-----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, SQ0F8xYSXo3X6VERpvKx3eEZbMEA+cnDYPeD+eZUjgOEjVlKrKxZCpx80ENrURvW STOZW+YNAwQXzgRhfXo48Q== 0000318300-99-000004.txt : 19990331 0000318300-99-000004.hdr.sgml : 19990331 ACCESSION NUMBER: 0000318300-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99579247 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 0-16772 PEOPLES BANCORP INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Ohio 31-0987416 - ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 138 Putnam Street, P. O. Box 738, Marietta, Ohio 45750 - ------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 373-3155 --------------- 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 (5,7333,617 outstanding at March 4, 1999) --------------------------------------- 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. [ X ] Based upon the closing price of the Common Shares of the Registrant on The NASDAQ National Market as of March 4, 1999, the aggregate market value of the Common Shares of the Registrant held by nonaffiliates on that date was $123,520,116. For this purpose, certain executive officers and directors are considered affiliates. Documents Incorporated by Reference: 1) Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998, 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 15, 1999, are incorporated by reference into Part III of this Annual Report on Form 10-K. Exhibit Index Appears on Pages 21 through 24 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. Effective April 6, 1993, Peoples Delaware was merged into Peoples Bancorp Inc., an Ohio corporation (the "Company"), for the purpose of changing the Company's state of incorporation from Delaware to Ohio. 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"), Peoples Bank FSB and The Northwest Territory Life Insurance Company, an Arizona corporation ("Northwest Territory"). The Company's subsidiaries provide an array of financial products and services to their customers, including traditional banking products such as deposit accounts, lending products, credit and debit cards, corporate and personal trust services, and safe deposit rental facilities. The Company's insurance agency subsidiaries also offer investment and insurance products. The Company's banking subsidiaries provide services through ordinary walk-in offices, automated teller machines, and automobile drive-in facilities, banking by phone, and also provide limited cash management services through computer banking. The Company's subsidiaries operate 34 sales offices in the states of Ohio, West Virginia, and Kentucky. At December 31, 1998, the Company had total assets of $880.3 million, total loans of $567.9 million, total deposits of $714.2 million, and total shareholders' equity of $86.0 million. For the year ended December 31, 1998, the Company's return on average assets was 1.20% and return on average stockholders' equity was 12.21%. At December 31, 1998, the Company and its subsidiaries had 362 full-time equivalent employees (including 27 full-time equivalent employees at the parent company level). The principal executive office of the Company is located at 138 Putnam Street, Marietta, Ohio 45750, and its telephone number is (740) 374-6136. Over the past several years, the Company has experienced significant growth in assets and shareholders' equity, primarily through acquisitions as well as banking center purchases. For the five-year period ended December 31, 1998, the Company's assets grew at a 12.1% compound annual growth rate, while stockholders' equity grew at a compound annual growth rate of 13.5%. The Company has also had a history of consistent earnings growth, as net income per share grew at a compound rate of 9.9% for the five-year period ended December 31, 1998. Over that same period, the Company's annual return on average assets and equity were 1.23% and 13.24%, respectively. The Company routinely explores opportunities for additional growth and expansion of its core financial service businesses, including the acquisition of companies engaged in similar activities. Management also focuses on internal growth as a method for reaching performance goals and reviews key performance indicators on a regular basis to measure the Company's success. There can be no assurance, however, that the Company will be able to grow, or if it does, that any such growth or expansions will result in an increase in the Company's earnings, dividends, book value, or market value of its common stock. The Peoples Banking and Trust Company - ------------------------------------- General - ------- Peoples Bank, a full-service commercial bank, was chartered as an Ohio banking corporation under its present name in Marietta, Ohio, in 1902. It provides the following products to its customers: checking accounts; NOW and Super NOW accounts; money market deposit accounts; savings accounts; time certificates of deposit; commercial, installment, and commercial and residential real estate mortgage loans; credit and debit cards; lease financing; corporate and personal trust services; and safe deposit rental facilities. Peoples Bank also sells travelers checks, money orders and cashier's checks. Peoples Bank provides services through ordinary walk-in offices, automated teller machines ("ATMs"), automobile drive-in facilities called "Motor Banks," and banking by phone, and provides limited cash management services through computer banking. With offices located in Ohio and West Virginia, Peoples Bank serves principally Washington, Athens, Meigs, Fairfield, and Gallia Counties in Ohio and Wood, Wetzel, and Mason Counties in West Virginia, together with portions of Hocking, Perry, Lawrence, Licking, and Vinton Counties in Ohio and Tyler, Pleasants, and Jackson Counties in West Virginia. At December 31, 1998, Peoples Bank had assets of $694.0 million, deposits of $582.3 million, net loans of $455.7 million and 279 full-time equivalent employees. Also at December 31, 1998, the Investment and Trust Division of Peoples Bank held approximately $535 million of assets (market value) in trust and custodial accounts apart from the assets of the Bank. Recent Acquisitions and Additions - --------------------------------- Effective at the close of business on June 26, 1998, Peoples Bank completed the purchase of four full-service banking offices located in the communities of Point Pleasant (two offices), New Martinsville, and Steelton, West Virginia, from an unaffiliated financial institution. In the transaction, Peoples Bank assumed approximately $121.0 million in deposits and purchased $8.3 million in loans. The Point Pleasant offices, located in Mason County, and the New Martinsville office, located in Wetzel County, currently operate full-service banking offices and Motor Banks while the Steelton office, also located in Wetzel County, operates a full-service banking office, Motor Bank, and an ATM. On August 17, 1998, a new banking facility was opened at 2107 Pike Street in Parkersburg, West Virginia. The facility, located in the South Gate Shopping Center, is a full-service office with an attached Motor Bank, and offers loan, insurance, investment, and trust services along with traditional deposit products. In addition, Peoples Bank will operate a new ATM on leased property in Nelsonville, Ohio. The lease expires four years from the ATM's delivery date, which is expected to be in late March, 1999. Banking Facilities - ------------------ Peoples Bank provides services to its customers through the various banking facilities and ATMs throughout Ohio. In Marietta, Peoples Bank has four facilities and ATMs: its principal banking office and ATM in downtown Marietta; a full-service office, Motor Bank and ATM located at the Frontier Shopping Center and at Second and Scammel Streets; and a full-service office and ATM located inside a grocery store at Pike and Acme Streets. In Belpre, Peoples Bank operates a full-service office, two Motor Banks and an ATM. Other offices in Washington County include full-service offices with Motor Banks located in Lowell and Reno. Peoples Bank provides services to its Athens County customers through a full-service office and ATM located at One North Court Street in downtown Athens, Ohio; a full-service office, Motor Bank and ATM located at the Athens Mall on East State Street and at the HDL Center on West Union Street in Athens; three ATMs located on the campus of Ohio University, also in Athens; and a full service office with a Motor Bank in Nelsonville, Ohio. In Meigs County, a full-service office and separate Motor Bank are located in downtown Pomeroy, together with an ATM located outside a local convenience store; and full-service offices located at Middleport, and Rutland, Ohio. A full-service office and Motor Bank in Gallipolis, Ohio, serve customers in neighboring Gallia County. A full- service office in Baltimore, Ohio, complements a loan production office in Granville, Ohio, both serving parts of Licking and Fairfield Counties. Future Sales Offices - -------------------- In January 1999, Peoples Bank announced its intention to open three sales offices in Wal-Mart stores located in the communities of New Martinsville, Vienna, and Parkersburg, West Virginia. These sales offices will be located in the front of each Wal-Mart store near the customer service area and will offer new deposit accounts, loans, insurance products, investment services, Internet access, ATM access, and more. Peoples Bank anticipates opening its New Martinsville Wal-Mart sales office on April 1, 1999. The Vienna Wal-Mart and Parkersburg (south) Wal-Mart sales offices are scheduled to open in the third quarter and late fourth quarter of 1999, respectively, coinciding with the grand opening of each store. The First National Bank of Southeastern Ohio - -------------------------------------------- General - ------- 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's market area is comprised of Caldwell, Chesterhill, McConnelsville and the surrounding area in Noble and Morgan Counties, Ohio. At December 31, 1998, it had assets of $87.8 million, deposits of $65.4 million, net loans of $58.0 million and 27 full-time equivalent employees. First National Bank also owns two insurance agency subsidiaries, Northwest Territory Life Insurance Agency, Inc. and Northwest Territory Property and 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. In August 1998, these agencies were licensed by Ohio-based Motorists Mutual Insurance Company, MICO Insurance Company and Motorists Life Insurance Company ("Motorists"). The Agencies offer a complete line of life and property and casualty products through Motorists. At December 31, 1998, the Agencies had 8 full-time employees. In addition, a full line of investment products are offered at the Company through Marketing One Securities, Inc., a unaffiliated registered broker dealer, member NASD and SIPC. The Company has 16 registered representatives and one registered principal. Banking Facilities - ------------------ First National Bank operates a full-service office and Motor Bank at one location at 415 Main Street, Caldwell, Ohio. It also operates a full- service office and Motor Bank on Marion Street in Chesterhill, Ohio, as well as a full-service office on Kennebec Street, McConnelsville, Ohio. The Agencies' principal office is located within the First National Bank office at 415 Main Street in Caldwell, Ohio. The Agencies also use office space within the various offices of Peoples Bank and First National Bank as necessary to serve their customers. Peoples Bank FSB - ---------------- General - ------- On January 1, 1997, the Company acquired Russell Federal Savings Bank ("Russell Federal"), and continued its operation as a federal savings bank. Russell Federal was originally chartered as a mutual association in 1914, but later converted to a stock corporation on October 6, 1994. On December 12, 1997, the Company acquired Gateway Bancorp, Inc. ("Gateway") and its subsidiary, Catlettsburg Federal Savings Bank ("Catlettsburg Federal"). Catlettsburg Federal was originally chartered as a mutual savings and loan association in 1935, and converted to a federally-chartered stock savings bank in 1994 with Gateway as its sole shareholder. On January 1, 1998, Russell Federal became a subsidiary of Gateway to begin the process of aligning the Company's business units in northeast Kentucky. Effective January 1, 1999, the Company merged Russell Federal and Catlettsburg Federal to form a single thrift and renamed it "Peoples Bank FSB". In addition, the Company dissolved Gateway. These actions were designed to align the Company's Kentucky operations and optimize its focus on sales and service in its markets. At January 1, 1999, Peoples Bank FSB had total assets of $97.5 million, deposits of $66.8 million, net loans of $44.7 million and 20 full-time equivalent employees. Peoples Bank FSB's principal products include savings accounts, time certificates of deposit and commercial and residential real estate loans. Peoples Bank FSB's primary market area consists of Catlettsburg, Ashland, Grayson, Russell and the contiguous areas of Greenup, Carter, and Boyd Counties in Kentucky. Recent Additions - ---------------- In 1998, Peoples Bank FSB expanded its products and services to include non-interest bearing transaction accounts; NOW and Super NOW accounts; commercial and consumer loans; debit cards; and ATM services. It also completed the renovation of a new walk-in office and attached Motor Bank located in Boyd County at 1410 Eagle Drive in Ashland, Kentucky in March, 1998. Peoples Bank FSB added its first ATM as part of the renovation. Banking Facilities - ------------------ In addition to the Ashland office, Peoples Bank FSB serves the financial needs of customers through a walk-in office located at 2717 Louisa Street in Catlettsburg, Kentucky. Peoples Bank FSB also has a full-service, walk-in office and adjacent Motor Bank at 380 South Carol Malone Boulevard in Grayson, Kentucky and a full-service, walk-in office and Motor Bank on Ferry Street in Russell, Kentucky. 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, 1998, Northwest Territory had total assets of $1.5 million and had gross premium income of $208,000 in 1998, $218,000 in 1997 and $201,000 in 1996. 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 its subsidiaries have no 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 Loans - ---------------- At December 31, 1998, the Company's subsidiaries had outstanding approximately $212.5 million in commercial loans (including commercial, financial and agricultural loans), representing approximately 37.4% of the total aggregate loan portfolio as of that date. Legal Lending Limit. At December 31, 1998, none of the Company's subsidiaries had extended credit to any one borrower in excess of its respective legal lending limit (approximately $10.4 million, $1.2 million and 1.1 million for Peoples Bank, First National and Peoples Bank FSB, respectively) at the time the loan was closed. Lending Practices. Commercial lending entails significant additional risks as compared with consumer lending (i.e., single-family residential mortgage lending, installment lending, credit card loans and indirect lending). In addition, the payment experience on commercial loans typically depends on adequate cash flow of a business and thus may be subject to a greater extent, to adverse conditions in the general economy or in a specific industry. Loan terms include amortization schedules commensurate with the purpose of each loan, the source of repayment and the risk involved. Approval is required from each respective banking subsidiary's Board of Directors for loans to borrowers whose aggregate total debt, including the principal amount of the proposed loan, exceeds $2 million, $275,000 and $1 million for Peoples Bank, First National and Peoples Bank FSB, respectively. However, the Company's Loan Committee approval is required for loans by Peoples Bank FSB to borrowers whose aggregate total debt exceeds $300,000. The primary analysis technique used in determining whether to grant a commercial loan is the review of a schedule of cash flows to evaluate whether anticipated future cash flows will be adequate to service both interest and principal due. In addition, collateral is reviewed to determine its value in relation to the loan. Peoples Bank periodically evaluates all new commercial loans greater in amount than $250,000 and on an annual basis, all loans greater in amount than $500,000. First National and Peoples Bank FSB periodically evaluate all commercial loans greater in amount than $100,000. If deterioration has occurred, the lender subsidiary takes effective and prompt action designed to assure repayment of the loan. Upon detection of the reduced ability of a borrower to meet cash flow obligations, the loan is considered an impaired loan and reviewed for possible downgrading or placement on non-accrual status. Consumer Loans - -------------- At December 31, 1998, the Company's subsidiaries had outstanding consumer loans (including indirect loans and credit cards) in an aggregate amount of approximately $111.5 million (approximately 19.6% of the aggregate total loan portfolio). Lending Practices. Consumer loans generally involve more risk as to collectibility than mortgage loans because of the type and nature of the collateral and, in certain instances, the absence of collateral. As a result, consumer lending collections are dependent upon the borrower's continued financial stability, and thus are more likely to be adversely affected by employment loss, personal bankruptcy, or adverse economic conditions. Credit approval for consumer loans requires demonstration of sufficiency of income to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is the policy of 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 and 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. Each subsidiary also offers its customers credit card access through the consumer lending department of Peoples Bank. Real Estate Loans - ----------------- At December 31, 1998, there were approximately $243.9 million ($213.3 million, $20.3 million, and $10.3 million, respectively) in residential real estate, home equity lines of credit and construction mortgages outstanding, representing 43.0% of total loans outstanding. Lending Practices. The Company's subsidiaries require that the residential real estate loan amount be no more than 90% of the purchase price or the appraisal value of the real estate securing the loan, unless private mortgage insurance is obtained by the borrower with respect to the percentage exceeding such 90%. On occasion, the subsidiaries may lend up to 100% of the appraised value of the real estate. The risk conditions of these loans are considered during underwriting for the purposes of establishing an interest rate compatible with the risks inherent in 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 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 subsidiaries also require proof of hazard insurance with the subsidiary named as the mortgagee and as the loss payee. Licensed appraisals are required in the case of loans in excess of $250,000 for Peoples Banks and $75,000 for First National and Peoples Bank FSB. Home Equity Loans. 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 Company's subsidiaries will lend up to 100% of the appraised value to the property at higher interest rates which are considered compatible with the additional risk assumed in these types of equilines. The home equity lines of credit are written with ten-year terms but are subject to review upon request for renewal. For the past two years, the Company's subsidiaries have generally charged a fixed rate on their home equity loans for the first five years. At the end of the five-year period, the equiline reverts to a variable interest rate product. Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, the subsidiary making the loan may be required to advance funds beyond the amount originally committed to permit completion of the project. 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 provides flexibility, which enables the Company to offer an array of banking products and services. The Company's financial condition also contributes to a favorable competitive position in the markets it serves. 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 property and casualty insurance products. 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. The Company primarily focuses on non-major metropolitan markets in which to provide products and services. Management believes the Company has developed a niche and certain level of expertise in serving these communities. The Company historically has operated under a "needs-based" selling approach that management believes has proven successful in serving the financial needs of many customers. Management anticipates that in future periods, the Company will increase its investment in sales training and education to assist in the development of the Company's associates and their identification of customer service opportunities. It is not the Company's strategy to compete solely on the basis of interest rate. Management believes that a focus on customer relationships and incentives that promote customers' continued use of the Company's financial products and services will lead to enhanced revenue opportunities. Management believes the integration of traditional financial products with the recent entry into insurance product offerings will lead to enhanced revenues through complementary product offerings that satisfy customer demands for high quality, "one-stop shopping". Supervision and Regulation - -------------------------- The following is a summary of certain statutes and regulations affecting the Company and its subsidiaries and is qualified in its entirety by reference to such statutes and regulations: General - ------- Bank Holding Company. The Company is a bank holding company under the Bank Holding Company Act of 1956, 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 Federal Reserve Board. The Company's subsidiary banks are subject to restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the Company or its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the Company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the Company and other subsidiaries. The Company is prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. The 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 Company or its subsidiaries. In addition, any savings association acquired by the Company must conform its activities to those permissible for a bank holding company under the Bank Holding Company Act. Savings and Loan Holding Company. The Company is also a savings and loan holding company due to its ownership of Peoples Bank FSB. 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 associations. Pursuant to this legislation, Congress may eliminate the Office of Thrift Supervision (the "OTS") and Peoples Bank FSB may be regulated under federal law as a bank or be required to change its charter. Such change in regulation or charter would likely change the range of activities in which Peoples Bank FSB may engage and would probably subject Peoples Bank FSB to more regulation by the Federal Deposit Insurance Corporation ("FDIC"). At this time, the Company cannot predict when or whether Congress may actually pass legislation regarding the Company's and Peoples Bank FSB's regulatory requirements or charter. Although such legislation, if enacted, may change the activities in which Peoples Bank FSB may engage, it is not anticipated that the current activities of either the Company or Peoples Bank FSB will be materially affected by those activity limits. Banking Subsidiaries. Peoples Bank is an Ohio state-chartered bank supervised and regulated by the Ohio Division of Financial Institutions and the FDIC. First National Bank is a national bank, supervised and regulated by the Comptroller of the Currency. Peoples Bank FSB is a federally- chartered savings bank subject to regulation, supervision, and examination by the OTS and as a member of the Federal Home Loan Bank ("FHLB") of Cincinnati subject to limited regulation by the Federal Reserve Board. Insurance Subsidiaries. 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. Federal Deposit Insurance Corporation - ------------------------------------- The FDIC insures the deposits of Peoples Bank, First National Bank, and Peoples Bank FSB 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 the 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 is required to guarantee a portion of the institution's capital shortfall. 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 BIF members. Peoples Bank FSB is a SAIF member. Insurance premiums for BIF and SAIF members are determined during each semi-annual assessment period based upon the members' respective categorization as (1) well capitalized, (2) adequately capitalized or (3) under capitalized. An institution is also assigned by the FDIC to one of these supervisory subgroups within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC be the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institution's state supervisor). An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Office of Thrift Supervision - ---------------------------- Peoples Bank FSB must file periodic reports with the OTS concerning its activities and financial condition. Examinations are conducted periodically by the OTS to determine whether Peoples Bank FSB is in compliance with various regulatory requirements and is operating in a safe and sound manner. 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 specific circumstances, public disclosure of final enforcement actions by the OTS is required. Federal Home Loan Bank - ---------------------- The FHLBs provide credit to their members in the form of advances. As a member of the FHLB of Cincinnati, Peoples Bank FSB must maintain an investment in the capital stock of that FHLB in an amount equal to the greater of 1.0% of the aggregate outstanding principal amount of its respective residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. Peoples Bank FSB is in compliance with this requirement with an investment in stock of the FHLB of Cincinnati of $1.4 million at December 31, 1998. In addition, Peoples Bank and First National Bank also hold an investment in FHLB of Cincinnati stock of $6.7 million and $0.6 million, respectively, at December 31, 1998. Capital Requirements - -------------------- Federal Reserve Board. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and for state member banks. 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 off-balance sheet items, such as standby letters of credit) is 8%. At least 4% must be comprised of common stockholders' equity (including retained earnings but excluding treasury stock), qualifying noncumulative perpetual preferred stock, a limited amount of qualifying 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 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 specified conditions, including no operational, financial or supervisory deficiencies, and having the highest regulatory rating. The minimum leverage ratio is 4% to 5% for other bank holding companies and state member banks based on their particular circumstances and risk profiles and those experiencing or anticipating significant growth. Office of the Comptroller of Currency. National bank subsidiaries, such as First National Bank, are subject to similar capital requirements adopted by the Comptroller of the Currency. Office of Thrift Supervision. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to savings associations such as Peoples Bank FSB. 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. 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 is defined in OTS regulations as core capital minus any intangible assets. The capital standards also require core capital of 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 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. (Peoples Bank FSB currently qualifies 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 risk-based capital requirement on an individual basis for any association to take into account risks due to concentrations of credit and nontraditional activities. Compliance. 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 regulations require 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. As of December 31, 1998, the most recent notification 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. The Company's ability to obtain funds for the payment of dividends and for other cash requirements largely depends on the amount of dividends 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. The Federal Reserve Board may require the Company to retain capital for further investment in its subsidiaries, rather than for dividends for shareholders. Peoples Bank, First National Bank, and Peoples Bank FSB 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 regulatory 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 earnings and the retained earnings for the preceding two years, less required transfers to surplus. Peoples Bank FSB 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 its tangible, core or 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, Peoples Bank FSB must obtain prior approval from the OTS. Payment of dividends by a banking subsidiary may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and/or unsound banking practice or necessary to maintain adequate capital. These provisions could limit the Company's ability to pay dividends on its outstanding common shares. Federal and State Laws - ---------------------- Various requirements and restrictions under the laws of the United States and the States of Ohio, West Virginia and Kentucky affect the operations of Peoples Bank, First National Bank and Peoples Bank FSB. Included are requirements to maintain reserves against deposits, restrictions on the nature and amount of loans made and the interest 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 and Peoples Bank have been authorized to branch across state lines. Peoples Bank, as an Ohio chartered banking corporation, has done so in West Virginia, operating branches in that State under West Virginia consumer banking law. Peoples Bank FSB has had unlimited branching authority across state lines for some time but has not chosen, as yet, to do so. 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 has received a "satisfactory" examination rating under those regulations while Peoples Bank has received an "outstanding" examination rating. Peoples Bank FSB has not received a rating since its creation in January; however, Catlettsburg Federal and Russell Federal both had "satisfactory" ratings prior to merging. 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 Peoples Bank FSB 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 Peoples Bank FSB in a manner which would create the above-mentioned federal tax liabilities. 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, the Company can make no definitive predictions 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, 1998, (the "Company's 1998 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 38 through 58 and 12 through 33, respectively, of the Company's 1998 Annual Report. Average Balances and Analysis of Net Interest Income: Please refer to page 34 of the Company's 1998 Annual Report. Rate Volume Analysis: Please refer to page 35 of the Company's 1998 Annual Report. Loan Maturities: Please refer to page 35 of the Company's 1998 Annual Report. Average Deposits: Please refer to page 34 of the Company's 1998 Annual Report. Maturities Schedule of Large Certificates of Deposit: Please refer to page 35 of the Company's 1998 Annual Report. Loan Portfolio Analysis: Please refer to pages 36 and 37 of the Company's 1998 Annual Report. Securities Analysis: Please refer to pages 19 and 20 and page 51 and 52 of the Company's 1998 Annual Report. Return Ratios: Please refer to page 9 of the Company's 1998 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 they acquire in the future through foreclosure proceedings; however, the amount of such capital expenditures, if any, is not currently determinable. ITEM 2. PROPERTIES =================== Peoples Bancorp Inc. - -------------------- The Company's principal office is located at 138 Putnam Street, Marietta, Ohio. This location is also the principal location for the Company's largest subsidiary, Peoples Bank. The Peoples Banking and Trust Company - ------------------------------------- The principal office of Peoples Bank is located in Washington County at 138 Putnam Street, Marietta, Ohio. This location consists of a five-story building and another smaller building attached by interior corridors. In 1993, Peoples Bank completed construction of a five-story addition to the primary facility in downtown Marietta that was originally constructed in 1924. Peoples Bank also owns several nearby vacant lots for parking. Other Washington County offices operated by Peoples Bank include property owned at Second and Scammel Streets in downtown Marietta on which an additional Motor Bank exists, and leases property in the Frontier Shopping Center near downtown Marietta on which a full-service branch is located. In addition, Peoples Bank leases another 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 building on the Public Square in Nelsonville, Ohio, along with a nearby Motor Bank. Peoples Bank owns an office consisting of a two-story structure at One North Court Street, Athens, Ohio. Also in Athens, Peoples Bank owns a full-service office on real property it leases in the Athens Mall on East State Street and leases a full-service office located in the HDL Center on West Union Street. The leases for the East State Street and the West Union Street offices expire in June, 2002 and March, 2008, respectively. Peoples Bank also leases a full-service office in The Plains, Ohio, which lease expires in June, 2001. In Meigs County, Peoples Bank owns full-service offices in Middleport and Rutland along with a full service office and Motor Bank in Pomeroy, Ohio. In nearby Gallia County, Peoples Bank also owns a full-service office, currently under renovation, and Motor Bank in Gallipolis, Ohio. In Fairfield County, the Company owns a recently renovated full-service office located in Baltimore, Ohio. In adjacent Licking County, Peoples Bank leases a loan production office in the Newark-Granville area, which lease expires in September, 2000. In Mason County, West Virginia, Peoples Bank owns a two-story, full-service office and nearby Motor Bank located on Main Street in Point Pleasant and leases a two-story, full-service office and nearby Motor Bank on Jackson Avenue also in Point Pleasant. The Jackson Avenue office lease expires September, 2000. In Wood County, Peoples Bank leases a two-story, full-service office located in the South Gate Shopping Center in Parkersburg, West Virginia, which lease expires in April, 2004. In Wetzel County, Peoples Bank owns a two-story full-service office located on Main Street in New Martinsville, West Virginia, along with a full-service office located in the nearby community of Steelton in New Martinsville, West Virginia. The First National Bank of Southeastern Ohio - -------------------------------------------- First National Bank owns a three-story office building located in Noble County at 415 Main Street in Caldwell, Ohio. The Agencies headquarters are also located in the Caldwell office on Main Street. In Morgan County, First National Bank owns a one-story located on Marion Street in Chesterhill, Ohio, together with a two-story structure located on Kennebec Street in McConnelsville, Ohio. Peoples Bank FSB - ---------------- Peoples Bank FSB owns a two-story building located in Boyd County on Louisa Street in Catlettsburg, Kentucky. An additional one-story building was renovated and opened on Eagle Drive in Ashland, Kentucky in March, 1998. In Carter County, Peoples Bank FSB owns a single-story building located on Carol Malone Boulevard in Grayson, Kentucky. In Greenup County, Peoples Bank FSB also owns a two-story office building with adjoining land and parking lot at 404 Ferry Street as well as adjacent property located at 408 Ferry Street in Russell, Kentucky. Other Properties - ---------------- All other properties occupied by the Company and its subsidiaries are owned by the Company or its subsidiaries, including a two-story building at 223 Second Street in Marietta, Ohio. This location is used as general office space for certain operating units within the Company. The Company and its subsidiaries own other real property which, when considered in the aggregate, is not material to their operations. Property Condition - ------------------ 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 any of its subsidiaries is a party or to which any of their property is subject other than ordinary routine litigation to which the Company's subsidiaries are parties incidental to their respective banking businesses. The Company considers none of such proceedings to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ============================================================= Not applicable. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ====================================================================== Please refer to pages 10 and 11 of the Company's 1998 Annual Report, which are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. ================================= The table of Selected Financial Data on page 9 of the Company's 1998 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 38 through 58 of the Company's 1998 Annual Report, which are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ===================================================================== Please refer to pages 51 through 53 of the Company's 1998 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 12 through 32 of the Company's 1998 Annual Report, and the Report of Ernst & Young LLP included therein at page 33 are incorporated herein by reference. Following is an index to the financial statements included in the Company's 1998 Annual Report: 1998 Annual Report Pages Peoples Bancorp Inc. and Subsidiaries: ------ Report of Independent Auditors (Ernst & Young LLP) 33 Consolidated Balance Sheets as of December 31, 1998 and 1997 12 Consolidated Statements of Income for each of the three years ended December 31, 1998 13 Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 1998 14 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1998 15 Notes to the Consolidated Financial Statements 16-32 Peoples Bancorp Inc.: (Parent Company Only Financial Statements are included in Note 16 of the Notes to the Consolidated Financial Statements) 30-31 Quarterly Financial Data on page 32 of the Company's 1998 Annual Report are also incorporated herein be reference. 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 identified under "Election of Directors" on pages 5 through 8 of the Company's definitive Proxy Statement relating to the Company's Annual Meeting of Shareholders to be held April 15, 1999, which section is expressly incorporated by reference. Other Executive Officers are David B. Baker (52), Vice President; John (Jack) W. Conlon (53), Chief Financial Officer; Larry E. Holdren (51), Vice President; Carol A. Schneeberger (42), Vice President/Operations; Jeffrey D. Welch (44), Treasurer; and Mark F. Bradley (29), Controller. Mr. Baker became Vice President in February, 1999. In January, 1998, Mr. Baker was named President of Peoples Bank's Investment and Business Division and he is also President of the Investment and Trust Division of Peoples Bank, a position he has held since 1991. Mr. Baker has held various positions in the Investment and Trust Division for Peoples Bank since 1974. Mr. Conlon has been Chief Financial Officer of the Company since April, 1991. He has also been Chief Financial Officer and Treasurer of Peoples Bank for more than five years. Mr. Holdren became Vice President in February, 1999. He has been President of the Retail and Banking Division for Peoples Bank since January, 1998. Prior thereto, he was Executive Vice President of Human Resources for Peoples Bank since 1987. Ms. Schneeberger became 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. Welch has been Treasurer of the Company since 1985. Mr. Welch also serves as a Vice President of Peoples Bank's Investment and Trust Division. Mr. Bradley became Controller of the Company in January, 1997. Prior thereto, he was Manager of Accounting and External Reporting for the Company from February, 1995 to January, 1997. He has been Controller for Peoples Bank since March, 1997. He was Manager of Accounting and External Reporting for Peoples Bank from February, 1995 to January, 1997. Prior to February 1995, Mr. Bradley served as a staff accountant of the Company beginning in 1991. There was no disclosure required under Item 405 of Regulation S-K for the year ended December 31, 1998. ITEM 11. EXECUTIVE COMPENSATION. ================================= See "Compensation of Executive Officers and Directors" on pages 11 through 15 of the Company's definitive Proxy Statement relating to the Company's Annual Meeting of Shareholders to be held April 15, 1999, which is incorporated 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 15, 1999, shall be deemed to be incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ========================================================================= See "Security Ownership of Certain Beneficial Owners and Management" on pages 2 through 4 of the Company's definitive Proxy Statement relating to the Company's Annual Meeting of Shareholders to be held April 15, 1999, which section is incorporated 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 15, 1999, which section is incorporated 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 20. (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 21. The following table provides 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 Number Description Location ------- ----------- -------- 10(a) Deferred Compensation Incorporated herein Agreement dated November 16, by reference to 1976 between Robert E. Evans Exhibit 6(g) to and The Peoples Banking and Registration Statement Trust Company, as amended No. 2-68524 on Form March 13, 1979. S-14 of 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) ("the 1995 Form 10-K"). 10(c)(1) Peoples Bancorp Inc. Deferred Incorporated herein by Compensation Plan for Directors reference to Exhibit of Peoples Bancorp Inc. and 10(a) of the Company's Subsidiaries (Amended and Registration Statement Restated Effective January 2, on Form S-8 filed 1998.) December 31, 1997 (Registration No. 333-43629) 10(c)(2) Amendment No. 1 to Peoples Incorporated herein by Bancorp Inc. Deferred reference to Exhibit Compensation Plan for Directors 10(b) of the Company's of Peoples Bancorp Inc. and Post-Effective Subsidiaries effective January Amendment No. 1 2, 1998. to Form S-8 filed September 4, 1998 (Registration 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.) 1995 Form 10-K. 10(e) Summary of the Performance Incorporated herein by Compensation Plan of Peoples reference to Exhibit Bancorp Inc. effective for 10(f) of the Company's calendar year beginning Annual Report on Form 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 Option refrence to Exhibit 4 Plan. 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 Agreement Incorporated herein by used in connection with grant reference to Exhibit of non-qualified stock options 10(g) of the Company's under Peoples Bancorp Inc. 1995 Form 10-K. Amended and Restated 1993 Stock Option Plan. 10(h) Form of Stock Option Agreement Incorporated herein by dated May 20, 1993, used in reference to Exhibit connection with grant of 10(h) of the Company's incentive stock options under 1995 Form 10-K. Peoples Bancorp Inc. Amended and Restated 1993 Stock Option Plan. 10(i) Form of Stock Option Agreement Incorporated herein by dated November 10, 1994, used reference to Exhibit in connection with grant of 10(i) of the Company's incentive stock options under 1995 Form 10-K. Peoples Bancorp Inc. Amended and Restated 1993 Stock Option Plan. 10(j) Peoples Bancorp Inc. 1995 Stock Incorporated herein by 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 Agreement Incorporated herein by used in connection with grant reference to Exhibit of non-qualified stock options 10(k) of the Company's to non-employee directors of 1995 Form 10-K. the Company under Peoples Bancorp Inc. 1995 Stock Option Plan. 10(l) Form of Stock Option Agreement Incorporated herein by used in connection with grant reference to Exhibit of non-qualified stock options 10(l) of the Company's to non-employee directors of 1995 Form 10-K. the Company's subsidiaries under Peoples Bancorp Inc. 1995 Stock Option Plan. 10(m) Form of Stock Option Agreement * dated used in connection with grant of incentive stock options under Peoples Bancorp Inc. 1995 Stock Option Plan. 10(n) Peoples Bancorp Inc. 1998 Stock Incorporated herein by Option Plan. reference to Exhibit 10 of the Company's Form S-8 filed September 4, 1998 (Registration Statement No. 333-62935). 10(o) Form of Stock Option Agreement * used in connection with grant of non-qualified stock options to non-employee directors of the Company under Peoples Bancorp Inc. 1998 Stock Option Plan. 10(p) Form of Stock Option Agreement * used in connection with grant of non-qualified stock options to consultants/advisors of the Company under Peoples Bancorp Inc. 1998 Stock Option Plan. (b) Reports on Form 8-K ------------------- There were no current reports on Form 8-K filed during the fiscal quarter ended December 31, 1998. (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 21. (d) Financial Statement Schedules ----------------------------- None. * Filed herewith 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 25, 1999 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 25, 1999 Robert E. Evans Officer and Director /s/ GEORGE W. BROUGHTON Director March 25, 1999 George W. Broughton Director March 25, 1999 - --------------------- Frank L. Christy /s/ WILFORD D. DIMIT Director March 25, 1999 Wilford D. Dimit Director March 25, 1999 - --------------------- Barton S. Holl /s/ REX E. MAIDEN Director March 25, 1999 Rex E. Maiden /s/ NORMAN J. MURRAY Director March 25, 1999 Norman J. Murray /s/ PAUL T. THEISEN Director March 25, 1999 Paul T. Theisen /S/ THOMAS C. VADAKIN Director March 25, 1999 Thomas C. Vadakin /S/ JOSEPH H. WESEL Chairman of the Board and Director March 25, 1999 Joseph H. Wesel /s/ JOHN W. CONLON Chief Financial Officer March 25, 1999 John W. Conlon (Principal Accounting Officer) /s/ MARK F. BRADLEY Controller March 25, 1999 Mark F. Bradley PEOPLES BANCORP INC. INDEX TO FINANCIAL STATEMENTS 1998 Annual Report Financial Statements: Pages - --------------------- ------ Peoples Bancorp Inc. and Subsidiaries: Report of Independent Auditors (Ernst & Young LLP) 33 Consolidated Balance Sheets as of December 31, 1998 and 1997 12 Consolidated Statements of Income for each of the three years ended December 31, 1998 13 Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 1998 14 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1998 15 Notes to the Consolidated Financial Statements 16-32 Peoples Bancorp Inc.: (Parent Company Only Financial Statements are included in Note 16 of the Notes to the Consolidated Financial Statements) 30-31 EXHIBIT INDEX PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998 Exhibit Number Description Exhibit Location - ------- ----------- ---------------- 2(a) Office Purchase and Assumption Agreement Incorporated herein between The Peoples Banking and Trust by reference to Company and Community Trust Bank of West Exhibit 2 to the Virginia, NA dated January 26, 1998; and Company's Quarterly Letter Agreement between The Peoples Report on Form 10-Q Banking and Trust Company and Community filed August 14, 1998 Trust Bank of West Virginia, NA dated (File No. 0-16772). June 4, 1998. 2(b) Agreement of Merger, dated October 13, * 1998, between Russell Federal Savings Bank and Catlettsburg Federal Savings Bank. 3(a)(1) Amended Articles of Incorporation of Incorporatd herein by Peoples Bancorp Inc. (as filed with the reference to Exhibit Ohio Secretary of State on May 3, 1993) 3(a) to the Company's Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772). 3(a)(2) Certificate of Amendment to the Amended Incorporated herein by Articles of Peoples Bancorp Inc. (as reference to Exhibit filed with the Ohio Secretary of State 3(a)(2) to the on April 22, 1994) Company's Annual Report on Form 10-K for fiscal year ended December 31, 1997 (File No. 0-16772) (the "1997 Form 10-K). 3(a)(3) Certificate of Amendment to the Amended Incorporated herein by Articles of Peoples Bancorp Inc. (as reference to Exhibit filed with the Ohio Secretary of State 3(a)(3) to the Company's on April 9, 1996) 1997 Form 10-K. 3(a)(4) Amended Articles of Incorporation of Incorporated herein by Peoples Bancorp Inc. (reflecting reference to Exhibit amendments through April 9, 1996) 3(a)(4) to the Company's [For SEC reporting compliance purposes Company's 1997 Form only -- not filed with Ohio Secretary 10-K. of State] 3(b) Regulations of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3(b) to the Company's Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772). 4(a) Pledge Agreement, dated March 18, 1997, Incorporated herein by between Peoples Bancorp Inc. and reference to Exhibit 4 Fountain Square Commercial Funding Corp. of the Company's Registration Statement on Form S-4 (File No. 333-37261) effective October 2, 1997. 4(b) Master Note Agreement, dated May 11, * 1998, between Peoples Bancorp Inc. and The Fifth Third Bank. 10(a) Deferred Compensation Agreement dated Incorporated herein by November 16, 1976 between Robert E. Evans reference to Exhibit and The Peoples Banking and Trust 6(g) to the Company's Company, as amended March 13, 1979. Registration Statement No. 2-68524 on Form S-14 of Peoples Delaware, the Company's predecessor. 10(b) Peoples Bancorp Inc. Retirement Savings Incorporated herein by Plan. (Amended and Restated Effective reference to Exhibit January 1, 1996.) 10(b) of the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1995 (File No. 0-16772). 10(c)(1) Peoples Bancorp Inc. Deferred Incorporated herein by Compensation Plan for Directors of reference to Exhibit Peoples Bancorp Inc. and Subsidiaries 10(a) of the Company's (Amended and Restated Effective January Registration Statement 2, 1998.) on Form S-8 filed December 31, 1997 (Registration No. 333-43629) 10(c)(2) Amendment No. 1 to Peoples Bancorp Inc. Incorporated herein by Deferred Compensation Plan for Directors referene to Exhibit of Peoples Bancorp Inc. and Subsidiaries 10(b) of the Company's effective January 2, 1998. Post-Effective Amendment No. 1 to Form S-8 filed September 4, 1998 (Registration No. 333-43629) 10(d) Peoples Bancorp Inc. Retirement Plan Incorporated herein by and Trust. (Amended and Restated reference to Exhibit Effective January 1, 1989.) 10(d) of the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1995 (File No. 0-16772). 10(e) Summary of the Performance Compensation Incorporated herein by Plan for Peoples Bancorp Inc. effective reference to Exhibit for calendar year beginning January 1, 10(f) of the Company's 1997. Annual Report on Form 10-K for fiscal year ended December 31, 1996 (File No. 0-16772). 10(f) Peoples Bancorp Inc. Amended and Incorporated herein by Restated 1993 Stock Option Plan. reference to Exhibit 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 Agreement used in Incorporated herein by connection with grant of non-qualified reference to Exhibit stock options under Peoples Bancorp Inc. 10(g) of the Company's Amended and Restated 1993 Stock Option Annual Report on Form Plan. 10-K for fiscal year ended December 31, 1995 (File No. 0-16772). 10(h) Form of Stock Option Agreement dated Incorporated herein by May 20, 1993, used in connection with reference to Exhibit grant of incentive stock options under 10(h) of the Company's Peoples Bancorp Inc. Amended and Annual Report on Form Restated 1993 Stock Option Plan. 10-K for fiscal year ended December 31, 1995 (File No. 0-16772) 10(i) Form of Stock Option Agreement dated Incorporated herein by November 10, 1994, used in connection reference to Exhibits with grant of incentive stock options 10(i) of the Company's under Peoples Bancorp Inc. Amended and Annual Report on Form Restated 1993 Stock Option Plan. 10-K for fiscal year ended December 31, 1995 (File No. 0-16772). 10(j) Peoples Bancorp Inc. 1995 Stock Option Incorporated herein by 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 Agreement used in Incorporated herein by connection with grant of non-qualified reference to Exhibit stock options to non-employee directors 10(k) of the Company's of the Company under Peoples Bancorp Inc. Annual Report on Form 1995 Stock Option Plan. 10-K for fiscal year ended December 31, 1995 (File No. 0-16772). 10(l) Form of Stock Option Agreement used in Incorporated herein by connection with grant of non-qualified reference to Exhibit stock options to non-employee directors 10(l) of the Company's of the Company's subsidiaries under Annual Report on Form Peoples Bancorp Inc. 1995 Stock Option 10-K for fiscal year Plan. ended December 31, 1995 (File No. 0-16772). 10(m) Form of Stock Option Agreement dated * used in connection with grant of incentive stock options under Peoples Bancorp Inc. 1995 Stock Option Plan. 10(n) Peoples Bancorp Inc. 1998 Stock Option Incorporated herein by Plan. reference to Exhibit 10 of the Company's Form S-8 filed September 4, 1998 (Registration Statement No. 333-62935). 10(o) Form of Stock Option Agreement used in * connection with grant of non-qualified stock options to non-employee directors of the Company under Peoples Bancorp Inc. 1998 Stock Option Plan. 10(p) Form of Stock Option Agreement used in * connection with grant of non-qualified stock options to consultants/advisors of the Company under Peoples Bancorp Inc. 1998 Stock Option Plan. 11 Computation of Earnings Per Share. * 12 Statements of Computation of Ratios. * 13 Peoples Bancorp Inc. Annual Report to Pages 59 through 119. Shareholders for the fiscal year ended December 31, 1998 (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 Bancorp Inc. * 23 Consent of Independent Auditors - * Ernst & Young LLP. 27 Financial Data Schedule. * * Filed herewith EX-11 2 EXHIBIT 11-COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 ---------- PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998 COMPUTATION OF EARNINGS PER SHARE Year Ended December 31, 1998 1997 1996 BASIC EARNINGS PER SHARE EARNINGS: - ------------------------ Net income $10,045,000 $8,605,000 $7,651,000 AVERAGE SHARES OUTSTANDING: Weighted average Common Shares outstanding 5,744,943 5,209,737 5,156,685 ========= ========= ========= BASIC EARNINGS PER SHARE $1.75 $1.65 $1.48 ========= ========= ========= DILUTED EARNINGS PER SHARE EARNINGS: - -------------------------- Net income $10,045,000 $8,605,000 $7,651,000 AVERAGE SHARES OUTSTANDING: Weighted average Common Shares outstanding 5,744,943 5,209,737 5,156,685 Net effect of the assumed exercise of stock options based on the treasury stock method 174,072 164,136 70,004 --------- --------- --------- Total 5,919,015 5,373,873 5,226,689 ========= ========= ========= DILUTED EARNINGS PER SHARE $1.70 $1.60 $1.46 ========= ========= ========= EX-12 3 EXHIBIT 12-COMPUTATION OF RATIOS EXHIBIT 12 ---------- PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998 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 Non-interest expense/average assets ASSETS EFFICIENCY RATIO (Non-interest expenses less intangible 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 stockholders' equity/average AVERAGE ASSETS assets PRIMARY CAPITAL TO PERIOD END TOTAL (Stockholders' equity plus allowance ASSETS 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/Qyarterly average assets NET CHARGE-OFFS TO AVERAGE LOANS (Gross chargeoffs less recoveries)/ Average net loans NONPERFORMING LOANS AS A PERCENTAGE (Nonaccrual loans plus loans past due OF PERIOD END LOANS 90 days or greater plus other real estate owned)/Gross loans net of unearned interest ALLOWANCE FOR LOAN LOSSES TO PERIOD Allowance for loan losses/Gross loans END TOTAL LOANS net of unearned interest EX-13 4 ANNUAL REPORT TO SHAREHOLDERS 12/31/97 A LETTER TO OUR SHAREHOLDERS: ============================= Nineteen ninety eight was a significant year in the history of Peoples Bancorp: net income topped $10 million, marking the 25th consecutive year of increased earnings for your Company. Earnings were bolstered by strong asset growth and enhanced results of operations in key performance areas. Consistent earnings growth has provided Peoples Bancorp shareholders with a 10-year compound average annual return of 19.7% and a 5-year compound average annual return of 19.0% (both measures assume quarterly dividend reinvestment). Consistent earnings growth and our commitment to increased shareholder return are basic tenets of our strategic plan. As you can see by the financial highlights on page 10, it was a good year for your Company in terms of growth and profitability, as earnings per share reached record highs. Peoples Bancorp reported total net income of $10,045,000, an increase of 16.7% compared to 1997. Earnings per share totaled $1.70, up 10 cents over the previous year. Dividends per share continued to grow, reaching $0.53 per share in 1998, an increase of 8.2% compared to 1997. Peoples Bancorp's earnings growth can be attributed to a combination of increased revenues related to recent acquisitions and modest enhancements to the Company's operating efficiency. In 1998, we were challenged to employ funds acquired in the purchase of our Point Pleasant, New Martinsville, and Steelton banking centers. I am pleased to report we successfully completed transition of the acquired funding sources to an asset mix similar to that held by Peoples Bancorp in previous periods by shifting assets into higher- yielding assets (such as loans). Peoples Bancorp is committed to providing quality financial products and services through many delivery systems. In particular, our sales offices are an integral part of that delivery process, with local leadership and a strong community-minded perspective. In 1998, we successfully added four West Virginia banking centers to Peoples Bancorp's growing number of locations without compromising customer service. I commend our associates for their hard work and dedication during this transition period. In an effort to serve our growing customer base and boost our market presence, we opened additional full-service banking centers in Athens, Ohio, and Parkersburg, West Virginia. Also, we recently combined operating systems in our four Kentucky banking offices to provide customers consistent full- service banking throughout northeast Kentucky and surrounding areas. These actions are part of Peoples Bancorp's ongoing efforts to enhance customer service and optimize the efficiency of our operations. We believe our future is exciting and full of opportunities to provide financial solutions for our customers' product and service needs. Our focus for 1999 includes changes in how we sell our products and the introduction of a new marketing program that emphasizes the "connections" customers have through Peoples Bancorp. To be "connected" is to be joined or linked together. Our professional relationships and electronic access connect our customers to Peoples Bancorp's array of products and services. As we transfer our financial information to the customer, a value-added relationship is created and maintained. Your Company's sales and management teams are focused on continuous enhancement of customer relationships for a purpose: to be the leading financial services provider to the customers and markets we serve. Peoples Bancorp's professional staff is dedicated to customer service and to the communities in which we live, work, and invest. Our associates have developed and will continue to sharpen their abilities 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 relationships. We realize that customers have different needs and our ability to recognize those subtle variations differentiates Peoples Bancorp from our competitors. Our basic goal is to develop and deliver quality products which meet customer needs. Our vision is to make it easy to do business with Peoples Bancorp through a dedicated team of associates committed to community-based fundamentals and speedy service. We have learned that customers want choices, especially when choosing their preferred method of product delivery. In 1998, we began offering electronic banking through our pcPAL software program. During 1999, we will be offering Internet banking access for our customers after testing security and reliability. I am pleased to report the addition of Frank L. Christy as a director of Peoples Bancorp Inc. in February. Mr. Christy is a successful real estate developer and business executive with knowledge of the markets served by Peoples Bancorp. Frank and his family are long-term stockholders and he brings experience from previous directorships in financial companies. He is also a nominee for election to a three year term at the Annual Meeting. By now you have probably heard about the "Year 2000" computer issue and related gloomy predictions of computers not being able to work properly. This complex issue, also known as "Y2K", arises in computer programs written using two digits rather than four to define the applicable year, causing date-sensitive software or embedded chips to recognize a date of "00" as the year 1900 rather than the year 2000. Peoples Bancorp and many other businesses across various industries are investing resources to make sure their computer systems will work properly in the Year 2000. Peoples Bancorp has made the Y2K project a top priority and we will successfully meet the challenges of the Y2K issue. We have evaluated potential impacts and have implemented a comprehensive plan to test and ensure that all aspects of our business are prepared. As a shareholder, you can be assured that we are working hard to make sure our financial systems will be operating on a "business as usual" basis on January 1, 2000, and beyond. Your Company has weathered storms, floods, financial disruptions, and economic change for nearly 100 years. We are overcoming the Y2K issue in the usual hardworking manner. Now that most of the work is done, I am prepared to guarantee that our vaults will be open and our people will be "doing business as usual" on the first business day of 2000. Recently we announced a partnership with retail giant Wal-Mart, in which Peoples Bank will open three sales centers in certain mid-Ohio valley Wal-Mart stores. Our sales centers will complement existing full-service offices and serve as a catalyst for increasing sales volume by putting capable sales professionals in those offices where customers can easily take advantage of the many products and services available at Peoples Bancorp. I want to give special recognition to Norman J. Murray, who will retire from our Board of Directors upon completion of his current term at the Annual Meeting on April 15, 1999. Mr. Murray and his family have been leaders in our community for many years. He first joined the Peoples Bancorp organization in 1967 as a Director of Peoples Bank and is also one of the original group of Peoples Bancorp directors when the Company was chartered in 1980. Over the years Norm has contributed generously and unceasingly to the success of your Company as a Director, customer, and stockholder. Norm's integrity, commitment, and competitive fire are core values at Peoples Bancorp, and Norm's leadership over the past 32 years have helped instill these characteristics into the way we do business. Norm's leadership and contributions during his long tenure as a Director will continue to benefit the Company. We will certainly miss his insight, integrity, and presence in the Board room. The 1999 Annual Meeting of Shareholders will be held at the Historic Lafayette Hotel beginning at 9:30 AM in the Mississippi Delta Room. Our recent growth has absorbed the meeting space in our banking offices. We hope you are able to join us. The financial reports and analyses found throughout this report reflect the achievements of your Company in 1998. We are already working to make your investment more valuable in 1999. If you have any questions concerning Peoples Bancorp stock, please contact our Investor Relations Department at (740) 374-6136, or learn more by visiting our web site at www.peoplesbancorp.com. /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, 1998 has been derived from the Consolidated Financial Statements of the Company. (Dollars in Thousands, except Ratios and Per Share Data) 1998 1997 1996 1995 1994 Operating Data For the year ended: Total interest income $ 63,645 $ 53,836 $ 47,397 $ 43,068 $ 35,801 Total interest expense 30,497 25,216 21,966 20,777 15,424 Net interest income 33,148 28,620 25,431 22,291 20,377 Provision for loan losses 2,325 2,589 1,965 1,315 765 Other income 7,238 5,938 5,178 4,481 4,141 Other expenses 23,276 19,265 17,522 16,818 15,672 Net income 10,045 8,605 7,651 6,050 5,748 - ----------------------------------------------------------------------------- BALANCE SHEET DATA At year end: Total assets $880,284 $758,158 $616,635 $543,430 $498,006 Investment securities 235,569 174,291 147,783 131,762 99,419 Net loans 558,408 513,214 415,540 372,800 354,570 Total deposits 714,168 611,107 504,692 429,077 403,819 Long-term borrowings 40,664 28,577 29,200 23,142 23,787 Stockholders' equity 86,014 78,818 56,193 51,474 45,635 - ----------------------------------------------------------------------------- SIGNIFICANT RATIOS Net income to: Average total assets 1.20% 1.29% 1.29% 1.15% 1.20% Average stockholders' equity 12.2 14.3 14.4 12.3 12.9 Average stockholders' equity to average total assets 9.9 9.0 8.9 9.3 9.3 Average loans to average deposits 80.9 85.5 84.0 85.2 85.5 Risk-based capital ratio 11.95 14.34 12.86 13.85 14.13 Dividend payout ratio 30.4 30.5 30.5 32.2 29.3 - ----------------------------------------------------------------------------- PER SHARE DATA Net income: Basic $ 1.75 $ 1.65 $ 1.48 $ 1.16 $ 1.09 Diluted 1.70 1.60 1.46 1.15 1.09 Weighted average shares outstanding: Basic 5,744,943 5,209,737 5,156,685 5,221,764 5,263,412 Diluted 5,919,015 5,373,873 5,226,689 5,250,827 5,280,974 Cash dividends paid 0.53 0.49 0.43 0.37 0.32 Book value at end of period 14.99 13.71 10.88 10.03 8.67 - ------------------------------------------------------------------------------ COMMON STOCK ============ Return to Investors - ------------------- The Company's mission is to become the financial services leader in the communities we serve. Execution of this basic objective will lead to consistent earnings growth and increased shareholder return. Peoples Bancorp's capital structure provides a base for continued growth and expansion. Shareholder return on investment continues to be a top priority, through both dividends and growth in the market value of the Company's stock. Our associates are committed to enhancing the total return to our shareholders. 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 is a major Company goal, 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. In the last five years, the Company's earnings per share has grown by a compound annual average rate of 9.3%. Diluted earnings per share reached $1.70 in 1998. 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 rowth in stock value, we believe a competitive dividend rate is also important to the overall return to our shareholders. In the last five years, the compound annual average growth rate of the Company's per share dividend is 10.6%. The Company has paid cash dividends on its common stock for over 42 consecutive years and has increased the annual dividend in each of the last 33 years. The Company plans to continue to pay quarterly cash dividends, subject to certain regulatory restrictions described in Note 12 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. In 1998, the Company's ROE was challenged due to a significant issuance of equity for the Gateway Bancorp acquisition in December, 1997. The graph to the right shows recent ROE performance for the Company. Management will continue to focus on enhancements to ROE as a means of increasing the value of shareholder investment and is researching methods to enhance ROE in 1999. Earnings Dividends Return on Average per share per share Shareholders' Equity --------- --------- -------------------- 1994 $1.09 $0.32 12.94% 1995 1.15 0.37 12.33% 1996 1.46 0.43 14.43% 1997 1.60 0.49 14.33% 1998 1.70 9.53 12.21% 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. The Company's information can also be accessed electronically through the Company's web site at www.peoplesbancorp.com. In 1998, there were 1,378,883 shares traded through the Nasdaq system, an average daily volume of 5,472 shares. The table on page 11 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, four 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 3-for-2 stock split effective April 30, 1998 , and a 10% stock dividend issued on July 15, 1996. Peoples Bancorp had 1,281 stockholders of record at December 31, 1998. COMMON STOCK ============ Quarterly Market and Dividend Information (Adjusted for stock splits and stock dividends) PER SHARE High Bid Low Bid Dividend 1998 Fourth Quarter $ 27.25 $ 21.50 $ 0.14 Third Quarter 30.88 24.50 0.13 Second Quarter 35.17 29.50 0.13 First Quarter 29.83 26.17 0.13 1997 Fourth Quarter $ 2.67 $ 26.33 $ 0.13 Third Quarter 27.00 23.50 0.13 Second Quarter 24.50 19.50 0.12 First Quarter 20.17 17.50 0.12 1996 Fourth Quarter $ 18.67 $ 15.83 $ 0.11 Third Quarter 16.00 14.01 0.11 Second Quarter 14.24 13.94 0.10 First Quarter 14.39 13.94 0.10 The following table 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 ------------------- 1994 $13.23 1995 14.32 1996 17.67 1997 27.83 1998 24.38 Stockholders are cordially invited to attend the Annual Meeting of Stockholders of Peoples Bancorp Inc. to be held April 15, 1999, at 9:30 A.M. in the Mississippi Delta Room at the Hotel Lafayette in 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 =========================== (Dollars in Thousands) December 31, Assets 1998 1997 Cash and cash equivalents: Cash and due from banks $ 27,048 $ 21,473 Interest-bearing deposits in other banks 3,373 7,008 Federal funds sold 9,700 10,350 - ----------------------------------------------------------------------------- Total cash and cash equivalents 40,121 38,831 - ----------------------------------------------------------------------------- Available-for-sale investment securities, at estimated fair value (amortizedcost of $230,049 in 1998 and $170,702 in 1997) 235,569 174,291 - ----------------------------------------------------------------------------- Loans, net of deferred fees and costs 567,917 521,570 Allowance for loan losses (9,509) (8,356) - ----------------------------------------------------------------------------- Net loans 558,408 513,214 - ----------------------------------------------------------------------------- Bank premises and equipment, net 14,826 11,971 Other assets 31,360 19,851 - ----------------------------------------------------------------------------- Total assets $880,284 $758,158 ============================================================================= Liabilities - ----------- Deposits: Non-interest bearing $ 80,884 $ 64,229 Interest bearing 633,284 546,878 - ----------------------------------------------------------------------------- Total deposits 714,168 611,107 - ----------------------------------------------------------------------------- Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase agreements 31,814 30,811 Federal Home Loan Bank advances 700 1,750 - ----------------------------------------------------------------------------- Total short-term borrowings 32,514 32,561 - ----------------------------------------------------------------------------- Long-term borrowings 40,664 28,577 Accrued expenses and other liabilities 6,924 7,095 - ----------------------------------------------------------------------------- Total liabilities 794,270 679,340 ============================================================================= Stockholders' Equity Common stock, no par value, 12,000,000 shares authorized - 5,790,148 shares issued in 1998 and 3,831,206 issued in 1997 including shares in treasury 50,807 50,001 Accumulated comprehensive income, net of deferred income taxes 3,588 2,369 Retained earnings 33,441 26,448 - ----------------------------------------------------------------------------- 87,836 78,818 Treasury stock, at cost, 52,031 shares in 1998 and no shares in 1997 (1,822) - ----------------------------------------------------------------------------- Total stockholders' equity 86,014 78,818 - ----------------------------------------------------------------------------- Total liabilities and stockholders' equity $880,284 $758,158 ============================================================================= See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME ================================= (Dollars in Thousands, except Per Share Data) Year ended December 31, 1998 1997 1996 Interest Income: - ---------------- Interest and fees on loans $ 48,857 $ 43,451 $ 37,140 Interest and dividends on: Obligations of U.S. Government and its agencies 9,500 7,255 7,205 Obligations of states and political subdivisions 1,886 1,324 1,402 Other interest income 3,402 1,806 1,650 - ----------------------------------------------------------------------------- Total interest income 63,645 53,836 47,397 - ----------------------------------------------------------------------------- Interest Expense: - ----------------- Interest on deposits 26,051 22,282 18,880 Interest on short-term borrowings 2,241 1,023 1,449 Interest on long-term borrowings 2,205 1,911 1,637 - ----------------------------------------------------------------------------- Total interest expense 30,497 25,216 21,966 - ----------------------------------------------------------------------------- Net interest income 33,148 28,620 25,431 Provision for loan losses 2,325 2,589 1,965 - ----------------------------------------------------------------------------- Net interest income after provision for loan losses 30,823 26,031 23,466 - ----------------------------------------------------------------------------- Other Income: - ------------- Income from fiduciary activities 2,325 2,176 1,897 Service charges on deposit accounts 2,553 2,202 1,937 Gain (loss) on securities transactions 418 (28) 48 Other 1,942 1,588 1,296 - ----------------------------------------------------------------------------- Total other income 7,238 5,938 5,178 - ----------------------------------------------------------------------------- Other Expenses: - --------------- Salaries and employee benefits 9,315 8,358 7,514 Net occupancy 1,597 1,297 1,193 Equipment 1,728 1,501 1,329 Insurance 293 242 175 Supplies 779 516 713 Taxes other than income taxes 622 709 833 Amortization of intangibles 2,093 1,138 625 Other 6,849 5,504 5,140 - ----------------------------------------------------------------------------- Total other expenses 23,276 19,265 17,522 - ----------------------------------------------------------------------------- Income before income taxes 14,785 12,704 11,122 - ----------------------------------------------------------------------------- Income taxes: Current 4,869 3,941 3,303 Deferred (129) 158 168 - ----------------------------------------------------------------------------- Total income taxes 4,740 4,099 3,471 - ----------------------------------------------------------------------------- Net income $ 10,045 $ 8,605 $ 7,651 ============================================================================= Earnings per share: - ------------------- Basic $1.75 $1.65 $1.48 - ----------------------------------------------------------------------------- Diluted $1.70 $1.60 $1.46 - ----------------------------------------------------------------------------- Weighted average number of shares outstanding: - ---------------------------------------------- Basic 5,744,943 5,209,737 5,156,685 - ----------------------------------------------------------------------------- Diluted 5,919,015 5,373,873 5,226,689 - ----------------------------------------------------------------------------- See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ===============================================
Accumulated Other Common Stock Retained Comprehensive Treasury (Dollars in Thousands) Shares Amount Earnings Income (1) Stock Total - ----------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 3,332,598 $30,898 $ 21,786 $ 2,469 $ (3,679) $ 51,474 - ----------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 7,651 7,651 Other comprehensive income, net of tax: Unrealized losses on available-for-sale securities, net of reclassification adjustment (1,041) (1,041) -------- Comprehensive income 6,610 Purchase of treasury stock, 14,000 shares (332) (332) 10% stock dividend (reissued 226,989 treasury shares) 85,468 2,871 (6,727) 3,856 Exercise of common stock options (reissued 5,417 treasury shares) 16,434 330 101 431 Issuance of common stock under dividend reinvestment plan 10,575 250 250 Cash dividends declared of $0.43 per share (2,240) (2,240) - ----------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 3,445,075 34,349 20,470 1,428 (54) 56,193 - ----------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 8,605 8,605 Other comprehensive income, net of tax: Unrealized gains on available-for-sale securities, net of reclassification adjustment 941 941 -------- Comprehensive income 9,546 Purchase of treasury stock, 10,150 shares (327) (327) Exercise of common stock options (reissued 12,150 treasury shares) 9,173 (67) 381 314 Issuance of common stock under dividend reinvestment plan 11,486 370 370 Cash dividends declared of $0.49 per share (2,627) (2,627) Issuance of common stock to purchase Gateway Bancorp, Inc. 365,472 15,349 15,349 - ----------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 3,831,206 50,001 26,448 2,369 0 78,818 - ----------------------------------------------------------------------------------------------------------- Adjustment for the effect of 3-for-2 common stock split 1,915,603 Comprehensive income: Net income 10,045 10,045 Other comprehensive income, net of tax: Unrealized gains on available-for-sale securities net of reclassification adjustment 1,219 1,219 -------- Comprehensive income 11,264 Purchase of treasury stock, 71,057 shares (2,059) (2,059) Exercise of common stock options (reissued 19,026 treasury shares) 28,451 370 237 607 Issuance of common stock under dividend reinvestment plan 14,888 436 436 Cash dividends declared of $0.53 per share (3,052) (3,052) - ----------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 5,790,148 $ 50,807 $ 33,441 $ 3,588 $ (1,822) $ 86,014 =========================================================================================================== (1) Disclosure of reclassification amount for the years ended: 1998 1997 1996 Net unrealized appreciation (depreciation) arising during period, net of tax $ 1,491 $ 923 $ (1,009) Less: reclassification adjustment for net gains (losses) included in net income, net of tax 272 (18) 32 - ----------------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) on investment securities $ 1,219 $ 941 $ (1,041) =========================================================================================================== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS ===================================== (Dollars in Thousands) Year ended December 31, 1998 1997 1996 Cash flows from operating activities: - ------------------------------------- Net income $ 10,045 $ 8,605 $ 7,651 Adjustments to reconcile net income to net cash provided: Provision for loan losses 2,325 2,589 1,965 (Gain) loss on securities transactions (418) 28 (48) Depreciation, amortization, and accretion 5,095 2,648 2,068 Increase in interest receivable (630) (811) (31) Increase (decrease) in interest payable 257 (129) 486 Deferred income tax (benefit) expense (129) 158 168 Deferral of loan origination fees and costs 56 (118) 73 Other, net (3,325) (757) (820) - ----------------------------------------------------------------------------- Net cash provided by operating activities 13,276 12,213 11,512 - ----------------------------------------------------------------------------- Cash flows from investing activities: - ------------------------------------- Purchases of available-for-sale securities (138,141) (34,035) (45,240) Proceeds from sales of available-for-sale securities 20,349 5,309 5,522 Proceeds from maturities of available-for-sale securities 58,964 26,244 22,034 Net increase in loans (26,955) (59,026) (44,504) Purchase of loans (11,772) Expenditures for premises and equipment (3,011) (1,184) (1,773) Proceeds from sales of other real estate owned 200 144 Acquisitions, net of cash received 100,170 19,844 68,004 Investment in limited partnership (2,036) - ----------------------------------------------------------------------------- Net cash (used in) provided by investing activities (2,232) (42,704) 4,043 - ----------------------------------------------------------------------------- Cash flows from financing activities: - ------------------------------------- Net increase (decrease) in non-interest bearing deposits 5,234 (1,749) 8,393 Net (decrease) increase in interest bearing deposits (19,489) 32,335 (6,894) Net (decrease) increase in short-term borrowings (3,596) 13,039 (13,754) Proceeds from long-term borrowings 37,973 6,000 10,500 Payments on long-term borrowings (25,886) (6,623) (4,442) Cash dividends paid (2,538) (2,184) (1,934) Purchase of treasury stock (2,059) (327) (332) Proceeds from issuance of common stock for stock options 607 314 431 - ----------------------------------------------------------------------------- Net cash (used in) provided by financing activities (9,754) 40,805 (8,032) - ----------------------------------------------------------------------------- Net increase in cash and cash equivalents 1,290 10,314 7,523 Cash and cash equivalents at beginning of year 38,831 28,517 20,994 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 40,121 $ 38,831 $ 28,517 ============================================================================= Supplemental cash flow information: - ----------------------------------- Interest paid $ 26,831 $ 21,732 $ 21,757 - ----------------------------------------------------------------------------- Income taxes paid $ 5,542 $ 3,197 $ 3,832 - ----------------------------------------------------------------------------- See notes to consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ============================================== 1. SUMMARY OF SIGNIGICANT 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. On April 13, 1998, the Company declared a 3-for-2 stock split effective April 30, 1998. 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 other comprehensive income, net of applicable deferred income taxes. The cost of securities sold is based on the specific identification method. Allowance for Loan Losses: - -------------------------- The allowance for loan losses is maintained at a level believed adequate by management to absorb 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. Interest Rate Risk Management: - ------------------------------ The premium paid to purchase interest rate floors is included in other assets and amortized to interest expense over the original term of the agreements. Income Taxes: - ------------- Deferred income taxes (included in other assets) are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rate. The components of other comprehensive income included in the Consolidated Statements of Stockholders' Equity have been computed based upon a 35% effective tax rate. Stockholders' Equity: - --------------------- In 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The Statement requires that certain financial activity previously recorded directly in stockholders' equity be reported as an adjustment to net income in determining comprehensive income. The adoption of this standard had no impact on the Company's financial position, results of operations, or cash flows. Earnings per Share: - ------------------- Basic earnings per share is determined by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share is determined by dividing net income by the weighted average number of shares outstanding increased by the number of shares that would be issued assuming the exercise of stock options. Operating Segments: - ------------------- In June, 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement requires disclosure about an enterprise's operating segments in annual and interim financial reports issued to shareholders. The Statement defines an operating segment as a component of an enterprise that engages in business activities that generate revenue and incur expense, and the operating results of which are reviewed by the chief operating decision maker in the determination of resource allocation and performance. The Company's business activities are currently confined to one segment which is community banking. 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. Interest Rate Floors: - --------------------- Fair values for interest rate floors are based on quoted market prices. Financial instruments: - ---------------------- The fair value of loan commitments and standby letters of credit is estimated using the fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair value of these commitments approximates their carrying value. The estimated fair values of the Company's financial instruments are as follows: (Dollars in Thousands) 1998 1997 Carrying Fair Carrying Fair Amount Value Amount Value Financial assets: - ----------------- Cash and cash equivalents $ 40,121 $ 40,121 $ 38,831 $ 38,831 Investment securities 235,569 235,569 174,291 174,291 Loans 567,917 574,820 521,570 523,893 Financial liabilities: - ---------------------- Deposits 714,168 715,150 611,107 611,775 Short-term borrowings 32,514 32,514 32,561 32,561 Long-term borrowings 40,664 39,255 28,577 28,677 Off-balance sheet instruments: - ------------------------------ Interest rate floors $ 22 $ 104 $ 46 $ 101 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, 1998: - ------------------------------------------- (Dollars in Thousands) Gross Gross Estimated Amortized Unrealized Unrealized Fair Value U.S. Treasury securities Cost Gains Losses and obligations of U.S. government agencies and corporations $ 49,249 $ 1,034 $ (40) $ 50,243 Obligations of states and political subdivisions 44,007 1,541 (15) 45,533 Mortgage-backed securities 104,067 811 (117) 104,761 Other securities 32,726 2,428 (122) 35,032 - ---------------------------------------------------------------------------- Total available-for-sale securities $ 230,049 $ 5,814 $ (294) $ 235,569 ============================================================================ Maturity distribution of available-for-sale securities - ------------------------------------------------------ Contractual maturities at December 31, 1998
(Dollars in Thousands) U.S. Treasury Obligations securities and of states obligations of and Mortgage Total U.S. Government political backed Other available-for-sale Agencies subdivisions securities securities securities Within one year - --------------- Amortized cost $ 6,795 $ 2,473 $ 9,734 $ 2,259 $ 21,261 Fair value $ 6,876 $ 2,512 $ 9,872 $ 2,270 $ 21,530 Yield 7.16% 8.65% 6.64% 6.66% 7.04% 1 to 5 years - ------------ Amortized cost 30,102 6,098 80,654 8,062 124,916 Fair value 30,660 6,296 81,111 8,084 126,151 Yield 6.11% 7.87% 6.49% 6.26% 6.45% 5 to 10 years - ------------- Amortized cost 12,352 16,055 7,451 7,008 42,866 Fair value 12,707 16,762 7,484 7,179 44,132 Yield 6.47% 7.42% 6.40% 6.94% 6.89% Over 10 years - ------------- Amortized cost 19,381 6,228 15,397 41,006 Fair value 19,963 6,294 17,499 43,756 Yield 7.28% 6.46% 6.79% 6.97% - ------------------------------------------------------------------------------------------ Total amortized cost $49,249 $44,007 $104,067 $ 32,726 $ 230,049 Total fair value $50,243 $45,533 $104,761 $ 35,032 $ 235,569 Total yield 6.35% 7.49% 6.5 6.68% 6.68% ===========================================================================================
Securities classified as available-for-sale At December 31, 1997 - ------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 51,304 $ 751 $ (87) $ 51,968 Obligations of states and political subdivisions 24,679 1,030 (1) 25,708 Mortgage-backed securities 76,229 467 (288) 76,408 Other securities 18,490 1,720 (3) 20,207 - ------------------------------------------------------------------------------ Total available-for-sale securities $170,702 $ 3,968 $(379) $174,291 ============================================================================== Securities classified as available-for-sale At December 31, 1996 - ------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 41,855 $ 742 $(126) $ 42,471 Obligations of states and political subdivisions 23,949 743 (36) 24,656 Mortgage-backed securities 61,197 280 (697) 60,780 Other securities 18,618 1,277 (19) 19,876 - ------------------------------------------------------------------------------ Total available-for-sale securities $145,619 $ 3,042 $(878) $147,783 ============================================================================== In 1998, 1997 and 1996, gross gains of $523,000, $3,000 and $48,000 and gross losses of $105,000, $31,000 and $0 were realized, respectively. At December 31, 1998 and 1997, investment securities having a carrying value of $105,277,000 and $89,843,000, respectively, were pledged to secure public and trust department deposits and repurchase agreements in accordance with federal and state requirements. 4. LOANS: Loans are comprised of the following at December 31: - ---------------------------------------------------- (Dollars in Thousands) 1998 1997 Commercial, financial, and agricultural $212,530 $159,035 Real estate, construction 10,307 19,513 Real estate, mortgage 233,550 228,689 Consumer 111,530 114,333 - ------------------------------------------------------------------------ Total loans $567,917 $521,570 ======================================================================== Changes in the allowance for loan losses for each of the three years in the period ended December 31, 1998, were as follows: (Dollars in Thousands) 1998 1997 1996 Balance, beginning of year $ 8,356 $ 6,873 $ 6,726 Charge-offs (1,645) (1,917) (2,329) Recoveries 473 521 511 Net charge-offs (1,172) (1,396) (1,818) Provision for loan losses 2,325 2,589 1,965 Balances of acquired subsidiaries 290 - -------------------------------------------------------------------------- Balance, end of year $ 9,509 $ 8,356 $ 6,873 ========================================================================== 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 groups of business loans consist of credits to lodging and lodging related companies, as well as automobile dealer floor plans. Lodging and lodging related loans totaled $20,365,000 and $12,585,000 at December 31, 1998 and 1997, respectively. The credits have been subjected to the Company's normal commercial underwriting standards and do not present more than the normal amount of risk assumed in other lending areas. Automobile dealer floor plans totaled $15,532,000 and $18,769,000 at December 31, 1998 and 1997, 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, 1998 and 1997, 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 Company's 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, 1998: (Dollars in Thousands) Balance, January 1, 1998 $ 16,578 New loans 17,982 Repayments 16,928 Other changes (243) - ----------------------------------------- Balance, December 31, 1998 $ 17,389 ========================================= 5. BANK PREMISES AND EQUIPMENT: The major categories of bank premises and equipment and accumulated depreciation are summarized as follows at December 31: (Dollars in Thousands) 1998 1997 Land $ 2,556 $ 2,146 Building and premises 15,596 12,290 Furniture, fixtures and equipment 9,740 8,817 - -------------------------------------------------------------------- 27,892 23,253 Accumulated depreciation (13,066) (11,282) - -------------------------------------------------------------------- Net book value $ 14,826 $ 11,971 ==================================================================== The Company depreciates its building and premises and furniture, fixtures and equipment over estimated useful lives ranging from 5 to 20 years and 2 to 10 years, respectively. Depreciation expense was $1,745,000, $1,534,000, and $1,358,000 for the years ended December 31, 1998, 1997 and 1996 respectively. The Company leases certain banking facilities and equipment under various agreements with original terms providing for fixed monthly payments over periods ranging from two to ten years. The future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 1998: (Dollars in Thousands) Year Ending December 31 Operating Leases 1999 $ 227 2000 200 2001 180 2002 154 2003 140 Thereafter 795 ----------------------------------------------- Total minimum lease payments $ 1,696 ================================================ Rent expense was $242,000, $163,000 and $150,000 in 1998, 1997 and 1996, 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: $265,487,000 in 1999; $44,962,000 in 2000; $14,331,000 in 2001; $3,923,000 in 2002; $3,881,000 in 2003; and $1,237,000 thereafter. Deposits from related parties approximated $16.5 million and $17.0 million at December 31, 1998 and 1997, respectively. 7. SHORT-TERM BORROWINGS: Short-term borrowings consisted of the following at December 31: - ---------------------------------------------------------------- Federal Short-term Other Funds Repurchase FHLB Short-term (Dollars in Thousands) Purchased Agreements Advances Borrowings 1998 Ending balance $ 131 $ 31,683 $ 700 Average balance 996 31,429 12,534 Highest month end balance 1,725 33,457 59,200 Weighted average interest rate: End of year 4.18% 4.52% 5.32% During the year 5.45% 4.70% 5.68% Interest expense - YTD 54 1,476 712 1997 Ending balance 82 30,729 1,750 Average balance 419 20,020 2,024 Highest month end balance 1,542 20,552 5,250 Weighted average interest rate: End of year 5.69% 5.09% 5.89% During the year 5.49% 4.40% 5.78% Interest expense - YTD 23 881 117 1996 Ending balance 37 16,985 2,500 Average balance 331 13,134 12,294 $ 4,206 Highest month end balance 1,154 16,985 34,266 18,820 Weighted average interest rate: End of year 6.46% 4.56% 6.10% During the year 5.09% 3.82% 5.68% 5.52% Interest expense - YTD $ 17 $ 502 $ 698 $ 232 8. LONG-TERM BORROWINGS: Long-term borrowings consisted of the following at December 31: (Dollars in Thousands) 1998 1997 Term note payable, at LIBOR (parent company) $ 2,700 $ 3,000 Federal Home Loan Bank advances, bearing interest at rates ranging from 3.87% to 5.43% 37,964 25,577 - ----------------------------------------------------------------------------- Total long-term borrowings $ 40,664 $ 28,577 ============================================================================= The Federal Home Loan Bank ("FHLB") advances consist of various borrowings with maturities ranging from 10 to 20 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, and other bank assets. 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: (Dollars in Thousands) 1999 $ 28 2000 27 2001 28 2002 29 2003 31 Thereafter (includes parent company debt 40,521 ------------------------------------------------- Total long-term borrowings $ 40,664 ================================================== 9. EMPLOYEE BENEFIT PLANS: The Company sponsors a noncontributory defined benefit pension plan which covers substantially all employees. The plan provides benefits based on an employee's years of service and compensation. The Company's funding policy is to contribute annually an amount that can be deducted for federal income tax purposes. Plan assets consist primarily of U.S. Government obligations and collective stock and bond funds. The Company also has a contributory benefit postretirement plan for former employees who were retired as of December 31, 1992. The plan provides health and life insurance benefits. The Company's policy is to fund the cost of the benefits as they are incurred. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ending December 31, 1998, and a statement of the funded status as of December 31, 1998 and 1997: Pension Postretirement Benefits Benefits (Dollars in Thousands) 1998 1997 1998 1997 Change in benefit obligation: Obligation at January 1 $ 6,790 $ 5,868 $ 809 $ 831 Service cost 342 259 Interest cost 483 462 56 65 Plan participants' contributions 0 0 75 69 Actuarial loss (gain) 337 640 (5) 239 Benefit payments (651) (439) (127) (395) - ---------------------------------------------------------------------------- Obligation at December 31 7,301 6,790 808 809 - ---------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at January 1 6,249 5,034 Claims payable adjustment (3) Actual return on plan assets 737 904 Employer contributions 475 750 52 326 Plan participants' contributions 75 69 Benefit payments (651) (439) (127) (395) - ---------------------------------------------------------------------------- Fair value of plan assets at December 31 6,807 6,249 0 0 - ---------------------------------------------------------------------------- Funded status: Funded status at December 31 (494) (541) (808) (809) Unrecognized transition obligation (32) (40) Unrecognized prior-service cost (54) (63) Unrecognized net gain (278) (395) 191 205 - ---------------------------------------------------------------------------- Accrued benefit cost $ (858) $(1,039) $(617) $(604) ============================================================================ The following table provides the components of net periodic benefit cost for the plans: Pension Postretirement Benefits Benefits (Dollars in Thousands) 1998 1997 1996 1998 1997 1996 Service cost $ 342 $ 259 $ 248 Interest cost 483 462 416 $ 56 $ 65 $ 62 Expected return on plan assets (514) (422) (369) Amortization of transition asset (8) (8) (3) Amortization of prior service cost (9) (9) (9) Settlement gain (34) Amortization of net loss 9 - ----------------------------------------------------------------------------- Net periodic benefit cost $ 294 $ 282 $ 249 $ 65 $ 65 $ 62 ============================================================================= The assumptions used in the measurement of the Company's benefit obligation are shown in the following table: Pension Postretirement Benefits Benefits 1998 1997 1998 1997 Assumptions at December 31: Discount rate 7.00% 7.25% 7.00% 7.25% Expected return on plan assets 9.00% 9.00% n/a n/a Rate of compensation increase 4.00% 4.00% n/a n/a For measurement purposes, a 6% annual rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) was assumed for 1998, grading down 1% per year to an ultimate rate of 5%. The health care trend rate assumption does not have a significant effect on the contributory defined benefit postretirement plan, therefore, a one percentage point change in the trend rate is not material in the determination of the accumulated postretirement benefit obligation or the ongoing expense. 10. FEDERAL INCOME TAXES: The effective federal income tax rate in the consolidated statement of income is less than the statutory corporate tax rate due to the following: Year ended December 31 1998 1997 1996 Statutory corporate tax rate 35.0% 35.0% 34.0% Differences in rate resulting from: Interest on obligations of state and political subdivisions (4.0) (3.1) (3.7) Other, net 1.1 0.4 0.9 - -------------------------------------------------------------------------- Effective federal income tax rate 32.1% 32.3% 31.2% ========================================================================== The significant components of the Company's deferred tax assets and liabilities consisted of the following at December 31: (Dollars in Thousands) 1998 1997 Deferred tax assets: Allowance for loan losses $ 3,163 $ 2,447 Accrued employee benefits 724 1,046 Deferred loan fees and costs 323 441 Other 120 170 - --------------------------------------------------------------------- Total deferred tax assets 4,330 4,104 - --------------------------------------------------------------------- Deferred tax liabilities: Available-for-sale securities 1,931 1,220 Bank premises and equipment 673 764 Deferred Income 244 515 Investments 933 725 Other 598 347 - --------------------------------------------------------------------- Total deferred tax liabilities 4,379 3,571 - --------------------------------------------------------------------- Net deferred tax (liability) asset $ (49) $ 533 ===================================================================== The related federal income tax expense (benefit) on securities transactions approximated $146,000 in 1998, ($10,000) in 1997, and $16,000 in 1996. 11. 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: (Dollars in Thousands) Contract Amount 1998 1997 Loan commitments $ 69,568 $ 53,682 Standby letters of credit 1,430 1,973 Unused credit card limits 18,968 18,132 Interest Rate Floors: - --------------------- The Company has entered into interest rate floor contracts with an unaffiliated financial institution as a means of managing the risk 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 of approximately $20 million. 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 contracts expire as follows: $10 million in September, 1999, and $10 million in September, 2000. 12. 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, 1998, approximately $12 million of retained net profits plus retained net profits through the dividend date of the banking subsidiaries were available for the payment of dividends to Peoples Bancorp Inc. without regulatory approval. The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by the banking regulatory agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and each of its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of each entity's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and each of its banking subsidiaries' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and each of its banking subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). The Company and each of its banking subsidiaries met all capital adequacy requirements at December 31, 1998. As of December 31, 1998, 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 For Under Prompt Capital Action Provision (Dollars in Thousands) Actual Adequacy Amount Ratio Amount Ratio Amount Ratio As of December 31, 1998: Total capital (to risk-weighted assets) The Company $ 68,359 12.0% $ 45,766 8% $ 57,207 10% Peoples Bank 51,865 10.8% 38,380 8% 47,975 10% - ----------------------------------------------------------------------------- Tier 1 (to risk-weighted assets) The Company 60,310 10.5% 22,883 4% 34,324 6% Peoples Bank 45,846 9.6% 19,190 4% 28,785 6% - ----------------------------------------------------------------------------- Tier 1 (to average assets) The Company 60,310 7.1% 34,083 4% 42,604 5% Peoples Bank 45,846 6.8% 26,986 4% 33,732 5% - ----------------------------------------------------------------------------- As of December 31, 1997: Total capital (to risk-weighted assets) The Company $ 69,760 14.3% $ 38,904 8% $ 48,630 10% Peoples Bank 44,703 11.1% 32,095 8% 40,119 10% - ----------------------------------------------------------------------------- Tier 1 (to risk-weighted assets) The Company 63,653 13.1% 19,452 4% 29,178 6% Peoples Bank 39,665 9.9% 16,048 4% 24,071 6% - ----------------------------------------------------------------------------- Tier 1 (to average assets) The Company 63,653 9.3% 27,401 4% 34,251 5% Peoples Bank 39,665 7.1% 22,427 4% 28,034 5% - ----------------------------------------------------------------------------- 13. 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 $10,484,000 for the year ended December 31, 1998. 14. ACQUISITIONS: On June 26, 1998, the Company acquired the deposits (approximately $121 million) and total loans (approximately $8 million) of four full-service offices in the communities of Point Pleasant (two offices), New Martinsville, and Steelton, West Virginia, from an unaffiliated financial institution. This acquisition was accounted for under the purchase method of accounting. Accordingly, consolidated results include the operations of the acquired full-service banking offices from the date of acquisition. On December 12, 1997, the Company acquired Gateway Bancorp, Inc. and its subsidiary, Catlettsburg Federal Savings Bank, for total consideration of $21.6 million ($6.2 million in cash and $15.4 million in common stock). At the date of acquisition, Gateway Bancorp operated two full service offices in northeastern Kentucky, and had total assets of $61.2 million, deposits of $43.9 million and shareholders' equity of $15.3 million. This acquisition was accounted for under the purchase method of accounting. 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. At the date of acquisition, Russell Federal had 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 prices of the purchase 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 $5,817,000 and $2,682,000, net of accumulated amortization of $1,409,000 and $583,000, at December 31, 1998 and 1997. Goodwill, included in other assets, approximated $16,299,000 and $10,114,000, net of accumulated amortization of $3,160,000 and $1,874,000, at December 31, 1998 and 1997. 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. (Dollars in Thousands) 1997 1996 Total interest income $ 57,993 $ 53,125 Net income 8,888 7,600 Diluted earnings per share 1.49 1.45 15. STOCK OPTIONS: The Company's stock option plans provide for the granting of both incentive stock options and non-qualified stock options of up to 751,672 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, 1998 was 7.0 years. 1998 1997 Number Option Number Option of shares price of shares price Non-qualified stock options - --------------------------- Outstanding at beginning of year 121,374 $10.75-28.00 83,244 $10.75-14.10 Granted 11,400 28.75-32.75 57,718 17.92-28.00 Exercised 25,446 10.99-20.34 14,568 11.30-20.34 Canceled 5,020 10.99-20.34 - ----------------------------------------------------------------------------- Outstanding at end of year 107,328 10.75-32.75 121,374 10.75-28.00 ============================================================================= Exercisable at end of year 77,463 $10.75-32.75 73,948 $10.75-20.34 ============================================================================= Weighted average fair value of options granted during the year $ 5.97 $ 6.56 ============================================================================= Incentive stock options Outstanding at beginning of year 352,837 $ 9.65-29.17 272,938 $ 9.65-12.88 Granted 17,224 25.50-28.75 104,250 29.17 Exercised 22,482 9.65-12.88 24,351 9.65-12.88 Canceled 12,379 12.88-29.17 - ------------------------------------------------------------------------------ Outstanding at end of year 335,200 9.65-29.17 352,837 9.65-29.17 ============================================================================== Exercisable at end of year 164,697 $ 9.65-12.88 135,840 $ 9.65-12.88 ============================================================================== 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. 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 Company utilized the Black-Scholes option pricing model for purposes of providing pro forma disclosures as if the Company had used the fair value method for computing compensation expense for its stock- based compensation plans. The following weighted average assumptions were used in the pricing model for 1998, 1997, and 1996 respectively: risk-free interest rates of 5.25%, 6.40%, and 6.40%; dividend yields of 2.40%, 1.90%, and 1.90%; volatility factors of the expected market price of the Company's stock of 0.15, 0.12, and 0.12, and a weighted average expected life of the option of 7 years. Had compensation expense for the Company's stock based compensation plans been determined using the fair value method, net income and earnings per share would have been as summarized below: (Dollars in Thousands, except Per Share Data) 1998 1997 1996 Net Income: As Reported $ 10,045 $ 8,605 $ 7,651 Pro forma 9,811 8,458 7,637 Basic Earnings Per Share: As Reported $ 1.75 $ 1.65 $ 1.48 Pro forma 1.71 1.62 1.48 Diluted Earnings Per Share: As Reported $ 1.70 $ 1.60 $ 1.46 Pro forma 1.66 1.57 1.42 16. PARENT COMPANY ONLY FINANCIAL INFORMATION: (Dollars in Thousands) December 31, Condensed Balance Sheets 1998 1997 Assets: - ------- Cash $ 50 $ 20 Interest bearing deposits in subsidiary bank 116 530 Receivable from subsidiary bank 1,769 1,168 Investment securities: Available-for-sale (amortized cost of $1,164 and $1,341 at December 31, 1998 and 1997, respectively) 3,094 2,960 Investments in subsidiaries: Banks 84,909 76,869 Non-banks 1,197 1,138 Other assets 919 1,274 - ------------------------------------------------------------------------- Total assets $92,054 $83,959 ========================================================================= Liabilities: - ------------ Accrued expenses and other liabilities $ 2,533 $ 1,412 Dividends payable 807 729 Long-term borrowings 2,700 3,000 - ------------------------------------------------------------------------- Total liabilities 6,040 5,141 ========================================================================= Stockholders' equity 86,014 78,818 - ------------------------------------------------------------------------- Total liabilities and stockholders' equity $92,054 $83,959 ========================================================================= (Dollars in Thousands) Year ended December 31, Consolidated Statements of Income 1998 1997 1996 Income: - ------- Dividends from subsidiary banks $13,157 $12,990 $ 4,010 Dividends from other subsidiaries 40 50 40 Interest 179 72 346 Management fees from subsidiaries 909 903 902 Other 548 77 64 - -------------------------------------------------------------------------- Total income 14,833 14,092 5,362 - -------------------------------------------------------------------------- Expenses: - --------- Salaries and benefits 1,175 1,220 1,156 Interest 186 217 118 Other 749 818 784 - -------------------------------------------------------------------------- Total expenses 2,110 2,255 2,058 - -------------------------------------------------------------------------- Income before federal income taxes and (excess dividends from) equity in undistributed earnings of subsidiaries 12,723 11,837 3,304 Applicable income tax benefit (75) (250) (190) (Excess dividends from) equity in undistributed earnings of subsidiaries (2,753) (3,482) 4,157 - -------------------------------------------------------------------------- Net income $10,045 $ 8,605 $ 7,651 ========================================================================== (Dollars in Thousands) Year ended December 31, Statements of Cash Flows 1998 1997 1996 Cash flows from operating activities: - ------------------------------------- Net income $10,045 $ 8,605 $ 7,651 Adjustment to reconcile net income to cash provided by operations: Amortization and depreciation 223 230 208 Excess dividends from (equity in undistributed earnings of) subsidiaries 2,753 3,482 (4,157) Gain on securities transactions (517) Other, net 1,165 (48) (382) - -------------------------------------------------------------------------- Net cash provided by operating activities 13,669 12,269 3,320 ========================================================================== Cash flows from investing activities: - ------------------------------------- Proceeds from sales (purchases) of investment securities 693 (44) (199) Expenditures for premises and equipment (36) (33) (89) Investment in subsidiaries (9,819) (15,436) Repayment of capital note receivable from subsidiary 3,000 - -------------------------------------------------------------------------- Net cash used in investing activities (9,162) (12,513) (288) - -------------------------------------------------------------------------- Cash flows from financing activities: - ------------------------------------- Proceeds from long-term borrowings 3,000 Payments on long-term borrowings (300) (1,560) Purchase of treasury stock (2,059) (327) (332) Change in receivable from subsidiary (601) (268) 69 Proceeds from issuance of common stock 607 314 431 Cash dividends paid (2,538) (2,184) (1,934) - -------------------------------------------------------------------------- Net cash (used in) provided by financing activities (4,891) 535 (3,326) - -------------------------------------------------------------------------- Net (decrease) increase in cash (384) 291 (294) Cash and cash equivalents at the beginning of the year 550 259 553 - -------------------------------------------------------------------------- Cash and cash equivalents at the end of the year $ 166 $ 550 $ 259 ========================================================================== The parent company paid interest totaling $186,000, $217,000 and $118,000 during the years ended December 31, 1998, 1997, and 1996, respectively. 17. SUMMARIZED QUARTERLY INFORMATION (UNAUDITED): A summary of selected quarterly financial information for 1998 and 1997 follows: (Dollars in Thousands, except Per Share Data) 1998 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income $15,364 $15,735 $16,307 $16,239 Interest expense 7,320 7,531 7,921 7,725 Net interest income 8,044 8,204 8,386 8,514 Provision for possible loan losses 96 546 546 537 Investment securities gains (losses) 4 427 (13) Other income 1,618 1,590 1,647 1,965 Other expenses 5,414 5,444 6,400 6,018 Income taxes 1,180 1,431 978 1,151 Net income 2,376 2,800 2,096 2,773 Earnings per share: Basic 0.41 0.49 0.37 0.48 Diluted $ 0.40 $ 0.47 $ 0.36 $ 0.47 Average shares outstanding: Basic 5,746,684 5,754,541 5,741,362 5,737,102 Diluted 5,935,553 5,955,684 5,903,458 5,881,283 1997 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income $12,762 $13,122 $13,639 $14,313 Interest expense 5,918 6,106 6,443 6,749 Net interest income 6,844 7,016 7,196 7,564 Provision for possible loan losses 588 641 676 684 Investment securities (losses) gains (29) (2) 3 Other income 1,418 1,462 1,528 1,558 Other expenses 4,705 4,721 4,851 4,988 Income taxes 938 989 1,039 1,133 Net income 2,002 2,125 2,158 2,320 Earnings per share: Basic 0.39 0.41 0.42 0.44 Diluted $ 0.38 $ 0.40 $ 0.40 $ 0.42 Average shares outstanding: Basic 5,168,804 5,174,951 5,180,915 5,313,012 Diluted 5,292,567 5,329,832 5,361,400 5,513,401 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, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG, LLP Ernst & Young, LLP Charleston, West Virginia February 8, 1999 AVERAGE BALANCES AND ANALYSIS OF NET INTEREST INCOME ====================================================
(Dollars in Thousands) 1998 1997 1996 Average Average Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Securities (1): - --------------- Taxable $183,372 $11,671 6.36% $126,632 $ 8,636 6.82% $127,815 $ 8,655 6.77% Nontaxable (2) 34,653 2,677 7.72% 22,271 1,819 8.17% 22,621 1,906 8.42% Total 218,025 14,348 6.58% 148,903 10,455 7.02% 150,436 10,561 7.02% Loans (3) (4): Commercial 186,746 17,156 9.19% 145,971 13,939 9.55% 125,138 11,944 9.54% Real estate 234,141 20,176 8.62% 209,330 17,863 8.53% 172,367 14,322 8.31% Consumer 111,824 11,684 10.45% 112,928 11,739 10.40% 102,759 10,949 10.66% Valuation reserve (9,134) (7,521) (6,799) - -------------------------------------------------------------------------------------------------------------------------- Total 523,577 49,016 9.20% 460,708 43,541 9.30% 393,465 37,215 9.46% - -------------------------------------------------------------------------------------------------------------------------- Short-term Investments: - ----------------------- Interest-bearing deposits 3,967 222 5.60% 1,713 93 5.41% 622 29 4.64% Federal funds sold 20,671 1,104 5.34% 7,915 437 5.52% 5,900 315 5.35% - -------------------------------------------------------------------------------------------------------------------------- Total 24,638 1,326 5.38% 9,628 530 5.50% 6,522 344 5.28% - -------------------------------------------------------------------------------------------------------------------------- Total earning assets 766,240 64,690 8.45% 619,239 54,526 8.81% 550,423 48,120 8.74% Other assets 65,056 48,260 42,021 -------- -------- -------- Total assets $831,296 $667,499 $592,444 -------- -------- -------- Deposits: - --------- Savings $ 97,262 $ 2,764 2.84% $ 83,342 $ 2,552 3.06% $ 75,805 $ 2,302 3.04% Interest-bearing demand 168,035 6,002 3.57% 126,462 4,372 3.46% 111,376 3,656 3.28% Time 321,920 17,284 5.37% 277,559 15,358 5.53% 234,550 12,922 5.51% - -------------------------------------------------------------------------------------------------------------------------- Total 587,217 26,050 4.44% 487,363 22,282 4.57% 421,731 18,880 4.48% - -------------------------------------------------------------------------------------------------------------------------- Borrowed Funds: - --------------- Short-term 44,959 2,242 4.99% 22,463 1,023 4.55% 29,965 1,449 4.84% Long-term 38,885 2,205 5.67% 30,495 1,911 6.27% 26,692 1,637 6.13% - -------------------------------------------------------------------------------------------------------------------------- Total 83,844 4,447 5.30% 52,958 2,934 5.54% 56,657 3,086 5.45% - -------------------------------------------------------------------------------------------------------------------------- Total interest- bearing liabilities 671,061 30,497 4.54% 540,321 25,216 4.67% 478,388 21,966 4.59% - -------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing demand deposits 70,064 59,860 54,923 Other liabilities 7,904 7,248 6,114 ------- ------- ------- Total liabilities 749,029 607,429 539,425 Stockholders' equity 82,267 60,070 53,019 ------- ------- ------- Total liabilities and stockholders' equity $831,296 $667,499 $592,444 ------- ------- ------- Interest rate spread $34,193 3.91% $29,310 4.14% $26,154 4.15% ------- ----- ------- ----- ------- ----- Interest income/earning assets 8.45% 8.81% 8.74% Interest expense/earning assets 3.98% 4.07% 3.99% ----- ----- ----- Net yield on earning assets (net interest margin) 4.47% 4.74% 4.75% ===== ===== ===== (F1) Average balances of investment securities based on carrying value. (F2) Computed on a fully tax equivalent basis using a tax rate of 35% in 1998 and 1997 and 34% in 1996. Interest income was increased by $1,045,000, $690,000 and $723,000 for 1998, 1997, and 1996, respectively. (F3) Nonaccrual and impaired loans are included in the average balances listed. Related interest income on nonaccrual loans prior to the loan being put on nonaccrual is included in loan interest income. (F4) Loan fees included in interest income for 1998, 1997 and 1996 were $551,000, $542,000 and $460,000, respectively.
RATE VOLUME ANALYSIS/MATURITIES TABLES ======================================
(Dollars in Thousands) Change in Income/Expense (1) Rate Effect Volume Effect 1998 1997 1996 1998 1997 1996 1998 1997 1996 Investment income: (2) Taxable $ 3,035 $ (19) $ 1,988 $ (609) $ 61 $ (237) $ 3,644 $ (80) $ 2,225 Nontaxable 858 (87) (211) (103) (58) (112) 961 (29) (99) - ---------------------------------------------------------------------------------------------------------- Total 3,893 (106) 1,777 (712) 3 (349) 4,605 (109) 2,126 - ---------------------------------------------------------------------------------------------------------- Loan Income: Commercial 3,217 1,995 674 (547) 6 (397) 3,764 1,989 1,071 Real estate 2,313 3,541 659 177 396 (672) 2,136 3,145 1,331 Consumer (55) 790 1,644 67 (256) 1,028 (122) 1,046 616 - ---------------------------------------------------------------------------------------------------------- Total 5,475 6,326 2,977 (303) 146 (41) 5,778 6,180 3,018 - ---------------------------------------------------------------------------------------------------------- Short-term investments 796 186 (467) (12) 17 (75) 808 169 (392) - ---------------------------------------------------------------------------------------------------------- Total interest income 10,164 6,406 4,287 (1,027) 166 (465) 11,191 6,240 4,752 ========================================================================================================== Interest expense: Savings 212 250 (5) (193) 19 (226) 405 231 221 Interest-bearing demand deposits 1,630 716 428 149 202 (208) 1,481 514 636 Time 1,926 2,436 73 (3,570) 2,831 (583) 5,496 (395) 656 Short-term borrowings 1,219 ( 426) 398 106 (80) (182) 1,113 (346) 580 Long-term borrowings 294 274 295 (195) 36 240 489 238 55 - ---------------------------------------------------------------------------------------------------------- Total interest expense 5,281 3,250 1,189 (3,703) 3,008 (959) 8,984 242 2,148 - ---------------------------------------------------------------------------------------------------------- $ 4,883 $ 3,156 $ 3,098$ 2,676 $(2,842) $ 494 $ 2,207 $ 5,998 $ 2,604 ========================================================================================================== (F1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the dollar amounts of the change in each. (F2) Presented on a fully tax equivalent basis.
LOAN MATURITIES AT DECEMBER 31, 1998 ==================================== Due in One Year Due Due in Through After Loan Type One Year Five Five Total Or Less Years Years Commercial loans: Fixed $ 19,588 $ 28,960 $ 11,996 $ 60,544 Variable 56,503 32,154 63,333 151,990 - ----------------------------------------------------------------------------- 76,091 61,114 75,329 212,534 ============================================================================= Real estate loans: - ------------------ Fixed 9,038 29,105 40,025 78,168 Variable 32,046 81,136 52,502 165,684 - ----------------------------------------------------------------------------- 41,084 110,241 92,527 243,852 ============================================================================= Consumer loans: - --------------- Fixed 42,404 57,786 1,626 101,816 Variable 8,198 1,234 283 9,715 - ----------------------------------------------------------------------------- 50,602 59,020 1,909 111,531 ============================================================================= Total $ 167,777 $ 230,375 $ 169,765 $ 567,917 ============================================================================= MATURITIES OF CERTIFICATES OF DEPOSIT $100,000 AND OVER AT DECEMBER 31: ======================================================================= 1998 1997 1996 1995 Under 3 months $ 19,121 $ 13,302 $ 16,437 $ 18,662 3 to 6 months 34,636 24,069 8,279 9,319 6 to 12 months 9,189 9,520 10,309 5,140 Over 12 months 9,262 10,698 8,356 8,266 - -------------------------------------------------------------------- Total $ 72,208 $ 57,589 $ 43,381 $ 41,387 ==================================================================== LOAN PORTFOLIO ANALYSIS ======================= (Dollars in Thousands) 1998 1997 1996 1995 1994 Year-end balances: - ------------------ Commercial, financial and agricultural $212,530 $159,035 $127,927 $117,306 $117,015 Real estate 233,550 228,689 175,505 154,469 150,289 Real estate, construction 10,307 19,513 9,944 5,919 2,528 Consumer 104,718 107,158 102,044 95,464 86,098 Credit card 6,812 7,175 6,993 6,368 5,423 - ----------------------------------------------------------------------------- Total $567,917 $521,570 $422,413 $379,526 $361,353 ============================================================================= Average total loans 532,711 468,229 400,264 367,222 337,500 Average allowance for loan losses (9,134) (7,521) (6,799) (6,719) (6,680) - ----------------------------------------------------------------------------- Average loans, net of allowance $523,577 $460,708 $393,465 $360,503 $330,820 ============================================================================= Allowance for loan losses, January 1 $ 8,356 $ 6,873 $ 6,726 $ 6,783 $ 6,370 Allowance for loan losses acquired 290 Loans charged off: - ------------------ Commercial, financial and agricultural 101 354 342 256 39 Real estate 46 42 93 82 189 Consumer 1,220 1,258 1,726 1,352 842 Credit card 278 263 168 113 54 - ----------------------------------------------------------------------------- Total 1,645 1,917 2,329 1,803 1,124 - ----------------------------------------------------------------------------- Recoveries: - ----------- Commercial, financial and agricultural 55 124 36 111 392 Real estate 13 6 75 60 61 Consumer 378 374 391 251 304 Credit card 27 17 9 9 15 - ----------------------------------------------------------------------------- Total 473 521 511 431 772 - ----------------------------------------------------------------------------- Net chargeoffs: - --------------- Commercial, financial and agricultural 46 230 306 145 (353) Real estate 33 36 18 22 128 Consumer 842 884 1,335 1,101 538 Credit card 251 246 159 104 39 - ----------------------------------------------------------------------------- Total 1,172 1,396 1,818 1,372 352 - ----------------------------------------------------------------------------- Provision for loan losses, December 31 2,325 2,589 1,965 1,315 765 - ----------------------------------------------------------------------------- Allowance for loan losses, December 31 $ 9,509 $ 8,356 $ 6,873 $ 6,726 $ 6,783 ============================================================================= Allocation of allowance for loan losses at December 31: - ------------------------------------------------------- Commercial $ 3,757 $ 3,147 $ 2,741 $ 3,440 $ 3,281 Real estate 1,453 1,478 1,050 1,517 1,828 Consumer 2,556 2,255 2,078 1,519 1,096 Credit card 628 395 131 100 89 Unallocated 1,115 1,081 873 150 489 - ----------------------------------------------------------------------------- Total $ 9,509 $ 8,356 $ 6,873 $ 6,726 $ 6,783 ============================================================================= Percent of loans to total loans at December 31: - ----------------------------------------------- Commercial 37.4% 30.5% 30.3% 30.9% 32.4% Real estate 41.1 43.8 41.5 40.7 41.6 Real estate, construction 1.9 3.8 2.3 1.5 0.7 Consumer 18.4 20.5 24.2 25.2 23.8 Credit card 1.2 1.4 1.7 1.7 1.5 - ----------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ============================================================================= Ratio of net chargeoffs to average total loans: - ----------------------------------------------- Commercial 0.01% 0.05% 0.08% 0.04% (0.11)% Real estate 0.01 0.01 0.00 0.01 0.04 Consumer 0.16 0.19 0.33 0.30 0.16 Credit card 0.04 0.05 0.04 0.02 0.01 - ----------------------------------------------------------------------------- Total 0.22% 0.30% 0.45% 0.37% 0.10% ============================================================================= Nonperforming loans: - -------------------- Nonaccrual loans $ 687 $ 1,220 $ 999 $ 482 $ 902 Loans 90+ days past due 495 462 621 1,236 1,082 Other real estate owned 396 19 28 45 97 - ----------------------------------------------------------------------------- Total $1,578 $ 1,701 $ 1,648 $ 1,763 $ 2,081 ============================================================================= Nonperforming loans as a percent of total loans 0.28% 0.33% 0.39% 0.46% 0.58% ============================================================================= Interest income on nonaccrual loans which would have been recorded under the original terms of the loans for 1998, 1997 and 1996 was $33,000 (of which $5,000 was actually recorded), $41,000 (of which $5,000 was actually recorded) and $78,000 (of which $11,000 was actually recorded), respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS ==================================== INTRODUCTION - ------------ The following discussion and analysis of the consolidated financial statements is presented to provide insight into management's assessment of the financial results of Peoples Bancorp Inc. (the "Company"). It also recaps the significant events that led to the results. The Company's business activities are currently confined to one operating segment which is community banking. The Company's subsidiaries, The Peoples Banking and Trust Company ("Peoples Bank"), The First National Bank of Southeastern Ohio ("First National"), Peoples Bank FSB, and The Northwest Territory Life Insurance Company, provide financial services to individuals and businesses within the Company's market area. Peoples Bank is chartered by the State of Ohio and subject to regulation, supervision, and examination by the Federal Deposit Insurance Corporation ("FDIC") and the Ohio Division of Banks. First National is a member of the Federal Reserve System and subject to regulation, supervision, and examination by the Office of the Comptroller of the Currency. Peoples Bank FSB is a member of the Federal Home Loan Bank, and is subject to regulation, supervision, and examination by the Office of Thrift Supervision, and is also subject to limited regulation by the Board of Governors of the Federal Reserve System. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and footnotes and the ratios, statistics, and discussions contained elsewhere in this Annual Report. The following text will include references to several acquisition transactions that have affected or will affect the Company's results of operations. On December 12, 1997, the Company completed the purchase of Gateway Bancorp, Inc. and its subsidiary, Catlettsburg Federal Savings Bank ("Catlettsburg Federal"), of Catlettsburg, Kentucky, for approximately $21.6 million in a combination of cash of $6.2 million and 548,208 shares of Company stock ("Gateway Bancorp Acquisition"). Catlettsburg Federal had total assets of $64.3 million and deposits of $43.8 million at December 12, 1997. Management operated Catlettsburg Federal as a federal savings bank subsidiary of the Company until December 31, 1998, when it merged Catlettsburg Federal and Russell Federal Savings Bank ("Russell Federal") into a single thrift and renamed the company "Peoples Bank FSB". On June 26, 1998, Peoples Bank completed the purchase of four full-service banking offices located in the communities of Point Pleasant (two offices), New Martinsville, and Steelton, West Virginia ("West Virginia Banking Center Acquisition") from an unaffiliated institution. In the transaction, Peoples Bank assumed approximately $121.0 million of deposits and purchased $8.3 million in loans. OVERVIEW OF THE INCOME STATEMENT - -------------------------------- The Company had increased net income of $1,440,000 or 16.7%, to $10,045,000 in 1998 from $8,605,000 in 1997. On a diluted basis, earnings per share reached $1.70 in 1998, up $0.10 (or 6.3%) compared to the previous year. The Company's core earnings increased due to stronger earnings in existing business units and additional revenue streams associated with recent acquisitions. Return on average equity in 1998 totaled 12.21% compared to 14.33% in 1997. Return on average assets was 1.20% in 1998 compared to 1.29% the previous year. Due primarily to earning asset growth, net interest income in 1998 increased $4,528,000 (or 15.8%) to $33,148,000. The provision for loan losses in 1998 was comparable to the 1997 amount and reflective of the quality of the portfolio and management of the inherent credit risks therein. Bolstered by strong fourth quarter performance, non-interest income increased $854,000 (or 14.3%) to $6,820,000. In 1998, the Company reported net gains on securities transactions of $418,000 compared to nominal losses in 1997. Non-interest expense increased $4,011,000 (or 20.8%) to $23,276,000 due to a combination of costs related to market expansion and acquisition, as well as expenses related to refinancing of long-term debt. After considering one-time charges, the Company's efficiency ratio improved to 50.38% for the year ended December 31, 1998, compared to 51.06% in 1997. The Company continues to grow through purchase acquisitions. While acquisitions using stock are continually evaluated, management is cognizant of not diluting shareholder ownership merely for the sake of growth. Management believes a comparative approach to financial reporting should include the discussion of "cash earnings", which removes the after-tax impact of the amortization of intangibles on the Company's results of operations and facilitates comparison of the Company with competitors making acquisitions using pooling of interests accounting. The Company has supplemented and will continue to supplement the discussion of its results of operations with an analysis of cash earnings. Management uses cash earnings as one of several ways to evaluate the impact of acquisitions on profitability and the Company's return on its investment. Recent acquisitions have increased and will modestly increase 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 1998, intangible amortization expense totaled $2,093,000 ($1,360,000 after taxes) compared to $1,138,000 ($740,000 after taxes) last year. After adjusting for the after-tax effect of the amortization of intangibles, diluted cash earnings per share for the year ended December 31, 1998 was $1.95, up $0.21 (or 12.1%) from $1.74 in diluted cash earnings per share in 1997. Return on tangible assets was 1.41% in 1998 compared to 1.42% in 1997. Return on tangible equity dropped to 17.82% in 1998 compared to 18.00% last year. INTEREST INCOME AND EXPENSE - --------------------------- Net interest income is the amount by which interest income on earning assets exceeds interest paid on interest-bearing liabilities. Interest earning assets include loans and investment securities. Interest-bearing liabilities include interest-bearing deposits and borrowed funds such as Federal Home Loan Bank ("FHLB") borrowings. Net interest income remains the primary source of revenue for the Company. Changes in market interest rates, as well as adjustments in the mix of interest-earning assets and interest- bearing liabilities, impact net interest income. When compared to the previous year, increased operating earnings in 1998 can be attributed primarily to growth of the Company's net interest income. The West Virginia Banking Center Acquisition and the Gateway Bancorp Acquisition provided increased funding sources for the Company to grow its earning asset base, generating incremental interest income streams. As a result, net interest income grew significantly in 1998, up $4,528,000 (or 15.8%) to $33,148,000 compared to 1997. Total interest income reached $63,645,000 while interest expense totaled $30,497,000. Included in interest income is $1,967,000 of tax-exempt income from investments issued by and loans made to states and political subdivisions. Since these revenues are not taxed, it is more meaningful to analyze net interest income on a fully-tax equivalent ("FTE") basis. Net interest margin is calculated by dividing FTE net interest income by average interest-earning assets and serves as a measurement of the net revenue stream generated by the Company's balance sheet. In 1998, net interest margin was 4.47% compared to 1997's ratio of 4.74%. The FTE yield on earning assets was 8.45% in 1998, compared to 8.81% in 1997. The cost of earning assets decreased 9 basis points to 3.98% in 1998. In late 1998, the Federal Reserve Board modestly decreased the discount rate and, as a result, the national prime rate decreased 25 basis points. The Company adjusted its loan and deposit rates downward to reflect the decrease in the national prime rate. This rate adjustment, combined with the "flat" yield curve (i.e. little or no difference in short-term and long-term interest rates) in effect for interest rates in general, combined to produce decreased net interest margins for the Company in 1998. Several other factors also contributed to net interest margin compression. The deposits acquired in the West Virginia Banking Center Acquisition significantly increased the Company's earning asset base in comparatively lower-yielding assets such as federal funds sold. In 1998, average balances in federal funds sold were $20.7 million, up $12.8 million compared to 1997. By the end of 1998, the Company had redeployed recently acquired funds to an earning asset mix that had a more appropriate balance of profitability, risk, and characteristics similar in nature to the Company's allocation before the West Virginia Banking Center Acquisition. Net interest margin also decreased due to competitive pressures for loans and deposits in the Company's markets. In addition, the recent thrift acquisitions modestly changed the Company's earning asset mix and lowered margins, due to the fact the Company's thrifts have primarily invested in real estate loans, which typically do not generate return on investment like other loan products such as commercial and personal loans. In late 1998, the Company initiated actions designed to enhance net interest income, margin and other performance ratios. The Company prepaid $20.3 million of its long-term FHLB borrowings at a one time cost of $402,000 ($261,000 after tax). The average rate on these advances was 6.13% with a weighted average maturity of approximately 7 years. The Company replaced these borrowings with $20 million of FHLB advances with a one year weighted average cost of 4.28%. At the FHLB's option, the product may reprice to a LIBOR-based ("London Interbank Offer Rate") rate. Management estimates that, absent other changes, the one time cost of refinancing will be recovered in approximately two years. Recent declines in interest rates decreased yields on the Company's variable rate assets such as federal funds sold, as well as the rates on deposit products offered by the Company. The prepayment of certain long-term FHLB borrowings should partially offset the recent decreases in discount rates being paid by the Federal Reserve. Average loans grew $62.8 million (or 13.7%) in 1998 and comprise the largest earning asset component on the Company's balance sheet. Due to recent acquisitions and resulting increases in funding sources, the Company's average balances of investment securities increased $69.1 million from $148.9 million in 1997 to $218.0 million in 1998. Management is continuously evaluating alternative investment and loan products to maximize return at an appropriate level of risk. Yield on earning assets totaled 8.45% in 1998, compared to 8.81% the prior year. Loan yields decreased to 9.21% in 1998 compared to 9.30% in 1997. Net interest margin was negatively impacted by decreases in the Company's investment portfolio yield, which dropped 44 basis points to 6.58% in 1998, reflecting the reinvestment of higher-yielding, maturing investments into lower-yielding instruments. Compared to 1997, cost of interest-bearing liabilities decreased 13 basis points to 4.54% in 1998. Deposit costs decreased due to a combination of lowering time deposit rates, the acquisition of lower interest cost funding sources from the West Virginia Banking Center Acquisition, and the implementation of regional pricing in selected markets served by the Company. Interest costs on the Company's array of traditional interest-bearing deposit products decreased 13 basis points to 4.44% in 1998 compared to the previous year. The most significant component of interest expense in 1998 was interest paid on time deposits (i.e. Certificates of Deposits and Individual Retirement Accounts). In 1998, the Company paid interest of $17,285,000, or 5.37%, on average time deposit balances of $321.9 million. In 1997, the average rate paid was 5.53% on average time deposit balances of $277.6 million. Growth in this type of funding source was generated primarily from acquisitions. This combination increased interest expense costs by $715,000. Management expects deposit pricing to be increasingly competitive in 1999 and will continue to focus its efforts to increase balances in non-interest bearing demand deposits, which grew $10.2 million to $70.1 million in average balances in 1998. In 1998, the Company continued to use a combination of short-term and long-term borrowings as a funding source. The Company's cash management services (offered to a variety of business customers) have provided short-term funding, specifically overnight repurchase agreements. In 1998, the Company's average balances of overnight repurchase agreements increased $11.4 million to $31.4 million, due primarily to growth in balances from existing customers and increased market penetration. Due to product redesign of the Company's overnight repurchase agreements, the average rate paid in 1998 on overnight repurchase agreements totaled 4.70%, up 29 basis points from the prior year's average rate of 4.40%. In 1998, the Company used short-term FHLB advances as a funding source for a pre-investment strategy related to the West Virginia Banking Center Acquisition. As a direct result, average short-term FHLB balances increased to $12.5 million in 1998, compared to $2.0 million in 1997, causing interest costs to increase to $712,000 (up from $117,000 last year). In 1998, the average interest rate on short-term FHLB advances was 5.68% compared to 5.78% in 1997. Management plans to maintain access to short-term FHLB borrowings as an appropriate funding source. Long-term borrowing costs decreased compared to last year due to flattening of the yield curve. The rate paid on average long-term borrowings totaled 5.67% in 1998, down 60 basis points compared to 6.27% in 1997. The majority of the Company's long-term borrowings are fixed rate FHLB borrowings. The growth of the Company's earning asset base through recent acquisitions will continue to impact net interest margin in 1999. Although net interest margin compression has recently stabilized, management expects interest rate pressures will continue to challenge the Company in 1999 as financial institutions and other competitors continue to search for new methods and products to satisfy increasing customer demand for higher yielding interest-bearing deposits. Management will continue to monitor the effects of net interest margin on the performance of the Company. Please refer to the "Consolidated Average Balance Sheet and Analysis of Net Interest Income" table included on page 34 for a complete quantitative evaluation of the Company's net interest margin. PROVISION FOR LOAN LOSSES - ------------------------- In 1998, the Company recorded a provision for loan losses of $2,325,000, compared to 1997's expense of $2,589,000. The provision is based upon management's continuing evaluation of the adequacy of the allowance for loan losses and is reflective of the quality of the portfolio and overall management of the inherit credit risk. Management expects modest internal loan growth in 1999 and believes that 1999's provision expense will remain approximately level with the 1998 provision. The duration of current provision levels will be dependent on loan delinquencies, portfolio risk, overall loan growth, and general economic conditions in the Company's markets. 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 insurance commissions. Non-interest income (excluding securities transactions) from operations reached record levels in 1998, totaling $6,820,000, an increase of 14.3% compared to 1997. All non-interest income categories had strong growth compared to last year. Management continues to focus on non-interest income as a primary source of cost-recovery. In 1998, account service charge income related to deposits increased $351,000 (or 15.9%) to $2,553,000. Several factors contributed to this growth, including the West Virginia Banking Center Acquisition and its associated $121 million in deposits, which provided the base for increased fee income in the last six months of 1998. Approximately $255,000 (or 72.6%) of the Company's increase can be directly attributed to the deposits acquired in the West Virginia Banking Center Acquisition. The Company's fee income generated from deposits is based on the cost associated with relevant services provided. The fee structure for investment and fiduciary activities is based primarily on the market value of assets being managed, which totaled approximately $535 million at year-end 1998, up approximately $30 million from the previous year-end. Income from fiduciary activities totaled $2,325,000, an increase of 6.8% compared to 1997. The Company continues to build on its leadership position in its markets and investment and fiduciary services will be a significant contributor to the Company's non-interest income streams. Electronic banking, including ATM cards, direct deposit services, and debit card services, is one of the many product lines offered by the Company. The recovery of costs through fees associated with these products and services is beginning to significantly impact the Company's non-interest income. For the year ended December 31, 1998, total fees related to electronic banking reached $596,000, up $120,000 (or 25.3%) compared to the same period last year. These increases are primarily due to revenues related to the Company's growing debit card program as well as non-customer activity in the Company's network of ATM's, which has caused a corresponding increase in ATM-related revenues. In addition to traditional sources of non-interest income, the Company also has the capability to provide customer service through a complete line of insurance products. The Company's insurance subsidiaries, Northwest Territory Life Insurance Agency, Inc. and Northwest Territory Property and Casualty Insurance Agency, Inc. (the "Agencies"), which are part of First National Bank, provide full life and property insurance product lines to consumers in Ohio. In August 1998, these agencies were licensed by Ohio-based Motorists Mutual Insurance Company, MICO Insurance Company, and Motorists Life Insurance Company ("Motorists"). The Agencies offer a complete line of life and property and casualty products through Motorists, as well as investment products through Marketing One Securities, Inc. Commissions on insurance and securities operations generated revenues of $430,000 in 1998, up $91,000 (or 27.0%) compared to 1997, representing the Company's largest percentage non-interest income increase. Management will continue to explore new methods of enhancing non-interest income in the future. Both traditional and nontraditional financial service products are being analyzed for inclusion in the product mix currently being offered by the Company. GAINS (LOSSES) ON SECURITIES TRANSACTIONS - ----------------------------------------- In 1998, the Company recognized net gains on securities activity of $418,000 ($272,000 after taxes, or $0.05 per share), compared to a net loss on securities transactions of $28,000 a year earlier. For the year ended December 31, 1998, the Company had gains of $523,000, of which $516,000 related to an equity investment in a company that was acquired in a merger transaction. The Company reported losses on sales of securities of $105,000 from repositioning of the investment portfolio. Management does not expect similar gains or losses in 1999. NON-INTEREST EXPENSE - -------------------- Several categories within non-interest expense were directly impacted by recent acquisitions and the related growth of non-interest expenses such as salaries and benefits, depreciation expense, intangible amortization, etc. Maintaining acceptable levels of non-interest expense and operating efficiency are key performance indicators for the Company in its strategic initiatives. For the year ended December 31, 1998, non-interest expense totaled $23,276,000, up $4,011,000 (or 20.8%) compared to 1997. When comparing 1998 non-interest expense to 1997, it is important to consider the non-interest expense related to recent acquisitions. Acquisitions, and the related salaries and employee benefits and increased depreciation expense, comprise the majority of the increase in non-interest expense in 1998. Non-operational items also contributed to the increase in non-interest expense. In particular, amortization of intangibles totaled $2,093,000 (up $955,000) compared to $1,138,000 in 1997. This increase is due to completion in 1998 of the West Virginia Banking Center Acquisition as well as amortization expense related to December 1997's Gateway Bancorp Acquisition. The Company considers the impact of intangible amortization when evaluating potential acquisitions. The Company's recent acquisitions also impacted non-interest expense in other areas, as the Company continues to expand its services and geographic areas served. Compared to 1997, salaries and benefits expense increased $957,000 (or 11.4%) to $9,315,000 in 1998. Recent acquisitions have increased the number of Company employees, primarily customer service associates in the acquired offices. At December 31, 1998, the Company had 362 full-time equivalent employees, compared to 314 full-time equivalent employees at year-end 1997. While salaries and benefit expense has increased on a gross comparison basis due to the many customer service associates retained in the West Virginia Banking Center acquisition and other recent acquisitions, management believes the human resources obtained in recent acquisitions will enable the Company to further penetrate its new markets, thereby optimizing customer service and return to shareholders. Net occupancy expense, depreciation in particular, was impacted by recent acquisitions. In 1998, furniture and equipment expenses totaled $1,728,000, up $227,000 (or 15.1%) compared to 1997. Net occupancy expense totaled $1,597,000 in 1998, an increase of $300,000 (or 23.1%) compared to the previous year. These increases can be attributed primarily to the depreciation of the assets purchased in recent acquisitions (in particular the West Virginia Banking Center Acquisition), and completion of construction projects to full-service offices in Athens and Caldwell, Ohio; Ashland, Kentucky; and Parkersburg, West Virginia. Management believes the increased investment in these offices enhances customer service capabilities in those markets, and will provide additional opportunities for increased market penetration. Increases are also due to growth in depreciation of additional expenditures on technology. The Company's increased investment in technology and other customer-service enhancements will also impact depreciation expense in the future. Included in non-interest expense for year ended December 31, 1998, were one time expenses that management excludes from its assessment of operational efficiency. In late 1998, the Company prepaid approximately $20.3 million of FHLB borrowings to enhance net interest income, margin and other performance ratios, at a cost of $402,000 ($261,000 after taxes). In addition, the Company incurred $169,000 ($110,000 after taxes) of one time expense related to the conversion of the West Virginia Banking Centers. Expenses included purchase of new checks for the customers assumed in the West Virginia Banking Center Acquisitions, education of new associates, operational costs related to clearing items, telecommunications expense, etc. Also included in the $169,000 of nonrecurring expense were one-time costs related to market expansion in Parkersburg, West Virginia. The Company and financial services industry use the efficiency ratio (total non-interest expense less amortization of intangibles and nonrecurring items as a percentage of the aggregate of fully-tax equivalent net interest income and non-interest income) as a key indicator of performance. Gains and losses on sales of investment securities and other nonrecurring and/or one-time charges are not included in the calculation of the Company's efficiency ratio. In 1998, the Company reported an efficiency ratio of 50.38%, an improvement of 68 basis points compared to 1997's 51.06%. Management expects the efficiency ratio to continue to improve modestly in 1999 due to recent strategic initiatives to leverage non-interest expense associated with market expansion. RETURN ON ASSETS - ---------------- For the year ended December 31, 1998, return on average assets ("ROA") was 1.20%, compared to 1.29% in 1997. Increased income streams from recent acquisitions were offset by amortization of intangibles assumed in such purchases, resulting in lower ROA levels compared to previous periods. The Company's recent thrift acquisitions also affected ROA. In general, the thrift industry has historically performed at lower ROA levels than commercial banks. The Company's ROA was challenged in 1998 due to the West Virginia Banking Center Acquisition and the Gateway Bancorp Acquisition, and its corresponding impact to the Company's balance sheet. Due primarily to recent acquisitions, the Company's average assets grew approximately $164 million to over $830 million for the year ended December 31, 1998, while net income did not proportionately increase. In late 1998, the Company successfully employed recently acquired funds to an asset mix similar to the Company's mix before the West Virginia Banking Center Acquisition, in a manner consistent with acceptable return on investment. Management anticipates ROA will stabilize in 1999 and could be enhanced as the Company continues to shift the acquired funds into higher-yielding assets such as loans. RETURN ON EQUITY - ---------------- The Company's return on average stockholders' equity ("ROE") was 12.21% in 1998 compared to 14.33% in 1997. ROE decreased in 1998 primarily due to issuance of approximately $15.35 million of capital stock (548,208 shares) for the purchase of Gateway Bancorp, Inc. in December, 1997. As a result, the increase in total equity had a significant impact on ROE for the year ended December 31, 1998. Management expects ROE in 1999 to improve as the Company continues to leverage the additional capital issued in the Gateway Bancorp Acquisition. The Company and its banking subsidiaries are considered well-capitalized under regulatory and industry standards of risk-based capital (as discussed in Note 12 of the Notes to the Company's Consolidated Financial Statements) and has experienced growth through retention of increased earnings over the last several quarters. INCOME TAX EXPENSE - ------------------ Federal income taxes increased from $4,099,000 in 1997 to $4,740,000 in 1998. The Company's effective tax rate for 1998 was 32.1%, compared to 32.3% in 1997. The modest decrease can be attributed to increases in tax-exempt income compared to the prior year. Management continues to explore new methods of reducing the Company's overall tax burden and has finalized an investment that should help manage the Company's tax burden. OVERVIEW OF THE BALANCE SHEET - ----------------------------- Total assets reached $880.3 million at December 31, 1998, up $122.1 million compared to year-end 1997. Asset growth can be attributed primarily to the assets and liabilities acquired in the West Virginia Banking Center Acquisition. Net cash received in the West Virginia Banking Center Acquisition was redeployed primarily into investment securities, which increased $61.3 million (or 35.2%) from year-end 1997 to $235.6 million at December 31, 1998. Loan demand in the Company's established markets, loans acquired through the West Virginia Banking Center Acquisition, and loans purchased from external sources combined to increase loan balances $45.2 million (or 8.8%) to $558.4 million at year-end 1998. Loan growth occurred primarily in the commercial loan area. Total liabilities increased $114.9 million (or 16.9%) to $794.3 million at December 31, 1998. The majority of this growth occurred in the Company's total deposits, which increased $103.1 million (or 16.9%) to $714.2 million at December 31, 1998. Growth of the Company's funding sources occurred primarily due to funds acquired in the West Virginia Banking Center Acquisition. Increases in deposits for the Company occurred primarily in interest-bearing deposits, while non-interest bearing deposit balances grew $16.7 million (or 25.9%) to $80.9 million. Short-term borrowings totaled $32.5 million at December 31, 1998, a modest decrease from the previous year-end. Long-term borrowings, comprised primarily of FHLB borrowings with maturities greater than one year, increased $12.1 million (or 42.3%) to $40.7 million at December 31, 1998, due to strategic initiatives designed to leverage Peoples Bank FSB's strong equity position. Stockholders' equity increased $7.2 million (or 9.1%) to $86.0 million at December 31, 1998. Equity growth occurred primarily through retention of earnings, as well as increases in the Company's net unrealized gain on available for sale securities. At December 31, 1998, the Company had a treasury stock balance of 52,031 shares, or $1.8 million, due to purchases in 1998 and the adoption of a deferred compensation plan that permits the Company's directors to purchase the Company's stock through an established trust. At December 31, 1997, the Company had no treasury shares. Stockholders' equity as a percent of total assets was 9.77% at year-end 1998, down from 10.40% at December 31, 1997, as the Company leveraged its capital base through the West Virginia Banking Center Acquisition. Please see the Consolidated Statements of Stockholders' Equity found on page 14 in this Report for additional information regarding the changes in stockholders' equity. CASH AND CASH EQUIVALENTS - ------------------------- The Company's cash and cash equivalents totaled $40.1 million at December 31, 1998, an increase of $1.3 million compared to year-end 1997. The Company's balances of cash and cash equivalents, particularly federal funds sold, were higher than normal during the last six months of 1998 due to excess funds acquired in the West Virginia Banking Center Acquisition. By year-end 1998, the Company had successfully employed those excess funds into higher-yielding assets such as loans and investments. Management believes the current balance of cash and cash equivalents adequately serves the Company's liquidity and performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity needs. Management believes the liquidity needs of the Company are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that mature within one year. These sources of funds should enable the Company to meet cash obligations and off-balance sheet commitments as they come due. INVESTMENT SECURITIES - --------------------- Investment securities totaled $235.6 million at year-end 1998, up $61.3 million (or 35.2%) compared to December 31, 1997. Growth was funded in 1998 primarily by the deposits acquired in the West Virginia Banking Center Acquisition. 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, 1998, the amortized cost of the Company's investment securities totaled $230.0 million, resulting in unrealized appreciation in the investment portfolio of $5.5 million and a corresponding increase in the Company's equity of $3.6 million. As a direct result of growth in funding sources in recent periods, several categories of investments within the portfolio have experienced significant growth. Investments in mortgage-backed securities increased $28.4 million (or 37.1%) to $104.8 million at December 31, 1998. Due primarily to investments in trust preferred securities with attractive yields, investments in corporate and other securities totaled $35.0 million, up $14.8 million (or 73.4%) since December 31, 1997. Investments in obligations of states and political subdivisions totaled $45.5 million at year-end 1998, an increase of $19.8 million (or 77.1%) since year-end 1997. The Company's balances in US Treasury securities and obligations of US government agencies and corporations remained relatively unchanged since year-end 1997. Management expects current balances of investment securities to modestly shrink in 1999 due to anticipated 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. Management believes the risk characteristics inherent in the investment portfolio are acceptable based on these parameters. LOANS - ----- The Company's lending is primarily focused in central and southeastern Ohio, northern West Virginia, and northeastern Kentucky markets, and consists principally of retail lending, which includes single-family residential mortgages and other consumer lending. Loans totaled $567.9 million at December 31, 1998, an increase of $46.3 million (or 8.9%) compared to year-end 1997. Growth occurred internally in the Company's existing markets and also from other sources, such as $8.3 million of loans purchased in the West Virginia Banking Center Acquisition and $11.8 million of commercial loans purchased from an unrelated financial institution in the fourth quarter of 1998. Real estate loans to the Company's retail customers continue to be the largest portion of the loan portfolio, comprising 41.1% of the Company's total loan portfolio. Real estate mortgage loans totaled $233.6 million at December 31, 1998, up $4.9 million (or 2.1%) since year-end 1997. As the Company blends its recent acquisitions into its core operations, certain changes in loan mix will naturally occur. The Company experienced growth in the home equity credit lines ("Equilines"). At December 31, 1998, Equiline balances totaled $20.3 million, up $3.2 million (or 18.7%) since year-end 1997. The Company's Equiline growth was due primarily to special fixed Equiline rate offers in its markets. Management believes the Equiline product is a competitive product with an acceptable return on investment, after risk considerations. Residential real estate lending continues to represent a significant focus of the lending activities due to the lower risk factors associated with these types of loans and the opportunity to provide additional products and services to these consumers at attractive combined returns. Lending activity in the Company's northeastern Kentucky markets has historically centered on real estate loans. Management expects to continue to penetrate those local markets in 1999, seeking opportunities to sell additional lending and deposit products. 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 loan growth category for the Company in 1998 was commercial, financial, and agricultural loans ("commercial loans"), which increased $53.5 million (or 33.6%) to $212.5 million. Economic conditions in the Company's markets have provided quality credit opportunities, in particular, southeastern Ohio and central Ohio. Management will continue to focus on the enhancement and growth of the commercial loan portfolio while maintaining appropriate underwriting standards. Management expects commercial loan demand to continue to be strong in several of the Company's markets throughout 1999. In an effort to redeploy acquired funding sources and reallocate the Company's mix of earning assets to an allocation similar to previous reporting periods, the Company purchased $11.8 million of commercial loans in the fourth quarter of 1998. The majority of these loans are collateralized by real estate and are outside of the Company's geographic markets. Consumer lending also continues to be a vital part of the core lending of the Company. In 1998, consumer loan balances decreased $2.8 million (or 2.5%) to $111.5 million. The majority of the Company's consumer loans are indirect loans to consumers who purchase vehicles and similar items at sales locations in the Company's market areas. At December 31, 1998, the Company had indirect loan balances of $65.3 million, a decrease of $5.0 million since year-end 1997, as pressures to grow this segment of the business continue to increase in the highly competitive market for indirect lending. Management is pleased with the recent performance of the Company's indirect loan portfolio, which can be attributed to the Company's commitment to quality customer service and 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 delinquencies and caused a modest decrease in new indirect loan generation. Management plans to continue its focus on usage of this tiered system combined with controlled growth of the indirect lending portfolio in 1999. The Company's credit card balances at year-end 1998 were $6.8 million, a decrease of $0.4 million compared to December 31, 1997. The credit card industry is highly competitive, which has caused modest declines in the Company's credit card balances. Management will continue to evaluate new opportunities to serve our credit card customers, but will not assume additional unnecessary risk for the sake of growth. The offices acquired in the West Virginia Banking Center have generated nearly $6 million in additional loan balances since the end of the second quarter of 1998. Management is pleased with the loan growth momentum in these new offices and expects loan activity to continue to be strong in those markets in 1999. 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 $243.9 million (or 42.9%) of total loans, compared to $248.2 million at year-end 1997. At December 31, 1998, commercial, financial, and agricultural loans totaled $212.5 million (or 37.4%) of outstanding loans, up from $159.0 million (or 30.5% of loans) at year-end 1997. The Company's lending is primarily focused in the local southeastern Ohio market and contiguous mid-Ohio valley areas. The Company's loan mix principally consists of retail lending, which includes single-family residential mortgages and other consumer loan products. The Company's largest concentration of commercial loans are credits to lodging and lodging related companies, which comprise approximately 10% of the Company's outstanding commercial loans at December 31, 1998 and 8% at December 31, 1997. These lending opportunities have arisen because of the recent growth in the lodging industry and the need for additional travel related services in certain areas in or contiguous to the Company's markets, as well as the Company's ability to respond to the needs of customers in this segment of the economy. The credits have been subjected to the Company's normal commercial loan underwriting standards and do not present more than the normal amount of risk assumed in other types of lending. In addition to loans to lodging and lodging related companies, one of the Company's largest groups of commercial loans consists of automobile dealer floor plans, which totaled 7% of the Company's outstanding commercial loans at December 31, 1998 and 12% at December 31, 1997. ALLOWANCE FOR LOAN LOSSES - ------------------------- The loan portfolio analysis on pages 36 and 37 presents in detail an analysis of the Company's loan portfolio, the allowance for loan losses, loan chargeoffs and recoveries by type of loan, and an allocation of the allowance for loan losses by major loan type. Management continually monitors the loan portfolio through its Loan Review Department and Loan Loss Committee to determine the adequacy of the allowance for loan losses. This formal analysis determines the appropriate level of the allowance for loan losses, allocation of the allowance among loan types and the adequacy of the unallocated component of the allowance. The portion of the allowance allocated among the various loan types represents management's estimate of expected losses based upon specific allocations for individual lending relationships and historical loss experience for each category of loans. The individual loan reviews are based upon specific qualitative and quantitative criteria, including the size of the loan and loan grades below a predetermined level. The historical experience factor is based upon historical loss experience, trends in losses and delinquencies, the growth of loans in particular markets and industries, and known changes in economic conditions in the particular lending markets. Allowances for homogeneous loans (such as residential mortgage loans, credit cards, personal loans, etc.) are collectively evaluated upon historical loss experience, trends in losses and delinquencies, the growth of loans in particular markets, and known changes in economic conditions in the particular lending markets. The unallocated portion of the allowance is based upon management's assessment of qualitative risk factors that may not be evident in the Company's historical experience, such as, but not limited to, changes in specific markets in both competition for loans and local economies. This assessment involves a high degree of management judgment as well as higher amounts of uncertainty. Assessment of the adequacy of the allowance is a dynamic process that requires management to continually refine the process as markets, economic conditions, and the Company change. Differences between actual loss experiences and estimated events are compared on a quarterly basis, allowing management to regularly modify loss provisions as deemed appropriate based on market conditions and other factors previously described. The results of this analysis at December 31, 1998 indicate allocations to specific lending categories that are not significantly different from the prior year. The increase in the amount allocated to the commercial category results from recent increases in the Company's commercial loans outstanding. The amount allocated to the remaining categories and the unallocated portion reflect the growth in the portfolios and changes in economic conditions. Management expects 1999's quarterly loan loss provision to be consistent with recent quarters. The Company's consumer loan chargeoffs decreased $0.2 million (or 1.5%) to $1.6 million in 1998 due to decreased credit card chargeoffs and direct personal loan chargeoffs. Management will continue to monitor the performance of the consumer loan portfolio and focus efforts on improving experience and reducing losses. Real estate and commercial loan net chargeoffs were insignificant in 1998, demonstrating the quality of the portfolios. Nonperforming loans (those loans classified as nonaccrual, 90 days or more past due, and other real estate owned) as a percentage of outstanding loans were 0.28% at December 31, 1998, compared to 0.33% at December 31, 1997. Nonaccrual loans and those loans 90 days past due totaled $687,000 and $495,000, respectively, at year-end 1998, compared to $1,220,000 and $462,000, respectively, at year-end 1997. Other real estate owned totaled $396,000 at year-end 1998 compared to $19,000 at December 31, 1997. Management believes the current level of nonperforming loans is below peer group levels and is a reflection of the overall quality of the Company's loan portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of potential impaired loan losses is generally based on the present value of expected future cash flows discounted at the loan's historical effective interest rate, or the fair value of the collateral if the loan is collateral dependent. If foreclosure is probable, impairment loss is measured based on the fair value of the collateral. At December 31, 1998, the Company had an insignificant amount of loans that were considered impaired. Management will continue to monitor the status of impaired loans, including performing and non-performing loans. The allowance for loan losses is deemed to be adequate to absorb losses inherent in the portfolio at December 31, 1998. 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 acquisition in 1998 sustained the asset growth of the Company. In 1998, total deposits grew $103.1 million (or 16.9%) to $714.2 million, with the majority of the growth occurring in interest- bearing deposits. The West Virginia Banking Center Acquisition provided the Company with additional funding sources of $121.0 million ($11.3 million in non-interest bearing demand deposit balances) and experienced minimal runoff of those deposit balances following the completion of the acquisition. In 1998, the Company implemented regional pricing among its Peoples Bank banking centers, which permitted management to maintain interest cost structures in the markets entered via the West Virginia Banking Center Acquisition. Management believes regional pricing has provided the opportunity to maintain and improve results of operations. In 1998, the Company's average time deposit balances increased $44.4 million (or 16.0%) to $321.9 million. The Company continues to offer time deposit "specials" to customers in its established markets. In 1998, a 7-month time deposit special was offered to retain maturing short-term time deposits as well as provide a competitive product in the Company's markets. In late 1998 and early 1999, the Company began offering a 15-month time deposit special. Management expects CD's to continue to be a vital funding source for the Company in the future. On a percentage basis, the largest growth component for the Company in 1998 occurred in interest-bearing transaction accounts, which increased $41.6 million (or 32.9%) to $168.0 million. The Company continues to offer special "relationship accounts" (both non-interest bearing and interest-bearing) based on deposits in other products such as CD's or IRA's. Management believes that the deposit base remains the most significant funding source for the Company and will continue to concentrate on non-interest bearing deposit growth and maintaining adequate net interest margin to meet the Company's strategic goals. In addition to traditional deposits, the Company accesses both short-term and long-term borrowings to fund its operations and investments. The Company's short-term borrowings consist of federal funds purchased, corporate deposits held in overnight repurchase agreements, and various FHLB borrowings. Short-term borrowings at December 31, 1998, totaled $32.5 million compared to $32.6 million at year-end 1997. The largest component of short term borrowings at year-end 1998 was balances in corporate deposits in repurchase agreements, which totaled $31.7 million compared to $30.7 million at year-end 1997. At December 31, 1998, the Company had a balance of $0.7 million in short-term FHLB borrowings, down $1.0 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 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 $38.0 million at year-end 1998, a net increase of $12.4 million (or 48.4%) since year-end 1997. The increase in funds was used primarily to fund growth strategies designed to leverage the strong capital position of Peoples Bank FSB. In the second half of 1998, the Company prepaid $20.3 million of its long-term FHLB borrowings, of which $18.8 million were subject to prepayment penalties. The Company replaced $20 million of the prepaid FHLB advances with borrowings designed to enhance future performance. Management plans to maintain access to long-term FHLB borrowings as an appropriate funding source. The Company also has a long-term borrowing with an unaffiliated financial institution. The original borrowing was $3.0 million and was used to finance an acquisition in early 1997. At December 31, 1998, the balance was $2.7 million. Principal payments began in 1998 and continue semi-annually over the next three years. CAPITAL/STOCKHOLDERS' EQUITY - ---------------------------- During the year-ended December 31, 1998, the capital position of the Company grew approximately $7.2 million (or 9.1%) to $86.0 million. In 1998, the Company had net income of $10.0 million and paid dividends of $3.1 million, a dividend payout ratio of 30.38% of earnings, compared to a ratio of 30.53% 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 1998 by the adjustment for the net unrealized holding gain on available-for-sale securities which increased $1.2 million, net of deferred income taxes, (or 51.5%) to a net gain of $3.6 million at year-end 1998. Recent decreases in interest rates, combined with increased purchases of investment securities in early 1998, have combined to cause the gap to grow between the amortized cost and estimated fair value of the Company's investment portfolio, resulting in a corresponding increase to the Company's equity. 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. Detailed information concerning the Company's risk-based capital ratios can be found in Note 12 of the Notes to the Consolidated Financial Statements. At December 31, 1998, 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 11.95% at December 31, 1998, is well above the well-capitalized standard of 10%. The Company's Tier 1 capital ratio of 10.54% also exceeded the well-capitalized minimum of 6%. The Leverage ratio at year-end 1998 was 7.08% and was also above the well-capitalized standard of 5%. In 1998, the Company's risk-based capital ratios dipped slightly due to strategic leveraging of the Company's equity base, which increased significantly in late 1997 related to the Gateway Bancorp Acquisition. The Company's capital ratios provide quantitative data demonstrating the strength and future opportunities for use of the Company's capital base. Management continues to evaluate risk-based capital ratios and the capital position of the Company and each of its banking subsidiaries as part of its strategic decision process. In June, 1998, the Company implemented a formal plan to purchase treasury shares for use in its stock option plans. The announcement superseded a previously announced stock repurchase plan and serves as the basis for treasury purchases in anticipation of the Company's projected stock option exercises. The stock repurchase plan is based upon specific criteria related to market prices and the number of shares expected to be issued under the Company's stock option plans. In each of the second, third, and fourth quarters of 1998, the Company purchased 15,000 treasury shares at an average price of $29.50 per share. Purchases totaled $1.3 million in 1998. Management expects to purchase similar share amounts in future quarters for use in its stock option plans. Future changes, if any, to the Company's systematic share repurchase program may be necessary to respond to the number of shares expected to be reissued for the Company's stock option plans. The Company intends to fund future treasury share purchases with internally generated sources in the short-term or external borrowings as needed. In early 1998, the Company initiated the Peoples Bancorp Inc. Deferred Compensation Plan ("DCP") for the directors of the Company and its subsidiaries, which is designed to recognize the value to the Company of the past and present service of its directors and encourage their continued service through implementation of a deferred compensation plan. The DCP allows directors to defer the fees earned for their service as Company and subsidiary directors into deferred accounts which are either invested in the Company's common stock or a time deposit, at the specific director's discretion at the time of entering the DCP. As a result and in accordance with accounting regulations, the balances invested in Company stock in such accounts are reported as treasury stock in the Company's financial statements. At December 31, 1998, the Company owned $0.7 million of Company stock related to the DCP, which reduces the equity balance of the Company. Management does not expect the DCP to have a material impact on future financial statements or results of operations for the Company. As a result of treasury stock purchases net of reissuances, as well as DCP activity, the Company had a treasury stock balance of $1.8 million at year-end 1998. At December 31, 1997, the Company owned no treasury shares. Primarily due to DCP activity, management expects the Company's treasury stock balance to continue to modestly increase in the future. LIQUIDITY AND INTEREST RATE SENSITIVITY - --------------------------------------- The objective of the Company's Asset/Liability Management function is to maintain consistent growth in net interest income within the Company's policy guidelines. This objective is accomplished through management of the Company's balance sheet liquidity and interest rate risk exposure based on changes in economic conditions, interest rate levels, and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan demand, normal deposit balance fluctuations, or any potential unexpected deposit withdrawals. This goal is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities along with consistent core deposit growth, and the availability of unused capacity to purchase funds in the national money markets. At December 31, 1998, the Company had $45 million in securities and other short-term investments maturing within one year compared to $57 million at year-end 1997. Additional asset liquidity is provided by the remainder of the securities portfolio and securitizable loan assets. Cash provided by operating activities of $13.3 million during the year ended December 31, 1998 was offset by outflows from net investing activity of $2.2 million and from financing activity of $9.8 million. The Company employs a practice of maintaining core deposits as the primary means of funding interest-earning assets. This emphasis results in the majority of interest earning assets being funded by core deposit liabilities. As a matter of strategy rather than policy, the Company prefers to maintain a position of excess funds to sell in the open market. As a supplement to deposit funding, the Company has access to a variety of other short-term and long-term funding sources. The Company utilizes the Federal Home Loan Bank as a funding source, taking advantage of the attractive funding alternatives offered when appropriate. The Company maintains relationships with other correspondent institutions that can serve as a funding source as well. The Company has a strategic plan to address the contingency for extraordinary demands on liquidity due to the Year 2000 ("Y2K") phenomena. The essence of the plan will be to ensure the adequacy and availability of a variety of sources of liquidity. Securing the availability of the Federal Reserve Bank Discount Borrowings for the subsidiaries of the Company will be a primary part of the plan. Also, the Company plans, as much as is reasonably possible, to accumulate cash and near cash assets to meet or exceed the potential need of additional liquidity. Additionally, the Company intends to review current correspondent relationships, as well as seek additional such relationships to provide diverse sources of liquidity. A proactive campaign to allay concerns customers may have for potential problems arising from the century date change will complement the Y2K liquidity contingency plan. The Company manages interest rate risk to minimize the impact of fluctuating interest rates on earnings. The Company uses simulation techniques which attempt to measure the volatility of changes in the level of interest rates, basic banking interest rate spreads, the shape of the yield curve, and the impact of changing product growth patterns. The primary method of measuring the sensitivity of earnings to changing market interest rates is to simulate expected cash flows using varying assumed interest rates while also adjusting the timing and magnitude of non-contractual deposit repricing to more accurately reflect anticipated pricing behavior. These simulations include adjustments for the lag in prime loan repricing and the spread and volume elasticity of interest-bearing deposit accounts, regular savings, and money market deposit accounts. The principal function of interest rate risk management is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The Company closely monitors the sensitivity of its assets and liabilities on an on-going basis and projects the effect of various interest rate changes on its net interest margin. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or reprice within a designated time-frame. The difference between rate sensitive assets and rate sensitive liabilities for a specified period of time is known as "gap". To aid in interest rate management, the Company uses FHLB advances as a low risk means of matching maturities of earning assets with interest bearing funds to achieve a desired interest rate spread over the life of the earning assets. Additionally, the Company considers the use of certain off-balance sheet instruments such as interest rate caps, floors, and swaps, to further aid interest rate risk management. As shown in the table, the Company currently has two such off-balance sheet instruments. These instruments, known as interest rate floors, will provide income to the Company should a selected market interest rate decline below a preset level specified in the transaction agreement. The intent of this type of instrument is to provide additional income stability to the Company should there be a dramatic decline in interest rate. Off-balance sheet instruments are an important tool for effective interest rate risk management. The Company continuously evaluates the current off-balance sheet positions and the need for additional interest rate management tools. As demonstrated in the past, the Company will use these instruments whenever appropriate. In addition to gap analysis, management also analyzes the impact of maturing assets and liabilities relative to the interest rates on those products. The following table provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For loans, investment securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted average interest rates by contractual maturities as well as estimated prepayments of residential mortgages and mortgage-backed securities. For core deposits (non-interest bearing demand deposits, interest-bearing checking accounts, and savings accounts) that have no contractual maturity, the following table presents principal cash flows, and, as applicable, related weighted average interest rates based on the Company's historical experience and statistical analysis. For interest rate floors, the table presents notional amounts (as described in previous sections) and weighted average interest rates by contractual maturity date. A fundamental difference between the following table and traditional "static gap" analysis is that the following table presents the financial instruments based on the date of expected cash flows while a static gap analysis only focuses on the repricing characteristics of the financial instruments. PRINCIPAL/NOTIONAL AMOUNT MATURITIES AT DECEMBER 31, 1998: ==========================================================
Fair (Dollars in Thousands) There- Value 1999 2000 2001 2002 2003 after Total 12/31/98 Rate sensitive assets: - ---------------------- Fixed interest rate loans $ 71,030 $ 49,379 $ 32,824 $ 20,529 $ 13,119 $ 53,647 $240,528 $247,431 Average interest rate 9.66% 9.64% 9.45% 9.99% 9.92% 9.26% 9.58% Variable interest rate loans $ 96,747 $ 35,737 $ 30,532 $ 25,379 $ 22,876 $116,118 $327,389 $327,389 Average interest rate 9.03% 8.07% 8.10% 8.13% 8.15% 8.11% 8.38% Total loans $567,917 Fixed interest rate securities $ 28,446 $ 12,893 $ 14,211 $ 16,248 $ 13,847 $121,538 $207,183 $207,183 Average interest rate 6.04% 6.07% 5.90% 6.05% 6.01% 5.95% 5.98% Variable interest rate securities $ 2,937 $ 5,478 $ 3,890 $ 370 $ 1,198 $ 14,513 $ 28,386 $ 28,386 Average interest rate 6.34% 6.06% 6.68% 7.04% 6.73% 7.08% 6.74% Total securities $235,569 Other interest-bearing assets $ 14,050 $ 14,050 $ 14,050 Average interest rate 3.83% 3.83% - ----------------------------------------------------------------------------------------------------------------------- Rate sensitive liabilities: - --------------------------- Non-interest bearing checking $ 22,648 $ 12,941 $ 9,706 $ 3,235 $ 8,655 $ 23,699 $ 80,884 $ 80,884 Average interest rate Savings $ 15,847 $ 7,924 $ 7,924 $ 11,885 $ 5,943 $ 49,521 $ 99,044 $ 99,044 Average interest rate 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% 2.42% Interest bearing checking $ 24,049 $ 51,960 $ 24,050 $ 8,017 $ 19,641 $ 72,702 $200,419 $200,419 Average interest rate 3.45% 4.22% 3.45% 3.45% 3.45% 3.45% 3.65% Time deposits $265,487 $ 44,962 $ 14,331 $ 3,923 $ 3,881 $ 1,237 $333,821 $334,803 Average interest rate 5.26% 5.29% 5.51% 5.49% 5.23% 4.51% 5.27% Total deposits $714,168 Fixed interest rate borrowings $ 159 $ 27 $ 28 $ 29 $ 31 $ 37,821 $ 38,095 $ 36,686 Average interest rate 4.70% 4.06% 4.06% 4.06% 4.06% 4.86% 4.86% Variable interest rate borrowings $ 35,083 $ 35,083 $ 35,083 Average interest rate 4.77% 4.77% Total borrowings $ 73,178 - ----------------------------------------------------------------------------------------------------------------------- Rate sensitivity liabilities: - ----------------------------- Interest rate floors purchased $ 10,000 $ 10,000 $ 20,000 $ 104 Average strike rate 5.50% 5.25% Forward rate 5.06% 5.06% ========================================================================================================================
PRINCIPAL/NOTIONAL AMOUNT MATURITIES AT DECEMBER 31, 1997: ==========================================================
Fair There- 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% Total loans $521,570 Fixed interest rate securities $ 39,252 $ 13,407 $ 14,471 $ 6,292 $ 12,213 $ 74,683 $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 $ 4,403 $ 13,973 $ 13,973 Average interest rate 6.31% 7.65% 7.76% 6.94% 7.34% 7.07% 7.07% Total securities $174,291 Other interest-bearing 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 $ 16,122 $ 64,229 $ 64,229 Average interest rate Savings $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% 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% Time deposits $224,715 $ 78,199 $ 10,638 $ 6,496 $ 3,740 $ 630 $324,418 $325,086 Average interest rate 5.49% 5.81% 5.62% 6.00% 5.46% 4.60% 5.58% Total deposits $611,107 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% Total borrowings $ 61,138 - ----------------------------------------------------------------------------------------------------------------------- Rate sensitive derivative financial instruments: - ------------------------------------------------ Interest rate floors purchased $ 20,000 $ 10,000 $ 10,000 $40,000 $101 Average strike rate 7.00% 5.50% 5.25% Forward rate 5.81% 5.81% 5.81% =======================================================================================================================
The preceding tables represent the Company's best estimates of future cash flows from rate sensitive assets and liabilities. While this table represents several significant changes in cash flow estimates for assets and liabilities in maturity periods exceeding five years, the increases in fixed rate loan and fixed rate investment securities maturing in 2004 and beyond reflect investment decisions that were driven by simulation modeling which indicated an asset sensitive balance sheet. Consequently, additional emphasis was placed on adding fixed rate assets, which also resulted in extended cash flow cycles to reduce the potential earnings impact of a declining rate environment. In addition, several fixed rate liability categories also reflect increases in extended cash flow characteristics. While the underlying instruments have longer contractual maturities, certain repricing options, if exercised by the creditor, would result in a corresponding option to the Company to repay the borrowing. Management intends to actively manage the corresponding impact of these extended cash flow characteristics as a part of the regular review and actions of the ALCO. The Company employs a variety of measurement techniques to identify and manage its interest rate risk exposure. Evaluation and review of the techniques, tools, and assumptions used in assessing the Company's interest rate risk is an ongoing process. 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. OUTLOOK FOR 1999 ================ Recent financial data reflects enhanced operational results achieved through a combination of external growth and optimization of core competencies of customer service and community presence. 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. Management is pleased with the recent conversion of the offices acquired in the West Virginia Banking Center Acquisition. The successful transition of these offices bolstered loan activity with minimal loss of deposits. The new offices are a natural extension of the Company's presence in the mid-Ohio Valley and leverage the Company's equity position for 1999 and beyond. The Company expects to continue its investment in the new geographic markets through loans and other community reinvestment activities. Future loan growth is also anticipated as the Company continues to expand its relationship with selected customers outside traditional geographic markets. Management plans to continue recent momentum of non-interest income growth from various sources. The retention of the deposits acquired in the West Virginia Banking Center Acquisition represents an additional opportunity to provide superior customer service and strengthen the Company's position in those markets. One of the Company's priorities in 1999 will be the management and direction of the West Virginia Banking Center Acquisition offices with existing full-service banking centers to create a united financial service provider for the customers of Mason and Wetzel Counties in West Virginia and surrounding areas of West Virginia and Ohio. Management expects to enhance non-interest income streams in 1999 related to the acquired deposits and associated cost-recovery fees of those deposits. In January 1999, Peoples Bank announced intentions to open three sales offices in Wal-Mart stores located in West Virginia (in the communities of New Martinsville, Vienna, and Parkersburg). The Peoples Bank sales offices will be located in the front of each Wal-Mart store near the customer service area and will offer new deposit accounts, loans, insurance products, investment services, Internet access, ATM access, and more. Peoples Bank will open its New Martinsville Wal-Mart sales office in April, 1999; the Vienna (near Parkersburg) Wal-Mart is scheduled to open in the third quarter of 1999; and the south Parkersburg Wal-Mart is scheduled to be completed near the end of 1999. It is anticipated that the Peoples Bank sales office openings in the Vienna and Parkersburg Wal-Marts will coincide with the grand opening of each store. The three new offices will increase Peoples Bank's visibility in its West Virginia markets and give the Company's team of personal bankers better access to an increased number of shoppers compared to a traditional banking center. The new Wal-Mart locations will complement the Company's existing full-service banking centers in New Martinsville and Parkersburg, as well as provide additional locations to Peoples Bank's customers in the greater Parkersburg area, particularly through the Vienna store. Management believes these new sales centers will be catalysts for 1999's sales and customer service efforts and a focal point for future banking centers. Rather than traditional banking offices, the Wal-Mart locations will be full-service 'electronic' sales centers, with an emphasis on selling products that meet the customers' financial needs combined with electronic transaction capabilities and access to customer accounts. Mergers and acquisitions remain a viable strategic option for the continued growth of the Company's operations and scope of customer service. Future acquisitions, if they occur, may not be limited to specific geographic location or proximity to current markets. Management will focus its energies on review and research of possible mergers, consolidations, or banking center purchases as a means of acquiring sales centers that complement existing Peoples Bancorp locations and sales strategies. Ultimately, acquisitions will depend upon financial service opportunities that complement the Company's core competencies and strategic intent. Management considers mergers and acquisitions to be a viable method of enhancing the Company's earnings potential and will continue to pursue appropriate business opportunities as they develop. In conjunction with recent acquisitions and market expansion, management continues to focus on operational efficiency as a method of increasing shareholder value. As a means of increasing the Company's operating efficiency and leverage available resources, the Company merged its federal savings banks into a single unit effective January 1, 1999. The merger provided an opportunity to unite the Company's Kentucky operations and optimize the operating efficiency, profit potential, and capital positions of the resulting entity. In 1999, management will continue to focus efforts to enhance profitability of its southernmost operations through increased product offerings, commitment to development of a non-interest bearing deposit base, and other customer service possibilities. In addition to operating efficiency, management focuses on increasing future non-interest revenue streams to lessen the Company's dependency on net interest income as the primary driver of future net income. In 1998, net interest income increased as a percentage of total revenues due to the West Virginia Banking Center Acquisition. In future periods, management will focus on methods to enhance earnings potential through optimization of customer relationships through an integrated sales process. Integration of the Company's many sales processes, products, and services will be the cornerstone of 1999's focus. Management will concentrate on a marketing program based on establishing brand awareness of the Company in its markets. The Company's insurance capabilities are an integral part of future earnings streams and should reach break-even levels in 2000, and gradually increase profitability thereafter. Management will continue to research alternative methods of enhancing non-interest income streams, such as electronic banking revenues, low income housing tax credits, and other investments. Management concentrates on several key performance indicators to measure and direct the performance of the Company. While past results are not an indication of future earnings, management believes the Company is positioned to capitalize on its recent growth and enhance future performance levels through integrated sales techniques and commitment to strategic initiatives designed to increase shareholder value. IMPACT OF THE YEAR 2000 ISSUE ============================= The Company intends this information to constitute notice under the Year 2000 Information and Readiness Disclosure Act as a "Year 2000 Readiness Disclosure". Many companies across various industries have dedicated efforts to analyze the much-publicized "Year 2000" issue (or "Y2K"), which is the result of computer programs written using two digits rather than four to define the applicable year. Computer programs or hardware which have date-sensitive software or embedded chips may recognize a date of "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, the inability to process transactions or engage in similar normal business activities. As discussed further below and based on assessments completed by the Company, portions of the Company's software and hardware systems have been modified, updated, or replaced so that those systems will properly utilize dates beyond December 31, 1999. Management believes its assessment and resulting remediation measures have mitigated the Y2K issue and ensured Y2K compliance in regards to mission-critical applications, including customer service related hardware and software systems (except certain ATM's, which are to be updated in April, 1999). Management has implemented plans to address Y2K issues and the impact to the Company's business, operations, and relationships with customers, suppliers, and other third parties. The Company primarily relies on third party vendors for all critical processing systems software. Based on management's assessments, the Company replaced certain portions of its software and worked with software vendors so that those systems would properly utilize dates beyond December 31, 1999. Management presently believes with these recent modifications, combined with replacement of certain existing ATM hardware and software, the Y2K issue will be mitigated. Since the Company offers fiduciary services, management has conducted a review of these services to identify potential liabilities. Management continues to take appropriate action to manage identified exposure in order to fulfill its responsibilities to fiduciary clients and to observe the standards of prudence set forth in applicable laws and regulations. Management plans to resolve the Y2K issue in five phases as follows: awareness, assessment, renovation, validation, and implementation. To date, the Company has completed its assessment of all material systems which could be affected by the Y2K issue and addressed the extent to which its operations are vulnerable should its software fail to be Y2K compliant. The completed assessment indicates most of the Company's significant information technology systems could be affected. Banking regulators have issued guidelines and deadlines detailing what they expect financial institutions to do in order to insure Y2K preparedness. The Company is following these guidelines and expects to meet the deadlines defined by the regulators. As a part of this process, the Company is also developing contingency plans for all mission- critical systems, which it will implement in the event any of these systems fail to function. Contingency plans for both information technology systems ("IT") and non-information technology systems ("non-IT") include a combination of manual processes and utilization of systems (which have already been Y2K validated and implemented) that are completely independent from the Company's core information systems. The Company continues to assess the credit, liquidity and counterparty trading risks which may be posed by customers who encounter Year 2000-related problems. These problems may result from the failure of a customer to properly remediate its own systems and from Y2K problems that are not addressed by the customer's suppliers and clients. The Company has amended credit policies to include an assessment of Year 2000-related risks for material new customers. The initial assessment of customer-related risks for material customers has been completed and management does not anticipate material losses or a significant negative impact to the Company's future results of operations or financial position. The Company will continue to monitor these risks. The Company's assessment process included IT and non-IT systems. The IT systems identified included personal computers, mainframes, local area networks and servers, wide area network, automated teller machines ("ATM's"), printers, copy machines, facsimile machines, telephones, and the operating systems and softwares for these systems. Based on the results of its assessment process, management considers these IT systems to be compliant with Y2K, except approximately half of the Company's ATM's require hardware and/or software upgrades which will be completed in the second quarter of 1999. The remaining ATM's have been certified compliant by the vendors. Non-IT systems identified included heating, air conditioning, vault controls, alarm systems, surveillance systems, and postage meters. Contact has been made with all outside servicers and major vendors to determine their individual levels of Y2K compliance. Based on vendor responses and/or certification of Y2K compliance, the Company has determined that it should not be significantly impacted by Y2K from these systems. As of February 12, 1999, the following chart shows the current and projected status of the Company's Y2K compliance efforts relative to IT systems: Nov. 13, Dec. 31, Feb. 12, March 31, June 30, PHASE 1998 1998 1999 1999 1999 - ---------------------------------------------------------------------------- Awareness 100% --- --- --- --- Assessment 100% --- --- --- --- Renovation 80% 80% 100% --- --- Validation 20% 70% 75% 80% 100% Implementation 20% 70% 75% 80% 100% Management estimates that half of its potential Y2K issues originate in the Company's core banking system (software provided by a third-party vendor). The Company's core banking system supports approximately 50% of the information processing for the Company. This single system software provides accounting for the Company, as well as loan and deposit products. This core banking system has been certified as Y2K compliant by the vendor and the Information Technology Association of America. This software has essentially been Y2K compliant for several years, as it was designed with a four digit year field, and supports calculations beyond the year 2000. The Company has completed 100% of its due diligence review of the proxy testing of the core banking system. Additionally, the Company has conducted testing in its own environment and plans to complete the validation of the proxy tests through testing of mission critical interfaces into its core banking system. Approximately 25% of the interface testing has been successfully completed and the Company plans to complete the testing of the remaining critical interfaces by the end of the first quarter of 1999. The Company has replaced the central processing unit (hardware) that supports the accounting system for Investment and Trust. The Company has also upgraded the accounting system software, which has been certified compliant by its vendor. These replacements and upgrades enabled the Company to test the software and the related network and computer hardware, in its own environment. This testing has been completed and management believes the results were successful. The ATM network software has also been certified compliant by its vendor and has been tested in the Company's environment. The remaining mission critical IT system, the Company's document processing and retrieval system, is expected to be fully validated and implemented by June 30, 1999. The vendor has supplied its Y2K certified version of its software and it has been installed in the Company's current environment. Management is working closely with the Company's third party vendors to ensure Y2K compliance in a timely manner. As planned, management replaced the Company's internal operating systems (on existing hardware) during the second half of 1998. The internal operating system for the mainframe computer has been successfully tested and proven to be Y2K compliant. The Company has also completed the renovation phase for all internally developed software applications. Management does not consider internal software systems to be significant to the overall operations of the Company. All mission critical applications that were not Y2K compliant have been upgraded. All reprogramming of internal software was completed in the third quarter of 1998. After completing the replacement of certain systems in January, 1999, the Company's plans include testing and implementing its information technology systems. As of February 12, 1999, the Company approximates it has completed 75% of its testing and has implemented all of the renovated systems that have been tested. Completion of the testing phase is expected by the end of the first quarter of 1999, with all renovated systems fully implemented by June 30, 1999. The Company has queried, through written and verbal communication, its important suppliers (such as utility companies) which do not involve system interface. To date, the Company is not aware of any problems which would materially impact operations, although the Company has no means of ensuring that these organizations will be Y2K ready. The inability of these parties to complete their Year 2000 resolution process could materially impact the Company, as well as other businesses and consumers. The Company expenses Y2K project costs as incurred. The total out-of-pocket cost of the Y2K compliance project is not expected to be greater than $200,000 and, therefore, is immaterial to the Company's results of operations or financial position. As of February 12, 1999, management estimates that 60% of the Company's costs have been incurred. Included in the cost estimate is internal human resource expense which is estimated to approximate between $100,000 to $150,000. Actual out-of-pocket expenses have been less than anticipated, however, management has increased the amount of internal human resource expected to be consumed by this project, offsetting the costs saved relative to purchases of hardware, software, and/or consulting fees. In addition, the Company has no pending material legal proceedings related to Y2K. Due to the positive progress of the Company relative to remediation of the Y2K issue, management recently launched a comprehensive marketing program to its customers designed to communicate the Company's preparedness regarding Y2K. Throughout 1999, the Company plans to increase its efforts to communicate its preparedness in the market area it serves. The foregoing discussion of the Company's plans to complete the Y2K modifications contains forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995 and is based on management's best estimates, which were derived utilizing assumptions of future events including the continued availability of certain resources, and other factors. Estimates on the status of completion and the expected completion dates are based on costs incurred to date compared to total expected costs. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors which might cause such material differences include, but are not limited to, the availability and cost of personnel trained in the specialized area of Y2K compliance, the ability of vendors to deliver Y2K compliant software as planned, the ability to locate and correct all relevant computer codes, and similar uncertainties. COMPARISON OF 1997 TO 1996 ========================== The Company reported an increase in net income of 12.5%, to $8,605,000 in 1997 from $7,651,000 in 1996. This increase in earnings provided basic and diluted earnings per share of $1.65 and $1.60, respectively, for the year ended December 31, 1997, compared to $1.48 and $1.46 in 1996. Strong internal loan growth and loans acquired in the Russell Federal acquisition, coupled with enhanced operational efficiencies, were the driving forces behind the increase in net income. For the year ended December 31, 1997, return on average assets was unchanged from 1996's ratio of 1.29%. In 1997, return on stockholders' equity declined slightly to 14.33% compared to 14.43% in 1996, a decline of 10 basis points. Asset growth also contributed to incremental increases in net income in 1997 compared to 1996. In 1997, the Company grew its balance sheet through a combination of acquisition and internal growth. Total assets increased $141.5 million (or 23.0%) to $758.2 million at year-end 1997. For the year ended December 31, 1997, the Company's asset growth primarily occurred in earning assets such as loans and investments securities. Loans grew $99.2 million (or 23.5%) to $521.6 million and investment securities grew $26.5 million (or 17.9%) to $174.3 million. The Company recorded net interest income of $28,620,000 in 1997, an increase of 12.5% compared to 1996, as total interest income reached $53,836,000 and interest expense totaled $25,216,000. Net interest margin modestly decreased in 1997 to 4.74% from 4.75% in 1996. The interest cost on the Company's array of traditional interest-bearing deposit products (demand and time deposit accounts) increased nine basis points, with the most significant cost being interest paid on time deposits (CDs and IRAs). 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. The increases in interest expense were offset by increased interest income, as the Company experienced loan growth in 1997 of nearly $68 million compared to the prior year, which produced an additional incremental interest income of over $1 million. Loans continued to be the largest earning asset component for the Company. Loans averaged 84.0% of deposits in 1997, up from 82.3% at year-end 1996. The fully-tax equivalent (FTE) yield on earnings assets increased slightly, from 8.74% in 1996 to 8.81% in 1997. Interest costs as a percentage of earning assets increased 8 basis points to 4.07% in 1997 due primarily to the competitive rates paid on interest bearing deposits and minimal growth in non-interest bearing deposits. The Company's loan loss provision totaled $2,589,000 in 1997, up $624,000 compared to 1996, an increase of 31.8%. The growth was due primarily to loan growth and a rise in loan delinquencies in 1997. At December 31, 1997, the Company's allowance for loan losses as a percentage of total loans was 1.60%, compared to a year-end 1996 ratio of 1.63%. Non-interest income (excluding securities transactions) continued its positive growth trend in 1997, reaching $5,966,000, an increase of 16.3% compared to 1996. Several categories had strong growth compared to 1996, including income from fiduciary activities, which reported $2,176,000 in revenues in 1997, an increase of 14.7% compared to 1996. Income related to account service charges increased $265,000 (or 13.7%) to $2,202,000 in 1997, due primarily to the full-year impact of increased deposit base acquired in the acquisition of the Pomeroy, Rutland and Gallipolis offices in April, 1996. In 1997, electronic banking fee income increased $357,000 (or 33.4%) compared to prior year due to increased revenues from the Company's growing debit card program. In 1997, non-interest expense totaled $19,265,000, an increase of 9.9% over the prior year, due primarily to the Company's 1996 acquisitions and the associated increased levels of non-interest expense such as salaries and benefits, depreciation expense, and intangible amortization. Even though salaries and employee benefits continued to be the largest source of non-interest expense for the Company, totaling $8,358,000 in 1997, an increase of $844,000 (or 11.2%) from 1996, increase in expense for non-operational items also caused 1997's non-interest expense levels to rise. Amortization of intangibles totaled $1,138,000 in 1997 compared to $625,000 or the same period in the prior year, an increase of $513,000 (or 82.1%). Despite significant increases in major non-interest expense areas, the Company leveraged its increased operational expenses due to market share growth and enhanced revenue streams, causing the Company's efficiency ratio to improve to 51.06% in 1997 compared to 53.76% in 1996. "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 Company's ability to execute its plan to address the Y2K issue and the ability of third parties to effectively address their Y2K issues, the impact of competitive products and pricing, and other risks detailed in the Company's Securities and Exchange Commission filings. EX-21 5 EXHIBIT 21-PEOPLES BANCORP INC SUBSIDIARIES EXHIBIT 21 ---------- PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998 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 United States ("First National Bank") Northwest Territory Life Insurance Agency, Inc. Ohio (Subsidiary of First National Bank) Northwest Territory Property & Casualty Life Ohio Insurance Agency, Inc. (Subsidiary of First National Bank) Peoples Bank FSB United States Northwest Territory Life Insurance Company Arizona EX-23 6 EXHIBIT 23-CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 ---------- PEOPLES BANCORP INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998 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 8, 1999, included in the 1998 Annual Report to Shareholders of Peoples Bancorp Inc. We also consent to the incorporation by reference in the Registration Statements pertaining to the Peoples Bancorp Inc. Retirement Savings Plan (Form S-8, No. 33-1803), 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), the Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries (Form S-8, No. 333-43629), the 1998 Stock Option Plan of Peoples Bancorp Inc. (Form S-8, No. 333-62935), the Russell Federal Savings Bank 1995 Stock Option and Incentive Plan (Form S-8, No. 333-63039), and the Peoples Bancorp Inc. Dividend Reinvestment Plan (Form S-3, No. 33-54003) of our report dated February 8, 1999, 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, 1998. /s/ ERNST & YOUNG LLP Ernst & Young LLP Charleston, West Virginia March 25, 1999 EX-27 7 EXHIBIT 27 12/31/98
9 This schedule contains summary financial information extracted from the Form 10-K filed as of December 31, 1998. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 27,048 3,373 9,700 0 235,569 0 0 567,917 9,509 880,284 714,168 32,514 6,924 40,664 0 0 50,807 35,207 880,284 48,857 11,386 3,402 63,645 26,051 30,497 33,148 2,325 418 23,276 14,785 10,045 0 0 10,045 1.75 1.70 4.47 687 495 0 0 8,356 1,645 473 9,509 9,509 0 1,115
EX-2 8 EXHIBIT 2(B) MERGER AGREEMENT Agreement of Merger between Russell Federal Savings Bank of Russell, Kentucky and Catlettsburg Federal Savings Bank of Catlettsburg, Kentucky under the Charter of Catlettsburg Federal Savings Bank under the title of Peoples Bank FSB This Agreement of Merger ("Agreement"), made this 13th day of October, 1998, by and between Russell Federal Savings Bank, a federal savings bank, the principal office of which is 404 Ferry Street, Russell, Kentucky, (hereinafter called "Russell Federal Savings Bank"), and Catlettsburg Federal Savings Bank, a federal savings bank, the principal office of which is 2717 Louisa Street, Catlettsburg, Kentucky, (hereinafter called "Catlettsburg Federal Savings Bank"), said banking corporations being together hereinafter sometimes called the "Constituent Federal Savings Banks". RECITALS -------- 1) The amended Federal Stock Charter of the Russell Federal Savings Bank was originally filed in the Office of Thrift Supervision effective on January 1, 1997. The Russell Federal Savings Bank is authorized to issue 10,000 common shares with no par value, of which 10,000 shares are now issued and outstanding. 2) The amended Federal Stock Charter of Catlettsburg Federal Savings Bank was originally filed in the Office of Thrift Supervision effective on January 18, 1995. Catlettsburg Federal Savings Bank is authorized to issue 1,000,000 common shares with par value of $.01, of which 100 shares are now issued and outstanding. 3) The respective Boards of Directors of the Constituent Federal Savings Banks deem it advisable that the Constituent Federal Savings Banks be merged and the respective Boards of Directors at meetings duly called and held have approved this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements and promises set forth below, the Constituent Federal Savings Banks do hereby agree that Russell Federal Savings Bank be merged with and into Catlettsburg Federal Savings Bank, hereinafter sometimes called the "Resulting Federal Savings Bank"; and that the terms and conditions of the merger, the mode of the carrying it into effect and the manner and basis of converting the respective shares into shares of the Resulting Federal Savings Bank are and shall be as follows: FIRST. The name of the Resulting Federal Savings Bank shall be Peoples Bank FSB, and its principal office shall be at 1410 Eagle Drive, Ashland, Kentucky, 41102. SECOND. At the Effective Time, as defined below, the amount of capital of the Resulting Federal Savings Bank shall be at least $14,900,000. THIRD. The Bylaws of Catlettsburg Federal Savings Bank shall be amended at the Effective Time as attached hereto as Exhibit "A", and shall be the Bylaws of the Resulting Federal Savings Bank until changed or repealed according to the provisions of Article XI. FOURTH. The Federal Stock Charter of Catlettsburg Federal Savings Bank shall be amended at the Effective Time as attached hereto as Exhibit "B", and shall be the Federal Stock Charter of the Resulting Federal Savings Bank. FIFTH. RobRoy Walters, a natural person, whose address is Rt. 1, Box 266, Flatwoods, KY 41139, is hereby appointed as the Statutory Agent of the Resulting Federal Savings Bank on whom any process, notice or demand against Catlettsburg Federal Savings Bank or either of the Constituent Federal Savings Banks may be served. SIXTH. The names and addresses of the members of the Board of Directors of the Resulting Federal Savings Bank, as of the Effective Time and until the next annual meeting or until such time as their successors have been elected and qualified, shall be as listed on the attached Exhibit "C" hereto. SEVENTH. The mode of carrying into effect the merger and the manner and basis of converting the shares of Russell Federal Savings Bank into shares of Catlettsburg Federal Savings Bank shall be as follows: The capital stock of the Resulting Federal Savings Bank shall be divided into 10,000 shares of common stock, each of no par value, and at the Effective Time the Resulting Federal Savings Bank shall have a surplus of at least $29,035,000, and undivided profits, including capital reserves, which, when combined with the capital and surplus, will be equal to the combined capital structures of the Constituent Federal Savings Banks as stated in the preamble of this Agreement, adjusted, however, for normal earnings and expenses (and, if applicable, purchase accounting adjustments) between December 31, 1997, and the effective time of the merger. All assets as they exist at the Effective Time shall pass to and vest in the Resulting Federal Savings Bank without any conveyance or other transfer. The Resulting Federal Savings Bank shall be responsible for all of the liabilities of every kind and description, including liabilities arising from the operation of a trust department of each of the Constituent Federal Savings Banks existing as of the effective time of the merger. A committee of examiners, three to be appointed by the Board of Directors of each federal savings bank at the time of the merger, shall have satisfied themselves that the Statement of Condition of each federal savings bank as of December 31, 1997, and subsequent quarterly statements, fairly presents its financial condition and since such date there has been no material adverse change in the financial condition or business of either federal savings bank. Russell Federal Savings Bank shall contribute to the Resulting Federal Savings Bank acceptable assets having a book value, over and above its liability to its creditors, of at least $4,100,000, and having an estimated fair value, over and above its liability to its creditors, of at least $4,300,000, or 28.0% of the estimated fair value of excess acceptable assets, over and above liabilities to creditors, to the Resulting Federal Savings Bank adjusted, however, for normal earnings and expenses between December 31, 1997, and the Effective Time , and for allowances of cash payments, if any, permitted under this Agreement. At the Effective Time, Catlettsburg Federal Savings Bank shall have on hand acceptable assets having book value of at least $10,700,000, over and above its liabilities to its creditors, and having a fair value, over and above its liability to its creditors, of at least $11,050,000, or 72.0% of the estimated fair value of excess acceptable assets, over and above its liabilities to its creditors, of the Resulting Federal Savings Bank, adjusted, however, for normal earnings and expenses between December 31, 1997, and the Effective Time, and for allowances of cash payments, if any, permitted under this Agreement. Of the capital stock of the Resulting Federal Savings Bank, the Sole Shareholder shall be entitled to receive 10,000 shares of common stock to be issued upon consummation of the transaction, each of no par value, with contribution to be allocated according the the percentages referenced above and representing 100% of the total outstanding common stock of the Resulting Federal Savings Bank. EIGHTH. The merger shall become effective upon the filing of the Articles of Combination in the Office of Thrift Supervision, or at other such date as specified by the Office (the "Effective Time"), but not earlier than the close of business on December 31, 1998. NINTH. The amount of the earned surplus of the Resulting Federal Savings Bank shall be the combined total of the earned surplus of the Constituent Federal Savings Banks as of the Effective Time. TENTH. This Agreement may be signed in any number of duplicate copies, and all signed duplicate copies shall be deemed to constitute an original instrument. ELEVENTH. This Agreement may be terminated at any time prior to the merger becoming effective by mutual agreement of the Boards of Directors of the Constituent Federal Savings Banks. IN WITNESS WHEREOF, the Constituent Federal Savings Banks have caused this Agreement to be signed in their respective corporate names by their respective Presidents and Secretaries thereunto duly authorized by their respective Boards of Directors and Shareholders. CATLETTSBURG FEDERAL RUSSELL FEDERAL SAVINGS BANK SAVINGS BANK By /s/ REBECCA R. JACKSON By /s/ ROBROY WALTERS ------------------ -------------- Rebecca R. Jackson RobRoy Walters President & CEO President & CEO By /s/ ROBROY WALTERS By /s/ RONALD L. FRALEY ------------------- ---------------- RobRoy Walters Ronald L. Fraley Secretary/Treasurer Secretary/Treasurer EX-4 9 EXHIBIT 4(B) MASTER NOTE FIFTH THIRD MASTER NOTE ----------- NOTE NO. _____________ ________________, 1998 $3,500,000 (Effective Date) Cincinnati, Ohio On or before the Due below, PEOPLES BANCORP, INC., an Ohio corporation (hereinafter referred to as "Borrower") for value received, promises to pay the order of THE FIFTH THIRD BANK, an Ohio banking corporation, whose address is 38 Fountain Square Plaza, Cincinnati, Ohio 45263 (hereinafter referred to as "Bank") the sum of THREE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($3,500,000) (hereinafter referred to as the "Maximum Amount") plus interest as provided herein, or such lesser amount as may be advanced by Bank and as may be outstanding hereunder, less such amounts as shall have been repaid in accordance with this note. The outstanding balance of this note will appear on supplemental records of the Bank and is not necessarily the face amount of this note. Such record shall be conclusive as to the balance of this note at any time. Reducing Revolving Credit Loans. - -------------------------------- On the date hereof, subject to the terms and conditions hereof, Bank hereby extends to Borrower a committed reducing revolving line of credit facility (the "Facility") under which Bank shall make loans (the "Revolving Loans") to Borrower at Borrower's request from time to time during the term of this Note in amounts not exceeding the Maximum Amount. The Maximum Amount available to Borrower under the Facility shall be reduced by the amount of $87,500 on July 1, 1998 and on the first day of each October, January, April and July thereafter during the term hereof. If the aggregate amount of Revolving Loans outstanding at any time under the Facility exceeds the limits set forth above on any such date, Borrower will immediately pay the amount of such excess to Bank in cash. Provided no Event of Default has occurred and is continuing, Borrower may borrow, repay, and reborrow under the Facility, provided that the principal amount of all Revolving Loans outstanding at any one time under the Facility will not exceedthe Maximum Amount, as reduced from time to time during the term hereof. In the event Borrower fails to pay such excess, Bank may, in their discretion, setoff such amount against Borrower's accounts at Bank. In addition to the foregoing, Borrower agrees that at no time during the term hereof, the aggregate outstanding principal amount of all Revolving Loans hereunder shall not be less than the Maximum Amount then applicable at such time as set forth on Exhibit A attached hereto. At Borrower's request from time to time Bank shall make Revolving Loans to Borrower for LIBOR Interest Periods and at interest rates agreed to between Bank and Borrower as more fully set forth herein. Interest Rates: - --------------- Borrower will pay interest to Bank on the principal amount outstanding under the Facility at a rate of per annum equal to the interest rates set forth below. Any principal amount not paid when due (at maturity, by acceleration or otherwise) will bear interest thereafter until paid at the Default Rate; this provision does not constitute a waiver of any Events of Default or an agreement by Bank to permit any late payments whatsoever. Notwithstanding any other provision set forth in the Note, the principal balance outstanding will bear interest at a rate per annum equal to (a) the Prime Rate floating, as in effect from time to time or (b) the LIBOR Rate plus 100 basis points (the "Note Rate"). Interest will be payable in immediately available funds at the principal office of Bank. Interest shall be calculated based on a 360-day year and charged for the actual number of days elapsed, and will be payable (i) on the first (1st) day of each calendar month for Revolving Loans accruing interest at an interest rate based upon the LIBOR Rate. When interest is accruing at a rate based upon the LIBOR Rate, each date the interest rate is adjusted, the interest rate will remain at such rate for the remainder of the LIBOR Interest Period. On or before the date of any advance hereunder, and on or before the expiration of any LIBOR Interest Period, Borrower shall notify Bank (a) which interest rate Borrower has elected, (b) which LIBOR Interest Period Borrower has elected regarding each Borrowing hereunder, (c) the amount of such Borrowing and (d) the commencement date of each LIBOR Interest Period (a "LIBOR Election"). If at any time during the term hereof, Borrower fails to designate a LIBOR Interest Period and Borrower has not elected another LIBOR Interest Period, Bank may assume that Borrower has elected the Prime Rate. In addition, notwithstanding anything herein contained to the contrary, if, prior to or during with respect tot he LIBOR Rate, any change in any law, regulation or official directive, or in the interpretation thereof, by any governmental body charged with the administration thereof, shall make it unlawful for the Bank to find or maintain its funding Eurodollars of any portion of the Borrowings subject to the LIBOR Rate or otherwise to give effect to Bank's obligations as contemplated hereby: (i) Bank may, by written notice to Borrower, declare Bank's obligations in respect of the LIBOR Rate to be terminated forthwith, and (ii) the LIBOR Rate with respect to Bank shall forthwith cease to be in effect, and interest shall from and after such date be calculated at the Prime Rate, and interest shall be paid on the first (1st) day of each calendar month. Borrower hereby agrees to reimburse and indemnify Bank from all increased costs or fees incurred by Bank subsequent to the date hereof relating to the offering of interest rates based upon the LIBOR Rate. Provisions Relating to the Facility. - ------------------------------------ Borrower shall have the right to select the interest rate and the LIBOR Interest Period for each Revolving Loan on or before the first day of each LIBOR Interest Period. Each request by Borrower for a Revolving Loan under the Facility will be made by telephone prior to 11:00 A.M., Cincinnati, Ohio time on any Business Day on which a Revolving Loan is requested. Bank will, if Revolving Loans are then available to Borrower under the Facility, quote Borrower the interest rate based on the maturity requested by Borrower as of the date of such request. Borrower shall, at the time of quote, either accept or reject the quote, and if accepted, Bank will credit Borrower's account for the amount of the Revolving Loan or otherwise disburse the proceeds as agreed upon between Borrower and Bank. The amount of the interest rate on and the maturity date of each Loan shall be evidenced by the ledgers and records (including computer records) of Bank, which, in the case of a dispute, shall be conclusive except for manifest error. Each Revolving Loan funded by Bank shall be in the minimum principal sum equal to the Maximum Amount available on such date. Borrower agrees to repay Bank on the date then due each Revolving Loan now or hereafter made by Bank to Borrower, together with interest thereon at the agreed rate. Borrower shall have no right to prepay any Revolving Loan made by Bank prior to the agreed maturity date of such Revolving Loan. If any Revolving Loan is repaid prior to the last day of the applicable LIBOR Interest Period, Borrower agrees to reimburse bank for all damages and losses incurred by Bank as a result of such prepayment. The Borrower shall provide Bank with a list of those persons authorized to orally request Revolving Loan advances under this Note. Bank may rely on such list until amended in writing by Borrower. Each Revolving Loan accruing interest at the LIBOR Rate shall be for a LIBOR Interest Period agreed to between Bank and Borrower, however, each Revolving Loan shall have a minimum term of at least 7 days and shall have a maturity no greater than 90 days. Each Revolving Loan, together with interest thereon, shall be repaid in immediately available funds at the main office of Bank on the date agreed by Bank and Borrower. All outstanding principal and all accrued and unpaid interest shall be paid in full on the maturity date of the Revolving Loan. In the event Borrower shall fail to pay any Revolving Loan when due, all Revolving Loans outstanding to Borrower shall, at the option of the Bank, become immediately due and payable without presentment, demand, protest or notice of any kind. All payments of principal and interest made by Borrower to Bank shall be made no later than 2:00 P.M., Cincinnati, Ohio time, on the Business Day such payments are due. All amounts paid after such time will be credited on the following date. Borrower will pay to Bank its fees, costs and expenses (including, without limitation, reasonable attorney's fees, other professionals' fees, appraisal fees, environmental assessment fees, expert fees, court costs, litigation and other expense (collectively, "Costs") incurred or paid by bank in connection with the negotiating, documenting, administering and enforcing the Facility, the Loans and the defense, preservation and protection of Bank's rights and remedies thereunder, including without limitation, any security interest in any collateral or any other property pledged to secure the Loans, whether incurred in bankruptcy, insolvency, foreclosure or other litigation or Costs when upon such demand, Bank is entitled to disburse such sums as an advance under the Facility. Thereafter, the Costs will bear interest from the date incurred or disbursed at the highest rate set forth in the Note. This provision will survive the termination of this Agreement and/or the repayment of any amounts due or the performance of any Obligation. Due Date. - --------- In addition to the dates agreed to between Bank and Borrower relating to advances under the Facility, all outstanding amounts of principal and all accrued and unpaid interest owed to Bank shall be due and payable in full on December 31, 1998 (the "Due Date"). To secure repayment of this note and all modifications, extensions and renewals thereof, and all other Obligations (as herein defined) the Borrower to Bank, the Borrower grants Bank a continuing security interest in all of the Borrower's, now owned or hereafter acquired interests in all property in which Bank are at any time, granted a lien for any Obligation, and all property in possession of either Bank including, without limitation, money, securities, instruments, documents, letters of credit, chattel paper, or other property delivered to Bank in transit, for safekeeping, or for collection or exchange for other property, all distributions, dividends, warrants, securities and other rights in addition to such property, all rights to payment from and claims against Bank and all proceeds thereof, and all real and personal property described below ("Collateral"). The Borrower agrees to immediately deliver such additional dividends, warrants, securities or other property or rights thereto to Bank immediately upon receipt as additional Collateral and until delivery to hold same in trust for Bank. The Borrower agrees that the Bank may, at any time, call for additional Collateral satisfactory to it. All documents executed in connection with this note and all Collateral, including without limitation the following, further secure the Obligations: 100% of the outstanding common capital stock of First National Bank of Southeastern Ohio and a pledge of the securities as more particularly described in the Pledge Agreements. The Obligations secured by the Collateral shall include this note and each and every liability of the Borrower jointly or severally to Bank and all affiliates of Fifth Third Bancorp however created, direct or contingent, due or to become due, whether now existing or hereafter arising, participated in whole or in part, created by trust agreement, lease, overdraft, agreement. Or otherwise in any manner acquired by the Borrower. Said security interest shall not be enforced to the extent prohibited by the Truth in Lending Act as implemented by Federal Reserve Regulation Z. The Borrower certifies that the proceeds of this loan are to be used for business purposes. If this note is a renewal, in whole or in part, of a previous Obligation, the acceptance by Bank of this note shall not effectuate a payment but rather a continuation of the previous Obligation. Bank may charge and the Borrower agrees to pay on the above Effective Date, a note processing fee in an amount determined by Bank. Events of Default. - ------------------ This note, and all other Obligations of the Borrower of Bank, shall be and become immediately due and payable at the option of the Bank, without any demand or notice whatsoever, upon the occurrence of any of the following described events, each of which shall constitute an Event of Default: 1) Any failure to make any payment when due of the principal or interest on this note, the occurrence of any event of default as therein defined on any other Obligations of the Borrower, or a default in the Obligations under any security documents or in performing any covenants set forth in the Addendum attached hereto. 2) The death or dissolution of the Borrower, of any endorser or guarantor, or if the Borrower is a partnership, the death or dissolution of a general partner. 3) Any failure to submit to Bank current financial information upon request. 4) The creation of any lien (except liens to Bank) or the issuance of an attachment against or seizure of any of the property of, or the entry of judgment against, the Borrower. 5) In the judgment of Bank, and adverse change occurs in the ability of the Borrower to repay the Obligations, or the Bank deem themselves insecure. 6) An assignment for the benefit of the creditors of, or the commencement of any bankruptcy, receivership, insolvency, reorganization, or liquidation proceedings by or against the Borrower or any endorser or guarantor hereof. 7) The institution of any garnishment proceedings by attachment, levy or otherwise, against any Collateral, any deposit balance maintained or any property deposited with the Bank by the Borrower or any endorser or guarantor hereof. 8) The occurrence of an Event of Default under any indebtedness of any kind of Borrower owed to Bank or any wholly-owned subsidiaries of Fifth Third Bancorp. Upon the occurrence of an Event of Default herein described Bank may, at their option, cease making advances hereunder, declare this note and all other Obligations of the Borrower, to be fully due and payable in their aggregate amount together with accrued interest plus any applicable fees, and charges. In addition to any other remedy permitted by law, the Bank may at any time, without notice, apply the Collateral to this note or such other Obligations, whether due or not, and Bank may, at its option, proceed to enforce and protect its rights by an action at law or in equity or by any other appropriate proceedings. Notwithstanding any other legal or equitable rights of Bank, Bank, in the Event of Default, are (a) hereby irrevocably appointed and constituted attorney-in-fact, with full power of substitution, to exercise all rights of ownership with respect to Collateral including, but not limited to, the right to collect all income of other distributions arising therefrom and to exercise all voting rights connected with Collateral; and (b) hereby given full power to collect, sell, assign, transfer and deliver all of said Collateral or any part thereof, or any substitutes therefore, or any additions thereto, through any private or public sale without either demand or notice to the Borrower, or any advertisement, the same being hereby expressly waived, at which sale Bank is authorized to purchase said property or any part thereof, free from any right of redemption on the part of the Borrower, which is hereby expressly waived and released. In case of sale for any cause, after deducting all costs and expenses of every kind, Bank may apply, at they shall deem proper, the residue of the proceeds of such sale toward the payment of any one or more or all of the Obligations of the Borrower, whether due or not due, to Bank; after such application and the return of any surplus, the Borrower agrees to be and remains liable to Bank for any and every deficiency after application as aforesaid upon this and any other Obligations. The Borrower shall pay all costs of collection, whether or not payment is obtained before entry of judgment, which costs and fees are Obligations secured by the Collateral. If any payment is not paid when due (whether by acceleration or otherwise) or within 10 days thereafter, Borrower agrees to pay to Bank a late payment fee as provided for in any loan agreement or 5% of the payment amount, which ever is greater with a minimum fee of $20.00. After an Event of Default, the Borrower agrees to pay to Bank a fixed charge of $25.00, or the Borrower agrees that bank may, without notice, increase the above stated interest rate by 6%, whichever is greater. Under no circumstances shall said interest rate be raised to a rate which shall be in excess of the maximum rate of interest allowable under the state and/or federal usury laws in force at the time of such change. Representations and Warranties. - ------------------------------- Borrower hereby warrants and represents to Bank the following: (a) Organization and Qualification. Borrower is a duly organized, validly existing corporation in good standing under the laws of the State of Ohio, its state of incorporation, has the power and authority (corporate and otherwise) to carry on its business and to enter into and perform this Note and is qualified and licensed to do business in each jurisdiction in which such qualifications or licensing is required. All information provided to Bank with respect to Borrower and its operations is true and correct. (b) Due Authorization. The execution, delivery and performance by Borrower of this Agreement, the Pledge Agreements, this Note and the other Loan Documents have been duly authorized by all necessary corporate action, and will not contravene any law or any governmental rule or order binding on Borrower, or the articles of incorporation, code of regulations or bylaws of Borrower, nor violate any agreement or instrument by which Borrower is bound nor result in the creation of a Lien or any assets of Borrower except the Lien on any assets of Borrower except the Lien granted to Bank herein. Borrower had duly executed and delivered this Agreement, the Pledge Agreement, this Note and the other Loan Documents and they are valid and binding obligations of Borrower enforceable according to their respective terms except as limited by equitable principles and by bankruptcy, insolvency or similar laws affecting rights of creditors generally. No notice to or consent by any governmental body is needed in connection with this transaction. (c) Margin Stock. No part of the Loans will be used to purchase or carry, or to reduce or retire or refinance any credit incurred to purchase or carry, any margin stock (within the meaning of Regulations U and X of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any margin stock. If requested by Bank, Borrower will furnish to Bank statements in conformity with the requirements of Federal Reserve Form U-1. (d) Financial Condition. All financial information relating to Borrower which has been or may hereafter be delivered by Borrower or on its behalf to Bank is true and correct and has been prepared in accordance with generally accepted accounting principles consistently applied. Borrower has no material obligations or liabilities of any kind not disclosed in that financial information, and there has been no material adverse change in the financial condition of Borrower nor has Borrower suffered any damage, destruction or loss which has adversely affected its business or assets since the submission of the most recent financial information to Bank. Affirmative Covenants: - ---------------------- (a) Books and Records. ------------------ Borrower will maintain proper books of account and records and enter therein complete and accurate entries and records of all its transactions in accordance with generally accepted accounting principles and give representatives of Bank access thereto all reasonable times, including permission to examine, copy and make abstracts from any such books and records and such other information which might be helpful to Bank in evaluating the status of the Loans as it may reasonably request from time to time. Borrower will give Bank reasonable access to the Collateral and the other property securing the Obligations for the purpose of performing examinations thereof and to verify its condition or existence. (b) Financial Statements. --------------------- Borrower will maintain a standard and modern system for accounting and will furnish to Bank: (i) Within thirty (30) days after the end of each quarter, a copy of Borrower's consolidated financial statements for that quarter and for the year to date in a form reasonably acceptable to Bank, prepared and certified as complete and correct, subject to changes resulting from year-end adjustments, by the principal financial officer Borrower; (ii) Within ninety (90) days after the end of each fiscal year, a copy of Borrower's consolidated financial statements for that year audited by a firm of independent certified public accountants acceptable to Bank (which acceptance will not be unreasonably withheld), and accompanied by a standard audit opinion of such accountants without qualifications; (iii) All of the statements referred to in (i) and (ii) above shall be in conformance with generally accepted accounting principles; (iv) Prior to the end of each fiscal year, a projected balance sheet, projected income statement and projected statement of cash flow for the subsequent fiscal year prepared in accordance with generally accepted accounting principles consistently applied; (v) Immediately upon any officer of Borrower obtaining knowledge of any condition or event which constitutes or, after notice or lapse of time or both, constitutes an Event of Default, a certificate of such person specifying the nature and period of the existence thereof, and what action Borrower has taken or is taking or proposes to take in respect thereof; If at any time Borrower has any additional subsidiaries which have financial statements that could be consolidated with those of Borrower under generally accepted accounting principles, the financial statements required by subsections (i) and (ii) above will be the financial statements of Borrower and all such subsidiaries prepared on a consolidated consolidating basis. (c) Condition and Repair. --------------------- Borrower will maintain its assets in good repair and working order and will make all appropriate repairs and replacements thereof. (d) Existence; Business. -------------------- Borrower will (a) maintain its exercise, (b) engage primarily in business of the same general character as that now conducted, and (c) refrain from entering into any lines of business substantially different from the business or activities in which Borrower is presently engaged. (e) Compliance with Laws. --------------------- Borrower will comply with all federal, state and local laws, regulations and orders applicable to Borrower or its assets including but not limited to all Environmental Laws, in all respects material to Borrower's business, assets or prospects and will immediately notify Bank of any violation of any rule, regulation, statue, ordinance, order or law relating to the public health or the environment and of any complaint or notifications received by Borrower regarding to any environmental or safety and health rule, regulation, statue, ordinance or law. (f) Notice of Default. ------------------ Borrower will, within three (3) days of its knowledge thereof, give written notice to Bank of: (i) the occurrence of any event or the existence of any condition which would be, after notice or lapse of applicable grace periods, an Event of Default, and (ii) the occurrence of any event or the existence of any condition which would prohibit Borrower from continuing to make the representations set forth in this Agreement. (g) Other Amounts Deemed Loans. --------------------------- If Borrower fails to pay any tax, assessment, governmental charge or levy or to maintain insurance within the time permitted or required by this Agreement, or to discharge any Lien prohibited hereby, or to comply with any other Obligations, Bank may, but shall not be obligated to pay, satisfy, discharge or bond the same for the account of Borrower, and to the extent permitted by law and at the option of Bank, all monies so paid by Bank on behalf of Borrower will be deemed Loans and Obligations. Negative Covenants. - ------------------- (a) Merger; Disposition of Assets. ------------------------------ Borrower will not, without the prior written consent of Bank, which consent shall not be unreasonably withheld (i) change its capital structure, (ii) merge or consolidate with any other corporation where borrower is not surviving entity, (iii) amend or change its Articles of Incorporation or Code of Regulations or (iv) sell, transfer or otherwise dispose of all or any substantial part of its assets, whether now owned or hereafter acquired. (b) Minimum Tangible Net Worth. --------------------------- Borrower will not permit its Tangible Net Worth, on a consolidated basis, to be less than $50,000,000 as of the date hereof which shall be increased as of the first day of each fiscal quarter (commencing with the first fiscal quarter commencing subsequent to the date of this Note) by an amount equal to 40% of Borrower's cumulative earnings for each prior fiscal quarter of Borrower. (c) Loan Loss Reserve to Non-Performing Assets. ------------------------------------------- Borrower will not permit the ratio of (i) its Minimum Loan Loss Reserve, on a consolidated basis (as shown on Borrower's quarterly and annual financial statements delivered to Bank), to (ii) its Non- Performing Assets (as shown on Borrower's quarterly and annual financial statements delivered to Bank), to (ii) its Non-Performing Assets (as shown on Borrower's quarterly and annual financial statements delivered to Bank) to be less than 1.50 to 1.00 at any time during the term hereof. (d) Adequate Capitalization. ------------------------ Borrower will not permit its Capitalization Ratios as required by 12 U.S.C. Section 1831 (and any regulations issued thereunder) to be less that the minimums required by such statute at any time during the term hereof. Definitions. - ------------ "Collateral" shall mean all shares of common capital stock of First National Bank of Southeastern Ohio and the other securities described in the Pledge Agreement. "Default Rate" means six percent (6%) in excess of the interest rate otherwise in effect under amounts outstanding under the Note. In no event will the interest rate accruing under such Note be increased to be in excess of the maximum interest rate permitted by applicable state or federal usury laws then in effect. "LIBOR Rate" means the rate (adjusted for reserves if Bank is required to maintain reserves with respect to relevant advances) being asked on an amount of Eudodollar deposits equal to the amount of Borrowings subject to a LIBOR Rate Election on the first day of a LIBOR Interest Period and which has a maturity corresponding to the maturity of the LIBOR Interest Period, as reported by the TELERATE rate reporting system (or any successor) as determined by Bank by noon on the Effective Date of the LIBOR Interest Period. Each determination by Bank of the LIBOR Rate shall be conclusive in the absence of manifest error. "LIBOR Interest Period" mans, will respect to a Borrowing elected to accrue interest at the LIBOR Rate, periods of 30, 60, or 90 days, at Borrower's election, commencing on a business day selected by the Borrower pursuant to this Note. Such LIBOR Interest Period shall end on the day in the succeeding calendar month which corresponds numerically to the beginning day of such succeeding month, such LIBOR Interest period shall end on the last business day of such succeeding month. If a LIBOR Interest Period would otherwise end on a day which is not a business day, such LIBOR Interest Period shall end on the next succeeding business day, provided, however, that if said next succeeding business day falls in a new month, such LIBOR Interest Period shall end on the immediately preceding business day. "Lien" means any security interest, mortgage, pledge, assignment, lien or other encumbrance of any kind, including interests of vendors or lessors under conditional sale contracts and capitalized leases. "Loan Documents" means this Note, the Pledge Agreement, and every other document or agreement executed by any party evidencing, guarantying or securing any of the Obligations; and "Loan Document" means any one of the Loan Documents. "Obligation(s) means all loans, advances, indebtedness, liabilities and obligations of Borrower owed to each of Bank and the Affiliates of Fifth Third Bancorp of every kind and description whether now existing or hereafter arising including without limitations, those owed by Borrower to others and acquired by bank or any Affiliate of Fifth Third Bancorp, by purchase, assignment or otherwise, and whether direct or indirect, primary or as guarantor or surety, absolute or contingent, liquidated or unliquidated, matured or unmatured, whether or not secured by additional collateral, and including without limitation all liabilities, obligations to perform or forbear from performing acts, all amounts represented by letters of credit now or hereafter issued by Bank for the benefit of or at the request of Borrower, and all expenses and attorneys' fees incurred by bank and any Affiliate of Fifth Third Bancorp under this Note or any other document or instrument related to any of the foregoing. "Pledge Agreement" means the Pledge Agreement date _________________, 199 ___, between Borrower and Bank, securing the Obligations. "Prime Rate" means the rate of interest per annum announced to be its prime rate from time to time by bank at its principal office in Cincinnati, Ohio whether or not Bank will at times lend to borrowers at lower rates of interest or, if there is no such prime rate, then its base rate or such other rate as may be substituted by Bank for the prime rate. "Tangible Net Worth" means the total of the capital stock (less treasury stock), paid-in surplus, general contingency reserves and retained earnings (deficit) of Borrower and any Subsidiary as determined on a consolidated basis in accordance with generally accepted accounting principles, after eliminating all inter-company items and all amounts properly attributable to minority interests, if any, in the stock and surplus of any Subsidiary, minus the following items (without duplication of deductions) if any, appearing on the consolidated balance sheet of Borrower: (i) all deferred charges (less amortization, unamortized debt discount and expense and corporate organization expenses); (ii) the book amount of all assets which would be treated as intangibles under generally accepted accounting principles, including, without limitation, such items as good-will, trademark applications, trade names, service marks, brand names, copyrights, patents, patent applications and licenses, and rights with respect to the foregoing; (iii) the amount by which aggregate inventories or aggregate securities appearing on the asset side of such consolidated balance sheet exceed the lower of cost or Market value (at the date of such balance sheet) thereof; and (iv) any subsequent write-up in the book amount of any asset resulting from a Revaluation thereof from the book amount entered upon acquisition of such asset. ENTIRE AGREEMENT: The Borrower agrees that there are no conditions or understandings which are not expressed in this note and the documents referred to herein. WAIVER: No failure on the part of Bank to exercise any of its rights hereunder shall be deemed a waiver of any such rights or of any default. Demand, presentment, protest and notice of dishonor, notice of default are hereby waived. Borrower and all co-makers and accommodation makers of this note, hereby waives all suretyship defenses including but not limited to all defenses based upon impairment of Collateral and all suretyship defenses described in Section 3-605 of the Uniform Commercial Code, as revised in 1990 (the "UCC"). Such waiver is entered to the full extent permitted by Section 3-05 (i) of the UCC. JURY WAIVER: THE BORROWER AND ANY CO-MAKERS, ACCOMMODATION MAKERS, ENDORSERS OR GUARANTORS HEREOF, WAIVE THE RIGHT TO A TRIAL BY JURY OF ANY MATTERS ARISING OUT OF THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY. The declaration of invalidity of any provision of this note shall not affect any part of the remainder of the provisions. This note is supplemented by the terms and conditions of an Addendum and Note dated of even date herewith between the Borrower and Bank. Warrant of attorney: The Borrower, jointly and severally, authorize any attorney-at-law to appear in any court of record after maturity of this note, whether acceleration or otherwise, to waive the issuance and service of process and to confess judgment against them in favor of the Bank for the principal sum due herein together with interest, charges, court costs and attorney's fees, and to waive and release all errors, rights of appeal, exemptions and stays of execution. The Borrower also agrees that the attorney acting for the Borrower as set forth in this paragraph may be compensated by bank for such services, and the Borrower waives any conflict of interest caused by such representation and compensation arrangement. This warrant of attorney to confess judgment shall be construed under the laws of the State of Ohio. WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. DATE DUE: December 31, 1999 PEOPLES BANCORP, INC. ADDRESS: P.O. Box 738 By: /s/ JOHN W. CONLON -------------------- ------------------ Marietta, Ohio 45750 Its: Chief Financial Officer & Treasurer -------------------- ----------------------------------- Accepted and agreed this 11th day of May , 1998. ------ -------- ----- THE FIFTH THIRD BANK By: /s/ MICHAEL N. WALTER ------------------------ Its: Assistant Vice President ------------------------ EX-10 10 EXHIBIT 10M STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT PEOPLES BANCORP INC. 1995 Peoples Bancorp Inc. Stock Option Plan (Incentive Stock Options) THIS AGREEMENT is made to be effective as of ______________, by and between Peoples Bancorp Inc., an Ohio corporation (the "COMPANY"), and ______________, (the "OPTIONEE"). WITNESSETH: ----------- WHEREAS, the Board of Directors of the COMPANY adopted the Peoples Bancorp Inc. 1995 Stock Option Plan (the "PLAN") on January 19, 1995; and WHEREAS, the stockholders of the COMPANY, upon the recommendation of the COMPANY's Board of Directors, approved the PLAN at the Annual Meeting of Shareholders held on April 4, 1995; and WHEREAS, pursuant to the provisions of the PLAN, the Board of Directors of the COMPANY has appointed a Stock Option Committee (the "COMMITTEE") to administer the PLAN and the COMMITTEE has determined that an option to acquire common shares, without par value (the "COMMON SHARES"), of the COMPANY should be granted to the OPTIONEE under the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises, the parties hereto make the following agreements, intending to be legally bound thereby: 1. Grant of OPTION. ---------------- The COMPANY hereby grants to the OPTIONEE an option (the "OPTION") to purchase ____________________COMMON SHARES of the COMPANY. The OPTION is intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "CODE"). 2. Terms and Conditions of the OPTION. ----------------------------------- (A) OPTION PRICE. The purchase price (the "OPTION PRICE") to be paid by the OPTIONEE to the COMPANY upon the exercise of the OPTION shall be $_____ per share (being 100% of the Fair Market Value (as that term is defined in the PLAN) for the COMMON SHARES of the COMPANY on the date of this Agreement), subject to adjustment as provided herein. (B) Exercise of the OPTION. The OPTION may not be exercised until the OPTIONEE shall have_______________________________________. Thereafter, the OPTION may be exercised as follows: i) at any time after _________________________________________ of the COMMON SHARES subject to the OPTION; ii) at any time after _________________________________________ of the COMMON SHARES subject to the OPTION; iii) at any time after ________________________________________ of the COMMON SHARES subject to the OPTION; and iv) at any time after _______________________________________ of the COMMON SHARES subject to the OPTION. Subject to the other provisions of this Agreement, if the OPTION becomes exercisable as to certain COMMON SHARES, it shall remain exercisable as to those COMMON SHARES until the date of expiration of the OPTION term. The COMMITTEE may, but shall not be required to (unless otherwise provided in this Agreement), accelerate the schedule of the time or times when the OPTION may be exercised. The grant of this OPTION shall not confer upon the OPTIONEE any right to continue as an employee of the COMPANY or of any subsidiary of the COMPANY nor limit in any way the right of the COMPANY or of any such subsidiary to terminate the status of the OPTIONEE as an employee in accordance with law or the COMPANY's or the subsidiary's, as appropriate, governing corporate documents. (C) OPTION Term. The OPTION shall in no event be exercisable after the expiration of ten (10) years from the date of this Agreement. (D) Method of Exercise. To the extent that it is exercisable, the OPTION may be exercised by mailing or delivering to the COMMITTEE a written notice of exercise, signed by the OPTIONEE, or in the event of the death of the OPTIONEE, by such other person as is entitled to exercise the OPTION. The notice of exercise shall state the number of COMMON SHARES in respect of which the OPTION is being exercised, and shall either be accompanied by the payment of the full OPTION PRICE of such COMMON SHARES, or shall fix a date (not more than ten business days from the date of the notice) for the payment of the full OPTION PRICE of the COMMON SHARES being purchased. The OPTION PRICE may be paid in cash, or by the transfer by the OPTIONEE to the COMPANY of free and clear COMMON SHARES already owned by the OPTIONEE having a Fair Market Value (as that term is defined in the PLAN) on the exercise date equal to the OPTION PRICE, or by a combination of cash and COMMON SHARES already owned by the OPTIONEE equal in the aggregate to the OPTION PRICE for the COMMON SHARES being purchased. 3. Adjustments and Changes in the COMMON SHARES subject to the OPTION. ------------------------------------------------------------------- In the event there is any change in the COMMON SHARES resulting from stock splits, stock dividends, combinations or exchanges of shares, or other similar capital adjustments, the number of COMMON SHARES subject to the OPTION and the OPTION PRICE of the optioned COMMON SHARES shall be appropriately adjusted to reflect such change. 4. Vesting Acceleration of OPTIONS in an Acquisition Transaction. -------------------------------------------------------------- (A) In the event the COMPANY shall consolidate with, merge into, or transfer all or substantially all of its assets (an "ACQUISITION TRANSACTION") to another corporation or corporations (herein referred to as "SUCCESSOR EMPLOYER CORPORATION"), then each OPTION outstanding under the PLAN shall become exercisable in full, whether or not then exercisable by its terms, immediately upon consummation of the ACQUISITION TRANSACTION. As a condition of any such ACQUISITION TRANSACTION, the COMPANY shall require that the successor employer corporation obligate itself to continue this PLAN and to assume all obligations under the PLAN in a manner consistent with the provisions of Section 424(a) of the CODE. In the event that such SUCCESSOR EMPLOYER CORPORATION terminates for any reason the employment of any OPTIONEE who is a Key Employee, as defined by the PLAN, within the one year period immediately following the consummation of the ACQUISITION TRANSACTION, such OPTIONEE shall have the right to exercise his then unexercised OPTIONS during the period ending on the earlier of the expiration of the term of the OPTIONS or three months following the date of the OPTIONEE's termination of employment. (B) The grant of the OPTION shall not affect in any way the right of the COMPANY to consolidate with, merge into, or transfer all or substantially all of its assets to, another corporation or corporations. 5. Non-Assignability of the OPTION. -------------------------------- The OPTION shall not be assignable or transferable except, in the event of the death of the OPTIONEE, by the will of the OPTIONEE, or by the laws of descent and distribution. The OPTION shall be exercisable, during the OPTIONEE's lifetime, only by the OPTIONEE. 6. Exercise After OPTIONEE Ceases to be an Employee. ------------------------------------------------- If an OPTIONEE's employment with the COMPANY and its subsidiaries terminates for any reason other than (i) death of the OPTIONEE, (ii) the disability of the OPTIONEE within the meaning of Section22(e)(3) of the CODE, (iii) the retirement of the OPTIONEE under the provisions of any retirement plan of the COMPANY and its subsidiaries, or (iv) any reason (other than for an act of fraud or intentional misrepresentation, or embezzlement, misappropriation or conversion of assets or opportunities of the COMPANY or any subsidiary, hereafter referred as "CAUSE") after the OPTIONEE has been employed by the COMPANY and/or its subsidiaries for at least 10 consecutive years prior to the OPTIONEE's termination of employment, the portion of the OPTION which has not yet become exercisable in accordance with Section2(B), shall immediately terminate. If the termination of employment of the OPTIONEE was due to retirement under the provisions of any retirement plan of the COMPANY or any subsidiary or if the termination of employment was due to a reason other than for CAUSE and the OPTIONEE had been employed by the COMPANY and/or one or more subsidiaries for at least 10 consecutive years prior to the OPTIONEE's termination of employment, all of such OPTIONEE's OPTIONS may be exercised in full, whether or not then exercisable in accordance with Section 2(B), and the right of the OPTIONEE to exercise the OPTIONS shall terminate upon the earlier to occur of the expiration of the term of the OPTIONS or three months after the date of termination of employment. If the termination of employment was due to the death of an OPTIONEE who was an employee of the COMPANY and/or any subsidiary at the time of death, such OPTIONS may be exercised in full, whether or not then exercisable in accordance with Section 2(B), and the right of the representative or representatives of the OPTIONEE's estate (or the person or persons who acquire by bequest or inheritance) the right to exercise the OPTIONEE's OPTIONS) to exercise the OPTIONS shall terminate upon the earlier to occur of the expiration of the term of the OPTIONS or one year after the date of death of the OPTIONEE. If the termination of employment was due to the disability of the OPTIONEE within the meaning of Section22(e)(3) of the CODE, such OPTIONS may be exercised in full, whether or not then exercisable in accordance with Section 2(B), and the right of the OPTIONEE to exercise the OPTIONS shall terminate upon the earlier to occur of the expiration of the term of the OPTIONS or one year after the date of termination of employment. If the termination of employment of the OPTIONEE was due to reasons other than for CAUSE and the OPTIONEE had not been employed by the COMPANY and/or one or more subsidiaries for at least 10 consecutive years prior to the OPTIONEE's termination of employment, the OPTIONEE's OPTIONS may be exercised only to the extent then exercisable under Section 2(B) on the date of termination of employment, and the right of the OPTIONEE to exercise the OPTIONS shall terminate upon the earlier to occur of the expiration of the term of the OPTIONS or three months after the date of termination of employment. If the termination of employment of the OPTIONEE was for CAUSE, all OPTIONS which have not been exercised as of the date of termination of employment shall terminate immediately as of the date of termination of employment. 7. Restrictions on Exercise. ------------------------- Anything contained in this Agreement or elsewhere to the contrary notwithstanding: (A) The OPTION shall not be exercisable for the purchase of any COMMON SHARES subject thereto except for: i) COMMON SHARES subject thereto which at the time of such exercise and purchase are registered under the Securities Act of 1933, as amended (the "ACT"); and ii) COMMON SHARES subject thereto which at the time of such exercise and purchase are exempt or are the subject matter of an exempt transaction or are registered by description, by coordination or by qualification, or at such time are the subject matter of a transaction which has been registered by description, all in accordance with Chapter 1707 of the Ohio Revised Code, as amended; and iii) COMMON SHARES subject thereto in respect of which the laws of any state applicable to such exercise and purchase have been satisfied. (B) If any COMMON SHARES subject to the OPTION are sold or issued upon the exercise thereof to a person who (at the time of such exercise or thereafter) is an affiliate of the COMPANY for purposes of Rule144 promulgated under the ACT, or are sold and issued in reliance upon exemptions under the securities laws of any state, then upon such sale and issuance: i) Such COMMON SHARES shall not be transferable by the holder thereof, and neither the COMPANY nor its transfer agent or registrar, if any, shall be required to register or otherwise to give effect to any transfer thereof and may prevent any such transfer, unless the COMPANY shall have received an opinion from its counsel to the effect that any such transfer would not violate the ACT or the applicable laws of any state; and ii) The COMPANY may cause each share certificate evidencing such COMMON SHARES to bear a legend reflecting the applicable restrictions on the transfer thereof. (C) Any share certificate issued to evidence COMMON SHARES as to which the OPTION has been exercised may bear such legends and statements as the COMPANY shall deem advisable to insure compliance with applicable federal and state laws and regulations. (D) Nothing contained in this Agreement or elsewhere shall be construed to require the COMPANY to take any action whatsoever to make the OPTION exercisable or to make transferable any COMMON SHARES purchased and issued upon the exercise of the OPTION. 8. Rights of the OPTIONEE as a Shareholder. ---------------------------------------- The OPTIONEE shall have no rights or privileges as a shareholder of the COMPANY with respect to any COMMON SHARES of the COMPANY covered by the OPTION until the date of issuance and delivery of a certificate to the OPTIONEE evidencing such COMMON SHARES. 9. PLAN as Controlling. -------------------- All terms and conditions of the PLAN applicable to the OPTION which are not set forth in this Agreement shall be deemed incorporated herein by reference. In the event that any term or condition of this Agreement is inconsistent with the terms and conditions of the PLAN, the PLAN shall be deemed controlling. 10. Governing Law. -------------- This Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio. 11. Rights and Remedies Cumulative. ------------------------------- All rights and remedies of the COMPANY and of the OPTIONEE enumerated in this Agreement shall be cumulative and, except as expressly provided otherwise in this Agreement, none shall exclude any other rights or remedies allowed by law or in equity, and each of said rights or remedies may be exercised and enforced concurrently. 12. Captions. --------- The captions contained in this Agreement are included only for convenience of reference and do not define, limit, explain or modify this Agreement or its interpretation, construction or meaning and are no way to be construed as a part of this Agreement. 13. Notices and Payments. --------------------- All payments required or permitted to be made under the provisions of this Agreement, and all notices and communications required or permitted to be given or delivered under this Agreement to the COMPANY or to the OPTIONEE, which notices or communications must be in writing, shall be deemed to have been given if delivered by hand, or mailed by first-class mail (postage prepaid), addressed as follows: (A) If to the COMPANY, to: Peoples Bancorp Inc. Attn: Stock Option Committee 138 Putnam Street P. O. Box 738 Marietta, Ohio 45750-0738 (B) If to the OPTIONEE, to the address of the OPTIONEE set forth at the conclusion of this Agreement. The COMPANY or the OPTIONEE may, by notice given to the other in accordance with this Agreement, designate a different address for making payments required or permitted to be made, and for the giving of notices or other communications, to the party designating such new address. Any payment, notice or other communication required or permitted to be given in accordance with this Agreement shall be deemed to have been given on the date of the postmark stamped on the envelope by the U.S. Postal Service, metered dates not being acceptable, when placed in the U.S. Mail, addressed and mailed as provided in this Agreement. 14. Severability. ------------- If any provision of this Agreement, or the application of any provision hereof to any person or any circumstance shall be determined to be invalid or unenforceable, then such determination shall not affect any other provision of this Agreement or the application of said provision to any other person or circumstance, all of which other provisions shall remain in full force and effect, and it is the intention of each party to this Agreement that if any provision of this Agreement is susceptible of two or more constructions, one of which would render the provision enforceable and the other or others of which would render the provision unenforceable, then the provision shall have the meaning which renders it enforceable. 15. Number and Gender. ------------------ When used in this Agreement, the number and gender of each pronoun shall be construed to be such number and gender as the context, circumstances or its antecedent may require. 16. Entire Agreement. ----------------- This Agreement constitutes the entire agreement between the COMPANY and the OPTIONEE in respect of the subject matter of this Agreement, and this Agreement supersedes all prior and contemporaneous agreements between the parties hereto in connection with the subject matter of this Agreement. No change, termination or attempted waiver of any of the provisions of this Agreement shall be binding upon any party hereto unless contained in a writing signed by the party to be charged. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed to be effective as of the date first written above. COMPANY: Peoples Bancorp Inc., an Ohio corporation By: ____________________________________ Its: Secretary, Stock Option Committee --------------------------------- OPTIONEE: ________________________________________ Optionee Name _________________ Street Address _______________________ City, State and Zip Code ______________________ Social Security Number EX-10 11 EXHIBIT 10O STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT PEOPLES BANCORP INC. NON-EMPLOYEE DIRECTOR 1998 Peoples Bancorp Inc. Stock Option Plan (Non-Qualified Stock Options) THIS AGREEMENT is made to be effective as of ____________, by and between Peoples Bancorp Inc., an Ohio corporation (the "COMPANY"), and ____________ (the "OPTIONEE"). WITNESSETH: ----------- WHEREAS, the Board of Directors of the COMPANY adopted the Peoples Bancorp Inc. 1998 Stock Option Plan (the "PLAN") on December 11, 1997; and WHEREAS, the shareholders of the COMPANY, upon the recommendation of the COMPANY's Board of Directors, approved the PLAN at the Annual Meeting of Shareholders held on April 9, 1998; and WHEREAS, pursuant to the provisions of the PLAN, directors of the COMPANY who are not also employees of the COMPANY (the "NON-EMPLOYEE DIRECTORS") are to be granted options to acquire common shares (the "COMMON SHARES") of the COMPANY in accordance with the provisions of the PLAN; and WHEREAS, pursuant to the provisions of the PLAN, the OPTIONEE, who is a NON-EMPLOYEE DIRECTOR, is to be granted an option to acquire ___________ COMMON SHARES of the COMPANY, effective on ____________ (converted to ____________ COMMON SHARES of the COMPANY on and after April 13, 1998, pursuant to a 3-for-2-stock split), upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises, the parties hereto make the following agreements, intending to be legally bound thereby: SECTION 1 Grant of Option. ---------------- The COMPANY hereby grants to the OPTIONEE an option (the "OPTION") to purchase ____________ COMMON SHARES of the COMPANY (converted to ________________________ COMMON SHARES of the COMPANY on and after April 13, 1998, pursuant to a 3-for-2-stock split). The OPTION is not intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "CODE"). SECTION 2 Terms and Conditions of the OPTION. ----------------------------------- (A) OPTION Price. The purchase price (the "OPTION PRICE") to be paid by the OPTIONEE to the COMPANY upon the exercise of the OPTION shall be $______ per share (converted to $_____ per share on and after April 13, 1998, pursuant to a 3-for-2-stock split), subject to further adjustment as provided herein. (B) Exercise of the OPTION. The OPTION may be exercised no earlier than six months from the date of this Agreement. In the event the COMPANY shall consolidate with, merge into, or transfer all or substantially all of its assets (an "ACQUISITION TRANSACTION") to another corporation or corporations, then the OPTION shall become exercisable in full, whether or not then exercisable by its terms, immediately upon consummation of the ACQUISITION TRANSACTION. Subject to the other provisions of this Agreement, if the OPTION becomes exercisable as to certain COMMON SHARES, it shall remain exercisable as to those COMMON SHARES until the date of expiration of the OPTION term. The grant of this OPTION shall not confer upon the OPTIONEE any right to continue as a director of any subsidiary of the COMPANY nor limit in any way the right of the COMPANY or the shareholders of the COMPANY to terminate his status as a director in accordance with law or the COMPANY's governing corporate documents. (C) OPTION Term. The OPTION shall in no event be exercisable after the expiration of ten (10) years from the date of this Agreement. (D) Method of Exercise. To the extent that it is exercisable, the OPTION may be exercised by mailing or delivering to the Stock Option Committee of the Board of Directors of the COMPANY (the "COMMITTEE") a written notice of exercise, signed by the OPTIONEE, or in the event of the death of the OPTIONEE, by such other person as is entitled to exercise the OPTION. The notice of exercise shall state the number of COMMON SHARES in respect of which the OPTION is being exercised, and shall either be accompanied by the payment of the full OPTION PRICE of such COMMON SHARES, or shall fix a date (not more than 10 business days from the date of the notice) for the payment of the full OPTION PRICE of the COMMON SHARES being purchased. The OPTION PRICE may be paid in cash, or by the transfer by the OPTIONEE to the COMPANY of free and clear COMMON SHARES already owned by the OPTIONEE having a Fair Market Value (as that term is defined in the PLAN) on the exercise date equal to the OPTION PRICE, or by a combination of cash and COMMON SHARES already owned by the OPTIONEE equal in the aggregate to the OPTION PRICE for the COMMON SHARES being purchased. SECTION 3 Adjustments and Changes in the COMMON SHARES subject to the OPTION. ------------------------------------------------------------------- In the event there is any change in the COMMON SHARES resulting from stock splits, stock dividends, combinations or exchanges of shares, or other similar capital adjustments, the number of COMMON SHARES subject to the OPTION and the OPTION PRICE of the optioned COMMON SHARES shall be appropriately adjusted to reflect such change. SECTION 4 Assignability of the OPTION. ---------------------------- With the permission of the Committee, the OPTIONEE may transfer this OPTION to a revocable inter-vivos trust as to which the OPTIONEE is the settlor, or may transfer this OPTION to a "Permissible Transferee." A Permissible Transferee is defined as any member of the immediate family of the OPTIONEE, any trust, whether revocable or irrevocable, solely for the benefit of members of the OPTIONEE's immediate family, or any partnership whose only partners are members of the OPTIONEE's immediate family. Any such Permissible Transferee shall remain subject to all of the terms and conditions applicable to this OPTION and subject to the rules and regulations prescribed by the Committee. This OPTION may not be retransferred by a Permissible Transferee except by will or the laws of descent and distribution, and then only to another Permissible Transferee. Other than described above, this OPTION may not be transferred except by will or the laws of descent and distribution and, during the lifetime of an OPTIONEE to whom granted, may be exercised only by him, his guardian or legal representative. SECTION 5 Exercise After OPTIONEE Ceases to be a Director. ------------------------------------------------ Except as otherwise provided in this Section5, if the OPTIONEE ceases to be a director of the COMPANY for any reason other than the OPTIONEE's death or due to an act of (i) fraud or intentional misrepresentation, or (ii) embezzlement, misappropriation or conversion of assets or opportunities of the COMPANY or any subsidiary ("Cause"), the OPTION granted to the OPTIONEE under this Agreement may be exercised in full, whether or not then exercisable by its terms, on or before the expiration of the term of the OPTION; provided, however, that if the OPTIONEE shall die prior to the expiration of the term of the OPTION, the OPTION may only be exercised on or before the earlier of the expiration of the OPTION term or two years following the date of death. If the OPTIONEE ceases to be a director of the COMPANY because of death, the OPTION may be exercised in full, whether or not then exercisable by its terms, by the representative or representatives of the OPTIONEE's estate, or the person or persons who acquired (by bequest or inheritance) the rights to exercise the OPTION, only on or before the earlier of the expiration of the term of the OPTION or two years following the date of death. If the OPTIONEE ceases to be a director of the COMPANY and/or any subsidiary of the COMPANY due to Cause, all of then unexercised OPTIONS shall immediately terminate. SECTION 6 Restrictions on Exercise. ------------------------- Anything contained in this Agreement or elsewhere to the contrary notwithstanding: (A) The OPTION shall not be exercisable for the purchase of any COMMON SHARES subject thereto except for: (i) COMMON SHARES subject thereto which at the time of such exercise and purchase are registered under the Securities Act of 1933, as amended (the "ACT"); and (ii) COMMON SHARES subject thereto which at the time of such exercise and purchase are exempt or are the subject matter of an exempt transaction or are registered by description, by coordination or by qualification, or at such time are the subject matter of a transaction which has been registered by description, all in accordance with Chapter 1707 of the Ohio Revised Code, as amended; and (iii) COMMON SHARES subject thereto in respect of which the laws of any state applicable to such exercise and purchase have been satisfied. (B) If any COMMON SHARES subject to the OPTION are sold or issued upon the exercise thereof to a person who (at the time of such exercise or thereafter) is an affiliate of the COMPANY for purposes of Rule144 promulgated under the ACT, or are sold and issued in reliance upon exemptions under the securities laws of any state, then upon such sale and issuance: (i) Such COMMON SHARES shall not be transferable by the holder thereof, and neither the COMPANY nor its transfer agent or registrar, if any, shall be required to register or otherwise to give effect to any transfer thereof and may prevent any such transfer, unless the COMPANY shall have received an opinion from its counsel to the effect that any such transfer would not violate the ACT or the applicable laws of any state; and (ii) The COMPANY may cause each share certificate evidencing such COMMON SHARES to bear a legend reflecting the applicable restrictions on the transfer thereof. (C) Any share certificate issued to evidence COMMON SHARES as to which the OPTION has been exercised may bear such legends and statements as the COMPANY shall deem advisable to insure compliance with applicable federal and state laws and regulations. (D) Nothing contained in this Agreement or elsewhere shall be construed to require the COMPANY to take any action whatsoever to make the OPTION exercisable or to make transferable any COMMON SHARES purchased and issued upon the exercise of the OPTION. SECTION 7 Rights of the OPTIONEE as a Shareholder. ---------------------------------------- The OPTIONEE shall have no rights or privileges as a shareholder of the COMPANY with respect to any COMMON SHARES of the COMPANY covered by the OPTION until the date of issuance and delivery of a certificate to the OPTIONEE evidencing such COMMON SHARES. SECTION 8 PLAN as Controlling. -------------------- All terms and conditions of the PLAN applicable to the OPTION which are not set forth in this Agreement shall be deemed incorporated herein by reference. In the event that any term or condition of this Agreement is inconsistent with the terms and conditions of the PLAN, the PLAN shall be deemed controlling. SECTION 9 Governing Law. -------------- This Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio. SECTION 10 Rights and Remedies Cumulative. ------------------------------- All rights and remedies of the COMPANY and of the OPTIONEE enumerated in this Agreement shall be cumulative and, except as expressly provided otherwise in this Agreement, none shall exclude any other rights or remedies allowed by law or in equity, and each of said rights or remedies may be exercised and enforced concurrently. SECTION 11 Captions. --------- The captions contained in this Agreement are included only for convenience of reference and do not define, limit, explain or modify this Agreement or its interpretation, construction or meaning and are no way to be construed as a part of this Agreement. SECTION 12 Notices and Payments. --------------------- All payments required or permitted to be made under the provisions of this Agreement, and all notices and communications required or permitted to be given or delivered under this Agreement to the COMPANY or to the OPTIONEE, which notices or communications must be in writing, shall be deemed to have been given if delivered by hand, or mailed by first-class mail (postage prepaid), addressed as follows: (A) If to the COMPANY, to: Peoples Bancorp Inc. Attn.: Stock Option Committee 138 Putnam Street P. O. Box 738 Marietta, Ohio 45750-0738 (B) If to the OPTIONEE, to the address of the OPTIONEE set forth at the conclusion of this Agreement. The COMPANY or the OPTIONEE may, by notice given to the other in accordance with this Agreement, designate a different address for making payments required or permitted to be made, and for the giving of notices or other communications, to the party designating such new address. Any payment, notice or other communication required or permitted to be given in accordance with this Agreement shall be deemed to have been given on the date of the postmark stamped on the envelope by the U.S. Postal Service, metered dates not being acceptable, when placed in the U.S. Mail, addressed and mailed as provided in this Agreement. SECTION 13 Severability. ------------- If any provision of this Agreement, or the application of any provision hereof to any person or any circumstance shall be determined to be invalid or unenforceable, then such determination shall not affect any other provision of this Agreement or the application of said provision to any other person or circumstance, all of which other provisions shall remain in full force and effect, and it is the intention of each party to this Agreement that if any provision of this Agreement is susceptible of two or more constructions, one of which would render the provision enforceable and the other or others of which would render the provision unenforceable, then the provision shall have the meaning which renders it enforceable. SECTION 14 Number and Gender. ------------------ When used in this Agreement, the number and gender of each pronoun shall be construed to be such number and gender as the context, circumstances or its antecedent may require. SECTION 15 Entire Agreement. ----------------- This Agreement constitutes the entire agreement between the COMPANY and the OPTIONEE in respect of the subject matter of this Agreement, and this Agreement supersedes all prior and contemporaneous agreements between the parties hereto in connection with the subject matter of this Agreement. No change, termination or attempted waiver of any of the provisions of this Agreement shall be binding upon any party hereto unless contained in a writing signed by the party to be charged. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed to be effective as of the date first written above. COMPANY: PEOPLES BANCORP INC., an Ohio corporation By: ____________________________________ Charles R. Hunsaker Its: General Counsel and Secretary to the Stock Option Committee Date: __________________________________ OPTIONEE: ___________________________________________ Date: __________________________________ EX-10 12 EXHIBIT 10P STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT PEOPLES BANCORP INC. CONSULTANT/ADVISOR 1998 Peoples Bancorp Inc. Stock Option Plan (Non-Qualified Stock Options) THIS AGREEMENT is made to be effective as of __________, by and between Peoples Bancorp Inc., an Ohio corporation (the "COMPANY"), and _____________ (the "OPTIONEE"). WITNESSETH: ----------- WHEREAS, the Board of Directors of the COMPANY adopted the Peoples Bancorp Inc. 1998 Stock Option Plan (the "PLAN") on December 11, 1997; and WHEREAS, the shareholders of the COMPANY, upon the recommendation of the COMPANY's Board of Directors, approved the PLAN at the Annual Meeting of Shareholders held on April 9, 1998; and WHEREAS, pursuant to the provisions of the PLAN, a Consultant/Advisor ("CONSULTANT/ADVISOR") may be identified by the Stock Option Committee of the Board of Directors of the COMPANY (the "COMMITTEE") and granted options to acquire common shares (the "COMMON SHARES") of the COMPANY in accordance with the provisions of the PLAN; and WHEREAS, pursuant to the provisions of the PLAN, the OPTIONEE, who has been identified by the COMMITTEE as a CONSULTANT/ADVISOR for the purpose of this grant of an option to acquire ___________ COMMON SHARES of the COMPANY, effective on __________; NOW, THEREFORE, in consideration of the premises, the parties hereto make the following agreements, intending to be legally bound thereby: SECTION 1 Grant of Option. ---------------- The COMPANY hereby grants to the OPTIONEE an option (the "OPTION") to purchase ___________ COMMON SHARES of the COMPANY. The OPTION is not intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "CODE"). SECTION 2 Terms and Conditions of the OPTION. ----------------------------------- (A) OPTION Price. The purchase price (the "OPTION PRICE") to be paid by the OPTIONEE to the COMPANY upon the exercise of the OPTION shall be $______ per share, subject to further adjustment as provided herein. (B) Exercise of the OPTION. The OPTION may be exercised no earlier than twenty-four months from the effective date of this Agreement. Thereafter, the OPTION may be exercised as follows: i) at any time after such twenty-four-month period, as to twenty-five percent (25%) of the COMMON SHARES subject to the OPTION; ii) at any time after thirty-six months from the date of this Agreement, as to an additional twenty-five percent (25%) of the COMMON SHARES subject to the OPTION; iii) at any time after forty-eight months from the date of this Agreement, as to an additional twenty-five percent (25%) of the COMMON SHARES subject to the OPTION; and iv) at any time after sixty months from the date of this Agreement, as to an additional twenty-five percent (25%) of the COMMON SHARES subject to the OPTION. Subject to the other provisions of this Agreement, if the OPTION becomes exercisable as to certain COMMON SHARES, it shall remain exercisable as to those COMMON SHARES until the date of expiration of the OPTION term. The grant of this OPTION shall not confer upon the OPTIONEE any right to continue as a CONSULTANT/ADVISOR of the COMPANY limit in any way the right of the COMPANY to terminate the status of the OPTIONEE as a CONSULTANT/ADVISOR. In the event the COMPANY shall consolidate with, merge into, or transfer all or substantially all of its assets (an "ACQUISITION TRANSACTION") to another corporation or corporations, then the OPTION shall become exercisable in full, whether or not then exercisable by its terms, immediately upon consummation of the ACQUISITION TRANSACTION. (C) OPTION Term. The OPTION shall in no event be exercisable after the expiration of ten (10) years from the date of this Agreement. (D) Method of Exercise. To the extent that it is exercisable, the OPTION may be exercised by mailing or delivering to COMMITTEE a written notice of exercise, signed by the OPTIONEE, or in the event of the death of the OPTIONEE, by such other person as is entitled to exercise the OPTION. The notice of exercise shall state the number of COMMON SHARES in respect of which the OPTION is being exercised, and shall either be accompanied by the payment of the full OPTION PRICE of such COMMON SHARES, or shall fix a date (not more than 10 business days from the date of the notice) for the payment of the full OPTION PRICE of the COMMON SHARES being purchased. The OPTION PRICE may be paid in cash, or by the transfer by the OPTIONEE to the COMPANY of free and clear COMMON SHARES already owned by the OPTIONEE having a Fair Market Value (as that term is defined in the PLAN) on the exercise date equal to the OPTION PRICE, or by a combination of cash and COMMON SHARES already owned by the OPTIONEE equal in the aggregate to the OPTION PRICE for the COMMON SHARES being purchased. SECTION 3 Adjustments and Changes in the COMMON SHARES subject to the OPTION. ----------------------------------------------------------- In the event there is any change in the COMMON SHARES resulting from stock splits, stock dividends, combinations or exchanges of shares, or other similar capital adjustments, the number of COMMON SHARES subject to the OPTION and the OPTION PRICE of the optioned COMMON SHARES shall be appropriately adjusted to reflect such change. SECTION 4 Assignability of the OPTION. ---------------------------- With the permission of the Committee, the OPTIONEE may transfer this OPTION to a revocable inter-vivos trust as to which the OPTIONEE is the settlor, or may transfer this OPTION to a "Permissible Transferee." A Permissible Transferee is defined as any member of the immediate family of the OPTIONEE, any trust, whether revocable or irrevocable, solely for the benefit of members of the OPTIONEE's immediate family, or any partnership whose only partners are members of the OPTIONEE's immediate family. Any such Permissible Transferee shall remain subject to all of the terms and conditions applicable to this OPTION and subject to the rules and regulations prescribed by the Committee. This OPTION may not be retransferred by a Permissible Transferee except by will or the laws of descent and distribution, and then only to another Permissible Transferee. Other than described above, this OPTION may not be transferred except by will or the laws of descent and distribution and, during the lifetime of an OPTIONEE to whom granted, may be exercised only by him, his guardian or legal representative. SECTION 5 Exercise After OPTIONEE Ceases to be a CONSULTANT/ADVISOR. ---------------------------------------------------------- Except as otherwise provided in this Section5, if the OPTIONEE ceases to be a CONSULTANT/ADVISOR to the COMPANY for any reason other than the OPTIONEE's death or due to an act of (i) fraud or intentional misrepresentation, or (ii) embezzlement, misappropriation or conversion of assets or opportunities of the COMPANY or any subsidiary ("Cause"), the OPTION granted to the OPTIONEE under this Agreement may be exercised in full, whether or not then exercisable by its terms, on or before the expiration of the term of the OPTION; provided, however, that if the OPTIONEE shall die prior to the expiration of the term of the OPTION, the OPTION may only be exercised on or before the earlier of the expiration of the OPTION term or two years following the date of death. If the OPTIONEE ceases to be a CONSULTANT/ADVISOR to the COMPANY because of death, the OPTION may be exercised in full, whether or not then exercisable by its terms, by the representative or representatives of the OPTIONEE's estate, or the person or persons who acquired (by bequest or inheritance) the rights to exercise the OPTION, only on or before the earlier of the expiration of the term of the OPTION or two years following the date of death. If the OPTIONEE ceases to be a CONSULTANT/ADVISOR to the COMPANY and/or any subsidiary of the COMPANY due to Cause, all of then unexercised OPTIONS shall immediately terminate. SECTION 6 Restrictions on Exercise. ------------------------- Anything contained in this Agreement or elsewhere to the contrary notwithstanding: (A) The OPTION shall not be exercisable for the purchase of any COMMON SHARES subject thereto except for: (i) COMMON SHARES subject thereto which at the time of such exercise and purchase are registered under the Securities Act of 1933, as amended (the "ACT"); and (ii) COMMON SHARES subject thereto which at the time of such exercise and purchase are exempt or are the subject matter of an exempt transaction or are registered by description, by coordination or by qualification, or at such time are the subject matter of a transaction which has been registered by description, all in accordance with Chapter 1707 of the Ohio Revised Code, as amended; and (iii) COMMON SHARES subject thereto in respect of which the laws of any state applicable to such exercise and purchase have been satisfied. (B) Nothing contained in this Agreement or elsewhere shall be construed to require the COMPANY to take any action whatsoever to make the OPTION exercisable or to make transferable any COMMON SHARES purchased and issued upon the exercise of the OPTION. SECTION 7 Rights of the OPTIONEE as a Shareholder. ---------------------------------------- The OPTIONEE shall have no rights or privileges as a shareholder of the COMPANY with respect to any COMMON SHARES of the COMPANY covered by the OPTION until the date of issuance and delivery of a certificate to the OPTIONEE evidencing such COMMON SHARES. SECTION 8 PLAN as Controlling. -------------------- All terms and conditions of the PLAN applicable to the OPTION which are not set forth in this Agreement shall be deemed incorporated herein by reference. In the event that any term or condition of this Agreement is inconsistent with the terms and conditions of the PLAN, the PLAN shall be deemed controlling. SECTION 9 Governing Law. -------------- This Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio. SECTION 10 Rights and Remedies Cumulative. ------------------------------- All rights and remedies of the COMPANY and of the OPTIONEE enumerated in this Agreement shall be cumulative and, except as expressly provided otherwise in this Agreement, none shall exclude any other rights or remedies allowed by law or in equity, and each of said rights or remedies may be exercised and enforced concurrently. SECTION 11 Captions. --------- The captions contained in this Agreement are included only for convenience of reference and do not define, limit, explain or modify this Agreement or its interpretation, construction or meaning and are no way to be construed as a part of this Agreement. SECTION 12 Notices and Payments. --------------------- All payments required or permitted to be made under the provisions of this Agreement, and all notices and communications required or permitted to be given or delivered under this Agreement to the COMPANY or to the OPTIONEE, which notices or communications must be in writing, shall be deemed to have been given if delivered by hand, or mailed by first-class mail (postage prepaid), addressed as follows: (A) If to the COMPANY, to: Peoples Bancorp Inc. Attn.: Stock Option Committee 138 Putnam Street P. O. Box 738 Marietta, Ohio 45750-0738 (B) If to the OPTIONEE, to the address of the OPTIONEE set forth at the conclusion of this Agreement. The COMPANY or the OPTIONEE may, by notice given to the other in accordance with this Agreement, designate a different address for making payments required or permitted to be made, and for the giving of notices or other communications, to the party designating such new address. Any payment, notice or other communication required or permitted to be given in accordance with this Agreement shall be deemed to have been given on the date of the postmark stamped on the envelope by the U.S. Postal Service, metered dates not being acceptable, when placed in the U.S. Mail, addressed and mailed as provided in this Agreement. SECTION 13 Severability. ------------- If any provision of this Agreement, or the application of any provision hereof to any person or any circumstance shall be determined to be invalid or unenforceable, then such determination shall not affect any other provision of this Agreement or the application of said provision to any other person or circumstance, all of which other provisions shall remain in full force and effect, and it is the intention of each party to this Agreement that if any provision of this Agreement is susceptible of two or more constructions, one of which would render the provision enforceable and the other or others of which would render the provision unenforceable, then the provision shall have the meaning which renders it enforceable. SECTION 14 Number and Gender. ------------------ When used in this Agreement, the number and gender of each pronoun shall be construed to be such number and gender as the context, circumstances or its antecedent may require. SECTION 15 Entire Agreement. ----------------- This Agreement constitutes the entire agreement between the COMPANY and the OPTIONEE in respect of the subject matter of this Agreement, and this Agreement supersedes all prior and contemporaneous agreements between the parties hereto in connection with the subject matter of this Agreement. No change, termination or attempted waiver of any of the provisions of this Agreement shall be binding upon any party hereto unless contained in a writing signed by the party to be charged. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed to be effective as of the date first written above. COMPANY: PEOPLES BANCORP INC., an Ohio corporation By: ____________________________________ Charles R. Hunsaker Its: General Counsel and Secretary to the Stock Option Committee Date: __________________________________ OPTIONEE: ________________________________________ Optionee Name ________________________________________ Street Address ________________________________________ City, State and Zip Code ________________________________________ Social Security Number Date: _________________________________ -----END PRIVACY-ENHANCED MESSAGE-----