FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
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(Exact name of Registrant as specified in its charter)
Ohio 31-0987416
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614) 373-3155
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Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the
issuer's class of Common Stock, as of August 1, 1997: 3,451,835.
PART I - FINANCIAL INFORMATION
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ITEM 1
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The following Condensed Consolidated Balance Sheets,
Consolidated Statements of Income, and Consolidated Statements
of Cash Flow of Peoples Bancorp Inc. (the "Company") and
subsidiaries, reflect all adjustments (which include only normal
recurring accruals) necessary to present fairly such information
for the periods and dates indicated. Since the following
condensed unaudited financial statements have been prepared in
accordance with instructions to Form 10-Q, they do not contain
all information and footnotes necessary for a fair presentation
of financial position in conformity with generally accepted
accounting principles. Operating results for the six months
ended June 30, 1997, are not necessarily indicative of the
results that may be expected for the year ending December 31,
1997. Complete audited consolidated financial statements with
footnotes thereto are included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
PEOPLES BANCORP INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, December 31,
1997 1996
ASSETS
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Cash and cash equivalents:
Cash and due from banks $ 22,389,000 $ 26,200,000
Interest-bearing deposits in other banks 836,000 217,000
Federal funds sold 3,300,000 2,100,000
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Total cash and cash equivalents 26,525,000 28,517,000
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Investment securities (all classified as
available-for-sale, amortized cost of
$145,879,000 at June 30, 1997 and
$145,619,000 at December 31, 1996) 147,856,000 147,783,000
Loans, net of unearned interest 467,445,000 422,413,000
Allowance for loan losses (7,298,000) (6,873,000)
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Net loans 460,147,000 415,540,000
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Bank premises and equipment, net 11,321,000 11,508,000
Other assets 15,668,000 13,287,000
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Total assets $661,517,000 $616,635,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Deposits:
Non-interest bearing $ 58,678,000 $ 63,410,000
Interest bearing 486,652,000 441,282,000
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Total deposits 545,330,000 504,692,000
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Short-term borrowings:
Federal funds purchased and securities
sold under repurchase agreements 19,175,000 17,022,000
Federal Home Loan Bank term advances 600,000 2,500,000
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Total short-term borrowings 19,775,000 19,522,000
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Long-term borrowings 30,601,000 29,200,000
Accrued expenses and other liabilities 6,896,000 7,028,000
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Total liabilities 602,602,000 560,442,000
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Stockholders' Equity
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Common stock, no par value, 12,000,000
shares authorized - 3,451,708 shares
issued at June 30, 1997 and 3,445,075
issued at December 31, 1996, including
shares in treasury 34,442,000 34,349,000
Net unrealized holding gain on
available-for-sale securities, net of
deferred income taxes 1,305,000 1,428,000
Retained earnings 23,355,000 20,470,000
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59,102,000 56,247,000
Treasury stock, at cost, 5,640 shares
at June 30, 1997 and 2,000 shares
at December 31, 1996 (187,000) (54,000)
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Total stockholders' equity 58,915,000 56,193,000
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Total liabilities and
stockholders' equity $661,517,000 $616,635,000
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PEOPLES BANCORP INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Interest income $13,122,000 $11,725,000 $25,884,000 $23,041,000
Interest expense 6,106,000 5,416,000 12,024,000 10,783,000
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Net interest income 7,016,000 6,309,000 13,860,000 12,258,000
Provision for loan losses 641,000 435,000 1,229,000 795,000
----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses 6,375,000 5,874,000 12,631,000 11,463,000
Other income 1,462,000 1,271,000 2,880,000 2,433,000
(Loss) gain on sale of
securities (2,000) 0 (31,000) 26,000
Other expenses 4,721,000 4,299,000 9,426,000 8,312,000
----------- ----------- ----------- -----------
Income before income
taxes 3,114,000 2,846,000 6,054,000 5,610,000
Federal income taxes 989,000 875,000 1,927,000 1,758,000
----------- ----------- ----------- -----------
Net income $ 2,125,000 $ 1,971,000 $ 4,127,000 $ 3,852,000
=========== =========== =========== ===========
Earnings per share $0.59 $0.57 $1.16 $1.11
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Weighted average shares
outstanding (primary) 3,553,482 3,471,082 3,540,317 3,465,881
----------- ----------- ----------- -----------
Cash dividends declared $621,000 $531,000 $1,241,000 $1,061,000
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Cash dividend per share $0.18 $0.15 $0.36 $0.31
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PEOPLES BANCORP INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended
June 30,
1997 1996
Cash flows from operating activities:
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Net income $ 4,127,000 $ 3,852,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,229,000 795,000
Loss (gain) on sale of investment securities 31,000 (26,000)
Depreciation, amortization, and accretion 1,294,000 1,397,000
Increase in interest receivable (216,000) (344,000)
(Decrease) increase in interest payable (72,000) 382,000
Deferred income tax benefit 174,000 (100,000)
Deferral of loan origination fees and costs 32,000 50,000
Other, net (696,000) (1,381,000)
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Net cash provided by operating activities 5,903,000 4,625,000
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Cash flows from investing activities:
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Purchases of available-for-sale securities (9,774,000) (39,028,000)
Proceeds from sales of available-for-sale
securities 4,204,000 4,528,000
Proceeds from maturities of available-for-sale
securities 8,589,000 10,176,000
Net increase in loans (24,333,000) (19,871,000)
Expenditures for premises and equipment (354,000) (904,000)
Proceeds from sales of other real estate owned 28,000 0
Business acquisitions, net of cash received 4,679,000 68,004,000
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Net cash used in investing activities (16,961,000) 22,905,000
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Cash flows from financing activities:
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Net (decrease) increase in non-interest bearing
deposits (7,300,000) 1,269,000
Net increase in interest-bearing deposits 15,959,000 (10,737,000)
Net increase (decrease) in short-term borrowings 253,000 (10,662,000)
Proceeds from long-term borrowings 3,000,000 0
Payments on long-term borrowings (1,599,000) (1,634,000)
Cash dividends paid (1,031,000) (960,000)
Purchase of treasury stock (289,000) (235,000)
Proceeds from issuance of common stock 73,000 329,000
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Net cash provided by financing activities 9,066,000 (22,630,000)
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Net (decrease) increase in cash and cash
equivalents (1,992,000) 4,900,000
Cash and cash equivalents at beginning of year 28,517,000 20,994,000
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Cash and cash equivalents at end of period $26,525,000 $25,894,000
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NOTES TO FINANCIAL STATEMENTS
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Basis of Presentation
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The accounting and reporting policies of Peoples Bancorp Inc.
and Subsidiaries (the "Company") conform to generally accepted
accounting principles and to general practices within the
banking industry. The Company considers all of its principal
activities to be banking related. The preparation of the
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ
from those estimates.
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
1. Acquisitions
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On June 17, 1997, the Company and Gateway Bancorp, Inc.
("Gateway"), a Kentucky corporation headquartered in
Catlettsburg, Kentucky, entered into a definitive agreement
providing for the acquisition of Gateway by the Company, for a n
aggregate purchase price of $20,554,000 in stock and cash.
Gateway is a savings and loan holding company with one thrift
subsidiary, Catlettsburg Federal Savings Bank, a federally
chartered stock savings bank with its main office in
Catlettsburg, Kentucky. At June 30, 1997, Gateway had total
assets of $63.8 million, total deposits of $46.3 million, and
total shareholders equity of $17.3 million.
The Gateway acquisition will be accounted for using the
purchase method of accounting. Accordingly, Gateway's assets
and liabilities will be adjusted to their estimated fair values
at the date of consummation and its results of operations will
be included in the Company's consolidated results of operations
from the date of consummation. The transaction is expected to
close in the fourth quarter of 1997 and is not expected to
materially impact the Company's financial position or results of
operations.
On February 28, 1997, The Peoples Banking and Trust Company
("Peoples Bank"), one of the Company's subsidiaries, acquired
one full-service banking office located in Baltimore, Ohio from
an unrelated financial institution. In the transaction, Peoples
Bank assumed approximately $12.5 million in deposits. This
office is located in Fairfield County in central Ohio and
currently operates a full-service banking office with an ATM.
On January 1, 1997, the Company purchased Russell Federal
Savings Bank ("Russell Federal") in Russell, Kentucky for
approximately $9.25 million in cash. At December 31, 1996,
Russell Federal had total assets of $28.0 million, loans of
$21.5 million (primarily real estate loans), deposits of $19.5
million (interest bearing deposits including savings accounts
and certificates of deposit), and shareholders' equity of $8.0
million. 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 serves the financial needs of customers in
northeast Kentucky, in particular Greenup and Boyd Counties, its
primary market area. Its principal products include savings
accounts, time certificates of deposit and commercial and
residential real estate loans. With one office located on Ferry
Street in the city of Russell, services are provided by a
walk-in office and a Motor Bank.
On April 26, 1996, Peoples Bank acquired three full-service
banking offices and assumed approximately $73.9 million in
deposits from an unaffiliated institution. The offices are
located in southeastern Ohio in the cities of Gallipolis,
Pomeroy, and Rutland, Ohio, and serve the counties of Meigs
(Ohio), Gallia (Ohio) and Mason (West Virginia). The Gallipolis
office is located downtown in Gallipolis and currently operates
a full-service office, Motor Bank, and an automated teller
machine. A full-service office and separate Motor Bank are
located in downtown Pomeroy. An automated teller machine is
also located in Pomeroy outside a local convenience store. The
Rutland office is a full-service and Motor Bank facility.
2. New Accounting Pronouncements
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In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement on Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125") that provides
accounting and reporting standards for transfers of financial
assets and extinguishments of liabilities. SFAS No. 125
significantly changes the accounting rules for determining
whether a transfer represents a sale or secured borrowing
transaction. Portions of SFAS No. 125 were applicable for the
Company effective January 1, 1997 and did not have a material
impact on the Company's financial statements.
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. In general, these are the transactions
addressed by SFAS No. 125 that apply specifically to the
Company's current operations but will not be effective for
transfers of assets until beginning after December 31, 1997.
The adoption of Statement No. 125 as it relates to securities
lending, repurchase agreements, dollar rolls, and other similar
transactions is not expected to have a material effect on the
Company's future financial statements.
In February 1997, the FASB issued Statement on Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"), which simplifies the computation of earnings per share by
replacing primary earnings per share with basic earnings per
share. Under the new standard, basic earnings per share and
diluted earnings per share will be presented on the face of the
income statements. The provision of SFAS No. 128 will be
effective for periods ending after December 15, 1997. The
Company does not expect the application of SFAS No. 128 to
produce earnings per share amounts different from those
presented under existing standards.
ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
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SELECTED FINANCIAL DATA
The following data should be read in conjunction with the
unaudited consolidated financial statements and the management
discussion and analysis that follows.
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
SIGNIFICANT RATIOS
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Net income to:
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Average assets* 1.30% 1.34% 1.27% 1.34%
Average shareholders' equity* 14.80% 15.20% 14.46% 14.82%
Net interest margin* 4.75% 4.80% 4.73% 4.77%
Efficiency ratio* 51.80% 53.16% 52.44% 53.76%
Average shareholders' equity to
average assets 8.78% 8.80% 8.78% 9.03%
Loans net of unearned interest to
deposits (end of period) 85.72% 80.74% 85.72% 80.74%
Allowance for loan losses to loans
net unearned interest (end
of period) 1.56% 1.69% 1.56% 1.69%
Capital ratios:
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Tier I capital ratio 11.10% 11.47% 11.10% 11.47%
Risk-based capital ratio 12.36% 12.73% 12.36% 12.73%
Leverage ratio 7.68% 7.76% 7.68% 7.76%
Cash dividends to net income 29.23% 26.94% 30.07% 27.54%
PER SHARE DATA
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Book value per share $17.10 $15.07 $17.10 $15.07
Earnings per share $ 0.59 $ 0.57 $ 1.16 $ 1.11
Cash dividends per share $ 0.18 $ 0.15 $ 0.36 $ 0.31
* Net income to average assets, net income to average
shareholders' equity, net interest margin, and efficiency ratio
are presented on an annualized basis.
Net interest margin is calculated using fully tax equivalent net
interest income as a percentage of average earning assets.
Efficiency ratio is a ratio of non-interest expense (less
amortization of intangibles) as a percentage of fully tax
equivalent net interest income plus non-interest income
(excluding gains).
Introduction
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The following discussion and analysis of the consolidated
financial statements of the Company is presented to provide
insight into management's assessment of the financial results.
The Company's subsidiaries, The Peoples Banking and Trust
Company ("Peoples Bank"), The First National Bank of
Southeastern Ohio ("First National Bank"), Russell Federal
Savings Bank ("Russell Federal"), and The Northwest Territory
Life Insurance Company ("Northwest Territory"), provide
financial services to individuals and businesses primarily
within the Company's market area.
Peoples Bank is chartered by the state of Ohio and subject to
regulation, supervision, and examination by the Federal Deposit
Insurance Corporation ("FDIC") and the Ohio Division of Banks.
First National is a member of the Federal Reserve System and
subject to regulation, supervision, and examination by the
Office of the Comptroller of the Currency ("OCC"). Russell
Federal is a member of the Federal Home Loan Bank, and is
subject to the 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.
References will be found in this Form 10-Q to three separate
acquisition transactions that have impacted the Company's
results of operations. In April 1996, Peoples Bank completed
the acquisition of three full-service banking centers and
approximately $73.9 million in deposits of an unaffiliated
financial institution. Referred hereafter as "Banking Center
Acquisition", the three full-service branches are located in the
cities of Pomeroy, Gallipolis, and Rutland, Ohio. On January 1,
1997, the Company purchased Russell Federal in Russell, Kentucky
(referred hereafter as "Russell Federal Acquisition"), for $9.25
million in cash. At December 31, 1996, Russell Federal had
total assets of $28.0 million, loans of $21.5 million (primarily
real estate loans), deposits of $19.5 million (interest bearing
deposits including savings accounts and certificates of
deposit), and shareholders' equity of $8.0 million. On February
28, 1997, Peoples Bank acquired one full-service banking office
located in Baltimore, Ohio (referred to hereafter as "Baltimore
Banking Center Acquisition"), from an unaffiliated financial
institution. In the transaction, Peoples Bank assumed
approximately $12 million in deposits. This office is located
in Fairfield County in central Ohio and currently operates a
full-service banking office with an ATM.
The Banking Center Acquisition, the Russell Federal
Acquisition, and the Baltimore Banking Center Acquisition will
be referred to hereafter in the aggregate as "Acquisitions".
In addition to the Acquisitions, on June 17, 1997, the Company
and Gateway Bancorp, Inc. ("Gateway"), a Kentucky corporation
headquartered in Catlettsburg, Kentucky, entered into a
definitive agreement providing for the acquisition of Gateway by
the Company, for an aggregate purchase price of $20,554,000 in
stock and cash. Gateway is a savings and loan holding company
with one thrift subsidiary, Catlettsburg Federal Savings Bank, a
federally chartered stock savings bank with its main office in
Catlettsburg, Kentucky. At June 30, 1997, Gateway had total
assets of $63.8 million, total deposits of $46.3 million, and
total shareholders equity of $17.3 million. The transaction is
expected to close in the fourth quarter of 1997 and is not
expected to materially impact the Company's financial position
or results of operations.
RESULTS OF OPERATIONS
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Overview of the Income Statement
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For the six months ended June 30, 1997, the Company earned
$4,127,000, a 7.1% increase from $3,852,000 in net income for
the same period last year. For the quarter ended June 30, 1997,
the Company recorded net income of $2,125,000, a 7.8% increase
from $1,971,000 in second quarter 1996. In the second quarter,
earnings per share increased $0.02 from $0.57 last year to $0.59
in 1997. For the first half of 1997, earnings per share reached
$1.16, up $0.05 from $1.11 for the same period last year.
Second quarter net income increased for several reasons,
however most of the increase is due to the growth of the
Company's earning asset base through the Acquisitions and the
Company's ability to maintain consistent net interest margin.
Net interest income totaled $7,016,000, up $707,000 (or 11.2%)
compared to last year's second quarter. The Company's net
interest margin was 4.75% in the second quarter, down from
1996's second quarter ratio of 4.80%. This decrease is due to
the impact of the Russell Acquisition as well as increased
competition for loans and deposits.
For the six months ended June 30, 1997, provision for loan
losses totaled $1,229,000, up 54.6% compared to the same period
last year. Second quarter provision for loan losses totaled
$641,000 compared to $435,000 in 1996's second quarter.
Management has provided increased provision for loan losses in
recognition of strong loan growth as described in later sections.
Non-interest income increased $447,000 (or 18.4%) to $2,880,000
compared to the same quarter last year. For the second quarter,
non-interest income totaled $1,462,000, up $191,000 (or 15.0%)
compared to last year's second quarter. Non-interest expense
totaled $4,721,000 in the second quarter, up $422,000 (or 9.8%)
compared to the same period last year. For the first six months
of 1997, non-interest expense amounted to $9,426,000, up
$1,114,000 (or 13.4%) compared to 1996. Increases in
non-interest income and non-interest expense relate primarily to
the Company's Acquisitions.
Management believes that a comparative approach to financial
reporting should include the discussion of results using a "cash
earnings" method, which removes the after-tax impact of the
amortization of intangibles on the Company's results of
operations and facilitates comparison of the Company with
competitors that make acquisitions using pooling of interest
accounting. For the quarter and six months ended June 30, 1997,
intangible amortization expense totaled $240,000 ($158,000 after
taxes) and $481,000 ($317,000 after taxes), respectively,
compared to $174,000 ($115,000 after taxes) and $219,000
($145,000 after taxes) for the same periods a year earlier. As
a result, cash earnings per share for the quarter ended June 30,
1997, totaled $0.64, up $0.04 compared to the second quarter of
1996's calculation of cash earnings per share. For the first
half of 1997, cash earnings per share reached $1.25, an increase
of $0.10 compared to 1996.
Increased amortization of intangibles in 1997 has had an impact
on the representation of tangible return on assets and equity.
Recent acquisitions have increased the Company's amortization
expense related to goodwill and other intangibles and as a
result, the purchase method of accounting has resulted in a
decrease in earnings per share and other ratios. In order to
provide comparative earnings per share information, management
will supplement future financial analysis with discussion
concerning cash earnings per share, as previously defined.
Interest Income and Expense
- ---------------------------
The Federal Reserve Board increased the discount rate slightly
in early 1997. As a result, the national prime rate moved up 25
basis points and the Company adjusted its base loan rates to
reflect the increase in the national prime rate. These rate
adjustments increased net interest income and made significant
contributions to the Company's revenue streams.
Growth in net interest income continued to fuel the Company's
income growth in recent quarters. Second quarter net interest
income totaled $7,016,000 in 1997 compared to $6,309,000 the
same period one year earlier, up 11.2%. In the second quarter,
interest income totaled $13,122,000 (up $1,397,000 or 11.9%
compared to prior year) and interest expense totaled $6,106,000
(up $690,000 or 12.7% compared to prior year). Continued growth
in higher-yielding loans provided the Company increased net
interest income.
Asset growth and corresponding net interest revenue growth
occurred in the first quarter from the Russell Federal
Acquisition and the Baltimore Banking Center Acquisition.
Second quarter increases in net interest income occurred as a
result of continuing to shift the mix of the Company's earning
assets to higher-yielding assets such as loans.
Average loan balances grew nearly $69 million from second
quarter 1996 to second quarter 1997 and continues to be the
largest earning asset component of the Company's balance sheet.
The yield on earning assets was 8.80% in the second quarter of
1997, compared to 8.77% in the same quarter a year earlier.
Although the cost of funds increased 9 basis points in the
second quarter of 1997 to 4.04%, net interest income grew
through increases in volume.
Net interest margin is calculated by dividing fully-tax
equivalent ("FTE") net interest income by average
interest-earning assets and serves as a performance measurement
of the net interest revenue stream from the Company's balance
sheet. In second quarter 1997, the Company's net interest
margin was 4.75%, compared to 4.80% in second quarter 1996.
This modest decrease compared to prior year net interest margin
can be attributed to increased market competition. Net interest
margin remained stable compared to the first quarter of 1997
total of 4.72%.
During the second quarter, the Company began aggressively
marketing special short-term time deposits to fund loan demand.
The 5-month and 10-month time deposits were priced competitively
in the Company's markets and generated significant funding for
recent asset growth. The 5-month and 10-month specials reached
volume goals in early third quarter 1997, and as a result, the
interest rates on those products were lowered. Management
expects interest rate pressures will continue to challenge the
Company for the remainder of 1997.
Please refer to the "Consolidated Average Balance Sheet and
Analysis of Net Interest Income" table included on page 21 for a
complete quantitative evaluation of the Company's net interest
margin.
In the second quarter, the Company recorded a provision for
loan losses of $641,000, up from $435,000 in second quarter
1996, due to the combination of increased loan volumes and
higher than anticipated consumer loan delinquencies. In recent
months, the Company has experienced decreased consumer credit
delinquencies as a percent of total consumer loans outstanding.
Therefore management expects to maintain the current level of
loan loss provision in the third quarter.
Non-Interest Income
- -------------------
The Company's non-interest income is generated from four
primary sources: income derived from fiduciary activities,
cost-recovery fees related to deposit accounts, electronic
banking revenues, and income generated by the Company's
insurance agency subsidiaries. In the first half and second
quarter of 1997, all of the Company's major sources of
non-interest income increased compared to the same periods a
year earlier. These increases illustrate management's
commitment to continual improvement of the Company's operating
performance through revenue growth associated with a variety of
non-interest income generating activities.
The Company's Investment and Trust Division of Peoples Bank had
a strong quarter for the three months ended June 30, 1997. The
fee structure for fiduciary activities is based primarily on the
fair value of assets under management. Since year-end 1996,
total assets managed have increased nearly $20 million to
approximately $450 million at June 30, 1997. As a result of
growth in market values and in the number of accounts served,
second quarter income generated from fiduciary activities
totaled $528,000, up 4.8% compared to $504,000 of revenue in
second quarter 1996. The Investment and Trust Division
continues to be a leader in fiduciary services for the Company's
market area and a significant contributor to the Company's
increased revenue related to cost-recovery services. Through
six months, revenue from fiduciary activities totaled
$1,032,000, up 9.7% compared to last year's income through June 30.
Deposit account service charge income has also increased in
1997 compared to prior periods, due primarily to the full-year
effect of additional cost-recovery fees from deposits acquired
in the Banking Center Acquisition in the second quarter of 1996.
The Company's fee income generated from deposits is based on
cost recoveries associated with services provided. In the
second quarter of 1997, total account service charge income
reached $509,000, compared to $483,000 for the same period last
year, an increase of 5.4%. In the first six months of 1997,
account service charge income reached $1,052,000, up $176,000
(or 20.1%) over 1996.
Electronic banking has been a service offered to the Company's
customer's for several years, including ATM cards, direct
deposit services, and debit card services. Recently the
financial services industry has increased its focus on
electronic banking products as a method to enhance relationships
with the customer. In the first six months of 1997, the
cost-recovery fees associated with these products and services
have started to impact the Company's non-interest income. In
second quarter 1997, total electronic banking revenue reached
$113,000, up $32,000 (or 39.5%) compared to the same period a
year earlier. For the six months ended June 30, 1997,
electronic banking revenues totaled $223,000, up 44.8% from
$154,000 for the same period in 1996. Increases are due
primarily to revenues related to the debit card program launched
in late 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.
Although the Agencies' results of operations did not have a
material impact on results of the first half of 1997, 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.
In addition to traditional deposit products generating
non-interest income for the Company, an agreement with an
unaffiliated securities dealer has also generated non-interest
income through the receipt of lease payments. Management
expects this non-traditional revenue source to continue to
provide incremental earnings for the Company in the future.
Non-Interest Expense
- --------------------
Maintaining acceptable levels of non-interest expense and
operating efficiency continue to be vital performance objectives
for the Company. For the quarter ended June 30, 1997,
non-interest expense was $4,721,000, an increase of $422,000 (or
9.8%) compared to the same period last year. This increase
relates to the Banking Center Acquisition and management has
initiated steps to leverage non-interest expense associated with
market expansion, and believes non-interest expense levels have
stabilized when compared to first quarter 1997's expense of
$4,705,000.
When comparing 1997 to 1996, it is important to note the
changes to the Company's non-interest expense levels related to
the Acquisitions. The impact of the Acquisitions, including
salaries and employee benefits and amortization of intangibles,
represent the majority of the increase in non-interest expense
for the second quarter. Non-operational items significantly
contributed to the increase in the second quarter and first half
of 1997's non-interest expense. In particular, amortization of
intangibles totaled $240,000 in second quarter 1997, compared to
$174,000 for the same period last year, an increase of $66,000.
Expenses for human resources also increased through the
Acquisitions and expansion of the Company's services and
geographic area. For the quarter ended June 30, 1997, salaries
and benefits expense increased $182,000 (or 9.9%) to $2,016,000
compared to 1996's second quarter. The Acquisitions increased
the number of employees due to the retention of many customer
service associates. At June 30, 1997, the Company had 303
full-time equivalent employees, up from 288 employees at
year-end 1996. Before the combined impact of the Acquisitions,
at March 31, 1996, the Company had 261 employees. Management
will continue to strive to find new ways of increasing
efficiencies and leveraging its resources while concentrating on
maximizing customer service.
The Acquisitions also impacted net occupancy expenses, in
particular depreciation expense. For the quarter ended June 30,
1997, furniture and equipment expenses totaled $375,000, up
$67,000 (or 21.8%) from the same period a year earlier. This
increase can be attributed primarily to the depreciation of the
assets purchased in the Acquisitions as well as increased
depreciation of additional expenditures on technology acquired
in 1996. The Company's increased investment in technology and
other customer-service enhancements will also impact
depreciation expense in the future.
Many categories within non-interest expense remained at levels
comparable to last year's second quarter and first six months.
Management believes that non-interest expense was leveraged
through the first six months and will continue to focus on the
Company's efficiency ratio as a key indicator of performance.
The Company's efficiency ratio totaled 51.80% and 53.16% in the
recent quarter and six months, compared to 52.44% and 53.76% for
the same periods last year. Management expects the efficiency
ratio to continue to modestly improve throughout the remainder
of 1997.
Return on Assets
- ----------------
For the quarter ended June 30, 1997, return on average assets
("ROA") totaled 1.30%, a modest decrease compared to 1.34%
recorded in the same period a year earlier. For the six months
ended June 30, 1997, ROA totaled 1.27% compared to 1.34% in
1996. Decreased ROA in 1997 can be attributed primarily to the
additional amortization expenses related to the Acquisitions.
Also, the Company's Russell Federal Acquisition (a thrift
subsidiary) has caused ROA to decrease slightly in 1997. In
general, the thrift industry has historically performed at lower
ROA levels than commercial banks due to the core competencies
usually associated with the thrift industry. Management plans
to implement changes to the asset mix of Russell Federal to
enhance future ROA. Management anticipates that ROA levels will
remain relatively stable for the remainder of 1997.
Return on Equity
- ----------------
Management believes return on average stockholders' equity
("ROE") is an important indicator of an organization's financial
strength and continues to monitor the performance of the Company
relative to this ratio. The Company's ROE in the second quarter
was 14.80%, down from 15.20% for the same period last year.
The Company's capital is adequate under regulatory and industry
standards and has grown through retention of higher earnings
over the last several quarters, increasing over $5.5 million
since second quarter 1996. As a result, the Company's ROE has
been tempered in the second quarter and first half of 1997.
Management will focus efforts on enhancing ROE through the
remainder of 1997 and into 1998.
On June 12, 1997, the Company's Board of Directors authorized
the Company to repurchase up to 10,000 treasury shares at market
prices. The newly purchased treasury shares will be used in the
Company's stock option programs.
Federal Income Tax Expense
- --------------------------
Federal income taxes increased from $875,000 in second quarter
1996 to $989,000 in 1997's second quarter, a change of $114,000
(or 13.0%) compared to the same period a year earlier. For the
six months ended June 30, 1997, federal income taxes totaled
$1,927,000, an increase of $169,000 (or 9.6%) compared to the
same period a year earlier. These increases can be attributed
to the Company's higher pre-tax income and a modest decrease in
tax-exempt revenue. The Company's effective tax rate is
approximately 32%.
FINANCIAL CONDITION
- -------------------
Overview of Balance Sheet
- -------------------------
Total assets increased from $616.6 million at December 31, 1996
to $661.5 million at June 30, 1997, a growth rate of 7.3%, as
the Company leveraged its capital base through the first quarter
Acquisitions. The increase in assets can be attributed
primarily to the assets acquired in the Russell Federal
Acquisition and the Baltimore Banking Center Acquisition. The
Russell Federal Acquisition boosted the Company's loan balances
by $21.7 million at June 30, 1997. Internal loan growth also
continued its upward trend in the first half of 1997 as the
Company employed more assets into higher-yielding products.
Average loans totaled $458.1 million in second quarter 1997, up
$12.8 million (or 2.9%) compared to the previous quarter.
Total deposits increased $40.6 million (or 8.0%) in the first
half of 1997. The Russell Federal Acquisition and the Baltimore
Banking Center Acquisition comprised the majority of deposit
growth for the Company, totaling nearly $33 million in deposits
at June 30, 1997. In general, the Company has been successful
maintaining the deposit balances purchased in the Acquisitions.
Additional deposit growth occurred in interest-bearing demand
deposits and in particular, certificates of deposits ("CD's"),
which increased over $8 million in the second quarter to $276.4
million at June 30, 1997. In addition to retaining many
maturing CD's, an aggressively priced short-term CD offering
contributed approximately $10 million of new deposits to second
quarter growth.
Since December 31, 1996, total borrowings increased $1.7
million (or 3.5%) to $50.4 million, while stockholders' equity
increased $2.0 million (or 3.6%) to $58.9 million. The Company
purchased $289,000 of treasury shares in the first six months of
1997 and also reissued treasury shares through exercised stock
options, resulting in a total balance of treasury stock of
$187,000 at June 30, 1997.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents totaled $26.5 million at June 30,
1997, down significantly from $39.5 million in cash balances at
the end of the first quarter. As expected, balances at March
31, 1997, were higher than normal due directly to the funds
acquired in the Baltimore Banking Center Acquisition.
Management considers cash balances at June 30, 1997, to be
normal and reflect the shifting of balances to other
higher-yielding assets such as loans.
Total cash and cash equivalents fluctuate on a daily basis due
to transactions in process and other liquidity factors.
Management believes the liquidity needs of the Company are
satisfied by the current balance of cash and cash equivalents,
readily available access to traditional and non-traditional
funding sources, and the portion of the investment and loan
portfolios that matures within one year. These sources will
enable the Company to meet funding obligations and off-balance
sheet commitments as they come due.
Investment Securities
- ---------------------
Investments in securities did not significantly fluctuate
during the second quarter of 1997 and were relatively unchanged
from year-end 1996. At June 30, 1997, investment securities
totaled $147.9 million, up $1.0 million since March 31, 1997.
The Company's entire investment portfolio is classified as
available-for-sale and as a result, changes in interest rates
have more impact to the total valuation of investment
securities. At December 31, 1996, the markup on investment
securities totaled $2.2 million, dropped to $328,000 at March
31, 1997 (due primarily to an increase in the Federal Reserve
discount rate in late first quarter), and increased to $1.3
million at June 30, 1997. However, management believes
securities classified as available-for-sale provide greater
flexibility in management of this portfolio to meet liquidity
needs and other funding obligations as they arise.
The Company's balances in specific investment categories
remained relatively unchanged from year-end 1996. The
investment portfolio primarily is comprised of $74.5 million
invested in US Agencies and mortgage-backed securities. The
Company continues a significant investment in US Treasuries,
which totaled $30.0 million at June 30, 1997, up nearly $4
million since year-end 1996. Tax-exempt investments totaled
$21.8 million at the end of the second quarter compared to
$$22.6 million at year-end 1996.
The impact of the Russell Federal Acquisition increased the
Company's total investment securities by $4.0 million at June
30, 1997. Upon consummation of the Russell Federal Acquisition,
the Company reclassified all of Russell Federal's investment
portfolio to available-for-sale securities to conform to the
Company's investment policy. The majority of Russell Federal's
portfolio is invested in US Treasury and US Agencies securities.
Management monitors the earnings performance and the
effectiveness of the liquidity of the investment portfolio on a
regular basis through Asset/Liability Committee ("ALCO")
meetings. The ALCO 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
- -----
The Company's lending is primarily focused in the southeastern
Ohio, northern West Virginia, and northeastern Kentucky markets,
and consists principally of retail lending, which includes
single-family residential mortgages and other consumer lending.
Since 1993, the Company has generated additional loans in
central Ohio (Licking County) through its loan production
office.
The Company's loan volume grew in early 1997 due primarily to
the Russell Federal Acquisition. At June 30, 1997, Russell
Federal had $21.7 million in loans, up $0.2 million since March
31, 1997.
In the second quarter of 1997, loan originations occurred
primarily in the southeastern and central Ohio markets,
reflecting additional credit opportunities in the markets
served. Average loans in the second quarter totaled $458.1
million, up $12.8 million (or 2.9%) from 1997's first quarter
average of $445.3 million.
The following table details total outstanding loans at the
specified dates:
June 30, 1997 December 31, 1996
------------- -----------------
Commercial, financial, and agricultural $135,799,000 $127,927,000
Real estate, construction 11,938,000 9,944,000
Real estate, mortgage 205,348,000 175,505,000
Consumer 114,360,000 109,037,000
------------ ------------
Total loans $467,445,000 $422,413,000
============ ============
Real estate loans (excluding construction loans) continue to
comprise the largest portion of the Company's loan portfolio,
totaling over $205.3 million at June 30, 1997, up nearly $30
million since year-end 1996. The Russell Federal Acquisition
boosted loan volume while other markets also experienced
increased loan activity, particularly in the second quarter.
Significant growth also occurred in 1 to 4 family residential
loans. Average balances in all real estate loans (including
construction loans) totaled $206.2 million for the second
quarter, up $4.8 million compared to first quarter 1997. The
majority of real estate loan growth in the second quarter of
1997 occurred primarily in the established markets of
southeastern Ohio.
Since March 31, 1997, home equity credit line ("Equiline")
balances increased $0.8 million to $16.5 million at the end of
the second quarter. Equiline growth demonstrates the Company's
commitment for quality loan programs designed to meet the needs
of the customer.
In the second quarter, average balances in commercial,
financial, and agricultural loans ("commercial loans") increased
$4.5 million (or 3.3%) compared to the previous quarter, to a
balance of $139.2 million. The economies in the Company's
markets have provided quality credit opportunities, in
particular, in southeastern Ohio and central Ohio. Management
will continue to focus on the enhancement and growth of the loan
portfolio while maintaining appropriate underwriting standards.
Consumer lending continues to be a vital part of the core
lending facilities of the Company. In the second quarter, the
Company's average consumer loans increased $3.5 million to
$112.7 million. The majority of the Company's consumer loans
are in the indirect lending area. At June 30, 1997, the Company
had indirect loan balances of $71.9 million, an increase of $2.8
million since March 31, 1997. Management is pleased with the
recent combination of performance and growth of the indirect
segment of the Company's loan portfolio. Lenders use a tiered
pricing system that enables the Company to apply an interest
rate based on the corresponding risk of a loan. Although
consumer debt delinquency is on the rise in the financial
services industry (due mostly to credit card debt), management's
recent actions to reinforce the Company's pricing system have
tempered delinquencies and overall growth of the portfolio.
Management expects the indirect lending portfolio to remain an
integral part of the Company's loan portfolio in future quarters.
Loan Concentration
- ------------------
The Company does not have a concentration of its loan portfolio
in any one industry. In the first quarter, the Russell
Acquisition increased the Company's loan balances in real estate
lending (both mortgage and construction loans), and this
component continues to comprise the largest balance of the loan
portfolio. Growth in real estate loans continued in the second
quarter, reaching $217.3 million (or 46.5%) of total loans at
June 30, 1997, while commercial, financial, and agricultural
loans totaled $135.8 million, or 29.1% of the loan portfolio.
The remaining loans are comprised of loans to individuals
totaling $114.4 million at June 30, 1997, or 24.6% of the loan
portfolio.
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. Recent market penetrations
occurred in the northeast Kentucky real estate market in the
form of the Russell Federal Acquisition. One of the Company's
largest group of commercial loans consists of automobile
dealer floor plans, which totaled $15,072,000 at March 31, 1997.
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 in
excess of the combined legal lending limits of its subsidiary
banks, which approximate $9.8 million.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses as a percentage of loans
decreased modestly from 1.59% at March 31, 1997, to 1.56% at the
end of the second quarter of 1997. Since March 31, 1997, the
total dollar amount of the allowance for loan losses increased
$146,000 while total loans grew $18.6 million in the second
quarter, causing a modest decrease in the allowance as a
percentage of total loans.
In the second quarter of 1997, the provision for loan losses
totaled $641,000 compared to $435,000 for the same period last
year. For the six months ended June 30, 1997, the provision for
loan losses totaled $1,229,000 compared to $795,000 for the same
period a year earlier. The Company's provision for loan losses
has increased steadily since the second quarter of 1996 due to
the combination of overall loan growth and consumer loan
delinquencies.
Over the past several years, the Company has been very active
in indirect lending and other personal loans. In late 1996 and
early 1997, management implemented initiatives designed to
refocus the indirect lending goals of the Company, including
tighter underwriting standards and more aggressive collection of
past due accounts, and as a result, the Company's consumer loan
delinquencies have modestly decreased. Management will continue
to monitor the entire loan portfolio to maintain loan quality
and high underwriting standards and expects future quarterly
provisions to modestly increase due mostly to anticipated loan
growth.
The following table presents changes in the Company's allowance
for loan losses:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Balance, beginning
of period $7,152,000 $6,743,000 $6,873,000 $6,726,000
Allowance for loan
losses acquire in
Russell Federal
Acquisition 0 0 120,000 0
Chargeoffs (642,000) (578,000) (1,153,000) (1,009,000)
Recoveries 147,000 123,000 229,000 211,000
---------- ---------- ---------- ----------
Net chargeoffs (495,000) (455,000) (924,000) (798,000)
---------- ---------- ---------- ----------
Provision for
loan losses 641,000 435,000 1,229,000 795,000
---------- ---------- ---------- ----------
Balance, end of period $7,298,000 $6,723,000 $7,298,000 $6,723,000
========== ========== ========== ==========
Chargeoffs in the second quarter of 1997 slightly increased
compared to 1996's second quarter. Net chargeoffs in the
commercial loan category were higher than normal due to
chargeoffs of multiple delinquent commercial loans, none of
which was individually significant. Commercial loan chargeoffs
and recoveries were $308,000 and $17,000, respectively, in
second quarter 1997 and represent the largest single component
of the Company's net chargeoffs for the three months ended June
30, 1997. Net chargeoffs for commercial loans were immaterial
in the second quarter of 1996.
Second quarter consumer loan chargeoffs and recoveries totaled
$328,000 and $126,000, respectively, down from second quarter
1996's totals of gross chargeoffs of $488,000 and recoveries of
$85,000. Unlike many other financial institutions, where
consumer credit problems have occurred in the credit card
segment, a significant portion of the Company's recent
chargeoffs have occurred in the consumer loan category and in
particular, indirect lending, which has experienced increased
loan activity in recent reporting periods. Management is
confident that the recent positive trends experienced in the
indirect loan portfolio will continue through the remainder of
1997.
Net chargeoffs in the real estate loan category were lower than
expected and demonstrate the quality of that segment of the loan
portfolio. Management will continue to monitor the entire loan
portfolio to determine the adequacy of the allowance.
Nonperforming loans (those loans classified as nonaccrual, 90
days or more past due, and other real estate owned) as a
percentage of outstanding loans were 0.31% at June 30, 1997,
compared to 0.44% at March 31, 1997, and 0.39% at year-end 1996.
Nonaccrual loans and those loans 90 days past due totaled
$808,000 and $875,000 at June 30, 1997, compared to $1,204,000
and $776,000, respectively, at March 31, 1997. Other real
estate owned totaled $67,000 at June 30, 1997, and had no
balance in that category at March 31, 1997. Management believes
the current nonperforming loan ratio is acceptable and reflects
the overall quality of the Company's loan portfolio.
At June 30, 1997, the Company had an insignificant amount of
loans that were considered impaired under Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114"), as amended by SFAS No.
118. Management will continue to monitor the status of impaired
loans, as well as performing and non-performing loans, in order
to determine the appropriate level of the allowance for loan
losses. Management believes the allowance for loan losses of
1.56% of total loans at June 30, 1997, to be adequate to absorb
inherent losses in the 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, reaching $545.3 million at June 30,
1997, an increase of $2.6 million since March 31, 1997.
Deposit growth in 1997 occurred primarily in the first quarter
through the Russell Federal Acquisition and the Baltimore
Banking Center Acquisition. At March 31, 1997, the Company's
total deposits were impacted by the deposits assumed in the
Russell Federal Acquisition, which totaled $21 million
(approximately $4.7 million in savings deposits and $16.3
million in balances of certificates of deposit). At the end of
the second quarter, the Baltimore Banking Center Acquisition
contributed approximately $12 million to 1997's deposit growth.
The majority of those deposits are interest-bearing certificates
of deposits ("CD's") and Individual Retirement Accounts
("IRA's").
In addition to funds acquired in the Russell Federal
Acquisition and the Baltimore Banking Center Acquisition, the
Company also experienced internal deposit growth in
interest-bearing transaction accounts and savings accounts. In
early 1997, the Company introduced several "relationship
accounts" that provided incentives for new and existing
customers to open deposit accounts (both non-interest bearing
and interest-bearing) if they had deposits in other products
such as CD's or IRA's. The program was successful and as a
result, management intends to promote other products in a
similar manner.
In the second quarter of 1997, management introduced
aggressively priced 5-month and 10-month CD's. These "specials"
were well-received in the Company's markets and produced
approximately $10 million in additional deposits for the Company
to fund recent loan growth. The CD specials also allowed the
Company to retain many maturing deposits as competition for
deposits continued to increase in the second quarter of 1997.
In early third quarter, the specials reached volume goals and as
a result, management discontinued offering the specials. As a
result of the CD specials, total CD's reached $276.4 million at
June 30, 1997, an increase of $8.0 million in the second
quarter. Management expects CD's to continue to be a vital
funding source for the Company in the future.
Average balances in non-interest bearing demand deposits
maintained levels similar to those experienced in the first
quarter of 1997. Second quarter average non-interest bearing
deposits totaled $60.2 million, compared to $59.3 million in the
previous quarter. Management will continue to focus efforts to
maintain the non-interest bearing deposit base of the Company.
Compared to the previous quarter, the largest percentage of
average deposit growth occurred in interest-bearing demand
deposits. For the quarter ended June 30, 1997, average balances
in interest-bearing demand deposits reached $125.0 million, up
$5.4 million (or 4.5%) compared to the previous quarter. Many
customers shifted deposits into certain interest-bearing
checking accounts during the second quarter due to favorable
rates being offered on those deposits.
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.
Short-term borrowings increased during the second quarter to
$19.8 million at June 30, 1997, up from March 31, 1997's total
of $18.0 million, due primarily to increases in the account
balances of corporate customers with overnight repurchase
agreements. At June 30, 1997, the Company had $0.6 million
short-term Federal Home Loan Bank borrowings. In general, the
Company accesses this funding source at various times to meet
liquidity needs as they come due. The Company will continue to
access short-term FHLB borrowings as necessary.
In addition to traditional deposits, the Company continues to
maintain long-term borrowings from the FHLB. This allows the
Company to obtain reliable funds at fixed and indexed rates for
longer periods of time than other traditional deposit products,
creating the opportunity to match longer term fixed rate
mortgages and other extended-maturity asset commitments against
a similar funding source. Total long-term FHLB advances were
$27.6 million at June 30, 1997, a net decrease of $763,000
during the second quarter as a result of scheduled principal
paydowns. Management plans to maintain access to long-term FHLB
borrowings as an appropriate funding source.
In order to finance the purchase of the Russell Federal
Acquisition, the Company obtained a $3 million loan from an
unaffiliated financial institution. The remaining funds for the
Russell Federal Acquisition were generated from internal
sources. Principal paydowns are scheduled to begin on the $3
million note in the first quarter of 1998.
On June 17, 1997, the Company and Gateway Bancorp, Inc.
("Gateway"), a Kentucky corporation headquartered in
Catlettsburg, Kentucky, entered into a definitive agreement
providing for the acquisition of Gateway by the Company. The
definitive agreement states the terms of consideration to be 32%
cash and 68% in shares of Company stock, resulting in an
aggregate purchase price of $20,554,000, or $18.75 per share
(including $383,000 in Gateway stock options). The Company
plans to finance the cash portion of the purchase with sources
currently existing at Gateway.
Capital/Stockholders' Equity
- ----------------------------
The Company's capital provides a strong base for profitable
growth. Total stockholders' equity was $58.9 million at June
30, 1997, compared to $56.5 million at March 31, 1997, and $56.2
million at year-end 1996.
Since the Company's investment portfolio is 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. As a result of first quarter
increases in interest rates, equity growth was slowed at March
31, 1997, by the adjustment for the net unrealized holding gain
on available-for-sale securities, net of deferred income taxes,
which decreased to a net gain of $206,000 at March 31, 1997. At
June 30, 1997, the impact to equity had increased $1.1 million
to $1.3 million due to favorable changes in interest rates
relative to the Company's investment portfolio yields.
In the second quarter of 1997, the Company earned $2.1 million
and declared dividends of $621,000, a dividend payout ratio of
29.22%, compared to 26.94% in second quarter 1996. For the six
months ended June 30, 1997, the Company had net income of $4.1
million and declared dividends of $1.2 million, a dividend
payout ratio of 30.07%, compared to 27.54% for the same period
last year. Management feels this is an acceptable payout ratio
for the Company and anticipates similar payout ratios in future
periods.
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. The Company's risk-based capital ratio of 12.36%
at June 30, 1997, is well above the minimum standard of 8%. The
Company's Tier 1 capital ratio of 11.10% also exceeded the
regulatory minimum of 4%. The Leverage ratio at March 31, 1997
was 7.68% and also above the minimum standard of 3%. These
ratios did not significantly change during the second quarter
and provide quantitative data demonstrating the strength and
future opportunities for use of the Company's capital base.
Management continues to evaluate risk-based capital ratios and
the capital position of the Company as part of its strategic
decision process.
On December 12, 1996, the Company's Board of Directors
authorized the purchase of 10,000 treasury shares at market
prices for use in conjunction with employee benefit plans. In
early June, the Company had purchased 9,150 treasury shares. On
June 12, 1997, the Board of Directors authorized the purchase of
an additional 10,000 treasury shares and subsequently, the
Company purchased 1,000 treasury shares. At June 30, 1997, the
Company had 5,640 shares in its treasury for use in its employee
benefit plans. Due to stock option exercises, the Company had
no treasury shares at August 1 for use in its employee benefit
plans. Future exercises will be issued from authorized and
unissued common shares, unless additional treasury shares are
purchased. At August 1, 1997, the Company had 9,000 shares
available to be purchased as treasury shares under the Board's
June 12, 1997 authorization.
Liquidity
- ---------
Liquidity measures an organization's ability to meet cash
obligations. During the six months ended June 30, 1997, the
Company generated cash from operating and financing investing
activities of $5.9 million and $9.1 million, respectively. The
Company used cash flows of $17.0 million in investing
activities, primarily through lending activities.
The major cash inflow in the first half of 1997 was the $16.0
million increase in interest-bearing deposits. The CD specials
offered during the second quarter generated significant cash
flow and retained many existing deposits. Also, the net cash
received from the Acquisitions during the first quarter of 1997
was $4.7 million. Major outlays of cash for the six months
ended June 30, 1997, included $24.3 million in loans. The
Consolidated Statements of Cash Flows presented on page 5 of the
Company's Consolidated Financial Statements provides analysis of
cash flow activity.
Additionally, management considers that portion of the loan
portfolio that matures within one year and the maturities within
one year in the investment portfolio as part of the Company's
liquid assets. The Company's liquidity is monitored by the
ALCO, which establishes and monitors ranges of acceptable
liquidity. Management feels the Company's current liquidity
position is acceptable.
Interest Rate Sensitivity
- -------------------------
At June 30, 1997, the Company's interest rate sensitivity
position, based on static gap analysis, did not significantly
shift from the previous quarter-end and 1996 year-end:
liability sensitive in the short-term and asset sensitive for
periods longer than one year. In general, static gap
information reflects that the Company is in a net asset
sensitive position for periods beyond three months and in
theory, this means if interest rates increase, the Company's net
interest income will increase over time. Management uses
simulation modeling and forecasting to determine the impact of a
changing interest rate environment. These tools provide dynamic
information concerning the Company's balance sheet structure in
different rate environments. Management believes the Company's
current mix of assets and liabilities provides a reasonable
level of insulation to significant fluctuations in net interest
income and the resulting volatility of the Company's earnings
base.
In the future, management intends to analyze interest rate risk
utilizing a complete risk management model. Currently the ALCO
reviews interest rate risk parameters using in-house technology,
which provides simulation modeling and assists the ALCO in terms
of balance sheet structure and interest rate risk management.
Management considers various hedging products as a method of
minimizing the interest rate risk of the Company's balance
sheet. The Company's management reviews interest rate risk in
relation to its effect on net interest income, net interest
margin, and the volatility of the earnings base of the Company.
Effects of Inflation on Financial Statements
- --------------------------------------------
Substantially all of the Company's assets relate to banking and
are monetary in nature. Therefore they are not impacted by
inflation to the same degree as companies in capital intensive
industries in a replacement cost environment. During a period
of rising prices, a net monetary asset position results in loss
in purchasing power and conversely a net monetary liability
position results in an increase in purchasing power. In the
banking industry, typically monetary assets exceed monetary
liabilities. Therefore as prices have recently increased,
financial institutions experienced a decline in the purchasing
power of their net assets.
Future Outlook
- --------------
Second quarter results of operations represent improved
financial performance through a combination of external growth
and enhanced core competencies. Management continues to
challenge its workforce to identify critical banking processes
and re-engineer services to provide the customer with the
highest quality products and services. Investments in
technology provide the opportunity to compete at higher levels
than most other financial institutions of similar size and
enable the Company to meet future customer service challenges.
The Acquisitions in 1996 and 1997 have provided increased
funding sources as well as new markets for the Company. As
expected, the transition of combining the new offices with
existing full-service banking centers went smoothly and
customers in these markets responded favorably to the change.
Management is satisfied with the retention of the acquired
deposits and looks forward to continuing the development of
Russell Federal and the Baltimore office.
The Russell Federal Acquisition in early 1997 established the
Company's first presence in Kentucky as well as in the thrift
industry. In the first half of 1996, Russell Federal initiated
strategic steps to leverage its substantial capital base (as a
recently converted mutual savings bank) and increase earnings
potential. The tri-state markets of southern Ohio, northeastern
Kentucky, and western West Virginia offer many future growth
opportunities. By late 1997, the Company intends to offer its
complete program of deposit and loan products to the customers
of northeastern Kentucky through Russell Federal.
As discussed in detail in Part II of this Form 10-Q, Item 5, on
April 25, 1997, the Company announced the signing of a
non-binding letter of intent with Gateway Bancorp, Inc.
("Gateway"), a Kentucky corporation headquartered in
Catlettsburg, Kentucky, providing for the acquisition of
Gateway. The aggregate purchase price will approximate $20.6
million, or $18.75 per share.
On May 2, 1997, the Company received approval from the Office
of Thrift Supervision permitting the execution of a definitive
agreement (signed by both companies on June 17, 1997). On
August 8, 1997, the Company received notification of approval
from the Federal Reserve Bank to purchase Gateway. The
acquisition is subject to approval of Gateway shareholders and a
vote is expected near the end of the third quarter of 1997.
Completion of the purchase is expected to occur in the fourth
quarter of 1997. This purchase would represent the Company's
second acquisition of a thrift subsidiary, and would expand the
Company's presence in northeastern Kentucky. As of June 30,
1997, Gateway had approximately $64 million in total assets and
$46 million in deposits.
After the consummation of the Gateway acquisition, management
intends to expand Gateway's current product offerings and focus
on leveraging existing resources as well as additional
technological and strategic resources that will enhance customer
service and increase market penetration.
Management continues to view a combination of external growth
and internal development as strategic goals to enhance
shareholder return. While first half results show that the
Company's earning assets were positioned to provide strong net
interest income, the interest rate environment will play an
important role in the future earnings of the Company. Although
management is satisfied with second quarter 1997's net interest
margin, continuing pressures on net interest margin is likely to
intensify in the future.
In addition to the special short-term CD's that were introduced
during the second quarter, management has implemented new
pricing strategies to generate deposits and effectively retain
the new deposits assumed through the Acquisitions. This
strategy includes a tiered CD pricing structure in which the
customer earns a higher interest rate by investing more money in
a CD product.
Also in the third quarter, the Company introduced its new "Bank
at Work" CD, a deposit product designed to provide customers
with ease of opportunity to increase their investment through
electronic transfers. Deposits can be added electronically to
this account on a weekly, bi-weekly, semi-monthly, or monthly
basis for any amount over $25. The interest rate will also be
tiered on the Bank at Work CD and is offered at a 2-year term.
Management believes the new CD products will offer customers an
excellent vehicle for periodic savings with higher rates than
available in a typical savings account. The Company will
continue to pursue new, innovative products designed to satisfy
customer preferences.
The Company's balance sheet growth continues to be a focus of
management. The recent CD specials boosted the Company's
funding sources and provided opportunity for asset growth
through increased loan activity. Management expects commercial
loan demand to provide additional income opportunities for the
Company during the remainder of 1997. At June 30, 1997, the
loan to deposit ratio totaled 85.72%, which is an increase from
the previous quarter-end ratio of 82.71%. Management is
comfortable with the current loan to deposit ratio and expects
the ratio to stabilize or increase slightly in the future due to
continued loan activity.
The recent increase in loan balances has also spurred increases
in the provision for loan losses. Consumer loan chargeoffs
slowed in the second quarter and management expects future
consumer loan chargeoffs to be consistent with second quarter
results. Management feels the current allowance for loan losses
is adequate to absorb losses inherent in the loan portfolio at
June 30, 1997. However, future provision for loan losses are
affected by the delinquencies in all loan categories, and as a
result, may increase in future quarters as anticipated loan
growth occurs.
Management is in the process of using simulation data in its
analysis of the earnings potential of the Company and how it
relates to changes in interest rates. Simulation data indicates
the Company is asset sensitive. Management believes the balance
sheet is adequately positioned to avoid significant earnings
volatility.
The Company continues to research methods to provide electronic
banking services to its customers. The Company's successful
debit card has been well-received by many customers and should
continue to generate increasing revenue streams. In late 1997,
the Company plans to introduce a cash management product that
will be offered for both consumer and commercial customers.
Management believes that "home banking" and "PC banking" are
future services that must be part of the Company's core delivery
of services. Management recognizes the importance of electronic
banking to its customer base and continues to focus efforts
designed to enhance this process and allow customers unlimited
banking products and services at their convenience.
In September, management intends to file an application to the
FDIC and the Ohio Division of Financial Institutions on behalf
of Peoples Bank to locate a full-service banking facility in
Athens, Ohio, near the Ohio University campus. The facility
would be a full-service center, including an ATM, a
drive-through facility, and will have loans and investment
services. Currently Peoples Bank operates two offices in Athens,
plus offices in nearby The Plains and Nelsonville. Management
believes expanding Peoples Bank's presence in Athens (in
southeastern Ohio) represents a strategic initiative designed to
capture increased market share in this area. The new office is
expected to open in early 1998.
In addition to the new full-service facility in Athens, Peoples
Bank plans to refurbish its office in Baltimore, adding
drive-through customer service areas. First National Bank is in
initial stages of rehabilitating its downtown Caldwell office to
enhance customer service. Also, First National Bank has added
an ATM location near a major highway, providing improved
customer service and cost-recovery opportunities through
convenient access by non-customers. Enhancements to the
Company's existing facilities will improve customer service and
emphasize the Company's existing strengths in serving our
customers.
Management concentrates on return on equity and earnings per
share objectives, plus other methods, to measure and direct the
performance of the Company. New products and services are
consistently being evaluated for consumer acceptance and
potential return on the Company's investment. While past
results are not an indication of future earnings, management
feels the Company is positioned to maintain current levels of
performance through the remainder of 1997.
"Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995
- ---------------------------------------------------------------
The statements in this Form 10-Q which are not historical fact
are forward looking statements that involve risks and
uncertainties, including, but not limited to, the interest rate
environment, the effect of federal and state banking and tax
regulations, the effect of 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. AND SUBSIDIARIES
- -------------------------------------
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
- ----------------------------------------------------------------------
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate Balance Rate
ASSETS
Securities:
Taxable $125,614 6.87% $131,884 6.77% $125,755 6.85% $126,201 6.75%
Tax-exempt 21,640 8.32% 22,365 8.56% 22,067 8.34% 22,864 8.23%
-------- ------ -------- ------ -------- ------ -------- ------
Total 147,254 7.08% 154,249 7.03% 147,822 7.07% 149,065 7.01%
Loans:
Commercial 139,199 9.54% 121,763 9.78% 136,975 9.53% 120,175 9.52%
Real estate 206,211 8.49% 166,285 8.32% 203,817 8.44% 163,676 8.55%
Consumer 112,674 10.34% 101,489 10.78% 110,946 10.38% 101,636 10.75%
-------- ------ -------- ------ -------- ------ -------- ------
Total loans 458,084 9.26% 389,537 9.42% 451,738 9.25% 385,487 9.43%
Less: Allowance
for loan loss (7,269) (6,700) (7,194) (6,725)
-------- ------ -------- ------ -------- ------ -------- ------
Net loans 450,815 9.41% 382,837 9.58% 444,544 9.40% 378,762 9.60%
Interest-bearing
deposits 681 3.48% 1,093 4.78% 1,377 4.29% 1,030 4.86%
Federal funds sold 6,273 5.53% 9,667 5.29% 7,195 5.43% 7,807 5.33%
-------- ------ -------- ------ -------- ------ -------- ------
Total earning
assets 605,023 8.80% 547,846 8.77% 600,938 8.76% 536,664 8.81%
Other assets 48,451 40,889 48,097 37,801
-------- -------- -------- --------
Total assets $653,474 $588,735 $649,035 $574,465
======== ======== ======== ========
LIABILITIES AND EQUITY
- ----------------------
Interest-bearing
deposits:
Savings $ 85,203 3.03% $ 77,817 3.02% $ 84,118 3.04% $ 73,836 3.04%
Interest-bearing
demand deposits 124,962 3.43% 112,342 3.22% 122,301 3.38% 104,573 3.32%
Time 268,207 5.53% 234,285 5.54% 267,468 5.52% 223,390 5.60%
-------- ------ -------- ------ -------- ------ -------- ------
Total 478,372 4.54% 424,444 4.47% 473,887 4.53% 401,799 4.53%
Borrowed funds:
Short-term 19,647 4.35% 30,368 4.86% 19,610 4.19% 40,735 5.14%
Long-term 30,851 6.26% 22,125 6.05% 31,133 6.28% 22,503 6.05%
-------- ------ -------- ------ -------- ------ -------- ------
Total 50,498 5.52% 52,493 5.35% 50,743 5.47% 63,238 5.45%
Total interest
bearing
liabilities 528,870 4.63% 476,937 4.57% 524,630 4.62% 465,037 4.66%
Non-interest
bearing deposits 60,189 54,733 59,768 51,803
Other liabilities 6,987 5,182 7,562 5,630
-------- -------- -------- --------
Total liabilities 596,046 536,852 591,960 522,470
Stockholders' equity 57,428 51,883 57,075 51,995
-------- -------- -------- --------
Total liabilities
and equity $653,474 $588,735 $649,035 $574,465
======== ======== ======== ========
Interest income to
earning assets 8.80% 8.77% 8.76% 8.81%
Interest expense to
earning assets 4.05% 3.97% 4.03% 4.04%
------ ------ ------ ------
Net interest margin 4.75% 4.80% 4.73% 4.77%
====== ====== ====== ======
Interest income and yields presented on a fully tax-equivalent basis
using a 34% tax rate.
PART II
- -------
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities.
None.
ITEM 3: Defaults upon Senior Securities.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None.
ITEM 5: Other Information.
On June 17, 1997, Peoples Bancorp Inc. (the "Company") and
Gateway Bancorp, Inc. ("Gateway"), a Kentucky corporation
headquartered in Catlettsburg, Kentucky, entered into a
Definitive Agreement ("Agreement") providing for the acquisition
of Gateway by the Company. Gateway is a savings and loan
holding company with one thrift subsidiary, Catlettsburg Federal
Savings Bank, a federally chartered stock savings bank with its
main office in Catlettsburg, Kentucky.
On June 27, 1997, the Company filed notice with the Federal
Reserve Bank of Cleveland regarding the pending acquisition. In
the proposed transaction, the Company will form an Ohio
corporation, Peoples Acquisition Corp., a wholly-owned
subsidiary of the Company, to acquire 100% of the issued and
outstanding common stock of Gateway, and Gateway will be merged
with and into the subsidiary. The name of the resulting Ohio
corporation will be Gateway Bancorp, Inc.
On August 8, 1997, the Company received notification of
approval from the Federal Reserve Bank to purchase Gateway.
The Agreement states the terms of consideration to be 32% cash
and 68% in shares of Company stock, resulting in an aggregate
purchase price of $20,554,000, or $18.75 per share (including
$383,000 in Gateway stock options). Further, all outstanding
options to purchase Gateway common stock will be extinguished
upon consummation of the proposed transaction. Consideration
paid to the optionee will be 32% in cash and 68% in Peoples
common stock (based on the difference between the Purchase Price
per share of Gateway common stock and the applicable exercise
price thereof). The aggregate Purchase Price for payment of the
consideration of the Gateway stock options is approximately
$383,000, or $5.25 per option share.
The acquisition is subject to approval of Gateway shareholders
at a special meeting expected to be held near the end of the
third quarter of 1997. Completion of the purchase is expected
in the fourth quarter of 1997.
At June 30, 1997, Gateway had total deposits of $63.8 million,
total deposits of $46.3 million, and total stockholders' equity
of $17.3 million. The Gateway acquisition will be accounted for
using the purchase method of accounting. Accordingly, Gateway's
assets and liabilities will be adjusted to their estimated fair
values at the date of consummation and its results of operations
will be included in the Company's consolidated results of
operations from the date of consummation. The transaction is
expected to close in the fourth quarter of 1997 and is not
expected to materially impact the Company's financial position
or results of operations.
ITEM 6: Exhibits and Reports on Form 8-K.
a) Exhibits:
EXHIBIT INDEX
-------------
Exhibit Number Description Exhibit Location
- -------------- ----------------------------------- ----------------
11 Computation of Earnings Per Share. Page 25.
27 Financial Data Schedule. EDGAR electronic
filing only.
b) Reports on Form 8-K: None.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunder duly authorized.
PEOPLES BANCORP INC.
Date: August 14, 1997 By: /s/ ROBERT E. EVANS
Robert E. Evans
President and Chief Executive Officer
Date: August 14, 1997 By: /s/ JOHN W. CONLON
John W. Conlon
Chief Financial Officer
EXHIBIT INDEX
-------------
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR PERIOD ENDED JUNE 30, 1997
--------------------------------------------------
Exhibit Number Description Exhibit Location
- -------------- ----------------------------------- ----------------
11 Computation of Earnings Per Share. Page 25.
27 Financial Data Schedule. EDGAR electronic
filing only.