-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P+OKjZqFHopdBbJdtQdsvzegWOR9SxSLXeXjEYGsPnga46QBEp12Y2NK/FQuFmVZ ze6Qbsw1E6yGvp0Hws2rDw== 0000318300-98-000002.txt : 19980401 0000318300-98-000002.hdr.sgml : 19980401 ACCESSION NUMBER: 0000318300-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES BANCORP INC CENTRAL INDEX KEY: 0000318300 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 310987416 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16772 FILM NUMBER: 98583164 BUSINESS ADDRESS: STREET 1: 138 PUTNAM ST STREET 2: P O BOX 738 CITY: MARIETTA STATE: OH ZIP: 45750 BUSINESS PHONE: 6143733155 10-K 1 ACTUAL FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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 incorporation or organization) Identification No.) 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 -------------------------------------- Securities registered pursuant to Section 12(b) of the Act: None -------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Shares, No Par Value (3,841,449 outstanding at February 28, 1998) -------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based upon the closing price of the Common Shares of the Registrant on the The NASDAQ National Market as of February 28, 1998, the aggregate market value of the Common Shares of the Registrant held by nonaffiliates on that date was $137,414,318. For this purpose, certain executive officers and directors are considered affiliates. Documents Incorporated by Reference: 1) Portions of Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1997, are incorporated by reference into Parts I and II of this Annual Report on Form 10-K. 2) Portions of Registrant's Definitive Proxy Statement relating to the Annual Meeting to be held April 9, 1998, are incorporated by reference into Part III of this Annual Report on Form 10-K. PART I ------ ITEM 1. BUSINESS. ================== Introduction - ------------ Peoples Bancorp Inc. ("Peoples Delaware") was incorporated under the laws of the State of Delaware on April 1, 1980. Peoples Delaware was merged, following shareholder approval, into Peoples Bancorp Inc., an Ohio corporation (the "Company"), effective April 6, 1993, pursuant to a reincorporation proceeding. The Company's principal business is to act as a multi-bank holding company. Its wholly-owned subsidiaries are The Peoples Banking and Trust Company ("Peoples Bank"), The First National Bank of Southeastern Ohio ("First National Bank"), Gateway Bancorp, Inc. ("Gateway Bancorp"), a multiple saving and loan holding company with two wholly-owned subsidiaries which include Russell Federal Savings Bank ("Russell Federal") and Catlettsburg Federal Savings Bank ("Catlettsburg Federal"), and The Northwest Territory Life Insurance Company, an Arizona corporation ("Northwest Territory"). At December 31, 1997, Peoples Bancorp Inc. (parent company only) had 31 full-time equivalent employees. The Peoples Banking and Trust Company - ------------------------------------- Peoples Bank was chartered as an Ohio banking corporation under its present name in Marietta, Ohio, in 1902. At December 31, 1997, it had assets of $577.0 million, deposits of $480.6 million, and net loans of $412.4 million. Peoples Bank is a full-service commercial bank. It provides the following products to its customers: checking accounts, NOW accounts, Super NOW accounts, money market deposit accounts, savings accounts, time certificates of deposit, commercial loans, installment loans, commercial and residential real estate mortgage loans, credit cards, debit cards, lease financing, corporate and personal trust services and safe deposit rental facilities. Peoples Bank also sells travelers checks, money orders and cashier's checks. Services are provided through ordinary walk-in offices, automated teller machines ("ATMs"), automobile drive-in facilities called "Motor Banks", banking by phone, and limited cash management services through computer banking. At December 31, 1997, the Trust Department of Peoples Bank held approximately $503 million of assets (market value) in trust and custodial accounts apart from the assets of the Bank. With all of its offices currently located in Ohio, Peoples Bank serves principally Washington, Athens, Meigs, and Gallia Counties, together with portions of Hocking, Perry, Lawrence and Vinton Counties in Ohio and adjacent parts of Northern West Virginia. Effective at the close of business on February 28, 1997, Peoples Bank completed the purchase of one full-service banking office located in Baltimore, Ohio, from National City Bank of Columbus. In the transaction, Peoples Bank assumed approximately $12.5 million in deposits. The Baltimore office, located in Fairfield County, currently operates a full-service banking office and an ATM. In addition to the office acquired in 1997, Peoples Bank provides services to its customers at its principal banking office in downtown Marietta and through ATMs and other banking facilities. A full-service office, Motor Bank and ATM are located at the Frontier Shopping Center in Marietta. Also, a full-service office and ATM are located inside a grocery store at Pike and Acme Streets in Marietta. A full-service office, two Motor Banks and a ATM are operated in Belpre, Ohio. Full-service offices with Motor Banks are located in Lowell, Reno, Gallipolis, Rutland and Nelsonville, Ohio. A full-service branch and ATM are located at One North Court Street in downtown Athens, Ohio. A full-service office, Motor Bank and ATM are located at the Athens Mall. Also, three ATMs are located on the campus of Ohio University in Athens, Ohio. A full-service office and separate Motor Bank are located in downtown Pomeroy, together with an ATM located outside a local convenience store. A full-service bank is located at Middleport, Ohio. A loan production office in Newark-Granville, Ohio, serves that immediate area in Licking County. At December 31, 1997, Peoples Bank had 234 full-time equivalent employees. On March 4, 1998, a new banking facility was opened in the recently renovated HDL Center at 152 Union Street in Athens, Ohio. The facility, located near the Ohio University campus, is a full-service office, offering an ATM and drive-through facility, with loan and investment services. The First National Bank of Southeastern Ohio - -------------------------------------------- First National Bank is a national banking association chartered in 1900. It provides banking services and products that are substantially the same as those of Peoples Bank. First National Bank operates a commercial bank and Motor Bank at one location at 415 Main Street, Caldwell, Ohio. It also has a full-service office and Motor Bank on Marion Street in Chesterhill, Ohio. It also operates a full-service office on Kennebec Street, McConnelsville, Ohio. First National Bank's market area is comprised of Caldwell, Chesterhill, McConnelsville and the surrounding area in Noble and Morgan Counties, Ohio. At December 31, 1997, it had assets of $86.3 million, deposits of $65.3 million, and net loans of $59.0 million. At December 31, 1997, First National Bank had 34 full-time equivalent employees. First National Bank also operates two insurance agency subsidiaries, Northwest Territory Life Insurance Agency, Inc. and Northwest Territory Property & Casualty Insurance Agency, Inc. (the "Agencies"). The Agencies were created in compliance with federal regulations allowing insurance powers to national banks in communities with populations of 5,000 people or less. On December 22, 1995, each Agency received a Certificate of Qualification (license) to operate the Agency from the Ohio Department of Insurance, thereby allowing the Agencies to engage in the insurance agency business, subject to the regulations of the Ohio Department of Insurance and the Comptroller of the Currency. These were the first insurance agencies in Ohio associated with a financial institution to receive licenses to conduct a broad-based insurance business. At December 31, 1997, the Agencies had 5 full-time equivalent employees. Gateway Bancorp, Inc. - --------------------- On December 12, 1997, the Company completed the acquisition of Gateway Bancorp, Inc. and its subsidiary, Catlettsburg Federal, of Catlettsburg, Kentucky, for approximately $21.6 million in a combination of cash of $6.2 million and 365,472 Common Shares of the Company ("Gateway Bancorp Acquisition" or "Catlettsburg Federal Acquisition"). Management has continued to operate Catlettsburg Federal as a federal savings bank subsidiary. Gateway Bancorp, Inc. was incorporated under Kentucky law in October 1994 in connection with the conversion of Catlettsburg Federal from a federally-chartered mutual savings and loan association to a federally-chartered stock savings bank. In this conversion, Gateway Bancorp, Inc. became the sole shareholder of Catlettsburg Federal. Effective December 12, 1997, Gateway Bancorp, Inc. merged with and into Peoples Acquisition Corporation, an Ohio corporation, formed as a wholly-owned subsidiary of the Company for purposes of effecting the transaction. Pursuant to the terms and conditions of the Gateway Bancorp Acquisition, the separate corporate existence of Gateway Bancorp, Inc. terminated upon consummation of the merger. With the filing of the Certificate of Merger with the Secretary of the State of Ohio, the name of the surviving corporation "Peoples Acquisition Corporation" was changed to "Gateway Bancorp, Inc." On January 1, 1998, Russell Federal became a subsidiary of Gateway Bancorp to align the Company's business units in northeast Kentucky. Catlettsburg Federal Savings Bank - --------------------------------- Catlettsburg Federal was originally chartered as a mutual savings and loan association in 1935. As mentioned above, Catlettsburg Federal converted to a federally-charted stock savings bank in 1994 with Gateway Bancorp, Inc. as sole shareholder of Catlettsburg Federal common stock. The Company acquired Catlettsburg Federal and its parent company Gateway Bancorp, Inc. on December 12, 1997. At December 31, 1997, Catlettsburg Federal had total assets of $59.2 million, deposits of $44.0 million and shareholders' equity of $14.8 million. Catlettsburg Federal serves the financial needs of customers in Carter and Boyd Counties, Kentucky its primary market area, together with portions of Greenup County. Its principal products include savings accounts, time certificates of deposit and commercial and residential real estate loans. Catlettsburg Federal operates two branches located in Catlettsburg and Grayson, Kentucky. The Catlettsburg branch, located on Louisa Street, offers services via a walk-in office while the Grayson branch, located on Carol Malone Boulevard, is a walk-in office and Motor Bank. In February 1998, Catlettsburg Federal Savings Bank completed construction of a full-service office in Ashland, Kentucky. Located on Eagle Drive, this branch will offer services through a walk-in office. At December 31, 1997, Catlettsburg Federal had 10 full-time equivalent employees. Russell Federal Savings Bank - ---------------------------- Effective January 1, 1997, Russell Federal in Russell, Kentucky was purchased by the Company for approximately $9.25 million in cash. Management has continued Russell Federal's operations as a federal savings bank. At December 31, 1997, Russell Federal had total assets of $31.3 million, deposits of $21.3 million and shareholders' equity of $5.9 million. Russell Federal was originally chartered as a mutual association in 1914. On October 6, 1994, Russell Federal converted from a mutual association to a stock corporation. Russell Federal serves the financial needs of customers in Greenup and Boyd Counties, Kentucky its primary market area. Its principal products include savings accounts, time certificates of deposit and commercial and residential real estate loans. Russell Federal has one full-service office located on Ferry Street in the city of Russell and serves its customers by this walk-in office and attached Motor Bank. At December 31, 1997, Russell Federal had 7 full-time equivalent employees. The Northwest Territory Life Insurance Company - ---------------------------------------------- Northwest Territory was organized under Arizona law in 1983 and was issued a Certificate of Authority to act as a reinsurance company by the State of Arizona on February 8, 1984. Northwest Territory reinsures credit life and disability insurance issued to customers of banking subsidiaries of the Company by the issuing insurance company. At fiscal year end November 30, 1997, Northwest Territory had total assets of $1.4 million and had gross premium income of $218,000 in 1997, $201,000 in 1996 and $244,000 in 1995. Northwest Territory reinsures risks (currently not exceeding $15,000 per insured on a present value basis) within limits established by governmental regulations and management policy. Northwest Territory has no employees. Customers and Markets - --------------------- The Company's service area has a diverse economic structure. Principal industries in the area include metals, plastics and petrochemical manufacturing; oil, gas and coal production and related support industries. In addition, tourism, education and other service-related industries are important and growing industries. Consequently, the Company is not dependent upon any one industry segment for its business opportunities. Each of the Company's banking subsidiaries originates various types of loans, including commercial and commercial real estate loans, residential real estate loans, home equity lines of credit, real estate construction loans, and consumer loans (including loans to individuals, credit card loans, and indirect loans). In general, the Company retains most of its originated loans and, therefore, secondary market activity has been minimal. The loans of each of the Company's subsidiaries are spread over a broad range of industrial classifications. The Company believes that its subsidiaries have no significant concentrations of loans to borrowers engaged in the same or similar industries and such subsidiaries do not have any loans to foreign entities. The lending market areas served by the Company's subsidiaries are primarily concentrated in southeastern Ohio and neighboring areas of Kentucky and West Virginia. In addition, a loan production office in central Ohio provides opportunities to serve customers in that economic region. Commercial lending entails significant additional risks as compared with consumer lending, i.e. single-family residential mortgage lending, installment lending, credit card loans and indirect lending. In addition, the payment experience on commercial loans is typically dependent on adequate cash flow of a business and thus may be subject, to a greater extent, to adverse conditions in the economy generally or adverse conditions in a specific industry. At December 31, 1997, the Company's subsidiaries had outstanding approximately $159.0 million in commercial loans (including commercial, financial and agricultural loans), representing approximately 30.5% of the total aggregate loan portfolio as of that date. At December 31, 1997, none of the Company's subsidiaries had extended credit to any one borrower in excess of its respective legal lending limits (approximately $7.8 million, $1.6 million, $2.2 million and $0.9 million, for Peoples Bank, First National, Catlettsburg Federal and Russell Federal, respectively). Loan terms include amortization schedules commensurate with the purpose of each loan, the source of repayment and the risk involved. Board of Director approval is required for loans whose aggregate total debt, including the principal amount of the proposed loan, exceeds $2 million, $300,000, $275,000 and $750,000 for Peoples Bank, Russell Federal, First National and Catlettsburg Federal, respectively. The primary analysis technique used in determining whether to grant a commercial loan is the review of a schedule of cash flows in order to evaluate whether anticipated future cash flows will be adequate to service both interest and principal due. In addition, collateral is reviewed to determine its value in relation to the loan. Each of the Company's subsidiaries regularly evaluates all commercial loans greater in amount than $100,000. If it is determined that deterioration has occurred, effective and prompt action is taken by the responsible subsidiary. Upon detection of a reduced ability of a borrower to meet cash flow obligations, the loan is considered an impaired loan and reviewed for possible downgrading or placement on non-accrual status. At December 31, 1997, the Company's subsidiaries had outstanding consumer loans (including indirect loans and credit cards) in an aggregate amount of approximately $114.3 million (approximately 21.9% of the aggregate total loan portfolio). Credit approval for consumer loans requires demonstration of sufficiency of income to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is the Company's policy to adhere strictly to all laws and regulations governing consumer lending. A qualified compliance officer is responsible for monitoring the Company's performance in this area and for advising and updating loan personnel. The Company's subsidiaries make credit life insurance and health and accident insurance available to all qualified buyers, thus reducing their risk of loss when a borrower's income is terminated or interrupted. It is the policy of each of the Company's subsidiaries to review its consumer loan portfolio monthly and to charge off loans that do not meet that subsidiary's standards. Each subsidiary also offers its customers credit card access through the consumer lending department of Peoples Bank. Consumer loans generally involve more risk as to collectibility than mortgage loans because of the type and nature of the collateral and, in certain instances, the absence of collateral. As a result, consumer lending collections are dependent upon the borrower's continued financial stability, and thus are more likely to be adversely affected by employment loss, personal bankruptcy, or adverse economic conditions. At December 31, 1997, there were approximately $248.2 million in residential real estate, home equity lines of credit and construction mortgages outstanding, representing 47.6% of total loans outstanding. The Company's subsidiaries require that the loan amount with respect to residential real estate loans be no more than 90% of the purchase price or the appraisal value of the real estate securing the loan, unless private mortgage insurance is obtained by the borrower with respect to the percentage exceeding such 90%. On occasion, the Company's subsidiaries may lend up to 100% of the appraised value of the real estate. The risk conditions of such loans are considered during underwriting for the purposes of establishing an interest rate compatible with the risks inherent in such home equity loans. Loans made for each subsidiary's portfolio in this lending category are generally one to five year adjustable rate, fully amortized mortgages. The Company's subsidiaries also generate fixed rate real estate loans and generally retain these loans. All real estate loans are secured by first mortgages with evidence of title in favor of the subsidiary in the form of an attorney's opinion of the title or a title insurance policy. The Company's subsidiaries also require proof of hazard insurance with the appropriate subsidiary named as the mortgagee and as the loss payee. Licensed appraisals are required in the case of loans in excess of $250,000. Home equity lines of credit are generally made as second mortgages by the Company's subsidiaries. The maximum amount of a home equity line of credit is generally limited to 80% of the appraised value of the property less the balance of the first mortgage. The home equity lines of credit are written with ten year terms but are subject to review. A variable interest rate is generally charged on the home equity lines of credit. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, the Company's subsidiary making the loan may be required to advance funds beyond the amount originally committed to permit completion of the project. At December 31, 1997, the Company had approximately $19.5 million in real estate construction loans, representing approximately 3.7% of the Company's total loan portfolio. Competition - ----------- The banking subsidiaries of the Company experience significant competition in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks, savings associations, insurance companies, governmental agencies, credit unions, brokerage firms and pension funds. The primary factors in competing for loans are interest rate and overall lending services. Competition for deposits comes from other commercial banks, savings associations, money market funds and credit unions as well as from insurance companies and brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity, convenience of office location and overall financial condition. The Company believes that its size, overall banking services and financial condition place it in a favorable competitive position. Northwest Territory operates in the highly competitive industry of credit life and disability insurance. The principal methods of competition in the credit life and disability insurance industry are the availability of coverages and premium rates. The Company believes Northwest Territory has a competitive advantage due to the fact that the business of Northwest Territory is limited to the accepting of life and disability reinsurance ceded in part to Northwest Territory from the credit life and disability insurance purchased by loan customers of primarily Peoples Bank and First National Bank. The Agencies operate in the extremely competitive life insurance and property and casualty insurance industries, due mostly to the large number of companies and agents located within the Company's markets. The Agencies provide several insurance product options to consumers, including traditional life insurance, as well as investments in mutual funds, variable and fixed annuities and securities. The Company intends to provide property and casualty insurance products through Northwest Territory Property & Casualty Insurance Agency, Inc. The Agencies' future competitive advantage will be based on their ability to provide products to consumers efficiently with sensitivity to customer service and cost price issues. Supervision and Regulation - -------------------------- The following is a summary of certain statutes and regulations affecting the Company and its subsidiaries. The summary is qualified in its entirety by reference to such statutes and regulations. The Company is a bank holding company under the Bank Holding Company Act of 1956, as amended, which restricts the activities of the Company and the acquisition by the Company of voting stock or assets of any bank, savings association or other company. The Company is also subject to the reporting requirements of, and examination and regulation by, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the bank holding company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the bank holding company and other subsidiaries. Bank holding companies are prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by the bank holding company or its subsidiaries. In addition, any savings association acquired by a bank holding company must conform its activities to those permissible for a bank holding company under the Bank Holding Company Act. The Company is also a savings and loan holding company due to its ownership of Russell Federal and Catlettsburg Federal. However, since the Company is a bank holding company regulated by the Federal Reserve Board, it is not subject to any separate regulation as a savings and loan holding company. Transactions between a savings association subsidiary of a savings and loan holding company and an affiliate thereof are subject to the same restrictions imposed by the Federal Reserve Act on subsidiary banks of a bank holding company. Congress is considering legislation to eliminate the federal savings and loan charter and the separate federal regulations of savings and loan associations. Although such legislation may change the activities in which Catlettsburg Federal and Russell Federal may engage, it is not anticipated that the current activities of either the Company or the Bank will be materially affected by those activity limits. As a national bank, First National Bank is supervised and regulated by the Comptroller of the Currency. As an Ohio state-chartered bank, Peoples Bank is supervised and regulated by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation ("FDIC"). The deposits of First National Bank and Peoples Bank are insured by the FDIC and those entities are subject to the applicable provisions of the Federal Deposit Insurance Act. A subsidiary of a bank holding company or savings and loan holding company can be liable to reimburse the FDIC if the FDIC incurs or anticipates a loss because of a default of another FDIC-insured subsidiary of the bank holding company or savings and loan holding company or in connection with FDIC assistance provided to such subsidiary in danger of default. In addition, the holding company of any insured financial institution that submits a capital plan under the federal banking agencies' regulations on prompt corrective action, guarantees a portion of the institution's capital shortfall, as discussed below. Russell Federal and Catlettsburg Federal are federally-chartered savings bank and are subject to regulation, supervision, and examination by the Office of Thrift Supervision ("OTS"). As members of the FHLB of Cincinnati, they are subject to certain limited regulation by the Federal Reserve Board. Russell Federal and Catlettsburg Federal deposits are insured by the FDIC, which exercises regulatory and examination authority. The enforcement authority of the OTS includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required. The FHLBs provide credit to their members in the form of advances. The Company's savings bank subsidiaries are members of the FHLB of Cincinnati and must maintain an investment in the capital stock of that FHLB in an amount equal to the greater of 1.0% of the aggregate outstanding principal amount of their respective residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. The Company's savings bank subsidiaries are in compliance with this requirement with an aggregate investment in stock of the FHLB of Cincinnati of $8.0 million at December 31, 1997. Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of Peoples Bank, First National Bank, Russell Federal and Catlettsburg Federal including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, and limitations on branching. Since June 1997, pursuant to federal legislation, First National Bank has been authorized to branch across state lines, unless the law of the other state specifically prohibits the interstate branching authority granted by federal law. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and for state member banks, such as Peoples Bank and First National Bank. The risk-based capital guidelines include both a definition of capital and a framework for calculating weighted-risk assets by assigning assets and off-balance sheet items to broad risk categories. The minimum ratio of total capital to weighted-risk assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least 4.0 percentage points is to be comprised of common stockholder's equity (including retained earnings but excluding treasury stock), noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist, among other things, of mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of allowance for loan and lease losses. The Federal Reserve Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of 3% for bank holding companies and state member banks that meet certain specified conditions, including no operational, financial or supervisory deficiencies and including having the highest regulatory rating. The minimum leverage ratio is 100 - 200 basis points higher for other bank holding companies and state member banks based on their particular circumstances and risk profiles and those experiencing or anticipating significant growth. National bank subsidiaries, such as First National Bank, are subject to similar capital requirements adopted by the Comptroller of the Currency. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and risk-based capital requirement applicable to savings associations such as Russell Federal and Catlettsburg Federal. The framework provided by the OTS to define capital and calculate risk-weighted assets is much the same as the framework provided by the Federal Reserve Board for bank holding companies and for state member banks, such as Peoples Bank. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained income and certain noncumulative perpetual preferred stock and related income. The capital standards also require core capital equal at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. The OTS risk-based requirement requires saving associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. The Company and its subsidiaries currently satisfy all capital requirements. Failure to meet applicable capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal and state regulatory authorities, including the termination of deposit insurance by the FDIC. Federal regulation requires prompt corrective action to resolve capital deficient banks and savings associations. Under these regulations, institutions which become undercapitalized become subject to mandatory regulatory scrutiny and limitations, which increase as capital continues to decrease. Such institutions are also required to file capital plans with their primary federal regulator, and their holding companies must guarantee the capital shortfall up to 5% of the assets of the capital deficient institution at the time it becomes undercapitalized. The OTS has adopted an interest rate risk component to the risk-based capital requirement, though the implementation of that component has been delayed. Pursuant to that requirement, a savings association would have to measure the effect of an immediate 200 basis point change in interest rates on the value of its portfolio, as determined under the methodology established by the OTS. If the measured interest rate risk is above the level deemed normal under the regulation, the association will be required to deduct one-half of that excess exposure from its total capital when determining its level of risk-based capital. In general, an association with less than $300 million in assets and a risk-based capital ratio of greater than 12% will not be subject to the interest rate risk component. (Catlettsburg Federal and Russell Federal currently qualify for such exemption.) Pending implementation of the interest rate risk component, the OTS has the authority to impose a higher individualized capital requirement on any savings association it deems to have excess interest rate risk. The OTS also may adjust the rick-based capital requirement on an individual basis for any association to take into account risks due to concentrations of credit and non-traditional activities. The ability of a bank holding company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary banks and other subsidiaries. However, the Federal Reserve Board expects the Company to serve as a source of strength to its subsidiary banks, which may require it to retain capital for further investment in subsidiaries, rather than for dividends for shareholders of the Company. Peoples Bank, First National Bank, Russell Federal and Catlettsburg Federal may not pay dividends to the Company if, after paying such dividends, they would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. Peoples Bank and First National Bank must have the approval of their respective regulative authorities if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year's net profits and the retained net profits for the preceding two years, less required transfers to surplus. Russell Federal and Catlettsburg Federal may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus 50% of the amount by which the lesser of the savings bank's tangible, core of risk-based capital exceeds its capital requirement for such capital component, as measured at the beginning of the calendar year, or 75% of its net income for the most recent four-quarter period. If the current minimum capital requirements following a proposed capital distribution are not met, Russell Federal and Catlettsburg Federal must obtain prior approval from the OTS. Payment of dividends by the Company's subsidiaries may be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice. These provisions could have the effect of limiting the Company's ability to pay dividends on its outstanding common shares. The Company's financial institution subsidiaries are subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity , fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of a financial institution to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent an institution lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas. First National, Russell Federal and Catlettsburg Federal have received a "satisfactory" examination rating under those regulations while Peoples Bank has received an "outstanding" examination rating. Prior to the enactment of the Small Business Jobs Protection Act (the "1996 Act") which was signed into law on August 21, 1996, earnings appropriated to bad debt reserves and deducted for federal income tax purposes could not be used by Russell Federal or Catlettsburg Federal to pay cash dividends to the Company without the payment of federal income taxes by the Company at the then current income tax rate on the amount deemed distributed, which would include the amount of any federal income taxes attributable to the distribution. The Company does not contemplate any distribution by Russell Federal or Catlettsburg Federal in a manner which would create the above-mentioned federal tax liabilities. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the Bank Insurance Fund ("BIF") and of the Savings Association Insurance Fund ("SAIF"). Peoples Bank and First National Bank are members of the BIF. Russell Federal and Catlettsburg Federal are members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both BIF and SAIF members. Under this system, assessments may vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Because BIF has become fully funded, BIF assessments for well-capitalized commercial banks were reduced to, in effect, $2,000 per year, during 1996. Federal legislation, which became effective September 30, 1996, provides, among other things, for the costs of prior thrift failures to be shared by both the BIF and the SAIF. As a result of such cost sharing, BIF assessments for well-capitalized banks during 1998 will be $.013 per $100 in deposits. SAIF assessments for well-capitalized institutions in 1998 will be $.063 per $100 in deposits. Based upon their respective level of deposits at December 31, 1997, the projected BIF assessment for the Company's banking subsidiaries would aggregate approximately $71,000 in 1998. The projected SAIF assessment for Russell Federal and Catlettsburg Federal would total approximately $41,000 in 1998. Northwest Territory is chartered by the State of Arizona and is subject to regulation, supervision and examination by the Arizona Department of Insurance. The powers of regulation and supervision of the Arizona Department of Insurance relate generally to such matters as minimum capitalization, the grant and revocation of certificates of authority to transact business, the nature of and limitations on investments, the maintenance of reserves, the form and content of required financial statements, reporting requirements and other matters pertaining to life and disability insurance companies. The Agencies are incorporated in the State of Ohio and licensed by the Ohio Department of Insurance, which regulates, supervises and has authority to examine the Agencies. Monetary Policy and Economic Conditions - --------------------------------------- The business of commercial banks and savings associations is affected not only by general economic conditions, but also by the policies of various governmental regulatory agencies, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. Government securities, changes in the discount rate on bank borrowings, and changes in the reserve requirements against bank and savings association deposits. These policies and regulations significantly affect the overall growth and distribution of bank and savings association loans, investments and deposits, and the interest rates charged on loans, as well as the interest rates paid on deposits and accounts. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks and savings associations in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the money markets and the activities of monetary and fiscal authorities, no definitive predictions can be made as to future changes in interest rates, credit availability or deposit levels. Statistical Financial Information Regarding the Company - ------------------------------------------------------- The following listing of statistical financial information, which is included in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1997 (the "Company's 1997 Annual Report") and incorporated herein by reference, provides comparative data for the Company over the past three and five years, as appropriate. These tables should be read in conjunction with "Management's Discussion and Analysis" and the Consolidated Financial Statements of the Company and its subsidiaries found at pages 32 through 49 and 8 through 26, respectively, of the Company's 1997 Annual Report. Average Balances and Analysis of Net Interest Income: Please refer to page 28 of the Company's 1997 Annual Report. Rate Volume Analysis: Please refer to page 29 of the Company's 1997 Annual Report. Loan Maturities: Please refer to page 29 of the Company's 1997 Annual Report. Average Deposits: Please refer to page 28 of the Company's 1997 Annual Report. Maturities Schedule of Large Certificates of Deposit: Please refer to page 29 of the Company's 1997 Annual Report. Loan Portfolio Analysis: Please refer to pages 30 and 31 of the Company's 1997 Annual Report. Securities Analysis: Please refer to pages 14 and 15, page 43 and page 45 of the Company's 1997 Annual Report. Return Ratios: Please refer to page 5 of the Company's 1997 Annual Report. Effect of Environmental Regulation - ---------------------------------- Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Company and its subsidiaries. The Company believes that the nature of the operations of its subsidiaries has little, if any, environmental impact. The Company, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future. The Company's subsidiaries may be required to make capital expenditures for environmental control facilities related to properties which they may acquire through foreclosure proceedings in the future; however, the amount of such capital expenditures, if any, is not currently determinable. ITEM 2. PROPERTIES =================== The principal office of the Company and Peoples Bank is located at 138 Putnam Street, Marietta, Ohio. This location consists of a five-story, stone-block building and one other smaller building attached by interior corridors. In 1993, Peoples Bank completed construction of a five-story addition to its primary facility in downtown Marietta. Peoples Bank also owns several nearby vacant lots for parking and a nearby Motor Bank. Other Washington County offices for Peoples Bank include property owned at Second and Scammel Streets in downtown Marietta on which an additional Motor Bank exists. Peoples Bank also leases land in the Frontier Shopping Center near downtown Marietta on which a full-service branch is located. In addition, Peoples Bank leases its other full-service branch located inside a supermarket in Washington Center near downtown Marietta. In Belpre, Peoples Bank owns a full-service branch at 1902 Washington Boulevard and a nearby Motor Bank. Peoples Bank also owns a full-service branch in Lowell, Ohio, and a Motor Bank in Reno, Ohio. In Athens County, Peoples Bank owns a two-story, block building on the Public Square in Nelsonville, Ohio, and an additional Motor Bank in Nelsonville. In addition, Peoples Bank owns an office consisting of a two-story concrete structure at One North Court Street, Athens, Ohio, and a brick full-service office in the Athens Mall. The building in the Mall is owned by Peoples Bank on leased real property. The branch office located in The Plains is operated under a lease which expires in June, 2001. The newly opened brick full-service office located on Union Street in Athens is operated under a lease which expires in March, 2008. In Meigs County, Peoples Bank owns full-service offices in Middleport and Rutland, Ohio. Peoples Bank also owns full-service and nearby Motor Banks in Gallipolis and Pomeroy, Ohio. Peoples Bank's loan production office in Newark-Granville is also leased. The Company owns the land and building on which the newly acquired Baltimore branch is located. First National Bank owns a three-story office building of brick and stone at 415 Main Street in Caldwell, Ohio, and a one-story masonry and brick building located on Marion Street in Chesterhill, Morgan County, Ohio, together with a two-story brick structure in McConnelsville, Morgan County, Ohio, located on Kennebec Street. The Agencies headquarters are also located in the Caldwell office of First National Bank. Catlettsburg Federal owns a two-story block and brick building located on Louisa Street in Catlettsburg, Kentucky, and a single-story block and brick located on Carol Malone Boulevard in Grayson, Kentucky. An additional one-story brick building was renovated and opened on Eagle Drive in Ashland, Kentucky by Catlettsburg Federal in March, 1998. Russell Federal owns a two-story brick office building with adjoining land and parking lot at 404 Ferry Street in Russell, Kentucky, as well as adjacent property located at 408 Ferry Street. All other properties occupied by the Company and its subsidiaries are owned by the Company or its subsidiaries. The Company and its subsidiaries own other real property which, when considered in the aggregate, is not material to their operations. Management believes all of the properties described above are in satisfactory condition for their intended use. ITEM 3. LEGAL PROCEEDINGS. =========================== There are no pending legal proceedings to which the Company or its subsidiaries are a party or to which any of their property is subject other than ordinary routine litigation incidental to their business, none of which is material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ============================================================= Not applicable. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ========================================================== Please refer to pages 6 and 7 of the Company's 1997 Annual Report, which are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. ================================= The table of Selected Financial Data on page 5 of the Company's 1997 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. ========================================================== Please refer to pages 32 through 49 of the Company's 1997 Annual Report, which are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ===================================================================== Please refer to page 45 of the Company's 1997 Annual Report, which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ===================================================== The Consolidated Financial Statements of Peoples Bancorp Inc. and it subsidiaries, included on pages 8 through 26 of the Company's 1997 Annual Report, and the Report of Ernst & Young LLP included therein at page 27 are incorporated herein by reference. Following is an index to the financial statements included in the Company's 1997 Annual Report: 1997 Annual Report Financial Statements: Pages - -------------------------------------------------------------- ------ Peoples Bancorp Inc. and Subsidiaries: Report of Independent Auditors (Ernst & Young LLP) 27 Consolidated Balance Sheets as of December 31, 1997 and 1996 8 Consolidated Statements of Income for each of the Three Years Ended December 31, 1997 9 Consolidated Statements of Stockholders' Equity for each of the Three Years Ended December 31, 1997 10 Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 1997 11 Notes to the Consolidated Financial Statements 12-26 Peoples Bancorp Inc.: (Parent Company Only Financial Statements are included in Note 15 of the Notes to the Consolidated Financial Statements) 24-25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ========================================================= No response required. PART III --------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ============================================================= Directors and Executive Officers of the Company include those persons enumerated under "Election of Directors" on pages 5 through 7 of the Company's definitive Proxy Statement relating to the Company's Annual Meeting of Shareholders to be held April 9, 1998, which section is expressly incorporated by reference. Other Executive Officers are Carol A. Schneeberger (41), Vice President/Operations; John (Jack) W. Conlon (52), Chief Financial Officer; Jeffrey D. Welch (43), Treasurer; and Mark F. Bradley (28), Controller. Ms. Schneeberger became Vice President/Operations of the Company in October, 1988. Prior thereto, she was Auditor of the Company from August, 1987 to October, 1988, and Auditor of Peoples Bank from January, 1986 to October, 1988. She was Assistant Auditor of Peoples Bank from January, 1979 to January, 1986. Mr. Conlon has been Chief Financial Officer of the Company since April, 1991. He has also been Chief Financial Officer and Treasurer of Peoples Bank for more than five years. Mr. Welch has been Treasurer of the Company since 1985. Mr. Bradley became Controller of the Company in January, 1998. Prior thereto, he was Manager of Accounting and External Reporting for the Company from February, 1995 to January, 1998. Has has been Controller for Peoples Bank since March, 1997. He was Manager of Accounting and External Reporting for Peoples Bank from February, 1995 to January, 1997. Prior to February 1995, Mr. Bradley served as a staff accountant of the Company beginning in 1991. The information required to be disclosed under Item 405 of Regulation S-K is included under the caption "Section 16(a) Beneficial Ownership Report Compliance" on pages 4 and 5 of the Company's definitive Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. ================================= See "Compensation Committee Interlocks and Insider Participation" and "Compensation of Executive Officers and Directors" on page 11, and pages 11 through 15, respectively, of the Company's definitive Proxy Statement relating to the Company's Annual Meeting of Shareholders to be held April 9, 1998, which are expressly incorporated herein by reference. Neither the report on executive compensation nor the performance graph included in the Company's definitive Proxy Statement relating to the Company's Annual Meeting of Shareholders to be held on April 9, 1998, shall be deemed to be incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ========================================================================= See "Security Ownership of Certain Beneficial Owners and Management" on pages 2 through 4 of the Company's definitive Proxy Statement relating to the Company's Annual Meeting of Shareholders to be held April 9, 1998, which section is expressly incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ========================================================= See "Transactions Involving Management" on page 8 of the Company's definitive Proxy Statement relating to the Company's Annual Meeting of Shareholders to be held April 9, 1998, which section is expressly incorporated herein by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. ============================================================== (a) (1) Financial Statements -------------------- For a list of all financial statements included in this Annual Report on Form 10-K, see "Index to Financial Statements" at Page 17. (a) (2) Financial Statement Schedules ----------------------------- All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a) (3) Exhibits -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see "Exhibit Index" beginning at page 18. The following table provides certain information concerning executive compensation plans and arrangements required to be filed as exhibits to this Annual Report on Form 10-K. Executive Compensation Plans and Arrangements --------------------------------------------- Exhibit No. Description Location ----------- ---------------------------- ----------------------- 10(a) Deferred Compensation Incorporated herein by Agreement dated November 16, reference to Exhibit 1976 between Robert E. Evans 6(g) to Registration and The Peoples Banking and Statement No. 2-68524 Trust Company, as amended on Form S-14 of March 13, 1979. Peoples Delaware, the Company's predecessor. 10(b) Peoples Bancorp Inc. Incorporated herein by Retirement Savings Plan. reference to Exhibit (Amended and Restated 10(b) of the Company's Effective January 1, 1996.) Annual Report on Form 10-K for fiscal year ended December 31, 1995 (File No. 0-16772) 10(c) Peoples Bancorp Inc. Incorporated herein by Deferred Compensation Plan reference to Exhibit for Directors of Peoples 10(a) of Registrant's Bancorp Inc. and Registration Statement Subsidiaries (Amended and on Form S-8 December Restated Effective January 31, 1997 (Registration 2, 1998.) No. 333-43629) 10(d) Peoples Bancorp Inc. Incorporated herein by Retirement Plan and Trust. reference to Exhibit (Amended and Restated 10(d) of the Company's Effective January 1, 1989.) Annual Report on Form 10-K for fiscal year ended December 31, 1995 (File No. 0-16772) 10(e) Summary of the Performance Incorporated herein by Compensation Plan of reference to Exhibit Peoples Bancorp Inc. 10(f) of the Company's effective for calendar year Annual Report on Form beginning January 1, 1997. 10-K for fiscal year ended December 31, 1996 (File No. 0-16772). 10(f) Peoples Bancorp Inc. Amended Incorporated herein by and Restated 1993 Stock reference to Exhibit Option Plan. 4 of the Company's Registration Statement on Form S-8 filed August 25, 1993 (Registration Statement No. 33-67878). 10(g) Form of Stock Option Incorporated herein by Agreement used in connection reference to Exhibit with grant of non-qualified 10(g) of the Company's stock options under Peoples Annual Report on Form Bancorp Inc. Amended and 10-K for fiscal year Restated 1993 Stock Option ended December 31, 1995 Plan. (File No. 0-16772) 10(h) Form of Stock Option Incorporated herein by Agreement dated May 20, reference to Exhibit 1993, used in connection 10(h) of the Company's with grant of incentive Annual Report on Form stock options under Peoples 10-K for fiscal year Bancorp Inc. Amended and ended December 31, 1995 Restated 1993 Stock Option (File No. 0-16772) Plan. 10(i) Form of Stock Option Incorporated herein by Agreement dated November 10, reference to Exhibit 1994, used in connection 10(i) of the Company's with grant of incentive Annual Report on Form stock options under Peoples 10-K for fiscal year Bancorp Inc. Amended and ended December 31, 1995 Restated 1993 Stock Option (File No. 0-16772) Plan. 10(j) Peoples Bancorp Inc. 1995 Incorporated herein by Stock Option Plan. reference to Exhibit 4 of the Company's Form S-8 filed May 24, 1995 (Registration Statement No. 33-59569). 10(k) Form of Stock Option Incorporated herein by Agreement used in connection reference to Exhibit with grant of non-qualified 10(k) of the Company's stock options to Annual Report on Form non-employee directors of 10-K for fiscal year the Company under Peoples ended December 31, 1995 Bancorp Inc. 1995 Stock (File No. 0-16772) Option Plan. 10(l) Form of Stock Option Incorporated herein by Agreement used in connection reference to Exhibit with grant of non-qualified 10(l) of the Company's stock options to Annual Report on Form non-employee directors of 10-K for fiscal year the Company's subsidiaries ended December 31, 1995 under Peoples Bancorp Inc. (File No. 0-16772) 1995 Stock Option Plan. (b) Reports on Form 8-K ------------------- The Company filed a Current Report on Form 8-K on December 24, 1997 relating to the acquisition on December 12, 1997 of all of the outstanding shares of common stock of Gateway Bancorp, Inc., a Kentucky corporation, pursuant to an Agreement and Plan of Merger, dated June 17, 1997, as amended as of September 2, 1997, between the Company and Gateway Bancorp, Inc. This acquisition was report under Item 5 - Other Events. No financial statement of pro forma financial information was required to be filed therein. (c) Exhibits -------- Exhibits filed with Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see "Exhibit Index" beginning at page 18. (d) Financial Statement Schedules ----------------------------- None. SIGNATURES ========== Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PEOPLES BANCORP INC. Date: March 26, 1998 By: /s/ ROBERT E. EVANS Robert E. Evans, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date - -------------------------- ----------------------------- -------------- /s/ ROBERT E. EVANS President and Chief Executive March 30, 1998 Robert E. Evans Officer and Director /s/ GEORGE W. BROUGHTON Director March 26, 1998 George W. Broughton /s/ WILFORD D. DIMIT Director March 26, 1998 Wilford D. Dimit /s/ BARTON S. HOLL Director March 26, 1998 Barton S. Holl /s/ REX E. MAIDEN Director March 26, 1998 Rex E. Maiden /s/ NORMAN J. MURRAY Director March 26, 1998 Norman J. Murray /s/ PAUL T. THEISEN Director March 26, 1998 Paul T. Theisen /S/ THOMAS C. VADAKIN Director March 26, 1998 Thomas C. Vadakin /S/ JOSEPH H. WESEL Chairman of the Board March 26, 1998 Joseph H. Wesel and Director /s/ JEFFREY D. WELCH Treasurer (Principal March 30, 1998 Jeffrey D. Welch Accounting Officer) /s/ JOHN W. CONLON Chief Financial Officer March 30, 1998 John W. Conlon PEOPLES BANCORP INC. INDEX TO FINANCIAL STATEMENTS 1997 Annual Report Financial Statements: Pages - -------------------------------------------------------------- ------ Peoples Bancorp Inc. and Subsidiaries: Report of Independent Auditors (Ernst & Young LLP) 27 Consolidated Balance Sheets as of December 31, 1997 and 1996 8 Consolidated Statements of Income for each of the Three Years Ended December 31, 1997 9 Consolidated Statements of Stockholders' Equity for each of the Three Years Ended December 31, 1997 10 Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 1997 11 Notes to the Consolidated Financial Statements 12-26 Peoples Bancorp Inc.: (Parent Company Only Financial Statements are included in Note 15 of the Notes to the Consolidated Financial Statements) 24-25 EXHIBIT INDEX PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 Exhibit Number Description Exhibit Location - ----------- ---------------------------- ----------------------- 2 (a) Agreement and Plan of Merger Incorporated herein by and Reorganization by and reference to Exhibit between Peoples Bancorp Inc. 2(b) of the Company's and Russell Federal Savings Annual Report on Form Bank, dated August 19, 1996. 10-K for fiscal year ended December 31, 1996 (File No. 0-16772). 2 (b) Agreement and Plan of Incorporated herein by Merger, dated June 17, 1997, reference to Exhibit as amended by and between 2(a) of Registrant's Peoples Bancorp Inc. and Registration Statement Gateway Bancorp, Inc. on Form S-4 (File No. 333-37261) effective October 2, 1997. 3 (a)(1) Amended Articles of Incorporated herein by Incorporation of Peoples reference to Exhibit Bancorp Inc. (as filed with 3(a) to the Company's the Ohio Secretary of State Registration Statement on May 3, 1993) on Form 8-B filed July 20, 1993 (File No. 0-16772). 3(a)(2) Certificate of Amendment to * the Amended Articles of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 22, 1994) 3(a)(3) Certificate of Amendment to * the Amended Articles of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 9, 1996) 3(a)(4) Amended Articles of * Incorporation Peoples Bancorp Inc. (reflecting amendments through April 9, 1996) [ For SEC reporting compliance purposes only -- not filed with Ohio Secretary of State] 3 (b) Regulations of Peoples Incorporated herein by Bancorp Inc. reference to Exhibit 3(b) to the Company's Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772). 4 Pledge Agreement, dated Incorporated herein by March 18, 1997, between reference to Exhibit Peoples Bancorp Inc. and 4 of Registrant's Fountain Square Commercial Registration Statement Funding Corp. on Form S-4 (File No. 333-37261) effective October 2, 1997. 10(a) Deferred Compensation Incorporated herein by Agreement dated November 16, reference to Exhibit 1976 between Robert E. Evans 6(g) to Registration and The Peoples Banking and Statement No. 2-68524 Trust Company, as amended on Form S-14 of March 13, 1979. Peoples Delaware, the Company's predecessor. 10(b) Peoples Bancorp Inc. Incorporated herein by Retirement Savings Plan. reference to Exhibit (Amended and Restated 10(b) of the Company's Effective January 1, 1996.) Annual Report on Form 10-K for fiscal year ended December 31, 1995 (File No. 0-16772) 10(c) Peoples Bancorp Inc. Incorporated herein by Deferred Compensation Plan reference to Exhibit for Directors of Peoples 10(a) of Registrant's Bancorp Inc. and Registration Statement Subsidiaries (Amended and on Form S-8 December Restated Effective January 31, 1997 (Registration 2, 1998.) No. 333-43629) 10(d) Peoples Bancorp Inc. Incorporated herein by Retirement Plan and Trust. reference to Exhibit (Amended and Restated 10(d) of the Company's Effective January 1, 1989.) Annual Report on Form 10-K for fiscal year ended December 31, 1995 (File No. 0-16772) 10(e) Summary of the Performance Incorporated herein by Compensation Plan of reference to Exhibit Peoples Bancorp Inc. 10(f) of the Company's effective for calendar year Annual Report on Form beginning January 1, 1997. 10-K for fiscal year ended December 31, 1996 (File No. 0-16772). 10(f) Peoples Bancorp Inc. Amended Incorporated herein by and Restated 1993 Stock reference to Exhibit Option Plan. 4 of the Company's Registration Statement on Form S-8 filed August 25, 1993 (Registration Statement No. 33-67878). 10(g) Form of Stock Option Incorporated herein by Agreement used in connection reference to Exhibit with grant of non-qualified 10(g) of the Company's stock options under Peoples Annual Report on Form Bancorp Inc. Amended and 10-K for fiscal year Restated 1993 Stock Option ended December 31, 1995 Plan. (File No. 0-16772) 10(h) Form of Stock Option Incorporated herein by Agreement dated May 20, reference to Exhibit 1993, used in connection 10(h) of the Company's with grant of incentive Annual Report on Form stock options under Peoples 10-K for fiscal year Bancorp Inc. Amended and ended December 31, 1995 Restated 1993 Stock Option (File No. 0-16772) Plan. 10(i) Form of Stock Option Incorporated herein by Agreement dated November 10, reference to Exhibit 1994, used in connection 10(i) of the Company's with grant of incentive Annual Report on Form stock options under Peoples 10-K for fiscal year Bancorp Inc. Amended and ended December 31, 1995 Restated 1993 Stock Option (File No. 0-16772) Plan. 10(j) Peoples Bancorp Inc. 1995 Incorporated herein by Stock Option Plan. reference to Exhibit 4 of the Company's Form S-8 filed May 24, 1995 (Registration Statement No. 33-59569). 10(k) Form of Stock Option Incorporated herein by Agreement used in connection reference to Exhibit with grant of non-qualified 10(k) of the Company's stock options to Annual Report on Form non-employee directors of 10-K for fiscal year the Company under Peoples ended December 31, 1995 Bancorp Inc. 1995 Stock (File No. 0-16772) Option Plan. 10(l) Form of Stock Option Incorporated herein by Agreement used in connection reference to Exhibit with grant of non-qualified 10(l) of the Company's stock options to Annual Report on Form non-employee directors of 10-K for fiscal year the Company's subsidiaries ended December 31, 1995 under Peoples Bancorp Inc. (File No. 0-16772) 1995 Stock Option Plan. 11 Computation of Earnings Per Page 29. Share. 12 Statements of Computation Page 30. of Ratios. 13 Peoples Bancorp Inc. Annual Page 31 through 88. Report to Stockholders for the fiscal year ended December 31, 1997 (not deemed filed except for portions thereof which are specifically incorporated by reference into this Annual Report on Form 10-K). 21 Subsidiaries of Peoples Page 89. Bancorp Inc. 23 Consent of Independent Page 90. Auditors - Ernst & Young LLP. 27.1 Financial Data Schedule. Page 91. 27.2 Financial Data Schedule. Page 92 through 93. 27.3 Financial Data Schedule. Page 94 through 95. 27.4 Financial Data Schedule. Page 96 through 97. *Filed herewith. EX-3 2 EXHIBIT 3(A)(2)-AMENDED ARTICLES OF INC-4/22/1994 Exhibit 3(a)(2) --------------- Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. as filed with the Ohio Secretary of State on April 22, 1994 CERTIFICATE OF AMENDMENT TO THE AMENDED ARTICLES OF INCORPORATION OF PEOPLES BANCORP INC. The undersigned hereby certify that they are the duly elected, qualified and acting President and Secretary, respectively, of Peoples Bancorp Inc., an Ohio corporation (the "Company"); that the Annual Meeting of the Shareholders (the "Annual Meeting") of the Company was duly called and held on April 5, 1994, at which Annual Meeting a quorum of shareholders of the Company was at all times present in person or by proxy; that the directors of the Company unanimously approved and recommended to the shareholders the approval of an amendment to Article FOURTH of the Company's Amended Articles of Incorporation in order to increase the authorized number of shares of the Company to 6,000,000 shares, all of which will be common shares, without par value; and that the resolution attached hereto as Annex 1 and incorporated herein by this reference was duly adopted by the shareholders of the Company at the Annual Meeting by the affirmative vote of the holders of shares entitling them to exercise at least a majority of the voting power of the Company entitled to vote thereon in accordance with Article SEVENTH of the Amended Articles of Incorporation of the Company. IN WITNESS WHEREOF, the undersigned President and Secretary of Peoples Bancorp Inc., acting for and on behalf of said corporation, have hereunto set their hands this 19th day of April, 1994. /s/ Robert E. Evans - -------------------------- Robert E. Evans, President /s/ Ruth I. Otto - -------------------------- Ruth I. Otto, Secretary Annex 1 ------- RESOLVED, that the Amended Articles of Incorporation of Peoples Bancorp Inc. be, and the same hereby are, amended by deleting present Article FOURTH in its entirety and by substituting in its place new Article FOURTH in the following form: Article FOURTH of the Amended Articles of Incorporation of Peoples Bancorp Inc. -------------------- FOURTH: The authorized number of shares of the Corporation shall be 6,000,000, all of which shall be common shares, each without par value. 03/30/98 - 8095187.01 EX-3 3 EXHIBIT 3(A)(3)-AMENDED ARTICLES OF INC-4/9/1996 Exhibit 3(a)(3) --------------- Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. as filed with the Ohio Secretary of State on April 9, 1996 CERTIFICATE OF AMENDMENT TO THE AMENDED ARTICLES OF INCORPORATION OF PEOPLES BANCORP INC. The undersigned hereby certify that they are the duly elected, qualified and acting President and Secretary, respectively, of Peoples Bancorp Inc., an Ohio corporation (the "Company"); that the Annual Meeting of the Shareholders (the "Annual Meeting") of the Company was duly called and held on April 9, 1996, at which Annual Meeting a quorum of shareholders of the Company was at all times present in person or by proxy; that the directors of the Company unanimously approved and recommended to the shareholders the approval of an amendment to Article FOURTH of the Company's Amended Articles of Incorporation in order to increase the authorized number of shares of the Company to 12,000,000 shares, all of which will be common shares, without par value; and that the resolution attached hereto as Annex 1 and incorporated herein by this reference was duly adopted by the shareholders of the Company at the Annual Meeting by the affirmative vote of the holders of shares entitling them to exercise at least a majority of the voting power of the Company entitled to vote thereon in accordance with Article SEVENTH of the Amended Articles of Incorporation of the Company. IN WITNESS WHEREOF, the undersigned President and Secretary of Peoples Bancorp Inc., acting for and on behalf of said corporation, have hereunto set their hands this 9th day of April, 1996. /s/ Robert E. Evans - -------------------------- Robert E. Evans, President /s/ Ruth I. Otto - -------------------------- Ruth I. Otto, Secretary Annex 1 ------- RESOLVED, that Article FOURTH of the Corporation's Amended Articles of Incorporation be amended to increase the authorized number of shares from 6,000,000 to 12,000,000, all of which will be common shares, without par value. EX-3 4 EXHIBIT 3(A)(4)-AMENDED ARTICLES OF INC-4/9/1996 Exhibit 3(a)(4) --------------- Amended Articles of Incorporation of Peoples Bancorp Inc. (reflecting amendments through April 9, 1996) [For SEC reporting compliance purposes only -- not filed with Ohio Secretary of State] AMENDED ARTICLES OF INCORPORATION OF PEOPLES BANCORP INC. (reflecting amendments through April 9, 1996) [for SEC reporting compliance only -- not filed with Ohio Secretary of State] FIRST: The name of the corporation shall be Peoples Bancorp Inc. (the "Corporation"). SECOND: The place in Ohio where the principal office of the Corporation is to be located is in the City of Marietta, County of Washington. THIRD: The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98 of the Ohio Revised Code. FOURTH: The authorized number of shares of the Corporation shall be 12,000,000, all of which shall be common shares, each without par value. FIFTH: The directors of the Corporation shall have the power to cause the Corporation from time to time and at any time to purchase, hold, sell, transfer or otherwise deal with (A) shares of any class or series issued by it, (B) any security or other obligation of the Corporation which may confer upon the holder thereof the right to convert the same into shares of any class or series authorized by the Articles of the Corporation, and (C) any security or other obligation which may confer upon the holder thereof the right to purchase shares of any class or series authorized by the Articles of the Corporation. The Corporation shall have the right to repurchase, if and when any shareholder desires to sell, or on the happening of any event is required to sell, shares of any class or series issued by the Corporation. The authority granted in this Article FIFTH of these Articles shall not limit the plenary authority of the directors to purchase, hold, sell, transfer or otherwise deal with shares of any class or series, securities, or other obligations issued by the Corporation or authorized by its Articles. SIXTH: No shareholder of the Corporation shall have, as a matter of right, the preemptive right to purchase or subscribe for shares of any class, now or hereafter authorized, or to purchase or subscribe for securities or other obligations convertible into or exchangeable for such shares or which by warrants or otherwise entitle the holders thereof to subscribe for or purchase any such share. SEVENTH: Notwithstanding any provision of the Ohio Revised Code now or hereafter in force requiring for any purpose the vote, consent, waiver or release of the holders of shares of the Corporation entitling them to exercise two-thirds (2/3) or any other proportion of the voting power of the Corporation or of any class or classes of shares thereof, such action, unless expressly otherwise provided by statute, may be taken by the vote, consent, waiver or release of the holders of shares entitling them to exercise not less than a majority of the voting power of the Corporation or of such class or classes; provided, however, that if any three members of the Board of Directors of the Corporation shall affirmatively vote against any of the following matters, the affirmative vote of the holders of shares entitling them to exercise not less than 75% of the voting power of the Corporation entitled to vote thereon shall be required to adopt: (1) a proposed amendment to the Articles of the Corporation; (2) proposed new regulations or an alteration, amendment or repeal of the regulations of the Corporation; (3) an agreement of merger or consolidation providing for the merger or consolidation of the Corporation with or into one or more other corporations; (4) a proposed combination or majority share acquisition involving the issuance of shares of the Corporation and requiring shareholder approval; (5) a proposal to sell, lease, exchange, transfer or otherwise dispose of all or substantially all of the property and assets of the Corporation; (6) a proposed dissolution of the Corporation; or (7) a proposal to fix or change the number of directors by action of the shareholders of the Corporation. The written objection of a director to any such matter submitted to the President or Secretary of the Corporation not less than three days before the meeting of the shareholders of the Corporation at which any such matter is to be considered shall be deemed to be an affirmative vote by such director against such matter. EIGHTH: The members of the Board of Directors of the Corporation, when evaluating any offer of another party to (A) make a tender or exchange offer for any shares of the Corporation, (B) merge or consolidate the Corporation with another corporation or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, in connection with the exercise of their judgment in determining what they reasonably believe to be in the best interests of the Corporation, shall consider the interests of the Corporation's shareholders and, in their discretion, may consider any of the following: (1) the interests of the Corporation's employees, suppliers, creditors, and customers; (2) the economy of Ohio and the nation; (3) community and societal considerations; and (4) the long-term as well as the short-term interests of the Corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the Corporation. NINTH: Shareholders of the Corporation shall not have the right to vote cumulatively in the election of directors. TENTH: These Amended Articles of Incorporation take the place of and supersede the existing Articles of Incorporation of Peoples Bancorp Inc. EX-11 5 EXHIBIT 11-COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 ---------- PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 COMPUTATION OF EARNINGS PER SHARE Year Ended December 31, 1997 1996 1995 ------------------------------------------ BASIC EARNINGS PER SHARE - ------------------------ EARNINGS: Net income $8,605,000 $7,651,000 $6,050,000 AVERAGE SHARES OUTSTANDING: Weighted average Common Shares outstanding 3,473,158 3,437,790 3,481,176 ---------- ---------- ---------- BASIC EARNINGS PER SHARE $2.48 $2.23 $1.74 ========== ========== ========== DILUTED EARNINGS PER SHARE - -------------------------- EARNINGS: Net income $8,605,000 $7,651,000 $6,050,000 AVERAGE SHARES OUTSTANDING: Weighted average Common Shares outstanding 3,473,158 3,437,790 3,481,176 Net effect of the assumed exercise of stock options based on the treasury stock method 110,188 43,002 17,779 ---------- ---------- ---------- Total 3,583,346 3,480,792 3,498,955 DILUTED EARNINGS PER SHARE $2.40 $2.20 $1.73 ========== ========== ========== EX-12 6 EXHIBIT 12-COMPUTATION OF RATIOS EXHIBIT 12 ---------- PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 COMPUTATION OF RATIOS CASH DIVIDENDS PER SHARE Cash dividends paid/Common shares outstanding at date of declaration BOOK VALUE PER SHARE Total stockholders' equity/Common shares outstanding at year-end RETURN ON AVERAGE ASSETS Net income/Average assets RETURN ON AVERAGE STOCKHOLDERS' EQUITY Net income/Average stockholders' equity NET INTEREST MARGIN Fully-tax equivalent net interest income/Average earning assets NON-INTEREST EXPENSE TO AVERAGE ASSETS Non-interest expense/Average assets EFFICIENCY RATIO (Non-interest expenses less intangible and non-recurring , non-operational items)/ (Fully-tax equivalent net interest income plus non-interest income) AVERAGE LOANS TO AVERAGE DEPOSITS Average gross loans/Average deposits DIVIDEND PAYOUT RATIO Dividends declared/Net income AVERAGE STOCKHOLDERS' EQUITY TO AVERAGE ASSETS Average stockholders' equity/Average assets PRIMARY CAPITAL TO PERIOD END TOTAL ASSETS (Stockholders' equity plus allowance for loan losses less intangible assets)/ (Period end total assets plus allowance for loan losses less intangible assets) TIER 1 CAPITAL RATIO Stockholders' equity less intangible assets less securities mark-to-market capital reserve ("Tier 1 Capital")/ Risk adjusted assets TOTAL CAPITAL RATIO Tier 1 Capital plus allowance for loan losses/Risk adjusted assets TIER 1 LEVERAGE RATIO Tier 1 Capital/Quarterly average assets NET CHARGE-OFFS TO AVERAGE LOANS (Gross chargeoffs less recoveries)/ Average net loans NONPERFORMING LOANS AS A PERCENTAGE OF PERIOD END LOANS (Nonaccrual loans plus loans past due 90 days or greater plus other real estate owned)/Gross loans net of unearned interest ALLOWANCE FOR LOAN LOSSES TO PERIOD END TOTAL LOANS Allowance for loan losses/Gross loans net of unearned interest EX-13 7 ANNUAL REPORT TO SHAREHOLDERS 12/31/97 EXECUTIVE SUMMARY ================= In 1997 Peoples Bancorp Inc. attained record levels of earnings and asset growth. We also welcomed many new shareholders in late 1997 through the acquisition of Gateway Bancorp, Inc. of Catlettsburg, Kentucky. Consistent earnings growth and increased shareholder return are basic principles of our strategic plan. The financial information beginning on page 5 highlights your Company's growth and profitability. 1997 marks the Company's 24th consecutive year of increased earnings, with total net income of $8,605,000, an increase of 12.5% compared to 1996. Diluted earnings per share totaled $2.40, up 9.1% over 1996's $2.20. Dividends per share continued to grow, reaching $0.74 per share in 1997, an increase of $0.09 per share (or 13.8%) compared to 1996. Strong earnings growth in 1997 can be attributed primarily to internal loan growth and enhancements to the Company's operating efficiency. Expansion of our products, services and markets remains a principal objective for our bankers in 1998 and beyond. In 1997, Peoples Bancorp successfully completed three acquisitions. In December, 1997, Peoples Bancorp acquired Gateway Bancorp, Inc. and its wholly-owned subsidiary, the Catlettsburg Federal Savings Bank, which has approximately $60 million in assets. Catlettsburg Federal represents Peoples Bancorp's second acquisition in northeast Kentucky. In January, 1997, Peoples Bancorp purchased Russell Federal Savings Bank which was recently reorganized as a subsidiary of Gateway Bancorp in an effort to align our business units in northeast Kentucky. We also added a full-service banking facility in Baltimore, Ohio, purchased by The Peoples Banking and Trust Company. We are encouraged by the early performance of these acquired offices and expect even stronger contributions in 1998. More recently we announced the signing of an agreement by Peoples Bank to acquire five full-service banking facilities in West Virginia from an unaffiliated financial institution. The offices are located in Point Pleasant, New Martinsville, and Steelton, West Virginia, and will establish Peoples Bancorp's first physical presence in West Virginia. The acquisition is expected to be completed in mid-1998. In the agreement, Peoples Bank will assume approximately $125 million in deposits and purchase $10 million in loans. The acquisition is contingent upon regulatory approval and other conditions. We are excited by the many opportunities that exist in these West Virginia markets and the opportunity for new relationships and new product offerings. In addition to new products, we are constantly looking for ways to enhance service to customers through our delivery systems. The First National Bank of Southeastern Ohio opened their first ATM in 1997, expanding service potential to their customer base in Noble County. The Peoples Connect Card, a debit card that acts like a check, is currently being enjoyed by thousands of customers who make electronic purchases with ease. In recent months we began offering a PC-based cash management product that will be offered to both consumer and commercial customers. We believe that home banking and PC banking are future services that must be part of the Company's core delivery of services. Our people look forward to the opportunities that lie ahead in new markets, products, and services. It seems the financial services industry is in a state of perpetual motion, as technologies continue to reshape the way we do business. Our associates' commitment to adjust to meet customer needs allows for a flexible work environment. 1997 produced strong loan growth. Internal loan growth totaled over $50 million in 1997, as total loans grew to over $515 million. Our lenders believe that investment in the communities where we live is an integral part of the role of today's financial institutions and will continue to support community growth applying sound underwriting skills. The experience of our associates is one of Peoples Bancorp's strongest assets and we strive to share our talents and resources to improve the communities we serve. Considering the rise of electronic banking services, banking now has no geographical boundaries, but we maintain our commitment to those markets where we have developed long-term relationships. Excellence within the Company means more than just meeting or exceeding financial goals. Our customers set the standards. The ability to adapt to shifting customer needs and preferences provides the base for consistent return to investors. As our enterprising customers have grown, so have we. Each year we set financial goals and key performance indicators that, if met, create a solid return for our investors. The strategic plan for Peoples Bancorp is simple: to strive for excellence in all aspects of delivering financial products and services. This pursuit of excellence is a program of adding value to a customer relationship, maximizing the customer's link to Peoples Bancorp, and creating a fair profit for our shareholders. Our key performance indicators are financial goals based on improvement over prior year performance and are designed to reward our associates for increasing shareholder value. We believe that our associates are stakeholders in the Company and should share the same competitive goals as our owners. Expectations for 1998 are high. In 1997 alone, your Company's stock price climbed 58% to $41.75, the closing price of PEBO December 31, 1997. Increased stock price creates pressure to continue such success, a challenge to our bankers for 1998. Recent acquisitions should position your Company for continued asset growth and market penetration, but acquisitions by themselves do not guarantee enhanced performance in 1998 and beyond. Looking to the long-term, the main challenge for Peoples Bancorp continues to be earnings growth in an increasingly competitive environment. In order to provide ongoing enhancement to our shareholders' investment, Peoples Bancorp must be an efficient financial services provider. A measure of operating efficiency in the financial services industry is the efficiency ratio, which improved to 51.06% in 1997, compared to 53.76% in 1996, and continued our recent trend of enhanced operating efficiency through leveraged technology and continuous improvement. Understandably, Peoples Bancorp will surely be challenged by our shareholders and competitors to continue to improve operating efficiency in 1998 and beyond. It is not Peoples Bancorp's strategy to be simply efficient, because cutting costs is not enough in a highly competitive industry, such as banking, where customers expect professionalism along with efficiency. Our associates have developed the ability to serve customers in a manner that best fits the customer's needs, whether it's 24-hour banking through our TeleBank office, or one-on-one service through one of our many Personal Bankers. We realize that group of customers have different needs and our ability to recognize those subtle differences provides a competitive advantage. Exceeding the expectations of our customers, shareholders, and associates is the challenge for 1998. And finally, a note about the loss of a friend. On August 2, 1997, we received notice of the death of William K. Hamer, retired Chairman of Peoples Bancorp (1982-1988) and the fifth President of The Peoples Banking and Trust Company (1968-1986). Recognizing his excellent leadership at the time of his retirement it was said, "A bank is known by the quality of its people and the quality of its people is determined by the quality of its leadership." We will always remember Bill Hamer as an excellent leader and an outstanding person. If you have any questions concerning Peoples Bancorp stock, please contact our Investor Relations Department at (740) 374-6136, or visit our web site at www.peoplesbancorp.com. We invite you to enjoy the benefits of Peoples Bancorp's many financial products and services. /s/ ROBERT E. EVANS Robert E. Evans President and Chief Executive Officer SELECTED FINANCIAL DATA ======================= The information below under the captions "Operating Data", "Balance Sheet Data" and "Per Share Data" for each of the five years in the period ended December 31, 1997 has been derived from the Consolidated Financial Statements of the Company. (Dollars in thousands, except ratios and per share data) 1997 1996 1995 1994 1993 OPERATING DATA for the year ended: Total interest income $ 53,836 $ 47,397 $ 43,068 $ 35,801 $ 35,086 Total interest expense 25,216 21,966 20,777 15,424 15,263 Net interest income 28,620 25,431 22,291 20,377 20,048 Provision for loan losses 2,589 1,965 1,315 765 1,592 Other income 5,938 5,178 4,481 4,141 4,177 Other expenses 19,265 17,522 16,818 15,672 15,124 Net income 8,605 7,651 6,050 5,748 5,071 - ----------------------------------------------------------------------------- BALANCE SHEET DATA at year end: Total assets $758,158 $616,635 $543,430 $498,006 $465,373 Investment securities 174,291 147,783 131,762 99,419 103,349 Net loans 513,214 415,540 372,800 354,570 315,305 Total deposits 611,107 504,692 429,077 403,819 385,639 Long-term borrowings 28,577 29,200 23,142 23,787 20,331 Stockholders' equity 78,818 56,193 51,474 45,635 42,778 - ----------------------------------------------------------------------------- SIGNIFICANT RATIOS Net income to: Average total assets 1.29% 1.29% 1.15% 1.20% 1.09% Average stockholders' equity 14.3 14.4 12.3 12.9 11.9 Average stockholders' equity to average total assets 9.0 8.9 9.3 9.3 8.8 Average loans to average deposits 85.5 84.0 85.2 85.5 78.4 Primary capital to period end total assets 9.9 9.9 10.4 10.1 10.1 Dividend payout ratio 30.5 30.5 32.2 29.3 29.8 - ----------------------------------------------------------------------------- PER SHARE DATA Net income: Basic $ 2.48 $ 2.23 $ 1.74 $ 1.64 $ 1.50 Diluted 2.40 2.20 1.73 1.63 1.48 Weighted average shares outstanding: Basic 3,473,158 3,437,790 3,481,176 3,508,941 3,380,694 Diluted 3,583,346 3,480,792 3,498,955 3,520,337 3,438,808 Cash dividends paid 0.74 0.65 0.56 0.48 0.43 Book value at end of period 20.57 16.32 15.04 13.01 12.15 - ----------------------------------------------------------------------------- COMMON STOCK ============ Return to Investors - ------------------- The Company's goal is to become the financial services leader in all of the communities we serve. Achieving this objective will lead to increases in shareholder value, the most important measure of our financial success. Peoples Bancorp's strong capital base ensures the Company's safety and allows opportunity for growth and expansion. Shareholder return on this investment continues to be a top priority, through both dividends and growth in the market value of the Company's stock. Management focuses on several key ratios that define our dedication to shareholder return. We concentrate on earnings per share, return on shareholders' equity, and dividends per share. Enhancement of net income and profitability through increased efficiencies are major Company goals, as well as positioning the Company for increased future profits. Under normal circumstances, as earnings per share increase, the dividends paid per share should follow with a similar increase and have a positive effect on the market value of the Company's common stock. Our associates are committed to enhancing the total return to our shareholders and the following graphs illustrate our commitment. In the last five years, the Company's earnings per share has grown by a compound annual average rate of 10.2%. Diluted earnings per share reached $2.40 in 1997. Through balance sheet growth and investments in technology, the Company has gained efficiencies and enhanced overall performance. Increases in non-interest income have also contributed to the profitability of the Company. In addition to increasing shareholder wealth through growth in stock value, we believe a competitive dividend rate is also important to the overall return to our shareholders. In the last 5 years, the compound annual average growth rate of the Company's per share dividend was 11.5%. The Company has paid cash dividends on its Common Stock for over 40 consecutive years and has increased the annual dividend in each of the last 32 years. The Company plans to continue to pay quarterly cash dividends, subject to certain regulatory restrictions as described in Note 11 to the audited financial statements. In recent years, the financial services industry has emphasized return on shareholders' equity (or "ROE") as a means of measuring an entity's performance. Recently, the Company has implemented several strategic initiatives designed to increase ROE. The graph to the right shows recent ROE performance for the Company. Future ROE will be impacted by the shares issued in a recent acquisition. Management will continue to focus on enhancements to ROE as a means of increasing the value of shareholder investment. Earnings Dividends Return on Average per share per share Shareholders' Equity --------- --------- -------------------- 1993 $1.48 $0.43 12.45% 1994 1.63 0.48 12.94 1995 1.73 0.56 12.33 1996 2.20 0.65 14.43 1997 2.40 0.74 14.33 Since February 9, 1993, the Company's common stock has traded on the Nasdaq National Stock Market (National Association of Securities Dealers Automated Quotation) under the symbol PEBO. Nasdaq provides brokers and others with immediate access to the best stock price for the Company and thousands of other companies across the world. In 1996, the Company also launched its web site at address www.peoplesbancorp.com, where the Company's information can be accessed electronically. In 1997, there were 383,977 shares traded through the Nasdaq system, an average daily volume of 1,523 shares. The table on page 7 sets forth the high and low bid quotations for the indicated periods, and the cash dividends declared, with respect to the Company's common stock. Currently, five companies serve as market makers on the Nasdaq National Stock Market on behalf of the Company. Market prices have been obtained directly from the Nasdaq quotation system. The bid quotations and per share dividends have been retroactively adjusted for a 10% stock dividend issued on July 15, 1996, and a 10% stock dividend issued on October 25, 1995. Peoples Bancorp had 1,243 stockholders of record at December 31, 1997. Quarterly Market and Dividend Information - ----------------------------------------- PER SHARE High Bid Low Bid Dividend 1997 Fourth Quarter $ 49.00 $ 39.50 $ 0.19 Third Quarter 40.50 35.25 0.19 Second Quarter 36.75 29.25 0.18 First Quarter 30.25 26.25 0.18 - ------------------------------------------------------------------------ 1996 Fourth Quarter $ 28.00 $ 23.75 $ 0.17 Third Quarter 24.00 21.02 0.17 Second Quarter 21.36 20.91 0.15 First Quarter 21.59 20.91 0.15 - ------------------------------------------------------------------------ 1995 Fourth Quarter $ 21.48 $ 20.23 $ 0.15 Third Quarter 20.66 18.18 0.14 Second Quarter 20.05 18.18 0.14 First Quarter 20.66 18.59 0.14 - ------------------------------------------------------------------------ The following graph presents the closing stock price of the Company's common stock for each of the last five years (adjusted for stock splits and stock dividends): Closing Stock Price ------------------- 1993 $17.25 1994 19.84 1995 21.48 1996 26.50 1997 41.75 Stockholders are cordially invited to attend the Annual Meeting of Stockholders of Peoples Bancorp Inc. to be held April 9, 1998, at 11:00 A.M. in the Peoples Bank Conference Room, 138 Putnam Street, Marietta, Ohio. On written request, a copy of our Annual Report to the Securities and Exchange Commission on Form 10-K is available to interested Stockholders. Requests should be addressed to Ruth Otto, Corporate Secretary, Peoples Bancorp Inc., P.O. Box 738, Marietta, Ohio 45750. CONSOLIDATED BALANCE SHEETS =========================== December 31, Assets 1997 1996 - ------ Cash and cash equivalents: Cash and due from banks $ 21,473,000 $ 26,200,000 Interest-bearing deposits in other banks 7,008,000 217,000 Federal funds sold 10,350,000 2,100,000 - --------------------------------------------------------------------------- Total cash and cash equivalents 38,831,000 28,517,000 - --------------------------------------------------------------------------- Available-for-sale investment securities, at estimated fair value (amortized cost of $170,702,000 in 1997 and $145,619,000 in 1996) 174,291,000 147,783,000 - --------------------------------------------------------------------------- Loans, net of deferred fees and costs 521,570,000 422,413,000 Allowance for loan losses (8,356,000) (6,873,000) - --------------------------------------------------------------------------- Net loans 513,214,000 415,540,000 - --------------------------------------------------------------------------- Bank premises and equipment, net 11,971,000 11,508,000 Other assets 19,851,000 13,287,000 - --------------------------------------------------------------------------- Total assets $758,158,000 $ 616,635,000 =========================================================================== Liabilities - ----------- Deposits: Non-interest bearing $ 64,229,000 $ 63,410,000 Interest bearing 546,878,000 441,282,000 - --------------------------------------------------------------------------- Total deposits 611,107,000 504,692,000 - --------------------------------------------------------------------------- Short-term borrowings: Federal funds purchased and securities sold under repurchase agreements 30,811,000 17,022,000 Federal Home Loan Bank advances 1,750,000 2,500,000 - --------------------------------------------------------------------------- Total short-term borrowings 32,561,000 19,522,000 - --------------------------------------------------------------------------- Long-term borrowings 28,577,000 29,200,000 Accrued expenses and other liabilities 7,095,000 7,028,000 - --------------------------------------------------------------------------- Total liabilities 679,340,000 560,442,000 - --------------------------------------------------------------------------- Stockholders' Equity - -------------------- Common stock, no par value, 12,000,000 shares authorized - 3,831,206 shares issued in 1997 and 3,445,075 issued in 1996, including shares in treasury 50,001,000 34,349,000 Net unrealized holding gain on available-for-sale securities, net of deferred taxes 2,369,000 1,428,000 Retained earnings 26,448,000 20,470,000 - --------------------------------------------------------------------------- 78,818,000 56,247,000 Treasury stock, at cost, no shares in 1997 and 2,000 shares in 1996 (54,000) - --------------------------------------------------------------------------- Total stockholders' equity 78,818,000 56,193,000 - --------------------------------------------------------------------------- Total liabilities and stockholders' equity $758,158,000 $ 616,635,000 =========================================================================== See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME ================================= Year ended December 31, 1997 1996 1995 Interest Income: - ---------------- Interest and fees on loans $43,451,000 $37,140,000 $34,177,000 Interest and dividends on: Obligations of U.S. Government and its agencies 7,255,000 7,205,000 5,338,000 Obligations of states and political subdivisions 1,324,000 1,402,000 1,543,000 Other interest income 1,806,000 1,650,000 2,010,000 - ---------------------------------------------------------------------------- Total interest income 53,836,000 47,397,000 43,068,000 - ---------------------------------------------------------------------------- Interest Expense: - ----------------- Interest on deposits 22,282,000 18,880,000 18,384,000 Interest on short-term borrowings 1,023,000 1,449,000 1,010,000 Interest on long-term borrowings 1,911,000 1,637,000 1,383,000 - ---------------------------------------------------------------------------- Total interest expense 25,216,000 21,966,000 20,777,000 - ---------------------------------------------------------------------------- Net interest income 28,620,000 25,431,000 22,291,000 Provision for loan losses 2,589,000 1,965,000 1,315,000 - ---------------------------------------------------------------------------- Net interest income after provision for loan losses 26,031,000 23,466,000 20,976,000 - ---------------------------------------------------------------------------- Other Income: - ------------- Income from fiduciary activities 2,176,000 1,897,000 1,751,000 Service charges on deposit accounts 2,202,000 1,937,000 1,565,000 (Loss) gain on sales of securities (28,000) 48,000 24,000 Other 1,588,000 1,296,000 1,141,000 - ---------------------------------------------------------------------------- Total other income 5,938,000 5,178,000 4,481,000 - ---------------------------------------------------------------------------- Other Expenses: - --------------- Salaries and employee benefits 8,358,000 7,514,000 7,836,000 Net occupancy 1,297,000 1,193,000 1,126,000 Equipment 1,501,000 1,329,000 1,241,000 Insurance 242,000 175,000 656,000 Supplies 516,000 713,000 572,000 Taxes other than income taxes 709,000 833,000 588,000 Amortization of intangibles 1,138,000 625,000 210,000 Other 5,504,000 5,140,000 4,589,000 - ---------------------------------------------------------------------------- Total other expenses 19,265,000 17,522,000 16,818,000 - ---------------------------------------------------------------------------- Income before federal income taxes 12,704,000 11,122,000 8,639,000 - ---------------------------------------------------------------------------- Federal Income Taxes: Current 3,941,000 3,303,000 2,792,000 Deferred 158,000 168,000 (203,000) - ---------------------------------------------------------------------------- Total federal income taxes 4,099,000 3,471,000 2,589,000 - ---------------------------------------------------------------------------- NET INCOME $ 8,605,000 $ 7,651,000 $ 6,050,000 ============================================================================ Earnings per share: - ------------------- Basic $2.48 $2.23 $1.74 - ---------------------------------------------------------------------------- Diluted $2.40 $2.20 $1.73 - ---------------------------------------------------------------------------- Weighted average number of shares outstanding: - ---------------------------------------------- Basic 3,473,158 3,437,790 3,481,176 - ---------------------------------------------------------------------------- Diluted 3,583,346 3,480,792 3,498,955 - ---------------------------------------------------------------------------- See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ===============================================
Net Unrealized Holding Gain/(Loss) on Available- Common Stock Retained for-Sale Treasury Shares Amount Earnings Securities Stock Total - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994 3,020,908 $ 24,326,000 $ 24,078,000 $ (1,030,000) $ (1,739,000) $ 45,635,000 - ------------------------------------------------------------------------------------------------------------------------ Net income 6,050,000 6,050,000 Purchase of treasury stock, 87,340 shares (1,940,000) (1,940,000) 10% stock dividend 302,470 6,394,000 (6,394,000) Exercise of common stock options 2,722 26,000 26,000 Issuance of common stock under dividend reinvestment plan 6,498 152,000 152,000 Net change in unrealized gain(loss) on available-for-sale securities 3,499,000 3,499,000 Cash dividends declared of $0.56 per share (1,948,000) (1,948,000) - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1995 3,332,598 30,898,000 21,786,000 2,469,000 (3,679,000) 51,474,000 - ------------------------------------------------------------------------------------------------------------------------ Net income 7,651,000 7,651,000 Purchase of treasury stock, 14,000 shares (332,000) (332,000) 10% stock dividend (reissued 226,989 treasury shares) 85,468 2,871,000 (6,727,000) 3,856,000 Exercise of common stock options (reissued 5,417 treasury shares) 16,434 330,000 101,000 431,000 Issuance of common stock under dividend reinvestment plan 10,575 250,000 250,000 Net change in unrealized gain (loss) on available-for-sale securities (1,041,000) (1,041,000) Cash dividends declared of $0.65 per share (2,240,000) (2,240,000) - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 3,445,075 34,349,000 20,470,000 1,428,000 (54,000) 56,193,000 - ------------------------------------------------------------------------------------------------------------------------ Net income 8,605,000 8,605,000 Purchase of treasury stock, 10,150 shares (327,000) (327,000) Exercise of common stock options (reissued 12,150 treasury shares) 9,173 (67,000) 381,000 314,000 Issuance of common stock under dividend reinvestment plan 11,486 370,000 370,000 Net change in unrealized gain (loss) on available-for-sale securities 941,000 941,000 Cash dividends declared of $0.74 per share (2,627,000) (2,627,000) Issuance of common stock to purchase Gateway Bancorp, Inc. 365,472 15,349,000 15,349,000 - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 3,831,206 $ 50,001,000 $ 26,448,000 $ 2,369,000 $ 0 $ 78,818,000 - ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS ===================================== Year ended December 31, 1997 1996 1995 Cash flows from operating activities: - ------------------------------------- Net income $ 8,605,000 $ 7,651,000 $ 6,050,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,589,000 1,965,000 1,315,000 Loss (gain) on sales of investment securities 28,000 (48,000) (24,000) Depreciation, amortization, and accretion 2,648,000 2,068,000 1,564,000 Increase in interest receivable (811,000) (31,000) (480,000 (Decrease) increase in interest payable (129,000) 486,000 238,000 Deferred income tax expense (benefit) 158,000 168,000 (203,000) Deferral of loan origination fees and costs (118,000) 73,000 17,000 Other, net (757,000) (820,000) 896,000 - --------------------------------------------------------------------------- Net cash provided by operating activities 12,213,000 11,512,000 9,373,000 - --------------------------------------------------------------------------- Cash flows from investing activities: - ------------------------------------- Purchases of available-for-sale securities (34,035,000) (45,240,000) (52,955,000) Purchases of held-to-maturity securities (1,230,000) Proceeds from sales of available-for-sale securities 5,309,000 5,522,000 1,066,000 Proceeds from maturities of available-for-sale securities 26,244,000 22,034,000 25,337,000 Proceeds from maturities of held-to-maturity securities 803,000 Net increase in loans (59,026,000) (44,504,000) (19,562,000) Expenditures for premises and equipment (1,184,000) (1,773,000) (1,122,000) Proceeds from sales of other real estate owned 144,000 77,000 Business acquisitions, net of cash received 19,844,000 68,004,000 - --------------------------------------------------------------------------- Net cash (used in) provided by investing activities (42,704,000) 4,043,000 (47,586,000) - --------------------------------------------------------------------------- Cash flows from financing activities: - ------------------------------------- Net (decrease) increase in non-interest bearing deposits (1,749,000) 8,393,000 1,946,000 Net increase (decrease) in interest bearing deposits 32,335,000 (6,894,000) 23,312,000 Net increase (decrease) in short-term borrowings 13,039,000 (13,754,000) 13,509,000 Proceeds from long-term borrowings 6,000,000 10,500,000 2,500,000 Payments on long-term borrowings (6,623,000) (4,442,000) (3,145,000) Cash dividends paid (2,184,000) (1,934,000) (1,702,000) Purchase of treasury stock (327,000) (332,000) (1,940,000) Proceeds from issuance of common stock 314,000 431,000 26,000 - --------------------------------------------------------------------------- Net cash provided by (used in) financing activities 40,805,000 (8,032,000) 34,506,000 - --------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 10,314,000 7,523,000 (3,707,000) Cash and cash equivalents at beginning of year 28,517,000 20,994,000 24,701,000 - --------------------------------------------------------------------------- Cash and cash equivalents at end of year $38,831,000 $28,517,000 $20,994,000 =========================================================================== Supplemental cash flow information: Interest paid $21,732,000 $21,757,000 $20,540,000 - --------------------------------------------------------------------------- Income taxes paid $ 3,197,000 $ 3,832,000 $ 2,364,000 - --------------------------------------------------------------------------- See notes to consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ============================================== 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of Peoples Bancorp Inc. and Subsidiaries (the "Company") conform to generally accepted accounting principles and to general practices within the banking industry. The Company considers all of its principal activities to be banking related. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed in the preparation of the financial statements. Principles of Consolidation: - ---------------------------- The consolidated financial statements include the accounts of Peoples Bancorp Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents: - -------------------------- Cash and cash equivalents include cash and due from banks, interest bearing deposits in other banks, and federal funds sold, all with original maturities of ninety days or less. Investment Securities: - ---------------------- Management determines the appropriate classification of investment securities at the time of purchase. Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to the Company's liquidity needs, changes in market interest rates, and asset-liability management strategies, among others. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses reported in a separate component of stockholders' equity, net of applicable deferred income taxes. The cost of securities sold is based on the specific identification method. Allowance for Loan Losses: - -------------------------- The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on a quarterly evaluation of the portfolio, historical loan loss experience, current national and local economic conditions, volume, growth and composition of the portfolio, and other relevant factors. This evaluation is inherently subjective and requires management to make estimates of the amounts and timing of future cash flows on impaired loans, consisting primarily of non-accrual and restructured loans. The allowance for loan losses related to impaired loans is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Bank Premises and Equipment: - ---------------------------- Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. Other Real Estate: - ------------------ Other real estate owned, included in other assets on the consolidated balance sheet, represents properties acquired by the Company's subsidiary banks in satisfaction of a loan. Real estate is recorded at the lower of cost or fair value based on appraised value at the date actually or constructively received, less estimated costs to sell the property. Intangibles: - ------------ Intangible assets representing the present value of future net income to be earned from deposits are being amortized on an accelerated basis over a ten year period. The excess of cost over the fair value of net assets acquired (goodwill) is being amortized on a straight-line basis over periods ranging from 10 to 15 years. Income Recognition: - ------------------- Interest income is recognized by methods which result in level rates of return on principal amounts outstanding. Amortization of premiums has been deducted from and accretion of discounts has been added to the related interest income. Nonrefundable loan fees and direct loan costs are deferred and recognized over the life of the loan as an adjustment of the yield. Subsidiary banks discontinue the accrual of interest when, in management's opinion, collection of all or a portion of contractual interest has become doubtful, which generally occurs when a loan is 90 days past due. When deemed uncollectible, previously accrued interest recognized in income in the current year is reversed and interest accrued in prior years is charged against the allowance for loan losses. Interest received on non-accrual loans is included in income only if principal recovery is reasonably assured. A non-accrual loan is restored to accrual status when it is brought current, has performed in accordance with contractual terms for a reasonable period of time, and the collectibility of the total contractual principal and interest is no longer in doubt. Income Taxes: - ------------- Deferred income taxes (included in other assets) are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rate. Earnings Per Share: - ------------------- In 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128 requires the presentation of basic and diluted earnings per share for all periods presented. Basic earnings per share is determined by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share is determined by dividing net income by the weighted average number of shares outstanding increased by the number of shares that would be issued assuming the exercise of stock options. Earnings per share amounts for all periods presented have been restated to conform to SFAS No. 128. 2. FAIR VALUES OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments in accordance with SFAS No. 107: Cash and cash equivalents: - -------------------------- The carrying amounts reported in the balance sheet for these captions approximate their fair values. Investment securities: - ---------------------- Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices of comparable securities. Loans: - ------ The fair value of performing variable rate loans that reprice frequently and performing demand loans, with no significant change in credit risk, is based on carrying value. The fair value of certain mortgage loans is based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair value of other performing loans (e.g., commercial real estate, commercial and consumer loans) is estimated using discounted cash flow analyses and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value for significant nonperforming loans is based on either the estimated fair value of underlying collateral or estimated cash flows, discounted at a rate commensurate with the risk. Assumptions regarding credit risk, cash flows, and discount rates are determined using available market information and specific borrower information. Deposits: - --------- The carrying amounts of demand deposits, savings accounts and certain money market deposits approximate their fair values. The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation that applies current rates offered for deposits of similar remaining maturities. Short-term borrowings: - ---------------------- The carrying amounts of federal funds purchased, Federal Home Loan Bank advances, and securities sold under repurchase agreements approximate their fair values. Long-term borrowings: - --------------------- The fair value of long-term borrowings is estimated using discounted cash flow analysis based on rates currently available to the Company for borrowings with similar terms. Financial instruments: - ---------------------- The fair value of loan commitments and standby letters of credit is estimated using the fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair value of these commitments approximates their carrying value. The fair value of the interest rate floor is based on quotes from other financial institutions. The estimated fair values of the Company's financial instruments are as follows: 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value Financial Assets: - ----------------- Cash and cash equivalents $ 38,831,000 $ 38,831,000 $ 28,517,000 $ 28,517,000 Investment securities 174,291,000 174,291,000 147,783,000 147,783,000 Loans, net 513,214,000 518,736,000 415,540,000 418,921,000 Financial Liabilities: - ---------------------- Deposits 611,107,000 611,775,000 504,692,000 506,039,000 Short-term borrowings 32,561,000 32,561,000 19,522,000 19,522,000 Long-term borrowings 28,577,000 28,677,000 29,200,000 29,289,000 Off-Balance Sheet Instruments: - ------------------------------ Interest rate floors 46,000 101,000 71,000 325,000 Bank premises and equipment, customer relationships, deposit base, banking center networks, and other information required to compute the Company's aggregate fair value are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of the Company. 3. INVESTMENT SECURITIES: The estimated maturities presented in the tables below may differ from the contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties. Rates are calculated on a taxable equivalent basis using a 35% federal income tax rate. The portfolio contains no single issue (excluding U.S. Government and U.S. Agency securities) which exceeds 10% of stockholders' equity. Securities classified as available-for-sale At December 31, 1997: - ------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 51,304,000 $ 751,000 $ (87,000) $ 51,968,000 Obligations of states and political subdivisions 24,679,000 1,030,000 (1,000) 25,708,000 Mortgage-backed securities 76,229,000 467,000 (288,000) 76,408,000 Other securities 18,490,000 1,720,000 (3,000) 20,207,000 - ----------------------------------------------------------------------------- Total available-for-sale securities $170,702,000 $3,968,000 $(379,000) $174,291,000 ============================================================================= Maturity distribution of available-for-sale securities - ------------------------------------------------------ Contractual maturities at December 31, 1997
U.S. Treasury Obligations securities and of states Total obligations of and Mortgage- available- U.S. Government political backed Other for-sale Agencies subdivisions securities securities securities Within one year - --------------- Amortized cost $27,299,000 $ 2,517,000 $ 6,296,000 $ 1,753,000 $ 37,865,000 Fair value $27,322,000 $ 2,543,000 $ 6,229,000 $ 1,769,000 $ 37,863,000 Yield 6.63% 9.06% 5.89% 7.01% 6.69% 1 to 5 years - ------------ Amortized cost 20,832,000 7,049,000 48,118,000 5,844,000 81,843,000 Fair value 21,228,000 7,291,000 48,350,000 5,900,000 82,769,000 Yield 6.76% 8.34% 7.00% 6.75% 7.04% 5 to 10 years - ------------- Amortized cost 3,173,000 7,726,000 18,198,000 1,001,000 30,098,000 Fair value 3,418,000 8,139,000 18,153,000 1,028,000 30,738,000 Yield 7.49% 8.13% 6.91% 6.79% 7.28% Over 10 years - ------------- Amortized cost 7,387,000 3,617,000 9,892,000 20,896,000 Fair value 7,735,000 3,676,000 11,510,000 22,921,000 Yield 8.14% 6.81% 6.46% 7.11% - -------------------------------------------------------------------------------------------------- Total amortized cost $51,304,000 $24,679,000 $76,229,000 $18,490,000 $170,702,000 Total fair value $51,968,000 $25,708,000 $76,408,000 $20,207,000 $174,291,000 Total yield 6.74% 8.29% 6.88% 6.62% 7.01% ==================================================================================================
Securities classified as available-for-sale At December 31, 1996: - ------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 41,855,000 $ 742,000 $(126,000) $ 42,471,000 Obligations of states and political subdivisions 23,949,000 743,000 (36,000) 24,656,000 Mortgage-backed securities 61,197,000 280,000 (697,000) 60,780,000 Other securities 18,618,000 1,277,000 (19,000) 19,876,000 - ----------------------------------------------------------------------------- Total available-for-sale securities $145,619,000 $3,042,000 $(878,000) $147,783,000 ============================================================================= Securities classified as available-for-sale At December 31, 1995: - ------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 39,242,000 $1,319,000 $ (28,000) $ 40,533,000 Obligations of states and political subdivisions 24,879,000 997,000 (16,000) 25,860,000 Mortgage-backed securities 45,465,000 619,000 (68,000) 46,016,000 Other securities 18,435,000 920,000 (2,000) 19,353,000 - ----------------------------------------------------------------------------- Total available-for-sale securities $128,021,000 $3,855,000 $(114,000) $131,762,000 ============================================================================= Gross realized gains and realized losses were $3,000 and $31,000, respectively, in 1997. Gross realized gains were $48,000 and $24,000 in 1996 and 1995, respectively. At December 31, 1997, investment securities having a carrying value of $89,843,000 were pledged to secure public and trust department deposits and repurchase agreements in accordance with federal and state requirements. 4. LOANS: Loans are comprised of the following at December 31: 1997 1996 Commercial, financial, and agricultural $159,035,000 $128,033,000 Real estate, construction 19,513,000 9,944,000 Real estate, mortgage 228,689,000 175,505,000 Consumer 114,333,000 108,931,000 - ------------------------------------------------------------------------ Total loans $521,570,000 $422,413,000 ======================================================================== Changes in the allowance for loan losses for each of the three years in the period ended December 31, 1997, were as follows: 1997 1996 1995 Balance, beginning of year $6,873,000 $6,726,000 $6,783,000 Charge-offs (1,917,000) (2,329,000) (1,803,000) Recoveries 521,000 511,000 431,000 - -------------------------------------------------------------------------- Net charge-offs (1,396,000) (1,818,000) (1,372,000) Provision for loan losses 2,589,000 1,965,000 1,315,000 Balances of acquired subsidiaries 290,000 - -------------------------------------------------------------------------- Balance, end of year $8,356,000 $6,873,000 $6,726,000 ========================================================================== The Company's lending is primarily focused in the local southeastern Ohio market and consists principally of retail lending, which includes single-family residential mortgages and other consumer lending. The Company's largest group of business loans consists of automobile dealer floor plans, which totaled $20,559,000 and $13,673,000 at December 31, 1997 and 1996, respectively. It is the Company's policy to obtain the underlying inventory as collateral on these loans. The Company does not extend credit to any single borrower or group of related borrowers in excess of the combined legal lending limits of its subsidiary banks. Impaired loans at December 31, 1997 and 1996, and the average investment in impaired loans for the years then ended were immaterial to the financial statements. In the normal course of its business, the subsidiary banks have granted loans to executive officers and directors of the Company and to their associates. Related party loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with unrelated persons and did not involve more than normal risk of collectibility. The following is an analysis of activity of related party loans for the year ended December 31, 1997: Balance, January 1, 1997 $ 8,453,000 New loans 19,442,000 Repayments 11,317,000 ------------------------------------------- Balance, December 31, 1997 $16,578,000 =========================================== In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which was applicable to the Company effective January 1, 1997. However, in December 1996, the FASB agreed to defer the effective date for one year for the following transactions: securities lending, repurchase agreements, dollar rolls and other similar secured transactions. The adoption of the 1997 provisions did not have a material effect on the Company's financial statements and management anticipates the same results for the provisions adopted on January 1, 1998. 5. BANK PREMISES AND EQUIPMENT: The major categories of bank premises and equipment and accumulated depreciation are summarized as follows at December 31: 1997 1996 Land $ 2,146,000 $ 1,836,000 Building and premises 12,290,000 11,299,000 Furniture, fixtures and equipment 8,817,000 8,162,000 --------------------------------------------------------------- 23,253,000 21,297,000 Accumulated depreciation 11,282,000 9,789,000 --------------------------------------------------------------- Net book value $11,971,000 $11,508,000 =============================================================== Depreciation expense was $1,534,000, $1,358,000, and $1,230,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company leases a banking facility and equipment under various agreements with original terms providing for fixed monthly payments over periods ranging from two to ten years. The future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 1997: Year Ending December 31, Operating Leases 1998 $223,000 1999 162,000 2000 94,000 2001 73,000 2002 48,000 Thereafter 177,000 ------------------------------------------- Total minimum lease payments $777,000 =========================================== Rent expense was $163,000, $150,000 and $170,000 in 1997, 1996 and 1995, respectively. 6. DEPOSITS: Included in interest-bearing deposits are various time deposit products. The maturities of time deposits for each of the next five years and thereafter are as follows: $224,705,000 in 1998; $78,199,000 in 1999; $10,638,000 in 2000; $6,496,000 in 2001; $3,740,000 in 2002; and $631,000 thereafter. Deposits from related parties approximated $17.0 million and $6.2 million at December 31, 1997 and 1996, respectively. 7. LONG-TERM BORROWINGS: Long-term borrowings consisted of the following at December 31: 1997 1996 Term note payable, at LIBOR (parent company) $ 3,000,000 Federal Home Loan Bank advances, bearing interest at rates ranging from 4.15% to 7.00% 25,577,000 $29,200,000 - --------------------------------------------------------------- Total long-term borrowings $28,577,000 $29,200,000 =============================================================== The Federal Home Loan Bank ("FHLB") advances consist of various borrowings with maturities ranging from 10 to 15 years. The advances are collateralized by the Company's real estate mortgage portfolio and all of the FHLB common stock owned by the banking subsidiaries. The most restrictive requirement of the debt agreement requires the Company to provide real estate mortgage loans as collateral in an amount not less than 150% of advances outstanding. The aggregate minimum annual retirements of long-term borrowings in the next five years and thereafter are as follows: 1998 $ 8,304,000 1999 3,681,000 2000 3,752,000 2001 2,837,000 2002 2,818,000 Thereafter (includes parent company debt) 7,185,000 ------------------------------------------------------ Total long-term borrowings $28,577,000 ====================================================== 8. EMPLOYEE BENEFIT PLANS: The Company has a noncontributory defined benefit pension plan which covers substantially all employees. The plan provides benefits based on an employee's years of service and compensation. The Company's funding policy is to contribute annually an amount that can be deducted for federal income tax purposes. Net pension cost included the following components: 1997 1996 1995 Service cost-benefits earned during the year $259,000 $248,000 $ 254,000 Interest cost on projected benefit obligations 462,000 416,000 444,000 Actual return on plan assets (904,000) (635,000) (831,000) Early retirement benefits 777,000 Net amortization and deferral 465,000 220,000 381,000 - -------------------------------------------------------------------- Net pension cost $282,000 $249,000 $1,025,000 ==================================================================== The following table sets forth the funded status and amounts recognized for the defined benefit pension plan in the consolidated balance sheets at December 31: 1997 1996 Actuarial present value of accumulated benefit obligations: Vested benefits $ 5,430,000 $ 4,598,000 Nonvested benefits 127,000 118,000 - --------------------------------------------------------------- Accumulated benefit obligation 5,557,000 4,716,000 Impact of future salary increases 1,233,000 1,152,000 - --------------------------------------------------------------- Actuarial present value of projected benefit obligation for service rendered to date 6,790,000 5,868,000 Plan assets at fair value, primarily U.S. Government obligations and collective investment stock and bond funds 6,249,000 5,034,000 - --------------------------------------------------------------- Projected benefit obligations in excess of plan assets (541,000) (834,000) Unrecognized prior service cost (63,000) (73,000) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (395,000) (552,000) Unrecognized net transition asset (40,000) (48,000) - --------------------------------------------------------------- Accrued pension cost included in other liabilities $(1,039,000) $(1,507,000) =============================================================== The rates used in determining the actuarial present value of the projected benefit obligation were as follows: 1997 1996 1995 Discount rate 7.25% 8.00% 7.50% Rate of increase in compensation levels 4.00% 4.50% 4.00% Long-term rate of return on assets 9.00% 9.00% 9.00% In late 1995, the Company offered a voluntary early retirement program to a select group of employees who met certain qualifications. All employees eligible for the early retirement program accepted the offer and the Company incurred $777,000 in additional expense. The Company has a contributory defined benefit postretirement plan for former employees who were retired as of December 31, 1992. The plan provides for health and life insurance benefits. The Company's policy is to fund the cost of the benefits as they are incurred. The net periodic postretirement benefit cost, which relates primarily to interest cost, was $65,000, $62,000 and $65,000 for 1997, 1996, and 1995, respectively. The following table sets forth the funded status and amounts recognized in the consolidated balance sheets at December 31: 1997 1996 Accumulated postretirement benefit obligation $(604,000) $(865,000) Unrecognized net loss (gain) 205,000 (34,000) - ----------------------------------------------------------------------- Accrued postretirement benefit cost included in other liabilities $(399,000) $(899,000) ======================================================================= The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% at December 31, 1997 and 8.00% at December 31, 1996. The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) is 7% for 1998, grading down 1% per year to an ultimate rate of 5%. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point each year would increase the accumulated benefit obligation for the plan at December 31, 1997, by $85,000 and the net periodic postretirement benefit cost in 1997 by $10,000. 9. FEDERAL INCOME TAXES: The effective federal income tax rate in the consolidated statement of income is less than the statutory corporate tax rate due to the following: Year ended December 31 1997 1996 1995 Statutory corporate tax rate 35.0% 34.0% 34.0% Differences in rate resulting from: Interest on obligations of state and political subdivisions (3.1) (3.7) (5.0) Other, net 0.4 0.9 1.0 - ----------------------------------------------------------------------- Effective federal income tax rate 32.3% 31.2% 30.0% ======================================================================= The significant components of the Company's deferred tax assets and liabilities consisted of the following at December 31: 1997 1996 Deferred tax assets: - -------------------- Allowance for loan losses $2,447,000 $1,888,000 Accrued employee benefits 1,046,000 945,000 Deferred loan fees and costs 441,000 191,000 Other 170,000 240,000 - ---------------------------------------------------------------- Total deferred tax assets 4,104,000 3,264,000 - ---------------------------------------------------------------- Deferred tax liabilities: - ------------------------- Available-for-sale securities 1,220,000 736,000 Bank premises and equipment 764,000 593,000 Deferred Income 515,000 Investments 725,000 312,000 Other 347,000 275,000 - ---------------------------------------------------------------- Total deferred tax liabilities 3,571,000 1,916,000 - ---------------------------------------------------------------- Net deferred tax assets $ 533,000 $1,348,000 ================================================================ The related federal income tax (benefit) expense on securities transactions approximated ($10,000) in 1997, $16,000 in 1996, and $8,000 in 1995. 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: In the normal course of business, the Company is party to financial instruments with off-balance sheet risk necessary to meet the financing needs of customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, and interest rate floors. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments express the extent of involvement the Company has in these financial instruments. Loan Commitments and Standby Letters of Credit: - ----------------------------------------------- Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Historically, most loan commitments and standby letters of credit expire unused. The Company's exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same underwriting standards in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. The total amounts of loan commitments and standby letters of credit are summarized as follows at December 31: Contract Amount 1997 1996 Loan commitments $53,682,000 $50,518,000 Standby letters of credit 1,973,000 3,164,000 Unused credit card limits 18,132,000 17,718,000 Interest Rate Floors: - --------------------- The Company has entered into several interest rate floor contracts with three unaffiliated financial institutions as a means of managing the risks of changing interest rates. Interest rate floors are agreements to receive payments for interest rate differentials between an index rate and a specified floor rate, computed on notional amounts. The Company is subject to the risk that the effect of changes in interest rates will cause the Company to earn less than the then current market rates on its assets. These interest rate floors subject the Company to the risk that the counter-parties may fail to perform. In order to minimize such risk, the Company deals only with high-quality, financially secure financial institutions. The exposure to credit risk is significantly less than the notional amounts of $40 million since the Company will only receive the interest rate differential. These interest rate contracts expire as follows: $20 million in February, 1998, $10 million in September, 1999, and $10 million in September, 2000. 11. REGULATORY MATTERS: The primary source of funds for the dividends paid by the Company is dividends received from its banking subsidiaries. The payment of dividends by banking subsidiaries is subject to various banking regulations. The most restrictive provision requires regulatory approval if dividends declared in any calendar year exceed the total net profits of that year plus the retained net profits of the preceding two years. At December 31, 1997, approximately $10,615,000 of retained net profits of the banking subsidiaries was available for the payment of dividends to Peoples Bancorp Inc. without regulatory approval. The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by the banking regulatory agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and each of its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of each entity's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and each of its banking subsidiaries' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and each of its banking subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). The Company and each of its banking subsidiaries met all capital adequacy requirements at December 31, 1997. As of December 31, 1997, the most recent notifications from the banking regulatory agencies categorized the Company and each of its banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and each of its banking subsidiaries must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since these notifications that management believes have changed the Company's or any of its banking subsidiaries' category. The Company's and its significant banking subsidiary's, The Peoples Banking and Trust Company ("Peoples Bank"), actual capital amounts and ratios are also presented in the table below. Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Action Provision Amount Ratio Amount Ratio Amount Ratio As of December 31, 1997: - ------------------------- Total capital (to Risk Weighted Assets) The Company $69,760,000 14.3% $38,904,000 8% $48,630,000 10% Peoples Bank 44,703,000 11.1% 32,095,000 8% 40,119,000 10% - ---------------------------------------------------------------------------- Tier 1 (to Risk Weighted Assets) The Company 63,653,000 13.1% 19,452,000 4% 29,178,000 6% Peoples Bank 39,665,000 9.9% 16,048,000 4% 24,071,000 6% - ---------------------------------------------------------------------------- Tier 1 (to Average Assets) The Company 63,653,000 9.3% 27,401,000 4% 34,251,000 5% Peoples Bank 39,665,000 7.1% 22,427,000 4% 28,034,000 5% - ---------------------------------------------------------------------------- As of December 31, 1996: - ------------------------- Total capital (to Risk Weighted Assets) The Company $53,560,000 12.9% $33,324,000 8% $41,654,000 10% Peoples Bank 41,727,000 11.4% 29,354,000 8% 36,693,000 10% - ---------------------------------------------------------------------------- Tier 1 (to Risk Weighted Assets) The Company 48,332,000 11.6% 16,662,000 4% 24,993,000 6% Peoples Bank 34,125,000 9.3% 14,677,000 4% 22,016,000 6% - ---------------------------------------------------------------------------- Tier 1 (to Average Assets) The Company 48,332,000 7.9% 24,408,000 4% 30,510,000 5% Peoples Bank 34,125,000 6.5% 21,163,000 4% 26,454,000 5% - ---------------------------------------------------------------------------- 12. FEDERAL RESERVE REQUIREMENTS: The subsidiary banks are required to maintain average reserve balances with the Federal Reserve Bank. The Reserve requirement is calculated on a percentage of total deposit liabilities and averaged $9,015,000 for the year ended December 31, 1997. 13. ACQUISITIONS: On December 12, 1997, the Company acquired Gateway Bancorp, Inc. and its subsidiary, Catlettsburg Federal Savings Bank, for a total consideration of $21.6 million ($6.2 million in cash and $15.4 million in common stock). Gateway Bancorp operates two full service offices in northeastern Kentucky, and had total assets of $61.2 million, deposits of $43.9 million and shareholders' equity of $15.3 million. This acquisition was accounted for under the purchase method of accounting. In February 1997, the Company assumed approximately $12.5 million in deposit liabilities from an unaffiliated institution. In the agreement, the Company also acquired one full-service banking office in the community of Baltimore, Ohio. This acquisition was accounted for under the purchase method of accounting. On January 1, 1997, the Company acquired Russell Federal Savings Bank ("Russell Federal") for a cash consideration of approximately $9.25 million. Russell Federal has one full service office located in Russell, Kentucky, and had total assets of $28.0 million, deposits of $19.5 million and shareholders' equity of $8.0 million at December 31, 1996. This acquisition was accounted for under the purchase method of accounting. On April 26, 1996, the Company acquired three full-service banking offices in the cities of Pomeroy, Gallipolis, and Rutland, Ohio, and assumed approximately $74 million in deposit liabilities from an unaffiliated institution for a cash consideration of approximately $5.4 million. Accordingly, consolidated results include the operations of the three full-service banking offices subsequent to the acquisition date. The purchase prices of the above and other previous acquisitions were allocated to the identifiable tangible and intangible assets acquired based upon their fair value at the acquisition date. Deposit intangibles, included in other assets, approximated $2,682,000 and $1,827,000 at December 31, 1997 and 1996, respectively, while the related amortization expense approximated $407,000 and $206,000 in 1997 and 1996, respectively. Goodwill, included in other assets, approximated $10,114,000 and $4,606,000 at December 31, 1997 and 1996, respectively, and the related amortization expense approximated $731,000 and $419,000 in 1997 and 1996, respectively. The following summarizes the unaudited pro forma results of operations for the years ended December 31, 1997 and 1996, assuming the acquisitions accounted for under the purchase method had been consummated at the beginning of each year presented. 1997 1996 Total interest income $57,993,000 $53,125,000 Net income 8,888,000 7,600,000 Diluted earnings per share 2.26 1.98 On January 20, 1998, the Company entered into an agreement to acquire five full-service banking offices located in the communities of Point Pleasant (three offices), New Martinsville, and Steelton, West Virginia, from an unaffiliated institution. In the agreement, the Company will assume approximately $125 million in deposits and purchase $10.5 million in loans. The acquisition is contingent upon regulatory approval and other conditions and is expected to be completed in the second quarter of 1998. The acquisition is expected to be accounted for under the purchase method of accounting. 14. STOCK OPTIONS: The Company's stock option plans provide for the granting of both incentive stock options and non-qualified stock options of up to 387,200 shares of common stock. Under the provisions of the plans, the option price per share shall not be less than the fair market value of the common stock on the date of grant of such option, therefore no compensation expense is recognized. All granted options vest in periods ranging from six months to eight years and expire 10 years from the date of grant. The weighted average remaining contractual life of options outstanding at December 31, 1997 was 7.8 years. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options instead of applying SFAS Statement No. 123 "Accounting for Stock Based Compensation". Under APB 25, because the exercise price of the Company's stock options granted is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share has been determined as if the Company had recognized compensation expense for its employee stock options under the fair value method. However, pro forma financial information and assumptions used to estimate the fair value of stock options have not been included herein because the effect of applying the fair value method to the Company's stock-based awards in 1997 and 1996 results in net income and earnings per share that are not materially different from amounts reported. Activity in the plans is summarized as follows: 1997 1996 Number Option Number Option of shares price of shares price Non-qualified stock options - --------------------------- Outstanding at beginning of year 44,698 $ 16.12-21.14 50,120 $16.12-19.42 Granted 38,467 26.875-42.00 1,785 21.14 Exercised 9,710 16.95-30.50 6,142 16.95-19.42 Canceled 2,998 18.60-30.50 1,065 16.95-18.60 - ---------------------------------------------------------------------------- Outstanding at end of year 70,457 16.12-42.00 44,698 16.12-21.14 ============================================================================ Exercisable at end of year 45,134 $ 16.12-30.50 29,481 $16.12-21.14 ============================================================================ Weighted average fair value of options granted during the year $ 8.43 3.54 ============================================================================ Incentive stock options - ----------------------- Outstanding at beginning of year 180,215 $ 14.47-19.32 202,065 $14.47-19.32 Granted 69,500 43.75 Exercised 16,234 14.47-19.32 17,615 14.47-19.32 Canceled 4,235 19.32 - ---------------------------------------------------------------------------- Outstanding at end of year 233,481 14.47-43.75 180,215 14.47-19.32 ============================================================================ Exercisable at end of year 89,873 $ 14.47-19.32 69,063 $14.47-19.32 ============================================================================ 15. PARENT COMPANY ONLY FINANCIAL INFORMATION: December 31, CONDENSED BALANCE SHEETS 1997 1996 Assets: - ------- Cash $ 20,000 $ 20,000 Interest bearing deposits in subsidiary bank 530,000 239,000 Receivable from subsidiary bank 1,168,000 900,000 Investment securities: Available-for-sale (amortized cost of $1,341,000 and $1,297,000 at December 31, 1997 and 1996, respectively) 2,960,000 2,447,000 Capital note receivable from subsidiary bank 3,000,000 Investments in subsidiaries: Banks 76,869,000 48,951,000 Non-banks 1,138,000 1,125,000 Goodwill 693,000 830,000 Other 581,000 939,000 - ------------------------------------------------------------------------- Total assets $83,959,000 $58,451,000 ========================================================================= Liabilities: - ------------ Accrued pension $ 1,071,000 $ 1,525,000 Accrued expenses 341,000 148,000 Dividends payable 729,000 585,000 Long-term borrowings 3,000,000 - ------------------------------------------------------------------------- Total liabilities 5,141,000 2,258,000 - ------------------------------------------------------------------------- Stockholders' equity 78,818,000 56,193,000 - ------------------------------------------------------------------------- Total liabilities and stockholders' equity $83,959,000 $58,451,000 ========================================================================= Year ended December 31, CONSOLIDATED STATEMENTS OF INCOME 1997 1996 1995 Income: - ------- Dividends from subsidiary banks $12,990,000 $4,010,000 $3,415,000 Dividends from other subsidiaries 50,000 40,000 50,000 Interest 72,000 346,000 393,000 Management fees from subsidiaries 903,000 902,000 907,000 Other 77,000 64,000 69,000 - -------------------------------------------------------------------------- Total income 14,092,000 5,362,000 4,834,000 - -------------------------------------------------------------------------- Expenses: - --------- Salaries and benefits 1,220,000 1,156,000 1,183,000 Interest 217,000 118,000 148,000 Other 818,000 784,000 764,000 - -------------------------------------------------------------------------- Total expenses 2,255,000 2,058,000 2,095,000 - -------------------------------------------------------------------------- Income before federal income taxes and (excess dividends from) equity in undistributed earnings of subsidiaries 11,837,000 3,304,000 2,739,000 Applicable income tax benefit (250,000) (190,000) (200,000) (Excess dividends from) equity in undistributed earnings of subsidiaries (3,482,000) 4,157,000 3,111,000 - -------------------------------------------------------------------------- Net income $ 8,605,000 $7,651,000 $6,050,000 ========================================================================== Year ended December 31, STATEMENTS OF CASH FLOWS 1997 1996 1995 Cash flows from operating activities: - ------------------------------------- Net income $ 8,605,000 $7,651,000 $6,050,000 Adjustment to reconcile net income to cash provided by operations: Amortization and depreciation 230,000 208,000 179,000 Excess dividends from (equity in undistributed earnings of) subsidiaries 3,482,000 (4,157,000) (3,111,000) Other, net (48,000) (382,000) 189,000 - ---------------------------------------------------------------------------- Net cash provided by operating activities 12,269,000 3,320,000 3,307,000 - ---------------------------------------------------------------------------- Cash flows from investing activities: - ------------------------------------- Purchase of investment securities (44,000) (199,000) (340,000) Expenditures for premises and equipment (33,000) (89,000) (87,000) Investment in subsidiaries (15,436,000) (150,000) Repayment of capital note receivable from subsidiary 3,000,000 - ---------------------------------------------------------------------------- Net cash used in investing activities (12,513,000) (288,000) (577,000) - ---------------------------------------------------------------------------- Cash flows from financing activities: - ------------------------------------- Proceeds from long-term borrowings 3,000,000 Payments on long-term borrowings (1,560,000) (260,000) Purchase of treasury stock (327,000) (332,000) (1,940,000) Change in receivable from subsidiary (268,000) 69,000 1,043,000 Proceeds from issuance of common stock 314,000 431,000 26,000 Cash dividends paid (2,184,000) (1,934,000) (1,702,000) - ---------------------------------------------------------------------------- Net cash provided by (used in) financing activities 535,000 (3,326,000) (2,833,000) - ---------------------------------------------------------------------------- Net increase (decrease) in cash 291,000 (294,000) (103,000) Cash and cash equivalents at the beginning of the year 259,000 553,000 656,000 - ---------------------------------------------------------------------------- Cash and cash equivalents at the end of the year $ 550,000 $ 259,000 $ 553,000 ============================================================================ The parent company paid interest totaling $217,000, $118,000 and $148,000 during the years ended December 31, 1997, 1996, and 1995, respectively. 16. SUMMARIZED QUARTERLY INFORMATION (UNAUDITED): A summary of selected quarterly financial information for 1997 and 1996 follows. 1997 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income $12,762,000 $13,122,000 $13,639,000 $14,313,000 Interest expense 5,918,000 6,106,000 6,443,000 6,749,000 Net interest income 6,844,000 7,016,000 7,196,000 7,564,000 Provision for possible loan losses 588,000 641,000 676,000 684,000 Investment securities (losses) gains (29,000) (2,000) 3,000 Other income 1,418,000 1,462,000 1,528,000 1,558,000 Other expenses 4,705,000 4,721,000 4,851,000 4,988,000 Income taxes 938,000 989,000 1,039,000 1,133,000 Net income 2,002,000 2,125,000 2,158,000 2,320,000 Earnings per share: Basic 0.58 0.62 0.62 0.65 Diluted $ 0.57 $ 0.60 $ 0.60 $ 0.63 Average shares outstanding: Basic 3,446,000 3,450,000 3,454,000 3,542,000 Diluted 3,528,000 3,553,000 3,574,000 3,677,000 1996 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income $11,316,000 $11,725,000 $12,046,000 $12,310,000 Interest expense 5,367,000 5,416,000 5,539,000 5,644,000 Net interest income 5,949,000 6,309,000 6,507,000 6,666,000 Provision for possible loan losses 360,000 435,000 585,000 585,000 Investment securities gains 26,000 22,000 Other income 1,162,000 1,271,000 1,304,000 1,393,000 Other expenses 4,013,000 4,299,000 4,578,000 4,632,000 Income taxes 883,000 875,000 818,000 895,000 Net income 1,881,000 1,971,000 1,830,000 1,969,000 Earnings per share: Basic 0.55 0.57 0.53 0.57 Diluted $ 0.54 $ 0.57 $ 0.53 $ 0.56 Average shares outstanding: Basic 3,429,000 3,442,000 3,440,000 3,444,000 Diluted 3,461,000 3,473,000 3,479,000 3,513,000 REPORT OF INDEPENDENT AUDITORS ============================== To the Stockholders and Board of Directors: We have audited the accompanying consolidated balance sheets of Peoples Bancorp Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peoples Bancorp Inc. and Subsidiaries at December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Ernst & Young LLP Charleston, West Virginia February 6, 1998 AVERAGE BALANCES AND ANALYSIS OF NET INTEREST INCOME ====================================================
(Dollars in Thousands) 1997 1996 1995 Average Average Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Securities : - ---------------- Taxable $126,632 $ 8,636 6.82% $127,815 $ 8,655 6.77% $ 95,056 $ 6,667 6.98% Nontaxable 22,271 1,819 8.17% 22,621 1,906 8.42% 23,761 2,117 8.91% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total 148,903 10,455 7.02% 150,436 10,561 7.02% 118,817 8,784 7.40% -------- ------- ------ -------- ------- ------ -------- ------- ------ Loans : - ---------------- Commercial 145,971 13,939 9.55% 125,138 11,944 9.54% 114,020 11,270 9.88% Real estate 209,330 17,863 8.53% 172,367 14,322 8.31% 156,598 13,663 8.73% Consumer 112,762 11,739 10.41% 102,759 10,949 10.66% 96,604 9,305 9.63% Valuation reserve (7,521) (6,799) (6,719) -------- ------- ------ -------- ------- ------ -------- ------- ------ Total 460,542 43,541 9.30% 393,465 37,215 9.46% 360,503 34,238 9.50% -------- ------- ------ -------- ------- ------ -------- ------- ------ Short-term Investments: - ----------------------- Interest-bearing deposits 1,713 93 5.41% 622 29 4.64% 526 31 5.80% Federal funds sold 7,915 437 5.52% 5,900 315 5.35% 13,226 780 5.90% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total 9,628 530 5.50% 6,522 344 5.28% 13,752 811 5.90% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total earning assets 619,073 54,526 8.81% 550,423 48,120 8.74% 493,072 43,833 8.89% -------- ------- ------ -------- ------- ------ -------- ------- ------ Other assets 48,426 42,021 34,910 -------- -------- -------- Total assets $667,499 $592,444 $527,982 ======== ======== ======== Deposits: - --------- Savings $ 83,342 2,552 3.06% $ 75,805 2,302 3.04% $ 68,867 2,307 3.35% Interest-bearing demand 126,462 4,372 3.46% 111,376 3,656 3.28% 92,280 3,228 3.50% Time 277,559 15,358 5.53% 234,550 12,922 5.51% 222,898 12,849 5.76% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total 487,363 22,282 4.57% 421,731 18,880 4.48% 384,045 18,384 4.79% -------- ------- ------ -------- ------- ------ -------- ------- ------ Borrowed Funds: - --------------- Short-term 22,463 1,023 4.55% 29,965 1,449 4.84% 19,993 1,010 5.05% Long-term 30,495 1,911 6.27% 26,692 1,637 6.13% 22,612 1,383 6.12% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total 52,958 2,934 5.54% 56,657 3,086 5.45% 42,605 2,393 5.62% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest- bearing liabilities 540,321 25,216 4.67% 478,388 21,966 4.59% 426,650 20,777 4.87% -------- ------- ------ -------- ------- ------ -------- ------- ------ Noninterest-bearing demand deposits 59,860 54,923 46,876 Other liabilities 7,248 6,114 5,396 -------- -------- -------- Total liabilities 607,429 539,425 478,922 Stockholders' equity 60,070 53,019 49,060 -------- -------- -------- Total liabilities and stockholders' equity $667,499 $592,444 $527,982 ======== ======== ======== Interest rate spread 29,310 4.14% 26,154 4.15% 23,056 4.02% ------- ------ ------- ------ ------- ------ Interest revenue/earning assets 8.81% 8.74% 8.89% Interest expense/earning assets 4.07% 3.99% 4.21% ------ ------ ------ Net yield on earning assets (net interest margin) 4.74% 4.75% 4.68% ====== ====== ====== Average balances of investment securities based on historical cost. Computed on a fully tax equivalent basis using a tax rate of 35% in 1997 and 34% in 1996 and 1995. Interest income was increased by $618,000, $723,000 and $765,000 for 1997, 1996 and 1995, respectively. Nonaccrual and impaired loans are included in the average balances listed. Related interest income on nonaccrual loans prior to the loan being put on nonaccrual status is included in loan interest income. At December 31, 1997, 1996 and 1995, nonaccrual loans outstanding were $1,220,000, $999,000 and $482,000, respectively. Loan fees included in interest income for 1997, 1996 and 1995 were $542,000, $460,000 and $428,000, respectively.
RATE VOLUME ANALYSIS/MATURITIES TABLES ====================================== Rate Volume Analysis - -------------------- (Dollars in Thousands)
Change in Income/Expense Rate Effect Volume Effect 1997 1996 1995 1997 1996 1995 1997 1996 1995 Investment income: - ------------------ Taxable $ (19) $1,988 $1,359 $ 61 $ (237) $ 141 $ (80) $2,225 $1,218 Nontaxable (87) (211) (103) (58) (112) (79) (29) (99) (24) - -------------------------------------------------------------------------------------------------------------- Total (106) 1,777 1,256 3 (349) 62 (109) 2,126 1,194 - -------------------------------------------------------------------------------------------------------------- Loan income: - ------------ Commercial 1,995 674 2,336 6 (397) 1,557 1,989 1,071 779 Real estate 3,541 659 1,352 396 (672) 525 3,145 1,331 827 Consumer 790 1,644 1,965 (256) 1,028 923 1,046 616 1,042 - -------------------------------------------------------------------------------------------------------------- Total 6,326 2,977 5,653 146 (41) 3,005 6,180 3,018 2,648 - -------------------------------------------------------------------------------------------------------------- Short-term investments 186 (467) 328 17 (75) 262 169 (392) 66 - -------------------------------------------------------------------------------------------------------------- Total interest income 6,406 4,287 7,237 166 (465) 3,329 6,240 4,752 3,908 ============================================================================================================== Interest expense: - ----------------- Savings 250 (5) 201 19 (226) 395 231 221 (194) Interest-bearing demand deposits 716 428 1,016 202 (208) 824 514 636 192 Time 2,436 73 3,551 2,831 (583) 1,664 (395) 656 1,887 Short-term borrowings (426) 398 673 (80) (182) 294 (346) 580 379 Long-term borrowings 274 295 (88) 36 240 34 238 55 (122) - -------------------------------------------------------------------------------------------------------------- Total interest expense 3,250 1,189 5,353 3,008 (959) 3,211 242 2,148 2,142 ============================================================================================================== $3,156 $3,098 $1,884 $(2,842) $ 494 $ 118 $5,998 $2,604 $1,766 ============================================================================================================== The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the dollar amounts of the change in each.
Loan Maturities at December 31, 1997: - ------------------------------------- Due in Due in One Year Due One Year Through After or Less Five Years Five Years Total LOAN TYPE Commercial loans: - ----------------- Fixed $ 14,807 $ 12,394 $ 4,709 $ 31,910 Variable 56,884 25,698 44,543 127,125 - ------------------------------------------------------------------------- 71,691 38,092 49,252 159,035 ========================================================================= Real estate loans: - ------------------ Fixed 5,973 20,364 44,595 70,932 Variable 22,545 28,722 126,003 177,270 - ------------------------------------------------------------------------- 28,518 49,086 170,598 248,202 ========================================================================= Consumer loans: - --------------- Fixed 32,446 67,004 3,889 103,339 Variable 8,449 2,154 391 10,994 - ------------------------------------------------------------------------- 40,895 69,158 4,280 114,333 ========================================================================= Total $141,104 $156,336 $224,130 $521,570 ========================================================================= Maturities of Certificates of Deposit $100,000 and over at December 31: - ------------------------------------------------------------------------ 1997 1996 1995 1994 Under 3 months $13,302 $16,437 $18,662 $ 5,657 3 to 6 months 24,069 8,279 9,319 2,149 6 to 12 months 9,520 10,309 5,140 5,868 Over 12 months 10,698 8,356 8,266 12,695 - ------------------------------------------------------------------------- Total $57,589 $43,381 $41,387 $26,369 ========================================================================= LOAN PORTFOLIO ANALYSIS ======================= (Dollars in thousands) 1997 1996 1995 1994 1993 Year-end balances: - ------------------ Commercial, financial and agricultural $159,035 $127,927 $117,306 $117,015 $101,633 Real estate 228,689 175,505 154,469 150,289 135,704 Real estate, construction 19,513 9,944 5,919 2,528 5,421 Consumer 107,158 102,044 95,464 86,098 74,775 Credit card 7,175 6,993 6,368 5,423 4,142 - ---------------------------------------------------------------------------- Total $521,570 $422,413 $379,526 $361,353 $321,675 ============================================================================ Average total loans $467,897 $400,264 $367,222 $337,500 $306,282 Average allowance for loan losses (7,521) (6,799) (6,719) (6,680) (6,095) - ---------------------------------------------------------------------------- Average loans, net of allowance $460,376 $393,465 $360,503 $330,820 $300,187 ============================================================================ Allowance for loan losses, January 1 $6,873 $6,726 $6,783 $6,370 $5,687 Allowance for loan losses acquired 290 Loans charged off: - ------------------ Commercial, financial and agricultural 354 342 256 39 193 Real estate 42 93 82 189 143 Consumer 1,258 1,726 1,352 842 816 Credit card 263 168 113 54 51 - ---------------------------------------------------------------------------- Total 1,917 2,329 1,803 1,124 1,203 - ---------------------------------------------------------------------------- Recoveries: - ----------- Commercial, financial and agricultural 124 36 111 392 60 Real estate 6 75 60 61 65 Consumer 374 391 251 304 157 Credit card 17 9 9 15 12 - ---------------------------------------------------------------------------- Total 521 511 431 772 294 - ---------------------------------------------------------------------------- Net chargeoffs: - --------------- Commercial, financial and agricultural 230 306 145 (353) 133 Real estate 36 18 22 128 78 Consumer 884 1,335 1,101 538 659 Credit card 246 159 104 39 39 - ---------------------------------------------------------------------------- Total 1,396 1,818 1,372 352 909 - ---------------------------------------------------------------------------- Provision for loan losses 2,589 1,965 1,315 765 1,592 - ---------------------------------------------------------------------------- Allowance for loan losses, December 31 $8,356 $6,873 $6,726 $6,783 $6,370 ============================================================================ Allocation of allowance for loan losses at December 31: - ------------------------------------------------------- Commercial $3,147 $2,741 $3,440 $3,281 $3,185 Real estate 1,478 1,050 1,517 1,828 2,000 Consumer 2,255 2,078 1,519 1,096 987 Credit card 395 131 100 89 166 Unallocated 1,081 873 150 489 32 - ---------------------------------------------------------------------------- Total $8,356 $6,873 $6,726 $6,783 $6,370 ============================================================================ Percent of loans to total loans at December 31: - ----------------------------------------------- Commercial 30.5% 30.3% 30.9% 32.4% 31.6% Real estate 43.8 41.5 40.7 41.6 42.2 Real estate, construction 3.8 2.3 1.5 0.7 1.7 Consumer 20.5 24.2 25.2 23.8 23.2 Credit card 1.4 1.7 1.7 1.5 1.3 - ---------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ============================================================================ Ratio of net chargeoffs to average total loans: - ----------------------------------------------- Commercial 0.05% 0.08% 0.04% (0.11)% 0.04% Real estate 0.01 0.00 0.01 0.04 0.03 Consumer 0.19 0.33 0.30 0.16 0.22 Credit card 0.05 0.04 0.03 0.01 0.01 - ---------------------------------------------------------------------------- Total 0.30% 0.45% 0.38% 0.10% 0.30% ============================================================================ Nonperforming loans: - -------------------- Nonaccrual loans $1,220 $ 999 $ 482 $ 902 $1,416 Loans 90+ days past due 462 621 1,236 1,082 896 Other real estate owned 19 28 45 97 38 - ---------------------------------------------------------------------------- Total $1,701 $1,648 $1,763 $2,081 $2,350 ============================================================================ Nonperforming loans as a percent of total loans 0.33% 0.39% 0.46% 0.58% 0.73% ============================================================================ Interest income on nonaccrual loans which would have been recorded under the original terms of the loans for 1997, 1996 and 1995 was $41,000 (of which $5,000 was actually recorded), $78,000 (of which $11,000 was actually recorded) and $19,000 (of which $10,000 was actually recorded), respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS ==================================== Introduction - ------------ The following discussion and analysis of the consolidated financial statements of Peoples Bancorp Inc. (the "Company") is presented to give the reader insight into management's assessment of the financial results. It also recaps the significant events that led to the results. The Company's subsidiaries, The Peoples Banking and Trust Company ("Peoples Bank"), The First National Bank of Southeastern Ohio ("First National"), Catlettsburg Federal Savings Bank ("Catlettsburg Federal"), Russell Federal Savings Bank ("Russell Federal"), and The Northwest Territory Life Insurance Company, provide financial services to individuals and businesses within our market area. Peoples Bank is chartered by the State of Ohio and subject to regulation, supervision, and examination by the Federal Deposit Insurance Corporation ("FDIC") and the Ohio Division of Banks. First National is a member of the Federal Reserve System and subject to regulation, supervision, and examination by the Office of the Comptroller of the Currency. Catlettsburg Federal and Russell Federal are members of the Federal Home Loan Bank, and are subject to regulation, supervision, and examination by the Office of Thrift Supervision, and are also subject to limited regulation by the Board of Governors of the Federal Reserve System. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and footnotes thereto and the ratios, statistics, and discussions contained elsewhere in this Annual Report. The following text will include references to several acquisition transactions that have affected and/or will affect the Company's results of operations. In April 1996, Peoples Bank completed the acquisition of three full-service banking centers in the communities of Pomeroy, Gallipolis, and Rutland, Ohio ("Southeast Ohio Banking Center Acquisition"), by acquiring approximately $74 million in deposits from an unaffiliated financial institution. In January 1997, the Company completed the purchase of Russell Federal in Russell, Kentucky, for approximately $9.25 million in cash ("Russell Federal Acquisition"). Management has continued Russell Federal's operations as a federal savings bank subsidiary of the Company. Russell Federal had total assets of $28.0 million and deposits of $19.5 million at December 31, 1996. On February 28, 1997, Peoples Bank acquired one full-service banking office located in Baltimore, Ohio, ("Baltimore Banking Center Acquisition"), by assuming approximately $12.5 million in deposits from an unrelated financial institution. This full-service banking office is located in Fairfield County in central Ohio. On December 12, 1997, the Company completed the purchase of Gateway Bancorp, Inc. and its subsidiary, Catlettsburg Federal, of Catlettsburg, Kentucky, for approximately $21.6 million in a combination of cash of $6.2 million and 365,472 shares of Company stock ("Gateway Bancorp Acquisition" or "Catlettsburg Federal Acquisition"). Management has continued to operate Catlettsburg Federal as a federal savings bank subsidiary of the Company. Catlettsburg Federal had total assets of $64.3 million and deposits of $43.8 million at December 12, 1997. In January, 1998, the Company reincorporated Russell Federal as a subsidiary of Gateway Bancorp to align the Company's business units in northeast Kentucky. On January 20, 1998, the Company announced the signing by Peoples Bank of an agreement to acquire five full-service banking offices located in the communities of Point Pleasant (three offices), New Martinsville, and Steelton, West Virginia ("West Virginia Banking Center Acquisition") from an unaffiliated institution. In the agreement, Peoples Bank will assume approximately $125 million in deposits and purchase $10.5 million in loans. The acquisition is contingent upon regulatory approval and other conditions and is expected to be completed in the second quarter of 1998. Overview of the Income Statement - -------------------------------- Net income increased $954,000 or 12.5%, to $8,605,000 in 1997 from $7,651,000 in 1996. The increase was primarily due to strong internal loan growth and loans acquired in the Russell Federal Acquisition as well as enhanced operational efficiencies. Fully tax equivalent net interest income increased $3,156,000 in 1997 to $29,310,000, up 12.1% compared to 1996. The yield on interest-earning assets increased from 8.74% in 1996 to 8.81% in 1997, as the Company increased its percentage of interest-earning assets to higher-yielding assets such as loans. The average interest rate paid on interest-bearing liabilities also increased, from 4.59% in 1996 to 4.67% in 1997. Net interest margin for the Company totaled 4.74% compared to 4.75% last year. Strong loan growth prompted an increase in the provision for loan losses in 1997, totaling $2,589,000, up from $1,965,000 in 1996. Non-interest income (excluding gains or losses on sales of investment securities) increased 16.3% to $5,966,000 in 1997, compared to $5,130,000 last year. Gains and losses on sales of investment securities were insignificant in 1997 and 1996. Due primarily to increased expenses related to the aforementioned multiple acquisitions, non-interest expense increased 9.9% in 1997 to $19,265,000, compared to $17,522,000 in the prior year. The Company's efficiency ratio improved to 51.06% for the year ended December 31, 1997, compared to 53.76% in 1996. Diluted earnings per share totaled $2.40 in 1997, up $0.20 per share compared to 1996. 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 1997, intangible amortization expense totaled $1,138,000 ($751,000 after taxes) compared to $625,000 ($413,000 after taxes) for the same period a year earlier. Adjusting for the amortization of intangibles results in diluted cash earnings per share for the year ended December 31, 1997 of $2.61, up $0.29 from $2.32 in cash earnings per share in 1996. Management uses cash earnings as one of several ways to evaluate the impact of acquisitions to profitability and return on investment. Increased amortization of intangibles in 1997 also impacted tangible return on assets and equity. Recent acquisitions have increased the Company's amortization expense related to goodwill and other intangibles and as a result, the purchase method of accounting has affected 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 adjustments in the mix of interest-earning assets and interest-bearing liabilities, impact net interest income. Short-term market interest rates did not fluctuate significantly in 1997. The Federal Reserve Board modestly increased the discount rate in early 1997 and, as a result, the national prime rate moved up 25 basis points. The Company adjusted its base loan rates in mid-1997 to reflect the increase in the national prime rate. These rate adjustments increased net interest income in 1997 and made significant contributions to interest income streams. The Company's interest bearing transaction accounts that are tied to various national market indices were also affected by the modest rise in interest income and therefore also increased in 1997, causing a slight increase in interest costs in 1997. In 1997, the Company recorded net interest income of $28,620,000, an increase of 12.5% from 1996. Total interest income reached $53,836,000 while interest expense totaled $25,216,000. Included in interest income is $1,324,000 of tax-exempt income from investments issued by states and political subdivisions. Since these revenues are not taxed, it is more meaningful to analyze net interest income on a fully-tax equivalent ("FTE") basis. Net interest margin is calculated by dividing FTE net interest income by average interest-earning assets and serves as a measurement of the net revenue stream generated by the Company's balance sheet. Net interest margin remained relatively stable at 4.74% in 1997, a modest decrease compared to 1996's ratio of 4.75%. The FTE yield on earning assets was 8.81% in 1997, compared to 8.74% in 1996. The cost of earning assets increased 8 basis points to 4.07% in 1997, due primarily to rates paid on time deposits and minimal growth in non-interest bearing deposits. Average loan balances increased nearly $68 million compared to prior year and continue to be the largest component of the earning assets on the Company's balance sheet. Loans averaged 84.2% of deposits during 1997 compared to 82.6% in 1996. This increase is consistent with the Company's strategic initiatives to increase its higher-yielding asset base and satisfy the loan demand experienced in its markets. Detailed analyses of several categories within interest-earning assets and interest-bearing liabilities reveal changes in mix and modest shifts in interest rates. Commercial loans continued to grow in 1997, reaching average balances of $146.0 million and a maintaining yield of 9.55% compared to average balances and yields of $125.1 million and 9.54%, respectively, in the prior year. This volume growth increased interest income nearly $2 million in 1997. In 1997, average real estate loan balances grew $37.0 million (or 21.4%) due primarily to the Russell Federal Acquisition and significant internal growth. The average yield on real estate loans was 8.53% in 1997, compared to 8.31% in 1996. The modest increase in yield and significant growth in volume produced an increase of $3,541,000 in real estate loan income. In 1997, average balances in personal loans increased $10.0 million or 9.7%. The average yield on those loans was 10.41% in 1997 compared to 10.66% in 1996. This decrease in yield was due primarily to increased competition for personal loans in the Company's markets. However, increased volumes provided the Company with additional incremental interest income of over $1 million. The Company has been able to meet its operating goals while growing the loan portfolio at competitive, but profitable yields. Yields on long-term investment securities remained stable in 1997 compared to prior year, totaling 7.02% of average balances on an FTE basis. Average balances decreased $1.5 million as the Company shifted earning assets to higher-yielding assets such as loans. Average short-term investment balances (interest bearing deposits in other banks and federal funds sold) increased $3.1 million in 1997, and yields increased 22 basis points to 5.50% in 1997. The increased income from short-term investments offset the decreased interest income generated from long-term investment securities in 1997. During 1997, the Company offered several special short-term time deposits to fund loan demand. In the first half of 1997, special 5-month and 10-month time deposits were priced competitively in the Company's markets and generated significant funding for recent asset growth. The 5-month and 10-month specials were discontinued in the second quarter of 1997, and in the third quarter, the Company began offering a special 7-month time deposit designed to retain previously written short-term time deposits as well as encourage customers to use the many products and services offered by the Company. The 7-month special was discontinued in late 1997 when volume goals were reached. Management expects interest rate pressures will continue to challenge the Company in 1998 as financial institutions and other competitors continue to search for new methods and products to satisfy increasing customer demand for higher yielding interest-bearing deposits. Interest costs on the Company's array of traditional interest-bearing deposit products increased nine basis points to 4.57% in 1997 compared to 4.48% in 1996. The most significant component of interest expense in 1997 was interest paid on time deposits (i.e., Certificates of Deposits and Individual Retirement Accounts). In 1997, the Company incurred interest of $15,358,000, or 5.53%, on average time deposit balances of $227.6 million. In 1996, the rate paid on average time deposit balances of $234.6 million was 5.51%. Growth in this type of funding source came primarily from southeastern Ohio markets which the Company serves, but some funding was acquired from the Russell Federal Acquisition as well as the Catlettsburg Federal Acquisition. The largest rate increase occurred in average interest-bearing demand deposits, which increased 18 basis points to 3.46% on average deposit balances of $126.5 million in 1997, compared to 3.28% on average balances of $111.4 million in 1996. This combination increased interest expense costs by $716,000 as customers continue to search for ways to maximize their investments in banking products. Management expects deposit pricing to be increasingly competitive in 1997. In 1997, the Company continued its use of short-term borrowings as a funding source. Historically the Company's cash management services offered to a variety of business customers have provided short-term funding, specifically overnight repurchase agreements. In 1997, the Company's average balances of overnight repurchase agreements increased $7.0 million (or 51.8%) to $20.4 million, due primarily to growth in balances from existing customers and increased market penetration. The average rate paid in 1997 on overnight repurchase agreements totaled 4.43%, up 58 basis points from the prior year's average rate of 3.85%. Interest costs on this product totaled $905,000 in 1997, up significantly from 1996's total of $519,000. These rates are based on selected indices which increased in 1997. Interest expense on average short-term Federal Home Loan Bank ("FHLB") advances in 1997 totaled $117,000, an average interest rate of 5.79%. Average short-term FHLB balances totaled $2.0 million in 1997, compared to $12.3 million in 1996, when the Company used this type of borrowing as a funding source for the Southeastern Ohio Banking Center Acquisition. In 1996, the average rate on these funding sources was 5.68%. As a result of decreased use of this funding source in 1997, interest costs for all short-term borrowings decreased $426,000 compared to the prior year. Management plans to maintain access to short-term FHLB borrowings as an appropriate funding source. In 1997, interest expense on long-term borrowings modestly increased to $1,911,000, up $274,000 (or 16.7%) compared to 1996. The rate paid on average long-term borrowings totaled 6.27% in 1997, an increase of 14 basis points over 1996's average rate of 6.13%. The modest increase was commensurate with the increase in the national prime rate in 1997. The majority of the Company's long-term borrowings are fixed rate FHLB borrowings. Please refer to the "Average Balances and Analysis of Net Interest Income" table included on page 28 for a complete quantitative evaluation of the Company's net interest margin. In 1997, the Company recorded a provision for loan losses of $2,589,000, up from $1,965,000 in 1996. The increase was due primarily to increased loan volume. In 1997, consumer credit delinquencies as a percent of total consumer loans outstanding improved. However, due to anticipated increased commercial loan activity and the inherent risk associated with commercial loans, management expects to maintain the current level of loan loss provision in 1998. Non-Interest Income - ------------------- The Company's non-interest income is generated from four primary sources: cost-recovery fees related to deposit accounts, income derived from fiduciary activities, electronic banking revenues, and income generated by the Company's insurance agency subsidiaries. Non-interest income (excluding securities transactions) from operations reached record levels in 1997, totaling $5,966,000, an increase of 16.3% compared to 1996. Several categories had strong growth compared to 1996. Management continues to focus on non-interest income as a primary source of cost-recovery. In 1997, account service charge income related to deposits increased $265,000 or 13.7% to $2,202,000. Several factors contributed to this growth. A full year of cost-recovery fees related to the $74 million growth in deposits assumed in the Southeastern Ohio Banking Center Acquisition contributed to increases in fee income. The Company's fee structure is based on cost recoveries associated with services provided. In addition, non-customer activity in the Company's network of ATM's has increased and caused a corresponding increase in ATM-related revenues. The Company's Investment and Trust Division continued its strong earnings trend. The fee structure for investment and fiduciary activities is based primarily on the market value of assets being managed, which totaled approximately $503 million at December 31, 1997, an increase of over $65 million from the previous year-end. Income from fiduciary activities totaled $2,176,000, an increase of 14.7% compared to 1996. The Investment and Trust Division will continue to build on its leadership position in the Company's markets and will be a significant contributor to the Company's net income. Electronic banking has been a service offered to the Company's customers for several years. Electronic banking services include ATM cards, direct deposit services, and the Peoples Connect Card, a debit card first introduced in 1996. Recently the financial services industry has increased its focus on electronic banking products as a method to enhance relationships with the customer. In 1997, a combination of modifications in the Company's fee schedule and increased volume related to these products impacted the Company's non-interest income. In 1997, total electronic banking revenue reached $476,000, up $357,000 (or 33.4%) compared to the same period a year earlier. Increases are due primarily to revenues related to the debit card program launched in late 1996. In late 1995, First National Bank's subsidiaries, Northwest Territory Life Insurance Agency, Inc. and Northwest Territory Property and Casualty Insurance Agency, Inc. (the "Agencies"), were awarded insurance agency powers in the State of Ohio. The Agencies received Certificates of Qualification to provide full life and property insurance product lines to consumers in Ohio. These Agencies were the first in Ohio to be affiliated with a financial institution. Although the Agencies' results of operations did not have a material impact on 1997 results, they are anticipated to produce income growth and long-term value to the Company through internal development as well as external affiliation and acquisition. Currently, the Agencies are generating fee income on sales of annuities, mutual funds, and other similar investment products, as well as life insurance policies. Management intends to develop the Agencies' property and casualty insurance product lines through both internal development and acquisition of existing independent agencies. Management will continue to explore new methods of enhancing non-interest income in the future. Both traditional and non-traditional financial service products are being analyzed for inclusion in the product mix currently being offered by the Company. Non-Interest Expense - -------------------- Operating efficiently and maintaining acceptable levels of non-interest expense and operating efficiency are key performance indicators for the Company in its strategic initiatives. Several categories within non-interest expense directly related to banking operations remained at levels comparable to the prior year. In 1997, non-interest expense totaled $19,265,000, an increase of 9.9% over the prior year. This increase relates primarily to the Company's recent acquisitions and related increased levels of non-interest expense such as salaries and benefits, depreciation expense, intangible amortization, etc. Management has initiated steps to leverage non-interest expense associated with its recent market expansion. When comparing non-interest expense information from 1997 to 1996, it is important to note the changes to the Company's non-interest expense levels related to acquisition activity. Acquisitions, and the related salaries and employee benefits and amortization of intangibles, comprise the majority of the increase in non-interest expense in 1997. Non-operational items have resulted in significant increases in 1997's non-interest expense compared to the prior year. In particular, amortization of intangibles totaled $1,138,000 in 1997 compared to $625,000 for the same period last year, an increase of $513,000 (or 82.1%). Expenses for human resources also increased through the acquisitions and corresponding expansion of the Company's services and geographic area. For the year ended December 31, 1997, salaries and benefits expense increased $844,000 (or 11.2%) to $8,358,000 compared to 1996. The acquisitions increased the number of employees due to the retention of many customer service associates. At December 31, 1997, the Company had 314 full-time equivalent employees, up from 304 full-time equivalent employees at year-end 1996. The Company had 261 full-time equivalent employees at March 31, 1996, before the combined impact of recent acquisition activity. Management expects salaries and employee benefits to increase in 1998 due to the pending West Virginia Banking Center Acquisition and normal merit increases. Management will continue to strive to find new ways of increasing efficiency and leveraging its resources while concentrating on maximizing customer service. Depreciation expense increased in 1997 due primarily to assets purchased in the acquisitions and other investments in fixed assets such as refurbishing several of the Company's full-service banking offices. Depreciation on fixed assets totaled $1,531,000 in 1997, compared to $1,356,000 in 1996, an increase of $175,000 or 12.9%. Management expects future depreciation expense to increase in 1997 due to construction projects scheduled to be completed in the first quarter of 1998 on new full-service offices in Athens, Ohio, and Ashland, Kentucky. Also, 1998 depreciation expense will be impacted by increased fixed assets purchased in the West Virginia Banking Center Acquisition. Compared to 1996, data processing and software support and maintenance costs increased $116,000 to $829,000 in 1997. These costs are related to upgrades of existing software products as well as expense for maintenance agreements for many of the software systems used for product delivery and enhanced customer service. The Company expanded its market area in 1997 and continued to enhance its product-delivery technology to improve customer service. Management believes technology is a key factor for the Company's delivery methods and plans to continue investment in technology to enhance customer service and improve operating efficiencies. Many categories within non-interest expense remained at levels comparable to last year. Management believes that non-interest expense was leveraged in 1997 to enhance customer service and improve market share and will continue to focus on the Company's efficiency ratio as a key indicator of performance. The efficiency ratio is calculated as follows: operational non-interest expense (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. Also, gains and losses on sales of investment securities are not included in the calculation of the Company's efficiency ratio. In 1997, the Company's efficiency ratio totaled 51.06% compared to 53.76% for the same periods last year. Management expects the efficiency ratio to modestly improve in 1998 due to planned leveraging of the Company's non-interest expense to generate net interest income and other revenue streams. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options instead of applying SFAS Statement No. 123 "Accounting for Stock Based Compensation". Under APB 25, because the exercise price of the Company's stock options granted is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. The effect of applying the fair value method to the Company's stock-based awards in 1997, 1996, and 1995 results in net income and basic and diluted earnings per share that are not materially different from amounts reported. Return on Assets - ---------------- For the year ended December 31, 1997, return on average assets ("ROA") was 1.29%, matching 1996's results. Increased income streams from recent acquisitions were partially offset by amortization of intangibles assumed in such purchases, resulting in ROA levels identical to prior year. The Company's recent thrift acquisitions also affect ROA performance. In general, thrifts have produced lower returns on assets than commercial banks. As management is successful in transitioning the recently acquired thrifts to core competencies usually associated with commercial banks, the thrifts will produce greater returns. In addition to thrift acquisitions, the Company's ROA will be challenged in 1998 and future periods due to the West Virginia Banking Center Acquisition and its related approximately $125 million in deposits. The Company will be challenged to employ these new funding sources in a manner consistent with acceptable return on investment in a short period of time. Since the Company's asset base will increase significantly and earnings streams will be spread over several quarters, management anticipates that ROA levels will modestly decrease in 1998 as a result of the acquisitions and corresponding asset growth. Management plans to utilize pre-investment strategies in anticipation of the West Virginia Banking Center Acquisition and its associated deposits in order to maximize earnings streams and mitigate the impact on the Company's performance ratios. This pre-acquisition investment strategy of approximately $40 million is also designed to position the portfolio for future earnings while maintaining adequate liquidity. Management views the West Virginia Banking Center Acquisition as a vital part of its strategic initiatives in the West Virginia market. Return on Equity - ---------------- Management recognizes that the Company's return on average stockholders' equity ("ROE") is an important indicator of an entity's financial performance. In 1997, ROE totaled 14.33% compared to 14.43% in 1996. The Company is considered "well-capitalized" under regulatory and industry standards, as discussed in Note 11 of the Notes to the Company's Consolidated Financial Statements. In December 1997, in accordance with the agreement to purchase Gateway Bancorp, the Company issued 365,472 shares of stock with a value of approximately $15.35 million. As a result, this increase in total equity will have a significant impact on average equity in 1998. In addition, the Company's capital has grown through retention of higher earnings over the last several quarters and the recent growth in the markup of the Company's equity due to net unrealized holding gains on the Company's investment portfolio. Total equity for the Company increased over $22.6 million for the year ended December 31, 1997. As a result of the increased equity base of the Company, management expects 1998 ROE to be below recent levels and will continue to strive to find ways to leverage the capital of the Company in 1998 and beyond. Federal Income Tax Expense - -------------------------- Federal income taxes increased from $3,471,000 in 1996 to $4,099,000 in 1997. This increase can be attributed to the Company's higher pre-tax income and a modest decrease in tax-exempt income compared to prior year. The Company's effective tax rate for 1997 was 32.3%, up modestly from 1996's effective tax rate of 31.2%, as a result of the growth in pre-tax income and the Company's earnings now being taxed at the federal statutory rate of 35% compared to 34% in 1996 and 1995. Overview of Balance Sheet - ------------------------- In 1997, the Company significantly grew its balance sheet through acquisitions and internal growth. The Company's acquisitions in 1997 combined to produce increased assets of approximately $100 million. Internal asset growth was fueled primarily by strong loan demand in the markets served by the Company. Total assets increased $141.5 million (or 23.0%) to $758.2 million at year-end 1997. Loan growth from the Company's 1997 acquisitions totaled approximately $42 million, while growth from existing offices contributed over $57 million in growth. In total, loans grew $99.2 million (or 23.4%) to $521.6 million and investment securities grew $26.5 million (or 17.9%) to $174.3 million. Total liabilities increased $118.9 million (or 21.2%) to $679.3 million at December 31, 1997. The majority of this growth occurred in the Company's total deposits, which increased $106.4 million (or 21.1%) to $611.1 million at December 31, 1997. This was due primarily to funds acquired in the Russell Federal Acquisition, Baltimore Banking Center Acquisition, and Catlettsburg Federal Acquisition. Increases in deposits for the Company occurred primarily in interest-bearing deposits, while non-interest bearing deposit balances grew nearly $1 million to $64.2 million. Short-term borrowings increased $13.0 million (or 66.8%) to $32.6 million, as balances in overnight repurchase agreement for corporate customers grew sharply in the fourth quarter of 1997. Long-term borrowings, comprised primarily of FHLB borrowings with maturities greater than one year, declined by $0.6 million (or 2.1%) to $28.6 million at December 31, 1997. Stockholders' equity increased $22.6 million (or 40.3%) to $78.8 million at December 31, 1997. Equity growth occurred in the fourth quarter of 1997 through the issuance of 365,472 shares of Company stock valued at $15.35 million in accordance with the Company's purchase of Gateway Bancorp. Normal equity growth also occurred through retention of net income. The Company purchased $327,000 of treasury shares in 1997 and also reissued treasury shares through exercised stock options. At December 31, 1997, the Company did not have a treasury share balance. Please see the Consolidated Statements of Stockholders' Equity found on page 10 in this Report for additional information regarding the changes in stockholders' equity. Cash and Cash Equivalents - ------------------------- The Company's cash and cash equivalents totaled $38.8 million at December 31, 1997, an increase of $10.3 million compared to year-end 1996. Increases in late December in the Company's balances of overnight repurchase agreements created a temporary increase in cash and cash equivalents at year-end 1997. Management expects these funding sources to slowly decrease in the first half of 1998, and as a result, cash and cash equivalent balances should return to normal levels. Also, since the acquisition date in December, 1997, Catlettsburg Federal has maintained significant balances in short-term investments. The Company intends to shift such assets into higher-yielding assets to enhance profitability. This temporary situation also caused a significant increase in cash and cash equivalents at December 31, 1997, compared to previous reporting periods. Management expects the temporary increase in cash and cash equivalents to reduce in early 1998 through expected modest attrition of those funding sources. Those funds that are determined to be long-term funding sources will be shifted into higher-yielding assets such as loans or investment securities in 1998. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity needs. Management feels the liquidity needs of the Company are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portion of the investment and loan portfolios that mature within one year. These sources of funds should enable the Company to meet cash obligations and off-balance sheet commitments as they come due. Investment Securities - --------------------- Investment securities totaled $174.3 million at year-end 1997, up $26.5 million (or 17.9%) compared to December 31, 1996. Growth occurred in 1997 through the Russell Federal Acquisition and Catlettsburg Federal Acquisition, which contributed $6.5 million and $27.0 million, respectively, to total investment securities at December 31, 1997. The majority of Russell Federal's and Catlettsburg Federal's investment portfolios are invested in US Treasury and US agencies securities, as well as mortgage-backed securities. The Company's other subsidiaries modestly decreased balances in investment securities in 1997 as assets were shifted to higher-yielding assets 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 December 31, 1997, the amortized cost of the Company's investment securities totaled $170.7 million, resulting in unrealized appreciation in the investment portfolio of $3.6 million and a corresponding markup of the Company's equity of $2.4 million. At year-end, investments in US Treasury securities and obligations of US government agencies and corporations totaled $52.0 million, up $9.5 million since December 31, 1996. Investments in mortgage-backed securities increased $15.6 million to $76.4 million at December 31, 1997. The Company's balances in investment obligations of states and political subdivisions of $25.7 million and corporate investments of $20.2 million remained relatively unchanged since year-end 1996. In early 1998 and in anticipation of the West Virginia Banking Center Acquisition and its associated approximate $125 million in deposits, management plans to initiate a pre-acquisition investment strategy to take advantage of reasonably favorable asset yields on selected investment securities (such as mortgage-backed securities and other corporate investments). The pre-investment program will total approximately $40 million and increase the relative size of the investment portfolio in 1998. Management expects to retain the approximate $40 million purchase of investment securities for long-term enhancement to net interest income. Depending on loan activity, management expects current balances of investment securities to modestly shrink due to expected loan demand and the shifting of maturing investments to higher-yielding assets. 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. 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. The Company's loan volume grew in 1997 due to acquisitions (Russell Federal and Catlettsburg Federal had $22.4 million and $19.6 million, respectively, at year-end 1997) and internal growth primarily from further penetration in the Company's southeastern Ohio markets, reflecting additional credit opportunities in those markets. Total loans increased $99.2 million (or 23.4%) to $521.6 million at December 31, 1997. Growth occurred in all types of loans in 1997, in particular real estate loans purchased in the Russell Federal and Catlettsburg Federal acquisitions, and commercial loan growth at Peoples Bank. Real estate loans to the Company's retail customers (not including real estate construction loans) continue to be the largest portion of the loan portfolio, comprising 43.8% of the Company's total loan portfolio. Total real estate loans reached $228.7 million at December 31, 1997, up $53.2 million (or 30.3%) since year-end 1996. The majority of real estate loan growth occurred primarily through acquisitions. Internal loan growth also occurred due to increases in the Company's balance of home equity credit lines ("Equilines") in 1997. At December 31, 1997, Equiline balances totaled $17.1 million, up $1.6 million (or 10.3%) since year-end 1996. 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. Lending activity in the Russell Federal and Catlettsburg Federal markets have historically centered on real estate loans. Management expects to continue to penetrate those local markets in 1998, providing increased loan activity. Mortgage lending will remain a vital part of the Company's lending operation due to the programs offered to customers, who continue to seek quality real estate loan products in a competitive environment. The largest internally generated loan growth for the Company in 1997 occurred in commercial, financial, and agricultural loans ("commercial loans"), which increased $31.0 million (or 24.2%) to $159.0 million. Economic conditions in the Company's markets have provided quality credit opportunities. 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 1998. The Company's team of Personal Bankers is dedicated to serving consumer needs for loans, and as a result, consumer lending continues to be a vital part of the core lending facilities of the Company. In 1997, consumer loan balances increased $5.4 million (or 5.0%) to $114.3 million. The majority of the Company's consumer loans are in the indirect lending area. At December 31, 1997, the Company had indirect loan balances of $70.4 million, up $2.1 million since year-end 1996. Management is pleased with the recent performance and growth of the Company's loan portfolio, which can be attributed to the Company's commitment to quality customer service and the continued strong demand for indirect loans in the markets served by the Company. Lenders use a tiered pricing system that enables the Company to apply interest rates 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 recent actions to reinforce the Company's pricing system and underwriting criteria have tempered indirect lending delinquencies without sacrificing overall growth of the portfolio. Management plans to continue its focus on the use of this tiered system combined with controlled growth of the indirect lending portfolio in 1998. The Company's credit card balances at December 31, 1997, were $7.2 million, an increase of $0.2 million (or 2.6%) compared to year-end 1996. In the past, the Company has offered several new products to better serve the credit needs of its customers, including a no-fee credit card and increased credit limits to qualified customers. Management will continue to evaluate new opportunities to serve its credit card customers. At December 31, 1997, the Company also had $6 million of term federal funds sold invested with unaffiliated financial institutions. These investments are classified as loans for purposes of financial statement reporting and generate interest income streams similar to federal funds sold. These investments were made in late 1997 to enhance the Company's short-term net interest income at a fixed rate. These investments are scheduled to mature in the first quarter of 1998 and reinvestment of these assets will be determined considering interest rate, liquidity needs, and other factors. 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 $248.2 million (or 47.6%) of total loans. At December 31,1996, these loans comprised 43.9% of outstanding loans. At year-end 1997, commercial, financial, and agricultural loans totaled $159.0 million (or 30.5%) of outstanding loans, relatively unchanged since year-end 1996. The Company's lending is primarily focused in the local southeastern Ohio market and consists principally of retail lending, which includes single-family residential mortgages and other consumer loan products. One of the Company's largest groups of commercial loans consists of automobile dealer floor plans, which totaled $20.6 million at December 31, 1997. It is the Company's policy to obtain the underlying inventory as collateral on these loans. Allowance for Loan Losses - ------------------------- The allowance for loan losses as a percentage of total loans decreased from 1.63% at December 31, 1996 to 1.60% at year-end 1997, due primarily to significant loan growth. The total dollar amount of the allowance increased $1,483,000 over the same period to $8,356,000 at December 31, 1997. The Company's 1997 provision for loan losses totaled $2,589,000, while gross chargeoffs were $1,917,000 and recoveries amounted to $521,000. In 1996, the Company had gross chargeoffs of $2,329,000 and recoveries of $511,000. The Company's provision for loan losses increased in 1997 due primarily to loan growth. A significant portion of the Company's chargeoffs in 1996 occurred in consumer lending. In 1997, the Company's consumer loan chargeoffs decreased to $1,258,000, down $468,000 (or 27.1%) compared to 1996. Management had anticipated consumer chargeoff activity to slow in 1997 due to implementation of additional measurements of the Company's indirect lending portfolio performance, including a review of underwriting standards and more aggressive collection of past due accounts. Management will continue to monitor the performance of the consumer loan portfolio and focus efforts to continue recent positive trends. Financial services industry reports indicate that credit card delinquencies and chargeoffs are reaching record levels. In 1997, the Company's credit card net chargeoffs followed this basic industry pattern, increasing $87,000 to $246,000. Due to increased credit card delinquencies, management increased its allocation of the allowance to the credit card portfolio in 1997 to address this potential exposure and expects the rate of credit card losses to remain comparable to 1997 in the upcoming year. Commercial loan chargeoffs totaled $354,000 and recoveries were $124,000, resulting in a net chargeoff of $230,000 in 1997 (a decrease of $76,000 compared to prior year). Real estate loan chargeoffs and recoveries were insignificant in both 1997 and 1996 and continue to be lower than expected, demonstrating the quality of the real estate loan portfolio. 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 0.33% at December 31, 1997, compared to 0.39% at year-end 1996. Nonaccrual loans and those loans 90 days past due totaled $1,220,000 and $462,000 at December 31, 1997, compared to $999,000 and $621,000, respectively, at year-end 1996. Management believes the current nonperforming loan ratio is acceptable and reflects the overall quality of the Company's loan portfolio. At December 31, 1997, the Company had an insignificant amount of loans that were considered impaired under Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended by SFAS No. 118. Management will continue to monitor the status of impaired loans, as well as performing and non-performing loans, in order to determine the appropriate level of the allowance for loan losses. Management 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 December 31, 1997. Management expects 1998's loan loss provision to be comparable to 1997's, due mostly to anticipated loan growth and industry predictions of continued consumer credit delinquencies. Management believes the current allowance for loan losses of 1.60% of total loans at year-end 1997 to be adequate to absorb inherent losses in the portfolio. Funding Sources - --------------- The Company considers deposits, short-term borrowings, and long-term borrowings when evaluating funding sources. Traditional deposits continue to be the most significant source of funds for the Company and the expansion of the deposit base through deposit growth in the Company's existing markets as well as acquisitions in 1997 sustained the asset growth of the Company. In 1997, total deposits grew $106.4 million (or 21.1%) to $611.1 million, with the majority of the growth occurring in interest-bearing deposits, particularly time deposits. Deposit growth in 1997 occurred primarily in the Russell Federal Acquisition, the Baltimore Banking Center Acquisition, and the Catlettsburg Federal Acquisition. At December 31, 1997, the combined impact of those three acquisitions to the Company's deposit base was an increase of $78.3 million. The majority of those deposits are interest-bearing certificates of deposits ("CD's") and Individual Retirement Accounts ("IRA's"), as well as savings deposits. In addition to funding sources obtained through acquisitions, the Company experienced significant internal deposit growth at Peoples Bank and First National, particularly in interest-bearing deposit accounts, which increased $15.5 million (or 13.3%) to $131.9 million at December 31, 1997. Non-interest bearing transaction accounts grew a modest $0.8 million to $64.2 million at year-end 1997, as many customers shifted their deposits to interest-bearing transaction accounts to maximize returns. Management will continue to emphasize deposit-gathering methods in 1998 through special "relationship accounts" (both non-interest bearing and interest-bearing) based on deposits in other products such as CD's or IRA's. These marketing programs were implemented in 1997 and widely accepted in the Company's markets. Time deposit balances grew in 1997 despite increased competition for those deposits in the Company's established markets. In mid-1997, the Company introduced aggressively priced 5-month and 10-month CD specials, which were well-received by many customers and met volume goals in the third quarter of 1997. Later in the year, management introduced a 7-month special designed to retain maturing short-term CD's as well as provide a competitive product in the Company's markets. The 7-month special was discontinued in late 1997 as volume goals were reached. Management expects CD's to continue to be a vital funding source for the Company in the future. The West Virginia Banking Center Acquisition is expected to provide approximately $50 million in time deposits, as well as approximately $75 million in other interest bearing and non-interest bearing deposits, for the Company's use as a funding source for future asset growth or replacement of current funding sources, depending on the Company's interest rate asset/liability position and interest rate risk factors in mid-1998. Management believes the deposit base remains the most significant funding source for the Company and will continue to concentrate on deposit growth and maintaining adequate net interest margin to meet the Company's strategic goals. The Company's short-term borrowings consist of federal funds purchased, corporate deposits held in overnight repurchase agreements, and various FHLB borrowings. Short-term borrowings totaled $32.6 million at December 31, 1997, up $13.0 million (or 66.8%) since year-end 1996. The largest component and biggest increase in short term borrowings at December 31, 1997, were balances in corporate repurchase agreements, which grew $13.7 million (or 80.1%) to $30.7 million. The growth was due primarily to increases in overnight repurchase agreement balances from a significant commercial customer in late 1997. Management expects these balances to slowly decrease in the first half of 1998 and, as a result, overnight repurchase agreement balances will correspondingly decrease to lower levels and stabilize. At December 31, 1997, the Company had a balance of $1.8 million in short-term FHLB borrowings, down $0.8 million compared to prior year-end. In general, the Company accesses this funding source at various times to meet liquidity needs as they arise, and will continue to access short-term FHLB borrowings as necessary and appropriate in the future. 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. Total long-term FHLB advances were $25.6 million at December 31, 1997, a net decrease of $3.6 million (or 12.3%) since year-end 1996 (new advances totaled $2.0 million, maturities totaled $2.5 million, and scheduled principal paydowns were $3.1 million). Management plans to maintain access to long-term FHLB borrowings as an appropriate funding source. In order to finance a portion of the total purchase price of the Russell Federal Acquisition, the Company obtained a $3 million loan from an unaffiliated financial institution. The remaining funds for the Russell Federal Acquisition were generated from internal sources. Principal paydowns were scheduled to begin on the $3 million note in the first quarter of 1998 and continue semi-annually over the next several years. Effective December 12, 1997, the Company completed the Gateway Bancorp Acquisition with a combination of cash and Company stock. The cash portion totaled approximately $6.2 million and was funded with internally generated sources (a dividend from Gateway Bancorp after completion of the purchase). In early 1998 and in anticipation of the West Virginia Banking Center Acquisition and its associated approximate $125 million in deposits, management plans to initiate a pre-acquisition investment program of approximately $40 million to take advantage of more favorable asset yields on selected investment securities. Management expects to finance the pre-investment strategy with short-term FHLB borrowings, and ultimately replace such borrowings with the deposits acquired in the West Virginia Banking Center Acquisition. As a result, future balances in short-term borrowings will increase significantly by mid-1998 and decrease after completion of the West Virginia Banking Center Acquisition. Capital/Stockholders' Equity - ---------------------------- For the year-ended December 31, 1997, the capital position of the Company grew approximately $22.6 million (or 40.2%) to $78.8 million at year-end, due primarily to the equity issued in the form of common shares of the Company in the acquisition of Gateway Bancorp. In the Gateway Bancorp Acquisition, the Company issued 365,472 shares at a market value of $42.00 per share, or a total value of $15.35 million. In 1997, the Company had net income of $8.6 million and paid dividends of $2.6 million, a dividend payout ratio of 30.53% of earnings, compared to 29.28% in the prior year. Retention of the increased earnings also caused total equity to increase in 1997. Management believes recent dividends represent an acceptable payout ratio for the Company and anticipates similar payout ratios in future periods through quarterly dividends. Equity growth was affected in 1997 by the adjustment for the net unrealized holding gain on available-for-sale securities, net of deferred income taxes, which increased $0.9 million to a net gain of $2.4 million at year-end 1997, due to favorable changes in interest rates relative to the Company's investment portfolio yields. Since all of the investment securities in the Company's portfolio are classified as available-for-sale, both the investment and equity sections of the Company's balance sheet are more sensitive to the changing market values of investments. 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. Detailed information concerning the Company's risk-based capital ratios can be found in Note 11 of the Notes to the Consolidated Financial Statements. At December 31, 1997, the Company's and each of its banking subsidiaries' risk-based capital ratios were above the minimum standards for a well-capitalized institution. The Company's risk-based capital ratio of 14.34% at December 31, 1997, is well above the minimum standard of 8%. The Company's Tier 1 capital ratio of 13.09% also exceeded the regulatory minimum of 4%. The Leverage ratio at year-end 1997 was 9.29% and also above the minimum standard of 4%. These ratios increased in the fourth quarter due to the acquisition of Gateway Bancorp, which had significant levels of capital as a percentage of total assets. 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. As a result of the West Virginia Banking Center Acquisition, Peoples Bank's capital position will require an additional capital injection to maintain well-capitalized risk-based capital ratios. Management intends to use internally generated sources to fund this increase in required equity while maintaining adequate capital ratios at each of the Company's banking subsidiaries. Treasury share purchases were minimal in 1997, totaling $327,000. The Company has established a pattern of purchasing treasury shares for use in conjunction with its employee benefit plans. Due to recent stock option exercises, the Company had no treasury shares at December 31, 1997 for use in its employee benefit plans. Future exercises will be issued from authorized and unissued common shares, unless additional treasury shares are purchased. At year-end the Company had 9,000 shares available to be purchased as treasury shares under the Board of Director's September 12, 1997, authorization to purchase up to 10,000 shares at market value. Liquidity - --------- Liquidity measures an organization's ability to meet cash obligations as they come due. During the year ended December 31, 1997, the Company generated cash from operating and financing investing activities of $12.2 million and $40.8 million, respectively. The Company used cash flows of $42.7 million in investing activities, primarily through lending activity. The major cash inflow in 1997 was the $32.3 million increase in interest-bearing deposits. The CD special offered throughout 1997 generated significant cash flow and helped retain many existing rate sensitive deposits. Major outlays of cash in 1997 included $59.0 million in loans. The Consolidated Statements of Cash Flows presented on page 11 of the Company's financial statements provides an analysis of cash flow activity. Additionally, management considers that portion of the investment securities and loan portfolios that matures within one year as part of liquid assets. The Company's liquidity is monitored by the ALCO, which establishes ranges of acceptable liquidity. The current liquidity position is adequate to fund off-balance sheet commitments and liabilities as they come due. Please see additional discussion of off-balance sheet commitments in Note 10 of the Notes to the Consolidated Financial Statements. Effects of Inflation on Financial Statements - -------------------------------------------- Substantially all of the Company's assets relate to banking and are monetary in nature. Therefore, they are not impacted by inflation in the same manner as companies in capital intensive industries. During a period of rising prices, a net monetary asset position results in loss in purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In banks, monetary assets typically exceed monetary liabilities and therefore, as prices have increased over the past year, financial institutions experienced a modest decline in the purchasing power of their assets. Interest Rate Sensitivity - ------------------------- The following table presents the Company's interest rate sensitivity position using the static gap method at December 31, 1997 (dollars in thousands): 0-3 0-12 Up to 5 Over Months Months Years 5 Years Interest earning assets: - ------------------------ Investment securities (all securities available-for-sale): Taxable $ 37,319 $ 48,332 $ 92,514 $ 150,670 Tax-exempt 849 2,265 6,118 23,621 - -------------------------------------------------------------------------- Total 38,168 50,597 98,632 174,291 - -------------------------------------------------------------------------- Federal funds sold 10,350 10,350 10,350 10,350 Loans 176,787 304,904 456,689 521,570 Interest-bearing deposits with banks 6,908 7,008 7,008 7,008 - -------------------------------------------------------------------------- Total 232,213 372,859 572,679 713,219 - -------------------------------------------------------------------------- Interest-bearing liabilities: - ----------------------------- Deposits 282,744 447,177 546,249 546,878 Federal funds purchased 82 82 82 82 Securities sold under agreements to repurchase 30,729 30,729 30,729 30,729 Short-term Federal Home Loan Bank borrowings 750 1,750 1,750 1,750 Long-term Federal Home Loan Bank borrowings 722 8,304 21,392 25,577 Long-term borrowings 3,000 3,000 3,000 3,000 - -------------------------------------------------------------------------- Total 315,027 488,042 600,202 605,016 - -------------------------------------------------------------------------- Interest sensitivity $ (82,814) $(115,183) $ (27,523) $ 108,203 ========================================================================== Static gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities which reprice within a specified time period. Based on the static gap presentation in the table above, the Company's interest rate sensitivity at December 31, 1997, was liability sensitive in the short-term and asset sensitive for periods over 5 years. In theory, this means that if interest rates increase, the Company's net income will increase in the long-term. Conversely, if interest rates decline, so too will net income over time. The opposite is true in the short-term. The above table allocates interest rate sensitivity within various time frames, based on the static gap method. Up to one year, the Company is liability sensitive due primarily to increases in funding sources, which are short-term, such as the CD specials previously mentioned. The table indicates the relative neutrality of the Company's interest rate sensitivity in the five year cumulative period beginning December 31, 1997, which theoretically insulates the Company from significant increases or decreases in interest rates. Management monitors the asset and liability sensitivity through the ALCO and uses available dynamic data to make appropriate strategic decisions. In addition to the interest rate sensitivity schedule and asset/liability repricing schedules, management also uses simulation modeling and forecasting to determine the impact of a changing rate environment and 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 adjustments more accurately indicate the interest rate risk of the Company. Management believes the Company's current mix of assets and liabilities provides a reasonable level of insulation to significant fluctuations in net interest income and the resulting volatility of the Company's earning base. As part of its asset/liability strategies, the Company may use certain off-balance sheet derivatives to manage interest rate risks. Please see Note 10 of the Notes to the Consolidated Financial Statements for further information regarding these off-balance sheet derivatives. In February 1995, the Company paid a premium of $195,000 for interest rate floors with a total notional value of $20 million. The interest rate floors require the counter-party to pay the difference between the specified floor rate and an index rate. The Company receives nothing if the index rate exceeds the specified floor rate. The Company is subject to the risk that the effect of changes in interest rates will cause the Company to earn less than the current market rates on the commercial loans associated with these floors. These interest rate floors also subject the Company to the risk that the counter-parties may fail to perform. To minimize this credit risk, the Company only enters into these types of transactions with high-quality, financially secure entities. The exposure to credit risk is substantially less than the notional principal amounts since only the interest rate differential is received and the premium was paid at the inception. In 1997, due to interest rates being below the indexed "strike" rate on the interest rate floors for all of 1997, the Company experienced a modest enhancement to net interest margin and net interest income. These agreements, which expire in February 1998, did not materially affect net income in 1997. In August 1997, the Company entered into additional agreements for similar interest rate floors. The Company paid a $46,500 premium for interest rate floors with a total notional value of $20 million. In 1997 and in early 1998, due to interest rates being above the indexed "strike" rate on the new interest rate floors, the Company had no income streams related to these interest rate floors. $10 million of the notional amount expire in August 1999 and the remaining $10 million expire in August 2000. In a declining rate environment, these floors would replace lost income streams on interest-earning assets (prime rate based commercial loans) that would reprice to lower interest rates. In addition to traditional 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 the previously discussed 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 MATURING IN:
Fair Value (Dollars in Thousands) 1998 1999 2000 2001 2002 after Total 12/31/97 Rate sensitive assets: - ---------------------- Fixed interest rate loans $ 68,336 $ 39,449 $ 27,989 $ 18,117 $ 11,045 $ 41,245 $206,181 $208,504 Average interest rate 9.35% 9.78% 9.49% 9.87% 9.76% 9.23% 9.48% Variable interest rate loans $104,969 $ 31,063 $ 25,710 $ 21,797 $ 18,660 $113,190 $315,389 $315,389 Average interest rate 10.11% 8.43% 8.39% 8.44% 8.39% 8.59% 9.04% Fixed interest rate securities $ 39,252 $ 13,407 $ 14,471 $ 6,292 $ 12,213 $ 74,681 $160,318 $160,318 Average interest rate 6.12% 6.61% 6.28% 6.30% 6.56% 6.62% 6.45% Variable interest rate securities $ 202 $ 2,412 $ 590 $ 5,861 $ 505 $ 4,404 $ 13,973 $ 13,973 Average interest rate 6.31% 7.65% 7.76% 6.94% 7.34% 7.07% 7.07% Other interest-earning assets $ 17,358 $ --- $ --- $ --- $ --- $ --- $ 17,358 $ 17,358 Average interest rate 6.50% --- --- --- --- --- 6.50% - ------------------------------------------------------------------------------------------------------------------------- Rate sensitive liabilities: - --------------------------- Non-interest-bearing checking $ 17,984 $ 10,277 $ 7,707 $ 7,129 $ 5,010 $ 16,121 $ 64,229 $ 64,229 Average interest rate --- --- --- --- --- --- --- Interest bearing checking $ 15,829 $ 37,395 $ 15,829 $ 12,003 $ 10,684 $ 40,166 $131,906 $131,906 Average interest rate 3.38% 4.29% 3.38% 3.38% 3.38% 3.38% 3.54% Savings accounts $ 14,489 $ 7,244 $ 7,244 $ 7,878 $ 6,339 $ 47,360 $ 90,554 $ 90,554 Average interest rate 3.10% 3.10% 3.10% 3.10% 3.10% 3.10% 3.10% Time deposits $224,715 $ 78,199 $ 10,638 $ 6,496 $ 3,740 $ 631 $324,418 $325,086 Average interest rate 5.49% 5.81% 5.62% 6.00% 5.46% 4.60% 5.58% Fixed interest rate borrowings $ 9,886 $ 3,681 $ 3,752 $ 2,837 $ 2,818 $ 4,185 $ 27,159 $ 27,259 Average interest rate 6.04% 6.14% 6.17% 6.05% 6.05% 6.46% 6.12% Variable interest rate borrowings $ 33,979 $ --- $ --- $ --- $ --- $ --- $ 33,979 $ 33,979 Average interest rate 5.05% --- --- --- --- --- 5.05% - ------------------------------------------------------------------------------------------------------------------------- Rate sensitive derivative financial instruments: - ------------------------------------------------ Interest rate floors purchased $ 20,000 $ 10,000 $ 10,000 --- --- --- $ 40,000 $ 0.1 Average strike rate 7.00% 5.50% 5.25% --- --- --- --- --- Forward rate 5.81% 5.81% 5.81% --- --- --- --- --- =========================================================================================================================
The table above indicates that the Company has a significant amount of time deposits maturing in 1998 due primarily to short-term CD specials offered in 1997. Management expects a portion of these funds to remain with the Company as part of its traditional funding sources. Other such funds that management considers highly rate sensitive are expected to leave the Company due to attrition. Also, management expects a portion of the funds to be acquired in the second quarter of 1998 in the West Virginia Banking Center Acquisition to replace some of the more rate-sensitive time deposits in the table above. Management considers this information vital to its analyses due to the presentation of financial instruments based on the date of the expected cash flows. Also, the data presents such cash flows for the next five years and remaining years thereafter. Management believes the Company's current mix of maturing assets and liabilities, and the average interest yields and rates on such financial instruments, combined with the impact of existing off-balance sheet derivative instruments, provide an acceptable level of market risk relative to interest rates. Management believes the current balance sheet provides an acceptable level of risk related to future earnings of the Company as well as expected future cash flows. Outlook for 1998 - ---------------- Results of operations in 1997 represent improved financial performance through a combination of external growth and enhanced 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. Depending on financial results, all of the Company's associates are subject to annual incentive payouts based on success in these key performance areas, which are designed to increase long-term value for the shareholder's investment in the Company. The incentive plan's focus is to enhance the earnings potential of the Company and increase shareholder wealth based on several growth and efficiency measurements, creating an environment where each employee has a personal stake in the overall performance of the Company. The acquisitions in 1996 and 1997 have provided increased funding sources and new markets for the Company. Many goals have been established for future operations, most of which target customer service enhancement as a means of increasing shareholder value. In addition to providing superior customer service, management believes growth into new markets, as well as further penetration of existing markets, is a priority of the Company. The acquisitions of 1997 are evidence of the Company's commitment to value-added growth. As expected, the transition of combining the new offices with existing full-service banking centers went smoothly and customers in these markets responded favorably to the change. Management is satisfied with the retention of the acquired core deposits and looks forward to continuing the development of Russell Federal, Baltimore Banking Center, and Catlettsburg Federal in 1998 and future periods. In early 1998, the Company merged Russell Federal under Gateway Bancorp to unite the Company's northeast Kentucky operations. The Company's management intends to introduce new products and services to the customers of northeast Kentucky through its three existing Catlettsburg Federal and Russell Federal offices. Products will include non-interest bearing demand deposit accounts, electronic banking, and other products and services. At year-end 1997, neither Catlettsburg Federal nor Russell Federal offered non-interest bearing deposit accounts to their markets. Management intends to expand Catlettsburg Federal's and Russell Federal's product offerings and focus on leveraging existing resources and additional technological resources that will enhance customer service and increase market penetration. These strategies are designed to complement the product offerings at the Company's thrifts to maximize the relationship with current customers as well as increase the potential to attract new customers in those markets. Management is excited about the opportunity to expand the Company's presence in northeast Kentucky and contiguous metropolitan areas in West Virginia. The nearby Ashland, Kentucky - Huntington, West Virginia metropolitan market represents an opportunity to provide the Company's array of financial products to many commercial and consumer customers through the Company's network of offices and customer service resources. In the first quarter of 1998, Catlettsburg Federal will complete a new full-service office on Route 60 near Interstate 64 in the Ashland, Kentucky, area. Management intends to leverage the significant capital bases of Catlettsburg Federal and Russell Federal through expansion of product offerings, increased market penetration, customer retention, and performance based growth opportunities. Acquisitions and expansion of the Company's markets will be a significant strategic initiative for the Company in 1998. Upon completion of the West Virginia Banking Center Acquisition announced in January, 1998, the Company will gain its first physical presence in the state of West Virginia. The offices are located in and near the communities of Point Pleasant and New Martinsville along the Ohio River. The Company will assume approximately $125 million in deposits and purchase approximately $10.5 million in loans from this acquisition. The acquisition is expected to be completed in the second quarter of 1998. Due to the large inflow of cash associated with the acquisition, the Company will be challenged in 1998 to employ these funding sources in assets that provide acceptable return on investment without compromising the Company's risk-weighted assets and other capital ratios. In order to remain well-capitalized under risk-based capital ratios, the Company will optimize internally available sources of equity within its subsidiaries to provide sufficient capital for Peoples Bank to support the significant increase in assets. In early 1998, management plans to initiate a pre-acquisition investment program to take advantage of more favorable asset yields on selected investment securities. Management expects to retain the approximate $40 million purchase of investment securities, as appropriate, for long-term enhancement to net interest income. Management intends to invest a significant portion of the acquired deposits in loans in the new markets as well as established markets. The combined effect of the recent acquisitions for the Company will impact financial performance in 1998. To the extent the Company can integrate into current operations and redeploy acquired assets into the Company's current asset mix, which has produced acceptable levels of ROA, ROE, and earnings per share, future financial performance will depend directly on the timing of anticipated loan growth and other factors. Future operating results will be determined by the ability of the Company to capture lending opportunities in expanded market areas. Managing the delicate balance between expansion into new markets and developing new products and services will also challenge the Company in 1998 and in future years as the financial services environment continues to change. The Company will continue to research methods to provide electronic banking services to its customers. The Company's successful debit card has been well-received by many customers and should continue to generate increasing revenue streams in 1998. Investments in technology provide the opportunity to compete at higher levels than many other financial institutions of similar size and enable the Company to meet future customer service challenges. Electronic banking continues to be a priority for many customers in the Company's markets, and recently management has taken steps to make "banking at home" a reality in 1998. In the first quarter of 1998, the Company plans to introduce a PC-based cash management/home banking product that will be offered for both consumer and commercial customers. In the fourth quarter of 1997, management began testing the cash management product at several "beta" sites, and the results were successful and well-received by the users. Management believes that "home banking" and "PC banking" are future services that must be part of the Company's core service delivery process. The Company is aware of changing consumer preferences related to financial product delivery systems and believes that PC banking will emerge as a significant financial product delivery system for many of the Company's existing and prospective customers in 1998 and in the future. Management recognizes the importance of electronic banking to its customer base and continues to focus efforts designed to enhance this process and allow customers unlimited banking products and services at their convenience. All of the Company's offices are connected via a Wide Area Network (WAN) that provides the infrastructure necessary to cater to today's customer needs. The Company's associates are linked with all offices to deliver prompt, efficient, quality customer service. Management intends to continue to develop this WAN in 1998 and expand its capabilities to include the offices acquired in the West Virginia Banking Center Acquisition. In addition to increased market penetration in Kentucky, the Company intends to increase its market presence in southeastern Ohio with the opening of a new full-service office in Athens, Ohio, during the first quarter of 1998. Peoples Bank will open a full-service banking facility in the newly renovated HDL Center at 152 Union Street in downtown Athens, near the Ohio University campus. The facility will be a full-service center, including an ATM, a drive-through facility, and loans and investment services. The Union Street office will complement two existing full-service offices in Athens as well as offices in nearby Nelsonville and The Plains. The expansion of Peoples Bank's presence in Athens (in southeastern Ohio) represents a strategic initiative designed to capture increased market share in this area. Many companies across various industries have dedicated efforts to analyze the much-publicized "Year 2000" issue, which arises because many existing computer programs recognize the last two digits to identify the year in the date information field. Management has implemented plans to address Year 2000 issues and how it relates to its business, operations, and relationships with customers, suppliers, and other third parties. Management has completed its assessment phase, which addresses the extent to which its operations are vulnerable should its software fail to be Year 2000 compliant. The majority of the Company's software is supplied by third-party vendors. The Company has been assured by third-party vendors who provide its core software applications that such applications are Year 2000 compliant without additional significant costs to the Company. Management plans to conduct tests on such applications in 1998. While the Company believes its planning efforts are adequate to address Year 2000 concerns, there can be no guarantee that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material effect. The cost of Year 2000 limitations is not expected to be material to the Company's results of operations or financial position. The Company's balance sheet growth and future leveraging of equity is a management focus for 1998. Future loan growth will reflect the Company's ability to serve existing markets, markets to be penetrated via acquisition, and selected customers outside traditional geographic markets. Loans for construction and generation of low-income housing projects in southeastern Ohio combined with expanded opportunities for construction of model homes in various other geographic markets should provide valuable future revenue streams. Management is comfortable with the current loan to deposit ratio of 85.3% and anticipates the loan to deposit ratio will increase in early 1998, and decrease slightly throughout the year due to the increase in deposits assumed through the West Virginia Banking Center Acquisition. Management continues to strive for both traditional and non-traditional methods to increase the Company's earnings and strengthen the commitment to the communities it serves. As an example, in 1996, Peoples Bank entered into an agreement to fund a low-income housing project in a historical district of Marietta, Ohio. As part of the understanding, Peoples Bank agreed to fund the construction of the project and participate as an equity contributor, as a limited partner to the project. In summary, the Company will benefit from historic tax credits and low-income housing tax credits over future periods. Recent acquisitions and the announced purchase agreement reflect the Company's commitment to expand its geographic customer service area. Future acquisitions, if they occur, may not be limited to geographic location or proximity to current markets. Acquisitions will depend upon financial service opportunities that strengthen the core competencies developed by the Company. Management considers mergers and acquisitions to be a viable method of enhancing the Company's earnings potential and will continue to pursue appropriate business opportunities as they develop. The recent increase in loan balances has also spurred growth in the Company's loan loss provision. As a result of anticipated loan growth in 1998, management expects the loan loss provision in the near-term to remain at or slightly above the 1997 level and could be affected by delinquencies in all loan categories. In 1997, consumer loan chargeoffs stabilized and management expects the consumer loan portfolio to maintain this positive trend in 1998. Management believes that the current allowance for loan losses is adequate to cover potential chargeoffs as they occur, based on the inherent risk in the loan portfolio. Increasing non-interest income and controlling non-interest expense are critical to the success of the Company and are measured in the financial services industry by the efficiency ratio. For the year ended December 31, 1997, the Company's efficiency ratio was an improved 51.06%, compared to 53.76% for the same period last year. In 1998, the Company will be challenged to improve the efficiency ratio due to the impact of recent acquisitions. Management expects to maintain similar efficiency ratios in 1998. Management will continue to evaluate and control the efficiency ratio as a method of enhancing long-term shareholder value and will strive to optimize efficiency ratio in 1998 through income growth and leveraging of technology and existing delivery resources. The interest rate environment will play an important role in the future earnings of the Company. Net interest income in 1997 reached record levels due to balance sheet growth and maintenance of net interest margin. In 1998, management anticipates pressure on net interest margin as growth of the Company's balance sheet continues. Management expects the Company's net interest margin to decrease slightly in 1998 due to timing issues related to deploying acquired assets in the West Virginia Banking Center Acquisition. The Company plans to manage the interest costs of its funding sources in 1998 with the expansion of the products offered in the Russell Federal and Catlettsburg Federal markets. Non-interest bearing demand deposits will be introduced in these offices in the first quarter of 1998 as the Company increases its emphasis on gathering non-interest expense funding sources in 1998. Management believes non-interest bearing demand deposits are a vital source of funds for the Company and intends to implement marketing plans to heighten the awareness in those markets to align the strategic initiatives of the Company. Movements in interest rates continue to impact the performance of financial institutions. However, the Company does not solely manage its balance sheet based upon interest rate forecasts. Through its ALCO, management evaluates the balance sheet and monitors earnings performance, as well as effectiveness of its liquidity policy. The ALCO also monitors net interest income, sets pricing guidelines, and manages interest rate risk for the Company. In 1998, the Company's focus is to continue to balance external and internal growth, profitability, and customer service to increase shareholder return. Recent strategic initiatives create the base for future operations and customer service opportunities, promising an exciting year in 1998 for the Company's customers, associates, and shareholders. While past results are not an indication of future earnings, management feels the Company is positioned to maintain performance of normal operations in 1998. Comparison of 1996 to 1995 - -------------------------- The Company reported an increase in net income of 26.5%, to $7,651,000 in 1996 from $6,050,000 in 1995. This increase in earnings provided basic and diluted earnings per share of $2.23 and $2.20, respectively, for the year ended December 31, 1996, compared to $1.74 and $1.73 in 1995. Net income in 1995 was negatively impacted by an after-tax expense of $513,000, which represented a non-recurring expense related to a voluntary early retirement program offered to certain qualifying employees (representing approximately 7% of the Company's employee base at the time). For the year ended December 31, 1996, return on average assets was 1.29%, an increase of 14 basis points from 1995's ratio of 1.15%. Return on stockholders' equity also increased, reaching 14.43% in 1996 compared to 12.33% in 1995. The primary reason for enhancements to the Company's performance ratios was the increased income recognized in 1996 versus lower net income in 1995 as a result of the early retirement program. Asset growth also contributed to incremental increases in net income in 1996 compared to 1995. In 1996, the Company grew its balance sheet primarily through increased loan balances, funded by the deposits assumed in the Southeastern Ohio Banking Center Acquisition. Total assets increased $73.2 million or 13.5% to $616.6 million at year-end 1996. Since December 31, 1995, the Company's asset growth primarily occurred in interest earning assets such as loans and investments securities. Loans grew nearly $43 million (or 11.3%) to $422.4 million and investment securities grew $16.0 million (or 12.2%) to $147.8 million. In 1996, the Company recorded net interest income of $25,431,000, an increase of 14.1% from 1995. Total interest income reached $47,397,000 while interest expense totaled $21,966,000. In 1996, net interest margin was 4.75%, an increase of 7 basis points compared to 1995's 4.68%. The increase can be attributed to the Company's loan growth of over $40 million in 1996 as well as the assumption of approximately $74 million in deposits related to the Southeastern Ohio Banking Center Acquisition. These deposits were primarily utilized as funding sources for 1996's loan growth and also allowed the Company to pay off certain higher-cost borrowings, which enhanced net interest margin in 1996 compared to the prior year. The growth in loan volume produced an increase in total average earning assets. Total average earning assets increased from $493.1 million in 1995 to $550.4 million in 1996, an increase of 11.6%. From 1996 to 1995, the average yield associated with total average earning assets modestly decreased, from 8.89% in 1995 to 8.74% in 1996. However, the decrease in 1996's average asset yield was more than offset by a larger decrease in interest costs as a percentage of average earning assets, which fell to 3.99% in 1996 compared to 1995's rate of 4.21%. The Southeastern Ohio Banking Center Acquisition allowed the Company to quickly grow its balance sheet yet maintain competitive pricing on its funding sources and decrease its cost of funding sources compared to the prior year. In addition, the Company had $10 million of brokered certificates of deposits mature in mid-1996, which were replaced with lower interest rate funding sources. Non-interest income (excluding securities transactions) from operations reached new levels in 1996, totaling $5,130,000, an increase of 15.1% compared to 1995. Several categories had strong growth compared to 1995. During 1996, the Company's Investment and Trust Division continued its earnings trend and provided a strong boost to non-interest income. Income from fiduciary activities totaled $1,897,000 in 1996, an increase of 8.3% compared to 1995. Income related to account service charges increased $372,000 (or 23.8%) over 1995 to $1,937,000 in 1996, due primarily to the increased deposit base acquired in the Southeastern Ohio Banking Center Acquisition. In 1996, non-interest expense totaled $17,522,000, an increase of 4.2% over the prior year. In 1996, non-interest expense was affected by a variety of sources, including a reduction in FDIC insurance premiums and additional amortization of intangibles and operational expense related to the Southeastern Ohio Banking Center Acquisition. Salaries and employee benefits continued to be the largest source of non-interest expense for the Company, totaling $7,514,000 in 1996 compared to $7,836,000 in 1995 (increased by $777,000 due to impact of early retirement program). Non-interest expense decreased in 1996 due to a reduction in insurance premiums paid on Bank Insurance Fund ("BIF") deposits. In 1995, BIF related expense totaled $481,000 compared to $61,000 in 1996. In 1996, legislation was passed to recapitalize the Savings Association Insurance Fund ("SAIF") and affected the Company, due to small balances of "Oakar" deposits held at Peoples Bank. The Company paid a one-time expense of $40,000 to recapitalize the SAIF (the fund established to insure the deposits of thrift institutions). In 1996, several categories within non-interest expense remained at levels comparable to 1995. As expected, net occupancy expenses and depreciation expense on furniture and fixtures increased slightly due to the Southeastern Ohio Banking Center Acquisition's related fixed assets. The Company's increased investment in technology and other customer-service enhancements also impacted depreciation expense in 1996. Amortization of intangibles totaled $419,000 in 1996 compared to $159,000 in 1995. This increase was due to the intangibles related to the Southeastern Ohio Banking Center Acquisition. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 - --------------------------------------------------------------- The statements in this Annual Report which are not historical fact are forward-looking statements that involve risks and uncertainties, including, but not limited to, the interest rate environment, the effect of federal and state banking and tax regulations, the effect of economic conditions, the impact of competitive products and pricing, and other risks detailed in the Company's Securities and Exchange Commission filings. PEOPLES BANCORP INC. ==================== DIRECTORS - --------- George W. Broughton Executive Vice President/Sales and Marketing, Broughton Foods Company Wilford D. Dimit Owner, First Settlement Square Robert E. Evans President and Chief Executive Officer, Peoples Bancorp Inc. Barton S. Holl Chairman of the Board, Logan Clay Products Rex E. Maiden Chairman of the Board, Maiden & Jenkins Construction Co. Norman J. Murray Retired, The Airolite Company Paul T. Theisen Attorney, Theisen, Brock, Frye, Erb, & Leeper Co., L.P.A. Thomas C. Vadakin Retired, Vadakin, Inc. Joseph H. Wesel, Chairman Chairman of the Board and Chief Executive Officer Marietta Automotive Warehouse, Inc. Directors Emeritus - ------------------ Jewell Baker William E. McKinney Fred R. Price James B. Stowe OFFICERS - -------- Robert E. Evans President and Chief Executive Officer Carol A. Schneeberger Vice President, Operations Rolland B. Swart Vice President, Business Development Charles R. Hunsaker General Counsel John W. Conlon Chief Financial Officer Jeffrey D. Welch Treasurer Mark F. Bradley Controller Ruth I. Otto Corporate Secretary Karen L. Mills Assistant Corporate Secretary Karen V. Clark Auditor Johanna Burke Compliance Officer Teresa A. Pyles Security Officer THE PEOPLES BANKING AND TRUST COMPANY ===================================== DIRECTORS - --------- Dave M. Archer President, Pioneer Pipe, Inc. George W. Broughton Executive Vice President/Sales and Marketing, Broughton Foods Company Wilford D. Dimit Owner, First Settlement Square Robert E. Evans President and Chief Executive Officer Brenda R. Jones, M.D. Medical Director, Marietta Ophthalmology Associates, Inc. Harold D. Laughlin Owner, Laughlin Music and Vending Rex E. Maiden Chairman of the Board, Maiden & Jenkins Construction Co. Norman J. Murray, Chairman Retired, The Airolite Company T. Pat Sauber Owner, McDonald's Restaurants Paul T. Theisen Attorney, Theisen, Brock, Frye, Erb, & Leeper Co., L.P.A. Thomas C. Vadakin Retired, Vadakin, Inc. Joseph H. Wesel, Chairman Chairman of the Board, Marietta Automotive Warehouse, Inc. Directors Emeritus - ------------------ William E. McKinney OFFICERS - -------- Executive Officers - ------------------ Robert E. Evans President and Chief Executive Officer David B. Baker President, Investment and Trust Division John W. Conlon Chief Financial Officer and Treasurer Larry E. Holdren President, Retail and Banking Division Robert A. McKnight Executive Vice President, Commercial Lending Joseph S. Yazombek Executive Vice President, Consumer and Mortgage Lending Banking and Lending - ------------------- Susan L. Corcoran Vice President/Sales Manager John L. Cornett Vice President, MGM Division R. Joe Cowdery Vice President John O. Keirns Vice President, Athens County Division William L. Malster Vice President Jerald L. Post Vice President David M. Redrow Vice President, Licking Co. David L. Batten Assistant Vice President Joseph P. Flinn Assistant Vice President John A. King Assistant Vice President Cathleen S. Knox Assistant Vice President Betty L. Reynolds Assistant Vice President Larry P. Smith Assistant Vice President Stuart C. Goldsberry Private Banking Manager Donald L. Harris Commercial Banking Officer Deborah L. Roberts Commercial Banking Officer/Credit Analyst Sondra K. Herlan Personal Banker Cathy J. Linscott Personal Banker Beverly C. Mellinger Personal Banker Jonathan T. Schenz Personal Banker Operations - ---------- Charles R. Hunsaker Vice President and General Counsel Mark F. Bradley Controller Julie I. Giffin Assistant Vice President, Account Services Mary Ann Mitchell Assistant Vice President Stephen L. Nulter Assistant Vice President, Information Systems Lisa H. Slimmer Accounting Manager Karen L. Mills Secretary to the Board Ruth I. Otto Assistant Secretary to the Board Teresa A. Pyles Security Officer Investment and Trust Division - ----------------------------- David B. Baker President, Investment and Trust Division Rose N. Haas Vice President and Senior Investment Officer Jeffrey D. Welch, CPA Vice President Beth Ann Worthington Vice President, Personal Trust Officer Ronald L. Close Financial Planning Officer John R. Davis Financial Consultant and Trust Officer Richard J. Flanagan Assistant Investment Officer Joy L. Bowen Assitant Trust Officer, Estate Manager Janet L. Gregory Assistant Trust Officer Lori O'Connor Assitant Trust Officer, Retirement Services Manager Kelly A Sheppard Assistant Trust Officer Tina M. Weckbacher Assistant Trust Officer THE FIRST NATIONAL BANK OF SOUTHEASTERN OHIO ============================================ DIRECTORS - --------- Larry J. Armstrong Armstrong and Smith, C.P.A. Carl Baker, Jr. Co-Owner, B & N Coal Company Robert E. Evans President and Chief Executive Officer, Peoples Bancorp Inc. Wilfred O. Hill Retired, Oil and Gas Charles R. Hunsaker General Counsel H. Clayton John Vice Chairperson James D. McKinney Retired Superintendent, Morgan County Schools Carol A. Schneeberger, Chairperson Vice President, Operations, Peoples Bancorp Inc. Paul T. Theisen Attorney, Theisen, Brock, Frye, Erb, & Lepper Co., L.P.A. Rick D. Turner President and Chief Executive Officer Directors Emeritus - ------------------ Marcus Gant OFFICERS - -------- Rick D. Turner President and Chief Executive Officer Kenneth E. Shafer Executive Vice President and Cashier Catherine R. Ogle Vice President, Lending Thomas D. Hesson Assistant Vice President, Operations Michael J. Schramm Assistant Vice President, Manager, McConnelsville Office Tori J. Allen Personal Banking Officer Cheryl L. Hanson Loan Officer, Manager, Chesterhill Office Teresa A. Pyles Security Officer Ruth I. Otto Secretary to the Board Karen L. Mills Assistant Secretary to the Board Charles R. Hunsaker General Counsel RUSSELL FEDERAL SAVINGS BANK ============================ DIRECTORS - --------- David B. Baker Executive Vice President, The Peoples Banking and Trust Company Charles M. Daniels Attorney-at-Law Robert E. Evans, Chairman President and Chief Executive Officer, Peoples Bancorp Inc. Dr. Lewis E. Franz Dentist John T. Lawson Retired, Lawson's Hardware James D. McConnell Senior Staff Engineer, AK Steel Norman R. Menshouse Executive Vice President, Russell Federal Savings Bank Carol A. Schneeberger Vice President, Operations, Peoples Bancorp Inc. RobRoy Walters President and Chief Executive Officer, Gateway Bancorp, Inc. Joseph H. Wesel Chairman of the Board, Marietta Automotive Warehouse, Inc. Joseph S. Yazombek Executive Vice President, The Peoples Banking and Trust Company OFFICERS - -------- RobRoy Walters President and Chief Executive Officer Norman R. Menshouse Executive Vice President Ronald L. Fraley Vice President, Treasurer and Secretary to the Board Shirley A. Menshouse Vice President and Corporate Secretary CATLETTSBURG FEDERAL SAVINGS BANK ================================= DIRECTORS - --------- David B. Baker Executive Vice President, The Peoples Banking and Trust Company Hunter E. Clark Retired President, Ross Furniture Harold Freedman President, Freedman's Department Store John H. Fugeman Retired President and CEO, Catlettsburg Federal Savings Bank Robert E. Evans President and Chief Executive Officer, Peoples Bancorp Inc. Charles M. Hedrick Assistant Treasurer, Cash Management, Ashland, Inc. Rebecca R. Jackson President and Chief Executive Officer, Catlettsburg Federal Savings Bank Norman R. Menshouse Executive Vice President, Russell Federal Savings Bank Carol A. Schneeberger Vice President, Operations, Peoples Bancorp Inc. RobRoy Walters, Chairman President and Chief Executive Officer, Gateway Bancorp, Inc. Joseph H. Wesel Chairman of the Board, Marietta Automotive Warehouse, Inc. OFFICERS - -------- Rebecca R. Jackson President and Chief Executive Officer RobRoy Walters Secretary and Treasurer Carl A. Stanley Vice President Pamela G. Howard Assistant Secretary and Treasurer DIRECTORY ========= Peoples Bancorp Inc. - -------------------- Corporate Offices 138 Putnam Street, (740) 374-6136 P.O. Box 738 Marietta, OH 45750 The Peoples Banking and Trust Company - ------------------------------------- Marietta, Ohio Office 138 Putnam Street* (740) 373-3155 Motor Bank Second & Scammel Streets* Office & Motor Bank Frontier Shopping Center* Kroger Office Washington Center, Pike & Acme Streets* Athens, Ohio Office & Motor Bank 1 North Court Street* (740) 593-7761 Athens Mall Office & Motor Bank 801 East State Street* HDL Center Office & Motor Bank Union Street* Ohio University* Baltimore, Ohio Office & Motor Bank 120 N. Main Street (740) 862-4174 Belpre, Ohio Office & Motor Bank 1902 Washington Boulevard* (740) 423-7516 Motor Bank 510 Washington Boulevard Gallipolis, Ohio Office & Motor Bank 352 Second Avenue (740) 446-0909 Licking County, Ohio Lending Office 1915 Newark-Granville Road (740) 587-0909 Lowell, Ohio Office & Motor Bank 300 Main Street (740) 896-2369 Middleport, Ohio Office & Motor Bank 97 North Second Street (740) 992-6661 Nelsonville, Ohio Office 35 Public Square (740) 753-1955 Motor Bank Washington Street Pomeroy, Ohio Office Court & Second Streets (740) 992-2133 Motor Bank Lynn & Second Streets Reno, Ohio Office & Motor Bank State Route 7 (740) 374-6131 Rutland, Ohio Office & Motor Bank Salem Street (740) 742-2888 The Plains, Ohio Office & Motor Bank 70 North Plains Road, (740) 797-4547 Suite 101* The First National Bank of Southeastern Ohio - -------------------------------------------- Caldwell, Ohio Office & Motor Bank 415 Main Street (740) 732-5654 Chesterhill, Ohio Office & Motor Bank Marion Street (740) 554-5281 McConnelsville, Ohio Office & Motor Bank 68 South Kennebec (740) 962-2999 Catlettsburg Federal Savings Bank - --------------------------------- Catlettsburg, Kentucky Office 2717 Louisa Street (606) 739-4126 Ashland, Kentucky Office & Motor Bank 1410 Eagle Drive (606) 928-7800 (Cedar Knoll) * Grayson, Kentucky Office & Motor Bank 380 S. Carol Malone Blvd. (606) 474-5139 Russell Federal Savings Bank - ---------------------------- Russell, Kentucky Office & Motor Bank 404 Ferry Street (606) 836-8141 Northwest Territory Insurance Agencies, Inc. - -------------------------------------------- Northwest Territory Life Insurance Agency, Inc. Office, Caldwell, Ohio 415 Main Street (740) 732-5654 Northwest Territory Property and Casualty Insurance Agency, Inc. Office, Caldwell, Ohio 415 Main Street (740) 732-5654 * Denotes ATM location for 24 Hour Banking Convenience In Athens, Ohio University is served exclusively by Peoples Bancorp ATMs in three locations: Baker Center, Boyd Hall & Nelson Commons EX-21 8 EXHIBIT 21-PEOPLES BANCORP INC SUBSIDIARIES EXHIBIT 21 ---------- PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 Subsidiaries of Peoples Bancorp Inc. - ------------------------------------ The following are the only subsidiaries of Peoples Bancorp Inc.: Jurisdiction of Name of Subsidiary Incorporation - ------------------------------------------------- ------------- The Peoples Banking and Trust Company Ohio The First National Bank of Southeastern Ohio ("First National Bank") United States Northwest Territory Life Insurance Agency, Inc. (Subsidiary of First National Bank) Ohio Northwest Territory Property & Casualty Life Insurance Agency, Inc. (Subsidiary of First National Bank) Ohio Gateway Bancorp, Inc. ("Gateway") Ohio Catlettsburg Federal Savings Bank ("Subsidiary of Gateway") United States Russell Federal Savings Bank ("Subsidiary of Gateway") United States The Northwest Territory Life Insurance Company Arizona EX-23 9 EXHIBIT 23-CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 ---------- PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Peoples Bancorp Inc. of our report dated February 6, 1998, included in the 1997 Annual Report to Shareholders of Peoples Bancorp Inc. We also consent to the incorporation by reference in the Registration Statements pertaining to the Amended and Restated 1993 Stock Option Plan of Peoples Bancorp Inc. (Form S-8, No. 33-67878), the 1995 Stock Option Plan of Peoples Bancorp Inc. (Form S-8, No. 33-59569), and the Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries (Form S-8, No. 333-43629) of our report dated February 6, 1998, with respect to the consolidated financial statements of Peoples Bancorp Inc. and Subsidiaries incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 1997. /s/ ERNST & YOUNG LLP Ernst & Young LLP Charleston, West Virginia March 26, 1998 EX-27 10 EXHIBIT 27.1-12/31/97
9 This schedule contains summary financial information extracted from the Form 10-K filed as of December 31, 1997. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 21,473 7,008 10,350 0 174,291 0 0 521,570 8,356 758,158 611,107 32,561 7,095 28,577 0 0 50,001 28,817 758,158 43,451 8,579 1,806 53,836 22,282 25,216 28,620 2,589 (28) 19,265 12,704 8,605 0 0 8,605 2.48 2.40 4.74 1,220 462 0 0 6,873 1,917 521 8,356 8,356 0 1,081
EX-27 11 EXHIBIT 27.2-RESTATED 12/31/96, 12/31/95
9 This schedule contains restated summary financial information extracted from the Form 10-K filed as of December 31, 1996, and December 31, 1995. 1,000 YEAR YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 26,200 17,251 217 243 2,100 3,500 0 0 147,783 131,762 0 0 0 0 422,413 379,526 6,873 6,726 616,635 543,430 504,692 429,077 19,522 33,276 7,028 6,461 29,200 23,142 0 0 0 0 34,349 30,898 21,844 20,576 616,635 543,430 37,140 34,501 8,607 6,881 1,650 2,010 47,397 43,392 18,880 18,384 21,966 20,777 25,431 22,615 1,965 1,315 48 24 17,522 16,818 11,122 8,639 7,651 6,050 0 0 0 0 7,651 6,050 2.23 1.74 2.20 1.73 4.75 4.73 999 482 621 1,236 0 0 0 2,041 6,726 6,783 2,329 1,803 511 431 6,873 6,726 6,873 6,726 0 0 873 150
EX-27 12 EXHIBIT 27.3-RESTATED 9/30/97, 6/30/97, 3/31/97
9 This schedule contaings restated summary financial information extracted from the Form 10-Q filed as of September 30, 1997, June 30, 1997, and March 31, 1997. 1,000 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 27,072 22,389 23,329 583 836 1,200 0 3,300 15,000 0 0 0 149,209 147,856 146,912 0 0 0 0 0 0 484,183 467,445 448,860 7,763 7,298 7,152 679,947 661,517 655,153 555,779 545,330 542,684 24,579 19,775 17,959 6,605 6,896 6,688 31,593 30,601 31,363 0 0 0 0 0 0 34,399 34,442 34,438 26,992 24,473 22,021 679,947 661,517 655,153 31,848 20,758 10,181 6,391 4,281 2,139 1,284 845 442 39,523 25,884 12,762 16,321 10,640 5,230 18,467 12,024 5,918 21,056 13,860 6,844 1,905 1,229 588 (31) (31) (29) 14,277 9,426 4,705 9,251 6,054 2,940 6,285 4,127 2,002 0 0 0 0 0 0 6,285 4,127 2,002 1.82 1.20 0.58 1.77 1.17 0.57 4.73 4.73 4.72 746 875 1,204 428 580 776 0 0 0 0 0 0 6,873 6,873 6,873 1,529 1,153 511 394 229 82 7,763 7,298 7,152 7,763 7,298 7,152 0 0 0 856 786 726
EX-27 13 EXHIBIT 27.4-RESTATED 9/30/96, 6/30/96, 3/31/96
9 This schedule contains restated summary financial information extracted from the Form 10-Q filed as of September 30, 1996, June 30, 1996, and March 31, 1996. 1,000 9-MOS 6-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 27,315 25,647 17,680 193 247 1,479 0 0 11,800 0 0 0 153,709 152,079 156,559 0 0 0 0 0 0 417,072 398,823 383,696 6,906 6,723 6,743 617,241 596,506 582,883 506,803 493,964 435,839 18,478 22,614 67,523 6,797 6,575 5,703 31,455 21,508 22,395 0 0 0 0 0 0 34,263 34,139 31,100 19,445 17,706 20,323 617,241 596,506 582,883 27,379 17,946 8,790 7,433 4,863 2,434 275 232 92 35,087 23,041 11,316 13,917 9,060 4,345 16,322 10,783 5,367 18,765 12,258 5,949 1,380 795 360 26 26 26 12,890 8,312 4,013 8,258 5,610 2,764 8,258 5,610 2,764 0 0 0 0 0 0 5,682 3,852 1,881 1.65 1.12 0.55 1.64 1.11 0.54 4.63 4.77 4.72 1,008 652 939 644 972 1,441 0 0 0 2,698 2,100 2,181 6,726 6,726 6,726 1,578 1,009 431 378 211 88 6,906 6,723 6,743 6,906 6,723 6,743 0 0 0 150 150 150
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