 1996, a 10% stock dividend issued on October 25, 1995 and a
two-for-one stock split issued on April 29, 1994. Peoples
Bancorp had 1,072 stockholders of record on December 31, 1996.
Quarterly Market and Dividend Information
- -----------------------------------------
PER SHARE
High Bid Low Bid Dividend
1996
Fourth Quarter $ 28.00 $ 23.75 $ 0.17
Third Quarter 24.00 21.02 0.17
Second Quarter 21.36 20.91 0.15
First Quarter 21.59 20.91 0.15
- --------------------------------------------------------------------------
1995
Fourth Quarter $ 21.48 $ 20.23 $ 0.15
Third Quarter 20.66 18.18 0.14
Second Quarter 20.05 18.18 0.14
First Quarter 20.66 18.59 0.14
- --------------------------------------------------------------------------
1994
Fourth Quarter $ 21.07 $ 19.22 $ 0.13
Third Quarter 20.25 18.18 0.13
Second Quarter 19.84 16.53 0.12
First Quarter 18.59 15.70 0.12
- --------------------------------------------------------------------------
The following graph presents the closing stock price of the
Company's common stock for each of the last five years (adjusted
for stock splits and stock dividends):
Closing Stock Price
-------------------
1992 $14.65
1993 17.25
1994 19.84
1995 21.48
1996 26.50
Stockholders are cordially invited to attend the Annual Meeting
of Stockholders of Peoples Bancorp Inc. to be held Thursday,
April 10, 1997 at 10:00 A.M. in the Peoples Bank Conference
Room, 138 Putnam Street, Marietta, Ohio.
On written request, a copy of our Annual Report to the
Securities and Exchange Commission on Form 10-K is available to
interested Stockholders. Requests should be addressed to Ruth
Otto, Corporate Secretary, Peoples Bancorp Inc., P.O. Box 738,
Marietta, Ohio 45750.
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
Assets
- ------
Cash and cash equivalents:
Cash and due from banks $ 26,200,000 $ 17,251,000
Interest-bearing deposits in other banks 217,000 243,000
Federal funds sold 2,100,000 3,500,000
------------ ------------
Total cash and cash equivalents 28,517,000 20,994,000
------------ ------------
Available-for-sale investment securities,
at estimated fair value (amortized cost
of $145,619,000 in 1996 and
$128,021,000 in 1995) 147,783,000 131,762,000
------------ ------------
Loans, net 422,413,000 379,526,000
Allowance for loan losses (6,873,000) (6,726,000)
------------ ------------
Net loans 415,540,000 372,800,000
------------ ------------
Bank premises and equipment, net 11,508,000 10,575,000
Other assets 13,287,000 7,299,000
------------ ------------
Total assets $616,635,000 $543,430,000
============ ============
Liabilities
- -----------
Deposits:
Non-interest bearing $ 63,410,000 $ 50,067,000
Interest bearing 441,282,000 379,010,000
------------ ------------
Total deposits 504,692,000 429,077,000
------------ ------------
Short-term borrowings:
Federal funds purchased and securities
sold under repurchase agreements 17,022,000 12,060,000
Federal Home Loan Bank advances 2,500,000 21,216,000
------------ ------------
Total short-term borrowings 19,522,000 33,276,000
------------ ------------
Long-term borrowings 29,200,000 23,142,000
Accrued expenses and other liabilities 7,028,000 6,461,000
------------ ------------
Total liabilities 560,442,000 491,956,000
------------ ------------
Stockholders' Equity
- --------------------
Common stock, no par value, 6,000,000
shares authorized - 3,445,075 shares
issued in 1996 and 3,332,598 issued in
1995, including shares in treasury 34,349,000 30,898,000
Net unrealized holding gain on
available-for-sale securities,
net of deferred taxes 1,428,000 2,469,000
Retained earnings 20,470,000 21,786,000
------------ ------------
56,247,000 55,153,000
Treasury stock, at cost, 2,000 shares
in 1996 and 220,406 shares in 1995 (54,000) (3,679,000)
------------ ------------
Total stockholders' equity 56,193,000 51,474,000
------------ ------------
Total liabilities and
stockholders' equity $616,635,000 $543,430,000
============ ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
1996 1995 1994
Interest Income:
- ----------------
Interest and fees on loans $37,140,000 $34,177,000 $28,545,000
Interest and dividends on:
Obligations of U.S.
Government and its agencies 7,205,000 5,338,000 4,266,000
Obligations of states and
political subdivisions 1,402,000 1,543,000 1,613,000
Other interest income 1,650,000 2,010,000 1,377,000
----------- ----------- -----------
Total interest income 47,397,000 43,068,000 35,801,000
----------- ----------- -----------
Interest Expense:
- -----------------
Interest on deposits 18,880,000 18,384,000 13,616,000
Interest on short-term
borrowings 1,449,000 1,010,000 337,000
Interest on long-term
borrowings 1,637,000 1,383,000 1,471,000
----------- ----------- -----------
Total interest expense 21,966,000 20,777,000 15,424,000
----------- ----------- -----------
Net interest income 25,431,000 22,291,000 20,377,000
Provision for loan losses 1,965,000 1,315,000 765,000
----------- ----------- -----------
Net interest income after
provision for loan losses 23,466,000 20,976,000 19,612,000
----------- ----------- -----------
Other Income:
- -------------
Income from fiduciary activities 1,897,000 1,751,000 1,607,000
Service charges on deposit
accounts 1,937,000 1,565,000 1,456,000
Gain (loss) on sales of
securities 48,000 24,000 (237,000)
Other 1,296,000 1,141,000 1,315,000
----------- ----------- -----------
Total other income 5,178,000 4,481,000 4,141,000
----------- ----------- -----------
Other Expenses:
- ---------------
Salaries and employee benefits 7,514,000 7,836,000 6,779,000
Net occupancy 1,193,000 1,126,000 1,040,000
Equipment 1,329,000 1,241,000 1,205,000
Insurance 175,000 656,000 1,038,000
Supplies 713,000 572,000 619,000
Taxes other than income taxes 833,000 588,000 575,000
Amortization of excess cost
over net assets acquired 419,000 159,000 159,000
Other 5,346,000 4,640,000 4,257,000
----------- ----------- -----------
Total other expenses 17,522,000 16,818,000 15,672,000
----------- ----------- -----------
Income before federal income taxes 11,122,000 8,639,000 8,081,000
----------- ----------- -----------
Federal Income Taxes:
- ---------------------
Current 3,303,000 2,792,000 2,330,000
Deferred 168,000 (203,000) 3,000
----------- ----------- -----------
Total federal income taxes 3,471,000 2,589,000 2,333,000
----------- ----------- -----------
NET INCOME $ 7,651,000 $ 6,050,000 $ 5,748,000
=========== =========== ===========
Earnings per share:
- -------------------
Primary $2.20 $1.73 $1.63
Assuming full dilution $2.18 $1.72 $1.63
Weighted average number of shares outstanding:
- ----------------------------------------------
Primary 3,480,999 3,498,955 3,520,337
Assuming full dilution 3,506,996 3,519,124 3,523,812
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net
Unrealized
Holding
Gain (Loss)
on
Available-
Common Stock Retained for-Sale Treasury
Shares Amount Earnings Securities Stock Total
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 1,509,540 $24,290,000 $20,012,000 $(1,524,000) $42,778,000
- ----------------------------------------------------------------------------------------------------------------
Adjustment for change in method
of accounting, net of taxes $ 3,048,000 3,048,000
Net income 5,748,000 5,748,000
Purchase of treasury stock,
10,488 shares (215,000) (215,000)
Two-for-one stock split 1,509,540
Exercise of common
stock options 520 5,000 5,000
Issuance of common stock under
dividend reinvestment plan 1,308 31,000 31,000
Net change in unrealized
gain (loss) on available-
for-sale securities (4,078,000) (4,078,000)
Cash dividends declared
of $0.48 per share (1,682,000) (1,682,000)
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 3,020,908 24,326,000 24,078,000 (1,030,000) (1,739,000) 45,635,000
- ----------------------------------------------------------------------------------------------------------------
Net income 6,050,000 6,050,000
Purchase of treasury stock,
87,340 shares (1,940,000) (1,940,000)
10% stock dividend 302,470 6,394,000 (6,394,000)
Exercise of common
stock options 2,722 26,000 26,000
Issuance of common stock under
dividend reinvestment plan 6,498 152,000 152,000
Net change in unrealized
gain (loss) on available-
for-sale securities 3,499,000 3,499,000
Cash dividends declared
of $0.56 per share (1,948,000) (1,948,000)
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,332,598 30,898,000 21,786,000 2,469,000 (3,679,000) 51,474,000
- ----------------------------------------------------------------------------------------------------------------
Net income 7,651,000 7,651,000
Purchase of treasury stock,
14,000 shares (332,000) (332,000)
10% stock dividend (reissued
226,989 treasury shares) 85,468 2,871,000 (6,727,000) 3,856,000
Exercise of common stock
options (reissued 5,417
treasury shares) 16,434 330,000 101,000 431,000
Issuance of common stock under
dividend reinvestment plan 10,575 250,000 250,000
Net change in unrealized
gain (loss) on available-
for-sale securities (1,041,000) (1,041,000)
Cash dividends declared
of $0.65 per share (2,240,000) (2,240,000)
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,445,075 $34,349,000 $20,470,000 $ 1,428,000 $ (54,000) $56,193,000
- ----------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995 1994
Cash flows from operating activities:
- -------------------------------------
Net income $ 7,651,000 $ 6,050,000 $ 5,748,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 1,965,000 1,315,000 765,000
(Gain) loss on sale of
investment securities (48,000) (24,000) 237,000
Depreciation, amortization,
and accretion 2,068,000 1,564,000 1,884,000
Increase in interest receivable (31,000) (480,000)
Increase in interest payable 486,000 238,000 185,000
Deferred income tax expense
(benefit) 168,000 (203,000) 3,000
Deferral of loan origination
fees and costs 73,000 17,000 410,000
Other, net 820,000 896,000 (91,000)
- --------------------------------------------------------------------------
Net cash provided by
operating activities 11,512,000 9,373,000 9,141,000
- --------------------------------------------------------------------------
Cash flows from investing activities:
- -------------------------------------
Purchases of available-for-sale
securities (45,240,000) (52,955,000) (35,659,000)
Purchases of held-to-maturity
securities (1,230,000) (4,409,000)
Proceeds from sales of
available-for-sale securities 5,522,000 1,066,000 23,072,000
Proceeds from maturities of
available-for-sale securities 22,034,000 25,337,000 16,479,000
Proceeds from maturities of
held-to-maturity securities 803,000 2,025,000
Net increase in loans (44,504,000) (19,562,000) (40,576,000)
Expenditures for premises
and equipment (1,773,000) (1,122,000) (1,142,000)
Proceeds from sales of
other real estate owned 77,000 137,000
Purchase of branches,
net of cash received 68,004,000
- --------------------------------------------------------------------------
Net cash used in
investing activities 4,043,000 (47,586,000) (40,073,000)
- --------------------------------------------------------------------------
Cash flows from financing activities:
- -------------------------------------
Net increase in non-interest
bearing deposits 8,393,000 1,946,000 3,016,000
Net (decrease) increase in
interest bearing deposits (6,894,000) 23,312,000 15,164,000
Net (decrease) increase in
short-term borrowings (13,754,000) 13,509,000 7,507,000
Proceeds from long-term
borrowings 10,500,000 2,500,000 7,700,000
Payments on long-term
borrowings (4,442,000) (3,145,000) (4,244,000)
Cash dividends paid (1,934,000) (1,702,000) (1,623,000)
Purchase of treasury stock (332,000) (1,940,000) (215,000)
Proceeds from issuance of
common stock 431,000 26,000 5,000
- --------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (8,032,000) 34,506,000 27,310,000
- --------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 7,523,000 (3,707,000) (3,622,000)
Cash and cash equivalents
at beginning of year 20,994,000 24,701,000 28,323,000
- --------------------------------------------------------------------------
Cash and cash equivalents
at end of year $28,517,000 $20,994,000 $24,701,000
==========================================================================
Supplemental cash flow information:
Interest paid $21,757,000 $20,540,000 $15,239,000
Income taxes paid $ 3,832,000 $ 2,364,000 $ 2,383,000
See notes to consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Peoples Bancorp Inc.
and Subsidiaries (the "Company") conform to generally accepted
accounting principles and to general practices within the
banking industry. The Company considers all of its principal
activities to be banking related. The preparation of the
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates. The following is a summary of significant
accounting policies followed in the preparation of the financial
statements. Certain amounts in the 1995 and 1994 financial
statements have been reclassified to conform to the 1996
presentation.
Principles of Consolidation:
- ----------------------------
The consolidated financial statements include the accounts of
Peoples Bancorp Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.
Cash and Cash Equivalents:
- --------------------------
Cash and cash equivalents include cash and due from banks,
interest bearing deposits in other banks, and federal funds
sold, all with original maturities of ninety days or less.
Investment Securities:
- ----------------------
Management determines the appropriate classification of
investment securities at the time of purchase. Held-to-maturity
securities are those securities that the Company has the
positive intent and ability to hold to maturity and are recorded
at amortized cost. Available-for-sale securities are those
securities that would be available to be sold in the future in
response to the Company's liquidity needs, changes in market
interest rates, and asset-liability management strategies, among
others. Available-for-sale securities are reported at fair
value, with unrealized holding gains and losses reported in a
separate component of stockholders' equity, net of applicable
deferred income taxes. The cost of securities sold is based on
the specific identification method.
Allowance for Loan Losses:
- --------------------------
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the
allowance for loan losses is based on a quarterly evaluation of
the portfolio, historical loan loss experience, current national
and local economic conditions, volume, growth and composition of
the portfolio, and other relevant factors.
On January 1, 1995, the Company adopted SFAS No. 114
"Accounting by Creditors for Impairment of a Loan", as amended
by SFAS No. 118. The allowance for loan losses related to loans
that are identified for evaluation in accordance with SFAS No.
114 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. Prior to the adoption of
SFAS No. 114, the allowance for loan losses related to these
loans was based on undiscounted cash flows or the fair value of
the collateral on collateral dependent loans. The adoption of this
standard did not have a material effect on the Company's
financial position, results of operations, accounting policies,
or the determination of the adequacy of the allowance for loan
losses. Impaired loans at December 31, 1996 and 1995 and the
average investment in impaired loans for the year then ended
were immaterial to the financial statements.
Bank Premises and Equipment:
- ----------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets.
Other Real Estate:
- ------------------
Other real estate owned, included in other assets on the
consolidated balance sheet, represents properties acquired by
the Company's subsidiary banks in satisfaction of a loan. Real
estate is recorded at the lower of cost or fair value based on
appraised value at the date actually or constructively received,
less estimated costs to sell the property.
Intangibles:
- ------------
Intangible assets representing the present value of future
net income to be earned from deposits are being amortized
on an accelerated basis over a ten year period. The excess
of cost over the fair value of net assets acquired (goodwill)
is being amortized on a straight-line basis over a
ten-year period.
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 are deferred and recognized as income 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.
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 Company and its banking
subsidiaries file a consolidated federal income tax return and
income tax expense is allocated among all companies on a
separate return basis.
Earnings Per Share:
- -------------------
Primary and fully diluted earnings per share are computed by
dividing net income by average common shares outstanding during
the year plus the dilutive effect of common stock equivalents.
Options granted under the Company's stock option plans are
considered common stock equivalents for the purpose of computing
earnings per share.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial
instruments in accordance with SFAS No. 107:
Cash and due from banks, interest bearing deposits in other
banks, and federal funds sold:
- -----------------------------------------------------------
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, using interest rates currently
being offered for loans with similar terms to borrowers of
similar credit quality.
The fair value for significant nonperforming loans is based on
either the estimated fair value of underlying collateral or
estimated cash flows discounted at a rate commensurate with the
risk. Assumptions regarding credit risk, cash flows, and
discount rates are determined using available market information
and specific borrower information.
Deposits:
- ---------
The carrying amounts of demand deposits, savings accounts and
certain money market deposits approximate their fair values.
The fair value of fixed maturity certificates of deposit is
estimated using a discounted cash flow calculation that applies
current rates offered for deposits of similar remaining
maturities.
Short-term borrowings:
- ----------------------
The carrying amounts of federal funds purchased, Federal Home
Loan Bank advances, and securities sold under repurchase
agreements approximate their fair values.
Long-term borrowings:
- ---------------------
The fair value of long-term borrowings is estimated using
discounted cash flow analysis based on rates currently available
to the Company for borrowings with similar terms.
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 fair value of the interest rate floor is
based on quotes from other financial institutions.
The estimated fair values of the Company's financial instruments
are as follows:
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
FINANCIAL ASSETS:
Cash and due from
banks, interest
bearing deposits with
other banks, and
federal funds sold $ 28,517,000 $ 28,517,000 $ 20,994,000 $ 20,994,000
Investment securities 147,783,000 147,783,000 131,762,000 131,762,000
Loans, net 415,540,000 418,921,000 372,800,000 378,612,000
FINANCIAL LIABILITIES:
Deposits 504,692,000 506,039,000 429,077,000 430,184,000
Short-term borrowings 19,522,000 19,522,000 33,276,000 33,276,000
Long-term borrowings 29,200,000 29,289,000 23,142,000 23,255,000
OFF-BALANCE SHEET INSTRUMENTS:
Interest rate floors $ 71,000 $ 325,000 $ 116,000 $ 751,000
3. INVESTMENT SECURITIES:
Effective January 1, 1994, the Company adopted the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The effect of this change in accounting
principle resulted in an unrealized holding gain of $3,048,000
(net of $1,570,000 in deferred income taxes), for securities
classified as available-for-sale effective January 1, 1994, and
has been reflected in a separate component of stockholders'
equity.
In late 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report, "A Guide to Implementation of Statement
of Financial Accounting Standards ("SFAS") No. 115 on Accounting
for Certain Investments in Debt and Equity Securities". In
accordance with provisions in that Special Report, the Company
chose to reclassify all held-to-maturity securities to
available-for-sale. At the date of transfer the amortized cost
of those securities was $9,644,000 and the unrealized holding
gain, net of deferred income taxes, on those securities was
$271,000, which is included in stockholders' equity.
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 34% federal income tax rate. The
portfolio contains no single issue (excluding U.S. Government
and U.S. Agency securities) which exceeds 10% of stockholders'
equity.
Securities classified as available-for-sale
At December 31, 1996:
- -------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government agencies
and corporations $ 41,855,000 $ 742,000 $(126,000) $ 42,471,000
Obligations of states and
political subdivisions 23,949,000 743,000 (36,000) 24,656,000
Other mortgage-backed
securities 61,197,000 280,000 (697,000) 60,780,000
Other securities 18,618,000 1,277,000 (19,000) 19,876,000
------------ ---------- --------- ------------
Total securities
available-for-sale $145,619,000 $3,042,000 $(878,000) $147,783,000
============ ========== ========= ============
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE-FOR-SALE
Contractual maturities at December 31, 1996
U.S. Treasury
securities and Obligations
obligations of of states Total
U.S. and Mortgage- available
Government political backed Other for-sale
Agencies subdivisions securities securities securities
Within one year
- ---------------
Amortized cost $ 9,492,000 $ 3,560,000 $ 2,582,000 $ 2,499,000 $ 18,133,000
Fair value $ 9,553,000 $ 3,601,000 $ 2,568,000 $ 2,535,000 $ 18,257,000
Yield 6.98% 8.39% 6.02% 7.03% 7.13%
1 to 5 years
- ------------
Amortized cost 29,029,000 7,456,000 19,587,000 7,008,000 63,080,000
Fair value 29,371,000 7,727,000 19,720,000 7,072,000 63,890,000
Yield 6.83% 8.68% 7.01% 6.78% 7.10%
5 to 10 years
- -------------
Amortized cost 3,334,000 7,317,000 22,909,000 1,501,000 35,061,000
Fair value 3,547,000 7,526,000 22,650,000 1,509,000 35,232,000
Yield 7.40% 8.30% 7.17% 7.02% 7.42%
Over 10 years
- -------------
Amortized cost 5,616,000 16,119,000 7,610,000 29,345,000
Fair value 5,802,000 15,842,000 8,760,000 30,404,000
Yield 8.41% 7.16% 6.10% 7.12%
------------ ----------- ----------- ----------- ------------
Total amortized
cost $41,855,000 $23,949,000 $61,197,000 $18,618,000 $145,619,000
Total fair value $42,471,000 $24,656,000 $60,780,000 $19,876,000 $147,783,000
Total yield 6.91% 8.46% 7.07% 6.55% 7.19%
----------- ----------- ----------- ----------- ------------
Securities classified as available-for-sale
At December 31, 1995:
- -------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government, agencies
and corporations $ 39,242,000 $1,319,000 $ (28,000) $ 40,533,000
Obligations of states and
political subdivisions 24,879,000 997,000 (16,000) 25,860,000
Other mortgage-backed
securities 45,465,000 619,000 (68,000) 46,016,000
Other securities 18,435,000 920,000 (2,000) 19,353,000
------------ ---------- --------- ------------
Total securities
available-for-sale $128,021,000 $3,855,000 $(114,000) $131,762,000
============ ========== ========= ============
Securities classified as available-for-sale
At December 31, 1994:
- -------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government, agencies
and corporations $32,361,000 $ 181,000 $ (585,000) $31,957,000
Obligations of states and
political subdivisions 21,624,000 312,000 (233,000) 21,703,000
Other mortgage-backed
securities 23,430,000 16,000 (1,535,000) 21,911,000
Other securities 14,368,000 554,000 (321,000) 14,601,000
----------- ---------- ----------- -----------
Total securities
available-for-sale $91,783,000 $1,063,000 $(2,674,000) $90,172,000
=========== ========== =========== ===========
Securities classified as held-to-maturity
At December 31, 1994:
- -----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
government, agencies
and corporations $ 4,683,000 $ 5,000 $ (35,000) $ 4,653,000
Obligations of states and
political subdivisions 3,414,000 40,000 (123,000) 3,331,000
Other mortgage-backed
securities 992,000 0 (38,000) 954,000
Other securities 158,000 0 (7,000) 151,000
----------- -------- --------- -----------
Total securities
held-to-maturity $ 9,247,000 $ 45,000 $(203,000) $ 9,089,000
=========== ======== ========= ===========
Gross realized gains were $48,000 and $24,000 in 1996 and 1995,
respectively. Gross realized gains and realized losses were
$126,000 and $363,000, respectively, in 1994. At December 31,
1996 and 1995, investment securities having a par value of
$88,404,000 and $68,501,000, respectively, were pledged to
collateralize government and trust department deposits in
accordance with federal and state requirements.
4. LOANS:
Loans are comprised of the following at December 31:
1996 1995
Commercial, financial, and agricultural $127,927,000 $117,306,000
Real estate, construction 9,944,000 5,919,000
Real estate, mortgage 175,505,000 154,469,000
Consumer 109,037,000 101,832,000
------------ ------------
Total loans $422,413,000 $379,526,000
============ ============
Changes in the allowance for loan losses for each of the three
years in the period ended December 31, 1996, were as
follows:
1996 1995 1994
Balance, beginning of year $6,726,000 $6,783,000 $6,370,000
Charge-offs (2,329,000) (1,803,000) (1,124,000)
Recoveries 511,000 431,000 772,000
---------- ---------- ----------
Net charge-offs (1,818,000) (1,372,000) (352,000)
Provision for loan losses 1,965,000 1,315,000 765,000
---------- ---------- ----------
Balance, end of year $6,873,000 $6,726,000 $6,783,000
========== ========== ==========
The Company's lending is primarily focused in the local
southeastern Ohio market and consists principally of retail
lending, which includes single-family residential mortgages and
other consumer lending. The Company's largest group of business
loans consists of automobile dealer floor plans, which totaled
$13,673,000 and $16,455,000 at December 31, 1996 and 1995,
respectively. It is the Company's policy to obtain the
underlying inventory as collateral on these loans. The Company
does not extend credit to any single borrower or group of
related borrowers in excess of the combined legal lending limits
of its subsidiary banks.
In the normal course of its business, the subsidiary banks have
granted loans to executive officers and directors of the Company
and to their associates. Related party loans were made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable loans
with unrelated persons and did not involve more than normal risk
of collectibility. The following is an analysis of activity of
related party loans for the year ended December 31, 1996:
Balance, January 1, 1996 $12,255,000
New loans 9,851,000
Repayments 13,653,000
-----------
Balance, December 31, 1996 $ 8,453,000
===========
In June 1996, the FASB issued Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" which is applicable to the Company effective
January 1, 1997. However, in December 1996, the FASB agreed to
defer the effective date for one year for the following
transactions: securities lending, repurchase agreements, dollar
rolls and other similar secured transactions. The delay in
implementation was necessary to allow companies to overcome
technological problems in their systems which would create
control and accountability issues. Statement No. 125
establishes standards for determining whether certain transfers
of financial assets should be considered sales of all or part of
the assets or secured borrowings. Statement No. 125 also
establishes standards for settlements of liabilities through the
transfer of assets to a creditor or obtaining an unconditional
release and whether these settlements should prove the debt
extinguished. The adoption of Statement No. 125 is not expected
to have a material effect on the Company's financial statements.
5. BANK PREMISES AND EQUIPMENT:
The major categories of bank premises and equipment and
accumulated depreciation are summarized as follows at December 31:
1996 1995
Land $ 1,836,000 $ 1,607,000
Building and premises 11,299,000 10,341,000
Furniture, fixtures and equipment 8,162,000 7,274,000
----------- -----------
21,297,000 19,222,000
Accumulated depreciation 9,789,000 8,647,000
----------- -----------
Net book value $11,508,000 $10,575,000
=========== ===========
Depreciation expense was $1,358,000, $1,230,000, and $1,110,000
for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company leases a banking facility 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,
1996:
Year Ending December 31, Operating Leases
1997 $192,000
1998 182,000
1999 116,000
2000 48,000
2001 34,000
Thereafter 54,000
--------
Total minimum lease payments $626,000
========
Rent expense was $150,000, $170,000 and $181,000 in 1996, 1995
and 1994, respectively.
6. DEPOSITS:
Deposits from related parties approximated $6.2 million and $9.4
million at December 31, 1996 and 1995, respectively. 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: $160,204,000 in 1997, $45,814,
000 in 1998; $28,589,000 in 1999; $5,725,000 in 2000; $6,183,000
in 2001; and $1,976,000 thereafter.
7. LONG-TERM BORROWINGS:
Long-term borrowings consisted of the following at December 31:
1996 1995
Term note payable, at prime $ 1,560,000
Federal Home Loan Bank advances,
bearing interest at rates
ranging from 4.15% to 7.00% $29,200,000 21,582,000
----------- -----------
Total long-term borrowings $29,200,000 $23,142,000
=========== ===========
The Federal Home Loan Bank ("FHLB") advances consist of various
borrowings with maturities ranging from 10 to 15 years. The
advances are collateralized by the Company's real estate
mortgage portfolio and all of the FHLB common stock owned by the
banking subsidiaries. The most restrictive requirement of the
debt agreement requires the Company to provide real estate
mortgage loans as collateral in an amount not less than 150% of
advances outstanding.
The aggregate minimum annual retirements of long-term borrowings
in the next five years and thereafter are as follows:
1997 5,802,000
1998 8,125,000
1999 2,681,000
2000 2,752,000
2001 2,837,000
Thereafter 7,003,000
-----------
Total long-term borrowings $29,200,000
===========
8. EMPLOYEE BENEFIT PLANS:
The Company has a noncontributory defined benefit pension plan
which covers substantially all employees. The plan provides
benefits based on an employee's years of service and
compensation. The Company's funding policy is to contribute
annually an amount that can be deducted for federal income tax
purposes.
Net pension cost included the following components:
1996 1995 1994
Service cost-benefits
earned during the year $248,000 $ 254,000 $260,000
Interest cost on projected
benefit obligations 416,000 444,000 401,000
Actual return on plan assets (635,000) (831,000) (414,000)
Early retirement benefits 777,000
Net amortization and deferral 220,000 381,000 (13,000)
-------- ---------- --------
Net pension cost $249,000 $1,025,000 $234,000
======== ========== ========
The following table sets forth the funded status and amounts
recognized for the defined benefit pension plan in the
consolidated balance sheets at December 31:
1996 1995
Actuarial present value of
accumulated benefit obligations:
Vested benefits $ 4,598,000 $ 5,555,000
Nonvested benefits 118,000 186,000
----------- -----------
Accumulated benefit obligation 4,716,000 5,741,000
Impact of future salary increases 1,152,000 1,164,000
----------- -----------
Actuarial present value of
projected benefit obligation for
service rendered to date 5,868,000 6,905,000
Plan assets at fair value,
primarily U.S. Government
obligations and collective
investment stock and bond funds 5,034,000 5,460,000
----------- -----------
Projected benefit obligations
in excess of plan assets (834,000) (1,445,000)
Unrecognized prior service cost (73,000) (82,000)
Unrecognized net gain from past
experience different from that
assumed and effects of changes
in assumptions (552,000) (171,000)
Unrecognized net transition asset (48,000) (59,000)
----------- -----------
Accrued pension cost included
in other liabilities $(1,507,000) $(1,757,000)
=========== ===========
The rates used in determining the actuarial present value of the
projected benefit obligation were as follows:
1996 1995 1994
Discount rate 8.00% 7.50% 8.50%
Rate of increase in compensation levels 4.50% 4.00% 5.00%
Long-term rate of return on assets 9.00% 9.00% 8.50%
The unrecognized net gain increased in 1996 due to the change in
the discount rate. In late 1995, the Company offered a
voluntary early retirement program to a select group of
employees who met certain qualifications. All employees
eligible for the early retirement program accepted the offer and
the Company incurred $777,000 in additional expense.
The Company has a contributory defined benefit postretirement
plan for former employees who were retired as of December 31,
1992. The plan provides for health and life insurance benefits.
The Company's policy is to fund the cost of the benefits as
they are incurred. The net periodic postretirement benefit
cost, which relates primarily to interest cost, was $62,000,
$65,000, and $68,000 for 1996, 1995, and 1994, respectively.
The following table sets forth the funded status and amounts
recognized in the consolidated balance sheets at December 31:
1996 1995
Accumulated postretirement benefit obligation $(865,000) $(857,000)
Unrecognized net (gain) loss (34,000) 1,000
--------- ---------
Accrued postretirement benefit cost
included in other liabilities $(899,000) $(856,000)
========= =========
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 8.00% at
December 31, 1996 and 7.50% at December 31, 1995.
The weighted average annual assumed rate of increase in the per
capita cost of covered benefits (i.e. health care cost trend
rate) is 8% for 1997, grading down 1% per year to an ultimate
rate of 5%. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one
percentage point each year would increase the accumulated
benefit obligation for the plan at December 31, 1996, by $87,000
and the net periodic postretirement benefit cost in 1996 by
$6,000.
9. 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
1996 1995 1994
Statutory corporate tax rate 34.0% 34.0% 34.0%
Differences in rate resulting from:
Interest on obligations of state
and political subdivisions (3.7) (5.0) (5.8)
Other, net 0.9 1.0 0.7
---- ---- ----
31.2% 30.0% 28.9%
==== ==== ====
The significant components of the Company's deferred tax assets
and liabilities consisted of the following at December 31:
1996 1995
Deferred tax assets:
Allowance for loan losses $1,888,000 $1,709,000
Accrued employee benefits 945,000 991,000
Deferred loan fees and costs 191,000 333,000
Other 240,000 211,000
---------- ----------
Total deferred tax assets 3,264,000 3,244,000
Deferred tax liabilities:
Available-for-sale securities 736,000 1,272,000
Bank premises and equipment 593,000 546,000
Other 587,000 446,000
---------- ----------
Total deferred tax liabilities 1,916,000 2,264,000
---------- ----------
Net deferred tax assets $1,348,000 $ 980,000
---------- ----------
The related federal income tax expense (benefit) on securities
transactions approximated $16,000 in 1996, $8,000 in 1995, and
$(81,000) in 1994.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the normal course of business, the Company is party to
financial instruments with off-balance sheet risk necessary to
meet the financing needs of customers and to manage its own
exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby
letters of credit, and interest rate floors. The instruments
involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance
sheets. The contract or notional amounts of these instruments
express the extent of involvement the Company has in these
financial instruments.
Loan Commitments and Standby Letters of Credit:
- -----------------------------------------------
Loan commitments are made to accommodate the financial needs of
the Company's customers. Standby letters of credit commit the
Company to make payments on behalf of customers when certain
specified future events occur. Historically, most loan
commitments and standby letters of credit expire unused. The
Company's exposure to credit loss in the event of nonperformance
by the counter-party to the financial instrument for loan
commitments and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses the
same underwriting standards in making commitments and
conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained is based on
management's credit evaluation of the customer. Collateral held
varies, but may include accounts receivable, inventory,
property, plant, and equipment, and income-producing commercial
properties. The total amounts of loan commitments and standby
letters of credit are summarized as follows at December 31:
Contract Amount
1996 1995
Loan commitments $50,518,000 $36,106,000
Standby letters of credit 3,164,000 2,116,000
Unused credit card limits 17,718,000 14,582,000
Interest Rate Floors:
- ---------------------
In February, 1995, the Company entered into several interest
rate floor contracts with two unaffiliated financial
institutions as a means of managing the risks of changing
interest rates. Interest rate floors are agreements to receive
payments for interest rate differentials between an index rate
and a specified floor rate, computed on notional amounts. The
Company is subject to the risk that the effect of changes in
interest rates will cause the Company to earn less than the then
current market rates on its assets. These interest rate floors
subject the Company to the risk that the counter-parties may
fail to perform. In order to minimize such risk, the Company
deals only with high-quality, financially secure financial
institutions. The exposure to credit risk is significantly less
than the notional amounts of $20,000,000 since the Company will
only receive the interest rate differential. These interest
rate contracts expire in February, 1998.
11. REGULATORY MATTERS:
The primary source of funds for the dividends paid by the
Company is dividends received from its banking subsidiaries.
The payment of dividends by banking subsidiaries is subject to
various banking regulations. The most restrictive provision
requires regulatory approval if dividends declared in any
calendar year exceed the total net profits of that year plus the
retained net profits of the preceding two years. At December
31, 1996, approximately $7,257,000 of retained net profits of
the banking subsidiaries were available for the payment of
dividends to Peoples Bancorp Inc. without regulatory approval.
The Company and its banking subsidiaries are subject to various
regulatory capital requirements administered by the banking
regulatory agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company
and each of its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of each entity's
assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's
and each of its banking subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and each of its banking
subsidiaries to maintain minimum amounts and ratios of total and
Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). The Company and each of its
banking subsidiaries met all capital adequacy requirements at
December 31, 1996.
As of December 31, 1996, the most recent notifications from the
banking regulatory agencies categorized the Company and each of
its banking subsidiaries as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company and each of its
banking subsidiaries must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the
table below. There are no conditions or events since these
notifications that management believes have changed the
Company's or any of its banking subsidiaries' category.
The Company's and its significant banking subsidiary's, The
Peoples Banking and Trust Company ("Peoples Bank"), actual
capital amounts and ratios are also presented in the table below.
Well
For Capital Capitalized
Actual Adequacy Provision
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
- -------------------------
Total capital (to
Risk Weighted Assets)
The Company $53,560,000 12.9% $33,324,000 8% $41,654,000 10%
Peoples Bank 41,727,000 11.4% 29,354,000 8% 36,693,000 10%
- ----------------------------------------------------------------------------
Tier 1 (to
Risk Weighted Assets)
The Company 48,332,000 11.6% 16,662,000 4% 24,993,000 6%
Peoples Bank 34,125,000 9.3% 14,677,000 4% 22,016,000 6%
- ----------------------------------------------------------------------------
Tier 1 (to
Average Assets)
The Company 48,332,000 7.9% 24,408,000 4% 30,510,000 5%
Peoples Bank 34,125,000 6.5% 21,163,000 4% 26,454,000 5%
- ----------------------------------------------------------------------------
As of December 31, 1995:
- -------------------------
Total capital (to
Risk Weighted Assets)
The Company 52,631,000 13.8% 30,408,000 8% 38,010,000 10%
Peoples Bank 43,504,000 12.9% 26,969,000 8% 33,711,000 10%
- ----------------------------------------------------------------------------
Tier 1 (to
Risk Weighted Assets)
The Company 47,880,000 12.6% 15,204,000 4% 22,806,000 6%
Peoples Bank 36,290,000 10.8% 13,485,000 4% 20,227,000 6%
- ----------------------------------------------------------------------------
Tier 1 (to
Average Assets)
The Company 47,880,000 8.8% 21,739,000 4% 27,174,000 5%
Peoples Bank 36,290,000 7.7% 18,779,000 4% 23,473,000 5%
- ----------------------------------------------------------------------------
12. 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 $7,963,000 for the year ended December 31, 1996.
13. ACQUISITIONS:
On April 26, 1996, the Company acquired three
full-service banking offices in the cities of Pomeroy,
Gallipolis, and Rutland, Ohio, and assumed approximately $75
million in deposit liabilities from an unaffiliated institution
for a cash consideration of approximately $5.4 million.
Accordingly, consolidated results include the operations of the
three full-service banking offices subsequent to the acquisition
date.
The purchase prices of the above and other previous
acquisitions were allocated to the identifiable tangible and
intangible assets acquired based upon their fair value at the
acquisition date. Deposit intangibles, included in other
assets, approximated $1,827,000 at December 31, 1996 while the
related amortization expense approximated $206,000 in 1996.
Goodwill, included in other assets, approximated $4,606,000 and
$1,125,000 at December 31, 1996 and 1995, respectively, and the
related amortization expense approximated $419,000 and $159,000
in 1996 and 1995, respectively.
On January 1, 1997, the Company acquired Russell Federal Savings
Bank ("Russell Federal") for a cash consideration of
approximately $9.25 million. The Company plans to operate
Russell Federal as a federal savings bank subsidiary of Peoples
Bancorp with continuity of management, officers and directors.
Russell Federal has one full service office located in Russell,
Kentucky, and had total assets of $28.0 million, deposits of
$19.5 million and shareholders' equity of $8.0 million at
December 31, 1996. This acquisition was accounted for under the
purchase method of accounting.
In November 1996, the Company entered into a definitive
agreement to assume approximately $17 million in deposit
liabilities from an unaffiliated institution. In the agreement,
the Company will also acquire one full-service banking office in
the city of Baltimore, Ohio. Regulatory approval was received
in January 1997 and the acquisition is expected to be completed
in the first quarter of 1997. This acquisition will be
accounted for under the purchase method.
14. CHANGES IN CAPITAL STRUCTURE:
On June 14, 1996, the Company declared a 10% stock dividend
issued on August 1, 1996 to shareholders of record as of July
15, 1996. On August 22, 1995, the Company declared a 10% stock
dividend issued on October 25, 1995 to shareholders of record as
of October 10, 1995. On March 24, 1994, the Company declared a
two-for-one stock split issued on April 29, 1994 to shareholders
of record as of April 15, 1994. All per share information in
the accompanying consolidated financial statements gives
retroactive effect to these stock transactions.
15. STOCK OPTIONS:
The Company's stock option plans provide for the granting of
both incentive stock options and non-qualified stock options of
up to 387,200 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
five years and expire 10 years from the date of grant. The
weighted average remaining contractual life of options
outstanding at December 31, 1996 was 7.6 years.
As permitted, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations in accounting
for its employee stock options. Pro forma information regarding
net income and earnings per share is required by FASB Statement
123, "Accounting for Stock-Based Compensation" ("Statement
123") and has been determined as if the Company had accounted
for its employee stock options under the fair value method of
that Statement. However, pro forma financial information has
not been included herein because the effect of applying
Statement 123's fair value method to the Company's stock-based
awards in 1996 and 1995 results in net income and earnings per
share that are not materially different from amounts reported.
Activity in the plans is summarized as follows:
1996 1995
Number Option Number Option
of shares price of shares price
Non-qualified stock options
- ---------------------------
Outstanding at beginning
of year 50,120 $16.12-19.42 19,965 $16.12-18.18
Granted 1,785 21.14 30,155 18.59-19.42
Exercised 6,142 16.95-19.42
Canceled 1,065 16.95-18.60
------- ------------ ------- ------------
Outstanding at end of year 44,698 16.12-21.14 50,120 16.12-19.42
======= ============ ======= ============
Exercisable at end of year 29,481 $16.12-21.14 27,288 $16.12-19.42
======= ============ ======= ============
Weighted average fair
value of options granted
during the year $ 3.54 $ 3.14
============ ============
Incentive stock options
- -----------------------
Outstanding at beginning
of year 202,065 $14.47-19.32 207,515 $14.47-19.32
Granted
Exercised 17,615 14.47-19.32 5,450 14.47
Canceled 4,235 19.32
------- ------------ ------- ------------
Outstanding at end of year 180,215 14.47-19.32 202,065 14.47-19.32
======= ============ ======= ============
Exercisable at end of year 69,063 $14.47-19.32 49,603 $14.47-19.32
======= ============ ======= ============
16. PARENT COMPANY ONLY FINANCIAL INFORMATION:
December 31,
Condensed Balance Sheets 1996 1995
- ------------------------
ASSETS:
Cash $ 20,000 $ 20,000
Interest bearing deposits in subsidiary bank 239,000 533,000
Receivable from subsidiary bank 900,000 969,000
Investment securities: Available-for-sale
(amortized cost of $1,297,000 and $1,098,000
at December 31, 1996 and 1995, respectively) 2,447,000 1,636,000
Capital note receivable from subsidiary bank 3,000,000 3,000,000
Investments in subsidiaries:
Banks 48,951,000 46,299,000
Non-banks 1,125,000 1,065,000
Excess cost over net assets acquired 830,000 967,000
Other 939,000 906,000
----------- -----------
Total assets $58,451,000 $55,395,000
=========== ===========
LIABILITIES:
Accrued pension $ 1,525,000 $ 1,757,000
Accrued expenses 148,000 75,000
Dividends payable 585,000 529,000
Long-term borrowings 1,560,000
----------- -----------
Total liabilities 2,258,000 3,921,000
----------- -----------
Stockholders' equity 56,193,000 51,474,000
----------- -----------
Total liabilities and stockholders' equity $58,451,000 $55,395,000
=========== ===========
Year ended December 31,
Consolidated Statements of Income 1996 1995 1994
- ---------------------------------
INCOME:
Dividends from subsidiary banks $4,010,000 $3,415,000 $2,280,000
Dividends from other subsidiaries 40,000 50,000 40,000
Interest 346,000 393,000 301,000
Management fees from subsidiaries 902,000 907,000 818,000
Other 64,000 69,000 123,000
---------- ---------- ----------
Total income 5,362,000 4,834,000 3,562,000
---------- ---------- ----------
EXPENSES:
Salaries and benefits 1,156,000 1,183,000 948,000
Interest 118,000 148,000 141,000
Other 784,000 764,000 549,000
---------- ---------- ----------
Total expenses 2,058,000 2,095,000 1,638,000
---------- ---------- ----------
Income before federal income taxes
and equity in undistributed
earnings of subsidiaries 3,304,000 2,739,000 1,924,000
Applicable income tax benefit (190,000) (200,000) (100,000)
Equity in undistributed
earnings of subsidiaries 4,157,000 3,111,000 3,724,000
---------- ---------- ----------
Net income $7,651,000 $6,050,000 $5,748,000
========== ========== ==========
Year ended December 31,
STATEMENTS OF CASH FLOWS 1996 1995 1994
Cash flows from operating activities:
- -------------------------------------
Net income $7,651,000 $6,050,000 $5,748,000
Adjustment to reconcile net income
to cash provided by operations:
Amortization and depreciation 208,000 179,000 134,000
Equity in undistributed
earnings of subsidiaries (4,157,000) (3,111,000) (3,724,000)
Other, net (382,000) 189,000 1,103,000
- -------------------------------------------------------------------------
Net cash provided by
operating activities 3,320,000 3,307,000 3,261,000
- -------------------------------------------------------------------------
Cash flows from investing activities:
- -------------------------------------
Purchase of investment securities (199,000) (340,000) (188,000)
Expenditures for premises and
equipment (89,000) (87,000) (46,000)
Investment in subsidiaries (150,000)
- -------------------------------------------------------------------------
Net cash used in
investing activities (288,000) (577,000) (234,000)
- -------------------------------------------------------------------------
Cash flows from financing activities:
- -------------------------------------
Payments on long-term borrowings (1,560,000) (260,000) (260,000)
Purchase of treasury stock (332,000) (1,940,000) (215,000)
Change in receivable from
subsidiary 69,000 1,043,000 (406,000)
Proceeds from issuance of
common stock 431,000 26,000 5,000
Cash dividends paid (1,934,000) (1,702,000) (1,623,000)
- -------------------------------------------------------------------------
Net cash used in
financing activities (3,326,000) (2,833,000) (2,499,000)
- -------------------------------------------------------------------------
Net (decrease) increase in cash (294,000) (103,000) 528,000
Cash and cash equivalents at the
beginning of the year 553,000 656,000 128,000
- -------------------------------------------------------------------------
Cash and cash equivalents
at the end of the year $ 259,000 $ 553,000 $ 656,000
=========================================================================
The parent company paid interest totaling $118,000, $148,000
and $141,000 during the years ended December 31, 1996, 1995 and
1994, respectively.
17. SUMMARIZED QUARTERLY INFORMATION (UNAUDITED):
A summary of selected quarterly financial information for 1996
and 1995 follows. The quarterly data includes certain
reclassifications from interest income to other income to
conform to the year ended December 31, 1996, presentation.
These reclassifications did not have any impact on net income
or earnings per share.
1996
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $11,316,000 $11,725,000 $12,046,000 $12,310,000
Interest expense 5,367,000 5,416,000 5,539,000 5,644,000
Net interest income 5,949,000 6,309,000 6,507,000 6,666,000
Provision for possible
loan losses 360,000 435,000 585,000 585,000
Investment securities
gains 26,000 22,000
Other income 1,162,000 1,271,000 1,304,000 1,393,000
Other expenses 4,013,000 4,299,000 4,578,000 4,632,000
Income taxes 883,000 875,000 818,000 895,000
Net income 1,881,000 1,971,000 1,830,000 1,969,000
Earnings per share
assuming full dilution $0.55 $0.57 $0.53 $0.56
1995
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income $10,017,000 $10,705,000 $11,006,000 $11,340,000
Interest expense 4,616,000 5,228,000 5,476,000 5,457,000
Net interest income 5,401,000 5,477,000 5,530,000 5,383,000
Provision for possible
loan losses 285,000 310,000 360,000 360,000
Investment securities
gains 17,000 7,000
Other income 1,088,000 1,103,000 1,183,000 1,083,000
Other expenses 4,067,000 4,082,000 4,038,000 4,631,000
Income taxes 651,000 654,000 722,000 562,000
Net income 1,486,000 1,534,000 1,610,000 1,420,000
Earnings per share
assuming full dilution $0.42 $0.44 $0.46 $0.41
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, 1996
and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The
financial statements of Peoples Bancorp Inc. and Subsidiaries
for the year ended December 31, 1994, were audited by other
auditors whose report dated January 26, 1995, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Peoples Bancorp Inc. and
Subsidiaries at December 31, 1996 and 1995 and the consolidated
results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Charleston, West Virginia
January 31, 1997
AVERAGE BALANCES AND ANALYSIS OF NET INTEREST INCOME
(Dollars in Thousands)
1996 1995 1994
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Securities <F1>:
- ----------------
Taxable $127,815 $ 8,655 6.77% $ 95,056 $ 6,667 6.98% $ 77,649 $ 5,308 6.80%
Nontaxable <F2> 22,621 1,906 8.42% 23,761 2,117 8.91% 24,027 2,220 9.24%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total 150,436 10,561 7.02% 118,817 8,784 7.40% 101,676 7,528 7.40%
Loans <F3> <F4>:
- ----------------
Commercial 125,138 11,944 9.54% 114,020 11,270 9.88% 105,315 8,934 8.48%
Real estate 172,367 14,322 8.31% 156,598 13,663 8.73% 146,966 12,311 8.38%
Consumer 102,759 10,949 10.66% 96,604 9,305 9.63% 85,219 7,340 8.61%
Valuation reserve (6,799) (6,719) (6,680)
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total 393,465 37,215 9.46% 360,503 34,238 9.50% 330,820 28,585 8.64%
Money Market:
- -------------
Interest-bearing
deposits 622 29 4.64% 526 31 5.80% 1,744 61 3.51%
Federal funds sold 5,900 315 5.35% 13,226 780 5.90% 10,580 422 3.99%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total 6,522 344 5.28% 13,752 811 5.90% 12,324 483 3.92%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total earning assets 550,423 48,120 8.75% 493,072 43,833 8.89% 444,820 36,596 8.30%
-------- ------- -------- ------- -------- -------
Other assets 42,021 34,910 35,204
-------- -------- --------
Total assets $592,444 $527,982 $480,024
======== ========
Deposits:
- ---------
Savings $ 75,805 2,302 3.04% $ 68,867 2,307 3.35% $ 75,422 2,106 2.79%
Interest-bearing
demand 111,376 3,656 3.28% 92,280 3,228 3.50% 85,326 2,212 2.59%
Time 234,550 12,922 5.51% 222,898 12,849 5.76% 187,842 9,298 4.95%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total 421,731 18,880 4.48% 384,045 18,384 4.79% 348,590 13,616 3.91%
Borrowed Funds:
- ---------------
Short-term 33,166 1,408 4.25% 19,993 1,010 5.05% 10,953 337 3.08%
Long-term 23,490 1,678 7.14% 22,612 1,383 6.12% 24,614 1,471 5.98%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total 56,656 3,086 5.45% 42,605 2,393 5.62% 35,567 1,808 5.08%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-
bearing liabilities 478,387 21,966 4.59% 426,650 20,777 4.87% 384,157 15,424 4.02%
-------- ------- -------- ------- -------- -------
Noninterest-bearing
demand deposits 54,923 46,876 46,224
Other liabilities 6,115 5,396 5,029
-------- -------- --------
Total liabilities 539,425 478,922 435,410
Stockholders' equity 53,019 49,060 44,614
-------- -------- --------
Total liabilities
and stockholders'
equity $592,444 $527,982 $480,024
======== ======== ========
Interest rate spread $26,154 4.15% $23,056 4.02% $21,172 4.28%
------- ------ ------- ------ ------- ------
Interest revenue/earning assets 8.74% 8.89% 8.30%
Interest expense/earning assets 3.99% 4.21% 3.47%
------ ------ ------
Net yield on earning assets
(net interest margin) 4.75% 4.68% 4.83%
====== ====== ======
<FN>
<F1> Average balances of investment securities based on historical cost.
<F2> Computed on a fully tax equivalent basis using a tax rate
of 34%. Interest income was increased by $723,000, $765,000 and
$775,000 for 1996, 1995 and 1994, respectively.
<F3> Nonaccrual and impaired loans are included in the average
balances listed. Related interest income on nonaccrual loans
prior to the loan being put on nonaccrual status is included in
loan interest income. At December 31, 1996, 1995 and 1994,
nonaccrual loans outstanding were $999,000, $482,000 and
$902,000, respectively.
<F4> Loan fees included in interest income for 1996, 1995 and
1994 were $460,000, $428,000 and $358,000, respectively.
</FN>
RATE VOLUME ANALYSIS/MATURITIES TABLES
Rate Volume Analysis
- --------------------
(Dollars in Thousands)
Change in Income/Expense <F1> Rate Effect Volume Effect
1996 1995 1994 1996 1995 1994 1996 1995 1994
Investment income:
- ------------------
Taxable $1,988 $1,359 $ (730) $ (237) $ 141 $ (635) $2,225 $1,218 $ (95)
Nontaxable (211) (103) (330) (112) (79) (17) (99) (24) (313)
------ ------ ------ ------ ------ ------- ------ ------ ------
Total 1,777 1,256 (1,060) (349) 62 (652) 2,126 1,194 (408)
------ ------ ------ ------ ------ ------- ------ ------ ------
Loan income:
- ------------
Commercial 674 2,336 934 (397) 1,557 174 1,071 779 760
Real estate 659 1,352 819 (672) 525 (133) 1,331 827 952
Consumer 1,644 1,965 454 1,028 923 (541) 616 1,042 995
------ ------ ------ ------ ------ ------- ------ ------ ------
Total 2,977 5,653 2,207 (41) 3,005 (500) 3,018 2,648 2,707
------ ------ ------ ------ ------ ------- ------ ------ ------
Money market funds (467) 328 (344) (75) 262 151 (392) 66 (495)
------ ------ ------ ------ ------ ------- ------ ------ ------
Total interest income 4,287 7,237 803 (465) 3,329 (1,001) 4,752 3,908 1,804
====== ====== ====== ====== ====== ======= ====== ====== ======
Interest expense:
- -----------------
Savings (5) 201 (1) (226) 395 (70) 221 (194) 69
Interest-bearing
demand deposits 428 1,016 214 (208) 824 80 636 192 134
Time 73 3,551 (452) (583) 1,664 (30) 656 1,887 (422)
Short-term borrowings 398 673 134 (182) 294 90 580 379 44
Long-term borrowings 295 (88) 266 240 34 (34) 55 (122) 300
------ ------ ------ ------ ------ ------- ------ ------ ------
Total interest expense 1,189 5,353 161 (959) 3,211 36 2,148 2,142 125
------ ------ ------ ------ ------ ------- ------ ------ ------
$3,098 $1,884 $ 642 $ 494 $ 118 $(1,037) $2,604 $1,766 $1,679
====== ====== ====== ====== ====== ======= ====== ====== ======
<FN>
<F1> The change in interest due to both rate and volume has been
allocated to volume and rate changes in proportion to the
relationship of the dollar amounts of the change in each.
</FN>
Loan Maturities at December 31, 1996
- ------------------------------------
Due in
Due in One Year Due
One Year Through After
or Less Five Years Five Years Total
LOAN TYPE
Commercial loans:
- -----------------
Fixed $ 6,821 $ 7,894 $ 3,322 $ 18,037
Variable 45,655 26,824 37,411 109,890
-------- -------- -------- --------
52,476 34,718 40,733 127,927
-------- -------- -------- --------
Real estate loans:
- ------------------
Fixed 4,605 14,952 31,329 50,886
Variable 28,196 23,762 82,605 134,563
-------- -------- -------- --------
32,801 38,714 113,934 185,449
-------- -------- -------- --------
Consumer loans:
- ---------------
Fixed 28,718 62,283 4,381 95,382
Variable 9,352 3,741 562 13,655
-------- -------- -------- --------
38,070 66,024 4,943 109,037
-------- -------- -------- --------
Total $123,347 $139,456 $159,610 $422,413
======== ======== ======== ========
Maturities of Certificates of Deposit over $100,000 at December 31:
- --------------------------------------------------------------------
1996 1995 1994 1993
Under 3 months $16,437 $18,662 $ 5,657 $ 5,761
3 to 6 months 8,279 9,319 2,149 2,241
6 to 12 months 10,309 5,140 5,868 2,859
Over 12 months 8,356 8,266 12,695 6,939
------- ------- ------- -------
Total $43,381 $41,387 $26,369 $17,800
======= ======= ======= =======
LOAN PORTFOLIO ANALYSIS
(Dollars in thousands)
1996 1995 1994 1993 1992
Year-end balances:
- ------------------
Commercial, financial
and agricultural $127,927 $117,306 $117,015 $101,633 $ 91,138
Real estate 175,505 154,469 150,289 135,704 125,586
Real estate
construction 9,944 5,919 2,528 5,421 4,514
Consumer 102,044 95,464 86,098 74,775 66,129
Credit card 6,993 6,368 5,423 4,142 3,768
-------- -------- -------- -------- --------
Total $422,413 $379,526 $361,353 $321,675 $291,135
======== ======== ======== ======== ========
Average total loans $400,264 $367,222 $337,500 $306,282 $291,033
Average allowance
for loan losses (6,799) (6,719) (6,680) (6,095) (5,298)
-------- -------- -------- -------- --------
Average loans,
net of allowance $393,465 $360,503 $330,820 $300,187 $285,735
======== ======== ======== ======== ========
Allowance for loan
losses, January 1 $ 6,726 $ 6,783 $ 6,370 $ 5,687 $ 4,273
Allowance for loan losses
of acquired branch 721
Loans charged off:
- ------------------
Commercial, financial
and agricultural 342 256 39 193 1,163
Real estate 93 82 189 143 295
Consumer 1,726 1,352 842 816 826
Credit card 168 113 54 51 33
-------- -------- -------- -------- --------
Total 2,329 1,803 1,124 1,203 2,317
-------- -------- -------- -------- --------
Recoveries:
- -----------
Commercial, financial
and agricultural 36 111 392 60 241
Real estate 75 60 61 65 110
Consumer 391 251 304 157 267
Credit card 9 9 15 12 5
-------- -------- -------- -------- --------
Total 511 431 772 294 623
-------- -------- -------- -------- --------
Net chargeoffs:
- ---------------
Commercial, financial
and agricultural 306 145 (353) 133 922
Real estate 18 22 128 78 185
Consumer 1,335 1,101 538 659 559
Credit card 159 104 39 39 28
-------- -------- -------- -------- --------
Total 1,818 1,372 352 909 1,694
-------- -------- -------- -------- --------
Provision for
loan losses 1,965 1,315 765 1,592 2,387
-------- -------- -------- -------- --------
Allowance for loan
losses, December 31 $ 6,873 $ 6,726 $ 6,783 $ 6,370 $ 5,687
======== ======== ======== ======== ========
Allocation of allowance for loan losses at December 31
- ------------------------------------------------------
Commercial $ 2,741 $ 3,440 $ 3,281 $ 3,185 $ 2,651
Real estate 1,050 1,517 1,828 2,000 1,189
Consumer 2,078 1,519 1,096 987 602
Credit card 131 100 89 166 45
Unallocated 873 150 489 32 1,200
-------- -------- -------- -------- --------
Total $ 6,873 $ 6,726 $ 6,783 $ 6,370 $ 5,687
======== ======== ======== ======== ========
Percent of loans to total loans at December 31:
- -----------------------------------------------
Commercial 30.3% 30.9% 32.4% 31.6% 31.3%
Real estate 41.5 40.7 41.6 42.2 43.1
Real estate, construction 2.3 1.5 0.7 1.7 1.6
Consumer 24.2 25.2 23.8 23.2 22.7
Credit card 1.7 1.7 1.5 1.3 1.3
-------- -------- -------- -------- --------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Ratio of net chargeoffs to average total loans:
- -----------------------------------------------
Commercial 0.08% 0.04% (0.11)% 0.04% 0.32%
Real estate 0.00 0.01 0.04 0.03 0.06
Consumer 0.33 0.30 0.16 0.22 0.19
Credit card 0.04 0.03 0.01 0.01 0.01
-------- -------- -------- -------- --------
Total 0.45% 0.38% 0.10% 0.30% 0.58%
======== ======== ======== ======== ========
Nonperforming loans:
- --------------------
Nonaccrual loans 999 482 902 1,416 1,279
Loans 90+ days past due 621 1,236 1,082 896 1,284
Other real estate owned 28 45 97 38 49
-------- -------- -------- -------- --------
Total $ 1,648 $ 1,763 $ 2,081 $ 2,350 $ 2,612
======== ======== ======== ======== ========
Nonperforming loans as a
percent of total loans 0.39% 0.46% 0.58% 0.73% 0.90%
======== ======== ======== ======== ========
Interest income on nonaccrual loans which would have been
recorded under the original terms of the loans for 1996, 1995
and 1994 was $78,000 (of which $11,000 was actually recorded),
$19,000 (of which $10,000 was actually recorded) and $48,000 (of
which $36,000 was actually recorded), respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction
- ------------
The following discussion and analysis of the consolidated
financial statements of Peoples Bancorp Inc. (the "Company") is
presented to give the reader insight into management'
assessment of the financial results. It also recaps the
significant events that led to the results. The Company's
subsidiaries, The Peoples Banking and Trust Company ("Peoples
Bank"), The First National Bank of Southeastern Ohio ("First
National") and The Northwest Territory Life Insurance Company,
provide financial services to individuals and businesses within
our market area. Peoples Bank is chartered by the State of Ohio
and subject to regulation, supervision, and examination by the
Federal Deposit Insurance Corporation ("FDIC") and the Ohio
Division of Banks. First National is a member of the Federal
Reserve System and subject to regulation, supervision, and
examination by the Office of the Comptroller of the Currency.
This discussion and analysis should be read in conjunction with
the audited Consolidated financial statements and footnotes and
the ratios, statistics, and discussions contained elsewhere in
this Annual Report.
The following text will include references to three separate
acquisition transactions that have affected or will affect the
Company's results of operations. In April 1996, Peoples Bank
completed the acquisition of three full-service banking centers
from an unaffiliated financial institution in the cities of
Pomeroy, Gallipolis, and Rutland, Ohio ("Banking Center
Acquisition"). The Company acquired approximately $75 million
in deposits related to the Banking Center Acquisition. On
January 1, 1997, the Company completed the purchase of Russell
Federal Savings Bank ("Russell Federal") in Russell, Kentucky,
for approximately $9.25 million in cash ("Russell Federal
Acquisition"). Management plans to continue Russell Federal's
operations as a federal savings bank subsidiary of the Company
with continuity of management, officers and directors. Russell
Federal had total assets of $28.0 million, deposits of $19.5
million and shareholders' equity of $8.0 million at December 31,
1996. Russell Federal 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 November, 1996, the Company announced that
Peoples Bank had entered an agreement to acquire a full-service
banking facility in Baltimore, Ohio ("Baltimore Banking Center
Acquisition"). In the transaction, Peoples Bank will assume
approximately $17 million in deposits from this central Ohio
banking facility. The FDIC has already approved the acquisition
and the transaction is expected to be completed in the first
quarter of 1997.
Overview of the Income Statement
- --------------------------------
The Company recognized an increase in net income of $1,601,000
or 26.5%, to $7,651,000 in 1996 from $6,050,000 in 1995. Net
income in 1995 was negatively impacted in the amount of $513,000
in non-recurring expenses related to a voluntary early
retirement program. In April 1996, the Banking Center
Acquisition and related acquired deposits positively impacted
growth in the Company's balance sheet and revenue streams.
Fully tax equivalent net interest income increased $3,098,000 in
1996 to $26,154,000, up 13.4% compared to 1995. The yield on
interest-earning assets decreased modestly from 8.89% in 1995 to
8.75% in 1996. The average interest rate paid on
interest-bearing liabilities also decreased, from 4.87% in 1995
to 4.59% in 1996. Net interest margin for the Company reached
4.75% compared to 4.67% last year. Increased net interest
income can be attributed to the growth in the Company's
higher-yielding assets such as loans and the decrease in costs
associated with interest-bearing liabilities. Strong loan
growth prompted an increase in the provision for loan losses in
1996, totaling $1,965,000, up from $1,315,000 in 1995.
Non-interest income (excluding gains or losses on sales of
investment securities) increased 15.1% to $5,130,000 in 1996,
compared to $4,457,000 in 1995. Gains on sales of investment
securities totaled $48,000 in 1996, up from 1995's total gain of
$24,000. Non-interest expense increased 4.2% in 1996 to
$17,522,000.
Interest Income and Expense
- ---------------------------
Net interest income is the amount by which interest income on
earning assets exceeds interest paid on interest-bearing
liabilities. Interest-earning assets include loans and
investment securities. Interest-bearing liabilities include
interest-bearing deposits and borrowed funds such as Federal
Home Loan Bank borrowings. Net interest income remains the
primary source of revenue for the Company. Changes in market
interest rates, as well as adjustments in the mix of
interest-earning assets and interest-bearing liabilities,
continue to impact net interest income.
Market rates did not significantly fluctuate in 1996. In
general, long-term interest rates were flat for most of 1996,
increasing slightly in the fourth quarter. Short-term rates
remained relatively unchanged. The national prime rate was
8.50% at December 31, 1995, moved to 8.25% in the first quarter
of 1996 and remained at that level despite the increase in
long-term interest rates. The Company's Asset Liability
Committee ("ALCO") meets on a regular basis and monitors
adjustments in interest rates and sets pricing guidelines for
the Company.
In 1996, the Company recorded net interest income of
$25,431,000, an increase of 14.1% from 1995. Total interest
income reached $47,397,000 while interest expense totaled
$21,966,000. Included in interest income is $1,399,000 of
tax-exempt income from investments issued by states and
political subdivisions. Since these revenues are not taxed, it
is more meaningful to analyze net interest income on a fully-tax
equivalent ("FTE") basis.
Net interest margin is calculated by dividing FTE net interest
income by average interest-earning assets and serves as a
measurement of the net revenue stream generated by the Company's
balance sheet. In 1996, net interest margin was 4.75%, an
increase of 7 basis points compared to last year's 4.68%. This
increase can be attributed to the Company's strong loan growth
of over $40 million in 1996 as well as the assumption of
approximately $75 million in deposits related to the Banking
Center Acquisition. These deposits were primarily utilized as
funding sources for 1996's loan growth and also allowed the
Company to pay off certain higher-cost borrowings. Management
anticipates increasing pressure on future net interest margin.
Detailed analysis of several categories within interest-earning
assets and interest-bearing liabilities reveal changes in mix
and shifts in interest rates. In 1996, average balances in
commercial loans increased $11,118,000 or 9.8%. The average
yield on those loans decreased from 9.88% in 1995 to 9.54% in
1996 due primarily to the increasing competition for commercial
loans in the Company's markets. Average real estate loan
balances grew $15,769,000 or 10.1% to $172,367,000. This volume
increase provided additional interest income on real estate
loans of $689,000 to $14,322,000, an increase of 4.8%, despite a
decrease in average yield of 42 basis points to 8.31%. Consumer
loans also continued to grow, increasing $6,155,000 or 6.4% to
an average of $102,759,000 in 1996. The Company's yield on
consumer loans significantly increased, reaching 10.66% in 1996
compared to 9.63% in the prior year. This reflects management's
intent to price consumer loans at levels commensurate with the
inherent risk of these loans, in particular in the indirect
portfolio. The Company has been able to meet its operating
goals through the growth of the loan portfolio at competitive
but profitable yields.
The Company's interest costs in 1996 increased $1,189,000, but
the rate paid on these funding sources decreased from 4.87% in
1995 to 4.59% in 1996. The Banking Center Acquisition allowed
the Company to quickly grow its balance sheet yet maintain
competitive pricing on its funding sources. In addition, the
Company had $10 million of brokered certificates of deposits
mature, which were replaced with lower interest rate funding
sources.
Interest costs on traditional deposit products decreased 31
basis points to 4.48% compared to 1995. The most significant
component of interest expense in 1996 was interest paid on time
deposits (i.e., certificates of deposits). In 1996, the Company
paid interest of $12,922,000, or 5.51%, on average time deposit
balances of $234,550,000. In 1995, the average rate paid on
time deposits totaled 5.76% on average balances of $222,898,000.
The largest increase occurred in average interest-bearing
demand deposits, which grew $19,096,000 to $111,376,000. The
cost of these funding sources averaged 3.28% in 1996, down 22
basis points from 1995. Management expects deposit pricing to
be increasingly competitive in 1997.
In 1996, the Company continued its expanded use of short-term
borrowings as a funding source. Historically the Company's
cash management services offered to a variety of business
customers have provided short-term funding, specifically
overnight repurchase agreements. In 1995, the Company's average
balances of overnight repurchase agreements increased $3,226,000
(or 32.6%) to $13,134,000. The average rate paid in 1996 on
overnight repurchase agreements totaled 3.82%, down 19 basis
points from the prior year's average rate of 4.01%. These rates
are based on selected indices which modestly decreased in 1996.
Interest expense on average short-term Federal Home Loan Bank
("FHLB") advances in 1996 totaled $698,000, an average interest
rate of 5.68%. Average short-term FHLB balances totaled
$8,110,000 in 1995 at an average cost of 6.13%. Management
plans to maintain access to FHLB borrowings as an appropriate
funding source.
Interest expense on long-term borrowings increased significantly
in 1996. Total interest costs related to long-term borrowings
totaled $1,678,000 in 1996, up $295,000 (or 21.3%) compared to
1995. The rate paid on average long-term borrowings totaled
7.14% in 1996, an increase of 102 basis points compared to
1995's average rate of 6.12%, reflecting the increase in
long-term borrowing rates in 1996. The majority of the
Company's long-term borrowings are fixed rate FHLB borrowings.
Non-Interest Income
- -------------------
Non-interest income (excluding securities transactions) from
operations reached new levels in 1996, totaling $5,130,000, an
increase of 15.1% compared to 1995. Several categories had
strong growth compared to 1995. Management continues to focus
on non-interest income as a primary source of cost-recovery.
The Company's Investment and Trust Division continued its strong
earnings trend. The fee structure for fiduciary activities is
based primarily on the fair value of assets being managed, which
totaled nearly $430 million at December 31, 1996, an increase of
$40 million from the previous year-end. As a result of the
growth in market values and in the number of accounts served,
income from fiduciary activities totaled $1,897,000, an increase
of 8.3% compared to 1995. In 1997, management plans to continue
expansion of the Investment and Trust Division's presence in our
new markets and correspondingly increase non-interest income
through this expansion in service area.
In 1996, service charge income related to deposits
increased $372,000 or 23.8% to $1,937,000. Several factors
contributed to this growth, but primarily revenue streams
related to the $75 million growth in deposits assumed in the
Banking Center Acquisition. Increases in fee income were fueled
primarily by this growth in number of customers and their
related deposit accounts. Management is pleased with the
performance of the new banking centers and anticipates similar
revenue in the future. Revenues from electronic banking fees
and other cost-recovery based fees and charges also increased in
early 1996 due to a combination of modifications in the
Company's fee schedule and increased volume. Other sources of
non-interest income increased as a result of the Company's
continued investment in electronic banking products such as the
Peoples Connect Card, a debit card first introduced in 1996.
In late 1995, First National Bank's subsidiaries, Northwest
Territory Life Insurance Agency, Inc. and Northwest Territory
Property and Casualty Insurance Agency, Inc. (the "Agencies"),
were awarded insurance agency powers in the State of Ohio. The
Agencies received Certificates of Qualification to provide full
life and property insurance product lines to consumers in Ohio.
These Agencies were the first in Ohio to be affiliated with a
financial institution. Although the Agencies' results of
operations did not have a material impact on 1996 results, they
are anticipated to produce income growth and long-term value to
the Company through internal development as well as external
affiliation and acquisition. Currently, the Agencies are
generating fee income on sales of annuities, mutual funds, and
other similar investment products, as well as life insurance
policies. Management intends to develop the Agencies' property
and casualty insurance product lines through both internal
development and acquisition of existing independent agencies.
Management will continue to explore new methods of enhancing
non-interest income in the future. Both traditional and
non-traditional financial service products are being analyzed
for inclusion in the product mix currently being offered by the
Company.
Non-Interest Expense
- --------------------
Maintaining acceptable levels of non-interest expense and
operating efficiency are important performance objectives for
the Company. In 1996, non-interest expense totaled $17,522,000,
an increase of 4.2% over the prior year. In 1996, non-interest
expense was affected by a variety of sources, including a
reduction in FDIC insurance premiums and additional amortization
of intangibles and operational expense related to the Banking
Center Acquisition.
In 1995, non-interest expense was impacted by the voluntary
early retirement program offered to certain qualifying employees
(representing approximately 7% of the Company's employee base at
the time). In addition to rewarding long-time employees for
their valuable years of service, the program was designed to
position the Company to manage the future challenges facing the
banking industry. All employees eligible for the program
accepted the offer and as a result, the Company recognized a
charge to salaries and employee benefits of $777,000 in 1995.
Salaries and employee benefits in 1996 totaled $7,514,000, down
4.1% from 1995's amount (which included the early retirement
charge). Management expects salaries and employee benefits to
modestly increase in 1997 due to the January completion of the
Russell Federal Acquisition, the expected completion of an
acquisition of the Baltimore Banking Center in first quarter
1997, and the impact of a full-year's operation of the three
full-service offices from the 1996 Banking Center Acquisition.
Non-interest expense decreased in 1996 due to a reduction in
insurance premiums paid on Bank Insurance Fund ("BIF") deposits.
In 1995, BIF related expense totaled $481,000 compared to
$61,000 in 1996. On September 30, 1996, legislation was passed
to recapitalize the Savings Association Insurance Fund ("SAIF")
and affected the Company, due to small balances of "Oakar"
deposits held at Peoples Bank. The Company paid a one-time
expense of $40,000 to recapitalize the SAIF (the fund
established to insure the deposits of thrift institutions).
The legislation also mandated future assessments for insurance
premiums. In years 1997 to 1999, the Company expects to pay an
annual rate of 1.29 cents for every $100 of domestic deposits
held at Peoples Bank and First National Bank. In addition, the
Company will also annually pay 6.44 basis points per $100 of
deposits to the SAIF for its balance of "Oakar" deposits
held at Peoples Bank as well as the deposits held at Russell
Federal. For the years 2000 to 2017, both banks and thrifts
will annually pay 2.43 basis points per $100 of deposits.
Although 1997's expense to insure the Company's deposit base
will increase due to the Russell Federal and Baltimore
Banking Center acquisitions, management does not expect
the BIF-SAIF combination to have a material impact on the
Company's future results of operations. Lower deposit insurance
premiums in the future should improve the Company's related
efficiency ratios.
Several categories within non-interest expense remained at
levels comparable to the prior year. As expected, net occupancy
expenses and depreciation expense on furniture and fixtures
increased slightly due to the Banking Center Acquisition's
related fixed assets. The Company's increased investment in
technology and other customer-service enhancements will also
impact depreciation expense in the future. Management feels
that non-interest expense was leveraged in 1996 to enhance
customer service and improve market share.
In 1996, amortization of intangibles totaled $419,000 compared
to $159,000 in 1995. This increase was due to the intangibles
related to the Banking Center Acquisition. Future amortization
of intangibles will be increased in 1997 by the Russell Federal
and Baltimore Banking Facility acquisitions. Management does
not expect the additional expense to materially impact the
results of operations of the Company.
In October 1995, the FASB approved SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123 defines a fair value
based method of accounting for an employee stock option or
similar equity instrument or allows an entity to continue to
measure compensation cost for those plans using the intrinsic
value based method prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("Opinion No. 25"). SFAS No. 123
is effective for transactions entered into in fiscal years that
begin after December 15, 1995.
Under the fair value based method, compensation cost is measured
at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the
stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. The Company maintains
fixed price stock option plans which have no intrinsic value at
the grant date, and under Opinion No. 25, there is no
compensation expense to be recognized.
As permitted by SFAS No. 123, the Company will continue to
account for stock-based compensation under Opinion No. 25. The
effect of applying SFAS No. 123's fair value method to the
Company's 1996 and 1995 granted stock options results in net
income and earnings per share that are not materially different
from amounts reported.
Return on Assets
- ----------------
For the year ended December 31, 1996, return on average assets
("ROA") was 1.29%, up from 1995's ratio of 1.15%. The increase
in ROA can be attributed to increased net income through
enhanced net interest income as well as the effect of the early
retirement program on 1995's results of operations. Management
will continue to review opportunities to improve the efficiency
of the Company's operations and expects ROA to remain stable or
increase slightly in 1997.
Return on Equity
- ----------------
Management recognizes that the Company's return on average
stockholders' equity ("ROE") is an important indicator of an
entity's financial performance. Due mostly to the negative
impact to 1995's net income related to the early retirement
program expense, ROE was 12.33% a year ago. In 1996, ROE
reached 14.43%, the highest level in the Company's history.
1996's increase in ROE compared to 1995 can be attributed
primarily to increased net income as well as the effect of
leveraging of the Company's balance sheet through assumed
deposits in the Banking Center Acquisition, which provided
approximately $75 million in deposits and increased revenue
potential without increasing stockholders' equity. The
Company's capital is adequate under regulatory and industry
standards, as discussed in Note 11 of the Notes to the Company's
Consolidated Financial Statements.
Total equity was also affected in 1996 by the adjustment in the
net unrealized holding gain, net of deferred income taxes, on
available-for-sale securities. The adjustment of equity related
to the net unrealized holding gain on investment securities
decreased from $2,469,000 at year-end 1995 to $1,428,000 at
December 31, 1996, due to modest increases in long-term interest
rates since December 31, 1995.
Management will continue to emphasize improvement in ROE, among
other indicators, as a method of measuring performance in 1997.
Federal Income Tax Expense
- --------------------------
Federal income taxes increased from $2,589,000 in 1995 to
$3,471,000 in 1996. This increase can be attributed to the
Company's higher pre-tax income and a modest decrease in
tax-exempt income. The Company's effective tax rate for 1996
was 31.2%, up modestly from 1995's effective tax rate of 30.0%.
Overview of Balance Sheet
- -------------------------
In 1996, the Company grew its balance sheet primarily through
increased loan balances, funded by the deposits assumed in the
Banking Center Acquisition. Total assets increased $73,205,000
or 13.5% to $616,635,000 at year-end 1996. Since December 31,
1995, the Company's asset growth has primarily occurred in
interest earning assets such as loans and investment
securities. Loans grew nearly $43 million (or 11.3%) to
$422,413,000 and investment securities grew $16 million (or
12.2%) to $147,783,000.
Growth in assets in 1996 was provided primarily from the funds
acquired in the Banking Center Acquisition. Total deposits
increased $75,615,000 (or 17.6%) to $504,692,000, which enabled
the Company to reduce higher-costing short-term borrowings with
the Federal Home Loan Bank and enhance net interest margin.
Long-term borrowings, comprised primarily of FHLB borrowings
with maturities greater than one year, grew $6,058,000 (or
26.2%) to $29,200,000 at December 31, 1996.
Stockholders' equity increased $4,719,000, or 9.2%, to
$56,193,000 at December 31, 1996. Certain components of
stockholders' equity and all per share information have been
adjusted for the 10% stock dividend issued to shareholders of
record as of July 15, 1996. The Company purchased $332,000 of
treasury shares in 1996 and also reissued treasury shares in the
10% stock dividend and through exercised stock options,
resulting in total balance of treasury stock of $54,000 at
December 31, 1996. Please see the Consolidated Statements of
Stockholders' Equity found on page 18 in this Report for
additional information regarding the changes in stockholders'
equity.
Cash and Cash Equivalents
- -------------------------
The Company's cash and cash equivalents totaled $28,517,000 at
December 31, 1996, an increase of $7,523,000 compared to
year-end 1995. The Company's balance sheet growth essentially
dictated the need for increased Federal Reserve cash
requirements. Total cash and cash equivalents fluctuate on a
daily basis due to transactions in process and other liquidity
needs. Management feels the liquidity needs of the Company are
satisfied by the current balance of cash and cash equivalents,
readily available access to traditional and non-traditional
funding sources, and the portion of the investment and loan
portfolios that mature within one year. These sources of funds
should enable the Company to meet cash obligations and
off-balance sheet commitments as they come due.
Investment Securities
- ---------------------
Investment securities totaled $147,783,000, up $16,021,000 or
12.2% from year-end 1995. All of the Company's investment
securities are classified as available-for-sale. Management
believes the available-for-sale classification provides
flexibility for the Company in terms of selling securities as
well as interest rate risk management opportunities. At
December 31, 1996, the amortized cost of the Company's
investment securities totaled $145,619,000, resulting in
unrealized appreciation in the investment portfolio of
$2,164,000.
Except for investments in mortgage-backed securities, the
specific components of the Company's investment portfolio
remained relatively unchanged in 1996. At year-end, investments
in mortgage-backed securities totaled $60,780,000, up
$14,764,000 (or 32.1%) from December 31, 1995's balance of
$46,016,000. Increases in this category can be attributed
primarily to a growth strategy implemented in early 1996. In
anticipation of the Banking Center Acquisition (and its
associated deposits), management initiated a pre-acquisition
investment program to take advantage of more favorable asset
yields on mortgage-backed securities. As a result, balances in
mortgage-backed securities grew significantly in the first
quarter of 1996 and remained at those levels throughout the
year. These acquisitions reflect a portion of the strategy
implemented by the Company in 1995 to increase incremental
amounts of net interest income by investing in higher-yield
instruments. The pre-acquisition investment strategy was also
designed to position the portfolio for future earnings while
maintaining adequate liquidity and acceptable interest rate risk.
Management monitors the earnings performance and liquidity of
the investment portfolio on a regular basis through ALCO
meetings. The group also monitors net interest income, sets
pricing guidelines, and manages interest rate risk for the
Company. Through active balance sheet management and analysis
of the investment securities portfolio, the Company maintains
sufficient liquidity to satisfy depositor requirements and the
various credit needs of its customers.
Loans
- -----
Loan volumes increased significantly in 1996 from further
penetration in the Company's markets. Total loans increased
$42,887,000 or 11.3% to $422,413,000. Growth occurred in all
types of loans in 1996.
Real estate loans to our retail customers continue to be the
largest portion of the loan portfolio. Total real estate loans
reached $175,505,000 at December 31, 1996, an increase of
$21,036,000 (or 13.6%) compared to year-end 1995. In 1996,
significant growth occurred in 1 to 4 family residential loans
due in part to a special loan program which offered fixed rate
loans to single family residential borrowers. The program met
its goals in mid-1996 and was well accepted in the markets
served by the Company. Residential real estate lending
continues to represent a major focus of the lending portfolio
due to the lower risk factors associated with these types of
loans and the opportunity to provide additional products and
services to these consumers.
Also, real estate loan activity accelerated in 1996 due to the
Company's special home equity credit line ("Equiline") program,
designed to respond to the growing credit needs of the Company's
customers during mid-1996. The special program offered 5-year,
fixed rate Equilines at competitive interest rates and no loan
closing costs. As a direct result of the special program, the
Company's Equiline balances increased to $15,453,000 at December
31, 1996, up $5,179,000 (or 50.4%) since year-end 1995. In the
process, the Company nearly doubled the number of Equiline
accounts as a result of the special program, which reached its
intended goals near the end of second quarter 1996. As
expected, outstanding balances have increased. Management is
pleased with the response to the special Equiline promotion and
will continue to strive for quality loan programs designed to
meet the needs of the Company's customers.
Lending activity in the Banking Center Acquisition markets has
centered primarily on real estate loans. Management expects to
continue to penetrate these local southeastern Ohio markets in
1997, providing increased loan activity. Mortgage lending will
remain a vital part of the Company's lending operation due to
the programs offered to customers, who continue to seek quality
real estate loan products in a competitive environment.
In 1996, commercial, financial, and agricultural loans
("commercial loans") increased $10,621,000 (or 9.1%) to
$127,927,000. Commercial loan demand continues to be strong in
several of our markets. In particular, the Licking County
market in central Ohio continued its loan growth in 1996,
reaching over $23 million in loans at year-end. Established in
1993, this office has initiated increases in both the number of
customers served as well as loan balances (up approximately $10
million in 1996) in the central Ohio market, one of the leading
growth markets and economic sectors in Ohio.
The financial services industry has experienced recent increases
in consumer debt and the Company is no exception as its consumer
lending has grown to meet customer demand. The Company's total
consumer loans were $109,037,000 at December 31, 1996, an
increase of $7,205,000 (or 7.1%) from year-end 1995. The
majority of the Company's consumer loans are in the indirect
lending area. At December 31, 1996, the Company had indirect
loan balances of $68,333,000, up $5,686,000 (or 9.1%) from
year-end 1995's balance of $62,647,000. This growth can be
attributed to the Company's commitment to quality customer
service and the continued strong demand for indirect loans in
the markets served by the Company. Lenders use a tiered pricing
system that enables the Company to apply interest rates
commensurate with the risks inherent in the indirect loan.
Management recently initiated steps to reinforce the use of this
tiered system and anticipate growth in indirect loan balances to
be tempered in 1997.
The Company's credit card balances at December 31, 1996, were
$6,993,000, an increase of $625,000 (or 9.8%) from the prior
year's balance of $6,368,000. The Company has offered several
new products to better serve the credit needs of our customers,
including a no-fee credit card, increased credit limits to
qualified customers, and specialty credit cards issued to
specific organizational groups. Management will continue to
evaluate new opportunities to serve our credit card customers.
In May 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS No. 122"). SFAS No. 122
amends SFAS No. 65 and requires financial institutions to
recognize as separate assets rights to service mortgage loans
for others, whether those rights were acquired through purchase
or through the origination and subsequent sale of loans with
servicing rights retained. SFAS No. 122 is to be applied
prospectively for years beginning after December 15, 1995, with
earlier application encouraged. The Company does not engage in
significant secondary market activity, and accordingly, the
adoption of SFAS No. 122 was immaterial to the Company's
financial statements.
Loan Concentration
- ------------------
The Company does not have a concentration of its loan portfolio
in any one industry. Real estate lending (both mortgage and
construction loans) continues to be the largest component of the
loan portfolio, representing $185,449,000 (or 43.9%) of total
loans, while commercial, financial, and agricultural loans
totaled $127,927,000 (or 30.3%) at December 31, 1996.
The Company's lending is primarily focused in the local
southeastern Ohio market and consists principally of retail
lending, which includes single-family residential mortgages and
other consumer loan products. One of the Company's largest
group of commercial loans consists of automobile dealer floor
plans, which totaled $13,672,000 at year-end 1996. It is the
Company's policy to obtain the underlying inventory as
collateral on these loans.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses as a percentage of total loans
decreased from 1.77% at December 31, 1995 to 1.63% at year-end
1996. The total dollar amount of the reserve increased $147,000
over the same period. The Company's 1996 provision for loan
losses totaled $1,965,000, while gross chargeoffs were
$2,329,000 and recoveries amounted to $511,000. In 1995, the
Company had gross chargeoffs of $1,803,000 and recoveries of
$431,000. The Company's provision for loan losses increased in
1996 due to the combination of loan growth, loan delinquencies,
and anticipated chargeoff activity in the consumer loan
portfolio.
Chargeoff activity in 1996 was very similar to 1995. A
significant portion of the Company's chargeoffs in 1996 occurred
in consumer lending. Increased loan activity and loan
delinquencies, especially in the indirect lending area, resulted
in total gross chargeoffs of $1,726,000 in 1996, up $374,000 (or
27.7%) compared to 1995. Management had anticipated consumer
chargeoff activity to decrease in 1996, but consumer credit
delinquency increased modestly. As a result, management
increased its allocation of the allowance to consumer loans to
address this exposure and now expects the rate of consumer
chargeoffs to remain steady for 1997.
Commercial loan chargeoffs totaled $342,000 and recoveries were
$36,000, resulting in net chargeoffs of $306,000 in 1996 (up
$195,000 compared to 1995). Real estate loan chargeoffs and
recoveries were insignificant in both 1996 and 1995. Management
continually monitors the loan portfolio through its credit
review department and loan loss committee to determine the
adequacy of the allowance for loan losses and considers it to be
adequate at December 31, 1996. Management expects 1997's loan
loss provision to be comparable to 1996's, due mostly to
anticipated loan growth and industry predictions of continued
consumer credit delinquencies. Management believes the current
allowance for loan losses of 1.63% of total loans at year-end
1996 to be adequate to absorb inherent losses in the portfolio.
Nonaccrual loans and those loans 90 days past due totaled
$999,000 and $621,000, respectively, at December 31, 1996.
Nonperforming loans as a percentage of outstanding loans totaled
0.39% at year-end 1996, an improvement from 0.46% at December
31, 1995. Management believes the current nonperforming loan
ratio reflects the overall quality of the Company's loan
portfolio.
Funding Sources
- ---------------
The Company considers deposits, short-term borrowings, and
long-term borrowings when evaluating funding sources.
Traditional deposits continue to be the most significant source
of funds for the Company and the expansion of the deposit base
through the Banking Center Acquisition sustained the asset
growth of the Company. In 1996, total deposits grew 17.6% to
$504,692,000, with the majority of the growth occurring in time
deposits. The Banking Center Acquisition accounted for most of
this increase.
In 1996, the most significant change to the Company's funding
sources occurred as a result of the Banking Center Acquisition,
causing a shift from year-end 1995 balances in short-term
borrowings to traditional customer deposits in April, 1996. In
late 1995, the Company implemented a growth strategy designed to
enhance net interest income and other performance ratios, where
investment securities were funded with short-term borrowings.
At December 31, 1995, short-term borrowings totaled $33,276,000.
The funds associated with the Banking Center Acquisition
essentially replaced the short-term borrowings as a funding
source in the second quarter of 1996.
After utilizing short-term borrowings in early 1996 in
anticipation of the Banking Center Acquisition, the Company
decreased total short-term borrowings to below those at year-end
1995. At December 31, 1996, the Company had $19,522,000 in
total short-term borrowings, consisting primarily of corporate
deposit accounts in the form of repurchase agreements. The
Company will continue to access short-term FHLB borrowings as
necessary and had a balance of $2,500,000 in this type of
borrowing at year-end 1996.
Growth occurred in all major categories of traditional deposits
in 1996, occurring primarily through the Banking Center
Acquisition. Growth in interest bearing deposits totaled
$62,272,000 (or 16.4%) in 1996, rising to $441,282,000 at
December 31, 1996. Non-interest bearing deposits totaled
$63,410,000 at year-end 1996, up $13,343,000 (or 26.7%) from
December 31, 1995, representing management's focus on increasing
non-interest bearing balances. Management feels the deposit
base remains the most significant funding source for the Company
and will continue to concentrate on deposit growth and
maintaining adequate net interest margin to meet the Company's
strategic goals.
Nearly all major categories of deposits experienced growth in
1996, in particular certificates of deposit ("CD's"), which
totaled over $248 million at December 31, 1996, up nearly $30
million (or 13.5%). The Company continues to offer deposit
specials to remain competitive in its market area. In the
Banking Center Acquisition, the Company acquired approximately
$41 million in CD's and Individual Retirement Accounts. During
1996, the Company also replaced $10 million of brokered CD's
with a combination of lower cost short-term and long-term FHLB
borrowings.
Other deposit categories also grew in 1996. Interest-bearing
transaction accounts totaled $116,442,000 at December 31, 1996,
up $25,131,000 (or 27.5%) from $91,311,000 at year-end 1995.
Savings deposits were up $7,632,000 (or 11.1%) to $76,347,000 at
December 31, 1996. The Banking Center Acquisition bolstered
growth in deposits in 1996 and management is pleased with the
overall retention of those deposits. Internal growth was
minimal in 1996 but management expects internal growth to be
generated in 1997 due to special programs to be offered,
designed to increase non-interest and interest bearing deposits.
Management also expects deposit balances to increase in 1997
through the Russell Federal Acquisition ($19.5 million in
deposits) and the Baltimore Banking Center Acquisition
(approximately $17.5 million in deposits).
In addition to traditional deposits, the Company continues to
maintain long-term borrowings from the FHLB. This provides the
Company with a reliable source of funds at fixed and indexed
rates for longer periods of time than traditional deposit
products, and the opportunity to match longer term fixed rate
mortgages and other extended-maturity asset commitments against
a similar funding source. Total long-term FHLB advances were
$29,200,000 at December 31, 1996, a net increase of $7,618,000
since year-end 1995 (new advances totaled $10,500,000 and
scheduled principal paydowns were $2,882,000). Management plans
to utilize long-term FHLB borrowings as an appropriate funding
source and currently has additional borrowing capacity with the
FHLB.
On December 31, 1996, as scheduled, the Company also retired
long-term debt held with an unaffiliated financial institution
in the amount of $1,430,000. The payment was funded from a
corresponding dividend from Peoples Bank.
Effective January 1, 1997, the Company completed the Russell
Federal Acquisition with a cash payment of $9.25 million. The
Company funded the purchase with internally generated sources,
including dividends from Russell Federal (after completion of
the purchase) and payoff of a $3 million intercompany capital
note with Peoples Bank. The Company incurred additional debt in
January 1997, with an unaffiliated financial institution in the
amount of $3 million, to assist in the funding of the Russell
Federal Acquisition.
Capital/Stockholders' Equity
- ----------------------------
The capital position of the Company grew approximately $4.7
million (or 9.2%) to over $56 million at December 31, 1996,
providing a strong base for profitable growth. Stockholders'
equity increased in 1996 for several reasons, but primarily from
the retention of net income. The Company paid dividends of
$2,240,000 in 1996, a dividend payout ratio of 29.28% of
earnings. Management feels this is an acceptable payout ratio
for the Company and anticipates similar payout ratios in future
periods.
Equity growth was tempered in 1996 by the adjustment for the net
unrealized holding gain on available-for-sale securities, net of
deferred income taxes, which decreased $1,041,000 to a net gain
of $1,428,000 at year-end 1996. Since all of the investment
securities in the Company's portfolio are classified as
available-for-sale, both the investment and equity sections of
the Company's balance sheet are more sensitive to the changing
market values of investments. In 1996, long-term interest rates
modestly increased, causing a corresponding decrease in the
market value of the investment portfolio.
The Company has also complied with the standards of capital
adequacy mandated by the banking industry. Bank regulators have
established "risk-based" capital requirements designed to
measure capital adequacy. Risk-based capital ratios reflect the
relative risks of various assets banks hold in their portfolios.
A weight category of either 0% (lowest risk assets), 20%, 50%,
or 100% (highest risk assets) is assigned to each asset on the
balance sheet. Detailed information concerning the Company's
risk-based capital ratios can be found in Note 11 of the Notes
to the Consolidated Financial Statements. At December 31, 1996,
all of the Company's and each of its banking subsidiaries'
risk-based capital ratios were above the minimum standards for a
well-capitalized institution. Management continues to monitor
risk-based capital ratios and the capital position of the
Company and each of its banking subsidiaries as part of its
strategic decision process.
On August 1, 1996, the Company issued a 10% stock dividend to
shareholders of record on July 15, 1996, marking the third time
in the last four years that the Company has issued a 10% stock
dividend. The Company also declared a two-for-one stock split
in 1994. The Company retired all treasury shares as part of the
issuance of the 10% stock dividend in August 1996. Subsequently,
the Company's Board of Directors authorized the Company to
purchase up to 10,000 additional treasury shares at market
prices for use in conjunction with employee benefit plans.
At December 31, 1996, the Company had 2,000 shares in treasury
for use in its employee benefit plans.
Liquidity
- ---------
Liquidity measures an organization's ability to meet cash
obligations as they come due. During the year ended December
31, 1996, the Company generated cash from operating and
investing activities of $15,555,000 and used $8,032,000 in
financing activities. The major cash inflow was the cash
received in the Banking Center Acquisition of $68,004,000, and
the major outlays were for loans of $44,504,000 and securities
of $45,240,000. The Consolidated Statements of Cash Flows
presented on page 19 of the Company's Consolidated Financial
Statements provides analysis of cash flow activity.
Additionally, management considers that portion of the
investment securities and loan portfolios that matures within
one year as part of liquid assets. The Company's liquidity is
monitored by the ALCO, which establishes ranges of acceptable
liquidity. The current liquidity position is adequate to fund
off-balance sheet commitments and liabilities as they come due.
Please see additional discussion of off-balance sheet
commitments in Note 10 of the Notes to the Consolidated
Financial Statements.
Effects of Inflation on Financial Statements
- --------------------------------------------
Substantially all of the Company's assets relate to banking and
are monetary in nature. Therefore, they are not impacted by
inflation in the same manner as companies in capital intensive
industries. During a period of rising prices, a net monetary
asset position results in loss in purchasing power and
conversely a net monetary liability position results in an
increase in purchasing power. In banks, monetary assets
typically exceed monetary liabilities and therefore, as prices
have increased over the past year, financial institutions
experienced a modest decline in the purchasing power of their
assets.
Interest Rate Sensitivity
- -------------------------
The following table presents the Company's interest rate
sensitivity position using the static gap method at December 31,
1996 (dollars in thousands):
0 - 3 4 - 12 1 - 5 Over
Months Months Years 5 Years Total
--------- --------- --------- --------- ---------
Interest earning assets:
- ------------------------
Investment securities
(all securities
available-for-sale):
Taxable $ 20,891 $ 16,799 $ 52,675 $ 41,207 $ 131,572
Tax-exempt 251 1,676 3,913 10,371 16,211
--------- --------- --------- --------- ---------
Total 21,142 18,475 56,588 51,578 147,783
Federal funds sold 2,100 2,100
Loans 148,703 124,370 112,958 36,382 422,413
Interest-bearing
deposits with banks 217 217
--------- --------- --------- --------- ---------
Total 151,020 142,845 169,546 87,960 572,513
--------- --------- --------- --------- ---------
Interest-bearing liabilities:
- -----------------------------
Deposits 248,124 104,893 86,289 1,976 441,282
Federal funds purchased 37 37
Securities sold under
agreements to repurchase 16,985 16,985
Short-term Federal Home
Loan Bank borrowings 2,500 2,500
Long-term Federal Home
Loan Bank borrowings 4,120 7,882 13,503 3,695 29,200
--------- --------- --------- --------- ---------
Total 271,766 112,775 99,792 5,671 490,004
--------- --------- --------- --------- ---------
Interest
sensitivity $ (99,604) $ 30,070 $ 69,754 $ 82,289 $ 82,509
========= ========= ========= ========= =========
The Interest Rate Sensitivity table above shows that the Company
is in a net asset sensitive position. In theory, this means
that if interest rates increase, the Company's net income will
increase over time. Conversely, if interest rates decline, so
too will net income. The above table allocates interest rate
sensitivity within various time frames. Within zero to three
months, the Company is liability sensitive and all other
categories are asset sensitive. Management monitors the asset
and liability sensitivity through the ALCO and uses this data to
make appropriate strategic decisions.
In addition to the interest rate sensitivity schedule and
asset/liability repricing schedules, management has recently
added simulation modeling to its analysis of interest rate risk.
This combination provides dynamic information concerning the
Company's balance sheet structure in different interest rate
environments. When using simulation modeling, assumptions based
on anticipated market pricing are made to interest-earning
assets and interest-bearing liabilities. These adjustments more
accurately determine the interest rate risk of the Company. In
1996, the Company implemented in-house technology, which
provides more simulation modeling to assist the ALCO in terms of
balance sheet structure and interest rate risk management.
As part of its asset/liability strategies, the Company may use
certain off-balance sheet derivatives to manage interest rate
risks. In February 1995, the Company paid a $195,000 premium
for interest rate floors with a total notional value of
$20 million. The interest rate floors require the counter-party
to pay the difference between the specified floor rate and
an index rate. The Company receives nothing if the index rate
exceeds the specified floor rate. The Company is subject to
the risk that the effect of changes in interest rates will
cause the Company to earn less than the current market rates
on the commercial loans associated with these floors. These
interest rate floors also subject the Company to the risk that
the counter-parties may fail to perform. To minimize this
credit risk, the Company only enters into these types of
transactions with high-quality, financially secure financial
entities. The exposure to credit risk is substantially less
than the notional principal amounts since only the interest rate
differential is received and the premium was paid at the
inception. In 1996, due to interest rates being below the
indexed "strike" rate on the interest rate floors for all of
1996, the Company experienced a modest enhancement to net
interest margin and increased net interest income. These
agreements expire in February 1998 and did not materially affect
net income in 1996.
Outlook for 1997
- ----------------
Management is excited with the Company's future potential and
the plans for 1997. Operating results for 1996 represent
management's commitment to improved financial performance. The
consistent earnings record has positioned the Company to achieve
established goals and enhance investor return. Management feels
the current combination of people and technology has positioned
the Company well for future customer service challenges.
Continued investments in technology provide the opportunity to
compete at higher levels than other financial institutions of
similar size.
Many goals have been established for future operations, most of
which focus on customer service enhancement as a means of
increasing shareholder value. In addition to providing superior
customer service, management feels growth into new markets, as
well as further penetration of existing markets, is a priority
of the Company. In 1997, the first quarter acquisition of
Russell Federal in Kentucky and the expected completion of a
full-service office in Baltimore, Ohio, are evidence of the
Company's commitment.
The Banking Center Acquisition and its associated deposits in
1996 provided increased funding sources and new markets for the
Company. Although virtually no loans were assumed, the markets
of the Banking Center Acquisition have produced nearly $10
million in new loans. Management believes significant
opportunities exist for future growth in loans. In addition,
the Company has retained nearly all of the deposits purchased in
the Banking Center Acquisition, one of the main strategic goals
of the purchase. Management looks forward to continuing the
development of these markets and is confident the performance of
the new offices is an enhancement to the future performance of
the Company.
Recent technological advances should provide a more efficient
product delivery system to our customers. Investment in a
PC-based system for the Company's customer service
representatives ("CSR's") was completed in 1996, which allows
each CSR to be connected to the Company-wide electronic network
that provides a faster, more efficient method of serving our
customers. The system expands the integration of the Company's
financial information and enhances customer service through
readily available product information. Management believes the
Company is prepared for an electronic distribution system of the
future.
The Company's balance sheet growth and future leveraging of
equity is a management focus for 1997. Future loan growth will
rely on the Company's ability to serve both existing markets
(and markets to be penetrated via acquisition) and selected
customers outside those traditional geographic markets.
Construction loans started in 1996 through low-income housing
projects in southeastern Ohio and expanded opportunities for
construction of model homes outside of the Company's geographic
markets should provide strong future revenue streams. Also,
management expects loan activity in the Russell Federal market
to boost loan balances. Management is comfortable with the
current loan to deposit ratio of 83.70% and expects the loan to
deposit ratio to remain stable in early 1997 and decrease
slightly throughout the year due to the increase in deposits
assumed through acquisition.
External acquisitions will play an important role in the results
of operations in 1997. In January 1997, the Company completed
the acquisition of Russell Federal in northeastern Kentucky
along the Ohio River. Management plans to continue Russell
Federal's operation as a savings bank subsidiary with continuity
of management, officers and directors. At December 31, 1996,
Russell Federal had over $28 million in assets and deposits
exceeding $19 million, and operated one full-service office.
Russell Federal represents the first thrift-chartered subsidiary
of the Company. As a recently converted mutual savings bank,
Russell Federal has a substantial capital base. The Company's
management anticipates leveraging its capital base to increase
Russell Federal's earnings potential. The tri-state markets of
southern Ohio, northeastern Kentucky, and western West Virginia
offer expansive growth opportunities and represent some of the
biggest urban markets the Company serves.
In early 1997 the Company plans to complete the Baltimore
Banking Center Acquisition. In the transaction, Peoples Bank
will assume approximately $17 million in deposits. This new
full-service office will allow the Company to expand central
Ohio operations and complement our existing business production
office in Licking County, one of the Company's primary producers
of commercial and real estate loans. Baltimore is located in
Fairfield County and is part of one of the fastest growing
sectors of Ohio and will add a deposit-gathering presence in
central Ohio for the Company, creating a synergy for efforts in
this area. Amortization of intangibles related to this
acquisition are not expected to have a material impact on future
results of operations.
Russell Federal and the Baltimore Banking Center Acquisition
represent the Company's intention to continue to expand its
geographic customer service area. Future acquisitions, if they
occur, may not be limited to geographic location or proximity to
current markets, rather they will depend upon financial service
opportunities that strengthen the core competencies developed by
the Company. Management considers mergers and acquisitions to
be a viable method of enhancing the Company's earnings potential
and will continue to pursue appropriate business opportunities
as they develop.
The recent increase in loan balances has also spurred growth in
delinquencies and net chargeoffs. Consumer loan chargeoffs
continue to comprise the majority of the Company's loan losses
and delinquencies in other loans such as commercial loans have
increased modestly in recent quarters and as a result, net
chargeoffs in this category slightly increased in late 1996.
Management feels consumer chargeoffs have stabilized and that
the current allowance for loan losses is adequate to cover
potential chargeoffs as they occur, based on the inherent risk
in the remainder of the loan portfolio. The 1997 provision for
loan losses is expected to remain at 1996 levels for the near
term and may be affected by the delinquencies in all loan
categories.
Enhanced non-interest income and controlled non-interest expense
are critical to the success of the Company and is measured in
the financial services industry by the efficiency ratio. For
the year ended December 31, 1996, the Company's efficiency ratio
was 53.89%, compared to 57.62% for the same period last year.
Management will continue to focus on its efficiency ratio as a
method of enhancing profitability and strives to reach 50%
efficiency ratio in 1997 through income growth and leveraging of
technology and existing delivery resources.
The interest rate environment will play an important role in the
future earnings of the Company. Net interest income in 1996
reached record levels. In 1997, management expects pressures on
net interest margin to continue. However, due to the structure
of the balance sheet and other off-balance sheet items,
management estimates net interest income to remain level or
modestly increase in 1997. The 1997 acquisitions could enhance
net interest income depending on how quickly the Company can
invest the acquired deposits in interest-earning assets with
acceptable yields. Movements in interest rates continue to
impact the performance of financial institutions but the Company
does not solely manage its balance sheet based upon interest
rate forecasts. Through its ALCO, management evaluates the
balance sheet and monitors earnings performance, as well as
effectiveness of its liquidity policy. The group also monitors
net interest income, sets pricing guidelines, and manages
interest rate risk for the Company.
Management continues to strive for both traditional and
non-traditional methods to increase the Company's earnings and
strengthen the commitment to the communities we serve. As an
example, in 1996, Peoples Bank entered into an agreement to fund
a low-income housing project in a historic district of Marietta,
Ohio. As a part of the agreement, Peoples Bank agreed to fund
the construction of the project (expected to be completed in
mid-1997) and participate as an equity contributor to the
project. In general terms, the Company can anticipate historical
tax credits in 1997 once the structure is certified as a
historically rehabilitated building (estimated mid to late 1997
if construction occurs as planned). In addition, low-income
housing tax credits can be expected over future periods. This
project will lower the Company's effective tax rate in 1997.
The rapid changes in banking combined with increased competition
from all arenas have caused our organization to rethink the way
we do business. A strong customer focus has been identified
as key to the continued future growth, as the Company will
continue to build a "Sales and Service" delivery process
in 1997, representing a renewed commitment to emphasizing
our existing strength in serving our customers. The new
emphasis is designed to enhance our staff of associates with
the ability to serve the changing needs of our customers over
their lifetimes.
Management concentrates on return on equity and earnings per
share objectives, plus other methods, to measure and direct the
performance of the Company. Many industries have gravitated
towards performance-based compensation for their associates, and
in 1997, the Company will adopt a new incentive plan for all
associates. This plan is designed to enhance the earnings
potential of the Company and increase shareholder wealth based
on several growth and efficiency measurements, creating an
environment where each employee has a personal stake in the
overall performance of the Company. Management is excited with
the unlimited potential of the new incentive program and benefit
to the shareholder. While past results are not an indication of
future earnings, management feels the Company is positioned to
maintain performance of normal operations in 1997.
Comparison of 1995 to 1994
- --------------------------
The Company reported an increase in net income of 5.3%, to
$6,050,000 in 1995 from $5,748,000 in 1994. This increase in
earnings provided primary and fully diluted earnings per share
of $1.73 and $1.72, respectively, for the year ended December
31, 1995. Assets grew to over $543 million, a 9.1% increase
from 1994 total assets of $498 million. For the year ended
December 31, 1995, return on average assets was 1.15%, a decline
of five basis points from the 1994 ratio 1.20%. Return on
stockholders' equity declined to 12.33%. The primary reason for
these declines was expense related to an early retirement
program offered to qualified employees in late 1995.
From year-end 1994 to December 31, 1995, the Company's asset
growth occurred primarily in the area of investment securities,
which increased $32,343,000 (or 32.5%) to $131,762,000 at
year-end 1995. In addition, total gross loans grew $18,173,000
(or 5.0%) to nearly $380 million. Funding for these increases
was provided by deposit growth and short-term borrowings. Total
deposits grew to over $429 million, a 6.3% increase over the
December 31, 1994 balance of $403,819,000. The growth in
short-term borrowings consisted primarily of advances from the
FHLB. Short-term borrowings rose 68.3% to $33,276,000 at
December 31, 1995. Long-term borrowings, comprised mostly of
FHLB borrowings with maturities greater than one year, remained
relatively constant, totaling $23,142,000 at December 31, 1995.
The growth in loan volume and investment securities produced an
increase in total average earnings assets. Total average
earning assets increased from $444,602,000 at December 31, 1994
to $493,072,000 at December 31, 1995, an increase of 10.9%. From
1995 to 1994, the average yield associated with total average
earnings assets also grew to 8.9% from 8.3%. The average yield
on loans rose from 8.6% at December 31, 1994, to 9.5% at
December 31, 1995. However, 1995 average assets yield increases
were more than offset by a corresponding increase in the average
rate associated with deposits and borrowed funds from 1994 to
1995. Interest revenue and expense both increased at nearly the
same rate during 1995, which resulted in a decrease of 0.15% in
the net yield on average earning assets (net interest margin)
from 4.83% in 1994 to 4.68% in 1995.
Non-interest income (excluding gains and losses on sales of
investment securities) increased $99,000 to $4,457,000. Several
categories of non-interest income had increases in 1995 compared
to 1994. During 1995, the Company's Investment and Trust
Division continued its earnings trend and provided a strong
boost to non-interest income. Income from fiduciary activities
totaled $1,751,000 for 1995, an increase of 9.0% compared to
1994. Income related to account service charges increased
$109,000 (or 7.5%) over 1994 to $1,565,000 in 1995. Several
factors contributed to this growth, but is primarily due to
increased revenues from electronic banking fees and other
cost-recovery based fees and charges.
During 1995, the Company recorded net gains of $24,000 resulting
from the sales of investment securities. This is in contrast to
the net loss of $237,000 recorded on the sales of investment
securities in 1994. During 1994 management elected to sell some
of the lower yielding investments in its available-for-sale
investment portfolio, and replace those securities with
higher-yielding instruments. This opportunity to improve the
overall yield of the portfolio was available due to increases in
market interest rates during 1994.
In December 1995, the Company recognized the results of a
voluntary early retirement program to certain qualifying
employees representing approximately seven percent of the
Company's employee base. All employees eligible for the program
accepted the offer and as a result, the Company recognized a
charge to salaries and employee benefits of $777,000. This
expense effectively decreased 1995 net income approximately
$513,000, which impacted comparative results to 1995.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
- ---------------------------------------------------------------
The statements in this Annual Report which are not historical
fact are forward looking statements that involve risks and
uncertainties, including, but not limited to, the interest rate
environment, the effect of federal and state banking and tax
regulations, the effect of economic conditions, the impact of
competitive products and pricing, and other risks detailed in
the Company's Securities and Exchange Commission filings.
PEOPLES BANCORP INC.
====================
DIRECTORS
- ---------
Dennis D. Blauser
President, Blauser Energy Corp.
George W. Broughton
Executive Vice President/Sales and Marketing, Broughton Foods Company
Wilford D. Dimit
Owner, First Settlement Square
Robert E. Evans
President and Chief Executive Officer, Peoples Bancorp Inc.
Barton S. Holl
Chairman of the Board, Logan Clay Products
Rex E. Maiden
Chairman of the Board, Maiden & Jenkins Construction Co.
Norman J. Murray
Retired, The Airolite Company
James B. Stowe
Chairman of the Board, Stowe Truck and Equipment Company
Paul T. Theisen
Attorney, Theisen, Brock, Frye, Erb, & Leeper Co., L.P.A.
Thomas C. Vadakin
President, Vadakin, Inc.
Joseph H. Wesel, Chairman
Chairman of the Board and Chief Executive Officer
Marietta Automotive Warehouse, Inc.
Directors Emeritus
- ------------------
Jewell Baker
R. Neil Christy
William K. Hamer
William E. McKinney
Fred R. Price
OFFICERS
- --------
Robert E. Evans
President and Chief Executive Officer
Carol A. Schneeberger
Vice President, Operations
Rolland B. Swart
Vice President, Business Development
Charles R. Hunsaker
General Counsel
John W. Conlon
Chief Financial Officer
Jeffrey D. Welch
Treasurer
RobRoy Walters
Controller
Ruth I. Otto
Corporate Secretary
Karen V. Clark
Auditor
Johanna Burke
Compliance Officer
Teresa A. Pyles
Security Officer
Mark F. Bradley
Manager of Accounting and External Reporting
THE PEOPLES BANKING AND TRUST COMPANY
=====================================
DIRECTORS
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Dave M. Archer
President, Pioneer Pipe, Inc.
Dennis D. Blauser
President, Blauser Energy Corp.
George W. Broughton
Executive Vice President/Sales and Marketing, Broughton Foods Company
Wilford D. Dimit
Owner, First Settlement Square
Robert E. Evans
President and Chief Executive Officer
Brenda R. Jones, M.D.
Medical Director, Marietta Ophthalmology Associates, Inc.
Harold D. Laughlin
Owner, Laughlin Music and Vending
Rex E. Maiden
Chairman of the Board, Maiden & Jenkins Construction Co.
Norman J. Murray, Chairman
Retired, The Airolite Company
T. Pat Sauber
Owner, McDonald's Restaurants
James B. Stowe
Chairman of the Board, Stowe Truck and Equipment Company
Paul T. Theisen
Attorney, Theisen, Brock, Frye, Erb, & Leeper Co., L.P.A.
Thomas C. Vadakin
President, Vadakin, Inc.
Joseph H. Wesel, Chairman
Chairman of the Board, Marietta Automotive Warehouse, Inc.
Directors Emeritus
- ------------------
R. Neil Christy
William K. Hamer
William E. McKinney
OFFICERS
- --------
Executive Officers
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Robert E. Evans
President and Chief Executive Officer
David B. Baker
President, Investment and Trust Division
John W. Conlon
Chief Financial Officer and Treasurer
Larry E. Holdren
Executive Vice President, Director of Human Resources
Robert A. McKnight
Executive Vice President, Lending
Joseph S. Yazombek
Executive Vice President, Mortgage Lending
Banking and Lending
- -------------------
John L. Cornett
Vice President, MGM Division
Carol S. Herrold
Vice President, Athens Division
John A. King
Vice President
William L. Malster
Vice President
Jerald L. Post
Vice President
David M. Redrow
Vice President, Licking Co.
David L. Batten
Assistant Vice President
Joseph P. Flinn
Assistant Vice President, Personal Loan Manager
Betty L. Reynolds
Assistant Vice President
Larry P. Smith
Assistant Vice President
Stuart C. Goldsberry
Private Banking Manager
Sondra K. Herlan
Loan Officer
Cathleen S. Knox
Loan Officer
Cathy J. Linscott
Loan Officer
Beverly C. Mellinger
Loan Officer
Charles V. Robinson, Jr.
Loan Officer, Credit Administration
Jonathan T. Schenz
Loan Officer
Operations
- ----------
Charles R. Hunsaker
Vice President and General Counsel
Susan L. Corcoran
Assistant Vice President, Operations
Mary Ann Mitchell
Assistant Vice President
Stephen L. Nulter
Assistant Vice President, Information Systems
Charles A. Snodgrass
Assistant Vice President
Mark F. Bradley
Manager of Accounting and External Reporting
Julie L. Giffin
Manager, Account Services
Karen L. Mills
Secretary to the Board
Ruth I. Otto
Assistant Secretary to the Board
RobRoy Walters
Controller
Electronic Banking
- ------------------
R. Joe Cowdery
Vice President
Paul A. Huffman
Assistant Vice President
Investment and Trust Division
- -----------------------------
David B. Baker
President, Investment and Trust Division
Rose N. Haas
Vice President and Senior Investment Officer
Jeffrey D. Welch
Vice President
Beth Ann Worthington
Vice President, Personal Trust Officer
Ronald L. Close
Financial Planning Officer
Richard J. Flanagan
Assistant Investment Officer
Kelly A Sheppard
Assistant Trust Officer
Lori O'Connor
Assitant Trust Officer
Joy L. Bowen
Assitant Trust Officer
THE FIRST NATIONAL BANK OF SOUTHEASTERN OHIO
============================================
DIRECTORS
- ---------
Larry J. Armstrong
Armstrong and Smith
Carl Baker, Jr.
Co-Owner, B & N Coal Company
Robert E. Evans
President and Chief Executive Officer
Peoples Bancorp Inc.
Wilfred O. Hill
Retired, Oil and Gas
Charles R. Hunsaker
General Counsel
H. Clayton John
Vice Chairperson
James D. McKinney
Retired Superintendent, Morgan County Schools
Carol A. Schneeberger, Chairperson
Vice President, Operations, Peoples Bancorp Inc.
Paul T. Theisen
Attorney, Theisen, Brock, Frye, Erb, & Lepper Co., L.P.A.
Rick D. Turner
President and Chief Executive Officer
Directors Emeritus
- ------------------
Marcus Gant
OFFICERS
- --------
Rick D. Turner
President and Chief Executive Officer
Kenneth E. Shafer
Executive Vice President and Cashier
Catherine R. Ogle
Vice President, Lending
Thomas D. Hesson
Assistant Vice President, Operations
Kristi A. Shafer
Assistant Vice President, Marketing and Business Development
Michael J. Schramm
Assistant Vice President, Manager, McConnelsville Office
Tori J. Allen
Personal Banking Officer
Cheryl L. Hanson
Loan Officer, Manager, Chesterhill Office
Teresa A. Pyles
Security Officer
Ruth I. Otto
Secretary to the Board
Karen L. Mills
Assistant Secretary to the Board
Charles R. Hunsaker
General Counsel
RUSSELL FEDERAL SAVINGS BANK
============================
DIRECTORS
- ---------
David B. Baker
President, Investment and Trust Division
The Peoples Banking and Trust Company
Charles M. Daniels
Attorney-at-Law
Robert E. Evans, Chairman
Chief Executive Officer, Peoples Bancorp Inc.
Dr. Lewis E. Franz
Dentist
Charles R. Hunsaker
General Counsel
Peoples Bancorp Inc.
John T. Lawson
Retired, Lawson's Hardware
James D. McConnell
Senior Staff Engineer, AK Steel
Norman R. Menshouse
Executive Vice President, Russell Federal Savings Bank
Carol A. Schneeberger
Vice President, Operations, Peoples Bancorp Inc.
RobRoy Walters
Chief Executive Officer, Russell Federal Savings Bank
Joseph H. Wesel
Chairman of the Board, Marietta Automotive Warehouse, Inc.
Joseph S. Yazombek
Executive Vice President, The Peoples Banking and Trust Company
OFFICERS
- --------
RobRoy Walters
President and Chief Executive Officer
Norman R. Menshouse
Executive Vice President
Ronald L. Fraley
Vice President, Treasurer and Secretary to the Board
Shirley A. Menshouse
Vice President and Corporate Secretary