<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
0-24135
Commission File Number
PCB HOLDING COMPANY
----------------------------------------------------------------------
(Name of small business issuer as specified in its charter.)
<TABLE>
<S> <C>
Indiana 35-2040715
------------------------------------------------------------ -----------------------------------------------------------
(State or Other Jurisdiction of Incoprporation or Organization (I.R.S. Employer Identification No.)
819 Main Street, Tell City, Indiana 47586
-----------------------------------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (812) 547-7094
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01
</TABLE>
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $1,738,712.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer was $3,769,125. This figure is based on the
average of the last bid and ask price on the OTC Bulletin Board for a share of
the issuer's common stock on March 1, 1999, which was $9.50. For purposes of
this calculation, the Registrant is assuming that directors and executive
officers are affiliates.
The Registrant had 396,750 shares of Common Stock outstanding as of March 1,
1999.
Portions of the Annual Report to Shareholders for the year ended December 31,
1998 are incorporated by reference into Part II of this Form 10-KSB. Also,
portions of the proxy statement for the annual meeting of shareholders to be
held on April 22, 1999 are incorporated by reference into Part III of this Form
10-KSB.
Transitional Small Business Disclosure Format. Yes [_] No [ X ]
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Page No.
Item 1. Description of Business....................................... 3
Item 2. Description of Property....................................... 24
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...... 25
Item 6. Management's Discussion and Analysis or Plan of Operation..... 25
Item 7. Financial Statements.......................................... 25
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure .......................... 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............. 25
Item 10. Executive Compensation........................................ 26
Item 11. Security Ownership of Certain Beneficial Owners and Management 26
Item 12. Certain Relationships and Related Transactions................ 26
Item 13. Exhibits and Reports on Form 8-K.............................. 26
</TABLE>
SIGNATURES
<PAGE>
Item 1. Description of Business.
- ---------------------------------
BUSINESS OF THE COMPANY
General
PCB Holding Company (the "Company") was organized as an Indiana business
corporation at the direction of Peoples Community Bank (the "Bank") in March
1998 for the purpose of becoming the holding company for the Bank upon
completion of the conversion of the Bank from the mutual to the stock form of
organization.
The Bank's mutual to stock conversion was completed on July 1, 1998 with
the sale by the Company of 396,750 shares of common stock at $10.00 per share.
The Company used 50% of the net proceeds of the offering to purchase the capital
stock of the Bank. The Company's sole business activity is to direct the
operations of the Bank.
The Bank was chartered in 1914 as an Indiana mutual building and loan
association. In February 1998, the Bank adopted a federal mutual charter and in
July 1998, upon the completion of its mutual to stock conversion, became a
federal stock savings bank. The Bank's primary federal regulator is the Office
of Thrift Supervision ("OTS"). The Bank operates as a traditional savings
association, specializing in single-family residential mortgage lending and
savings deposits. The Bank's business consists primarily of attracting retail
deposits from the general public and using those funds to originate real estate
loans. The Bank generally holds its loans for long-term investment purposes.
Market Area and Competition
The Bank conducts operations out of its one office in Tell City, which is
the largest town in Perry County, Indiana. Tell City has a population of
approximately 9,000 persons, and Perry County has a population of approximately
20,000 persons. Most of the Bank's depositors live in Perry County and most of
the Bank's loans are secured by real estate in Perry County. The Bank also
makes loans in Spencer County, Indiana and occasionally in other surrounding
counties. Perry County is a rural county that historically has had higher
unemployment and lower income compared to the rest of Indiana. The economy of
Perry County is dependent on manufacturing, much of which is located across the
Ohio River in Kentucky. Industries present in the region include woodworking,
steel, motors, aluminum and paper.
The Bank faces intense competition in its primary market area for the
attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits has historically
come from the three commercial banks operating in Tell City and, to a lesser
extent, from other financial institutions, such as brokerage firms and insurance
companies. All of the three commercial banks in Tell City are affiliated with
large, multi-state bank holding companies and, therefore, have significantly
greater resources than the Bank. Particularly in times of high interest rates,
the Bank has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The Bank's competition for loans comes primarily from the
commercial banks operating in Tell City. Such competition for deposits and the
origination of loans may limit the Bank's growth in the future.
Lending Activities
General. At December 31, 1998, the Bank's net loans receivable totaled
$20.9 million, or 82.3% of total assets. The Bank has concentrated its lending
activities on one- to four-family mortgage loans, with such loans amounting to
83.2% of loans at December 31, 1998. The Bank also offers multi-family,
commercial real estate, land and residential construction loans, as well as
loans secured by savings accounts. All of the Bank's mortgage loan portfolio is
secured by real estate located in Indiana. In February 1998, the Bank expanded
its loan offerings to include automobile loans. In June 1998, the Bank began
offering additional secured and unsecured consumer loans.
3
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Loan Portfolio Analysis. The following table sets forth the composition of
the Bank's loan portfolio at the dates indicated. The Bank had no concentration
of loans exceeding 10% of total loans receivable other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ------------------- ---------------
Amount Percent Amount Percent Amount Percent
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family........................ $17,892 83.1% $16,893 85.7% $17,272 85.0%
Multi-family............................... 362 1.7 468 2.4 394 1.9
Commercial real estate..................... 901 4.2 864 4.4 873 4.3
Land....................................... 654 3.0 528 2.6 583 2.9
Residential construction................... 980 4.6 783 4.0 977 4.8
------- ------- ------- ------- ------- -------
Total mortgage loans..................... 20,789 96.6 19,536 99.1 20,099 98.9
Consumer Loans:
Loans secured by savings accounts......... 274 1.3 178 0.9 233 1.1
Other..................................... 454 2.1 - - - -
------- ----- ------- ----- ------- -----
Total consumer loans..................... 728 3.4 178 0.9 233 1.1
------- ----- ------- ----- ------- -----
Total loans............................. 21,517 100.0% 19,714 100.0% 20,332 100.0%
------- ===== ------- ===== ------- =====
Less:
Undisbursed portion of loans in process... 472 295 380
Deferred loan origination fees, net........ 64 72 73
Allowance for loan losses.................. 51 51 52
------- ------- -------
Total loans receivable, net.............. $20,930 $19,296 $19,837
======= ======= =======
</TABLE>
One- to Four-Family Real Estate Loans. The Bank's primary lending activity
is the origination of loans secured by one- to four-family residences located in
its market area. The Bank offers adjustable-rate mortgage ("ARM") loans which
provide for an interest rate that adjusts every year or that is fixed for three
years and then adjusts every year after the initial period. The Bank's ARM loans
generally provide for annual and lifetime interest rate adjustment limits of 1%
and 5%, respectively. When it was a state-chartered savings association, the
Bank based its ARM loans on the Bank's internal cost of funds. When the Bank
adopted a federal mutual charter in February 1998 it began basing its ARM loans
on the One Year U.S. Treasury Note Constant Maturity Rate. The Bank's ARM loans
are typically based on a 30-year amortization schedule. The initial rate on most
of the Bank's ARM loans is 1% to 1.5% below the rate offered for fixed-rate
loans that have a term of ten to 20 years.
The Bank offers fixed-rate, one- to four-family mortgage loans with
maturities of up to 20 years. These loans are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Generally, they are underwritten and documented in
accordance with guidelines established by Freddie Mac. The Bank's fixed-rate
loans customarily include "due on sale" clauses, which give the Bank the right
to declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not paid.
4
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The Bank offers second mortgage loans. Generally, the Bank makes second
mortgage loans only where it holds the first mortgage, unless the combined loan
to value ratio is less than 50%. Second mortgages are made on the same terms as
first mortgage loans when the combined loan to value ratio is less than 80%. At
December 31, 1998, the Bank had $722,000 of second mortgage loans included in
its one- to four-family mortgage loan portfolio.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce
the Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the borrower. It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased payments required by the borrower. In
addition, although ARM loans allow the Bank to increase the sensitivity of its
asset base to changes in interest rates, the extent of this interest sensitivity
is limited by the annual and lifetime interest rate adjustment limits. Because
of these considerations the Bank has no assurance that yields on ARM loans will
be sufficient to offset increases in the Bank's cost of funds. The Bank
believes these risks, which have not had a material adverse effect on the Bank
to date, generally are less than the risks associated with holding fixed-rate
loans in portfolio during a rising interest rate environment.
The Bank generally requires an acceptable attorney's opinion on the
status of its lien on all loans where real estate is the primary source of
security. The Bank also requires that fire and casualty insurance (and, if
appropriate, flood insurance) be maintained in an amount at least equal to the
outstanding loan balance.
The Bank's one- to four-family residential mortgage loans typically do
not exceed 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Bank's Board of Directors, the Bank can
lend up to 95% of the appraised value of the property securing a one- to- four
family residential loan; however, the Bank generally requires private mortgage
insurance on the portion of the principal amount that exceeds 90% of the
appraised value of the security property.
Multi-family and Commercial Real Estate Loans. The Bank occasionally
originates mortgage loans for the acquisition and refinancing of multi-family
and commercial real estate properties. The majority of the Bank's commercial
real estate loans are secured by churches, motels and a country club, all of
which are located in Indiana. At December 31, 1998, the Bank's largest multi-
family or commercial real estate loan was $213,000 and is secured by a motel.
Most of the Bank's commercial real estate loans have adjustable
interest rates and terms of 15 years or less. The Bank requires appraisals of
all properties securing commercial real estate loans. Appraisals are performed
by an independent appraiser designated by the Bank, all of which are reviewed by
management.
Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties usually are greater in amount and are more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by income
producing properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. The Bank seeks to minimize
these risks by limiting the maximum loan-to-value ratio to 80% and strictly
scrutinizing the financial condition of the borrower, the cash flow of the
project, the quality of the collateral and the management of the property
securing the loan. The Bank also obtains loan guarantees from financially
capable parties based on a review of personal financial statements.
5
<PAGE>
Residential Construction Loans. The Bank originates residential
construction loans to local home builders and to individuals for the
construction and acquisition of their personal residence.
The Bank's construction loans to builders generally have fixed
interest rates and are for a term of one year. Such loans to builders are
typically made with a maximum loan to value ratio of 85%. These loans are
usually made on a speculative (unsold) basis. The maximum amount that any one
builder may borrow from the Bank is $500,000, which is the Bank's internal loan-
to-one-borrower limit. At December 31, 1998, the largest amount of construction
loans outstanding to one builder was $150,000, all of which was for speculative
construction. Construction loans to individuals are made on the same terms as
the Bank's one- to four-family mortgage loans, but provide for the payment of
interest only during the construction phase, which is usually six months. At
the end of the construction phase, the loan converts to a permanent mortgage
loan.
Prior to making a commitment to fund a construction loan, the Bank
requires an appraisal of the property by a staff appraiser. The Bank also
reviews and inspects each project prior to disbursement of funds during the term
of the construction loan. Loan proceeds are disbursed after inspection of the
project based on percentage of completion.
Construction lending affords the Bank the opportunity to earn higher
interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted with a
project whose value is insufficient to assure full repayment. Projects may also
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Loans to builders to construct homes
for which no purchaser has been identified carry more risk because the payoff
for the loan is dependent on the builder's ability to sell the property prior to
the time that the construction loan is due.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting its construction lending to residential properties. It is also
the Bank's general policy to obtain regular financial statements from builders
so that it can monitor their financial strength.
Land Loans. The Bank occasionally originates loans secured by
unimproved land. Most of these loans have a term of ten years or less and may
have fixed or adjustable interest rates. The largest land loan at December 31,
1998 was $174,000.
Savings Account Loans. The Bank offers loans secured by savings
deposits. Generally, such loans are made at an interest rate that is 2% above
the account rate for an amount up to 100% of the amount on deposit at the Bank
less six month's interest.
Other Consumer Loans. In February 1998, the Bank began offering
automobile loans. The Bank expanded its consumer loan offering in June 1998 to
include other secured and unsecured consumer loans. The Bank does not
anticipate that consumer loans will constitute a significant portion of its loan
portfolio for the foreseeable future.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy.
6
<PAGE>
Loans to One Borrower. The maximum amount that the Bank may lend to
one borrower is limited by federal regulations. At December 31, 1998, the
Bank's regulatory limit on loans to one borrower was $607,000. At such date,
the Bank's largest amount of loans to one borrower (including the borrower's
related interests) was $492,000 and consisted of 10 single family mortgage loans
(7 of which were secured by non-owner-occupied properties) and one commercial
real estate loan.
Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1998 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as becoming due within one year. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance for
loans losses.
<TABLE>
<CAPTION>
After After
One 5 Years
Year Through
Within Through 10 After
One Year 5 Years Years 10 Years Total
---------- ---------- ---------- ---------- ----------
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C>
One- to four-family...................... $1,191 $3,737 $4,620 $8,344 $17,892
Multi-family............................. 20 94 121 127 362
Commercial real estate................... 261 194 171 275 901
Land..................................... 66 176 230 182 654
Residential construction................. 846 7 11 116 980
Consumer Loans:
Loans secured by savings accounts... 274 - - - 274
Other............................... 91 326 37 - 454
------ ------ ------ ------- ------
Total gross loans......... $2,749 $4,534 $5,190 $9,044 $21,517
====== ====== ====== ======= =======
</TABLE>
7
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Floating
or
Fixed- Adjustable
Rates - Rates
------------ -------------
(In thousands)
Mortgage loans:
<S> <C> <C>
One- to four-family............................................ $6,357 $10,345
Multi-family................................................... 98 244
Commercial real estate......................................... 364 275
Land........................................................... 247 341
Residential construction....................................... - 134
Consumer loans:
Loans secured by savings accounts......................... - -
Other..................................................... 363 -
------ -------
Total gross loans......................................... $7,429 $11,339
======= =======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual term because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of a mortgage loan tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, tends to decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
Loan Solicitation and Processing. The Bank's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations come from a number of sources. The customary
sources of loan originations are realtors, referrals and existing customers.
The Bank does not utilize mortgage brokers or other third-party originators.
Single-family residential mortgage loans up to $100,000 may be
approved by unanimous vote of the Bank's Loan Committee, which consists of the
President and three Directors. If the Loan Committee does not unanimously
approve a loan, it is referred to the Board of Directors. All single-family
residential mortgage loans of $100,000 or more and all other mortgage loans must
be approved by the Bank's Board of Directors. Consumer loans must be approved
by an authorized officer and ratified by the Board of Directors.
Loan Originations, Purchases and Sales. While the Bank originates
both adjustable-rate and fixed-rate loans, its ability to generate each type of
loan depends upon relative customer demand for loans. During the years ended
December 31, 1998 and 1997, the Bank originated $8.3 million and $4.8 million of
loans, respectively. Of the $8.3 million of loans originated in 1998, $2.9
million, or 35.4%, had adjustable rates of interest.
The Bank generally retains for its portfolio all of the loans that it
originates and does not frequently purchase loans. Occasionally, the Bank will
participate with other area financial institutions in multi-family or commercial
real estate loans. In 1995, the Bank established an informal relationship with
another financial institution pursuant to which the Bank occasionally sells 90%
participations in single-family mortgage loans and purchases participations in
loans secured by non-owner-occupied, one- to four-family properties. The Bank
retains the servicing rights on the
8
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participation loans that it sells. The Bank does not receive a fee for the loans
sold under this arrangement and pays no fee on the loans it purchases.
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
<TABLE>
<CAPTION> Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
------------- -------------- ------------
(In thousands)
<S> <C> <C> <C>
Total gross loans at beginning of period ...................... $19,714 $20,332 $20,264
Loan originated:
Mortgage loans:
One- to four-family......................................... 5,770 3,456 3,740
Multi-family................................................ - - -
Commercial real estate...................................... 175 70 55
Land........................................................ 248 84 110
Residential construction.................................... 1,422 972 1,150
Consumer loans................................................. 662 180 154
--------- --------- ----------
Total loans originated.................................. 8,277 4,762 5,209
--------- --------- ----------
Loans purchased:
Mortgage loans:
One- to four-family......................................... - - 44
Multi-family................................................ - - -
Commercial real estate...................................... - 73 -
Land........................................................ - - -
Residential construction.................................... - - -
Consumer loans:
Loans secured by savings accounts........................... - - -
Other....................................................... - - -
--------- --------- ----------
Total loans purchased .................................... - 73 44
Loans sold:
Mortgage loans:
One- to four-family........................................ - - (180)
Loan principal repayments...................................... (6,474) (5,453) (5,005)
--------- --------- ----------
Net loan activity.............................................. 1,803 (618) 68
--------- --------- ----------
Total gross loans at end of period............................. $21,517 $19,714 $20,332
========= ========= ==========
</TABLE>
9
<PAGE>
Loan Commitments. The Bank issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and are honored for up to 90 days from
approval. At December 31, 1998, the Bank had loan commitments totaling $234,000
(not including undisbursed portions of loans in process of $472,000).
Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.
The Bank charges loan origination fees for fixed-rate loans which are
calculated as a percentage of the amount borrowed. In accordance with
applicable accounting procedures, loan origination fees and discount points in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are accreted and amortized in the same
manner. At December 31, 1998, the Bank had $64,000 of deferred loan fees. The
Bank recognized $24,000 and $12,000 of deferred loan fees during the years ended
December 31, 1998 and 1997, respectively, in connection with loan refinancings,
payoffs, sales and ongoing amortization of outstanding loans.
Nonperforming Assets and Delinquencies. When a borrowers fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. A late notice is mailed 20 days
after a payment is due. In most cases, deficiencies are cured promptly. If a
delinquency continues, additional contact is made either through additional
notices or other means and the Bank will attempt to work out a payment schedule.
While the Bank generally prefers to work with borrowers to resolve such
problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
The Bank's Board of Directors is informed monthly of the amounts of loans
delinquent more than 60 days, all loans in foreclosure and all foreclosed and
repossessed property owned by the Bank.
The Bank ceases accruing interest on a loan when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. The Bank does not accrue interest on
loans past due 90 days or more when the estimated value of collateral and
collection efforts are deemed insufficient to ensure full recovery.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. The Bank had no restructured loans
within the meaning of SFAS No. 15 at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1998 1997 1996
---------------- ------------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis...................... $ - $ - $ -
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans................................................. 29 - 83
Consumer loans................................................. - - -
Total......................................................... 29 - 83
----- ----- -----
Foreclosed real estate, net..................................... - - -
----- ----- -----
Total nonperforming assets.................................... $ 29 $ - $ 83
===== ===== =====
Total loans delinquent 90 days or more to net loans............. 0.14% 0.00% 0.42%
Total loans delinquent 90 days or more to total assets.......... 0.11% 0.00% 0.37%
Total nonperforming assets to total assets...................... 0.11% N/M 0.37%
</TABLE>
10
<PAGE>
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until sold. When property is acquired it is recorded at fair market value at the
date of foreclosure. Subsequent to foreclosure, real estate owned is carried at
the lower of the foreclosed amount or fair value, less estimated selling costs.
At December 31, 1998, the Bank had no real estate owned.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and monitored by the Bank.
The following table sets forth the number and amount of classified loans at
December 31, 1998.
<TABLE>
<CAPTION>
Special
Loss Doubtful Substandard Mention
--------------------- ----------------- --------------- ----------------
Number Amount Number Amount Number Amount Number Amount
--------- --------- --------- -------- -------- -------- ------ ------
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........ - $ - - $ - 2 $ 29 18 $357
Multi-family............... - - - - - - - -
Commercial real estate..... - - - - - - - -
Land....................... - - - - - - - -
Residential construction... - - - - - - - -
Consumer loans.............. - - - - - - - -
</TABLE>
Allowance for Loan Losses. In originating loans, the Bank recognizes that
losses will be experienced and that the risk of loss will vary with, among other
things, the type of loan being made, the creditworthiness of the borrower over
the term of the loan, general economic conditions and, in the case of a secured
loan, the quality of the security for the loan. The allowance method is used in
providing for loan losses. Accordingly, all loan losses are charged to the
allowance and all recoveries are credited to it. The allowance for loan losses
is established through a provision for loan losses charged to operations. The
provision for loan losses is based on management's evaluation of of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specified impaired
loans, and economic conditions.
Although management believes that it uses the best information available to
establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and results of operations could be significantly
and adversely affected if circumstances differ substantially from the
assumptions used in making the determinations. Furthermore, while the Bank
believes it has established its existing allowance for loan losses in accordance
with generally accepted accounting principles, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank to
increase significantly its allowance for loan losses. In addition,
11
<PAGE>
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that substantial increases will not be necessary should
the quality of any loans deteriorate as a result of the factors discussed above.
Any material increase in the allowance for loan losses may adversely affect the
Bank's financial condition and results of operations. The following table
sets forth an analysis of the Bank's allowance for loan losses.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1998 1997 1996
-------------- --------------- -------------
(In thousands)
<S> <C> <C> <C>
Allowance at beginning of period......................... $ 51 $ 52 $ 44
Provision for loan losses................................ - - 8
Recoveries............................................... - - -
Charge-offs:
Mortgage loans.......................................... - - -
Consumer loans.......................................... - 1 -
------- ----- ------
Total charge-offs..................................... - 1 -
------- ----- ------
Net charge-offs....................................... - 1 1
------- ----- ------
Balance at end of period.............................. $ 51 $ 51 $ 52
======= ===== ======
Allowance for loan losses as a
percentage of total loans outstanding
at the end of the period............................... 0.24% 0.26% 0.26%
Net charge-offs (recoveries) as a
percentage of average loans outstanding
during the period...................................... 0.00% 0.01% 0.00%
Allowance for loan losses as a
percentage of nonperforming loans
at end of period....................................... 175.86% N/M 62.65%
</TABLE>
12
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------
1998 1997 1996
----------------------------- -------------------- ---------------
Percent Percent Percent
of Loans of Loans of Loans
in in in
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family................... $33 83.1% $37 85.7% $37 85.0%
Multi-family.......................... 1 1.7 2 2.4 2 1.9
Commercial real estate................ 5 4.2 7 4.4 7 4.3
Land.................................. 6 3.0 4 2.7 5 2.9
Residential construction.............. 1 4.6 1 4.0 1 4.8
Consumer loans:
Loans secured by savings accounts.... - 1.3 - 0.9 - 1.1
Other consumer loans................. 5 2.1 - - - -
Unallocated............................ - N/A - N/A - N/A
--- ----- --- ----- --- -----
Total allowances for loan losses.... $51 100.0% $51 100.0% $52 100.0%
=== ===== === ===== === =====
</TABLE>
Investment Activities
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Government obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Indianapolis, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. Savings institutions like the Bank are also required to
maintain an investment in FHLB stock. The Bank is required under federal
regulations to maintain a minimum amount of liquid assets.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." Such securities are reported at fair value, and
unrealized gains and losses on such securities would be included in earnings.
The Company does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." Such securities are reported
at fair value, and unrealized gains and losses on such securities are excluded
from earnings and reported as a net amount in a separate component of equity.
The Company's investment policies limit investments to U.S. Government and
agency securities, mortgage-backed securities and higher rated corporate
securities. A high credit rating indicates only that the rating agency believes
there is a low risk of default. However, all of the Company's investment
securities, including those that have high credit ratings, are subject to market
risk insofar as increases in market rates of interest may cause a decrease in
their
13
<PAGE>
market value. Corporate securities are also subject to credit risk insofar as
the payment obligations on such securities are dependent on the successful
operation of issuer's business. The Company's investment policy does not permit
engaging directly in hedging activities or purchasing high risk mortgage
derivative products. Investments are made based on certain considerations, which
include the interest rate, yield, settlement date and maturity of the
investment, the Company's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed investment would have on the Company's credit and interest
rate risk and risk-based capital is also considered.
The Bank purchases investment securities to provide necessary liquidity for
day-to-day operations. The Bank also purchases investment securities when
investable funds exceed loan demand. In recent years, the Bank has preferred to
invest in individual mortgage loans rather than mortgage-backed securities.
Depending on loan demand, the Bank may consider increasing its investment in
mortgage-backed securities.
The following table sets forth the amortized cost and fair value of the
Company's securities, by accounting classification and by type of security, at
the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------- ---------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------------ ----------- ------------ ----------- ------------ -----------
(Dollars in thousands)
Available for sale:
Investment securities:
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury obligations............... $ - $ - $ - $ - $100 $100
U.S. Government agency obligations...... 1,447 1,432 999 970 649 614
Corporate notes......................... 100 100 350 349 100 99
------ ----- ------ ------ ---- ----
Total available for sale.............. 1,547 1,532 1,349 1,319 849 813
Held to maturity:
Mortgage-backed securities:
Fannie Mae.............................. - - 17 16 20 20
Freddie Mac............................. - - 4 5 7 7
------ ----- ------ ------ ---- ----
Total held to maturity................ - - 21 21 27 27
------ ------ ------ ------ ---- ----
Total................................. $1,547 $1,532 $1,370 $1,340 $876 $840
====== ====== ====== ====== ==== ====
</TABLE>
14
<PAGE>
The following table sets forth certain information regarding the amortized
cost, weighted average yields and maturities or periods to repricing of the
Company's debt securities at December 31, 1998, all of which are available for
sale.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------------------------------------------
Less than One to After Five to After
One Year Five Years Ten Years Ten Years Total
------------------ -------------------- ------------------ ------------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- -------- ------ ------ ------- -------- ------ -------- -------
(Dollars in thousands)
Investment securities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury agency
obligations............. $ - -% $749 5.15% $100 6.13% $598 6.42% $1,447 5.74%
Corporate notes......... 100 5.95 - - - - - - 100 5.95
--------- ----- ------- ------ ------
Total available for sale $100 5.95 $749 5.15 $100 6.13 $598 6.42 $1,547 5.76
========= ===== ==== ====== ======
</TABLE>
15
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. The Bank
may use borrowings from the FHLB-Indianapolis to compensate for reductions in
the availability of funds from other sources. Presently, the Bank has no other
borrowing arrangements.
Deposit Accounts. Nearly all of the Bank's depositors reside in Indiana.
The Bank's deposit products include money market accounts, passbook accounts,
and term certificate accounts. The Bank introduced checking accounts in November
1998. Deposit account terms vary with the principal difference being the minimum
balance deposit, early withdrawal penalties and the interest rate. The Bank
reviews its deposit mix and pricing weekly. The Bank does not utilize brokered
deposits, nor has it aggressively sought jumbo certificates of deposit.
The Bank believes it is competitive in the interest rates it offers on its
deposit products. The Bank determines the rates paid based on a number of
factors, including rates paid by competitors, the Bank's need for funds and cost
of funds, borrowing costs and movements of market interest rates.
The following table indicates the amount of the Bank's jumbo certificate
accounts by time remaining until maturity as of December 31, 1998. Jumbo
certificate accounts have principal balances of $100,000 or more.
<TABLE>
<CAPTION>
Certificate
Maturity Period Accounts
-------- ------------
(In thousands)
<S> <C>
Three months or less..................... $ 331
Over three through six months............ 378
Over six through 12 months............... 465
Over 12 months........................... 1,098
------
Total $2,272
======
</TABLE>
16
<PAGE>
The following table sets forth the balances (inclusive of interest
credited) and changes in dollar amounts of deposits in the various types of
accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------- --------------------------------------- -------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
----------- ---------- ------------ ----------- ---------- ------------ ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand
accounts................ $ 14 0.07% $ 14 $ - -% $ - $ - -%
Interest-bearing demand
accounts................ 66 0.34 66 - - - - -
Regular savings accounts.. 1,244 6.37 (57) 1,301 6.56 (28) 1,329 6.58
Money market deposit...... 2,696 13.81 567 2,129 10.73 (121) 2,250 11.14
Fixed-rate certificates
which mature:
Within 1 year........... 8,000 41.00 (809) 8,809 44.39 1,071 7,738 38.32
After 1 year,
within 2 years ........ 4,670 23.94 32 4,638 23.37 (492) 5,130 25.40
After 2 years, but
within 4 years......... 1,913 9.80 (447) 2,360 11.89 93 2,267 11.23
After 4 years, but
within 6 years......... 914 4.67 305 609 3.06 (871) 1,480 7.33
------- ------ ----- ------ ------ ------- ------- ------
Total ............ $19,517 100.00% $ 329 $19,846 100.00% $ (348) $20,194 100.00%
======= ====== ===== ======= ======= ======= ======= ======
</TABLE>
The following table sets forth the amount of time deposits in the Bank
categorized by maturities at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------------------------
Less Than One to Two to Three to After
One Year Two Years Three Years Four Years Four Years Total
----------- ------------ ------------- ------------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Below 4.99% .................... $2,395 $ 17 $ - $ - $ - $ 2,412
5.00 - 5.49% ................... 1,206 2,241 650 250 19 4,366
5.50 - 5.99% ................... 1,370 931 116 202 857 3,476
6.00 - 6.49% ................... 1,757 292 37 10 - 2,096
6.50 - 6.99% ................... 331 1,044 138 390 - 1,903
7.00 - 7.49% ................... 1,244 - - - - 1,244
------ ------ ---- ---- ---- -------
Totals..................... $8,303 $4,525 $941 $852 $876 $15,497
====== ====== ==== ==== ==== =======
</TABLE>
17
<PAGE>
Borrowings. The Bank has the ability to use advances from the FHLB-
Indianapolis to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB-Indianapolis functions as a central reserve
bank providing credit for savings associations and certain other member
financial institutions. As a member of the FHLB-Indianapolis, the Bank is
required to own capital stock in the FHLB-Indianapolis and is authorized to
apply for advances on the security of such stock and certain of its mortgage
loans and other assets (principally securities that are obligations of, or
guaranteed by, the U.S. Government or agencies thereof) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit.
The following table sets forth certain information regarding the Bank's use
of FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-------------- --------------- -------------
(In thousands)
<S> <C> <C> <C>
Maximum balance at any month end ............................. $ - $ 500 $ 400
Average balance .............................................. - 254 154
Year end balance ............................................. - - -
Weighted average interest rate:
At end of year .......................................... - - -
During the year ......................................... - 5.91% 9.09%
</TABLE>
Subsidiary Activities
The Company's only direct subsidiary is the Bank. Under OTS regulations,
the Bank generally may invest up to 3% of its assets in service corporations,
provided that at least one-half of investment in excess of 1% is used primarily
for community, inner-city and community development projects. In 1989 the Bank
formed Peoples Building and Loan Association Service Corporation for the purpose
of selling annuities and mutual funds to customers of the Bank. The Bank's
service corporation is currently inactive.
Personnel
As of December 31, 1998, the Company had 8 full-time employees and 2 part-
time employee, none of whom is represented by a collective bargaining unit. The
Company believes its relationship with its employees is good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the Federal
Deposit Insurance Corporation ("FDIC"), as the deposit insurer. The Bank is a
member of the Federal Home Loan Bank System and its deposit accounts are insured
up to applicable limits by the Savings Association Insurance Fund ("SAIF")
managed by the FDIC. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions. The OTS and/or the FDIC
conduct periodic examinations to test the Bank's safety and soundness and
18
<PAGE>
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions and their holding companies set
forth in this Form 10-KSB does not purport to be a complete description of such
statutes and regulations and their effects on the Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution=s capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. In addition, the
prompt
19
<PAGE>
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMEL financial institution rating system), and,
together with the risk-based capital standard itself, a 4% Tier 1 risk-based
capital standard. The OTS regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At December 31, 1998, the Bank met each of
its capital requirements.
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there will be
equal sharing of FICO payments between SAIF and BIF members on the earlier of
January 1, 2000 or the date the SAIF and BIF are merged.
20
<PAGE>
The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Management cannot
predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that
the BIF and SAIF were to have merged on January 1, 1999 if there were no more
savings associations as of that date. Various proposals to eliminate the federal
savings association charter, create a uniform financial institutions charter,
abolish the OTS and restrict savings and loan holding company activities have
been introduced in Congress. The Bank is unable to predict whether such
legislation will be enacted or the extent to which the legislation would
restrict or disrupt its operations.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of December 31, 1998, the Bank met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998 established
three tiers of institutions based primarily on an institution's capital level.
An institution that exceeded all capital requirements before and after a
proposed capital distribution ("Tier 1 Bank") and had not been advised by the
OTS that it was in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during the calendar year equal to the greater of (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half the
excess capital over its capital requirements at the beginning of the calendar
year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions required prior regulatory approval. At December
31, 1998, the Bank was a Tier 1 Bank. Effective April 1, 1999, the OTS's capital
distribution regulation will change. Under the new regulation, an application to
and the prior approval of the OTS will be required prior to any capital
distribution if the institution does not meet the criteria for "expedited
treatment" of applications under OTS regulations (i.e., generally, examination
ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still provide prior notice to OTS of the capital
distribution. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
21
<PAGE>
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%. Monetary penalties may
be imposed for failure to meet these liquidity requirements. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended December 31, 1998 totaled $10,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million
22
<PAGE>
or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts aggregating greater than $46.5 million, the
reserve requirement is $1.395 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank complies with the
foregoing requirements.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a calendar year,
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank has not been audited by the IRS
since 1995, which covered the tax year 1994. For its 1998 taxable year, the
Bank is subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, repeals the reserve method of accounting for bad
debts for tax years beginning after 1995 and requires savings institutions to
recapture (i.e., take into income) certain portions of their accumulated bad
debt reserves. Thrift institutions eligible to be treated as "small banks"
(assets of $500 million or less) are allowed to use the Experience Method
applicable to such institutions, while thrift institutions that are treated as
large banks (assets exceeding $500 million) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves for
bad debts will treat such change as a change in method of accounting, initiated
by the taxpayer, and having been made with the consent of the IRS. Any Section
481(a) adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to a 2-year
suspension if the "residential loan requirement" is satisfied.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Bank's 1996 taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
The Bank is required to recapture (i.e., take into income) over a six year
period the excess of the balance of its tax bad debt reserves as of December 31,
1995 over the balance of such reserves as of December 31, 1987. The Bank has no
post-1987 reserves subject to recapture.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
23
<PAGE>
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Banks does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
Indiana Taxation
Indiana imposes an 8.5% franchise tax based on a financial institution=s
adjusted gross income as defined by statute. In computing adjusted gross
income, deductions for municipal interest, U.S. Government interest, the bad
debt deduction computed using the reserve method and pre-1990 net operating
losses are disallowed. The Bank's state franchise tax returns have not been
audited for the past five years.
Item 2. Description of Property
- -------------------------------
The Bank owns its one office. At December 31, 1998, the net book value of
the Bank's properties (including land and buildings), fixtures, furniture and
equipment was $218,000.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. Neither the Company nor the Bank is a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- -----------------------------------------------------------
None.
24
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------------------
Information relating to the market for the Company's common equity and
related stockholder matters is disclosed in the Company's 1998 Annual Report to
Shareholders on page 35 and is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation.
- -----------------------------------------------------------------
This information is disclosed in the Company's 1998 Annual Report to
Shareholders at pages 4 through 12 and is incorporated herein by reference.
Item 7. Financial Statements.
- ----------------------------
The consolidated financial statements of the Company and its subsidiary,
together with the report thereon by Monroe Shine & Co., Inc. for the year ended
December 31, 1998 are included in the Company's 1998 Annual Report to
Shareholders at pages 14 through 33 and are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosures.
- ---------------------
Prior to the fiscal year ended December 31, 1997, the Bank's consolidated
financial statements were audited by Umbach & Associates. The former accountant
was replaced by Monroe Shine & Co., Inc., which was engaged on January 28, 1998
and continues as the independent auditors of the Bank. The decision to change
auditors was approved by the Board of Directors on January 12, 1998. For the
fiscal years ended December 31, 1996 and 1995 and up to the date of the
replacement of the Bank's former accountant, there were no disagreements with
the former accountant on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of the former accountant, would have caused it to
make a reference to the subject matter of the disagreement in connection with
its reports. The independent auditors' report on the consolidated financial
statements for the fiscal years ended December 31, 1996 and 1995 did not contain
an adverse opinion or a disclaimer of opinion, and was not qualified or modified
as to uncertainty, audit scope, or accounting principles.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ------- -------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act.
-------------------------------------------------
Information regarding directors of the Company is incorporated herein by
reference to the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 22, 1999, at pages 2 through 4.
The following table sets forth certain information regarding the executive
officers of the Company and the Bank.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Carl D. Smith 52 President and Chief Executive Officer of the
Company and the Bank
Clarke A. Blackford 51 Vice President, Treasurer and Secretary of
the Company and the Bank
</TABLE>
25
<PAGE>
Carl D. Smith has served as President and Chief Executive Officer of the
Bank since 1976 and as President and Chief Executive Officer of the Company
since its formation in 1998.
Clarke A. Blackford has served as Vice President of the Bank since 1993 and
as Treasurer and Secretary since 1980. He has served as Vice President,
Treasurer and Secretary of the Company since its formation in 1998.
Item 10. Executive Compensation.
- --------------------------------
Information regarding the compensation of directors and executive officers
of the Company is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 22, 1999,
at pages 5 through 6.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners and
management of the Company is incorporated herein by reference to the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on
April 22, 1999, at page 2.
Item 12. Certain Relationships and Related Transactions.
- -------------------------------------------------------
Information regarding certain relationships and related transactions
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 22, 1999, at page 6.
Item 13. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) The following exhibits are filed as a part of this report:
3.1 Articles of Incorporation of PCB Holding Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 (File No. 333-48191))
3.2 Bylaws of PCB Holding Company (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form SB-2 (File No.
333-48191))
4.0 Stock Certificate of PCB Holding Company (incorporated by reference to
Exhibit 4.0 to the Company's Registration Statement on Form SB-2
(File No. 333-48191))
10.1 Employment Agreement with Carl D. Smith
13.0 Portions of Annual Report to Stockholders
21.0 Subsidiaries of Registrant
27.0 Financial Data Schedule
(b) Reports on Form 8-K.
None.
26
<PAGE>
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PCB HOLDING COMPANY
By: /s/ Carl D. Smith
-------------------------------------
Carl D. Smith
President and Chief Executive Officer
DATED: March 15, 1999
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Carl D. Smith President, Chief Executive Officer March 15, 1999
- ------------------------- and Director
Carl D. Smith (Principal Executive Officer)
/s/ Clarke A. Blackford Treasurer and Corporate Secretary March 15, 1999
- ------------------------- (Principal Accounting and Financial Officer)
Clarke A. Blackford
/s/ James L. Wittmer Chairman of the Board March 15, 1999
- -------------------------
James L. Wittmer
/s/ Howard L. Traphagen Director March 15, 1999
- -------------------------
Howard L. Traphagen
/s/ James G. Tyler Director March 15, 1999
- -------------------------
James G. Tyler
/s/ Daniel P. Lutgring Director March 15, 1999
- -------------------------
Daniel P. Lutgring
/s/ Marion L. Ress Director March 15, 1999
- -------------------------
Marion L. Ress
</TABLE>
27
<PAGE>
EXHIBIT 10.1
Employment Agreement with Carl D. Smith
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of July 1, 1998, by and between PEOPLES
COMMUNITY BANK (the "BANK"), PCB HOLDING COMPANY (the "COMPANY"), an Indiana
corporation; and CARL D. SMITH ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
WHEREAS, the BANK wishes to assure itself of the services of EXECUTIVE for
the period provided in this Agreement; and
WHEREAS, EXECUTIVE is willing to serve in the employ of the BANK on a full-
time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, EXECUTIVE agrees to serve as
President and Chief Executive Officer of the BANK. During said period,
EXECUTIVE also agrees to serve, if elected, as an officer and director of the
COMPANY or any subsidiary or affiliate of the COMPANY or the BANK. Executive
shall render administrative and management duties to the BANK such as are
customarily performed by persons situated in a similar executive capacity.
Specifically, EXECUTIVE shall perform all duties which are commonly
incident to the office of President and Chief Executive Officer including, but
not limited to, (i) managing the day-to-day operations of the BANK, (ii)
oversight of the BANK's compliance with applicable laws and regulations, (iii)
marketing of the BANK and its services, (iv) supervising the BANK's employees,
(v) reporting to the Board on the activities and condition of the BANK, and (vi)
making recommendations to the Board concerning the strategies, capital
structure, tactics and general operations of the BANK.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date, and
continuing at each anniversary date thereafter, the Board of Directors of the
BANK (the "Board") may extend the Agreement for an additional year. Prior to
the extension of the Agreement as provided herein, the Board of Directors of the
BANK will conduct a formal performance evaluation of EXECUTIVE for purposes of
determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
<PAGE>
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, EXECUTIVE shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the BANK; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
EXECUTIVE may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the BANK,
or materially affect the performance of EXECUTIVE's duties pursuant to this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The BANK
shall pay EXECUTIVE as compensation a salary of $59,500 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the BANK. During the period of this Agreement, EXECUTIVE's
Base Salary shall be reviewed at least annually; the first such review will be
made no later than one year from the date of this Agreement. Such review shall
be conducted by a Committee designated by the Board, and the Board may increase
EXECUTIVE's Base Salary. In addition to the Base Salary provided in this
Section 3(a), the BANK shall provide EXECUTIVE at no cost to EXECUTIVE with all
such other benefits as are provided uniformly to permanent full-time employees
of the BANK.
(b) The BANK will provide EXECUTIVE with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
EXECUTIVE was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the BANK will not, without
EXECUTIVE's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect EXECUTIVE's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), EXECUTIVE will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the BANK in the future to its senior executives
and key management employees, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plans and arrangements.
EXECUTIVE will be entitled to incentive compensation and bonuses as provided in
any plan, or pursuant to any arrangement of the BANK, in which EXECUTIVE is
eligible to participate. Nothing paid to EXECUTIVE under any such plan or
arrangement will be deemed to be in lieu of other compensation to which
EXECUTIVE is entitled under this Agreement, except as provided under Section
5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the BANK shall pay or reimburse EXECUTIVE for all reasonable travel
and other obligations under this
2
<PAGE>
Agreement and may provide such additional compensation in such form and such
amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during EXECUTIVE's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the BANK of EXECUTIVE's full-time employment hereunder for any reason other than
a Change in Control, as defined in Section 5(a) hereof; disability, as defined
in Section 6(a) hereof; death; retirement, as defined in Section 7 hereof; or
Termination for Cause, as defined in Section 8 hereof; (ii) EXECUTIVE's
resignation from the BANK's employ, upon (A) unless consented to by EXECUTIVE, a
material change in EXECUTIVE's function, duties, or responsibilities, which
change would cause EXECUTIVE's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Sections 1 and 2, above (any such material change shall be deemed a continuing
breach of this Agreement), (B) a relocation of EXECUTIVE's principal place of
employment by more than 35 miles from its location at the effective date of this
Agreement, or a material reduction in the benefits and perquisites to EXECUTIVE
from those being provided as of the effective date of this Agreement, (C) the
liquidation or dissolution of the BANK, or (D) any material breach of this
Agreement by the BANK. Upon the occurrence of any event described in clauses
(A), (B), (C) or (D), above, EXECUTIVE shall have the right to elect to
terminate his employment under this Agreement by resignation upon not less than
sixty (60) days prior written notice given within a reasonable period of time
not to exceed, except in case of a continuing breach, four (4) calendar months
after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the BANK shall pay
EXECUTIVE, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to EXECUTIVE for the remaining
term of the Agreement, including Base Salary, bonuses, and any other cash or
deferred compensation paid or to be paid (including the value of employer
contributions that would have been made on EXECUTIVE's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the BANK
as of the Date of Termination), to EXECUTIVE for the term of the Agreement
provided, however, that if the BANK is not in compliance with its minimum
capital requirements or if such payments would cause the BANK's capital to be
reduced below its minimum capital requirements, such payments shall be deferred
until such time as the BANK is in capital compliance. All payments made
pursuant to this Section 4(b) shall be paid in substantially equal monthly
installments over the remaining term of this Agreement following EXECUTIVE's
termination; provided, however, that if the remaining term of the Agreement is
less than one (1) year (determined as of EXECUTIVE's Date of Termination), such
payments and benefits shall be paid to EXECUTIVE in a lump sum within thirty
(30) days of the Date of Termination.
3
<PAGE>
(c) Upon the occurrence of an Event of Termination, the BANK will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the BANK for EXECUTIVE prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the COMPANY or the BANK. For purposes of this
Agreement, a "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) there occurs a change in control of the BANK or the
COMPANY within the meaning of the Home Owners Loan Act of 1933 and 12 C.F.R.
Part 574, (b) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act) is or becomes the beneficial owner, directly or indirectly,
of securities of the COMPANY or the BANK representing twenty-five percent (25%)
or more of the combined voting power of the COMPANY's or the BANK's then
outstanding securities, (c) the membership of the board of directors of the
COMPANY or the BANK changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such period,
or (d) shareholders of the COMPANY or the BANK approve a merger, consolidation,
sale or disposition of all or substantially all of the COMPANY's or the BANK's
assets, or a plan of partial or complete liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the BANK or the COMPANY has
reasonably determined that a Change in Control (as defined herein) has occurred,
EXECUTIVE shall be entitled to the benefits provided in paragraphs (c), (d) and
(e) of this Section 5 upon his subsequent involuntary termination following the
effective date of a Change in Control (or voluntary termination within twelve
(12) months of the effective date of a Change in Control following any material
demotion, loss of title, office or significant authority, material reduction in
his annual compensation or benefits (other than a reduction affecting the BANK's
personnel generally), or the relocation of his principal place of employment by
more than 35 miles from its location immediately prior to the Change in
Control), unless such termination is because of his death, retirement as
provided in Section 7, termination for Cause, or termination for Disability.
(c) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK shall pay EXECUTIVE, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to 2.99
times EXECUTIVE's "base amount," within the meaning of (S)280G(b)(3) of the
Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made
in a lump sum paid within ten (10) days of EXECUTIVE's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK will cause to be continued life, medical,
dental and disability coverage
4
<PAGE>
substantially identical to the coverage maintained by the BANK for EXECUTIVE
prior to his severance. Such coverage shall cease upon the expiration of thirty-
six (36) months. In addition, EXECUTIVE shall be entitled to receive the value
of employer contributions that would have been made on EXECUTIVE's behalf over
the remaining term of the agreement to any tax-qualified retirement plan
sponsored by the BANK as of the Date of Termination.
(e) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under (S)280G of the
Code, then, at the election of EXECUTIVE, (i) such payments or benefits shall be
payable or provided to EXECUTIVE over the minimum period necessary to reduce the
present value of such payments or benefits to an amount which is one dollar
($1.00) less than three (3) times EXECUTIVE's "base amount" under (S)280G(b)(3)
of the Code or (ii) the payments or benefits to be provided under this Section 5
shall be reduced to the extent necessary to avoid treatment as an excess
parachute payment with the allocation of the reduction among such payments and
benefits to be determined by EXECUTIVE.
6. TERMINATION FOR DISABILITY.
(a) If EXECUTIVE shall become disabled as defined in the BANK's then
current disability plan (or, if no such plan is then in effect, if EXECUTIVE is
permanently and totally disabled within the meaning of Section 22(e)(3) of the
Code as determined by a physician designated by the Board), the BANK may
terminate EXECUTIVE's employment for "Disability."
(b) Upon EXECUTIVE's termination of employment for Disability, the BANK
will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of EXECUTIVE's termination and will end on the earlier of (i) the
date EXECUTIVE returns to the full-time employment of the BANK in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's
full-time employment by another employer; (iii) EXECUTIVE attaining the age of
sixty-five (65); or (iv) EXECUTIVE's death; or (v) the expiration of the term of
this Agreement. The disability pay shall be reduced by the amount, if any, paid
to EXECUTIVE under any plan of the BANK providing disability benefits to
EXECUTIVE.
(c) The BANK will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
BANK for EXECUTIVE prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date EXECUTIVE returns to the
full-time employment of the BANK, in the same capacity as he was employed prior
to his termination for Disability and pursuant to an employment agreement
between
5
<PAGE>
EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time employment by another
employer; (iii) EXECUTIVE's attaining the age of sixty-five (65); (iv)
EXECUTIVE's death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to EXECUTIVE during any period during which
EXECUTIVE is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION
Termination by the BANK of EXECUTIVE based on "Retirement" shall mean
retirement at or after attaining age sixty-five (65) or in accordance with any
retirement arrangement established with EXECUTIVE's consent with respect to him.
Upon termination of EXECUTIVE upon Retirement, EXECUTIVE shall be entitled to
all benefits under any retirement plan of the BANK or the COMPANY and other
plans to which EXECUTIVE is a party. Upon the death of EXECUTIVE during the
term of this Agreement, the BANK shall pay to EXECUTIVE's estate the
compensation due to EXECUTIVE through the last day of the calendar month in
which his death occurred. Upon the voluntary resignation of EXECUTIVE during
the term of this Agreement, other than in connection with an Event of
Termination, the BANK shall pay to EXECUTIVE the compensation due to EXECUTIVE
through his Date of Termination.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of EXECUTIVE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar infractions) or final
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths (3/4) of the members of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to EXECUTIVE and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, EXECUTIVE was guilty of
conduct justifying termination for Cause and specifying the reasons thereof.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after termination for Cause. Any stock options granted to EXECUTIVE
under any stock option plan or any unvested awards granted under any other stock
benefit plan of the BANK, the COMPANY, or any subsidiary or affiliate thereof,
shall become null and void effective upon EXECUTIVE's receipt of Notice of
Termination for Cause pursuant to Section 10 hereof, and shall not be
exercisable by EXECUTIVE at any time subsequent to such Termination for Cause.
6
<PAGE>
9. REQUIRED PROVISIONS.
(a) The BOARD may terminate EXECUTIVE's employment at any time, but any
termination by the BOARD, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the BANK may, in its
discretion, (i) pay EXECUTIVE all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA),
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to the
extent determined that continuation of the Agreement is necessary for the
continued operation of the BANK): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his designee at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the BANK under the authority contained in Section 13(c) of the FDIA or
(ii) by the Director, or his designee at the time the Director or such designee
approves a supervisory merger to resolve problems related to operation of the
BANK or when the BANK is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the BANK or by EXECUTIVE shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of
7
<PAGE>
Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of EXECUTIVE's employment under the provision so indicated.
(b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, other than Termination for
Cause, the date specified in the Notice of Termination . In the event of
EXECUTIVE's Termination for Cause, the Date of Termination shall be the same as
the date of the Notice of Termination.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by EXECUTIVE in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
11. NON-COMPETITION.
(a) Upon any termination of EXECUTIVE's employment hereunder pursuant to an
Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not to
compete with the BANK and/or the COMPANY for a period of one (1) year following
such termination in Perry and Spencer Counties, Indiana. EXECUTIVE agrees that
during such period and within said counties, EXECUTIVE shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the BANK and/or the COMPANY. The parties hereto,
recognizing that irreparable injury will result to the BANK and/or the COMPANY,
its business and property in the event of EXECUTIVE's breach of this Subsection
11(a) agree that in the event of any such breach by EXECUTIVE, the BANK and/or
the COMPANY will be entitled, in addition to any other remedies and damages
available, to an injunction to restrain the violation hereof by EXECUTIVE,
EXECUTIVE's partners, agents, servants, employers, employees and all persons
acting for or with EXECUTIVE. EXECUTIVE represents and admits that in the event
of the termination of his employment pursuant to Section 4 hereof, EXECUTIVE's
experience and capabilities are such that EXECUTIVE can obtain employment in a
business engaged in other lines and/or of a different nature than the BANK
and/or the COMPANY, and that the enforcement of a remedy by way of injunction
will not prevent EXECUTIVE from earning a livelihood. Nothing herein will be
construed as prohibiting the BANK and/or the COMPANY from pursuing any other
remedies
8
<PAGE>
available to the BANK and/or the COMPANY for such breach or threatened breach,
including the recovery of damages from EXECUTIVE.
(b) EXECUTIVE recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the BANK and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the BANK. EXECUTIVE will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the BANK or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, EXECUTIVE may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the BANK. In the
event of a breach or threatened breach by EXECUTIVE of the provisions of this
Section, the BANK will be entitled to an injunction restraining EXECUTIVE from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the BANK or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the BANK from
pursuing any other remedies available to the BANK for such breach or threatened
breach, including the recovery of damages from EXECUTIVE.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
EXECUTIVE and, if such payments are not timely paid or provided by the BANK,
such amounts and benefits shall be paid or provided by the COMPANY.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the BANK or any
predecessor of the BANK and EXECUTIVE, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to EXECUTIVE of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that EXECUTIVE is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
9
<PAGE>
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the BANK, the COMPANY and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Indiana,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or state
law or regulation, including , specifically, 12 C.F.R. Section 563.39(b), the
provisions of such law or regulation shall prevail.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the BANK, if EXECUTIVE is successful pursuant to a legal
judgment, arbitration or settlement.
10
<PAGE>
20. INDEMNIFICATION.
The BANK shall provide EXECUTIVE (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
EXECUTIVE (and his heirs, executors and administrators) to the fullest extent
permitted under Indiana law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the BANK (whether or not he continues to be a directors or officer
at the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgment, court costs and
attorneys' fees and the cost of reasonable settlements. The provisions of 12
C.F.R. 545.121 shall apply to the BANK's obligations under this Section 20.
21. SUCCESSOR TO THE BANK OR THE COMPANY.
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent that
the BANK or the COMPANY would be required to perform if no such succession or
assignment had taken place.
IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement to
be executed and their seal to be affixed hereunto by a duly authorized officer,
and EXECUTIVE has signed this Agreement, all on the 23rd day of June, 1998.
ATTEST: PEOPLES COMMUNITY BANK
/s/ Marion L. Ress BY: /s/ James L. Wittmer
- ---------------------------- ---------------------------
ATTEST: PCB HOLDING COMPANY
/s/ Marion L. Ress BY: /s/ James L. Wittmer
- ---------------------------- ---------------------------
WITNESS:
/s/ Tammy A. Bruner /s/ Carl D. Smith
- ---------------------------- ---------------------------
Carl D. Smith
11
<PAGE>
EXHIBIT 13
Portions of 1998 Annual Report to Stockholders
<PAGE>
- --------------------------------------------------------------------------------
PCB HOLDING COMPANY
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Letter to Stockholders............................ 1
Selected Financial and Other Data................. 2-3
Management's Discussion and Analysis of
Financial Condition and Results of Operations... 4-12
Independent Auditor's Report...................... 14
Financial Statements.............................. 15-18
Notes to Financial Statements..................... 19-33
Board of Directors................................ 34
Corporate Information............................. 35
</TABLE>
BUSINESS OF THE COMPANY
PCB Holding Company (the Company) is the holding company of Peoples
Community Bank (the Bank).
The Bank's savings accounts are insured up to applicable legal limits
by the Federal Deposit Insurance Corporation through the Savings Association
Insurance Fund. The Bank is a member of the Federal Home Loan Bank System. The
Bank conducts its operations through its office located at 819 Main Street, Tell
City, Indiana. The telephone number is (812) 547-7094.
The Bank is a community-oriented financial institution offering
traditional financial services primarily to residents of Perry County, Indiana,
and, to a lesser extent, contiguous counties. The Bank's primary business is
attracting deposits from the general public and using those funds to originate
one-to-four family residential mortgage loans. The Bank also purchases
participation interests in multi-family and commercial real estate loans
originated by other financial institutions and secured by properties located
throughout Indiana. To a lesser extent, the Bank originates multi-family loans,
commercial real estate loans, residential construction loans and consumer loans.
The Bank invests excess liquidity primarily in U.S. government and agency
securities and, to a lesser extent, mortgage-backed securities issued by U.S.
government agencies, and local municipal obligations.
<PAGE>
PCB HOLDING COMPANY
819 Main Street
P. O. Box 68
Tell City, Indiana 47586
TO OUR STOCKHOLDERS
Fellow Shareholders of PCB Holding Company,
I am pleased to present to you the first Annual Report of PCB Holding Company.
This has been a year of change. In July of 1998, we completed our conversion
from a state chartered, mutual building and loan association to a federally
chartered stock savings bank. As part of this conversion, we adopted the name
Peoples Community Bank. Our new name reflects our goal of providing a wider
variety of products and services to our customers.
For over 80 years we operated as a traditional "Building and Loan," investing
primarily in single family housing and offering a small variety of deposit
services. As the financial environment changed, our board of directors
recognized that we needed to change as well in order to continue to satisfy the
banking needs of our community.
The conversion reorganized the Bank into the form used by most commercial banks
and businesses and provided us with additional capital to support the expansion
of our banking services.
Since our conversion, we have added a variety of services, including three
different types of consumer loans and several types of checking accounts. We
are currently investigating other opportunities, including ATM's, line of credit
lending, and increasing our commercial loan portfolio.
We remain committed to increasing our services without jeopardizing the value of
the institution.
The enclosed Annual Report indicates an increase in profits from 1997, which was
due primarily to the investment of the proceeds of our stock offering. We hope
to increase profits as additional services are added and the initial expense of
"start-up" is absorbed.
We thank you for your support and interest. As fellow shareholders, we look
forward to what we believe is a bright future together.
Sincerely,
/s/ Carl D. Smith
Carl D. Smith
President-Chief Executive Officer
1
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
PCB Holding Company (the Company) is the parent to its wholly owned subsidiary,
Peoples Community Bank (the Bank), a community-oriented financial institution
offering traditional financial services primarily to residents of Perry County,
Indiana, and, to a lesser extent, contiguous counties. The Company has no other
material income other than that generated by the Bank. The Bank's primary
business is attracting deposits from the general public and using those funds to
originate one-to-four family residential mortgage loans. The Bank's lending
activity also includes multi-family residential loans, commercial real estate
loans and consumer loans. The Bank invests excess liquidity primarily in U.S.
government and agency securities, local municipal obligations and, to a lesser
extent, mortgage-backed securities.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Bank. The information contained in this section
should be read in conjunction with the financial statements and the accompanying
notes to financial statements included elsewhere in this report.
Operating Strategy
The Bank's results of operations depend primarily on net interest income, which
is the difference between the income earned on its interest-earning assets, such
as loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits and, if utilized, borrowings from the Federal Home Loan
Bank of Indianapolis. The Bank's net income is also affected by, among other
things, fee income, provisions for loan losses, operating expenses and income
tax provisions. The Bank's results of operations are also significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates, government legislation and policies concerning monetary
and fiscal affairs, housing and financial institutions and the intended actions
of the regulatory authorities.
The Bank's current business strategy is to operate as a well capitalized,
locally owned community bank. This strategy has been implemented in recent
years by controlling growth, emphasizing the origination of residential mortgage
loans in the Bank's primary market area, improving asset quality, controlling
operating expenses, and expanding customer services. The Bank has been
successful in implementing its business strategy as the results have been
reflected in the stated growth in assets, loans and stockholders' equity.
Conversion and Stock Offering
On July 1, 1998, the Bank completed a conversion and stock offering whereby the
Bank converted from the mutual to the stock form of organization. As part of
the conversion, the Bank became a wholly-owned subsidiary of the Company which
offered common stock to certain current and former depositor and borrower
customers of the Bank in a subscription offering. The Company issued 396,750
shares of common stock with gross proceeds of $3,967,500 as a result of the
offering. Total expenses in connection with the conversion and offering
amounted to $308,000 and were charged against the proceeds from the offering.
Comparison of Financial Condition at December 31, 1998 and 1997
Total assets increased 15.7% from $22.0 million at December 31, 1997 to $25.4
million at December 31, 1998, primarily as a result of increases in loans
receivable and interest bearing deposits with banks, which were funded by the
proceeds from the issuance of common stock.
Loans receivable, net, were $20.9 million at December 31, 1998, compared to
$19.3 million at December 31, 1997, a 8.5% increase. This increase resulted
primarily from increases in residential real estate mortgage loans of $1.0
million and consumer loans of $550,000.
4
<PAGE>
Securities available for sale, carried at fair value increased 16.2% from $1.3
million at December 31, 1997 to $1.5 million at December 31, 1998. During 1998,
the Bank had maturities of $1.7 million and purchases of $1.9 million.
The investment in mortgage-backed securities held to maturity was eliminated due
to principal repayment during 1998.
Cash and interest bearing deposits increased from $752,000 at December 31, 1997
to $2.4 million at December 31, 1998 as a result of excess liquidity funded by
the net proceeds from the issuance of common stock.
Total deposits decreased 1.7% from $19.8 million at December 31, 1997 to $19.5
million at December 31, 1998 primarily as a result of deposit account holders
use of deposits for the purchase of common stock in the conversion.
Stockholders' equity increased from $2.1 million at December 31, 1997 to $5.8
million at December 31, 1998. This increase resulted from retained net income
during the year ended December 31, 1998 of $89,000, net proceeds from the
issuance of common stock of $3.7 million and a net decrease in the unrealized
loss on securities available for sale of $9,000. Stockholders' equity as a
percent of total assets increased from 9.5% at December 31, 1997 to 23.0% at
December 31.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income was $109,000 for the year ended December 31, 1998,
compared to $70,000 for the year ended December 31, 1997. The primary reason
for the increase in net income for 1998 was the increase in net interest income
provided by the growth in interest earning assets which was funded primarily by
the issuance of common stock.
Net Interest Income. Net interest income increased 29.0% from $539,000 in 1997
to $696,000 in 1998 as a result of an increase in total interest income, and a
decrease in interest expense. The average yield earned on interest-earning
assets and the average cost of interest-bearing liabilities remained relatively
constant. See "Average Balance Sheet" below. The changes in interest income
and interest expense resulting from changes in volume and changes in rates for
1998 and 1997 are shown in the schedule captioned "Rate/Volume Analysis"
included herein.
Provision for Loan Losses. Provisions for loan losses are charges to earnings
to bring the total allowance for loan losses to a level considered reasonable by
management to provide for probable known and inherent loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. In determining
the adequacy of the allowance for loan losses, the Bank reviews all loans
quarterly, and loans are assigned a risk weighting based on asset
classification.
There was no provision for loan losses in 1998 and 1997. The allowance for loan
losses was $51,000 at December 31, 1998, and management deemed that amount
reasonable at that date based on its best estimate of probable known and
inherent loan losses. The Bank's total non-performing loans as of December 31,
1998 were approximately $29,000 or 0.11% of total assets.
Non-Interest Income. Non-interest income totaled $8,000 for 1998 compared to
$7,000 for 1997.
5
<PAGE>
Non-Interest Expense. Non-interest expenses increased 20.9% from $448,000 in
1997 to $542,000 in 1998. Occupancy and equipment expenses and deposit
insurance premiums remained relatively constant for 1998 compared to 1997 while
compensation and benefits and other operating expenses increased for 1998
compared to 1997. Compensation and benefits increased 18.7% from $269,000 in
1997 to $319,000 in 1998 primarily do to normal increases in employee
compensation and benefits and additional staff. Other operating expenses
increased 30.6% from $124,000 in 1997 to $161,000 in 1998. Third-party computer
processing fees increased 19.5% from $39,000 in 1997 to $46,000 in 1998
primarily due to increased volume in loan and deposit accounts and inflationary
increases. The Bank increased its advertising expenditures in 1998 to $21,000
compared to $17,000 in 1997. Also, in 1998, the Bank was subject to one-time
printing and stationery costs related to a name change and an increase in
professional fees.
Income Tax Expense. Income tax expense increased from $28,000 in 1997 to
$53,000 in 1998 as a result of higher income before income taxes. The effective
tax rate for 1998 was 32.8% compared to 29.0% in 1997 due to the effect of the
graduated federal tax rates.
6
<PAGE>
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AVERAGE BALANCE SHEETS
- ------------------------------------------------------------------------------
The following table sets forth certain information for the periods indicated
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest earning assets and interest
expense on average interest bearing liabilites and average yields and costs.
Such yields and costs for the periods indicated are derived by dividing income
or expense by the average balances of assets or liabilities, respectively, for
the periods presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1998 1997
-------------------------- --------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable, net (1) $19,769 $1,518 7.68% $19,403 $1,494 7.70%
Investment securities (2) 1,602 94 5.85% 1,365 85 6.21%
Federal Home Loan Bank stock 196 16 8.16% 196 16 8.16%
Interest bearing deposits with banks 2,031 103 5.07% 1,179 51 4.33%
----------------- -----------------
Total interest earning assets 23,598 1,731 7.34% 22,143 1,646 7.43%
----------------- -----------------
Non-interest earning assets 414 777
------- -------
Total assets $24,012 $22,920
======= =======
Interest bearing liabilities:
Savings and interest bearing demand deposits $ 3,781 122 3.23% $ 3,564 132 3.70%
Time deposits 16,073 913 5.68% 16,462 960 5.83%
----------------- -----------------
Total deposits 19,854 1,035 5.21% 20,026 1,092 5.45%
----------------- -----------------
FHLB advances - - - 254 15 5.91%
----------------- -----------------
Total interest bearing liabilities 19,854 1,035 5.21% 20,280 1,107 5.46%
----------------- -----------------
Non-interest bearing liabilities 124 473
------- -------
Total liabilities 19,978 20,753
Stockholders' equity 4,034 2,167
------- -------
Total liabilities and stockholders' equity $24,012 $22,920
======= =======
Net interest income $ 696 $ 539
======= =======
Interest rate spread 2.13% 1.97%
========= =========
Net interest margin 2.95% 2.43%
========= =========
Ratio of average interest earning assets
to average interest bearing liabilities 118.86% 109.19%
========= =========
</TABLE>
_________________
(1) Average loans receivable includes non-performing loans. Interest income does
not include interest on loans 90 days or more past due.
(2) Includes debt securities classified as available for sale and mortgage-
backed securities classified as held to maturity.
7
<PAGE>
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RATE/VOLUME ANALYSIS
- --------------------------------------------------------------------------------
The following table sets forth the effects of changing rates and volumes on
interest income and interest expense. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) effects attributable to
changes in rate and volume (change in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
1998 Compared to 1997
Increase (Decrease) Due to
-------------------------------
Rate/
Rate Volume Volume Net
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Interest earning assets:
Loans receivable, net $ (4) $ 27 $ - $ 23
Investment securities (5) 15 (1) 9
Federal Home Loan Bank stock - - - -
Interest bearing deposits with banks 9 37 6 52
------ ------ ------ ------
Total net change in income
on interest earning assets - 79 5 84
------ ------ ------ ------
Interest bearing liabilities:
Savings and interest bearing demand (17) 8 (1) (10)
deposits
Time deposits (25) (24) 1 (48)
FHLB advances - (15) - (15)
Total net change in expense
on interest bearing liabilities (42) (31) - (73)
------ ------ ------ ------
Net change in net interest income $ 42 $110 $ 5 $157
====== ====== ====== ======
</TABLE>
8
<PAGE>
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from loan
repayments and prepayments, and from the sale and maturity of securities. The
Bank may also borrow from the Federal Home Loan Bank of Indianapolis. While
loan repayments and maturities and sales of securities are predictable sources
of funds, deposit flows and mortgage prepayments are greatly influenced by
market interest rates, general economic conditions and competition. At December
31, 1998, the Bank had cash and interest-bearing deposits with banks of $2.4
million and securities available for sale with a fair value of $1.5 million. At
December 31, 1998, the Bank also had an available, but undrawn, credit line of
$3.9 million from the Federal Home Loan Bank of Indianapolis.
The Bank's primary investing activity is the origination of one-to-four family
mortgage loans and, to a lesser extent, consumer, multi-family, commercial real
estate and residential construction loans. The Bank also invests in U.S.
government and agency securities and mortgage-backed securities issued by U.S.
government agencies.
The Bank must maintain an adequate level of liquidity to ensure the availability
of sufficient funds to support loan growth and deposit withdrawals, to satisfy
financial commitments and to take advantage of investment opportunities. At
December 31, 1998, the Bank had total commitments to extend credit of $706,000.
See Note 9 of Notes to Consolidated Financial Statements. At December 31, 1998,
the Bank had certificates of deposit scheduled to mature within one year of $8.0
million. Historically, the Bank has been able to retain a significant amount of
its deposits as they mature.
Current Office of Thrift Supervision (OTS) regulations require the Bank to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4.0% of the average daily balance of its net
withdrawable deposits and short-term borrowings. Historically, the Bank has
maintained liquidity levels in excess of regulatory requirements.
The Bank is required to maintain specific amounts of capital pursuant to OTS
requirements. As of December 31, 1998, the Bank was in compliance with all
regulatory capital requirements which were effective as of such date with
tangible, core and risk-based capital ratios of 15.9%, 15.9% and 30.4%,
respectively.
Effect of Inflation and Changing Prices
The financial statements and related financial data presented herein have been
prepared in accordance with generally accepted accounting principles, which
generally require the measurement of financial position and operating results in
terms of historical dollars, without considering the changes in relative
purchasing power of money over time due to inflation. The primary impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, virtually all the assets and liabilities of the
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on the financial institutions
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Market Risk Analysis
Qualitative Aspects of Market Risk. The Bank's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Bank has sought to reduce the exposure of
its earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. In order to
reduce the exposure to interstate fluctuations, the Bank has developed
strategies to manage its liquidity, shorten its effective maturities of certain
interest-earning assets and increase the interest rate sensitivity of its asset
base. Management has sought to decrease the average maturity of its assets by
emphasizing the origination of short-term commercial and consumer loans, all of
which are retained by the Bank for its portfolio. The Bank relies on retail
deposits as its primary source of funds. Management believes retail deposits,
compared to brokered deposits, reduce the effects of interest rate fluctuations
because they generally represent a more stable source of funds.
9
<PAGE>
Quantitative Aspects of Market Risk. The Bank does not maintain a trading
account for any class of financial instrument nor does the Bank engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk.
The Bank uses interest rate sensitivity analysis to measure its interest
rate risk by computing changes in NPV(net portfolio value) of its cash flows
from assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 100 to 400 basis point increase or decrease in
market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Using data compiled
by the OTS, the Bank receives a report which measures interest rate risk by
modeling the change in NPV (net portfolio value) over a variety of interest rate
scenarios. This procedure for measuring interest rate risk was developed by the
OTS to replace the "gap" analysis (the difference between interest-earning
assets and interest-bearing liabilities that mature or reprice within a specific
time period).
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at December 31, 1998, based on OTS assumptions, that would occur in
the event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------
Net Portfolio Value
------------------------------ Net Portfolio Value as a
Change Dollar Dollar Percent Percent of Present Value of Assets
In Rates Amount Change Change NPV Ratio Change
--------- ------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
400bp $2,809 $(1,363) (33)% 11.85% 434bp
300bp 3,230 (942) (23) 13.30 289bp
200bp 3,623 (549) (13) 14.58 161bp
100bp 3,945 (227) (5) 15.56 63bp
--bp 4,172 - - 16.19 --bp
(100)bp 4,319 147 4 16.55 36bp
(200)bp 4,462 290 7 16.88 69bp
(300)bp 4,658 486 12 17.36 117bp
(400)bp 4,796 624 15 17.65 146bp
</TABLE>
The above table indicates that in the event of a sudden and sustained
increase in prevailing market interest rates, the Bank's NPV would be expected
to decrease, and that in the event of a sudden and sustained decrease in
prevailing market interest rates, the Bank's NPV would be expected to increase.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
10
<PAGE>
Year 2000 Issues
The Bank is a user of computers, computer software, and equipment utilizing
embedded microcontrollers that will be affected by the Year 2000 ("Y2K") issue.
The Y2K issue exists because many computer systems and applications use two-
digit date fields to designate a year. As the century date change occurs, date
sensitive systems may incorrectly recognize the year 2000. This inability to
recognize or properly treat the Y2K issue may cause systems to process financial
and operational information incorrectly. The Y2K issue presents several
potential risks to the Bank:
1. The banking transactions of the Bank's customers are processed by one or
more computer systems provided by a third-party service bureau. The
failure of one or more of those systems to function as a result of the Y2K
date change could result in the Bank's inability to properly process
customer transactions. If that were to occur, the Bank could lose
customers to other financial institutions, resulting in a loss of revenue.
2. A number of the Bank's borrowers utilize computers and computer software to
varying degrees in conjunction with the operation of their businesses. The
customers and suppliers of those businesses may utilize computers as well.
Should the Bank's borrowers, or the businesses on which they depend,
experience Y2K related computer problems, such borrowers' cash flow could
be disrupted, adversely effecting their ability to repay their loans with
the Bank.
3. Concern on the part of certain depositors that the Y2K related problems
could impair access to their deposit account balances following the Y2K
date change could result in the Bank experiencing a deposit outflow prior
to December 31, 1999.
4. Should the Y2K related problems occur which cause any of the Bank's
systems, or the systems of the third-party service bureau upon which the
Bank depends, to become inoperative, increased personnel costs could be
incurred if additional staff is required to perform functions that the
inoperative systems would have otherwise performed.
5. Certain utility services, such as electrical power and telecommunication
services, could be disrupted if those services experience Y2K related
problems. The Bank's Y2K contingency plan will address such possible
situations.
Management believes it is not possible to estimate the potential lost revenue
due to the Y2K issue, as the extent and longevity of such potential problems
cannot be predicted. The Bank adopted a Y2K Action Plan in October 1997 to
assess all systems to insure that they will function properly in the Y2K. This
process involves separate phases which include: awareness, assessment,
renovation, validation, and implementation.
During 1997, the Bank completed the systems assessment phase, identifying each
internal system that could potentially be affected by the Y2K issue. Those
systems include the Bank's in-house microcomputer systems and third-party
service bureau as well as equipment such as the alarm system, vault locks,
telephone system, etc., that may contain embedded microprocessors. For each
such system, an action plan was created to set forth the process for determining
whether or not the system is Y2K compliant. Those determinations involved
obtaining Y2K compliant certifications from vendors wherever possible, and by
the Bank conducting its own validation testing.
When the results of the Bank's validation testing programs have revealed that a
particular system is not Y2K compliant, a contingency plan is formulated to
either upgrade the system in order to meet the Y2K compliance requirements or
replace the system with one that is certified as Y2K compliant. The Bank is
currently in the validation and implementation phases of this process. A third-
party service bureau processes all customer transactions and has completed
upgrades to its systems to be Y2K compliant. On November 8, 1998, the Bank
began testing those third-party systems by processing transactions for each type
of account.
As of December 31, 1998, the testing was complete and the results of the testing
indicated that those third party systems were Y2K compliant for all critical
test dates selected.
11
<PAGE>
Other third parties upon which the Bank depends for processing include
correspondent banks, brokerage firms, and the pension plan administrator. These
third parties have indicated their compliance or intended compliance with the
Y2K. Should the testing of any third-party system or service reveal that such
system or service is not Y2K compliant, a specific deadline will be set by which
time the system or service must be brought into Y2K compliance. Should Y2K
compliance not be achieved by the specified deadlines, the Bank has developed a
contingency plan for each such external system or service. Those contingency
plans document the action the Bank will take for each such non-compliant system.
In certain cases, such as the potential loss of electrical power or
telecommunication services due to Y2K problems, testing by the Bank is either
not practical or not possible. In those cases, contingency plans will be
designed that specify how the Bank will deal with such potential situations.
For example, the Bank is considering the purchase or lease of an electrical
power generator with sufficient capacity to allow the Bank to maintain critical
functions in the event power from the electric utility is interrupted.
The Bank, as a federally chartered thrift institution, is regulated by the
Office of Thrift Supervision. The federal regulators have established specific
guidelines and time tables to follow in addressing the Y2K issue. The Bank is
currently in compliance with the federally mandated Y2K guidelines and time
tables.
As of December 31, 1998, the Bank was on schedule with its internal Y2K
preparation efforts. All internal systems identified in the assessment phase of
the project that are considered "mission critical" have been tested for Y2K
compliance. Systems that have been determined to be Y2K compliant will be
retested during 1999 following any material upgrades or enhancements. The Bank
has replaced non-compliant microcomputer equipment and has installed and tested
the related software for Y2K compliance. Other equipment containing embedded
microprocessors have been certified as Y2K compliant by the applicable vendors.
The Bank's estimated total cost to replace computer equipment, software
programs, or other equipment containing embedded microprocessors that were not
Y2K compliant, is approximately $8,000, substantially all of which has been
incurred at December 31, 1998. System maintenance or modification costs are
being expensed as incurred, while the cost of new hardware, software, or other
equipment, is capitalized and amortized over their estimated useful lives.
While the third-party service bureau has not indicated what, if any, costs it
may pass onto its customers, the Bank does not believe that the cost associated
with its actions or those of its vendors will be material to the Bank. However,
in the event that the third-party service bureau is unable to fulfill its
contractual obligations to the Bank could have a significant adverse impact on
the financial condition and results of operations of the Bank.
12
<PAGE>
MONROE SHINE & CO., INC.
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
P.O. BOX 1407, 222 E. MARKET ST., NEW ALBANY, IN 47150 812-945-2311
Independent Auditor's Report
The Board of Directors
PCB Holding Company
Tell City, Indiana
We have audited the accompanying consolidated balance sheets of PCB Holding
Company and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 financial position of PCB Holding Company
and Subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Monroe Shine & Co., Inc.
January 29, 1999
14
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 43,327 $ 18,028
Interest bearing deposits with banks 2,322,875 733,720
Securities available for sale, at fair value 1,531,994 1,318,817
Mortgage-backed securities held to maturity
(fair value $20,696) - 20,944
Loans, net of allowance for loan losses of
$50,802 in 1998 and 1997 20,929,684 19,295,524
Federal Home Loan Bank stock, at cost 196,100 196,100
Premises and equipment 218,271 198,040
Accrued interest receivable:
Loans 111,323 108,636
Debt securities and other 36,463 23,378
Other assets 49,066 75,494
----------- -----------
Total Assets $25,439,103 $21,988,681
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 13,844 $ -
Savings and interest bearing demand deposits 4,005,692 3,430,092
Time deposits 15,497,155 16,416,025
----------- -----------
Total deposits 19,516,691 19,846,117
Accrued interest payable on deposits 5,990 6,174
Accrued expenses and other liabilities 66,480 44,871
----------- -----------
Total Liabilities 19,589,161 19,897,162
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share
Authorized 1,000,000 shares; none issued - -
Common stock of $.01 par value per share
Authorized 4,000,000 shares; issued 396,750 in 1998 3,967 -
Additional paid-in capital 3,655,917 -
Retained earnings-substantially restricted 2,198,860 2,109,721
Accumulated other comprehensive income-net
unrealized loss on securities available for sale (8,802) (18,202)
----------- -----------
Total Stockholders' Equity 5,849,942 2,091,519
----------- -----------
Total Liabilities and Stockholders' Equity $25,439,103 $21,988,681
=========== ===========
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $ - $ - $2,039,738 $(21,795) $2,017,943
COMPREHENSIVE INCOME
Net income - - 69,983 - 69,983
Other comprehensive income:
Change in unrealized loss on
securities available for sale,
net of deferred income tax
expense of $2,357 - - - 3,593 3,593
Less: reclassification adjustment -
----------
Total comprehensive income - - - - 73,576
-------- ----------- ----------- ------------- ----------
Balances at December 31, 1997 - - 2,109,721 (18,202) 2,091,519
COMPREHENSIVE INCOME
Net income - - 108,976 - 108,976
Other comprehensive income:
Change in unrealized loss on
securities available for sale,
net of deferred income tax
expense of $6,166 - - - 9,400 9,400
Less: reclassification adjustment -
----------
Total comprehensive income - - - - 118,376
----------
Issuance of common stock 3,967 3,655,917 - - 3,659,884
Cash dividends ($.05 per share) - - (19,837) - (19,837)
-------- ----------- ----------- ------------- ----------
Balances at December 31, 1998 $3,967 $3,655,917 $2,198,860 $ (8,802) $5,949,942
======== =========== =========== ============= ==========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans:
Real estate mortgage loans $1,490,756 $1,479,590
Other loans 27,177 13,961
Mortgage-backed securities 813 1,837
Other debt securities 93,354 83,404
Federal Home Loan Bank dividends 15,703 15,666
Interest bearing deposits with banks 102,700 51,443
---------- ----------
Total interest income 1,730,503 1,645,901
INTEREST EXPENSE
Deposits 1,035,012 1,091,908
Advances from Federal Home Loan Bank - 14,711
---------- ----------
Total interest expense 1,035,012 1,106,619
---------- ----------
Net interest income 695,491 539,282
Provision for loan losses - -
---------- ----------
Net interest income after provision for loan losses 695,491 539,282
NON-INTEREST INCOME
Service charges on deposit accounts 220 -
Other income 7,989 7,215
---------- ----------
Total non-interest income 8,209 7,215
---------- ----------
NON-INTEREST EXPENSES
Compensation and benefits 319,123 268,960
Occupancy and equipment 47,910 45,229
Deposit insurance premiums 13,126 10,168
Other operating expenses 161,411 123,596
---------- ----------
Total non-interest expenses 541,570 447,953
---------- ----------
Income before income taxes 162,130 98,544
Income tax expense 53,154 28,561
---------- ----------
Net Income $ 108,976 $ 69,983
========== ==========
Net income per common share, basic $.27 N/A
========== ==========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 108,976 $ 69,983
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of premiums and accretion of discounts
on securities, net 3,981 (3,221)
Depreciation expense 17,524 17,093
Deferred income taxes (credit) (1,995) 6,246
(Increase) decrease in accrued interest receivable (15,772) 2,501
Decrease in accrued interest payable (184) (191)
Net change in other assets/liabilities 43,866 7,837
----------- -----------
Net Cash Provided By Operating Activities 156,396 100,248
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with banks (1,589,155) 231,231
Proceeds from maturity of securities available for sale 1,735,022 599,850
Purchases of securities available for sale (1,935,832) (1,097,118)
Principal collected on mortgage-backed securities 20,162 5,862
Net (increase) decrease in loans receivable (1,634,160) 612,756
Purchase of participation loans - (71,117)
Purchase of premises and equipment (37,755) (28,004)
----------- -----------
Net Cash Provided (Used) By Investing Activities (3,441,718) 253,460
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits 589,444 (149,289)
Net decrease in time deposits (918,870) (198,742)
Repayment of advances from Federal Home Loan Bank - (750,000)
Advances from Federal Home Loan Bank - 750,000
Proceeds from issuance of common stock 3,659,884 -
Cash dividends paid (19,837) -
----------- -----------
Net Cash Provided (Used) By Financing Activities 3,310,621 (348,031)
----------- -----------
Net Increase in Cash and Due From Banks 25,299 5,677
Cash and due from banks at beginning of year 18,028 12,351
----------- -----------
Cash and Due From Banks at End Of Year $ 43,327 $ 18,028
=========== ===========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
PCB Holding Company (the Company) was incorporated by Peoples Building and
Loan Association (now known as Peoples Community Bank) (the Bank) in
connection with a conversion from a federally chartered mutual savings and
loan association to a federally chartered stock savings bank. Upon
consummation of the conversion and reorganization on July 1, 1998, the
Company became the holding company for the Bank.
The Bank provides a variety of banking services to customers through its
office in Tell City, Indiana. The Bank's primary source of revenue is
single-family residential loans.
Consolidation
The consolidated financial statements include the accounts of the Company,
the Bank and its wholly-owned subsidiary, Peoples Building and Loan Service
Corp., which was inactive in 1998 and 1997. All material intercompany
balances and transactions have been eliminated in consolidation.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company has defined cash
and cash equivalents as those amounts included in the balance sheet caption
"Cash and due from banks."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of foreclosed real estate. In connection with the determination
of the estimated losses on loans and foreclosed real estate, management
obtains appraisals for significant properties.
Securities Available for Sale
Securities available for sale consist of debt securities not classified as
held to maturity and are stated at fair value. Amortization of premium and
accretion of discount are recognized in interest income using the interest
method. Unrealized gains and losses, net of tax, on securities available
for sale are reported as a separate component of retained earnings until
realized. Gains and losses on the sale of securities available for sale
are determined using the specific identification method.
19
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(1 - continued)
Securities Held to Maturity
Debt securities, including mortgage-backed securities, for which the Bank
has the positive intent and ability to hold to maturity are carried at
cost, adjusted for amortization of premium and accretion of discount using
the interest method over the remaining period to maturity, adjusted for
anticipated prepayments. Mortgage-backed securities represent
participating interests in pools of long-term first mortgage loans
originated and serviced by issuers of the securities.
Loans
Loans are stated at unpaid principal balances, less net deferred loan fees
and the allowance for loan losses. The Bank's real estate loan portfolio
consists primarily of long-term loans collateralized by first mortgages on
single-family residences and multi-family residential property located in
the southern Indiana area and commercial real estate loans. In addition to
real estate loans, the Bank makes consumer loans secured by savings
accounts.
Loan origination fees and certain direct costs of underwriting and closing
loans are deferred and the net fee or cost is recognized as an adjustment
to interest income over the contractual life of the loans using the
interest method.
The accrual of interest is discontinued on a loan when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. The Bank does not accrue interest
on loans past due 90 days or more except when the estimated value of
collateral and collection efforts are deemed sufficient to ensure full
recovery. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income.
Subsequent receipts on nonaccrual loans, including specific impaired loans,
are recorded as a reduction of principal, and interest income is only
recorded once principal recovery is reasonably assured.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specified impaired loans, and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the related
allowance may change in the near term.
20
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(1 - continued)
Foreclosed Real Estate
Foreclosed real estate is carried at the lower of fair value minus
estimated costs to sell or cost. Costs of holding foreclosed real estate
are charged to expense in the current period, except for significant
property improvements, which are capitalized. Valuations are periodically
performed by management and an allowance is established by a charge to non-
interest expense if the carrying value exceeds the fair value minus
estimated costs to sell. The net expense from operations of foreclosed
real estate held for sale is reported in non-interest expense.
Premises and Equipment
The Bank uses the straight line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable
assets over their useful lives. Items capitalized as part of premises and
equipment are valued at cost. Maintenance and repairs are expensed as
incurred. The cost and related accumulated depreciation of assets sold, or
otherwise disposed of, are removed from the related accounts and any gain
or loss is included in earnings.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
available for sale securities, allowance for loan losses, accumulated
depreciation, and accrued income and expenses for financial and income tax
reporting. The deferred tax assets and liabilities represent the future
tax return consequences of those differences, which will either be taxable
or deductible when the assets and liabilities are recovered or settled.
Advertising Costs
Advertising costs are charged to operations when incurred.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings based on a control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets
it controls and liabilities it has incurred, derecognizes financial assets
when control has been surrendered and derecognizes liabilities when
extinguished. The provisions of SFAS No. 125 are effective for
transactions occurring after December 31, 1996, except those provisions
relating to repurchase agreements, securities lending, and other similar
transactions and pledged collateral, which have been delayed until after
December 31, 1997 by SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, an amendment of FASB
Statement No. 125. The adoption of these statements has no material impact
on financial position or results of operations.
21
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(2) DEBT SECURITIES
Debt securities have been classified in the balance sheets according to
management's intent.
The Bank's investment in debt securities at December 31, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1998:
Securities available for sale:
U.S. government agency $1,446,953 $6,396 $ 20,855 $1,432,494
Corporate notes 99,616 - 116 99,500
---------- ------ ---------- -------------
$1,546,569 $6,396 $ 20,971 $1,531,994
========== ====== ========== =============
December 31, 1997:
Securities available for sale:
U.S. government agency $ 999,596 $ - $ 29,097 $ 970,499
Corporate notes 349,362 - 1,044 348,318
---------- ------ ---------- -------------
$1,348,958 $ - $ 30,141 $1,318,817
========== ====== ========== =============
Securities held to maturity:
Mortgage-backed securities:
FNMA certificates $ 17,269 $ - $ 1,008 $ 16,261
FHLMC certificates 3,675 760 - 4,435
---------- ------ ---------- -------------
$ 20,944 $ 760 $ 1,008 $ 20,696
========== ====== ========== =============
The amortized cost and fair value of debt securities as of December 31, 1998 by contractual maturity, are shown below.
Securities Available for Sale
Amortized Fair
Cost Value
Due in one year or less $ 99,616 $ 99,500
Due after one year through
five years 749,453 732,974
Due after five years through
ten years 100,000 99,926
Due after ten years 597,500 599,594
---------- -------------
$1,546,569 $1,531,994
========== =============
</TABLE>
22
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(3) LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Real estate mortgage loans:
One to four family residential $17,891,615 $16,892,966
Multi-family residential 361,699 468,147
Commercial real estate 900,758 863,876
Land 654,006 527,971
Residential construction 980,000 783,200
Loan secured by savings accounts 274,559 177,664
Consumer loans 453,884 -
----------- -----------
21,516,521 19,713,824
----------- -----------
Less:
Deferred loan origination fees, net 63,939 72,167
Undisbursed portion of loans in process 472,096 295,331
Allowance for loan losses 50,802 50,802
----------- -----------
586,837 418,300
----------- -----------
Loans receivable, net $20,929,684 $19,295,524
=========== ===========
An analysis of the allowance for loan losses is as follows:
1998 1997
----------- -----------
Beginning balances $ 50,802 $ 51,729
Recoveries - -
Loans charged-off - (927)
Provision for loan losses - -
----------- -----------
Ending balances $ 50,802 $ 50,802
=========== ===========
</TABLE>
The Bank had no loans specifically classified as impaired at December 31,
1998 and 1997.
The Bank has entered into loan transactions with certain directors,
officers and their affiliates (related parties). In the opinion of
management, such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the time
for comparable transactions with other persons and does not involve more
than normal risk of collectibility or present other unfavorable features.
The following represents the aggregate activity for related party loans
which exceeded $60,000 in total:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1997 $177,028
New loans 120,649
Payments (7,376)
--------
Balance, December 31, 1998 $290,301
========
</TABLE>
23
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(4) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Land and land improvements $ 36,000 $ 36,000
Office buildings 373,194 354,654
Furniture, fixtures and equipment 140,141 120,926
-------- --------
549,335 511,580
Less accumulated depreciation 331,064 313,540
-------- --------
Totals $218,271 $198,040
======== ========
</TABLE>
(5) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000 or
more was approximately $2,272,000 at December 31, 1998.
At December 31, 1998, scheduled maturities of time deposits were as
follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 7,999,840
2000 4,670,356
2001 1,081,860
2002 830,983
2003 and thereafter 914,116
-----------
Total $15,497,155
===========
</TABLE>
The Bank held deposits of approximately $552,000 and $610,000 for related
parties at December 31, 1998 and 1997, respectively.
Deposit account balances in excess of $100,000 are not federally insured.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Savings and interest bearing demand deposits $ 121,671 $ 131,452
Time deposits 913,341 960,456
---------- ----------
Totals $1,035,012 $1,091,908
========== ==========
</TABLE>
24
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(6) INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Current $55,149 $22,315
Deferred (1,995) 6,246
------- -------
Totals $53,154 $28,561
======= =======
</TABLE>
Significant components of the Bank's deferred tax assets and liabilities as
of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees and costs $ 20,528 $ 23,473
Allowance for loan losses 20,123 20,123
Unrealized loss on securities available for sale 5,773 11,939
-------- --------
Total deferred tax assets 46,424 55,535
-------- --------
Deferred tax liabilities:
Cumulative effect of change to the accrual basis
of accounting for tax reporting (27,611) (36,816)
Depreciation (10,718) (6,453)
-------- --------
Total deferred tax liabilities (38,329) (43,269)
-------- --------
Net deferred tax asset $ 8,095 $ 12,266
======== ========
</TABLE>
The reconciliation of income tax expense with the amount which would have
been provided at the federal statutory rate of 34 percent follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Provision at federal statutory rate $ 55,124 $ 33,505
State income tax-net of federal tax benefit 9,445 6,529
Effect of federal graduated rates (11,750) (11,750)
Other 335 277
-------- --------
Totals $ 53,154 $ 28,561
======== ========
Effective tax rate 32.8% 29.0%
======== ========
</TABLE>
25
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(6 - continued)
Prior to January 1, 1996, the Bank was permitted by the Internal Revenue
Code to deduct from taxable income an annual addition to a statutory bad
debt reserve subject to certain limitations. Retained earnings at December
31, 1998 include approximately $695,000 of cumulative deductions for which
no deferred federal income tax liability has been recorded. Reduction of
these reserves for purposes other than tax bad debt losses or adjustments
arising from carryback of net operating losses would create income for tax
purposes subject to the then current corporate income tax rate. The
unrecorded deferred liability on these amounts was approximately $236,000
at December 31, 1998.
Recently enacted federal legislation repealed the reserve method of
accounting for bad debts by qualified thrift institutions for tax years
beginning after December 31, 1995. As a result, the Bank will no longer be
able to calculate the annual addition to the statutory bad debt reserve
using the percentage-of-taxable-income method. Instead, the Bank will be
required to compute its federal tax bad debt deduction based on actual loss
experience over a period of years. The legislation requires the Bank to
recapture into taxable income over a six-year period its post-1987
additions to the statutory bad debt reserve, thereby generating additional
tax liability. The recapture may be suspended for up to two years, if
during those years the Bank satisfies a residential loan requirement. The
Bank has no post-1987 reserves subject to recapture.
The legislation also provides that the Bank will not be required to
recapture its pre-1988 statutory bad debt reserves if it ceases to meet the
qualifying thrift definitional tests and if the Bank continues to qualify
as a "bank" under existing provisions of the Internal Revenue Code.
(7) EMPLOYEE BENEFIT PLANS
The Bank has a qualified contributory defined contribution plan that allows
participating employees to make tax-deferred contributions under Internal
Revenue Code Section 401(k).
The Bank also has a qualified defined contribution money-purchase plan
available to all eligible employees. Contributions to the plan are based
on a formula set forth in the plan documents.
The Bank made contributions to these plans of $26,612 and $24,044 for 1998
and 1997, respectively.
(8) CONCENTRATIONS OF CREDIT RISK
At December 31, 1998, the Bank had concentrations of credit risk with a
correspondent bank representing interest bearing deposits with banks in
excess of federal deposit insurance limits of $443,769.
(9) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities, such as commitments to extend credit and legal
claims, which are not reflected in the financial statements.
26
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(9 - contined)
The following is a summary of the commitments to extend credit at December
31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Mortgage loans:
Variable rate $179,000 $ 80,000
Fixed rate 54,400 76,650
Undisbursed home improvement loans in process 22,240 43,498
Undisbursed portion of construction loans in process 449,866 251,833
-------- --------
Total commitments to extend credit $705,506 $451,981
======== ========
</TABLE>
Commitments to originate mortgage loans generally expire in 90 days. No
commitment fees are required for commitments to originate mortgage loans.
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments (see Note 9). The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount and type of collateral obtained, if deemed necessary by the Bank
upon extension of credit, varies and is based on management's credit
evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters
of credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Bank's policy for obtaining
collateral, and the nature of such collateral, is essentially the same as
that involved in making commitments to extend credit.
The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank has not incurred any losses on its
commitments in either 1998 or 1997.
27
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(11) STOCKHOLDERS' EQUITY
Capital Stock
As part of the conversion completed on July 1, 1998, the Bank became a
wholly-owned subsidiary of the Company which offered common stock to
certain current and former deposit and borrower customers of the Bank in a
subscription offering. The Company issued 396,750 shares of common stock
with gross proceeds of $3,967,500 as a result of the offering. Total
expenses in connection with the conversion and offering amounted to
$307,616 and were charged against the proceeds from the offering.
Liquidation Account
Upon completion of the conversion, the Bank established a liquidation
account in an amount equal to its retained earnings at December 31, 1997
totaling $2,091,519. The liquidation account will be maintained for the
benefit of depositors as of the December 31, 1996 eligibility record date
(or the March 31, 1998 supplemental eligibility record date) who maintain
their deposits in the Bank after conversion.
In the event of complete liquidation, and only in such an event, each
eligible depositor will be entitled to receive a liquidation distribution
from the liquidation account in the proportionate amount of the then
current adjusted balance for deposits held, before any liquidation
distribution may be made with respect to the stockholders. Except for the
repurchase of stock and payment of dividends by the Bank, the existence of
the liquidation account does not restrict the use or application of
retained earnings of the Bank.
Dividends
The payment of dividends by the Bank is subject to regulation by the Office
of Thrift Supervision (OTS). The Bank may not declare or pay a cash
dividend or repurchase any of its capital stock if the effect would cause
retained earnings of the Bank to be reduced below regulatory capital
requirements imposed by the OTS.
(12) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
quantitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible capital to adjusted total assets (as defined),
Tier I (core) capital (as defined) to adjusted total assets, Tier I capital
to risk-weighted assets (as defined), and of total risk-based capital (as
defined) to risk-weighted assets. Management believes, as of December 31,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
28
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(12 - continued)
As of December 31, 1998, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
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 that notification that management believes have changed the
Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest-rate risk in
either year.
<TABLE>
<CAPTION> Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
As of December 31,
1998:
Total equity capital
and ratio to total
assets $ 4,037 15.9%
Adjustments to
equity capital 9
------
Tangible capital
and ratio to
adjusted total
assets $ 4,046 15.9% $ 382 1.5%
====== =====
Tier I (core) capital
and ratio to
adjusted total
assets $ 4,046 15.9% $ 763 3.0% $1,272 5.0%
====== ===== =====
Tier I capital and
ratio to risk-weighted
assets $ 4,046 30.1% $ 809 6.0%
=====
Allowance for loan
losses 51
------
Total risk-based
capital and ratio to
risk-weighted assets $ 4,097 30.4% $1,077 8.0% $1,346 10.0%
====== ===== =====
Total assets $25,439
======
Adjusted total assets $25,448
======
Risk-weighted assets $13,464
======
</TABLE>
29
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(12 - continued)
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
As of December 31,
1997:
Total equity capital
and ratio to total
assets $ 2,092 9.5%
Adjustments to
equity capital 18
------
Tangible capital
and ratio to
adjusted total
assets $ 2,110 9.6% $330 1.5%
====== ===
Tier I (core) capital
and ratio to
adjusted total
assets $ 2,110 9.6% $660 3.0% $1,100 5.0%
====== === =====
Tier I capital and
ratio to risk-weighted
assets $ 2,110 17.7% $ 714 6.0%
=====
Allowance for loan
losses 51
------
Total risk-based
capital and ratio to
risk-weighted assets $ 2,161 18.2% $952 8.0% $1,199 10.0%
====== === =====
Total assets $21,989
======
Adjusted total assets $22,007
======
Risk-weighted assets $11,898
======
</TABLE>
30
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(13) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash payments for:
Interest $1,035,196 $1,106,810
Taxes 39,763 (10,655)
Noncash investing activities:
Proceeds from sale of foreclosed real estate
financed through loans 21,233 -
</TABLE>
(14) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
Basic earnings per share for 1998 is calculated by dividing net income by
the 396,750 common shares outstanding after consummation of the conversion
and offering. The Company has no dilutive potential common shares.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 43 $ 43 $ 18 $ 18
Interest bearing deposits
with banks 2,323 2,323 734 734
Securities available for sale 1,532 1,532 1,319 1,319
Securities held to maturity - - 21 21
Loans, net 20,930 21,498 19,296 19,320
Federal Home Loan Bank
stock 196 196 196 196
Financial liabilities:
Deposits (19,517) (19,705) (19,846) (19,916)
Unrecognized financial
instruments:
Commitments to extend
credit - (3) - -
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
Cash and Short-Term Investments
For cash and short-term investments, including cash and due from banks and
interest bearing deposits with banks, the carrying value is a reasonable
estimate of fair value.
31
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(15 - continued)
Debt and Equity Securities
For debt securities, including mortgage-backed securities, the fair values
are based on quoted market prices. For restricted equity securities held
for investment, the carrying value is a reasonable estimate of fair value.
Loans
The fair value of loans is estimated by discounting the estimated future
cash flows using current rates at which loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposits
The fair value of savings and demand deposits is the amount payable on
demand at the balance sheet date. The fair value of fixed-maturity time
deposits is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar remaining maturities.
Commitments to Extend Credit
The majority of commitments to extend credit would result in loans with a
market rate of interest if funded. The value of those commitments are the
fees that would be charged to customers to enter into similar agreements.
For fixed rate loan commitments, the fair value also considers the
difference between current levels of interest rates and the committed
rates.
(16) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for PCB Holding Company (parent company
only) for the year ended December 31, 1998 follows:
Balance Sheet
(In thousands)
<TABLE>
<CAPTION>
Assets:
<S> <C> <C>
Cash and interest bearing deposits $1,817
Investment in bank subsidiary 4,037
-----
$5,854
=====
Liabilities and Stockholders' Equity:
Other liabilities $ 4
Stockholders' equity 5,850
-----
$5,854
=====
</TABLE>
32
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(16 - continued)
Statement of Income
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Interest income $ 20
Other operating expenses 15
-------
Income before income taxes and equity in
undistributed net income of subsidiary 5
Income tax expense 2
-------
Income before equity in undistributed net
income of subsidiary 3
Equity in undistributed net income of subsidiary 106
-------
Net income $ 109
=======
</TABLE>
Statement of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 109
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of subsidiary (106)
Increase in other liabilities 4
-------
Net cash provided by operating activities 7
-------
Investing Activities:
Investment in bank subsidiary (1,830)
Financing Activities:
Proceeds from issuance of common stock 3,660
Cash dividends paid (20)
-------
Net cash provided by financing activities 3,640
-------
Net increase in cash 1,817
Cash at beginning of year -
-------
Cash at end of year $ 1,817
=======
</TABLE>
33
<PAGE>
- -------------------------------------------------------------------------------
BOARD OF DIRECTORS/OFFICERS
- -------------------------------------------------------------------------------
Directors
James L. Wittmer Daniel P. Lutgring
Retired businessman and investor Co-owner of Lutgring Bros., Inc.
Howard L. Traphagen Marion L. Ress
Retired businessman Retired president and majority owner of
Frederick Sheet Metal, Inc.
James G. Tyler Carl D. Smith
Practicing attorney in Tell City, President and Chief Executive Officer
Indiana
Executive Officer
Clarke A. Blackford
Vice-President and Treasurer
34
<PAGE>
- -------------------------------------------------------------------------------
CORPORATE INFORMATION
- -------------------------------------------------------------------------------
General Counsel Independent Auditors
James G. Tyler Monroe Shine & Co., Inc.
717 Jefferson Street 222 East Market Street
P. O. Box 456 New Albany, Indiana 47150
Tell City, Indiana 47586
Special Counsel Transfer Agent
Muldoon, Murphy & Faucette, LLP Registrar and Transfer Company
5101 Wisconsin Ave., NW 10 Commerce Drive
Washington, D.C. 20016 Crawford, New Jersey 07016
Common Shares
The common shares of the Company are traded on the over-the-counter market
through the OTC "Electronic Bulletin Board" under the symbol "PCBH." As of
December 31, 1998, the Company has 256 stockholders of record and 396,750 common
shares outstanding. This does not reflect the number of persons whose shares
are in nominee or "street" name accounts through brokers.
Quarterly market price and dividend information per common share for 1998:
<TABLE>
<CAPTION>
First Second Third Fourth
<S> <C> <C> <C> <C>
Market price-end of period N/A N/A
Dividends N/A N/A $- $.05
</TABLE>
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m., Thursday, April
22, 1999, at the office of the Bank, 819 Main Street, Tell City, Indiana 47586.
General Inquiries and Reports
The Company is required to file an Annual Report on Form 10-KSB for its fiscal
year ended December 31, 1998 with the Securities and Exchange Commission.
Copies of this annual report and the Company's quarterly reports on Form 10-QSB
may be obtained without charge by contacting:
Carl D. Smith
President and Chief Executive Officer
PCB Holding Company
819 Main Street
Tell City, Indiana 47586
(812) 547-7094
35
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Parent
- ------
PCB Holding Company
<TABLE>
<CAPTION>
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- --------------- ------------- ----------------------
<S> <C> <C>
Peoples Community Bank 100% United States
Peoples Building and Loan Association
Service Corporation(b) 100% Indiana
</TABLE>
- -------------------------
(a) The operations of the Company's subsidiaries are included in the Company's
consolidated financial statements.
(b) This is an inactive company owned directly by Peoples Community Bank.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
finacial statements of PCB Holding Company for the year ended December 31, 1998
and in qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 43,327
<INT-BEARING-DEPOSITS> 2,322,875
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,531,994
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 20,980,486
<ALLOWANCE> 50,802
<TOTAL-ASSETS> 25,439,103
<DEPOSITS> 19,516,691
<SHORT-TERM> 0
<LIABILITIES-OTHER> 72,470
<LONG-TERM> 0
0
0
<COMMON> 3,659,884
<OTHER-SE> 2,190,058
<TOTAL-LIABILITIES-AND-EQUITY> 25,439,103
<INTEREST-LOAN> 1,517,933
<INTEREST-INVEST> 109,870
<INTEREST-OTHER> 102,700
<INTEREST-TOTAL> 1,730,503
<INTEREST-DEPOSIT> 1,035,012
<INTEREST-EXPENSE> 1,035,012
<INTEREST-INCOME-NET> 695,491
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 541,570
<INCOME-PRETAX> 162,130
<INCOME-PRE-EXTRAORDINARY> 162,130
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,976
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 7.34
<LOANS-NON> 0
<LOANS-PAST> 29,167
<LOANS-TROUBLED> 60,390
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 50,802
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 50,802
<ALLOWANCE-DOMESTIC> 50,802
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
