FORM 10-Q
=========
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-16772
PEOPLES BANCORP INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 31-0987416
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 373-3155
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's class of
Common Stock, as of May 1, 1999: 5,723,900.
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1
- ------
The following Condensed Consolidated Balance Sheets, Condensed Consolidated
Statements of Income, Consolidated Statement of Shareholders' Equity, and
Consolidated Statements of Cash Flows of Peoples Bancorp Inc. (the "Company")
nd subsidiaries, reflect all adjustments (which include normal recurring
accruals) necessary to present fairly such information for the periods and
dates indicated. Since the following condensed unaudited financial
statements have been prepared in accordance with instructions to Form 10-Q,
they do not contain all information and footnotes necessary for annual
financial statements in conformity with generally accepted accounting
principles. Operating results for the three months ended March 31, 1999,
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. 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, 1998.
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
- -------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
=====================================
(Dollars in thousands)
ASSETS March 31, December 31,
- ------ 1998 1998
Cash and cash equivalents:
Cash and due from banks $ 31,180 $ 27,048
Interest-bearing deposits in other banks 1,459 3,373
Federal funds sold 6,150 9,700
- -----------------------------------------------------------------------------
Total cash and cash equivalents 38,789 40,121
- -----------------------------------------------------------------------------
Available-for-sale investment securities,
at estimated fair value (amortized cost
of $218,914 and $230,049 at March 31,
1999 and December 31, 1998, respectively) 223,118 235,569
- -----------------------------------------------------------------------------
Loans, net of unearned interest 574,560 567,917
Allowance for loan losses (9,855) (9,509)
- -----------------------------------------------------------------------------
Net loans 564,705 558,408
- -----------------------------------------------------------------------------
Bank premises and equipment, net 14,783 14,826
Other assets 30,515 31,360
- -----------------------------------------------------------------------------
Total assets $871,910 $880,284
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Non-interest bearing $ 75,894 $ 80,884
Interest bearing 631,100 633,284
- -----------------------------------------------------------------------------
Total deposits 706,994 714,168
- -----------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased and securities
sold under repurchase agreements 31,296 31,814
Federal Home Loan Bank term advances 700
- -----------------------------------------------------------------------------
Total short-term borrowings 31,296 32,514
- -----------------------------------------------------------------------------
Long-term borrowings 40,507 40,664
Accrued expenses and other liabilities 6,353 6,924
- -----------------------------------------------------------------------------
Total liabilities 785,150 794,270
- -----------------------------------------------------------------------------
Stockholders' Equity
Common stock, no par value, 12,000,000
shares authorized - 6,375,164 shares
issued at March 31, 1999 and 5,790,148
issued at December 31, 1998, including
shares in treasury 50,814 50,807
Accumulated comprehensive income,
net of deferred income taxes 2,732 3,588
Retained earnings 35,262 33,441
- -----------------------------------------------------------------------------
88,808 87,836
Treasury stock, at cost, 67,786 shares
at March 31, 1999 and 52,031 shares at
December 31, 1998 (2,048) (1,822)
- -----------------------------------------------------------------------------
Total stockholders' equity 86,760 86,014
- -----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $871,910 $880,284
=============================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
- -------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
===========================================
(Dollars in thousands, except per share data) Three Months Ended
March 31,
1999 1998
Interest income $ 15,985 $ 15,364
Interest expense 7,242 7,320
- -----------------------------------------------------------------------------
Net interest income 8,743 8,044
Provision for loan losses 537 696
- -----------------------------------------------------------------------------
Net interest income after
provision for loan losses 8,20 7,348
Other income 1,844 1,618
Gain on securities transactions --- 4
Other expenses 6,236 5,414
- -----------------------------------------------------------------------------
Income before income taxes 3,814 3,556
Income taxes 1,184 1,180
- -----------------------------------------------------------------------------
Net income $ 2,630 $ 2,376
=============================================================================
Basic earnings per share $0.42 $0.38
- -----------------------------------------------------------------------------
Diluted earnings per share $0.41 $0.36
- -----------------------------------------------------------------------------
Weighted average shares outstanding (basic) 6,315,613 6,321,352
- -----------------------------------------------------------------------------
Weighted average shares outstanding (diluted) 6,463,929 6,529,108
- -----------------------------------------------------------------------------
Cash dividends declared $809 $730
- -----------------------------------------------------------------------------
Cash dividend per share $0.13 $0.12
- -----------------------------------------------------------------------------
Note: All per share references adjusted for 10% stock dividend to be
issued June 15, 1999, to shareholders of record at May 28, 1999.
PEOPLES BANCORP INC. AND SUBSIDIARIES
- -------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
==============================================
(Dollars in thousands, except share amounts)
Accumulated
Other
Common Stock Retained Treasury Comprehensive
Shares Amount Earnings Stock Income Total
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,790,148 $ 50,807 $ 33,441 $ (1,822) $ 3,588 $ 86,014
- --------------------------------------------------------------------------------------------------------------
Adjustment for the effect of 10%
common stock dividend 579,015
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 restated 6,369,163
- --------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 2,630 2,630
Other comprehensive income,
net of tax:
Unrealized losses on available-
for-sale securities (856) (856)
-------
Comprehensive income 1,774
Exercise of common stock options
(reissued 7,345 treasury shares) (121) 181 60
Cash dividends declared (809) (809)
Common stock issued under dividend
reinvestment plan 6,001 128 128
Purchase of treasury stock, 17,897 shares (407) (407)
- --------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 6,375,164 $ 50,814 $ 35,262 $(2,048) $ 2,732 $ 86,760
==============================================================================================================
PEOPLES BANCORP INC. AND SUBSIDIARIES
- -------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
(Dollars in thousands) Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
- -------------------------------------
Net income $ 2,630 $ 2,376
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 537 696
Gain on securities transactions --- (4)
Depreciation, amortization, and accretion 1,267 1,006
Decrease (increase) in interest receivable 264 (152)
(Decrease) increase in interest payable (157) 164
Deferred income taxes (515) 522
Deferral of loan origination fees and costs (85) 21
Other, net 297 (1,711)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 4,238 2,918
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of available-for-sale securities (558) (65,733)
Proceeds from sales of available-for-sale
securities --- 4,026
Proceeds from maturities of available-for-sale
securities 11,660 14,527
Net (increase) decrease in loans (6,644) 2,488
Expenditures for premises and equipment (528) (1,093)
Proceeds from sales of other real estate owned 53 79
- -----------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 3,983 (45,706)
- -----------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in non-interest
bearing deposits (4,990) 1,296
Net (decrease) increase in interest-bearing
deposits (2,162) 3,470
Net (decrease) increase in short-term borrowings (1,218) 16,678
Proceeds from long-term borrowings --- 16,500
Payments on long-term borrowings (157) (690)
Cash dividends paid (679) (630)
Purchase of treasury stock (407) (589)
Proceeds from issuance of common stock 60 182
- -----------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (9,553) 36,217
- -----------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (1,332) (6,571)
Cash and cash equivalents at beginning of period 40,121 38,831
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $38,789 $32,260
=============================================================================
NOTES TO FINANCIAL STATEMENTS
=============================
Basis of Presentation
- ---------------------
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.
On May 13, 1999, the Company declared a 10% stock dividend to be issued
June 15, 1999, to shareholders of record at May 28, 1999. Accordingly,
all per share data has been restated to reflect the dividend.
1. Acquisition
- ---------------
The following text will include references to several acquisition
transactions that have affected the Company's results of operations.
On June 26, 1998, The Peoples Banking and Trust Company ("Peoples Bank")
completed the purchase of four full-service banking offices located in the
communities of Point Pleasant (two offices), New Martinsville, and Steelton,
West Virginia ("West Virginia Banking Center Acquisition") from an
unaffiliated institution. In the transaction, Peoples Bank assumed
approximately $121.0 million of deposits and purchased $8.3 million in loans.
2. Accounting Pronouncements
- -----------------------------
In June, 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Statement requires disclosure about an enterprise's
operating segments in annual and interim financial reports issued to
shareholders. The Statement defines an operating segment as a component of
an enterprise that engages in business activities that generate revenue and
incur expense, and the operating results of which are reviewed by the chief
operating decision maker in the determination of resource allocation and
performance. The Company's business activities are currently confined to
one segment which is community banking.
3. Subsequent Events
- ---------------------
On April 20, 1999, the Company sold, through PEBO Capital Trust I (a newly
formed subsidiary) $30.0 million of 8.62% Capital Securities ("Trust
Preferred Securities"). The proceeds were used by the Trust to purchase,
from the Company, Junior Subordinated Debentures due May 1, 2029.
Management plans to use the proceeds for general corporate purposes,
including additional investments in its subsidiary banks and the repurchase
of a portion of its outstanding common shares. The effect of the Trust
Preferred Securities offering will impact several key performance indicators
of the Company's future financial results.
ITEM 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
===============================================
SELECTED FINANCIAL DATA
- -----------------------
The following data should be read in conjunction with the unaudited
consolidated financial statements and the management discussion and analysis
that follows.
For the Three Months Ended
March 31,
SIGNIFICANT RATIOS 1999 1998
==================
Net income to:
- --------------
Average assets 1.21% 1.22%
- -----------------------------------------------------------------------------
Average shareholders' equity 12.12% 11.94%
- -----------------------------------------------------------------------------
Net interest margin* 4.54% 4.60%
- -----------------------------------------------------------------------------
Efficiency ratio* 51.16% 52.06%
- -----------------------------------------------------------------------------
Average shareholders' equity to average assets 9.95% 10.25%
- -----------------------------------------------------------------------------
Loans net of unearned interest to deposits
(end of period) 81.27% 84.25%
- -----------------------------------------------------------------------------
Allowance for loan losses to loans net of
unearned interest (end of period) 1.72% 1.70%
- -----------------------------------------------------------------------------
Capital ratios:
- ---------------
Tier I capital ratio 10.83% 12.87%
- -----------------------------------------------------------------------------
Risk-based capital ratio 12.27% 14.13%
- -----------------------------------------------------------------------------
Leverage ratio 7.41% 8.60%
- -----------------------------------------------------------------------------
Cash dividends as a percentage of net income 30.76% 30.72%
- -----------------------------------------------------------------------------
PER SHARE DATA
==============
Book value per share $13.76 $12.65
- -----------------------------------------------------------------------------
Market value per share at end of period
(closing price) $20.11 $29.24
- -----------------------------------------------------------------------------
Diluted earnings per share $0.41 $0.36
- -----------------------------------------------------------------------------
Cash dividends per share $0.13 $0.12
- -----------------------------------------------------------------------------
All per share data adjusted for 10% stock dividend to be issued June 15,
1999, to shareholders of record at May 28, 1999, and a 3-for-2 stock split
issued April 30, 1998, to shareholders of record at April 13, 1998.
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 intangible
amortization and indirect operational expenses) as a percentage of fully
tax equivalent net interest income plus non-interest income. All
non-recurring items are removed from the calculation of the Company's
efficiency ratio.
Introduction
- ------------
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 wholly-owned subsidiaries
are The Peoples Banking and Trust Company ("Peoples Bank"); The First
National Bank of Southeastern Ohio ("First National Bank"); Peoples Bank
FSB; and The Northwest Territory Life Insurance Company ("Northwest
Territory").
The Company's banking subsidiaries provide an array of financial products
and services to their customers, including traditional banking products such
as deposit accounts, lending products, credit and debit cards, corporate and
personal trust services, and safe deposit rental facilities. The Company's
insurance agency subsidiaries also offer investment and insurance products.
The Company's banking subsidiaries provide services through ordinary walk-in
offices, automated teller machines, and automobile drive-in facilities,
banking by phone, and also provide limited cash management services through
computer banking.
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 Financial Institutions. 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"). Peoples Bank FSB is a member of the Federal Home Loan
Bank, and is subject to the regulation, supervision, and examination by the
Office of Thrift Supervision ("OTS"), and is also subject to limited
regulation by the Board of Governors of the Federal Reserve System. The
discussion and analysis should be read in conjunction with the prior
year-end audited consolidated financial statements and footnotes thereto and
the ratios, statistics, and discussions contained elsewhere in this Form
10-Q.
References will be found in this Form 10-Q to several acquisition
transactions that have affected or will affect the Company's results of
operations. On December 12, 1997, the Company completed the purchase of
Gateway Bancorp, Inc. and its subsidiary, Catlettsburg Federal Savings
Bank ("Catlettsburg Federal"), of Catlettsburg, Kentucky, for approximately
$21.6 million in a combination of cash of $6.2 million and 603,029 shares
of Company stock ("Gateway Bancorp Acquisition"). Management operated
Catlettsburg Federal as a federal savings bank subsidiary of the Company
until December 31, 1998, when it merged Catlettsburg Federal and Russell
Federal Savings Bank ("Russell Federal") into a single thrift and renamed
the thrift Peoples Bank FSB.
On June 26, 1998, Peoples Bank completed the purchase of four full-service
banking offices located in the communities of Point Pleasant (two offices),
New Martinsville, and Steelton, West Virginia ("West Virginia Banking Center
Acquisition") from an unaffiliated institution. In the transaction, Peoples
Bank assumed approximately $121.0 million of deposits and purchased $8.3
million in loans.
On April 20, 1999, the Company sold, through PEBO Capital Trust I (a newly
formed subsidiary) $30.0 million of 8.62% Capital Securities ("Trust
Preferred Securities"). The proceeds were used by the Trust to purchase,
from the Company, Junior Subordinated Debentures due May 1, 2029.
Management plans to use the proceeds for general corporate purposes,
including additional investments in its subsidiary banks and the repurchase
of a portion of its outstanding common shares. On April 22, 1999, the
Company announced intentions to repurchase up to 319,000 shares (or
approximately 5% of the Company's outstanding common shares) from time to
time in open market or privately negotiated transactions ("Stock Repurchase
Program"). The timing of the purchases and the actual number of common
shares purchased will depend on market conditions. The Stock Repurchase
Program will continue through December 31, 1999. The combined effect of the
Trust Preferred Securities offering and the Stock Repurchase Program will
impact several key performance indicators of the Company's future financial
results. The impact, where significant, is discussed in the applicable
sections of Management's Discussion and Analysis.
RESULTS OF OPERATIONS
=====================
Overview of the Income Statement
- --------------------------------
For the quarter ended March 31, 1999, the Company earned $2,630,000, a
10.7% increase over the $2,376,000 earned in the first quarter of 1998.
The increase resulted from growth in net interest income and non-interest
income revenue streams. The West Virginia Banking Center Acquisition ,
acquired in mid-1998, provided the Company with additional funding sources
and increased the Company's earning asset base.
Net interest income totaled $8,743,000, up $699,000 (or 8.7%) compared to
the same period last year. First quarter provision for loan losses totaled
$537,000 in the first quarter of 1999, down $159,000 (or 22.8%) compared to
$696,000 in 1998's first quarter. The provision for loan losses, which
is a product of management's formal quarterly analysis, is reflective of the
quality of the loan portfolio and management of the inherent credit risks
therein.
Non-interest income increased $226,000 (or 14.0%) to $1,844,000, due
primarily to growth of deposit service charges (generated from volume
increases related to the West Virginia Banking Center Acquisition),
increased fiduciary fees from activities in the Company's Investment and
Trust Division, and electronic banking fees. Non-interest expense for the
first quarter totaled $6,236,000, up $822,000 (or 15.2%) from last year.
The growth in non-interest expense was due primarily to the Company's recent
acquisitions and related expenses, such as salaries and benefits expense and
amortization of intangibles. The Company's efficiency ratio of 51.16% for
the first quarter of 1999 represents a modest enhancement compared to 52.06%
for the same period a year earlier.
First quarter diluted earnings per share increased 13.9% from $0.36 last
year to $0.41 in the first quarter of 1998. On May 13, 1999, the Company
declared a 10% stock dividend to be issued June 15, 1999, to shareholders of
record at May 28, 1999. Accordingly, all per share data has been restated to
reflect the dividend.
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 interests
accounting. In the first quarter of 1999, intangible amortization expense
totaled $657,000 ($427,000 after taxes) compared to $370,000 ($242,000 after
taxes) for the same period a year earlier. After adjusting for the after-tax
effect of the amortization of intangibles, diluted cash earnings per share
for the quarter ended March 31, 1999 was $0.48, up $0.07 from $0.41 in the
first quarter of 1998. On a cash earnings basis, return on average tangible
assets was 1.45% for the first quarter of 1999, an increase of 6 basis
points over last year's first quarter figure of 1.39%. Cash earnings as a
percentage of average tangible equity grew to 18.99% at March 31, 1999, up
significantly from 1998's first quarter return on average tangible equity of
15.84%.
Management uses cash earnings as one of several ways to evaluate the impact
of acquisitions on profitability and return on the Company's investment.
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 impacted earnings per share and other ratios. In
order to provide comparative earnings per share information, management
will continue to supplement future financial analysis with discussion
concerning cash earnings per share, as previously defined.
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. Net
interest income remains the primary source of revenue for the Company.
Changes in market interest rates, as well as changes in the mix and volume
of interest-earning assets and interest-bearing liabilities, impact net
interest income.
The Company's interest earning assets and interest-bearing liabilities
generated strong first quarter net interest income streams. Also, the
recent acquisitions provided increased funding sources for the Company to
grow its earning asset base, generating increased incremental net interest
income.
As a result, net interest income continued to grow in the first quarter
of 1999, reaching $8,743,000 compared to $8,044,000 last year, up $699,000
or 8.7%. In the first quarter of 1999, total interest income reached
$15,985,000 while interest expense totaled $7,242,000. Included in interest
income is $583,000 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 performance measurement of
the net interest revenue stream generated by the Company's balance sheet.
In the first quarter of 1999, net interest margin (on an FTE basis) totaled
4.54%, down modestly from 4.60% in 1998's first quarter. The first three
months of 1998 were not impacted by the funds purchased in the West Virginia
Banking Center Acquisition, which compressed net interest margin in the
final six months of 1998, when net interest margin totaled approximately
4.37%.
Net interest margin has steadily improved as the Company has successfully
redeployed the acquired funds to an earning asset mix that has a reasonable
balance of profitability, risk, and characteristics similar in nature to
the Company's before the West Virginia Banking Center Acquisition. The
Company continues to experience competitive pressures in its markets for
both loans and deposits.
Average loan balances, the largest earning asset component on the Company's
balance sheet, grew $49.7 million (or 9.6%) from first quarter 1998 to
first quarter 1999. Yield on earning assets totaled 8.22% in 1999, compared
to 8.72% in first quarter 1998. Compared to the first quarter of 1998,
cost of interest-bearing liabilities decreased 57 basis points in the first
quarter of 1999 to 4.18%, due primarily to attrition of higher cost funding
sources such as short-term, aggressively priced certificates of deposit, as
well as prepayments of long-term Federal Home Loan Bank ("FHLB") advances
in October, 1998. These funding sources were replaced with lower-costing
deposits and FHLB advances.
Please refer to the "Consolidated Average Balance Sheet and Analysis of Net
Interest Income" table included on page 27 in this Form 10-Q for a complete
quantitative evaluation of the Company's net interest margin.
Management continuously monitors the effects of net interest margin on the
performance of the Company. Net interest margin in future periods will be
impacted by an investment growth strategy ("Leverage Strategy") to be
implemented in the second quarter of 1999. The initiative, designed to
leverage the additional capital acquired in the Trust Preferred Securities
offering, includes the purchase of approximately $150 million of additional
investments and the selective use of FHLB advances, national market
borrowings, and other funding sources. Management anticipates future net
interest margin will continue to be pressured by the continual shifting of
funding sources due to intense competition for deposits.
Provision for Loan Losses
- -------------------------
The provision for loan losses is based upon management's continuing
evaluation of the adequacy of the allowance for loan losses and is
reflective of the quality of the portfolio and overall management of the
inherent credit risk. In the first quarter of 1999, the Company recorded a
provision for loan losses of $537,000, down $159,000 (or 22.8%) from
$696,000 in the first quarter of 1998.
Due to continued strong asset quality, management anticipates the Company's
loan loss provision for the year ending December 31, 1999 to be down
slightly from 1998. Any reduction in the provision will be dependent on
acceptable loan delinquencies, portfolio risk, and general economic
conditions in our markets and in the economy overall.
Non-Interest Income
- -------------------
The Company's non-interest income is generated from four primary sources:
cost-recovery based fees related to deposit accounts, income from fiduciary
activities, electronic banking revenue, and insurance commissions. In the
first quarter of 1999, all of the Company's major sources of non-interest
income increased compared to the same period a year earlier, as management
continued to focus on non-interest revenues as a primary source of
cost-recovery.
Total non-interest income reached $1,844,000 in the first three months of
1999, compared to $1,618,000 in the first quarter of 1998, an increase of
$226,000 (or 14.0%). Deposit account service charge income reached $720,000
in the first quarter of 1999, compared to $550,000 for the quarter ended
March 31, 1998, an increase of $170,000 (or 30.9%). In the first quarter of
1999, deposit account service charge income was impacted favorably by the
West Virginia Banking Center Acquisition and its associated $121 million in
deposits, which provided the base for increased fee income. Approximately
$125,000 (55.3%) of the Company's increase in non-interest revenue in the
first quarter of 1999 can be attributed to the deposits acquired in the
West Virginia Banking Center Acquisition. The Company's fee income
generated from deposits is based on cost recoveries associated with services
provided.
The fee structure for fiduciary activities is based primarily on the fair
value of assets being managed, which totaled over $559 million at March 31,
1999, up approximately $8 million (or 1.5%) from year-end 1998. As a result
of recent growth in market values and in the number of accounts served,
first quarter income from fiduciary activities increased $50,000 (or 8.1%)
to $666,000. The Company continues to build on its leadership position in
its markets and investment and fiduciary services will be a significant
contributor to the Company's non-interest income streams.
Electronic banking, including ATM cards, direct deposit services, and debit
card services, is one of the many product lines offered by the Company. The
cost-recovery fees associated with these products and services significantly
impact the Company's non-interest income. In the first quarter of 1999,
total fees related to electronic banking reached $158,000, up $28,000
(or 21.5%) compared to the previous year's first quarter. This increase is
due primarily to revenues related to the Company's growing debit card
program, as well as non-customer activity in the Company's network of ATM's,
which has caused a corresponding increase in ATM-related revenues.
In addition to traditional sources of non-interest income, the Company also
has the capability to provide customer service through a complete line of
insurance and investment products. The Company's product offerings include
credit life and disability insurance, as well as life and property insurance
to consumers in Ohio and West Virginia.
In the second quarter of 1999, the Company named Raymond James Financial
Services, Inc. (member NASD and SIPC), an unaffiliated registered
broker/dealer, to provide improved services to the Company's investment
customers, including, but not limited to, asset management, corporate bonds,
municipal bonds, portfolio evaluation, asset allocation, tax shelters, unit
trusts, common/preferred stocks, government securities, mutual funds,
retirement planning, estate planning, tax-exempt securities, annuities, and
financial planning services. Management believes these services are
critical to the Company's relationship and needs-based selling approach.
Commissions on insurance and securities operations generated revenues of
$127,000 in the first quarter of 1999, up $34,000 (or 36.5%) compared to the
same period in 1998, representing the Company's largest percentage
non-interest income increase. Management will continue to explore new
methods of enhancing non-interest income. Both traditional and
non-traditional financial service products are being analyzed for inclusion
in the Company's product mix.
Non-Interest Expense
- --------------------
For the three months ended March 31, 1999, non-interest expense totaled
$6,236,000, an increase of $822,000 (or 15.2%) compared to the same period
last year. Several categories within non-interest expense were directly
impacted by recent acquisitions and the related growth of non-interest
expenses such as salaries and benefits, depreciation expense, and intangible
amortization. Maintaining acceptable levels of non-interest expense and
operating efficiency are key performance indicators for the Company in its
strategic initiatives.
When comparing 1998 non-interest expense to 1999, it is important to isolate
the changes attributable to the West Virginia Banking Center Acquisition.
Acquisition-related salaries and employee benefits and increased depreciation
expense, comprise the majority of the increase in non-interest expense in
1999. Non-operational items also contributed to the increase in
non-interest expense during the first quarter of 1999, in particular,
amortization of intangibles, which totaled $657,000 in first quarter of 1999
compared to $370,000 for the same period last year, an increase of $287,000
(or 77.6%). Intangible asset amortization expense arising from the West
Virginia Banking Center Acquisition was the primary reason for this increase
over the first quarter of 1998.
Compared to 1998's first quarter, salaries and benefits expense (the largest
component of non-interest expense) increased $311,000 (or 11.6%) to
$2,983,000 in the first quarter of 1999, due to the retention of many
customer service associates in the acquired offices. At March 31, 1999,
the Company had 356 full-time equivalent employees compared to 315
full-time equivalent employees at March 31, 1998. At year-end 1998, the
Company had 362 full-time equivalent employees. Management will continue
to strive to find new ways of increasing efficiencies and leveraging its
resources, effectively optimizing customer service and return to
shareholders.
For the quarter ended March 31, 1999, bank premises depreciation expense
totaled $202,000, up $51,000 (or 33.8%) from last year's first quarter.
Net occupancy expense totaled $441,000 in the first quarter of 1999, an
increase of $98,000 (or 28.6%) compared to the same period a year earlier.
These increases can be attributed primarily to the depreciation of the
assets purchased in recent acquisitions, completion of branch office
remodeling projects, as well as increased depreciation of additional
expenditures on technology. The Company's increased investment in
technology and other customer-service enhancements will also impact
depreciation expense in the future.
Maintaining acceptable levels of non-interest expense and operating
efficiency are key performance indicators for the Company. The financial
services industry uses the efficiency ratio (total non-interest expense
less amortization of intangibles and non-recurring items as a percentage
of the aggregate of fully-tax equivalent net interest income and
non-interest income) as a key indicator of performance. Gains and losses on
sales of investment securities are not included in the calculation of the
Company's efficiency ratio. In the first quarter of 1999, the Company's
efficiency ratio was 51.16% compared to 52.06% for the same period last
year.
The cost to service the Trust Preferred Securities issued in the second
quarter of 1999 will increase future non-interest expense levels and result
in a slightly negative impact on the Company's efficiency ratio in future
periods.
Return on Assets
- ----------------
For the quarter ended March 31, 1999, return on average assets ("ROA")
totaled 1.21%, compared to 1.22% in the same period a year earlier. In
late 1998 and early 1999, the Company continued its transition of using
acquired funds from the West Virginia Baking Center Acquisition for
higher-yielding assets such as loans, which enabled the Company to nearly
duplicate last year's first quarter ratio of 1.22%.
Future ROA will be impacted by the Leverage Strategy described earlier
herein. Since the Company's asset base will increase more rapidly than
related earnings streams, management anticipates that ROA will decrease
in the second quarter of 1999 and then stabilize for the remainder of 1999.
As the Company is successful in transitioning the investments purchased in
the Leverage Strategy to higher-yielding loans, management expects ROA to
modestly improve.
Return on Equity
- ----------------
The Company's return on average equity ("ROE") in the first quarter of 1999
was 12.12% compared to 11.94% for the same period last year. The Company's
increased first quarter earnings contributed to enhanced ROE.
Using a portion of the proceeds from the Trust Preferred Securities
issuance, the Company's Stock Repurchase Program, implemented April 22,
1999, is expected to enhance ROE for the Company in future periods.
Enhancements to ROE are dependent on the timing of the common stock
repurchases and the availability of the Company's shares. Management views
the Trust Preferred Securities offering as an opportunity to leverage the
Company's strong equity position and will continue to strive to find ways to
enhance ROE in future periods.
The Company is considered well-capitalized under regulatory and industry
standards of risk-based capital and has experienced growth through retention
of increased earnings over the last several quarters.
Income Tax Expense
- ------------------
Income tax expense for the three months ended March 31, 1999, totaled
$1,184,000, compared to $1,180,000 for the same period a year earlier.
This modest increase, on growth of income before taxes of $258,000, can
be attributed to two primary reasons: increases in tax-exempt income
compared to the prior year, as well as tax credit investments finalized in
1998 that lowered the Company's effective tax rate. These tax credits
reduce the Company's tax burden and helped lower the Company's effective
tax rate to 31.0% for the first quarter of 1999, compared to 33.2% for the
same period last year.
FINANCIAL CONDITION
===================
Overview of Balance Sheet
- -------------------------
Total assets decreased from $880.3 million at December 31, 1998 to $871.9
million at March 31, 1999. The majority of this fluctuation can be
attributed to modest attrition of higher-cost, short-term funding sources
such as certificates of deposit. The Company's balance of investment
securities decreased $12.5 million (or 5.3%) to $223.1 million due primarily
to prepayments of mortgage-backed securities. Loan volumes continued to
grow in the first quarter of 1999, increasing $6.6 million (or 1.1%) to
$574.6 million. Loan growth occurred primarily in the commercial loan area.
Total liabilities decreased $9.1 million (or 1.1%) to $785.2 million for
the three months ended March 31, 1999. Due to the aforementioned attrition
of short-term time deposits, the Company's total deposits decreased $7.2
million to $707.0 million at March 31, 1999. In general, the Company's
total borrowings remained at year-end levels.
Stockholders' equity increased $0.7 million to $86.8 million, an increase
of 0.9%. Equity growth occurred primarily through retention of increased
earnings, and was modestly slowed by a decrease in the Company's net
unrealized gain on available for sale securities. At March 31, 1999, the
Company had a treasury share balance of 67,786 shares, up 15,755 shares
compared to year-end 1998, due to purchases in the first quarter of 1999 to
fund the Company's stock benefit plans and a deferred compensation plan that
permits the Company's directors to purchase the Company's stock through an
established trust. Stockholders' equity as a percent of total assets was
9.96% compared to 9.77% at year-end 1998. Please see the Consolidated
Statements of Stockholders' Equity found on page 5 in this Form 10-Q for
additional information regarding the Company's changes in stockholders'
equity.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents totaled $38.8 million at March 31, 1999, down
$1.3 million from year-end 1998. For the three months ended March 31,
1999, the Company's balance of federal funds sold dropped $3.6 million to
$6.2 million, reflecting management's focus to direct liquid funds into
higher-yielding assets such as loans to meet loan demand in its markets as
well as enhance profitability.
Management believes the current balance of cash and cash equivalents
adequately serves the Company's liquidity and performance needs. Total cash
and cash equivalents fluctuate on a daily basis due to transactions in
process and other liquidity needs. Management believes the liquidity needs
of the Company are satisfied by the current balance of cash and cash
equivalents, readily available access to traditional and non-traditional
funding sources, and the portions of the investment and loan portfolios
that mature within one year. These sources of funds should enable the
Company to meet cash obligations and off-balance sheet commitments as they
come due.
Investment Securities
- ---------------------
Investment securities totaled $223.1 million at March 31, 1999, down
$12.5 million (or 5.3%) compared to year-end 1998. The decrease that
occurred in the first three months of 1999 was due primarily to prepayments
of mortgage-backed securities in the Company's investment portfolio and
other maturities, which were shifted into higher-yielding investments such
as loans.
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
March 31, 1999, the amortized cost of the Company's investment securities
totaled $218.9 million, resulting in unrealized appreciation in the
investment portfolio of $4.2 million and a corresponding increase in the
Company's equity of $2.7 million.
At March 31, 1999, investments in US Treasury securities and obligations of
US government agencies and corporations totaled $49.2 million, down $1.1
million (or 2.2%) since year-end 1998. In the first quarter of 1999,
investments in mortgage-backed securities decreased $9.7 million (or 9.2%)
to $95.1 million at March 31, 1999. The Company's balances in investment
obligations of states and political subdivisions totaled $45.3 million at
March 31, 1999, a quarterly decrease of $0.2 million (or 0.44%). Corporate
investments at March 31, 1999, totaled $33.6 million, a decrease of $1.5
million (or 4.2%) for the quarter ended March 31, 1999.
In April, 1999, the Company began to implement the previously described
Leverage Strategy designed to utilize the additional capital acquired in
the Trust Preferred Securities offering. Management intends to purchase
approximately $150 million of additional investments by the end of the
second quarter of 1999. Management anticipates that the majority of
investments to be purchased will be comprised primarily of US Agency
securities and mortgage-backed investments. Market conditions and general
availability of investments in the market will dictate the type and maturity
of the investments.
Management monitors the earnings performance and liquidity of the investment
portfolio on a regular basis through Asset/Liability Committee ("ALCO")
meetings. The group also monitors net interest income, sets pricing
guidelines, and manages interest rate risk for the Company. Through active
balance sheet management and analysis of the investment securities
portfolio, the Company maintains sufficient liquidity to satisfy depositor
requirements and the various credit needs of its customers. Management
believes the risk characteristics inherent in the investment portfolio are
acceptable based on these parameters.
Loans
- -----
The Company's lending is primarily focused in central and southeastern
Ohio, northern West Virginia, and northeastern Kentucky markets, and
consists principally of retail lending, which includes single-family
residential mortgages and other consumer lending.
Loans totaled $574.6 million at March 31, 1999, an increase of $6.6 million
(or 1.2%) compared to year-end 1998's total of $567.9 million. Loan growth
occurred primarily in the Company's existing markets.
The following table details total outstanding loans at the specified dates:
(dollars in thousands) March 31, December 31,
1999 1998
------------ ------------
Commercial, financial, and agricultural $ 223,169 $ 212,530
Real estate, construction 10,362 10,307
Real estate, mortgage 230,610 233,550
Consumer 110,419 111,530
- ----------------------------------------------------------------------------
Total loans $ 574,560 $ 567,917
============================================================================
Real estate loans to the Company's retail customers (including real estate
construction loans) continue to be the largest portion of total loans,
comprising 41.9% of the total loan portfolio. Real estate loans totaled
$241.0 million at March 31, 1999, a modest decrease of $2.9 million
(or 1.2%) in the first quarter of 1999, as competition for real estate
loans continues to heighten in the Company's markets.
Included in real estate loans are home equity credit lines ("Equilines"),
which totaled $19.7 million at March 31, 1999, compared to $20.3 million
at year-end 1998. Management believes the Equiline product is a competitive
product with an acceptable return on investment, after risk considerations.
Residential real estate lending continues to represent a 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 at reasonable yields to the Company.
Lending activity in the Company's northeastern Kentucky markets has
historically focused on real estate loans. Recently Peoples Bank FSB
initiated special programs designed to increase its penetration of those
local markets and increase opportunities to sell additional lending and
deposit products. Mortgage lending will remain a vital part of the
Company's lending operations due to the programs offered to customers, who
continue to seek quality real estate loan products in a competitive
environment.
The Company experienced significant loan growth in the first quarter of
1999 in commercial, financial, and agricultural loans ("commercial loans"),
which increased $10.6 million (or 5.0%) to $223.2 million. Commercial loans
comprise 38.8% of the Company's total loan portfolio. Economic conditions
in the Company's markets have provided quality credit opportunities, in
particular, southeastern Ohio and central Ohio. Management will continue to
focus on the enhancement and growth of the commercial loan portfolio while
maintaining appropriate underwriting standards. Management expects
commercial loan demand to continue to be strong in several of the Company's
markets in 1999. In addition to the anticipated additional in-market
penetration, the Company will continue to selectively lend to customers
outside its primary markets.
Consumer lending continues to be a vital part of the Company's core lending.
In the first quarter of 1999, consumer loan balances (excluding credit card
loans) decreased $0.9 million (or 0.9%) to $104.1 million. The majority of
the Company's consumer loans are in the indirect lending area. At March 31,
1999, the Company had indirect loan balances of $64.6 million, compared to
$65.4 million at year-end 1998.
Management is pleased with the recent performance of the Company's consumer
loan portfolio, which can be attributed to the Company's commitment to
quality customer service and the continued 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 based on the corresponding risk
associated with the indirect loan. Although consumer debt delinquency is
increasing in the financial services industry (due mostly to credit card
debt), management's actions to reinforce the Company's pricing system and
underwriting criteria have tempered indirect lending delinquencies and
caused a modest decrease in new indirect loan generation. Management plans
to continue its focus on the use of this tiered pricing system combined with
controlled growth of the indirect lending portfolio in 1999, if strong
economic conditions continue.
The Company's credit card balances at March 31, 1999, totaled $6.3 million,
down $0.2 million (or 2.4%) since year-end 1998. Typically the Company
experiences a decrease in credit card balances in the first quarter of each
year as the Company's customers reduce seasonal debt. Management will
continue to evaluate new opportunities to serve credit card customers, but
will not assume additional unnecessary risk for the sake of growth.
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
$241.0 million (or 41.9%) of total loans. At year-end 1998, these loans
comprised 42.9% of outstanding loans. At March 31, 1999, commercial,
financial, and agricultural loans totaled $223.2 million (or 38.8%) of
outstanding loans, compared to 38.8% of outstanding loans at December 31,
1998.
The Company's lending is primarily focused in the local southeastern Ohio
market and contiguous mid-Ohio valley areas. The Company's loan mix
consists of retail lending, which includes single-family residential
mortgages and other consumer loan products.
The Company's largest concentration of commercial loans is credits to
lodging and lodging related companies, which comprised approximately 11% of
the Company's outstanding commercial loans at March 31, 1999 and 10% at
December 31, 1998. These lending opportunities have arisen because of the
recent growth in the lodging industry and the need for additional travel
related services in certain areas in or contiguous to the Company's markets,
as well as the Company's ability to respond to the needs of customers in
this segment of the economy. The credits have been subjected to the
Company's normal commercial loan underwriting standards and do not present
more than the normal amount of risk assumed in other types of lending.
In addition to loans to lodging and lodging related companies, one of the
Company's larger groups of commercial loans consists of automobile dealer
floor plans, which totaled 10% of the Company's outstanding commercial loans
at March 31, 1999 and December 31, 1998.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses as a percentage of loans increased from 1.67%
at December 31, 1998, to 1.72% at the end of the first quarter of 1999. The
balance in the allowance for loan losses increased $346,000, as net
chargeoffs remained stable compared to previous periods.
The following table presents changes in the Company's allowance for loan
losses for the three months ended March 31, 1999, and 1998, respectively:
Three Months Ended
(dollars in thousands) March 31,
1999 1998
------------------------
Allowance for loan losses, January 1 $ 9,509 $ 8,356
Chargeoffs 255 364
Recoveries 64 137
- -------------------------------------------------------------------------
Net chargeoffs 191 227
- -------------------------------------------------------------------------
Provision for loan losses 537 696
- -------------------------------------------------------------------------
Allowance for loan losses $ 9,855 $ 8,825
=========================================================================
For the three months ended March 31, 1999, the provision for loan losses
totaled $537,000, while gross chargeoffs were $255,000 and recoveries
amounted to $64,000. In the first quarter of 1998, the provision for loan
losses totaled $696,000, while gross chargeoffs were $364,000 and recoveries
amounted to $137,000. Chargeoffs decreased in the first quarter of 1999
compared to the prior year, reflecting improved portfolio quality. The
first quarter of 1999's provision for loan losses was reduced in
comparison to the same period a year earlier due to management's evaluation
of the adequacy of the allowance for loan losses, satisfactory loan portfolio
quality, and reduced overall inherent credit risk.
The most significant portion of the Company's chargeoffs continue to occur
in the consumer loan portfolio. When comparing the first quarter of 1999
to the first quarter of 1998, net chargeoffs decreased in the consumer and
commercial loan portfolios. Real estate and commercial loan chargeoffs and
recoveries were insignificant in the first quarter of 1999, demonstrating
the quality of these portfolios.
Nonperforming loans (those loans classified as nonaccrual, 90 days or more
past due, and other real estate owned) as a percentage of outstanding loans
were 0.27% at March 31, 1999, compared to 0.25% at December 31, 1998.
Nonaccrual loans and those loans 90 days past due totaled $538,000 and
$589,000, respectively, at March 31, 1999, compared to $685,000 and
$360,000, respectively, at year-end 1998. Management believes the current
level of nonperforming loans is better than peer group levels and is a
reflection of the quality of the Company's loan portfolio.
At March 31, 1999, the Company had an insignificant amount of loans that
were considered impaired. Management will continue to monitor the status of
impaired loans, including performing and non-performing loans, in order to
determine the appropriate level of the allowance for loan losses.
Management continually monitors the loan portfolio through its Loan Review
Department and Loan Loss Reserve Committee to determine the adequacy of the
allowance for loan losses and considers it to be adequate at March 31, 1999.
Management expects future loan loss provisions in 1999 to be less than 1998's
provision due to general improvements in loan delinquencies and the overall
quality of the loan portfolio. The allowance for loan losses of 1.72% of
total loans at March 31, 1999 is deemed to be adequate to absorb losses
inherent 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 $707.0
million at March 31, 1999, a quarterly decrease of $7.2 million (or 1.0%).
Non-interest bearing demand deposits decreased $5.0 million (or 6.2%) to
$75.9 million for the quarter ended March 31, 1999. Management does not
believe that core deposit attrition has occurred and also believes that
non-interest bearing demand deposit account balances are stable.
Interest bearing deposits totaled $631.1 million at March 31, 1999, a $2.2
million (or 0.3%) decrease compared to year end 1998. The Company
experienced modest attrition in the first quarter of maturing, short-term
certificates of deposit. Management expects similar attrition in the second
quarter of 1999 as rate sensitive customers strive to maximize their
investments by comparing rates offered by the Company's competitors.
Management will continue to emphasize deposit-gathering methods in 1999 by
offering special "relationship accounts" (both non-interest bearing and
interest-bearing) based on other products and services offered by the
Company.
Management believes that the deposit base remains the most significant
funding source for the Company and will continue to concentrate on balancing
deposit growth and adequate net interest margin to meet the Company's
strategic goals. The Company continues to offer a "special" 15-month CD
designed to compete with CD pricing in the Company's markets.
Along with traditional deposits, the Company accesses both short-term and
long-term borrowings to fund its operations and investments. The Company's
short-term borrowings consist of federal funds purchased, corporate deposits
held in overnight repurchase agreements, and various FHLB borrowings. At
March 31, 1999, short-term borrowings totaled $31.3 million, a quarterly
decrease of $1.2 million (or 3.7%). Management anticipates corporate
repurchase agreements balances to remain generally stable for the remainder
of 1999.
At March 31, 1999, the Company had no short-term FHLB advances, in contrast
to $0.7 million advanced at year-end 1998. In general, the Company accesses
this funding source at various times to meet liquidity needs as they arise.
The Company will continue to access short-term FHLB borrowings at various
times as deemed appropriate.
In addition to traditional deposits and short-term borrowings, the Company
continues to maintain long-term borrowings from the FHLB. This allows the
Company to obtain reliable funds at fixed and indexed rates for longer
periods of time than other traditional deposit products, creating the
opportunity to match longer term fixed rate mortgages and other
extended-maturity asset commitments against a similar funding source.
Long-term FHLB advances totaled $38.0 million at March 31, 1999, unchanged
since year-end 1998. In April 1999, the Company advanced $55 million in
long-term FHLB borrowings to fund investments purchased in the Leverage
Strategy, which is expected to generate additional net interest income.
Management plans to maintain access to long-term FHLB borrowings as an
appropriate funding source and expects to borrow an additional approximately
$30 million from the FHLB to fund the Leverage Strategy.
The Company also has a long-term borrowing with an unaffiliated financial
institution. The original borrowing was $3.0 million and was used to
finance an acquisition in early 1997. At March 31, 1999, the balance was
$2.6 million, a decrease of $0.1 million since year-end 1998. Principal
payments began in 1998 and continue semi-annually over the next three years.
Capital/Stockholders' Equity
- ----------------------------
The Company's capital continues to provide a strong base for profitable
growth. For the quarter ended March 31, 1999, stockholders' equity grew
approximately $0.7 million (or 0.9%) to $86.8 million.
In the first quarter of 1999, the Company had net income of $2.6 million and
paid dividends of $0.8 million, a dividend payout ratio of 30.76% of
earnings, compared to 30.72% in the first quarter of the prior year.
Management believes recent dividends represent an acceptable payout ratio
for the Company and anticipates similar payout ratios in future periods
through quarterly dividends.
At March 31, 1999, the adjustment for the net unrealized holding gain on
available-for-sale securities, net of deferred income taxes, totaled $2.7
million, a decrease of $0.9 million since year-end 1998. Since all the
investment securities in the Company's portfolio are classified as
available-for-sale, both the investment and equity sections of the Company's
balance sheet are more sensitive to the changing market values of
investments.
The Company has also complied with the standards of capital adequacy
mandated by the banking industry. Bank regulators have established
"risk-based" capital requirements designed to measure capital adequacy.
Risk-based capital ratios reflect the relative risks of various assets banks
hold in their portfolios. A weight category of either 0% (lowest risk
assets), 20%, 50%, or 100% (highest risk assets) is assigned to each asset
on the balance sheet and to certain off-balance sheet commitments.
At March 31, 1999, the Company's and each of its banking subsidiaries'
risk-based capital ratios was above the minimum standard for a
well-capitalized institution. The Company's risk-based capital ratio was
12.27%, well above the minimum standard of 8%. The Company's Tier 1 capital
ratio of 10.83% also exceeded the regulatory minimum of 4%. The Leverage
ratio at the end of the first quarter was 7.41% and also above the minimum
standard of 4%. The Company's capital ratios provide quantitative data
demonstrating the strength and future opportunities for use of the Company's
capital base. Management continues to evaluate risk-based capital ratios
and the capital position of the Company and each of its banking subsidiaries
as part of its strategic decision process.
In June, 1998, the Company implemented a formal plan to purchase treasury
shares for use in its stock option plans. The formal plan serves as the
basis for treasury purchases in anticipation of the Company's projected
stock option exercises and is based upon specific criteria related to market
prices, as well as the number of shares expected to be issued under the
Company's stock option plans. During the first quarter of 1999, the Company
purchased 16,500 treasury shares at an average price of $22.73 per share,
totaling $0.4 million in treasury share purchases in the first quarter of
1999. Management expects to purchase similar share amounts in future
quarters for use in its stock option plans. Future changes, if any, to the
Company's systematic share repurchase program may be necessary to respond to
the number of shares expected to be reissued for the Company's stock option
plans.
In 1998, the Company initiated the Peoples Bancorp Inc. Deferred Compensation
Plan ("Deferred Compensation Plan") for the directors of the Company and its
subsidiaries, which is designed to recognize the value to the Company of the
past and present service of its directors and encourage their continued
service through implementation of a deferred compensation plan. The Deferred
Compensation Plan allows directors to defer the fees earned for their service
as Company and subsidiary directors into deferred accounts that are either
invested in the Company's common stock or a time deposit, at the specific
director's discretion at the time of entering the Plan. As a result and in
accordance with accounting regulations, the balances invested in Company
stock in such accounts are reported as treasury stock in the Company's
financial statements. At March 31, 1999, the Deferred Compensation Plan and
its participants owned $0.7 million of Company stock, which is a reduction
to the equity balance of the Company. Management does not expect the Plan
to have a material impact on future financial statements or results of
operations for the Company.
Recently the Company announced its Stock Repurchase Program, in which the
Company will purchase up to 319,000 shares (or 5% of its outstanding Common
Stock) in open market or privately negotiated transactions. The timing of
the purchases and the actual number of common shares purchased will depend
on market conditions. The Stock Repurchase Program, initiated in late
April, 1999, will continue through December 31, 1999. Through May 10, 1999,
the Company had purchased 25,324 shares at an average price of $23.89 per
share.
In addition to the Stock Repurchase Program, management intends to continue
its systematic quarterly treasury share program for use in its stock option
plans.
Liquidity and Interest Rate Sensitivity
- ---------------------------------------
The objective of the Company's Asset/Liability Management function is to
maintain consistent growth in net interest income within the Company's
policy guidelines. This objective is accomplished through management of
the Company's balance sheet liquidity and interest rate risk exposure
based on changes in economic conditions, interest rate levels, and customer
preferences.
Liquidity measures an organization's ability to meet cash obligations as
they come due. During the quarter ended March 31, 1999, the Company
generated cash from operating and investing activities of $4.2 million and
$4.0 million, respectively. The Company used cash flows of $9.6 million
for financing activities. The major cash outflow from financing activities
resulted from the net decrease in non-interest and interest bearing deposits
totaling $5.0 million and $2.2 million, respectively.
The Company generated cash flows of $4.0 million in investing activities.
The major inflow of cash for the Company in the first quarter of 1999 was
provided by the maturity of investment securities totaling $11.7 million.
The major outlay of cash from investing activities resulted from the $6.6
million net increase in loans.
The Consolidated Statements of Cash Flows presented on page 6 of this Form
10-Q 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.
The Company has implemented a strategic plan to address the contingency for
extraordinary demands on liquidity due to the Year 2000 ("Y2K") phenomena.
The plan is designed to ensure the adequacy and availability of a variety of
sources of liquidity. A primary part of the plan involves securing the
availability of the Federal Reserve Bank Discount Borrowings for the
subsidiaries of the Company. Also, the Company plans, as much as is
reasonably possible, to accumulate cash and near cash assets to meet the
potential need of additional liquidity. Additionally, the Company intends
to review current correspondent relationships, as well as seek additional
relationships to provide diverse sources of liquidity. The Company has also
implemented a proactive campaign to allay customer Y2K concerns which
complements the Y2K liquidity contingency plan.
The Company manages interest rate risk to minimize the impact of fluctuating
interest rates on earnings. The Company uses simulation techniques which
attempt to measure the volatility of changes in the level of interest rates,
basic banking interest rate spreads, the shape of the yield curve, and the
impact of changing product growth patterns. The primary method of measuring
the sensitivity of earnings to changing market interest rates is to simulate
expected cash flows using varying assumed interest rates while also adjusting
the timing and magnitude of non-contractual deposit repricing to more
accurately reflect anticipated pricing behavior. These simulations include
adjustments for the lag in prime loan repricing and the spread and volume
elasticity of interest-bearing deposit accounts, regular savings, and money
market deposit accounts.
The principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are
sensitive to changing market interest rates. The Company closely monitors
the sensitivity of its assets and liabilities on an ongoing basis and
projects the effect of various interest rate changes on its net interest
margin. Interest sensitive assets and liabilities are defined as those
assets or liabilities that mature or reprice within a designated time-frame.
The difference between rate sensitive assets and rate sensitive liabilities
for a specified period of time is known as "gap".
At March 31, 1999, the Company's interest rate sensitivity position, based
on static gap analysis, was liability sensitive in the short-term (one year
or less) and decreasing in sensitivity for periods over one year and up to
five years. Up to one year, the Company is liability sensitive due primarily
to increases in funding sources which are short-term, such as the FHLB
borrowings and CD specials. Management believes the Company's balance sheet
is theoretically insulated from significant increases or decreases in
interest rates due to the various variable rate assets and liabilities.
Management monitors the asset and liability sensitivity through regular
meetings of the Company's ALCO and uses available dynamic data to make
appropriate strategic decisions.
To aid in interest rate management, the Company uses FHLB advances as a low
risk means of matching maturities of earning assets with interest bearing
funds to achieve a desired interest rate spread over the life of the earning
assets. Additionally, the Company considers the use of certain off-balance
sheet instruments such as interest rate caps, floors, and swaps, to further
aid interest rate risk management. As shown in the table below, the Company
currently has two such off-balance sheet instruments. These instruments,
known as interest rate floors, will provide income to the Company should a
selected market interest rate decline below a preset level specified in the
transaction agreement.
The intent of this type of instrument is to provide additional income
stability to the Company should there be a dramatic decline in interest
rate. Off-balance sheet instruments are an important tool for effective
interest rate risk management. The Company continuously evaluates the
current off-balance sheet positions and the need for additional interest
rate management tools. As demonstrated in the past, the Company will use
these instruments whenever appropriate.
In addition to gap analysis, management also analyzes the impact of maturing
assets and liabilities relative to the interest rates on those products. The
following table provides information about the Company's derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates. For loans, investment securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted average interest rates by contractual maturities as well as
estimated prepayments of residential mortgages and mortgage-backed
securities. For core deposits (non-interest bearing demand deposits,
interest-bearing checking accounts, and savings accounts) that have no
contractual maturity, the following table presents principal cash flows,and,
as applicable, related weighted average interest rates based on the Company's
historical experience and statistical analysis. For interest rate floors,
the table presents notional amounts (as described in previous sections) and
weighted average interest rates by contractual maturity date. A fundamental
difference between the following table and traditional "static gap" analysis
is that the following table presents the financial instruments based on the
date of expected cash flows while a static gap analysis only focuses on the
repricing characteristics of the financial instruments.
Principal/Notional Amount Maturities at March 31, 1999:
=======================================================
(Dollars in Thousands) There- Fair Value
1999 2000 2001 2002 2003 after Total 3/31/99
Rate sensitive assets:
- ----------------------
Fixed interest rate loans $ 72,464 $ 51,078 $ 33,623 $ 21,758 $ 14,252 $ 57,839 $251,014 $258,544
Average interest rate 9.60% 9.46% 9.24% 9.77% 9.65% 9.12% 9.43%
Variable interest rate loans $ 96,279 $ 34,551 $ 29,337 $ 24,686 $ 22,269 $116,424 $323,546 $323,546
Average interest rate 8.95% 8.00% 8.00% 8.01% 8.04% 8.00% 8.29%
Total loans $574,560
Fixed interest rate securities $ 29,306 $ 12,388 $ 13,484 $13,070 $ 11,945 $114,028 $194,221 $194,221
Average interest rate 6.04% 6.07% 5.90% 6.05% 6.01% 5.95% 5.98%
Variable interest rate securities $ 2,655 $ 5,266 $ 3,599 $ 291 $ 1,409 $ 15,677 $ 28,897 $ 28,897
Average interest rate 6.34% 6.06% 6.68% 7.04% 6.73% 7.08% 6.76%
Total securities $223,118
Other interest-bearing assets $ 7,609 $ 7,609 $ 7,609
Average interest rate 4.56% 4.56%
- ----------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ---------------------------
Non-interest bearing checking $ 21,250 $ 12,143 $ 9,107 $ 3,036 $ 8,121 $ 22,237 $ 75,894 $ 75,894
Average interest rate
Savings $ 15,832 $ 7,918 $ 7,916 $ 11,874 $ 5,937 $ 49,477 $ 98,954 $ 98,954
Average interest rate 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42%
Interest bearing checking $ 25,379 $ 53,731 $ 25,380 $ 8,460 $ 20,727 $ 77,820 $211,497 $200,419
Average interest rate 3.45% 4.22% 3.45% 3.45% 3.45% 3.45% 3.65%
Time deposits $225,939 $ 72,302 $ 12,477 $ 4,418 $ 4,439 $ 1,074 $320,649 $321,579
Average interest rate 5.09% 5.04% 5.42% 5.57% 5.06% 4.46% 5.10%
Total deposits $706,994
Fixed interest rate borrowings $ 36,559 $ 27 $ 29 $ 30 $ 31 $ 1,312 $ 37,988 $ 36,582
Average interest rate 4.72% 4.06% 4.06% 4.06% 4.06% 4.09% 4.70%
Variable interest rate borrowings $ 33,815 $ 33,815 $ 33,815
Average interest rate 4.26% 4.26%
Total borrowings $ 71,803
- ----------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial instruments:
- ------------------------------------------------
Interest rate floors purchased $ 10,000 $ 10,000 $ 20,000 $ 59
Average strike rate 5.50% 5.25%
Forward rate 5.00% 5.00%
======================================================================================================================
Principal/Notional Amount Maturities at March 31, 1998:
=======================================================
(Dollars in Thousands) There- Fair Value
1998 1999 2000 2001 2002 after Total 3/31/98
Rate sensitive assets:
- ----------------------
Fixed interest rate loans $ 60,229 $ 39,589 $ 28,212 $ 18,332 $ 11,082 $ 42,840 $200,284 $202,547
Average interest rate 9.82% 9.88% 9.61% 10.09% 10.09% 8.93% 9.65%
Variable interest rate loans $109,840 $ 30,640 $ 25,509 $ 21,731 $ 18,775 $112,055 $318,550 $318,550
Average interest rate 9.42% 8.40% 8.36% 8.35% 8.37% 8.56% 8.80%
Total loans $518,834
Fixed interest rate securities $ 32,767 $ 16,744 $ 16,228 $ 8,463 $ 12,058 $116,030 $202,290 $202,290
Average interest rate 6.07% 5.79% 6.00% 5.26% 6.02% 6.01% 5.97%
Variable interest rate securities $ 126 $ 3,013 $ 662 $ 7,885 $ 498 $ 6,843 $ 19,027 $ 19,027
Average interest rate 6.31% 7.65% 7.76% 6.94% 7.34% 7.07% 7.13%
Total securities $221,317
Other interest-bearing assets $ 4,222 $ 4,222 $ 4,222
Average interest rate 4.97% 4.97%
- ----------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ---------------------------
Non-interest bearing checking $ 18,347 $ 10,484 $ 7,863 $ 2,621 $ 7,011 $ 19,199 $ 65,525 $ 65,525
Average interest rate
Savings $ 14,735 $ 7,368 $ 7,367 $ 11,052 $ 5,526 $ 46,048 $ 92,096 $ 92,096
Average interest rate 3.05% 3.05% 3.05% 3.05% 3.05% 3.05% 3.05%
Interest bearing checking $ 16,303 $ 38,846 $ 16,303 $ 5,434 $ 13,314 $ 45,659 $135,859 $135,859
Average interest rate 3.45% 4.22% 3.45% 3.45% 3.45% 3.45% 3.45%
Time deposits $239,367 $ 61,502 $ 12,953 $ 4,748 $ 3,371 $ 410 $322,351 $323,028
Average interest rate 5.54% 5.77% 5.43% 6.04% 5.50% 4.11% 5.58%
Total deposits $615,831
Fixed interest rate borrowings $ 11,194 $ 3,711 $ 3,784 $ 2,872 $ 18,317 $ 4,509 $ 44,387 $ 44,551
Average interest rate 5.92% 6.14% 6.17% 6.05% 5.62% 5.26% 5.78%
Variable interest rate borrowings $ 49,239 $ 49,239 $ 49,239
Average interest rate 5.10% 5.10%
Total borrowings $ 93,626
- ----------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial instruments:
- ------------------------------------------------
Interest rate floors purchased $ 10,000 $ 10,000 $ 20,000 $ 31
Average strike rate 5.50% 5.25%
Forward rate 5.70% 5.70%
======================================================================================================================
The preceding tables represent the Company's best estimates of future cash
flows from rate sensitive assets and liabilities. While this table
represents several significant changes in cash flow estimates for assets and
liabilities in maturity periods exceeding five years, the increases in fixed
rate loan and fixed rate investment securities maturing in 2004 and beyond
reflect investment decisions that were driven by simulation modeling which
indicated an asset sensitive balance sheet. Consequently, additional
emphasis was placed on adding fixed rate assets, which also resulted in
extended cash flow cycles to reduce the potential earnings impact of a
declining rate environment. In addition, several fixed rate liability
categories also reflect increases in extended cash flow characteristics.
While the underlying instruments have longer contractual maturities, certain
repricing options, if exercised by the creditor, would result in a
corresponding option to the Company to repay the borrowing. Management
intends to actively manage the corresponding impact of these extended cash
flow characteristics as a part of the regular review and actions of the ALCO.
The Company employs a variety of measurement techniques to identify and
manage its interest rate risk exposure. In addition to the interest rate
sensitivity and asset/liability repricing schedules, management also uses
simulation modeling and forecasting to determine the impact of changing rate
environments and to assess 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 applied to interest-
earning assets and interest-bearing liabilities. These modeling results are
more reasonable indications of the Company's interest rate risk. Evaluation
and review of the techniques, tools, and assumptions used in assessing the
Company's interest rate risk is an ongoing process.
Management believes the Company's current mix of assets and liabilities
provides a reasonable level of insulation from significant fluctuations in
net interest income and the resulting volatility of the Company's earning
base. 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
- --------------
Results of operations in the first quarter of 1999 represent enhanced
financial performance through a combination of external growth and a focus
on core competencies. Management continues to challenge its employees to
identify critical banking processes and re-engineer services to provide the
customer with the highest quality products and services. In addition,
management has identified and will continue to analyze key performance areas
which quantitatively measure the relative performance of the Company
compared to prior year results.
The Company's recent announcements detailing the Trust Preferred Securities
Issuance and the Stock Repurchase Program offer unique opportunities to the
Company to enhance key performance indicators, in particular earnings per
share and return on stockholders' equity. The Company's future financial
results will depend on the timing of stock repurchases and other factors,
such as the interest rate environment and loan demand.
In the first quarter of 1999, the Company initiated multiple programs
designed to enhance customer service representatives' sales expertise and
relationship building. These and other investments in customer service
enhancements represent the Company's strategic initiatives to increase
customer relationships within the Company. Management will continue to
invest in sales training and other professional expenses as the Company's
sales process evolves.
On April 1, 1999, Peoples Bank successfully opened a new sales office in the
newly constructed Wal-Mart superstore in New Martinsville, West Virginia.
The new banking facility offers extended evening and weekend hours (including
Sundays) and provides a wide array of financial products and services.
Management is pleased with the early results of the new Wal-Mart office and
is encouraged by the sales momentum generated in this office.
Later in 1999, Peoples Bank will open additional sales office in West
Virginia Wal-Mart superstores currently under construction in Vienna
(mid-1999) and South Parkersburg (late 1999 or early 2000). The three new
offices will increase the Company's visibility in its West Virginia markets
and give the Company's personal bankers better access to an increased number
of shoppers compared to a traditional banking center.
The new Wal-Mart locations will complement the Company's existing
full-service banking centers in New Martinsville and Parkersburg, as well as
provide additional locations to Peoples Bank's customers in the greater
Parkersburg area, particularly through the Vienna store. Management believes
these new sales centers will be catalysts for 1999's sales and customer
service efforts and a focal point for future banking centers. Rather than
traditional banking offices, the Wal-Mart locations will be full-service
'electronic' sales centers, with an emphasis on selling products that meet
the customers' financial needs combined with electronic transaction
capabilities and access to customer accounts.
Continuing the Company's emphasis on electronic product delivery, management
expects to begin offering, in the third quarter of 1999, fully integrated
internet banking ("Internet Banking System"), which will allow customers to
perform online transactions, pay bills, view account history, stop payment,
open accounts, change address, reorder checks, and much more. The Internet
Banking System will be an on-line service that offers real time transaction
capability and portability for the customer.
The Company's intention is to satisfy some of the demand for internet banking
in the markets it serves while providing a link to its history of needs-based
selling and community-minded service. The Internet Banking System will act
as the conduit of financial information for many of the Company's customers
in future periods.
The Internet Banking System will be offered in conjunction with the Company's
current PC-based cash management/home banking product that has been used
primarily by commercial customers. The Company will continue to strive to
meet future customer service challenges through its wide array of delivery
channels, using technology and traditional methods in the manner that best
fits each customer. Management recognizes the importance of electronic
banking to its customer base and continues to focus efforts designed to
enhance this process and allow customers almost unlimited banking products
and services at their convenience.
In the early part of the second quarter of 1999, the Company changed
broker/dealers and named Raymond James Financial Services, Inc. (member NASD
and SIPC), an unaffiliated registered broker/dealer, to provide enhanced
services to the Company's investment customers, including asset management,
tax shelters, common/preferred stocks, mutual funds, retirement planning,
estate planning, and financial planning services in general. Management
believes these types of services are critical to the Company's relationship
and needs-based selling approach and is excited by the opportunity to blend
its investment services to create a powerful sales unit.
In addition to operating efficiency, management focuses on increasing future
non-interest revenue streams to lessen the Company's dependency on net
interest income as the primary driver of future net income. In 1998, net
interest income increased as a percentage of total revenues due to the West
Virginia Banking Center Acquisition. In future periods, management will
focus on methods to enhance earnings potential through optimization of
customer relationships through an integrated sales process.
Integration of the Company's many sales processes, products, and services
will be the primary focus for the remainder of 1999. Management will
concentrate on a marketing program based on establishing brand awareness of
the Company in its markets, as well as establishing the "connection" between
customers and the many products and services offered by the Company. The
Company's insurance capabilities are an integral part of future earnings
streams and should reach break-even levels in 2000, and gradually increase
profitability thereafter. Management will continue to research alternative
methods of enhancing non-interest income streams, such as electronic banking
revenues, low income housing tax credits, and other investments.
Mergers and acquisitions remain a viable strategic option for the continued
growth of the Company's operations and scope of customer service. Future
acquisitions, if they occur, may not be limited to specific geographic
location or proximity to current markets. Management will focus its
energies on review and research of possible mergers, consolidations, or
banking center purchases as a means of acquiring sales centers that
complement existing Company locations and sales strategies. Ultimately,
acquisitions will depend upon financial service opportunities that
complement the Company's core competencies and strategic intent. Management
considers mergers and acquisitions to be a viable method of enhancing the
Company's earnings potential and will continue to pursue appropriate business
opportunities as they develop.
Management concentrates on several key performance indicators to measure and
direct the performance of the Company. While past results are not an
indication of future earnings, management believes the Company is positioned
to capitalize on its recent growth and initiatives to reposition the
Company's balance sheet through the combined impact of the Trust Preferred
Offering, Stock Repurchase Program, and Leverage Strategy. Management
believes that the Company can produce enhanced future performance levels
through integrated sales techniques and commitment to the strategic
initiatives outlines in this section. The Company's strategic initiatives
are designed to enhance customer service and increase future shareholder
value.
Impact of the Year 2000 Issue
- -----------------------------
The Company intends this information to constitute notice under the Year
2000 Information and Readiness Disclosure Act as a "Year 2000 Readiness
Disclosure". Many companies across various industries have dedicated
efforts to analyze the much-publicized "Year 2000" issue (or "Y2K"), which
is the result of computer programs written using two digits rather than
four to define the applicable year. Computer programs or hardware which
have date-sensitive software or embedded chips may recognize a date of "00"
as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations, including,
among other things, the inability to process transactions or engage in
similar normal business activities.
As discussed further below and based on assessments completed by the
Company, portions of the Company's software and hardware systems have been
modified, updated, or replaced so that those systems will properly utilize
dates beyond December 31, 1999. Management believes its assessment and
resulting remediation measures have mitigated the Y2K issue and ensured Y2K
compliance in regards to mission-critical applications, including customer
service related hardware and software systems (except one ATM, which is to
be updated in May, 1999).
Management has implemented plans to address Y2K issues and the impact to the
Company's business, operations, and relationships with customers, suppliers,
and other third parties. The Company primarily relies on third party
vendors for all critical processing systems software. Based on management's
assessments, the Company replaced certain portions of its software and
worked with software vendors so that those systems would properly utilize
dates beyond December 31, 1999. Management presently believes with these
recent modifications, combined with replacement of certain existing ATM
hardware and software, the Y2K issue will be mitigated.
Since the Company offers fiduciary services, management has conducted a
review of these services to identify potential liabilities. Management
continues to take appropriate action to manage identified exposure in order
to fulfill its responsibilities to fiduciary clients and to observe the
standards of prudence set forth in applicable laws and regulations.
Management plans to resolve the Y2K issue in five phases as follows:
awareness, assessment, renovation, validation, and implementation. To date,
the Company has completed its assessment of all material systems which could
be affected by the Y2K issue and addressed the extent to which its
operations are vulnerable should its software fail to be Y2K compliant. The
completed assessment indicates most of the Company's significant information
technology systems could be affected. Banking regulators have issued
guidelines and deadlines detailing what they expect financial institutions
to do in order to insure Y2K preparedness. The Company is following these
guidelines and expects to meet the deadlines defined by the regulators.
As a part of this process, the Company is also developing contingency plans
for all mission-critical systems, which it will implement in the event any
of these systems fail to function. Contingency plans for both information
technology systems ("IT") and non-information technology systems ("non-IT")
include a combination of manual processes and utilization of systems (which
have already been Y2K validated and implemented) that are completely
independent from the Company's core information systems.
The Company continues to assess the credit, liquidity and counterparty
trading risks which may be posed by customers who encounter Year
2000-related problems. These problems may result from the failure of a
customer to properly remediate its own systems and from Y2K problems that
are not addressed by the customer's suppliers and clients. The Company has
amended credit policies to include an assessment of Year 2000-related risks
for material new customers. The initial assessment of customer-related risks
for material customers has been completed and management does not anticipate
material losses or a significant negative impact to the Company's future
results of operations or financial position. The Company will continue to
monitor these risks.
The Company's assessment process included IT and non-IT systems. The IT
systems identified included personal computers, mainframes, local area
networks and servers, wide area network, automated teller machines ("ATM's"),
printers, copy machines, facsimile machines, telephones, and the operating
systems and softwares for these systems. Based on the results of its
assessment process, management considers these IT systems to be compliant
with Y2K, except one of the Company's ATM's, which will require hardware
and/or software upgrades to be completed in the second quarter of 1999. The
remaining ATM's have been certified compliant by the specific vendor who
supplied the machine.
Non-IT systems identified included heating, air conditioning, vault
controls, alarm systems, surveillance systems, and postage meters. Contact
has been made with all outside servicers and major vendors to determine
their individual levels of Y2K compliance. Based on vendor responses and/or
certification of Y2K compliance, the Company has determined that it should
not be significantly impacted by Y2K from these systems.
As of May 10, 1999, the following chart shows the current and projected
status of the Company's Y2K compliance efforts relative to IT systems:
PHASE Nov. 13, Dec. 31, Feb. 12, Mar. 31, May 10, June 30,
1998 1998 1999 1999 1999 1999
Awareness 100% --- --- --- --- ---
Assessment 100% --- --- --- --- ---
Renovation 80% 80% 100% --- --- ---
Validation 20% 70% 75% 80% 90% 100%
Implementation 20% 70% 75% 80% 90% 100%
Management estimates that half of its potential Y2K issues originate in the
Company's core banking system (software provided by a third-party vendor),
which supports approximately 50% of the Company's information processing.
This single system software provides accounting for the Company, as well as
loan and deposit products. This core banking system has been certified as
Y2K compliant by the vendor and the Information Technology Association of
America. This software has essentially been Y2K compliant for several
years (it was designed with a four digit year field) and supports
calculations beyond the year 2000. The Company has completed 100% of its
due diligence review of the proxy testing of the core banking system.
Additionally, the Company has conducted testing in its own environment and
has validated the proxy tests. The Company has also tested nearly all its
mission critical interfaces into its core banking system. Approximately 95%
of the interface testing has been successfully completed and the Company
plans to complete the testing of the remaining critical interfaces by
June 30, 1999.
The Company has replaced the central processing unit (hardware) that
supports the accounting system for Investment and Trust. The Company has
also upgraded the accounting system software, which has been certified
compliant by its vendor. These replacements and upgrades enabled the
Company to test the software and the related network and computer hardware,
in its own environment. This testing has been completed and management
believes the results were successful.
The ATM network software has also been certified compliant by its vendor
and has been tested in the Company's environment. The remaining mission
critical IT system, the Company's document processing and retrieval system,
is expected to be fully validated and implemented by June 30, 1999. The
vendor has supplied its Y2K certified version of its software, which has
been installed in the Company's current environment. Management is working
closely with the Company's third party vendors to ensure Y2K compliance in a
timely manner.
As planned, management replaced the Company's internal operating systems
(on existing hardware) during the second half of 1998. The internal
operating system for the mainframe computer has been successfully tested and
proven to be Y2K compliant. The Company has also completed the renovation
phase for all internally developed software applications. Management does
not consider internal software systems to be significant to the overall
operations of the Company. All mission critical applications that were not
Y2K compliant have been upgraded. All reprogramming of internal software
was completed in the third quarter of 1998.
As of May 10, 1999, the Company approximates it has completed 90% of its
testing and has implemented all of the renovated systems that have been
tested. Completion of the testing phase and implementation of all renovated
systems is expected by June 30, 1999.
Throughout the remainder of 1999, the Company will continue to update
hardware and software in conjunction with its normal business plan. All
systems will be tested for Y2K compliance prior to the integration into the
Company's network. The Company has queried, through written and verbal
communication, its important suppliers (such as utility companies) which do
not involve system interface. To date, the Company is not aware of any
problems which would materially impact operations, although the Company has
no means of ensuring that these organizations will be Y2K ready. The
inability of these parties to complete their Year 2000 resolution process
could materially impact the Company, as well as other businesses and
consumers.
The Company expenses Y2K project costs as incurred. The total out-of-pocket
cost of the Y2K compliance project is not expected to be greater than
$200,000 and, therefore, is immaterial to the Company's results of operations
or financial position. As of May 10, 1999, management estimates that 75% of
the Company's costs have been incurred. Included in the cost estimate is
internal human resource expense which is estimated to approximate between
$100,000 to $150,000. Although actual out-of-pocket expenses have been less
than anticipated, management has increased the amount of internal human
resource expected to be consumed by this project, offsetting the costs saved
relative to purchases of hardware, software, and/or consulting fees. The
Company has no pending material legal proceedings related to Y2K.
Due to the positive progress of the Company relative to remediation of the
Y2K issue, management recently launched a comprehensive marketing program to
its customers designed to communicate the Company's preparedness regarding
Y2K. Throughout 1999, the Company plans to increase its efforts to
communicate its preparedness in the market areas it serves.
The foregoing discussion of the Company's plans to complete the Y2K
modifications contains forward-looking statements for purposes of the
Private Securities Litigation Reform Act of 1995 and is based on management's
best estimates, which were derived utilizing assumptions of future events
including the continued availability of certain resources, and other factors.
Estimates on the status of completion and the expected completion dates are
based on costs incurred to date compared to total expected costs. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors which
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in the specialized area of Y2K
compliance, the ability of vendors to deliver Y2K compliant software as
planned, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
"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.
ITEM 3
- ------
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
- -------------------------------------------------------
The information called for by this item is provided under the caption
"Liquidity and Interest Rate Sensitivity" under Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations in
this Form 10-Q, and is incorporated herein by reference.
PEOPLES BANCORP INC. AND SUBSIDIARIES
- -------------------------------------
CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
======================================================================
(dollars in thousands) For the Three Months Ended
March 31,
1999 1998
Average Yield/ Average Yield/
Balance Rate Balance Rate
ASSETS
======
Securities:
Taxable $186,941 6.06% $166,030 6.58%
Tax-exempt 43,436 7.38% 25,601 8.04%
- -----------------------------------------------------------------------------
Total 230,377 6.31% 191,631 6.77%
Loans:
Commercial 224,591 8.66% 175,664 9.52%
Real estate 235,672 8.40% 232,553 8.70%
Consumer (net) 110,171 10.48% 112,486 10.53%
- -----------------------------------------------------------------------------
Total 570,434 8.90% 520,703 9.37%
Less: Allowance for loan losses (9,719) (8,670)
- -----------------------------------------------------------------------------
Net loans 560,715 9.06% 512,033 9.53%
Interest-bearing deposits 2,166 3.97% 6,578 6.72%
Federal funds sold 5,206 4.90% 9,090 5.49%
- -----------------------------------------------------------------------------
Total earning assets 798,464 8.22% 719,332 8.72%
Other assets 71,792 55,623
- -----------------------------------------------------------------------------
Total assets $870,256 $774,955
=============================================================================
LIABILITIES AND EQUITY
======================
Interest-bearing deposits:
Savings $ 98,426 2.40% $ 91,101 3.07%
Interest-bearing demand deposits 205,031 3.48% 137,769 3.63%
Time 326,696 5.10% 322,604 5.53%
- -----------------------------------------------------------------------------
Total 630,153 4.15% 551,474 4.65%
Borrowed funds:
Short-term 30,729 4.19% 43,138 5.08%
Long-term 40,528 4.73% 30,153 6.09%
- -----------------------------------------------------------------------------
Total 71,257 4.50% 73,291 5.48%
Total interest bearing liabilities 701,410 4.18% 624,765 4.75%
Non-interest bearing deposits 76,058 62,724
Other liabilities 5,973 7,873
- -----------------------------------------------------------------------------
Total liabilities 783,441 695,362
Stockholders' equity 86,815 79,593
- -----------------------------------------------------------------------------
Total liabilities and equity $870,256 $774,955
=============================================================================
Interest income to earning assets 8.22% 8.72%
Interest expense to earning assets 3.68% 4.12%
- -----------------------------------------------------------------------------
Net interest margin 4.54% 4.60%
=============================================================================
Interest income and yields presented on a fully tax-equivalent basis using
a 35% tax rate.
PART II
- -------
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities and Use of Proceeds.
None.
ITEM 3: Defaults upon Senior Securities.
None.
ITEM 4: Submission of Matters to a Vote of Security Holders.
On April 15, 1999, the Peoples Bancorp Inc. Annual Meeting of Shareholders
was held in the Mississippi Delta Room at the Hotel Lafayette in Marietta,
Ohio. The meeting was well-attended and over 85% of the outstanding common
shares were represented by proxy. No votes were placed in person. Voting
results were as follows:
Three Directors of the Company were re-elected to serve terms of three years
each (expiring in 2002): Frank L. Christy, Rex E. Maiden, and Joseph H.
Wesel (Chairman of the Board). In addition, Norman J. Murray retired as a
Director of the Company after serving for 19 years on Peoples Bancorp's
Board of Directors and 32 years as a Director of Peoples Bank. Directors of
the Company who continue to serve after the 1999 Annual Meeting include
George W. Broughton, Wilford D. Dimit, Robert E. Evans, Barton S. Holl, Paul
T. Theisen and Thomas C. Vadakin.
SHAREHOLDER VOTING RESULTS
- --------------------------
BROKER
NON-
NOMINEE FOR WITHHELD AGAINST ABSTAIN VOTES
- ----------------- --------- -------- ------- ------- -------
Frank L. Christy 5,367,241 18,340 84 N/A N/A
Rex E. Maiden 5,368,194 17,350 121 N/A N/A
Joseph H. Wesel 5,368,024 17,350 290 N/A N/A
ITEM 5: Other Information.
On May 14, 1999, the Company's Board of Directors announced the declaration
of a 10% stock dividend to be issued June 15, 1999, to common shareholders
of record at May 28, 1999. Fractional shares will be paid in cash based on
the closing price of Peoples Bancorp's common stock on the record date. The
stock dividend marks the sixth time in the past seven years that Peoples
Bancorp has issued either a stock dividend or stock split.
Also on May 14, 1999, the Company announced its quarterly dividend of $0.14
per share. The second quarter dividend represents a 10% increase compared to
the previous quarter and is payable subsequent to the Company's 10% stock
dividend. The second quarter dividend payout of approximately $885,000 on
an estimated 6.3 million shares is payable July 1, 1999, to shareholders of
record June 15, 1999.
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 31.
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 thereunto duly authorized.
PEOPLES BANCORP INC.
Date: May 14, 1999 By: /s/ ROBERT E. EVANS
Robert E. Evans
President and Chief Executive Officer
Date: May 14, 1999 By: /s/ JOHN W. CONLON
John W. Conlon
Chief Financial Officer and Treasurer
EXHIBIT INDEX
-------------
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR PERIOD ENDED MARCH 31, 1999
==================================================
Exhibit Number Description Exhibit Location
- -------------- ---------------------------------- ----------------
11 Computation of Earnings Per Share. Page 31.
27 Financial Data Schedule. EDGAR electronic
filing only.