FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
or
For the transition period from ________________ to ________________
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-23134
PEOPLES BANK CORPORATION OF INDIANAPOLIS
(Exact name of registrant as specified in its charter)
INDIANA 35-1681096
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization Identification Number)
130 East Market Street, Indianapolis, Indiana 46204
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(317) 237-8059
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Nonvoting Common Shares, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the 36,312 shares of the issuer's voting stock
held by non-affiliates, as of March 9, 1998, was $1,379,856 (assuming the Voting
Common Shares have a value equal to the Nonvoting Common Shares).
The number of Nonvoting Common Shares of the Registrant, without par value,
outstanding as of March 9, 1998, was 2,812,834 shares. The number of Voting
Common Shares of the Registrant, without par value, as of such date was 264,096.
<PAGE>
PART I
Item 1. Business
Overview
Peoples Bank Corporation of Indianapolis (the "Company") is a one bank holding
company which owns Peoples Bank & Trust Company ("Peoples"). Peoples has
operated continuously since 1891 and its business activities are concentrated in
the greater Indianapolis, Indiana area. Peoples offers a broad range of lending,
deposit, loan servicing and trust services to individual, governmental and
commercial customers. Peoples conducts its business through its downtown
Indianapolis headquarters and through 12 offices located throughout the greater
Indianapolis area. Peoples is the largest and oldest locally owned and
headquartered commercial bank in Indianapolis.
The Company operates under a conservative management philosophy and is dedicated
to providing personal service coupled with competitive products and pricing.
Management believes that the acquisition of the three largest Indianapolis-based
commercial banks by out-of-state holding companies during the last several years
enables the Company to distinguish itself from competitors based on its
established reputation, local ownership and local decision making authority.
Focusing on developing strong, primary banking relationships with businesses and
individuals in its market area, Peoples generally limits its lending activities
to the greater Indianapolis area. Peoples focuses its commercial lending efforts
on small and medium-sized independent companies and its real estate lending on
owner-occupied commercial properties and one-to-four family residential
properties. Peoples' loan underwriting and review functions are centralized to
provide consistency and timely asset quality monitoring. Peoples' loan portfolio
is diversified, locally oriented and does not include any foreign loans.
The Company's principal office is located at 130 East Market Street,
Indianapolis, Indiana, 46204.
Market Area
Peoples' market area is the greater Indianapolis area which includes Marion
County, Indiana and certain contiguous townships. Indianapolis has experienced
significant employment growth in recent years. According to the 1990 Census,
Marion County had a total population of approximately 800,000, representing an
increase of over 4% since 1980. Employment in Marion County is concentrated in
the following industries: durable and nondurable goods manufacturing, retail,
financial and real estate services, health, education and professional services,
public administration and transportation.
Peoples' service area is highly competitive. The four largest banks in Marion
County, each of which is controlled out-of-state, carry a substantial majority
of the total deposits of banks and thrifts in the County. Management estimates
that Peoples' market share is currently between 2% and 3% of deposits with
financial institutions in Marion County. In addition to competition from
commercial banks and savings associations, Peoples also competes with numerous
credit unions, finance companies, insurance companies, mortgage companies,
securities and brokerage firms, money market mutual funds, loan production
offices and other providers of financial services generally. Some of Peoples'
competitors, including certain regional bank holding companies which have
operations in Peoples' market area, have substantially greater resources than
Peoples, may have higher lending limits and may offer other services not
available through Peoples. Peoples also faces significant competition,
particularly with respect to interest rates paid on deposit accounts, from
certain local thrift institutions. Peoples competes on the basis of rates of
interest charged on loans, the rates of interest paid for funds, the
availability, quality and diversity of services and responsiveness to the needs
of its customers.
Lending Activities
Focusing on developing strong, primary banking relationships with businesses and
individuals in its market area, Peoples generally limits its lending activities
to the greater Indianapolis area. Peoples focuses its commercial lending efforts
on small and medium-sized companies and its real estate lending on
owner-occupied commercial properties and one-to-four family residential
properties.
<PAGE>
Loans
Peoples provides loans to both individuals and businesses principally within the
greater Indianapolis area. Peoples has no material concentration of loans to any
single borrower or industry nor does it have any foreign loans.
The amount of loans outstanding (excluding loans held for sale) and the percent
of the total represented by each type on the dates indicated are reflected in
the following table.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction.......... $25,364 6.23% $23,644 7.10% $31,965 11.79% $19,162 8.94% $9,978 5.81%
Mortgage.............. 94,276 23.17 75,247 22.60 72,852 26.87 48,021 22.40 34,287 19.95
Commercial loans...... 185,089 45.49 156,755 47.08 97,914 36.12 78,870 36.79 68,394 39.80
Consumer.............. 100,139 24.61 75,187 22.58 66,132 24.40 65,722 30.66 56,094 32.64
Tax-exempt loans...... 2,025 .50 2,120 0.64 2,230 0.82 2,615 1.21 3,080 1.80
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans........... 406,893 100.00% 332,953 100.00% 271,093 100.00% 214,390 100.00% 171,833 100.00%
Less:
Allowance for
loan losses........... 5,516 3,900 3,290 2,704 2,513
-------- -------- -------- -------- --------
Net loans............. $401,377 $329,053 $267,803 $211,686 $169,320
======== ======== ======== ======== ========
</TABLE>
The loan portfolio, excluding loans held for sale, at December 31, 1997 was
comprised of approximately 52.22% commercial loans, 23.17% mortgage loans and
24.61% consumer loans. Peoples had no "highly leveraged transactions," as
defined by the banking regulators, and no foreign loans. Peoples generally does
not lend outside its market area and historically has not acquired participation
interests from other financial institutions. State law restricts the amount
Peoples can loan to one borrower, generally to 15% of capital and unimpaired
surplus, or $7.1 million at December 31, 1997.
Commercial Loans. Commercial loans account for the largest portion of the loan
portfolio. Commercial lending is generally considered to have higher credit risk
than other forms of credit because of the higher average dollar amount of
individual credits and the risk associated with potential diminution of the
value of special purpose collateral (which often serves as security on
commercial loans) in economic downturns. Commercial loans are made to a diverse
group of professional, industrial, and service business customers. Commercial
loans include working capital lines of credit, revolving credit loans, term
loans (generally not to exceed 7 years), single payment or short-term loans,
Small Business Administration loans (on which the SBA guarantees between 75% and
90% of the principal of the loans made to eligible borrowers) and, occasionally,
commercial letters of credit and lease financing. Commercial loans may be
secured or unsecured depending on the quality of the credit.
The Company's commercial loan category also includes commercial real estate
loans. Such loans are loans to businesses or individuals where the Company
relies upon the underlying real estate for collateral and repayment. The basis
for these loans includes income-producing properties, such as office buildings,
warehouses, shopping centers or apartment buildings and construction loans. The
Company will also provide land acquisition and development loans, such as loans
to purchase land for the development of a subdivision or condominium project.
Interest rates on loans in excess of five years are generally adjustable.
Construction loan terms are limited to one year and land development loan terms
are limited to two years. Peoples' policy establishes limits on the
loan-to-value ratio for loans on improved properties, construction loans and
land development loans.
Residential Real Estate Loans. Residential real estate loans consist of loans
secured by one-to-four family residential properties. During the twelve months
ended December 31, 1997, Peoples originated $56.9 million in real estate
mortgage loans. Residential real estate loans do not include loans made to
businesses to develop residential real estate, which are considered commercial
real estate loans.
Residential real estate loans originated for Peoples' portfolio are generally
adjustable rate mortgages and certain fixed rate loans. Peoples offers one-,
three- and five-year adjustable rate mortgage loans with initial fixed rate
periods of one, three, and five years. Certain fixed rate loans may be
considered for the portfolio from time to time. These could include loans with
one rate adjustment after seven years (7/23) and 15-year fixed rate loans.
Peoples also offers residential construction loans. The construction/permanent
loan program offers combined construction and permanent financing through a
single closing. Other construction loans are made in which the borrower obtains
permanent financing through another lender.
Peoples' residential lending department is responsible for the origination and
closing of all of Peoples' residential real estate loans. In addition to the
loans described above originated for Peoples' portfolio, the bank originates
fixed-rate loans with terms up to 30 years, adjustable rate mortgage loans with
terms up to 30 years and, occasionally, seven-year balloon loans for resale into
the secondary market, generally to the Federal National Mortgage Association
("FNMA"). Peoples retains servicing rights on substantially all the mortgage
loans it sells. At December 31, 1997, Peoples serviced, for both its own
portfolio and for others, $196.2 million in residential mortgage loans.
In 1996 and 1997, Peoples' restructured its residential lending department in
order to improve profitability within the residential mortgage loan origination
process. The staff was reduced from 22 to 6 employees, two offices were closed,
and the remaining staff was relocated to existing space at the Operations
Center. As a result, originations of residential real estate loans in 1997 were
down to $56.9 million as compared to 1995 when originations were $86.2 million.
Consumer Loans. Consumer loans offered by Peoples include home equity line of
credit loans, home improvement loans, automobile and motor vehicle loans and
other secured and unsecured personal loans. Consumer loans generally involve a
higher level of risk than residential mortgage loans, and have correspondingly
higher yields. Home equity loans are generally initiated on the same
underwriting standards as portfolio real estate mortgage loans. They generally
bear interest at adjustable rates and will only be made on the basis of a first
or second mortgage. Peoples directly reviews all loan applications and does not
engage in indirect lending through auto dealers, building contractors or similar
third parties.
Asset Quality and Provision for Loan Losses
Loan Quality. Peoples seeks to maintain a high level of asset quality through
careful underwriting and by emphasizing loan originations in its market area.
Peoples focuses its commercial lending efforts on small and medium-sized, local,
independent, commercial and professional firms, manufacturing companies and
individuals who are the owners and principals of such firms. Commercial loans
are subjected to a detailed review of the borrower's financial performance, the
value of the collateral and guarantees. Appraisals are generally required for
all real estate loans including residential mortgages and home equity loans
exceeding $10,000. Commercial loans may be approved by Peoples' officers up to
their established loan limits. Beyond these limits, the officer responsible for
the account will recommend the loan to one or more senior executive officers.
The primary functions of loan portfolio management are assuring loan quality,
maintaining portfolio diversification and monitoring potential problem loans.
Each of Peoples' commercial loan officers is accountable for the performance of
his or her loan accounts. Each loan officer monitors his or her borrowers'
performance and compliance and receives a daily report of any loan payment on
which payment is past due. On the basis of these reports they proceed to make
appropriate contacts with any delinquent borrowers. A weekly report to
management is prepared showing the past due loans for which each officer is
responsible. The commercial loan department then meets each month to discuss the
status of every loan that is more than 15 days past due.
Through a loan rating process monitored by the credit analysis staff, and the
loan officers' ongoing monitoring of borrowers, Peoples develops its loan "watch
list." A loan may be placed on the watch list for a variety of reasons,
including an existing or continuing past due status, a change in the borrower's
financial condition, a change in an industry which could adversely affect a
borrower, a loan mentioned or classified by a regulatory agency or independent
auditor, a loan in which the collateral has been affected or any other loan that
management desires to monitor specifically.
Any loan with a rating of five through eight or with any other basis for concern
as to security or collectibility, is placed on the watch list, which is updated
weekly. Each loan officer with a loan that appears on the watch list is
responsible for preparing a plan of action for such loan. The commercial loan
department then meets quarterly to review the status of handling the past due
loans. Based on this meeting, allowance for loan losses is reviewed to determine
its adequacy. The allowance for loan losses is also reviewed by the President
monthly and the adequacy of the allowance for loan losses is evaluated quarterly
by the Board of Directors. The ongoing evaluation of potential losses includes a
review of the current financial status and credit standing of borrowers and
their prior history, an evaluation of available collateral, a review of loss
experience in relation to outstanding loans and management's judgment as to
prevailing and anticipated economic conditions, among other relevant factors.
To provide assurance that the watch list is complete and loan grades assigned
are reasonable and consistent, Peoples engages an independent loan review
provider to annually review a sample of commercial loans larger than $350,000.
During 1997, 42% of commercial loan dollars were subject to such a review (using
the 1997 beginning portfolio balance as the denominator).
Peoples' collection department is responsible for past due mortgage and consumer
loans. Telephone contact is made once such loans are between 5 and 10 days past
due. The senior vice president for loan administration, the manager of consumer
lending and the supervisor of collections meet monthly to discuss delinquent
real estate and consumer loan accounts. At this meeting they discuss potential
foreclosures. Following this meeting the collection department prepares plans of
action for all cited problem loan accounts. Recommendations for charge-offs
based on collateral value versus loan balance and the likelihood of continued
non-payment are prepared and the decision whether to foreclose is made.
In 1997, Peoples recorded net charge-offs of $184,000 (0.05% of average loans)
as compared to net charge-offs of $515,000 (0.17% of average loans) in 1996.
Peoples' ratio of nonperforming loans to total loans was 0.96% of total loans at
December 31, 1997 compared to 0.09% at December 31, 1996. At December 31, 1997
and December 31, 1996, Peoples' allowance for loan losses was 1.35% and 1.17% ,
respectively, of total loans. The allowance for loan losses as a percentage of
nonperforming loans at December 31, 1997 and December 31, 1996 was 141.15% and
1,378.09% , respectively. See "Item 6. Selected Consolidated Financial Data" and
"Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition" for supplemental information.
Loans. During 1997, total loans (excluding loans held for sale) increased $73.94
million or 22.2%. During that period, commercial loans increased $30.0 million
or 16.5%, consumer loans increased $24.95 million or 33.2% and mortgage loans
increased $19.03 million or 25.3%. During 1996, total loans increased $61.86
million or 22.8%. During that period, commercial loans increased $50.4 million
or 38.16%, mortgage loans increased $2.4 million or 3.29%, and consumer loans
increased $9.06 million, or 13.69%.
A classification of amounts due in the periods indicated for commercial and real
estate construction loans is indicated in the following table as of December 31,
1997. Amounts due are based on remaining scheduled repayments of principal.
Amounts due after one year are also classified according to their sensitivity to
changes in interest rates.
<PAGE>
<TABLE>
<CAPTION>
After 1
But
Within Within After
1 Year 5 Years 5 Years Total
------ ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Commercial............................... $110,219 $71,759 $ 3,111 $185,089
Real estate -- construction.............. 22,659 2,705 0 25,364
------ ----- - ------
Total $132,878 $74,464 $3,111 $210,453
======== ======= ====== ========
Interest sensitivity:
With fixed rates......................... $25,212 $2,396
With variable rates...................... 49,253 715
------ ---
Total....................... $74,465 $3,111
======= ======
</TABLE>
Allowance for Loan Losses. The allowance for loan losses is a valuation
allowance providing for losses inherent in the loan portfolio. The allowance for
loan losses is reduced by the charge-off of loans and increased by the provision
for loan losses and by recoveries of loans previously charged-off. The
appropriate level of the valuation allowance is determined in an ongoing process
involving the credit analysis staff, the loan officers and senior management.
Specific loans are monitored on an on-going basis and included on the watch
list.
The allowance for loan losses is determined based upon characteristics of
particular groups of loans. Those characteristics include past due amounts,
historical loss trends and any other determinations made by management, credit
analysis and the loan officers. For larger loans, when any reasonable concern
exists as to the collectibility of interest or principal, the potential loss
exposures are estimated as part of the reserve analysis process. The allowance
for loan losses also includes an amount that is not specifically allocated to
particular loan categories in the event of unanticipated losses. An evaluation
of the adequacy of the level of the allowance for loan losses is performed by
the loan review officer at least quarterly. That analysis is reviewed by the
Board and senior management and an appropriate level of monthly provision for
loan losses is identified. The senior manager of lending reviews delinquent
loans with loan officers monthly or more frequently if deemed necessary.
The following table presents information concerning the activity in the
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in thousands)
Balance of allowance at
<S> <C> <C> <C> <C> <C>
beginning of period .......... $ 3,900 $ 3,290 $ 2,704 $ 2,513 $ 2,288
Recoveries of loans previously
charged off:
Commercial loans ............. 255 36 83 113 98
Consumer loans ............... 49 41 92 66 69
Mortgage loans ............... 0 15 0 0 0
------- ------- ------- ------- -------
Total recoveries .. 304 92 175 179 167
Loans charged off:
Commercial loans ............. 382 257 103 275 199
Consumer loans ............... 106 350 74 136 292
Mortgage loans ............... 0 0 (52) 105 57
Total charge-offs . 488 607 125 516 548
------- ------- ------- ------- -------
Net charge-offs ... (184) (515) 50 (337) (381)
Provision for loan losses .... 1,800 1,125 536 528 606
------- ------- ------- ------- -------
Balance of allowance at
end of period ................ $ 5,516 $ 3,900 $ 3,290 $ 2,704 $ 2,513
======= ======= ======= ======= =======
Net charge-offs to average
loans outstanding for period . .05% 0.17% (0.02)% 0.18% 0.23%
Allowance at end of period to
loans at end of period ....... 1.35 1.17 1.20 1.26 1.42
Allowance to nonperforming
loans at end of period ....... 141.15 1,378.09 256.43 164.38 117.98
</TABLE>
As part of its evaluation process, management allocates portions of the
allowance for loan losses to certain segments of the loan portfolio based upon
the specific review of credits and historical loss experience. The following
table presents a breakdown of the portions of the allowance for loan losses
allocated to each category of loans, the percentage of total loans that the
category comprises at the dates indicated, and the percentage of the allowance
for loan losses allocated to that category.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
---- ---- ----
Percent of Percent of Percent of
Percent Loan Percent Loan Percent Loan
Reserve of Category to Reserve of Category to Reserve of Category to
Allocated Reserve Total Loans Allocated Reserve Total Loans Allocated Reserve Total Loans
--------- ------- ----------- --------- ------- ----------- --------- ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans. $2,597 47.08% 52.22% $1,124 28.82% 54.82% $ 839 25.50% 48.73%
Consumer loans .. 528 9.57 24.61 398 10.21 22.58 350 10.64 24.40
Mortgage loans .. 237 4.30 23.17 378 9.69 22.60 377 11.46 26.87
Unallocated ..... 2,154 39.05 N/A 2,000 51.28 N/A 1,724 52.40 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------
Total ........... $5,516 100.00% 100.00% $3,900 100.00% 100.00% $3,290 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1994 1993
-------------------------------- --------------------------------
Percent of Percent of
Percent Loan Percent Loan
Reserve of Category to Reserve of Category to
Allocated Reserve Total Loans Allocated Reserve Total Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial loans $ 709 26.22% 46.94% $ 784 31.20% 47.41%
Consumer loans . 594 21.97 30.66 589 23.44 32.64
Mortgage loans . 121 4.47 22.40 194 7.72 19.95
Unallocated .... 1,280 47.34 N/A 946 37.64 N/A
------ ------ ------ ------ ------ ------
Total .......... $2,704 100.00% 100.00% $2,513 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Other Real Estate. Other real estate ("ORE") are properties of which Peoples has
taken possession. The carrying value of ORE was $209,000 at December 31, 1997,
$236,000 at December 31, 1996, and $240,000 at December 31, 1995. ORE is carried
at the lower of cost (fair value at foreclosure) or fair value, less expected
disposition cost. All carrying costs (e.g., taxes, insurance) are expensed.
Peoples generally has annual appraisals performed on all ORE. An amount required
to write down the carrying value to appraised value is charged to income.
Peoples utilizes the services of an outside manager for ORE properties. That
person maintains the properties, provides for repairs and improvements and
pursues the disposition.
Nonperforming Loans. Loans on which the Company no longer accrues interest are
referred to as "nonaccrual loans." Management places a loan on nonaccrual status
when collection of additional interest is unlikely and the loan is not
considered to be well secured and in the process of collection. When a loan is
placed on nonaccrual status, interest recognized but not received is reversed
from interest income to the extent the interest was recognized during the
current year. Interest recognized but not received in prior years is charged
against the allowance for loan losses.
Nonperforming loans are those loans that are on nonaccrual status, are 90 days
or more past due as to principal or interest or those that are restructured.
Nonperforming assets consist of nonperforming loans and ORE. The following table
shows the principal balance of nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual .................................. $ 3,626 $ 234 $ 838 $ 970 $ 1,762
Contractually past due 90
days or more as to
principal or interest ....................... 16 49 445 675 368
Restructured ................................ 266 0 0 0 0
-------- -------- -------- -------- --------
Total nonperforming loans ................... 3,908 283 1,283 1,645 2,130
Other real estate ........................... 209 236 240 0 101
-------- -------- -------- -------- --------
Total nonperforming assets .................. $ 4,117 $ 519 $ 1,523 $ 1,645 $ 2,231
======== ======== ======== ======== ========
Total loans, including loans
held for sale ............................... $407,454 $333,374 $273,650 $215,151 $176,840
Allowance for loan losses ................... 5,516 3,900 3,290 2,704 2,513
Nonperforming loans to total loans .......... .96% 0.09% 0.47% 0.76% 1.20%
Nonperforming assets to total
loans plus other real estate
owned ....................................... 1.01% 0.16% 0.56% 0.76% 1.26%
Allowance for loan losses
to nonperforming loans ...................... 141.15% 1,378.09% 256.43% 164.38% 117.98%
</TABLE>
As of December 31, 1997, nonperforming loans have increased $3,625,000 to
$3,908,000 from $0.3 million at December 31, 1996. The increase in nonaccrual
loans is primarily attributable to a large credit totaling aproximately $2.3
million and consists of credit facilities extended to two related companies and
their owner. Management is continuing to monitor the status of this loan and, if
it deems necessary, may charge-off the loan, and make a significant addition to
the provision for loan losses in respect of such loan which may be charged to
earnings in the current quarter.
At December 31, 1997, excluding nonaccrual loans, loans which were 60 days or
more past due were as follows:
<TABLE>
<CAPTION>
December 31, 1997
(Dollars in thousands)
Commercial Mortgage Consumer
<C> <C> <C> <C>
60-89 days past due................... $0 $0 $99
More than 90 days past due............ 0 0 16
</TABLE>
Nonperforming loans have deteriorated to the point that the borrower is no
longer paying as agreed and has become 90 days or more past due or where
management, as a result of delinquent status or significant concern about the
ultimate collectibility of the loan, has ceased recognizing interest income
(nonaccrual status) on the loan. Management typically evaluates loss exposure on
these credits based on the liquidation value of the underlying collateral.
Impaired Loans. Loans are considered impaired when management determines that it
is probable that the customer will not comply with the contractual terms of the
note. Peoples evaluates the commercial business and commercial real estate loans
considered during its quarterly allowance for loan loss analysis for impairment.
Residential mortgage loans and consumer credits are not typically individually
considered in that analysis. Impaired loans are carried at the present value of
expected cash flows, discounted at the loan's effective interest rate or at the
fair value of collateral if such loans are deemed to be collateral dependent. A
portion of the allowance for loan losses is allocated to impaired loans and
changes in that allowance are elements of People's provision for loan losses.
During 1997, Peoples identified loans with an average balance of $4,253,000
million as impaired. At year end, $5,241,000 of loans were so designated and
$1,145,000 of the allowance was allocated to such loans. Generally, only income
received in cash is recorded as interest income after a loan has been designated
as impaired.
Other Loans of Concern. Watch category loans may include loans with loss
potential that are still performing and accruing interest and may be current
under the terms of the loan agreement. However, management has a significant
degree of concern about the borrowers' ability to continue to perform according
to the terms of the loan. Loss exposure on these loans is also, typically,
evaluated based primarily upon the estimated liquidation value of the collateral
securing the loan. Also, watch category loans include credits which, although
adequately secured and performing, reflect a past delinquency problem or
unfavorable financial trends exhibited by the borrower.
All watch list loans are subject to additional scrutiny and monitoring. The
Company's philosophy encourages loan officers to identify borrowers that should
be monitored in this fashion and believes that this process ultimately results
in the identification of problem loans in a more timely fashion.
At December 31, 1997, the Company had a total of $15.6 million of loans on its
commercial loan watch list. Loans may be placed on the watch list as a result of
delinquent status, concern about the borrower's financial condition or the value
of the collateral securing the loan, substandard classification during
regulatory examinations or simply as a result of management's desire to monitor
more closely a borrower's financial condition and performance.
Securities
Peoples' securities portfolio is maintained in high quality, liquid, short to
medium-term securities. The goal of Peoples' investment policy is to maximize
return over the long term in a manner consistent with Peoples' liquidity
requirements, its asset and liability management strategies and safety of
principal. Peoples seeks to maintain a relatively short overall portfolio
maturity to reflect interest-earning characteristics more consistent with its
deposit base.
Peoples' securities policy is established by the Board of Directors and
monitored by the Investment Policy Committee, which consists of four executive
officers and a Board member.
The Company's securities portfolio includes U.S. Treasury securities,
obligations of U.S. government agencies, obligations of states and political
subdivisions, corporate investments and mortgage-backed investments issued by
U.S. government agencies and other intermediaries. Securities are designated as
"available-for-sale" because they might be sold in response to liquidity needs
or for asset/liability management purposes. Such securities are required to be
carried at fair value, with the resultant unrealized gain or loss reflected, net
of tax, as a component of shareholders' equity. All other securities are
designated as held-to-maturity securities because management has the positive
intent and ability to hold such securities until maturity. Such securities are
carried at amortized cost. At December 31, 1997, all securities were considered
"available for sale."
The maturities of securities are a principal source of funds for loan growth and
other liquidity needs. The following table illustrates, based on the date of
maturity or repricing, the amortized cost and the weighted average yield of
securities held as of December 31, 1997. The maturity classification for
mortgage-backed investments is determined by the estimated average life. Refer
to Note 2 of the Company's consolidated financial statements for additional
information.
<TABLE>
<CAPTION>
Less than 1 to 5 5 to 10 More than
1 Year Years Years 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield Total
------ ----- ------ ----- ------ ----- ------ ----- -----
(Dollars in thousands)
Obligation of U.S.
government
agencies and
government
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
sponsored agencies ... $ 2,000 6.08% $ 13,488 6.46% $ 5,353 6.58% $--- ---% $ 20,841
Obligations of states
and political
subdivisions ......... 6,585 6.26 15,294 5.57 4,905 5.61 450 5.00 27,233
Debt securities issued
by foreign
governments .......... -- -- 75 7.98 -- -- -- -- 75
Corporate securities . -- -- -- -- 1,698 6.29 2,365 8.00 4,063
Mortgage-backed
investments .......... 9,439 6.24 87,790 6.6 53,101 6.73 309 6.62 100,640
-------- -------- -------- -------- --------
Total ................ $ 18,024 6.23 $116,647 6.49 $ 15,057 6.26 $ 3,124 7.43 $152,852
======== ======== ======== ======== ========
</TABLE>
The following table presents, by category of investment and designation, the
carrying value of securities at the dates indicated.
<TABLE>
<CAPTION>
Carrying Value
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Available-for sale securities:
<S> <C> <C> <C>
U.S. Treasury securities............... $ 7,093 $ 7,031 $ 19,100
Obligations of U.S. Government
agencies and government
sponsored agencies..................... 13,855 8,989 8,980
Obligations of states and
political subdivisions................. 27,846 32,634 38,173
Mortgage-backed investments:
Issued by U.S. Government
agencies................... 100,932 41,620 35,589
Issued by other corporate
entities................... 0 731 2,289
Debt securities issued by foreign
governments............................ 75 75 70
Corporate securities................... 4,069 3,509 3,544
-------- ------- --------
Total securities........... $153,870 $94,589 $107,745
======== ======= ========
</TABLE>
The Company has no concentration in securities of any single issuer except that
a majority of the municipal portfolio consists of issuers of bonds with taxing
authority on properties in the State of Indiana. The Company's investment in
U.S. Government securities and government agencies exceeds 10% of its
shareholders' equity.
Sources of Funds
Deposits. Deposits represent the primary source of funds for Peoples. Deposits
are attracted principally from within the greater Indianapolis area through the
offering of a broad selection of deposit instruments including
non-interest-bearing and interest-bearing checking accounts, money market
accounts, fixed and variable rate certificates of deposit, individual retirement
accounts and regular savings accounts. Peoples does not actively solicit or
advertise for deposits outside the greater Indianapolis area. Deposit account
terms vary with principal differences being the minimum balance required, the
amount of time the funds remain on deposit and the interest rate, if any.
Interest rates are established by Peoples generally on a weekly basis. The
determination of rates and other terms (such as maturities, service fees and
withdrawal penalties) is predicated on rates paid and terms offered by
competitors and Peoples' funds acquisition and liquidity requirements.
The following reflects the noninterest-bearing and interest-bearing components
of deposits at the dates indicated.
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Deposits:
Non-interest bearing............ $ 82,132 $ 83,911 $ 67,966
Interest-bearing................ 426,179 327,894 283,796
-------- ------- -------
Total deposits.................. $508,311 $411,805 $351,762
======== ======== ========
Total deposits/total assets..... 84.93% 87.34% 84.35%
Peoples regularly accepts time deposits issued in denominations of $100,000 or
more. Balances of such deposits were $69.5 million at December 31, 1997 and
$13.6 million at December 31, 1996. The contractual maturity of such deposits
was as follows:
December 31,
1997 1996
---- ----
(In thousands)
Maturity distribution of time
certificates in amounts of $100,000 or more:
Three months or less............................ $39,571 $ 5,196
Over three months to six months................. 9,281 2,000
Over six months................................. 3,018 2,599
Over twelve months.............................. 17,603 3,811
------ -----
Total............................... $69,473 $13,606
======= =======
Short-Term Borrowings. Summary information regarding repurchase agreements,
which comprised the majority of Peoples' short-term borrowings during 1997, is
presented below. Such agreements provide customers with the opportunity to make
short-term investments of sums, usually in excess of $100,000, secured by
obligations of the U.S. Treasury or a U.S. government-sponsored agency. These
agreements are generally short-term and have been a relatively stable source of
funds for Peoples.
December 31,
1997 1996 1995
---- ---- ----
(In thousands)
Repurchase agreements:
Average for the year:
Amount outstanding................... $11,064 $11,964 $26,413
Weighted average interest rate....... 4.32% 4.69% 5.95%
At year-end:
Amount outstanding................... $12,180 $10,266 $16,056
Weighted average interest rate....... 4.30% 4.38% 4.95%
Maximum amount outstanding at any
month-end during the year............ $12,180 $14,052 $46,578
Trust Operations
Peoples' Trust and Investment Management Group offers a variety of fiduciary and
trust services and provides a growing source of fee income to Peoples. Trust
fees were $1,546,000 in 1997, $1,342,000 in 1996, $1,304,000 in 1995. This
reflects increases for 1997 and 1996 of $204,000 (15.2%) and $38,000 (2.9%),
respectively. Trust assets were $523.9 million at December 31, 1997, $427.0
million at December 31, 1996 and $376.1 million at December 31, 1995. Peoples'
Trust and Investment Management Group serves as trustee or agent for over 200
employee benefit plans, is trustee for over 500 personal trust accounts, estates
and guardianships and provides a variety of corporate trust and agency services.
The Trust and Investment Management Group obtains referrals from existing
customers, attorneys and accountants, and is actively seeking to develop new
business, especially among non-profit corporations and employee benefit plans.
The Company believes that opportunities exist for growth in Trust and Investment
Management activities.
Employees
As of December 31, 1997, the Company and Peoples had approximately 179 full-time
and 28 part-time employees. Turnover increased slightly from 28% in 1996 to 34%
in 1997. The majority of the turnover was seen in part-time teller positions.
Significant effort was spent in 1997 on building the bank's management talent,
including three new senior vice-presidents. Additionally, the testing process
for officers was enhanced. The bank continued to build toward incentive plans
for all staff linked to each unit's performance and profitability. A strong
emphasis was also placed on bringing compensation in line with the market,
revising the non-exempt performance appraisal system, and revising the process
for achieving officer title status. The bank embraced a new Sales and Service
culture in 1997. The new culture resulted in sales and product training for all
staff. Leadership training and sexual harassment training were also provided
this year. Benefit improvements included an increased 401(k) match, expanded
educational assistance policy, and a slight change in the vacation policy to
bring it in line with the competition. The bank considers its employee
relationships to be good.
Electronic Data Processing
In 1990, Peoples purchased two IBM AS400 computers and new banking software when
it established its Operations Center on the north side of Indianapolis. These
changes have enabled Peoples to achieve substantial efficiencies in electronic
data processing ("EDP") and to keep pace with developments in the financial
services industry by continuing to offer new competitive financial services and
products. An example is Peoples' "Cash Manager" account which offers both
checking and investment features through a "sweep" arrangement. Peoples has
enhanced this commercial service by adding the first Windows based PC-based cash
management service. This product has proven to be attractive to business
customers.
The Company has an established technology maximization committee to keep abreast
of technological developments and to consider new products and more efficient
ways to employ the technological capabilities.
In 1997 Peoples installed an image-based wholesale lockbox processing system to
accommodate the growth in this product. The system is designed to significantly
increase worker productivity and improve quality.
Peoples offers 24-hour telephone banking that provides balance inquiry and funds
transfer. Peoples Bank has 12 ATMs and is affiliated with the MAC network which
affords Peoples' customers access to MAC ATMs nationwide as well as all Cirrus
ATMs worldwide. Peoples has introduced a check card affording customers the
ability to use their ATM cards at all merchants accepting VISA. This capability
is expected to increase usage of the ATM card and generate additional fee
revenues.
Because computer memory was so expensive on early mainframe computers, some
computer programs used only the final two digits for the year in the date field
and assumed that the first two digits were "19." As a result, some computer
applications may be unable to interpret the change from year 1999 to year 2000.
Peoples has identified a number of critical software vendors, and is in the
process of communicating with each vendor about their compliance with the Year
2000 issue. Peoples has no internally generated code, and all of its core
processing is supplied by FISERV, one of the nation's leading software suppliers
for community banks. Management believes that Peoples' core processing systems
will be Year 2000 compliant by the middle of 1998, and anticipates completion of
testing by the end of 1998. As a result, management does not believe that the
Year 2000 issue represents a significant risk to Peoples' operations, and the
expense in connection with Year 2000 compliance is not expected to be material
to its overall financial condition.
Supervision and Regulation
Bank Holding Company Regulation. The Company is registered as a bank holding
company, and is subject to the regulations of the Board of Governors of the
Federal Reserve System ("Federal Reserve") under the Bank Holding Company Act of
1956, as amended ("BHCA"). Bank holding companies are required to file periodic
reports with and are subject to periodic examination by the Federal Reserve. The
Federal Reserve has issued regulations under the BHCA requiring a bank holding
company to serve as a source of financial and managerial strength to its
subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this
requirement, a bank holding company should stand ready to use its resources to
provide adequate capital funds to its subsidiary banks during periods of
financial stress or adversity. Additionally, under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is
required to guarantee the compliance of any insured depository institution
subsidiary that may become "undercapitalized" (as defined in the statute) with
the terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (i) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
Prior to September 29, 1995, the BHCA prohibited the Federal Reserve from
approving any direct or indirect acquisition by a bank holding company of more
than 5% of the voting shares, or of all or substantially all of the assets, of a
bank located outside of the state in which the operations of the bank holding
company's banking subsidiaries are principally located unless the laws of the
state in which the bank to be acquired is located specifically authorize such an
acquisition. Pursuant to amendments to the BHCA which took effect September 29,
1995, the Federal Reserve may now allow a bank holding company to acquire banks
located in any state of the United States without regard to geographic
restriction or reciprocity requirements imposed by state law, but subject to
certain conditions, including limitations on the aggregate amount of deposits
that may be held by the acquiring holding company and all of its insured
depository institution affiliates and state law provisions requiring the target
bank to have existed for some period of time (not exceeding five years) prior to
the date of acquisition.
The BHCA also prohibits the Company, with certain exceptions noted below, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and from engaging in any business
other than that of banking, managing and controlling banks or furnishing
services to banks and their subsidiaries, except that bank holding companies may
engage in, and may own shares of companies engaged in, certain businesses found
by the Federal Reserve to be "so closely related to banking . . . as to be a
proper incident thereto." Under current regulations of the Federal Reserve, the
Company and any non-bank subsidiaries it may control are permitted to engage in,
among other activities, such banking-related businesses as the operation of a
thrift, the operation of a trust company, sales, and consumer finance, equipment
leasing, the operation of a computer service bureau, including software
development, and mortgage banking and brokerage. The BHCA does not place
territorial restrictions on the activities of non-bank subsidiaries of bank
holding companies.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve is
the federal regulatory and examining authority for bank holding companies. The
Federal Reserve has adopted capital adequacy guidelines for bank holding
companies.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines which require a minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities such as
standby letters of credit) of 8%. At least half of the total required capital
must be "Tier I capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder ("Tier II
Capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance. In addition to the risk-based capital
guidelines, the Federal Reserve has adopted a Tier I (leverage) capital ratio
under which the bank holding company must maintain a minimum level of Tier I
capital to average total consolidated assets of 3% in the case of bank holding
companies which have the highest regulatory examination ratings and are not
contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a ratio of at least 1% to 2% above the stated minimum.
The Company and Peoples are required to comply with capital requirements
promulgated by their primary regulators that affect their ability to pay
dividends and can affect their operations. Those regulations require the
maintenance of specified levels of capital (as defined) to total assets (the
leverage ratio) and to risk weighted assets (the risk-based capital ratio).
These regulations require the maintenance of a leverage ratio of at least 3.00%
(only for the most sound institutions, others will be required to maintain 4% or
5%) and a total risk-based capital ratio of at least 8.00%.
The Company was in full compliance with all regulatory capital requirements at
December 31, 1997. The following table indicates the Company's actual capital
levels at the dates indicated:
At December 31,
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
Total assets (1) ......................... $597,861 $471,192 $416,781
Risk-based assets ........................ 428,689 346,971 301,426
Tier I capital ........................... 48,192 45,063 41,398
Total capital ............................ 53,553 48,963 44,688
Leverage ratio ........................... 8.26% 9.62% 9.93%
Tier I risk-based capital ratio........... 11.24 12.99 13.73
Total risk-based capital ratio............ 12.49 14.11 14.83
(1) Adjusted to exclude net unrealized gain/loss on available-for-sale
securities.
Bank Regulation. Peoples is organized under the laws of Indiana and as such is
subject to the supervision of the Indiana Department of Financial Institutions
("DFI"), whose examiners conduct periodic examinations of state banks. Peoples
is not a member of the Federal Reserve System, so its primary Federal regulator
is the FDIC, which also conducts periodic examinations of the bank. Peoples'
deposits are insured by the Bank Insurance Fund ("BIF") administered by the FDIC
and are subject to FDIC's rules and regulations respecting the insurance of
deposits. See "--Deposit Insurance."
Both federal and state law extensively regulate various aspects of the banking
business such as reserve requirements, truth-in-lending and truth-in-savings
disclosure, equal credit opportunity, fair credit reporting, trading in
securities and other aspects of banking operations. Current federal law also
requires banks, among other things, to make deposited funds available within
specified time periods.
Insured state-chartered banks are prohibited under FDICIA from engaging as
principal in activities that are not permitted for national banks, unless: (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund, and (ii) the bank is, and continues to be,
in compliance with all applicable capital standards. The Company does not
believe that these restrictions will have a material adverse effect on its
current operations.
Federal Home Loan Bank System. During 1994, Peoples was approved for membership
in the Federal Home Loan Bank ("FHLB") System. FHLB membership will provide
Peoples with a ready source from which to borrow short-term funds from time to
time. The FHLB System consists of 12 regional banks. The Federal Housing Finance
Board ("FHFB"), an independent agency, controls the FHLB System including the
FHLB of Indianapolis. The FHLB System provides a central credit facility
primarily for member savings and loan associations and savings banks and other
member financial institutions. Peoples is required to hold shares of capital
stock in the FHLB of Indianapolis in an amount at least equal to the greater of
1% of the aggregate principal amount of its unpaid residential mortgage loans,
home purchase contracts and similar obligations at the end of each calendar
year. Peoples is currently in compliance with this requirement. At December 31,
1997, Peoples' investment in stock of the FHLB of Indianapolis was $2.3 million.
In past years, Peoples has received dividends on its FHLB stock. All 12 FHLBs
are required by law to provide funds for the resolution of troubled savings
associations and to establish affordable housing programs through direct loans
or interest subsidies on advances to members to be used for lending at
subsidized interest rates for low- and moderate-income, owner-occupied housing
projects, affordable rental housing, and certain other community projects. These
contributions and obligations could adversely affect the FHLBs' ability to pay
dividends and the value of FHLB stock in the future. For the year ended December
31, 1997, dividends paid to Peoples by the FHLB of Indianapolis totaled $137,000
for an annual rate of 7.98%.
The FHLB of Indianapolis serves as a reserve or central bank for member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as determined
by the FHLB. Eligible collateral includes first mortgage loans less than 90 days
delinquent or securities evidencing interests therein, securities (including
mortgage-backed securities) issued, insured or guaranteed by the federal
government or any agency thereof, FHLB deposits and, to a limited extent, real
estate with readily ascertainable value in which a perfected security interest
may be obtained. Other forms of collateral may be accepted as over
collateralization or, under certain circumstances, to renew outstanding
advances. All long-term advances must be used to provide funds for residential
home financing and the FHLB has established standards of community service that
members must meet to maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Indianapolis and the purpose of the borrowing.
Bank Capital Requirements. The FDIC has adopted risk-based capital ratio
guidelines to which Peoples is subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk weighted categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
Like the capital guidelines established by the Federal Reserve for the Company,
these guidelines divide a bank's capital into two tiers. The first tier ("Tier
I") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Banks are required to maintain a
total risk-based capital ratio of 8%, of which 4% must be Tier I capital. The
FDIC may, however, set higher capital requirements when a bank's particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
Certain regulatory capital ratios under the FDIC's risk-based capital guidelines
for Peoples at December 31, 1997 are shown below:
Tier I Capital to Risk-Weighted Assets................ 9.96%
Total Risk-Based Capital to Risk-Weighted Assets...... 11.21
Tier I Leverage Ratio................................. 7.33
Dividend Limitations. Under Federal Reserve supervisory policy, a bank holding
company generally should not maintain its existing rate of cash dividends on
common shares unless (i) the organization's net income available to common
shareholders over the past year has been sufficient to fully fund the dividends
and (ii) the prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
The Company's Board of Directors has adopted a policy consistent with these
guidelines. The FDIC also has authority to prohibit a bank from paying dividends
if, in its opinion, the payment of dividends would constitute an unsafe or
unsound practice in light of the financial condition of the bank.
Under Indiana law, the Company is precluded from paying cash dividends if, after
giving effect to such dividends, the Company would be unable to pay its debts as
they become due or the Company's total assets would be less than its liabilities
and obligations to preferential shareholders. Under Indiana law, Peoples may pay
dividends so long as its capital is unimpaired and it has unimpaired retained
surplus equal to 25% of capital. Dividends may not exceed undivided profits on
hand (less losses, bad debts and expenses). The most stringent capital
requirements affecting Peoples, however, are those established by the prompt
corrective action provisions of FDICIA, which are discussed below. Peoples'
capital levels currently exceed the criteria established to be designated as a
"well capitalized" institution. Such institutions are required to have a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater and a leverage ratio of 5% or greater. At December 31, 1997,
Peoples' total risk-based capital, Tier I risk-based capital and leverage
capital exceeded the amounts required to be designated "well capitalized" by
$5.2 million, $16.9 million and $13.5 million, respectively.
Lending Limits. Under Indiana law, the total loans and extensions of credit by
an Indiana-chartered bank to a borrower outstanding at one time and not fully
secured may not exceed 15% of such bank's capital and unimpaired surplus. An
additional amount up to 10% of the bank's capital and unimpaired surplus may be
loaned to the same borrower if such loan is fully secured by readily marketable
collateral having a market value, as determined by reliable and continuously
available price quotations, at least equal to the amount of such additional
loans outstanding.
Limitations on Rates Paid for Deposits. Regulations promulgated by the FDIC
pursuant to FDICIA place limitations on the ability of insured depository
institutions to accept, renew or roll over deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having the same type
of charter in such depository institution's normal market area. Under these
regulations, "well-capitalized" depository institutions may accept, renew or
roll such deposits over without restriction, "adequately capitalized" depository
institutions may accept, renew or roll such deposits over with a waiver from the
FDIC (subject to certain restrictions on payments of rates) and
"undercapitalized" depository institutions may not accept, renew or roll such
deposits over. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definition adopted by the agencies to implement the corrective action
provisions of FDICIA. Peoples does not believe that these regulations will have
a materially adverse effect on its current operations.
Safety and Soundness Standards. On August 9, 1995, the federal banking agencies
final safety and soundness standards for all insured depository institutions
became effective. The standards, which were issued in the form of guidelines
rather than regulations, relate to internal controls, information systems,
internal audit systems, loan underwriting and documentation, compensation and
interest rate exposure. In general, the standards are designed to assist the
federal banking agencies in identifying and addressing problems at insured
depository institutions before capital becomes impaired. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan may
result in enforcement proceedings. Additional standards on earnings and
classified assets are expected to be issued in the near future.
Branching and Acquisitions or Dispositions. Establishment of branches is subject
to approval of the DFI and FDIC and geographic limits established by state laws.
Indiana branch banking law permits a bank having its principal place of business
in the State of Indiana to establish branch offices in any county in Indiana
without geographic restrictions. A bank may also merge with any national or
state chartered bank located anywhere in the State of Indiana without geographic
restrictions.
Indiana banks and savings associations are permitted to acquire other Indiana
banks and savings associations and to establish branches throughout Indiana. In
addition, The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in
other states and, with state consent and subject to certain limitations, allows
banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion. The Indiana Branching Law became effective March 15.
Transactions with Affiliates. Peoples is subject to Sections 22(h), 23A and 23B
of the Federal Reserve Act which restrict financial transactions between banks
and affiliated companies. The statute limits credit transactions between a bank
and its executive officers and its affiliates, prescribes terms and conditions
for bank affiliate transactions deemed to be consistent with safe and sound
banking practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
Prompt Corrective Action. FDICIA requires, among other things, federal bank
regulatory authorities to take "prompt corrective action" with respect to banks
that do not meet minimum capital requirements. For these purposes, FDICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
The FDIC may order a bank that has insufficient capital to take corrective
actions. For example, a bank that is categorized as "undercapitalized" would be
subject to growth limitations and would be required to submit a capital
restoration plan, and a holding company that controls such a bank would be
required to guarantee that the bank complies with the restoration plan.
"Significantly undercapitalized" banks would be subject to additional
restrictions. Banks deemed by the FDIC to be "critically undercapitalized" would
be subject to the appointment of a receiver or conservator.
Deposit Insurance. Peoples' deposits are insured up to $100,000 per insured
account by the Bank Insurance Fund ("BIF") of the FDIC. As an institution whose
deposits are insured by the BIF, Peoples is required to pay deposit insurance
premiums to the BIF.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the Savings Association Insurance Fund ("SAIF") for
savings associations and banks that have acquired deposits from savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund. As of December 31, 1997, the reserves of the BIF met the level
required by law.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance for members of the BIF and members of the SAIF. The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to the target level within a reasonable time and
may decrease such rates if such target level has been met. The FDIC has
established a risk- based assessment system for both SAIF and BIF members. Under
this system, assessments vary depending on the risk the institution poses to its
deposit insurance fund. Such risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
Because of the differing reserve levels of the SAIF and the BIF, the deposit
insurance assessments paid by healthy BIF-insured institutions were reduced over
time so as to be significantly lower than the level paid by healthy SAIF-insured
institutions.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
members of SAIF were charged a one-time special assessment based on assessable
deposits at March 31, 1995. BIF institutions pay only 20% of the rate being paid
by SAIF institutions on their deposits with respect to obligations issued by the
federally-chartered corporation which provided financing to resolve the thrift
crisis in the 1980's ("FICO"). As a result, BIF institutions such as Peoples pay
lower assessments than comparable SAIF institutions.
Federal Securities Law. The Nonvoting Common Shares of the Company are
registered with the SEC under the 1934 Act. The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder.
Community Reinvestment Act Matters. Federal law requires that ratings of
depository institutions under the Community Reinvestment Act of 1977 ("CRA") be
disclosed. The disclosure includes both a four-unit descriptive rating --
outstanding, satisfactory, needs to improve, and substantial noncompliance --
and a written evaluation of each institution's performance. Each FHLB is
required to establish standards of community investment or service that its
members must maintain for continued access to long-term advances from the FHLBs.
The standards take into account a member's performance under the CRA and its
record of lending to first-time home buyers. The examiners have determined that
Peoples has a satisfactory record of meeting community credit needs.
Limitations on Repurchase of Common Stock of Holding Company. Regulations
promulgated by the Federal Reserve provide that a bank holding company must file
written notice with the Federal Reserve prior to any repurchase of its equity
securities if the gross consideration for the purchase, when aggregated with the
net consideration paid by the bank holding company for all repurchases during
the preceding 12 months, is equal to 10% or more of the bank holding company's
consolidated net worth. This notice requirement is not applicable, however, to a
bank holding company that exceeds the thresholds established for a well
capitalized state member bank and that satisfies certain other regulatory
requirements.
Under Indiana law, the Company will be precluded from repurchasing its equity
securities if, after giving effect to such repurchase, the Company would be
unable to pay its debts as they become due or the Company's assets would be less
than its liabilities and obligations to preferential shareholders.
Additional Matters. In addition to the matters discussed above, the Company and
Peoples are subject to additional regulation of their activities, including a
variety of consumer protection regulations affecting their lending, deposit and
collection activities and regulations affecting secondary mortgage market
activities.
The earnings of financial institutions, including the Company and Peoples, are
also affected by general economic conditions and prevailing interest rates, both
domestic and foreign and by the monetary and fiscal policies of the U.S.
Government and its various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the banking industry
may be considered by the United States Congress, the Indiana General Assembly
and various regulatory agencies, including those referred to above. It cannot be
predicted with certainty whether such legislation or administrative action will
be enacted or the extent to which the banking industry in general or the Company
and Peoples in particular would be affected thereby.
Forward Looking Statements
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company or Peoples or their directors
or officers, primarily with respect to future events and the future financial
performance of the Company. The Company may also make other written or oral
forward looking statements from time to time. Any such forward looking
statements are not guarantees of future events or performance, involve risks and
uncertainties and are subject to important factors that may cause actual results
to differ materially from those projected or suggested in the forward looking
statements. The accompanying information contained in this Form 10-K identifies
important factors that could cause such differences. These factors include
changes in interest rates; competition, including the risk of loss of deposits
and loan demand to other financial institutions; substantial changes in
financial markets; changes in real estate values and the real estate market;
regulatory changes; or unanticipated results in pending legal proceedings.
Item 2. Properties.
The Company's executive offices are located at Peoples' main office building.
Peoples owns the main office building through a wholly-owned subsidiary. The
main office building is a twelve story building located in downtown
Indianapolis. The main office branch is located on the first level of the
building and, in addition, Peoples occupies the second, third, fourth, fifth and
part of the sixth floors. The Board Room and training area are located on the
twelfth floor. All other areas are leased to other tenants.
At December 31, 1997, Peoples operated 13 customer service offices, 8 of which
are owned (including the main office) and 5 of which are leased under lease
agreements with remaining terms (including renewal options) ranging from 1.6 to
22.2 years. The Company will develop plans and analyze opportunities to expand
its number of locations if the expansion appears to represent a profitable
opportunity. Peoples operations center on the north side of Indianapolis is
leased for a term (including renewal options) ending 2010. In January 1997,
Peoples closed its northside mortgage office and moved the staff to the
operations center.
The following table provides certain information with respect to Peoples'
properties as of December 31, 1997. All offices listed are located in
Indianapolis, Indiana.
Approximate
Year Opened "ART" ATM Square
Description and Address or Acquired Location Footage
- - ----------------------- ----------- -------- -------
Main Office
130 East Market Street 1905 ATM 3,500
Castleton Office
6071 East 82nd Street 1983 ATM 3,400
Chapel Hill Office (1)
7365 West 10th Street 1965 ATM 3,200
College Park Office (2)
8910 Wesleyan Road 1985 ATM 6,647
Lafayette Road Office (1)
2802 Lafayette Road 1956 ATM 3,200
Greenwood Place Office
7921 South U.S. Hwy. 31 1986 ATM 3,520
Lawrence Office
6909 East 38th Street 1951 ATM 3,275
Madison/Thompson Office
4940 Madison Avenue 1963 ATM 2,800
71st & Keystone Office
2411 East 71st Street 1967 ATM 2,000
West 86th Street Office
1851 West 86th Street 1970 ATM 3,525
Winona Office (1)
3266 North Meridian 1970 2,000
Washington Square Office (1)
10001 East Washington Street 1995 ATM 2,801
Operations Center (1)
5840 West 74th Street 1990 21,905
(1) Leased facility.
(2) Includes 2,927 square feet leased to a tenant through July 1998
Peoples has 24-hour automatic teller machines ("ATMs") at eleven of its branches
as indicated above. The automatic teller machines operate under the trade name
"ART". Peoples' ATMs participate in the nationwide CIRRUS and MAC ATM networks.
See "Item 1. Business--Electronic Data Processing."
Peoples owns substantially all of its computer and data processing equipment
used for transaction processing, accounting, financial forecasting, loan
documentation and all other data processing and reporting services. The main
data processing facility is at the Operations Center.
Item 3. Legal Proceedings.
From time to time the Company or Peoples is subject to various pending and
threatened lawsuits in which claims for monetary damages are asserted in the
ordinary course of business. While any litigation involves an element of
uncertainty, in the opinion of management, liabilities, if any, arising from
such litigation or threat thereof will not have a material effect on the
financial position or results of operations of the Company or Peoples.
Item 4. Submission of Matters to a Vote of Security Holders.
None
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Nonvoting Common Shares are quoted on the Nasdaq National Market under the
symbol "PPLS." The following table sets forth the high and low bid prices per
Nonvoting Common Share between January 1, 1995 and March 9, 1997.
Trading Period High Low
- - ------------------- -------- ------
01/01/95 - 03/27/95 10 15/16 9.5
04/01/95 - 06/30/95 10 1/4 9.5
07/01/95 - 09/30/95 12 9.5
10/01/95 - 12/31/95 12 5/8 11 5/8
01/01/96 - 03/31/96 14 3/4 12 1/8
04/01/96 - 06/30/96 15 1/8 12 3/8
07/01/96 - 09/30/96 17 1/8 14 1/4
10/01/96 - 12/31/96 18 3/8 16 1/2
01/01/97 - 03/31/97 22 1/4 17 1/2
04/01/97 - 06/30/97 26 1/4 21 3/4
07/01/97 - 09/30/97 35 1/4 25 1/2
10/01/97 - 12/31/97 37 3/4 29 3/4
01/01/98 - 03/09/98 40 3/4 35 1/4
As of March 9, 1998, there were 220 holders of record of the Company's Nonvoting
Common Shares, of which 2,812,834 were issued and outstanding. As of such date,
there were 37 holders of record of the Company's Voting Common Shares, of which
264,096 were issued and outstanding. The market for Voting Common Shares is
inactive and management has no plans to list the Voting Common Shares on Nasdaq
or any exchange.
The Company has paid cash dividends on its Common Shares every year since it was
formed in 1986 and Peoples paid regular dividends for many years prior thereto.
The per share amount of cash dividends declared for each quarter since the first
quarter of 1995 are as follows:
Cash Dividends
Per Common Share
Calandar Quarter
1995
First Quarter....................... $0.085
Second Quarter......................... 0.085
Third Quarter.......................... 0.09
Fourth Quarter......................... 0.09
1996
First Quarter....................... $0.09
Second Quarter......................... 0.09
Third Quarter.......................... 0.095
Fourth Quarter......................... 0.10
1997
First Quarter....................... $0.105
Second Quarter......................... 0.11
Third Quarter.......................... 0.115
Fourth Quarter......................... 0.12
On March 19, 1998, the Company declared a dividend of $0.125 per share payable
to shareholders of record March 31, 1998. The Company currently anticipates
paying quarterly cash dividends at the rate indicated above, although the
payment of dividends is subject to the discretion of the Board of Directors. The
declaration of future dividends will depend on, among other things, the
earnings, financial condition and cash requirements of the Company at the time
such payment is considered, and on the ability of the Company to receive
dividends from Peoples the amount of which is subject to regulatory limitations.
On June 19, 1997, the Board of Directors of the Company approved a split of the
Company's Voting Common Shares and Nonvoting Common Shares, on the basis of two
shares for each one of the issued and outstanding shares of each class, as of
the close of business on June 30, 1997. The foregoing data give retroactive
effect to such 2-for-1 share split.
Item 6. Selected Consolidated Financial Data.
The following table sets forth certain selected financial information reflecting
the operations and financial condition of the Company for each year in the five
year period ended December 31, 1997. This data should be read in conjunction
with the Company's consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition" included elsewhere herein.
<TABLE>
<CAPTION>
As Of and For The
Year Ended December 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Consolidated Statements of Income Data:
<S> <C> <C> <C> <C> <C>
Interest income ............................ $39,729 $32,251 $ 31,034 $ 24,806 $ 23,132
Interest expense ........................... 18,119 14,044 14,869 10,462 8,747
----------- ----------- ----------- ----------- -----------
Net interest income ........................ 21,610 18,207 16,165 14,344 14,385
Provision for loan losses .................. 1,800 1,125 536 528 606
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses ........ 19,810 17,082 15,629 13,816 13,779
Other operating income ..................... 5,953 5,437 4,868 4,819 4,912
Other operating expense .................... 16,469 14,794 15,316 14,885 13,293
----------- ----------- ----------- ----------- -----------
Income before income taxes
and cumulative effect of change in
accounting method (1) ............ 9,294 7,725 5,181 3,750 5,398
Income taxes ............................... 3,016 2,316 1,295 865 1,676
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of
change in accounting method (1) .. 6,278 5,409 3,886 2,885 3,722
Cumulative effect of change in
accounting method (1) ...................... 0 0 0 0 100
----------- ----------- ----------- ----------- -----------
Net income ....................... $ 6,278 $ 5,409 $ 3,886 $ 2,885 $ 3,822
=========== =========== =========== =========== ===========
Consolidated Balance Sheets Data:
Assets ..................................... $ 598,476 $ 471,478 $ 417,019 $ 425,075 $ 366,304
Held-to-maturity securities ................ -- -- -- 113,823 100,349
Available-for-sale securities .............. 153,870 94,589 107,745 55,177 43,939
Loans held for sale ........................ 561 421 2,557 761 5,007
Total loans ................................ 406,893 332,953 271,093 214,390 171,833
Allowance for loan losses .................. 5,516 3,900 3,290 2,704 2,513
Deposits ................................... 508,311 411,805 351,762 346,577 315,074
Shareholders' equity ....................... 48,817 45,349 41,636 38,477 29,216
Average shares outstanding basic ........... 3,112,319 3,168,260 3,190,644 3,364,042 2,548,024
Average shares outstanding diluted ......... 3,153,051 3,178,202 3,190,644 3,364,042 2,548,024
Per Share Data:
Income before cumulative effect of
change in accounting method (1) basic ...... 2.02 1.71 1.22 0.86 1.46
diluted ................................ 1.99 1.70 1.22 0.86 1.46
Net Income basic ........................... 2.02 1.71 1.22 0.86 1.50
diluted ............................... 1.99 1.70 1.22 0.86 1.50
Cash dividends declared .................... 0.45 0.38 0.35 0.33 0.18
Book value (2) ............................. 15.87 14.42 13.10 11.82 11.47
Other Statistics and Operating Data:
Return on average assets ................... 1.18% 1.21% 0.89% 0.73% 1.05%
Return on average equity ................... 13.40 12.62 9.70 7.56 14.16
Net interest margin (3) .................... 4.48 4.67 4.27 4.21 4.61
Efficiency ratio (4) ....................... 57.90 60.06 69.18 73.48 66.01
Average loans to average deposits .......... 75.80 76.27 70.65 57.75 54.02
Dividend payout ratio ...................... 22.24 21.91 28.64 38.37 11.66
Allowance for loan losses to loans
at the end of period ....................... 1.35 1.17 1.20 1.26 1.42
Allowance for loan losses to non-
performing loans ........................... 141.15 1,378.09 256.43 164.38 117.98
Nonperforming loans to loans
at the end of period ....................... 0.90 0.09 0.47 0.76 1.20
Net charge-offs to average loans ........... .05 0.17 (0.02) 0.18 0.23
Number of offices .......................... 13 13 15 15 13
Capital Ratios:
Average shareholders' equity to
average assets ............................. 8.78% 9.61% 9.14% 9.62% 7.45%
Leverage ratio ............................. 8.26 9.62 9.93 9.26 7.98
Total risk-based capital ratio ............. 12.49 14.11 14.83 15.34 14.44
----------- ----------- ----------- ----------- -----------
</TABLE>
(1) Effective January 1, 1993, the Company adopted Financial Accounting
Standard No, 109, Accounting for Income Taxes.
(2) Based on Common Shares outstanding at the end of the period.
(3) Net interest income as a percentage of average interest-earning assets, on
a fully tax equivalent basis.
(4) The efficiency ratio is calculated by dividing non-interest expense by the
sum of net interest income, on a fully tax equivalent basis, and recurring
non-interest income.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The business of Peoples Bank Corporation ("the Company") consists of holding and
administering its interest in Peoples Bank & Trust Company ("Peoples"). The
principal business of Peoples consists of attracting deposits from consumer and
commercial customers and making loans to individuals and businesses. Peoples
offers various products for depositors, including checking and savings accounts,
certificates of deposit and safe deposit boxes. Loans consist principally of
loans to individuals secured by mortgage liens on residential properties,
consumer loans generally secured by liens on personal property, and loans to
businesses generally secured by liens on business assets such as inventory,
accounts receivable, commercial real estate and other property. Peoples also
offers trust services to individuals, businesses and institutions. Peoples
operates 12 banking offices in Indianapolis, and an operations center on the
north side of Indianapolis. The Company will develop plans and analyze
opportunities to expand its number of locations if the expansion appears to
represent a profitable opportunity.
Earnings Summary
The Company's net income for 1997 was $6,278,000 compared with net income for
1996 of $5,409,000, an increase of $869,000 or 16.1%. Net income for 1995 was
$3,886,000. Earnings per share assuming full dilution were $1.99 in 1997, $1.70
for 1996 and $1.22 for 1995.
Net Interest Income
Net interest income is the principal component of net income for the Company and
is determined by the relative size and characteristics of interest-earnings
assets and interest-bearing liabilities. For the years ended December 31, 1997,
1996 and 1995, net interest income was $21,610,000, $18,207,000 and $16,165,000,
respectively. This represents an increase in 1997 of $3,403,000 (18.7%), and an
increase in 1996 of $2,042,000 (12.6%). Increased net interest income
contributed significantly to the net income growth during the period.
Average earning assets increased to $502,486,000 in 1997 from $411,118,000 in
1996, an increase of $91,368,000 (22.2%). Average loans increased $69,845,000
(23.6%) to $366,155,000 in 1996. Increasing loan balances were a primary driver
for the increase in net interest income during 1997. Increases in security
balances were also a source of growth in net interest income. As part of its
efforts to manage interest rate risk, the Company increased its balances of
fixed rate securities.
As interest rates declined, this contributed to an increase in the unrealized
gain on securities (net of tax) to $615,000 at December 31, 1997 from $286,000
at December 31, 1996. Increases in loans and securities were funded through
significant increases in time deposits. Average deposits increased $82,121,000
(21.1%) to $470,611,000 in 1997 from $388,490,000 in 1996. The following table
sets forth, for the periods indicated, information regarding the average
balances of interest-earning assets and interest-bearing liabilities, the dollar
amount of interest income and interest expense, and the resulting yield on
average earning assets and rates on average interest-bearing liabilities.
Average balances are also provided for non-earning assets, non-interest-bearing
liabilities and shareholders' equity.
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
(Dollar amounts in thousands)
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Interest-earning deposits $-- $-- --% $833 $45 5.40% $384 $22 5.73%
Federal funds sold 14,617 730 4.99 15,995 844 5.28 7,530 444 5.90
Investment securities:
Taxable 87,529 5,758 6.58 62,814 3,372 5.37 99,280 5,614 5.65
Tax-exempt 34,185 1,577 4.61 35,167 1,779 5.06 38,901 1,984 5.10
Loans (1) 364,081 31,532 8.66 294,141 26,074 8.86 256,035 22,805 8.91
Tax-exempt loans 2,074 132 6.35 2,169 137 6.32 2,460 165 6.71
Total interest-earning assets 502,486 39,729 7.91 411,119 32,251 7.84 404,590 31,034 7.67
Non-earning assets:
Cash and due from banks 21,570 24,571 22,743
Bank premises and equipment, net 6,514 7,127 8,461
Other non-earning assets 7,722 6,957 5,782
Allowance for loan losses (4,739) (3,634) (3,091)
------
Total assets $ 533,553 $ 446,140 $438,485
Liabilities and shareholders'
equity Interest-bearing liabilities:
Transaction accounts 36,262 574 1.58% 37,342 772 2.07% 37,488 778 2.08%
Savings deposits 180,701 6,826 3.78 168,726 6,483 3.84 147,281 6,087 4.13
Time deposits 171,281 10,163 5.93 103,597 6,216 6.00 106,279 3,305 5.93
Short-term borrowings 12,418 556 4.48 12,222 573 4.69 29,941 1,699 5.67
Total interest-bearing liabilities 400,662 18,119 4.52 321,887 14,044 4.36 320,989 14,869 4.63
Non-interest-bearing liabilities:
Demand deposits 82,367 78,825 74,816
Other liabilities 3,656 2,556 2,612
Shareholders' equity 46,868 42,872 40,068
Total liabilities and
shareholders' equity $ 533,553 $ 446,140 $438,485
Net interest income 21,610 18,207 16,165
Net interest spread 3.39% 3.48% 3.04%
Net interest margin 4.30 4.43 4.00
Tax-equivalent data: (2)
Tax-equivalent adjustment 880 987 1,107
Adjusted net interest income $ 22,490 $19,194 $ 17,272
Net interest spread 3.56% 3.72% 3.31%
Net interest margin 4.48 4.67 4.27
</TABLE>
Net interest income also depends on the rates earned on assets and paid on
liabilities. The net interest margin represents net interest income as a percent
of average earning assets. The net interest margin decreased to 4.30% in 1997
from 4.43% in 1996, but was still up from 4.00% in 1995. The most significant
reason for the decrease in the net interest margin in 1997 was the increase in
security balances. While this strategy reduced interest rate risk, enhanced net
interest income, and resulted in significant unrealized gains, it also reduced
the net interest margin. Had the Company not initiated this transaction during
1997, the net interest margin would have increased between 1996 and 1997. In
addition, during 1997, the Company repositioned much of its securities portfolio
to be longer term as part of a strategy to balance interest rate risk, further
contributing to the increase in the unrealized gain on securities, and locking
in a higher rate of return on that portfolio. The following table presents the
change in interest income or interest expense which is attributable to the
change in the average balance (volume) and the change in interest income or
interest expense which is related to change in rates. Changes in balances were
responsible for an increase in net interest income of $2,814,000 during 1997 as
both securities and loans grew and were funded by growth in time deposits and,
to some extent, savings deposits. The most significant change due to rate was
the increase in the yield on securities, more than offsetting declines in net
interest income resulting from lower loan rates. Also, deposit rates were
generally lower in 1997 as compared to 1996, despite the significant growth in
balances.
<TABLE>
<CAPTION>
Year ended December 31,
1997 vs. 1996
Change Change
Total Due To Due To
Change Volume Rate
(Dollars in thousands)
Interest income:
<S> <C> <C> <C>
Interest-earning deposits $ (45) $ (45) $ -
Federal funds sold (114) (73) (41)
Securities 2,184 1,248 936
Loans 5,453 6,191 (738)
------------ ------------ -------------
Total interest income 7,478 7,321 157
Interest expense:
Transaction accounts (198) (22) (176)
Savings deposits 343 460 (117)
Time deposits 3,947 4,061 (114)
Short-term borrowings (17) 9 (26)
------------ ------------ -------------
Total interest expense 4,075 4,508 (433)
------------ ------------ -------------
Net interest income $ 3,403 $ 2,813 $ 590
</TABLE>
Non-Interest Income
Non-interest income was $5,953,000 in 1997, $5,437,000 in 1996 and $4,868,000 in
1995. The increase in 1997 of $516,000 (9.5%) followed an increase of $569,000
(11.7%) in 1996. Trust fees increased both in 1997 and 1996, $204,000 (15.2%)
and $38,000 (2.9%), respectively.
The increase in revenue from the Trust & Investment Management Group in 1997 is
reflective of the continuing sales effort and the increased focus on growth.
Management believes that the Trust & Investment Management Group possesses a
competitive advantage by offering customers local trust and funds management
services. Service charges on deposit accounts and other retail related fees
increased $452,000 to $2,963,000 during 1997 following an increase of $463,000
in 1996. Fee income increased for a variety of services. Fees charged to
customers for overdrawn accounts were up in 1997, as were fees charged to
business customers who did not maintain significant balances but utilized a
variety of cash management related services. Peoples provides free access to
automated teller machines to customers who maintain checking accounts with the
bank, but implemented a fee for non-customers who use Peoples Bank automated
teller machines. This new fee produced $230,000 during 1997, an increase from
$105,000 in 1996 when the fee was only in place for six months.
Mortgage banking revenue includes net gains and losses realized when mortgage
loans are sold into the secondary market, service fee revenue earned from
servicing those loans after they are sold and, in 1995, a gain on the sale of
loan servicing rights. Mortgage banking revenue, as reflected in the Company's
financial statements, has not been reduced by the associated costs, such as
compensation expense, which is shown elsewhere within non-interest expense.
Mortgage banking revenue was $430,000 in 1997, $713,000 in 1996 and $843,000 in
1995. This reflects a decrease in 1997 of $283,000 (39.7%) against a decrease in
1996 of $130,000 (15.4%). The sale of loan servicing rights during 1995
generated $380,000. The decrease in mortgage banking revenue can be attributed
to a change in strategy which focused Peoples on generating less volume, with an
emphasis on loans which would not be sold into the secondary market but would
remain on the balance sheet. At December 31, 1997 the Company serviced mortgage
loans with an aggregate outstanding principal balance of approximately $101
million.
The Company does not engage in the purchase and sale of securities with the
intent to generate gains. The Company may sell available-for-sale securities for
liquidity or to manage its asset/liability position. During 1997, such sales, as
well as gains and losses realized when securities were called prior to their
maturity, generated net losses of $50,000 compared to net losses of $63,000
during 1996.
Non-Interest Expense
Non-interest expense, or overhead, includes the costs of personnel, occupancy,
equipment, insurance, and other costs of sustaining operations. Overhead for the
years ended December 1997, 1996 and 1995 was $16,469,000, $14,794,000 and
$15,316,000, respectively. This reflects an increase of $1,675,000 (11.3%) in
1997 compared to a decrease of $522,000 (3.4%) in 1996. More than half of total
non-interest expense is comprised of salaries and employee benefits. Salaries
and employee benefit expense increased $965,000 (12.0%) compared to a decrease
of $564,000 (6.6%) in 1996. During 1997, Peoples added staff in critical areas
to enhance its sales and service capacity and to accommodate the bank's strong
growth. The decrease in salary and benefit expense during 1996 resulted from the
reorganization of certain operations to improve process efficiency. Advertising
expense increased $147,000 in 1997, following a decrease of $106,000 in 1996.
FDIC insurance expense was $52,000 during 1997, up from $2,000 in 1996, but down
from $386,000 during 1995 as a result of changes in the FDIC's assessment rate.
Other expenses increased $501,000 due to increases in training and professional
services aimed at improving the bank's ability to increase market share, retain
existing relationships, and improve profitability.
Income Taxes
The Company's income tax expense was affected primarily by the level of pre-tax
income. As income increased, tax expense did as well. Tax expense for 1997
increased $700,000 following an increase of $1,021,000 during 1996. The Company
can and does purchase tax-free securities and originates tax-free loans as a
means of generating tax-free income, effectively mitigating tax expense. The
Company also has invested in several low income housing tax partnerships with
the intent of generating lower income tax expense in future years, in addition
to serving the community by providing subsidized housing for lower income
families. Another measure of the Company's tax expense is the effective tax
rate. It increased from 25.0% in 1995 to 30.0% in 1996 to 32.5% in 1997. Without
tax favored and tax credit producing investments, the Company's maximum
effective tax rate would be approximately 40.0%.
Net deferred tax assets at December 31, 1997 and 1996 were $1,963,000 and
$1,346,000. Deferred tax assets result, primarily, from book bad debt deductions
in excess of those deductible for tax purposes. The asset will be realized as
loans are charged off in future periods. Based on the Company's historical
levels of taxable income and the relatively small size of the deferred tax
assets recorded, management does not believe a valuation allowance for those
assets was needed at December 31, 1997.
Asset and Liability Management
The Company engages in a formal process of measuring and defining the amount of
interest rate risk. Interest rate risk is the effect on net interest income
resulting from changes in interest rates. The goal of the asset and liability
management process is to maintain a high, yet stable, net interest margin by
identifying the degree of interest rate risk and developing tactics and
strategies to mitigate the extent to which net interest income will be affected
by changes in interest rates.
The following tables illustrate the repricing opportunities, or "rate
sensitivity," of interest-earning assets and interest-bearing liabilities. A
repricing may occur if the rate on the asset or liability changes as interest
rates change, or, when the rate is fixed, at the time they mature. The "gap" is
the difference between rate sensitive assets and rate sensitive liabilities
within a specific time frame. Gap is considered an indicator of the effect a
change in interest rates may have on net interest income.
<TABLE>
<CAPTION>
At December 31, 1997
Repriceable or Maturing Within
0 to 3 3 to 6 6 Months 1 to 5 After 5
Months Months to 1 Year Years Years Total
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans $210,991 $ 32,666 $ 49,999 $111,753 $ 2,045 $407,454
Available-for-sale securities 8,683 18,467 14,368 101,332 11,020 153,870
--------------------------------------------------------------------------------
Total interest-earning assets 219,674 51,133 64,367 213,085 13,065 561,324
Interest-bearing liabilities:
Savings accounts 215,295 - - - - 215,295
Time deposits 54,589 23,142 22,255 110,591 307 210,884
Short-term borrowings 34,380 - - - - 34,380
--------------------------------------------------------------------------------
Total interest-bearing liabilities 304,264 23,142 22,255 110,591 307 460,559
--------------------------------------------------------------------------------
Asset (liability) gap $ (84,590) $ 27,991 $ 42,112 $102,494 $ 12,758 $100,765
================================================================================
Cumulative asset (liability) gap $ (84,590) $ (56,599) $ (14,487) $88,007 $100,765
Cumulative gap to total assets -14.1% -9.5% -2.4% 14.7% 16.8%
</TABLE>
As of December 31, 1997, the Company's rate sensitive liabilities exceeded rate
sensitive assets through one year. This would indicate that when rates increase,
net interest income may decline. In order to accurately determine the effect of
changes in interest rates, the repricing effect of each type of interest-earning
asset and interest-bearing liability must be measured. Assets and liabilities
have different characteristics and the magnitude of change differs for each.
Management continually monitors the changes to net interest income which may
result from changing interest rates.
A significant assumption that creates the large negative gap in the 0 to 3 month
category is that all interest-bearing demand and savings accounts are subject to
immediate repricing. While it is true that contractually, those accounts are
subject to immediate repricing, the rates paid on those accounts are not
generally tied to specific indices and are influenced by market conditions and
other factors. Accordingly, a general movement in interest rates, either up or
down, may not have any immediate effect on the rates paid on these deposit
accounts. The foregoing table illustrates only one source of information about
sensitivity to interest rate movements. The core of the Company's asset and
liability management process consists of simulations that take into account the
time that various assets and liabilities may reprice and the degree to which
various categories of such assets and liabilities will respond to general
interest rate movements. Interest rate risk can only be represented by a
measurement of the effects of changing interest rates given the capacity for and
magnitude of change on specific assets and liabilities.
Liquidity
Liquidity refers to the availability of funds to meet deposit withdrawals, fund
loan commitments and pay expenses. The Company's loan portfolio, excluding loans
held for sale, increased to $406,893,000 at December 31, 1997 from $332,953,000
at December 31, 1996, an increase of $73,940,000 (22.2%). Increases in deposits
provided funding for loan growth in 1997. Total deposits at December 31, 1997
were $508,311,000, an increase of $96,506,000 from balances of $411,805,000 at
December 31, 1996.
A measure of liquidity is the loan to deposit ratio. As of December 31, the net
loan to deposit ratio was 80.1% in 1997, and 80.9% in 1996. At these levels,
management believes that Peoples had adequate liquidity to meet its current and
future needs.
Loan commitments include unfunded portions of lines of credit and commercial
letters of credit. These unfunded commitments may or may not require funding. At
December 31, 1997 and 1996, such commitments totaled $114,769,000 and
$106,546,000, respectively. Loan commitments generate fee income for the
Company.
Loan Quality
The Company has maintained a high level of quality in the loan portfolio.
Non-performing loans are those loans which are past due more than 90 days and
still accruing interest, and those loans on which the Company no longer accrues
interest. As of December 31, 1997 and 1996, non-performing loans totaled
$3,908,000 and $283,000, respectively. As a percent of total loans,
non-performing loans were .96% at December 31, 1997 and .09% at December 31,
1996. Loans are considered impaired if full principal or interest payments are
not anticipated. Impaired loans are carried at the present value of expected
cash flows discounted at the loan's effective interest rate or at the fair value
of the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans. The Company's average
investment in impaired loans during 1997 and 1996 was $4,253,000 and $1,068,000
respectively. At December 31, 1997, $5,241,000 of loans were deemed to be
impaired and $1,145,000 of the allowance for loan losses was allocated to those
loans. The loans that are classified as impaired and are still accruing interest
are generally collateralized and currently making payments. However, based on
past experience with the customer and their analysis of the situation,
management believes that it is not probable that these loans will be repaid in
accordance with the contractual terms of the loan agreement. As a result,
management classifies these loan relationships as impaired.
The provision for loan losses is a charge to earnings to provide for potential
loan losses. The provision for loan losses was $1,800,000 in 1997, $1,125,000 in
1996 and $536,000 in 1995. The increase in the provision for loan losses in 1997
and 1996 was considered necessary by management to maintain the allowance at a
desirable level and provide for the substantial loan growth during the years.
The adequacy of the allowance for loan losses is evaluated at least quarterly by
management based upon a review of identified loans with more than a normal
degree of risk, historical loss percentages, and present and forecast economic
conditions affecting borrowers. At December 31, the allowance for loan losses
was $5,516,000 for 1997 and $3,900,000 for 1996. As a percent of total loans,
the allowance for loan losses was 1.35% at December 31, 1997 and 1.17% at
December 31, 1996. Management's analysis indicates that the allowance for loan
losses at December 31, 1997 was adequate to cover potential losses on identified
loans with credit problems and on the remaining portfolio based on historical
percentages. See also, "Item 1. Business - Asset Quality and Provision for Loan
Losses," above.
Gross loan charge-offs in 1997, 1996 and 1997 were $488,000, $607,000 and
$125,000, respectively. As a percentage of average loans, gross loan charge-offs
were .13%, .21% and .05% for those periods.
Capital Position
Both the Company and Peoples are required to comply with capital requirements
promulgated by their primary regulators. Those regulations require the
maintenance of specified levels of capital to total assets (the leverage ratio)
and to risk-weighted assets (the risk-based capital ratio). These regulations
require maintaining a leverage ratio of 3% for sound entities and a total
risk-based capital ratio of at least 8%.
The Company and Peoples were in full compliance with all regulatory capital
requirements at December 31, 1997.
The table indicates the Company's actual capital levels at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Tier I capital $ 48,192 $ 45,063 $ 41,398
Total capital 53,553 48,963 44,688
Leverage ratio 8.26% 9.62% 9.93%
Tier 1 risk-based capital ratio 11.24% 12.99% 13.73%
Total risk-based capital ratio 12.49% 14.11% 14.83%
</TABLE>
New Accounting Pronouncements
Financial Accounting Standard No. 130, "Reporting Comprehensive Income," is
effective for both interim and year-end financial statements for fiscal years
beginning after December 15, 1997 and establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Comprehensive
income is defined as all changes in equity other than those resulting from
investments by owners or distributions to owners. Net income is, therefore, a
component of comprehensive income. While full disclosure for each reported
period is required in year-end financial statements, interim financial
statements need only disclose total comprehensive income for each reported
period. The Standard does not mandate a specific format for reporting
comprehensive income, but does require that all items that are required to be
recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Implementation of this Standard will require additional disclosures
in future financial reports but will not otherwise affect the Company.
Financial Accounting Standard No. 131, "Disclosures About Segments of an
Enterprise and Related Information," is effective for reported periods included
in year-end financial statements for fiscal years beginning after December 15,
1997 and for all reported periods in interim financial statements for reporting
periods following the first required full fiscal year disclosures. FAS No. 131
establishes new guidance for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about reportable operating
segments in interim financial reports issued to shareholders. FAS No. 131
supersedes the industry approach to segment disclosures previously required by
FAS No. 14, "Financial Reporting for Segments of Business Enterprise," replacing
it with a method of segment reporting which is based on the structure of an
enterprise's internal organization reporting. The Statement also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Management expects that implementation of this Standard may
result in the identification of other reportable business segments.
Year 2000 Compliance
Because computer memory was so expensive on early mainframe computers, some
computer programs used only the final two digits for the year in the date field
and assumed that the first two digits were "19." As a result, some computer
applications may be unable to interpret the change from year 1999 to year 2000.
Peoples has identified a number of critical software vendors, and is in the
process of communicating with each vendor about their compliance with the Year
2000 issue. Peoples has no internally generated code, and all of its core
processing is supplied by FISERV, one of the nation's leading software suppliers
for community banks. Management believes that Peoples' core processing systems
will be Year 2000 compliant by the middle of 1998, and anticipates completion of
testing by the end of 1998. As a result, management does not believe that the
Year 2000 issue represents a significant risk to Peoples' operations, and the
expense in connection with Year 2000 compliance is not expected to be material
to its overall financial condition.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. Peoples has entered into variable pay interest rate swaps in
the notional amount of $20 million with other financial institutions. This means
that Peoples receives a fixed rate of interest calculated on $20 million and
pays a variable rate of interest calculated on $20 million. These swaps were
purchased to hedge risk because Peoples had funded growth in variable rate
assets with fixed rate CD's. If interest rates declined, bank earnings would
have decreased on variable rate loans, which would have been offset with
earnings on the swaps. The Board of Directors has approved a policy regarding
derivative financial instruments, and has included limits on the use of these
instruments tied to the term of the swap and the credit risk of the other
financial institution. Peoples is also a party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of 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 amount
recognized in the consolidated balance sheets. 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 and may require collateral from the borrower if deemed
necessary by Peoples. Standby letters of credit are conditional commitments
issued by Peoples to guarantee the performance of a customer to a third party up
to a stipulated amount and with specified terms and conditions. Commitments to
extend credit and standby letters of credit are not recorded as an asset or
liability by the Company until the instrument is exercised. Peoples' exposure to
market risk is reviewed on a regular basis by the Asset/Liability Committee.
Interest rate risk is the potential of economic losses due to future interest
rate changes. These economic losses can be reflected as a loss of future net
interest income and/or a loss of current fair market values. The objective is to
measure the effect on net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximize income. Management
realizes that certain risks are inherent and the goal is to identify and
minimize the risks. Tools used by management include the standard GAP report and
a recently instituted interest rate shock simulation report. Peoples has no
market risk-sensitive instruments held for trading purposes. It appears that
Peoples' market risk is reasonable at this time. The condensed GAP report
summarizing the Company's interest rate sensitivity is as follows:
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
The following table presents (dollars in thousands) the scheduled maturity of
market risk sensitive instruments at December 31, 1997:
<TABLE>
<CAPTION>
Maturing in:
Fair
1998 1999 2000 2001 2002 2003+ Total Value
- - ---------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Securities........ 48,221 35,398 23,925 13,145 9,271 8,841 138,801 138,801
Rate.................... 6.48% 6.44% 6.52% 6.39% 6.12% 6.16% 6.42%
Variable Securities..... 4,519 3,528 2,478 1,100 725 2,719 15,069 15,069
Rate.................... 6.62% 6.59% 6.65% 6.67% 6.70% 7.76% 6.83%
Fixed Rate Loans........ 43,899 22,232 11,309 5,056 1,472 1,388 85,356 86,518
Rate.................... 8.63% 8.68% 8.83% 8.88% 8.12% 8.13% 8.66%
Fixed Rate Loans........ 90,068 29,361 15,250 10,006 8,054 29,615 182,354 182,480
Rate.................... 9.06% 9.17% 9.17% 9.11% 9.11% 9.14% 9.11%
Adjustable Rate Loans... 43,527 29,214 21,096 14,030 9,743 22,134 139,744 140,456
Rate.................... 8.16% 8.11% 8.02% 7.96% 7.91% 9.59% 8.32%
------- ------- ------ ------ ------- ----- ------- -------
Total................... 230,234 119,733 74,058 43,337 29,265 64,697 561,324 563,324
Rate.................... 8.16% 7.94% 7.85% 7.83% 7.65% 8.81% 8.12%
LIABILITIES
Savings, NOW,
MMKT Deposits......... 215,295 215,295 (215,295)
Rate.................... 3.60% 3.60%
CD's.................... 99,398 78,555 26,859 3,013 2,752 307 210,884 (211,773)
Rate.................... 5.36% 5.99% 6.09% 5.86% 6.09% 7.45% 5.71%
Short-Term Borrowings... 34,380 34,380 (34,380)
Rate.................... 5.44% 5.44%
------- ------- ------ ------ ------- ----- ------- -------
Total................... 349,073 78,555 26,859 3,013 2,752 307 460,559 (461,448)
Rate.................... 4.67% 5.99% 6.09% 5.86% 6.09% 7.45% 4.70%
</TABLE>
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Report of Independent Auditors
Board of Directors and Shareholders
Peoples Bank Corporation of Indianapolis
Indianapolis, Indiana
We have audited the consolidated balance sheets of Peoples Bank Corporation of
Indianapolis as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 Peoples Bank
Corporation of Indianapolis as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
February 12, 1998
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollar amounts in thousands)
Assets 1997 1996
<S> <C> <C>
Cash and cash equivalents $ 25,462 $ 32,252
Available-for-sale securities (Note 2) 153,870 94,589
Loans held for sale, net 561 421
Total loans (Note 3) 406,893 332,953
Allowance for loan losses (Note 4) (5,516) (3,900)
----------- -----------
Loans, net 401,377 329,053
Premises and equipment, net (Note 5) 7,482 7,923
Accrued income and other assets 9,556 7,026
Gold, at fair value 168 214
------------ ------------
$598,476 $471,478
======== ========
Liabilities and Shareholders' Equity
Liabilities
Deposits
Non interest-bearing accounts $ 82,132 $ 83,911
Savings and NOW 215,295 216,146
Time deposits (Note 6) 210,884 111,748
--------- ---------
Total deposits 508,311 411,805
Short-term borrowings (Note 7) 34,380 10,266
Accrued expenses and other liabilities 6,968 4,058
----------- -----------
Total liabilities 549,659 426,129
--------- ---------
Shareholders' equity
Common shares, no par
value:
Authorized:
Voting - 300,000 shares
Non-voting - 4,000,000 shares
Issued:
Voting - 264,456 shares (1997)
and 280,000 shares (1996) 897 950
Non-voting - 2,812,394 shares (1997)
and 2,866,424 shares (1996) 13,085 14,775
Retained earnings 34,220 29,338
Net unrealized gain on available-for-sale securities 615 286
------------ ------------
Total shareholders' equity 48,817 45,349
---------- ----------
$598,476 $471,478
======== ========
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
Interest income
<S> <C> <C> <C>
Loans, including related fees $ 31,664 $ 26,211 $ 22,970
Federal funds sold 730 889 466
Securities
Taxable 5,758 3,372 5,614
Tax exempt 1,577 1,779 1,984
---------- ----------- -----------
Total interest income 39,729 32,251 31,034
Interest expense
Deposits 17,563 13,471 13,170
Short-term borrowings 556 573 1,699
------------ ------------ -----------
Total interest expense 18,119 14,044 14,869
---------- ---------- ----------
Net interest income 21,610 18,207 16,165
Provision for loan losses (Note 4) 1,800 1,125 536
----------- ----------- ------------
Net interest income after provision for loan losses 19,810 17,082 15,629
Non-interest income
Trust fees 1,546 1,342 1,304
Service charges and fees 2,963 2,511 2,048
Mortgage banking revenue 430 713 843
Net gain/loss on securities (Note 2) (50) (63) (112)
Other 1,064 934 785
----------- ------------ ------------
Total non-interest income 5,953 5,437 4,868
Non-interest expense
Salaries and employee benefits (Note 8) 8,994 8,029 8,593
Occupancy (net) 1,546 1,602 1,427
Equipment 1,078 1,010 1,248
FDIC insurance 52 2 386
Advertising 521 374 480
Other 4,278 3,777 3,182
---------- ---------- -----------
Total non-interest expense 16,469 14,794 15,316
--------- --------- ----------
Income before income taxes 9,294 7,725 5,181
Income tax expense (Note 9) 3,016 2,316 1,295
----------- ----------- -----------
Net income $ 6,278 $ 5,409 $ 3,886
========== ========== ============
Per share data (Note 10)
Earnings per share $ 2.02 $ 1.71 $ 1.22
Earnings per share, assuming dilution $ 1.99 $ 1.70 $ 1.22
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Changes
in Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Net Unrealized
Gain/(Loss) on
Common Retained Available-for-
Shares Earnings Sale Securities Total
<S> <C> <C> <C> <C>
Balance January 1, 1995 $ 17,119 $ 22,341 $ (983) $ 38,477
Net income - 3,886 - 3,886
Cash dividends ($.35 per share) - (1,113) - (1,113)
Redemption of 77,248 non-voting
shares (835) - - (835)
Change in net unrealized gain/(loss) - - 1,221 1,221
-------------- -------------- ---------- ----------
Balance December 31, 1995 16,284 25,114 238 41,636
Net income - 5,409 - 5,409
Cash dividends ($.38 per share) - (1,185) - (1,185)
Redemption of 33,560 non-voting (559) - - (559)
shares
Change in net unrealized gain/(loss) - - 48 48
-------------- -------------- ------------ ------------
Balance December 31, 1996 15,725 29,338 286 45,349
Net income - 6,278 - 6,278
Cash dividends ($.45 per share) - (1,396) - (1,396)
Redemption of 15,544 voting and
54,030 non-voting shares (1,743) - - (1,743)
Change in net unrealized gain/(loss) - - 329 329
-------------- -------------- ----------- -----------
Balance December 31, 1997 $ 13,982 $ 34,220 $ 615 $ 48,817
========= ========= =========== =========
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Cash Flows
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 6,278 $ 5,409 $ 3,886
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 1,067 1,032 1,252
Provision for loan losses 1,800 1,125 536
Net loss on securities 50 63 112
Net amortization on securities 104 362 540
Net gain on sale of loans (200) (488) (238)
Net change in loans originated for sale 60 2,624 (1,558)
Deferred tax benefit (832) (399) (346)
Change in assets and liabilities
Interest receivable (617) 383 298
Interest payable 1,134 141 384
Income tax payable 257 38 546
Other liabilities 1,776 321 1,121
Other assets (1,507) (469) (1,138)
----------- ------------ -----------
Net cash from operating activities 9,370 10,142 5,395
Cash flows from investing activities
Proceeds from maturities of held-to-maturity
securities - - 21,013
Proceeds from sales of available-for-sale securities 16,707 8,605 36,104
Proceeds from maturities of available-for-sale
securities 24,066 49,771 16,590
Purchase of available-for-sale securities (99,664) (45,566) (11,085)
Loans made to customers, net of principal
collections thereon (74,124) (62,375) (56,653)
Property and equipment expenditures, net (626) (211) (1,044)
------------ ------------ -----------
Net cash from investing activities (133,641) (49,776) 4,925
Cash flows from financing activities
Net change in deposits 96,506 60,043 5,185
Net change in short-term borrowings 24,114 (9,790) (17,905)
Redemption of common shares (1,743) (559) (835)
Dividends paid (1,396) (1,185) (1,113)
----------- ----------- -----------
Net cash from financing activities 117,481 48,509 (14,668)
---------- ----------- -----------
Net change in cash and cash equivalents (6,790) 8,875 (4,348)
Cash and cash equivalents at beginning of year 32,252 23,377 27,725
----------- ----------- -----------
Cash and cash equivalents at end of year $ 25,462 $ 32,252 $ 23,377
========== ========== ==========
Cash paid during the year for:
Interest $ 16,985 $ 13,903 $ 14,485
Income taxes 3,591 2,870 1,495
</TABLE>
See accompanying notes.
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except per share amounts)
Note 1 - Summary of Significant Accounting Policies
Basis of Reporting
The consolidated financial statements include Peoples Bank Corporation of
Indianapolis ("the Company"), its wholly-owned subsidiary, Peoples Bank & Trust
Company ("Peoples") and Peoples' wholly-owned subsidiaries, Peoples Building
Corporation and Peoples Investment Services, Inc. Intercompany transactions are
eliminated in consolidation.
Description of Business
The Company operates primarily in the banking industry which accounts for more
than 90% of its revenues, operating income and assets. Peoples provides
commercial and retail banking and trust services to its customers from its main
office and branches located in Marion County, Indiana. The majority of Peoples'
income is derived from commercial and retail business lending activities and
investments. The loan portfolio is diversified and the ability of debtors to
repay loans is not dependent upon any single industry. The majority of Peoples'
loans are secured by specific items of collateral including business assets,
real property and consumer assets.
Use of Estimates
Management makes estimates and assumptions in preparing financial statements
that affect the amounts reported therein and the disclosures provided. These
estimates and assumptions may change in the future, and future results could
differ. Significant areas involving the use of management's estimates and
assumptions that are more susceptible to change in the near term include the
allowance for loan losses, the fair values of certain securities, and the
deter-mination and carrying value of impaired loans.
Securities
The Company has designated all of its securities as available-for-sale
securities. Available-for-sale securities are those securities which might be
sold before maturity, and they are carried at fair value with the net unrealized
holding gain or loss reflected, net of tax, as an adjustment to shareholders'
equity.
Securities are written down to fair value when a decline in fair value is not
temporary. Premium amortization is deducted from and discount accretion is added
to interest income using the level yield method. The cost of securities sold is
computed on the identified securities method.
Mortgage Banking Activities
Peoples sells certain fixed rate first mortgage loans on the secondary market.
Loans held for sale are carried at the lower of cost or estimated fair value
determined on an aggregate basis. At December 31, 1997 and 1996, the estimated
fair value of loans held for sale exceeded their cost. Mortgage banking revenue
includes gains/losses realized when such loans are sold and service fee revenue
earned after the sale, offset by the amortization of capitalized loan servicing
rights.
Servicing rights represent the allocated value of servicing rights retained on
loans sold in 1996 and 1997. Servicing rights are expensed in proportion to, and
over the period of, estimated net servicing revenues. Impairment is evaluated
based on the fair value of the rights, using groupings of the underlying loans
as to interest rates and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance.
Interest Income on Loans
Interest income is accrued over the term of the loans based on the principal
outstanding. Loans are placed on nonaccrual status when the collection of
interest becomes doubtful. Loan fees, net of certain direct loan origination
costs, are deferred and recognized as an element of interest income over the
term of the loan using the level yield method.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance, increased by the
provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the allowance balance required based on past loan loss
experience, known and inherent risks in the portfolio, information about
specific borrower situations, and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated collectively for smaller-balance loans of
similar nature such as residential mortgage, consumer and credit card loans, and
on an individual loan basis for other loans. If a loan is impaired, a portion of
the allowance is allocated so that the loan is reported, net, at the present
value of estimated future cash flows using the loan's existing rate. Management
evaluates all loans selected for specific review during their analysis of the
allowance for loan losses for impairment. In general, loans classified as
doubtful or loss are considered impaired, while loans classified as substandard
are individually evaluated for impairment. Depending on the relative size of the
credit relationship, late or insufficient payments of 30 to 90 days will cause
management to reevaluate the credit under its normal evaluation procedures.
The carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows, and increases in the present
value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while increases or decreases due to
changes in estimates of future payments and due to the passage of time are
included in the provision for loan losses expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Premises and equipment are depreciated on the straight-line and
declining-balance methods over the estimated useful lives of the assets.
Maintenance and repairs are expensed and major improvements are capitalized.
Other Real Estate
Other real estate acquired through foreclosure is carried at the lower of cost
(fair value at foreclosure) or fair value less estimated selling costs. Expenses
incurred in carrying other real estate are charged to operations as incurred.
Income Taxes
Income tax expense is the sum of the current year income tax due, plus or minus
the change in deferred taxes. Deferred tax liabilities and assets are the
expected future tax consequences of temporary differences between the carrying
values and tax bases of assets and liabilities computed using enacted rates.
Recognition of deferred tax assets is limited by the establishment of a
valuation reserve unless management concludes that they are more likely than not
going to result in future tax benefits to the Company.
Pension Plan
Peoples maintains a defined benefit pension plan for all qualified employees.
The benefits are based primarily on years of service and employees' pay near
retirement. Peoples' funding policy is to contribute annually the maximum amount
that can be deducted for federal income tax purposes.
Stock Options
No expense for stock options is recorded, as the grant price equals the market
price of the stock at grant date. Pro forma disclosures show the effect on
income and earnings per share had the options' fair value been recorded using an
option pricing model. The pro-forma effect is expected to increase in the
future.
Derivatives
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. The Company enters into interest
rate swap agreements as a means of managing the interest rate exposure on
certain variable rate second mortgage loans. The interest rate swaps are
accounted for under the accrual method. Under this method, the differential to
be paid or received on the swap agreements is recognized over the lives of the
agreements in interest income. Changes in fair value of interest rate swaps
accounted for under the accrual method are not reflected in the accompanying
financial statements. Realized gains and losses on terminated interest rate
swaps are deferred as an adjustment to the carrying amount of the designated
instruments and amortized over the remaining original life of the agreements.
If the designated instruments are disposed of, the fair values of the interest
rate swap or unamortized deferred gains or losses are included in the
determination of such instruments. To qualify for such accounting, the interest
rate swap is designated to the second mortgage loans and alters their interest
rate characteristics.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed separately. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments and other factors, especially
in the absence of broad markets for particular items. Changes in assumptions or
in market conditions could significantly affect the estimates.
<PAGE>
Cash Flow Reporting
Cash and cash equivalents include cash on hand, amounts due from banks, and
daily federal funds sold. The Company reports net cash flows for customer loan
and deposit transactions, interest-bearing balances with banks, and short-term
borrowings with maturities of 90 days or less.
Dividend Restriction
Banking regulations require the maintenance of certain capital levels and may
limit the amount of dividends which may be paid by the bank to the holding
company or by the holding company to shareholders.
Earnings Per Share
Earnings per share is based on weighted average common shares outstanding.
Diluted earnings per share further assumes issue of any dilutive potential
common shares. The accounting standard for computing earnings per share was
revised for 1997, and all earnings per share previously reported are restated to
follow the new standard. Earnings per share are restated for all subsequent
stock dividends and splits.
Future Accounting Changes
New accounting standards have been issued which will require future reporting of
comprehensive income (net income plus unrealized gains and losses on
available-for-sale securities) and may require redetermination of industry
segment financial information.
Note 2 - Securities
The amortized cost and fair value of available-for-sale securities at year-end
are as follows:
<TABLE>
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
Obligations of U.S. Government
<S> <C> <C> <C> <C>
and its agencies $ 20,841 $ 127 $ (20) $ 20,948
Obligations of states and
political subdivisions 27,233 619 (6) 27,846
Mortgage-backed investments 100,640 386 (94) 100,932
Other 4,138 6 - 4,144
----------- -------------- -------------------------
$152,852 $ 1,138 $ (120) $153,870
======== ========== =========== ========
Gross Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
Obligations of U.S. Government
and its agencies $ 15,997 $ 26 $ (3) $ 16,020
Obligations of states and
political subdivisions 32,215 535 (116) 32,634
Mortgage-backed investments 42,321 119 (89) 42,351
Other 3,582 2 - 3,584
----------- -------------- -------------- -----------
$ 94,115 $ 682 $ (208) $ 94,589
======== ========== =========== ========
</TABLE>
The amortized cost and fair value of available-for-sale securities at December
31, 1997 are shown below by contractual maturity. Expected maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less $ 8,585 $ 8,604
Due after one year through five years 27,999 28,513
Due after five years through ten years 12,813 13,006
Due after ten years 2,815 2,815
----------- -----------
Subtotal 52,212 52,938
Mortgage-backed investments 100,640 100,932
--------- ---------
$152,852 $153,870
======== ========
The securities portfolio includes mortgage-backed investments which are
collateralized by residential mortgage loans and are repaid as the underlying
loans are repaid. The majority of the mortgage-backed investments consist of
Collateralized Mortgage Obligations (CMOs) with projected average lives between
one and five years and underlying mortgages which are guaranteed by U.S.
Government agencies or government sponsored entities.
Sales of available-for-sale securities during 1997, 1996 and 1995 resulted in
gross gains of $7, $0 and $130 and gross losses of $52, $63 and $246. During
1997 and 1995, securities were called resulting in net losses of $5 and net
gains of $4, respectively.
Securities with a carrying value of $29,013 and $26,193 at December 31, 1997 and
1996, respectively, were pledged to secure public deposits and repurchase
agreements and for other purposes required or permitted by law.
Note 3 - Loans
Year-end loans, excluding loans held for sale, are comprised of the following:
December 31, 1997 1996
Commercial $185,089 $156,755
Real estate 94,276 75,247
Construction 25,364 23,644
Consumer 100,139 75,187
Tax-exempt 2,025 2,120
----------- -----------
$406,893 $332,953
======== ========
The Bank services mortgage loans sold to the Federal National Mortgage
Association. These loans are not included in the accompanying consolidated
balance sheets. The unpaid principal balance of these loans at December 31, 1997
and 1996 was $101,168 and $104,084.
Activity for loan servicing rights and the related valuation allowance was as
follows:
1997 1996
Balance as of January 1 $ 177 $ -
Additions 104 193
Amortization (28) (16)
Valuation allowance - -
-------------- --------------
Balance as of December 31 $ 253 $ 177
== =========== ===========
Certain of the Company's directors were loan customers of Peoples. A schedule of
the aggregate activity in these loans follows:
1997
Balance as of January 1 $ 1,660
New loans 1,500
Loan reductions (346)
----------
Balance as of December 31 $ 2,814
==========
Note 4 - Allowances for Loan Losses
Activity in the allowance for loan losses is as follows:
Year ended December 31 1997 1996 1995
Beginning balance $ 3,900 $ 3,290 $ 2,704
Provision charged to operations 1,800 1,125 536
Loans charged off (488) (607) (125)
Recoveries 304 92 175
------------ ---------- -------------
Ending balance $ 5,516 $ 3,900 $ 3,290
=========== ========== ===========
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Average investment in impaired loans during the year $ 4,253 $ 1,068 $ 1,394
=========== =========== ===========
Interest income recognized on impaired loans including
interest income recognized on cash basis of $329,
$173 and $84 $ 329 $ 173 $ 84
=========== =========== ===========
Balance of impaired loans at year end $ 5,241 $ 743 $ 1,343
Less portion for which no allowance for loan
losses is allocated 613 159 233
------------- ------------- -------------
Portion for which an allowance for loan losses is allocated $ 4,628 $ 584 $ 1,110
=========== =========== ===========
Portion of allowance for loan losses allocated $ 1,145 $ 155 $ 306
=========== =========== ===========
</TABLE>
<PAGE>
Note 5 - Premises and Equipment
Year-end premises and equipment are as follows:
December 31, 1997 1996
Land $ 1,103 $ 1,103
Buildings and improvements 11,109 10,991
Furniture and equipment 7,788 7,410
----------- ----------
Total 20,000 19,504
Accumulated depreciation (12,518) (11,581)
--------- ---------
Net premises and equipment $ 7,482 $ 7,923
========== ==========
Note 6 - Interest-Bearing Deposits
Time deposits issued in denominations of $100 or greater totaled $69,473 and
$13,606 at December 31, 1997 and 1996. Interest expense in 1997, 1996 and 1995
for such deposits totaled $2,840, $965 and $2,243, respectively.
At December 31, 1997, stated maturities of time deposits were:
Year Amount
1998 $ 99,986
1999 77,965
2000 26,860
2001 3,013
2002 2,753
Thereafter 307
--------
$210,884
========
Note 7 - Short-Term Borrowing
Short-term borrowings are comprised of retail repurchase agreements and
short-term Federal Home Loan Bank (FHLB) advances. Repurchase agreements,
essentially, represent borrowings by Peoples from its customers and are
accounted for as such. Peoples pledges certain of its securities as collateral
for those borrowings but maintains control over all such securities. Repurchase
agreements outstanding as of December 31, 1997 had maturities ranging from one
day to two months. FHLB advances are secured by a blanket pledge of the Bank's
assets and mature during January 1998.
1997 1996
Balance of repurchase agreements at year-end $ 12,180 $ 10,266
Average balance during the year 11,064 11,964
Weighted average interest rate during the year 4.32% 4.69%
Maximum month-end balance during the year $ 12,180 $ 14,052
Balance of FHLB borrowings at year end 22,200 -
Weighted average interest rate 6.17% -
<PAGE>
Note 8 - Retirement Plans
Peoples has a defined benefit pension plan which covers a majority of its
employees.
The following sets forth the Plan's funded status and the amount recognized in
the balance sheet at year-end.
<TABLE>
<CAPTION>
December 31, 1997 1996
<S> <C> <C>
Accumulated benefit obligation (including
vested benefits of $3,419 and $3,051) $ 3,621 $ 3,272
========== ==========
Plan assets at fair value (primarily listed stocks) $ 5,623 $ 5,110
Projected benefit obligation for service
rendered to date (4,940) (4,521)
Unrecognized gain (712) (422)
Unrecognized transition asset, amortized over 18 years (396) (463)
------------ -----------
Accrued pension cost $ (425) $ (296)
========== ==========
</TABLE>
Net pension expense for the year included the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost for the year $ 306 $ 344 $ 293
Interest cost on projected benefit obligation 314 327 294
Actual return on plan assets (999) (731) (922)
Net amortization and deferral 508 270 535
------------ ------------ ------------
$ 129 $ 210 $ 200
=========== =========== ===========
</TABLE>
Significant assumptions made in computing pension liability and expense were as
follows:
1997 1996 1995
Weighted average discount rate 6.50% 7.00% 6.50%
Increase in future compensation 5.00 5.50 5.50
Long-term rate of return 8.50 8.50 8.50
Peoples also maintains a voluntary 401(k) plan in which substantially all
employees may participate. Peoples matches employees' contributions at up to 50
percent (25% in 1996) of each participant's contributions subject to certain
limits. Expense for the plan was $108, $46 and $45 for 1997, 1996 and 1995.
Note 9 - Income Tax Expense
Income tax expense consists of the following components:
1997 1996 1995
Income tax/(benefit)
Current $ 3,848 $ 2,715 $ 1,641
Deferred (832) (399) (346)
------------ ------------ -----------
Total $ 3,016 $ 2,316 $ 1,295
========== ========== ==========
<PAGE>
The following is a reconciliation of income tax expense and the amount computed
by applying the effective federal income tax rate of 34% to income before income
taxes:
<TABLE>
<CAPTION>
1997 1996 1995
Statutory rate applied to income before
<S> <C> <C> <C>
income taxes $ 3,160 $ 2,625 $ 1,762
Add/(deduct)
Tax exempt interest income (579) (646) (729)
Non-deductible interest 64 68 77
State tax expense (net of federal tax benefit) 545 450 306
Affordable housing credit (155) (190) (140)
Other (19) 9 19
----------- -------------- -------------
Total income taxes $ 3,016 $ 2,316 $ 1,295
========== ========== ==========
</TABLE>
The net deferred tax asset at year-end is comprised of the following components:
<TABLE>
<CAPTION>
1997 1996
Deferred tax assets from:
<S> <C> <C>
Loan loss provisions $ 1,925 $ 1,209
Deferred compensation 446 369
Pension 164 113
Other 7 10
-------------- -------------
2,542 1,701
Deferred tax liabilities for:
Depreciation (2) (67)
Accretion (11) (10)
Net unrealized gain on available-for-sale securities (403) (188)
Mortgage servicing rights (100) (71)
Other (63) (19)
------------- ------------
(579) (355)
------------ -----------
Valuation allowance - -
$ 1,963 $ 1,346
========== ==========
</TABLE>
Note 10 - Earnings Per Share
The following table presents share data used to compute earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Weighted average shares outstanding during the year 3,112,319 3,168,260 3,190,644
Dilutive effect of potential shares 40,732 9,942 -
----------- ------------ ---------------
Shares used to compute diluted earnings per share 3,153,051 3,178,202 3,190,644
========= ========= =========
</TABLE>
<PAGE>
Note 11 - Commitments and Contingencies
Peoples is committed under various non-cancelable lease contracts for certain
facilities which expire at various dates through the year 2005. Most of the
leases contain renewal provisions at Peoples' option and contain no restrictive
provisions of consequence.
Expense for leased premises was $387, $489 and $488 for 1997, 1996 and 1995.
Minimum lease payments at December 31, 1997 for all non-cancelable leases are as
follows:
Year Amount
1998 $ 390
1999 360
2000 204
2001 97
2002 87
Thereafter 214
----------
Total minimum lease payments $ 1,352
==========
In the ordinary course of business, Peoples has loans, commitments and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the accompanying consolidated balance sheets.
Peoples' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to make loans, standby letters
of credit, and financial guarantees is represented by the contractual amount of
those instruments. Peoples uses the same credit policy to make such commitments
as it used for on-balance-sheet items. At year-end, these financial instruments
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
Financial instruments whose contract amount
represents credit risk:
<S> <C> <C>
Unused commercial lines of credit $ 39,431 $ 41,460
Unused home equity lines of credit 59,020 50,147
Standby letters of credit 4,518 2,686
Commitments to make loans 11,800 12,253
</TABLE>
The unused home equity and commercial lines of credit are predominantly variable
rate agreements. Loan commitments are agreements to lend to a customer, provided
they accept the terms and conditions offered by Peoples. These commitments are
generally extended for terms of up to 60 days and, in many cases, allow the
customer to select from one of several financing options offered. At December
31, 1997, these commitments included $10,406 of fixed rate loan commitments at a
weighted average rate of 8.25%. Since many commitments to make loans expire
without being used, the amount does not necessarily represent future cash
commitments. Collateral obtained upon exercise of the commitment is determined
using management's credit evaluation of the borrower, and may include accounts
receivable, inventory, property, land and other items.
During 1997, the Company entered into interest rate swap agreements with a
notional principal balance of $20,000. The agreements require the Company to
make variable rate payments, based on the prime rate, and entitle it to receive
fixed rate payments, and serve to manage the Company's interest rate exposure on
variable rate second mortgage loans tied to the prime rate. The agreements are
for two to three years. At December 31, 1997, the rate payable under the
agreements was 8.50% and the weighted average fixed rate being received was
8.67%. The Company is exposed to credit loss in the event that the counterparty
does not perform under the agreement in an amount equal to the interest rate
differential when the fixed rate exceeds the variable rate.
<PAGE>
At December 31, 1997, Peoples was required to have $5,563 on deposit with the
Federal Reserve or as cash on hand as reserve.
During 1997, the Company entered into an employment contract with its Chief
Executive Officer. The agreement has an initial term of three years and an
additional year is added at each anniversary date, subject to certain
conditions. The contract provides for severance payments and other benefits, the
amount of which depend upon the nature of the separation. No amount is accrued
at December 31, 1997 under this agreement.
The Company is also subject to claims and lawsuits which arise primarily in the
ordinary course of business. It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not have a
material adverse effect on the financial position of the Company.
Note 12 - Stock Based Compensation Plans
The Company has granted stock options to directors and key members of
management. A total of 220,000 shares was made available for grant at a price
equal to the market price of the stock at the date of grant. The specific terms
of each agreement are determined by the Compensation Committee at the date of
the grant. Generally, options granted have a ten-year term and vest and become
exercisable based either on the passage of time or the achievement of specified
performance targets.
A summary of the Company's stock option activity, and related per share
information follows: (restated for stock splits)
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Fair Value
1996 Options Price of Grants
<S> <C> <C> <C>
Outstanding beginning of year -
Granted 112,020 $ 13.28 $ 4.14
Exercised -
Forfeited
-------
Outstanding at end of year 112,020
1997
Granted 78,226 22.98 9.02
Exercised -
-------
Forfeited -
Outstanding at end of year 190,246
=======
</TABLE>
Information about the Company's stock options at year-end is as follows:
December 31, 1997 1996
Options exercisable 85,028 45,592
Weighted average price of options exercisable $ 15.30 $ 12.76
Weighted average remaining life (years) of
options outstanding 8.5 9.0
Range of exercise price (per share) of options outstanding:
High $ 26.06 $ 15.13
Low 12.44 12.44
During 1997, the Company entered into a cash award agreement with its Chief
Operating Officer. The amount payable under the agreement is based upon the
value of the Company's stock at the time of payment and the award vests and
becomes payable only after the achievement of specified performance targets. The
term of the award is ten years and the timing of the payment is at the
executive's discretion. The Company accrues its current obligation under the
plan. During 1997, the Company accrued and expensed $161 related to this award.
<PAGE>
The fair value of options granted is estimated based upon assumptions about a
stock's dividend yield, the expected time until exercise, the volatility of a
company's stock price and the risk-free interest rate. Fair values are
determined at the date of grant and estimates are not subsequently changed. The
fair value estimates used the following weighted-average assumptions:
1997 1996
Risk free interest rate 7.03% 6.74%
Dividend yield 1.82% 2.62%
Expected volatility of stock price .21 .22
Expected life (years) 10.0 9.7
The following pro forma information presents net income and earnings per share
had the fair value method been used to measure compensation cost for stock
option plans.
1997 1996
Net income as reported $ 6,278 $ 5,409
Pro forma net income 6,055 5,157
Diluted earnings per share as reported 1.99 1.70
Pro forma diluted earnings per share 1.93 1.63
Note 13 - Capital Requirements
The Company and Peoples are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. These guidelines and the regulatory
framework for prompt corrective action involve quantitative measures of capital,
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices, as well as qualitative judgments by the
regulators about components, risk weightings and other factors.
Compliance with these regulations can limit dividends paid by either entity.
Both entities must comply with regulations that establish minimum levels of
capital adequacy. Peoples must also comply with capital requirements promulgated
by the FDIC under its "prompt corrective action" rules. Peoples' deposit
insurance assessment rate is based, in part, on these requirements. At December
31, 1997 and 1996, Peoples' capital level results in it being designated as
"well capitalized."
<PAGE>
The Company's consolidated and Peoples' (bank only) capital amounts and ratios
at December 31, 1997 are presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital
(to Risk Weighted Assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 53,553 12.49% $ 34,295 8% $ 42,869 10%
Peoples 47,823 11.21 34,122 8 42,653 10
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 48,192 11.24 $ 17,148 4 $ 25,721 6
Peoples 42,489 9.96 17,069 4 25,603 6
Tier 1 Capital
(to Average Assets)
Consolidated $ 48,192 8.26 $ 23,351 4 $ 29,189 5
Peoples 42,489 7.33 23,186 4 28,982 5
</TABLE>
Note 14 - Disclosures About Fair Value of Financial Instruments
The following table presents the carrying value and the fair value of the
Company's financial instruments at year-end. Items which are not financial
instruments are not included.
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets
<S> <C> <C> <C> <C>
Cash and equivalents $ 25,462 $ 25,462 $ 32,252 $ 32,252
Available-for-sale securities 153,870 153,870 94,589 94,589
Loans and loans held for sale (net) 401,938 403,938 329,474 331,878
Financial liabilities
Deposits (508,311) (509,200) (411,805) (411,679)
Short-term borrowings (34,380) (34,380) (10,266) (10,266)
Off-balance-sheet instruments
Interest rate swaps 0 44 0 0
</TABLE>
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair value for loans is based on the rates charged at year end for new loans
with similar maturities, applied until the loan is assumed to reprice or be
paid. Estimated fair value for time deposits is based on the rates paid at
year-end for new deposits or borrowings, applied until maturity. Estimated fair
value of the interest rate swaps is based on the amount the Company would have
to pay to enter into an equivalent agreement at year-end. Estimated fair value
for other off-balance-sheet loan commitments is considered nominal.
<PAGE>
Note 15 - Parent Company Financial Statements
Presented below are condensed balance sheets and the related condensed
statements of income and cash flows for the parent company:
Consolidated Balance Sheets - December 31, 1997 1996
Assets
Cash on deposit $ 2,604 $ 3,285
Investment in Peoples 43,099 38,084
Available-for-sale securities 2,884 3,994
Other assets 1,037 530
---------- ----------
Total assets $ 49,624 $ 45,893
========= =========
Liabilities $ 807 $ 544
Shareholders' equity 48,817 45,349
---------- ----------
Total liabilities and shareholders' equity $ 49,624 $ 45,893
========= =========
<TABLE>
<CAPTION>
Condensed Statements of Income -
Years ended December 31, 1997 1996 1995
Operating income
<S> <C> <C> <C>
Dividends from Peoples $ 1,395 $ 1,186 $ 1,130
Other operating income 263 292 290
------------ ------------ ------------
Total operating income 1,658 1,478 1,420
Operating expenses 41 59 43
------------- ------------- -------------
Income before income tax benefit and equity
in undistributed income of Peoples 1,617 1,419 1,377
Income tax expense 38 20 1
------------- ------------- --------------
Income before equity in undistributed
income of Peoples 1,579 1,399 1,376
Equity in undistributed income of Peoples 4,699 4,010 2,510
----------- ----------- -----------
Net income $ 6,278 $ 5,409 $ 3,886
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows -
Years ended December 31, 1997 1996 1995
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 6,278 $ 5,409 $ 3,886
Adjustments to reconcile net income to net
cash from operating activities:
Equity in undistributed income of Peoples (4,699) (4,010) (2,510)
Net loss on securities - - 8
Net amortization on securities 57 83 121
Change in other assets (507) (13) (45)
Change in other liabilities 254 236 31
------------ ------------ -------------
Net cash from operating activities 1,383 1,705 1,491
Cash flows from investing activities
Sales and maturities of available-for-sale
securities 1,075 2,750 2,145
Investment in Peoples - - (1,000)
-------------- -------------- -----------
Net cash from investing activities 1,075 2,750 1,145
Cash flows from financing activities
Dividends paid (1,396) (1,185) (1,113)
Redemption of shares (1,743) (559) (835)
----------- ------------ ------------
Net cash from financing activities (3,139) (1,744) (1,948)
----------- ----------- -----------
Net change in cash (681) 2,711 688
Cash at beginning of year 3,285 574 (114)
----------- ------------ ------------
Cash at end of year $ 2,604 $ 3,285 $ 574
========== ========== ===========
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company, their respective ages at
March 1, 1997 and their respective positions with the Company and Peoples are
listed below:
Name Age Position
William E. "Mac" McWhirter 47 Director, Chairman of the Board
and Chief Executive
Officer of the Company and Peoples
Gerald R. Francis 54 Director, President and Chief
Operating Officer of the
Company and Peoples
Charles R. Farber 48 Director, Executive Vice President of
the Company and Peoples
Elbert L. Bradshaw 70 Director, Retiring in 1998
Robert B. Hirschman, D.D.S. 63 Director
Ethan Jackson Director Nominee
David W. Knall 53 Director
Mary Ellen Rodgers 45 Director
Henry C. Ryder 70 Director, Retiring in 1998
Stephen R. West 66 Director
Darrell E. Zink, Jr. 51 Director Nominee
William L. Butcher 33 Senior Vice President,
Retail Banking for Peoples
Stephen J. Beck 53 Senior Vice President,
Senior Commercial Lender of Peoples
Robert R. Connors 48 Senior Vice President,
Director of Operations and Cashier
of Peoples
Thomas J. Flynn 51 Senior Vice President, Senior Commercial
Real Estate Lender for Peoples
Charles R. Hageboeck 35 Senior Vice President and CFO of the
Company and Peoples
Elliott R. Lese 64 Senior Vice President, Director of Loan
Administration of Peoples
Craig G. Stilwell 42 Senior Vice President, Director of Sales
& Marketing of Peoples
Terry L. Young 51 Senior Vice President, Senior Trust
Officer of Peoples
Mr. Mac McWhirter became Chairman of the Board of the Company and Peoples in
April 1997. He has been Chief Executive Officer of the Company since its
formation in 1986. He has served Peoples in various capacities since 1969,
including the position of President from 1985 to 1997. Mr. McWhirter is also
Chairman of Peoples Building Corporation and Peoples Investment Services, Inc.
In addition to serving on the Board of Directors of Peoples and the Company, Mr.
McWhirter serves on all committees of the Board, except the Board Related
Affairs Committee and the Audit Committee, described below. He is Chairman of
the Investment Committee. Mr. McWhirter serves as a director of the United Way
of Central Indiana, the Salvation Army, St. Vincent Hospital Foundation,
Crossroads Rehabilitation Center, the Kiwanis Club of Indianapolis Foundation
and the Greater Indianapolis Progress Committee. Mr. McWhirter is Past President
of the Kiwanis Club of Indianapolis, Past Treasurer of the United Way of Central
Indiana and Past Director and Treasurer of the Community Bankers Association of
Indiana. Mr. McWhirter is currently a member of the Indiana Bankers Association
Government Relations Committee and the Young Presidents Organization.
Mr. Francis was elected President of the Company and Peoples in April 1997. He
joined the Company in February of 1996 as an Executive Vice-President. He also
serves as the Chief Operating Officer for the Company and Peoples. Prior to
joining the Company, Mr. Francis was employed by Bank One, Cincinnati N.A.,
where he was the Chairman of the Board and Chief Executive Officer between 1992
and 1995. Between 1989 and 1992, Mr. Francis served as Regional President for
Bank One Ohio Corporation. Between 1982 and 1989, Mr. Francis was President of
Metropolitan Bank in Lima, Ohio. Before joining Metropolitan Bank, Mr. Francis
was Senior Vice President and Senior Loan Officer with the First National Bank
of Dayton, Ohio, having joined the bank in 1971.
Mr. Farber joined Peoples in 1972. He is Executive Vice President in charge of
the Commercial Services of the Company. He is a member of the Board of Directors
and serves on the Loan Committee and the Asset/Liability Management Committee.
Mr. Bradshaw, now semi-retired, owns and operates E. Bradshaw Enterprises, Inc.,
a consulting firm serving primarily small businesses. He has been a member of
the Board of Directors since 1967. Mr. Bradshaw will retire from the Board
effective April 16, 1998.
Dr. Hirschman has served on the Board of Directors since 1967. In 1991, he
retired from a thirty-year practice as an orthodontist in the Indianapolis area.
Mr. Jackson will be nominated for election to the Board of Directors of Peoples
Bank Corporation at the April 16, 1998 Shareholders Meeting. Mr. Jackson is
Chairman and CEO of Basic American Financial, Inc. He is the founder and
Chairman of Indiana Sports Outreach, Inc., and Chairman of the Ethan and Joyce
Jackson Foundation. He is a member of the International Public Affairs Center in
Brussels, Belgium. He serves on the Board of Directors for Unisurge Holdings,
Inc. of Atlanta, Georgia; Tier 4 Partners of Bloomington, Indiana; and Master
Golf, Inc. of Scottsdale, Arizona.
Mr. Knall is Senior Managing Director of McDonald & Company Securities, Inc.
("McDonald"), a leading regional investment banking brokerage and investment
advisory company. He joined McDonald in 1969; in 1975 was elected a General
Partner; and in 1983, upon that firm's initial public offering, became a
Managing Director and was appointed to the Board of Directors. Prior to joining
McDonald, Mr. Knall was a First Lieutenant in the United States Army. He is a
member of the Indianapolis Society of Securities Analysts and serves as a
director of Indianapolis Zoological Foundation, T.M. Englehart, Regenstrief
Institute, Goodwill Industries Foundation and the Indianapolis Public Library
Foundation. He is also a trustee of the Indianapolis Museum of Art, Wabash
College, the Christian Theological Seminary and is a member of the Board of
Arbitrators of the National Association of Securities Dealers (NASD). Mr. Knall
joined People's Board of Directors in 1991.
Ms. Rodgers has served as Senior Vice President, Chief Financial Officer and
Secretary of American Home Patient, a diversified home health care company based
in Brentwood, Tennessee, since April, 1996. From 1981 through 1995 Ms. Rodgers
was employed with Eli Lilly in various financial capacities. She had been
Controller of Lilly Research Laboratories, Assistant Treasurer of Eli Lilly and
Company, and Treasurer of Lilly International Corporation and was Controllor for
the Information Technology Division just prior to departure from Lilly. She
joined the Board of Directors in 1991 and currently chairs the Asset/Liability
Management Committee and the Investment Policy Committee of Peoples.
Mr. Ryder joined the Board of Directors in 1986 and currently chairs the Pension
and Retirement Committee. He founded the firm of Roberts & Ryder in 1960, and
came to the law firm of Barnes & Thornburg as a partner in 1987 as a result of
the merger of the two firms. Since January 1, 1996, Mr. Ryder has been of
counsel at Barnes & Thornburg. Mr. Ryder is involved in numerous professional,
civic, philanthropic, and social organizations throughout Indiana. Mr. Ryder
will retire from the Board effective April 16, 1998.
Mr. West has been on the Board of Directors since 1984 and currently chairs the
Corporation's Audit Committee. During the past ten years, he has served as the
President and Treasurer of West Baking, Inc., Indianapolis, Indiana. From 1957
to 1987, he was an officer of West Baking Company, Inc., and served as vice
president and treasurer from 1960 until its sale in 1987. He continued with this
company's subsidiary, Dunes Transport, Inc., as vice president and treasurer
until its liquidation in 1990. In addition, from 1972 to 1995, he was a six-term
elected member of the Indianapolis City-County Council. Since 1996, Mr. West has
served as trustee of Indiana Health and Hospital Corporation of Marion County.
Mr. Zink will be nominated for election to the Board of Directors of Peoples
Bank Corporation at the April 16, 1998 Shareholders Meeting. Mr. Zink is
currently Executive Vice-President and Chief Financial Officer of Duke Realty
Investments, Inc. where he is also a Director. In addition, Mr. Zink is a
director of the Indianapolis Chamber of Commerce and the Corporate Community
Council, and the CICOA Operating Board. He is Chairman of the Pleasant Run
Foundation, the CICOA Foundation, and the Park Tudor Endowment. In addition, he
is past President of the Park Tudor School Board of Trust. Mr. Zink holds an MBA
from the University of Hawaii and a J.D. from Indiana University.
Mr. Beck joined Peoples Bank Corporation in September 1997 as Senior Vice
President of Commercial Lending. Prior to joining Peoples, Mr. Beck served as
Senior Vice President-Marketing for First of America Bank from April 1996 to
September 1997, and as Senior Vice President-Commercial Banking for Huntington
Bank from April 1986 to April 1996. He is a founder of the Indiana Statewide
Certified Development Corp., where he is currently on the Board of Directors. He
is also a founder and member of the Board of the Venture Club of Indiana, Inc.
Mr. Beck is a member of the Board of Directors for the Indiana State Chamber of
Commerce - Small Business Board of Directors and a Board Member and Chairman of
the U.S. Small Business Administration - Indiana Advisory Council.
Mr. Butcher joined Peoples Bank Corporation in February 1998 as Senior
Vice-President of Retail Banking. Prior to joining Peoples, Mr. Butcher served
as a Vice-President of Retail Banking with Bank One of Cincinnati from November
1988 until January 1998. He holds an M.B.A. from Indiana University. He serves
Peoples Bank Corporation as a member of the Asset/Liability Management Committee
and the Product Pricing Committee.
Mr. Connors has served as Senior Vice President and Director of Operations since
he came to Peoples in 1984. He has 27 years of banking experience which includes
13 years with the Federal Reserve. His last position with the Federal Reserve
was that of Regional Manager for the Indianapolis office. Mr. Connors is
Chairman of the Research and Development Committee and the Technology
Maximization Group. Mr. Connors is currently on the Strategic Direction
Committee of the Comprehensive Banking System Users Group, a computer software
users group which consists of over 100 financial institutions around the
country.
Mr. Flynn joined Peoples Bank Corporation in September 1997 as Senior Vice
President of Commercial Real Estate Lending. Prior to joining Peoples, Mr. Flynn
was Senior Vice-President and Manager of the Commercial Real Estate Division for
Bank One Cincinnati from September 1991 until August 1997. He is a member of the
advisory Board, College of Real Estate, University of Cincinnati.
Mr. Hageboeck joined the Company in August of 1995 as Chief Financial Officer
and Director of Finance. He also serves as Secretary to the Board of Directors
for the Company and Peoples. Mr. Hageboeck was employed by NBD Bank, N.A. in
Indiana from 1989 to 1995, and for a portion of his tenure at NBD, he served as
the Chairman of the Asset/Liability Committee as well as manager of that bank's
funding and ALCO departments. Mr. Hageboeck also serves the Company on the
Asset/Liability Management Committee, Investment Committee, Product and Pricing
Committee, Audit Committee, and the Board of Directors of Peoples Building
Corporation and Peoples Investment Services, Inc. Mr. Hageboeck holds a Ph.D. in
Economics from Indiana University.
Mr. Lese came to Peoples from Marquette National Bank in Chicago, Illinois,
where he served as a Senior Vice President from 1985 to 1989. Since December,
1989, Mr. Lese has served as Senior Vice President in charge of Loan
Administration for Peoples. Mr. Lese has over 30 years of banking experience
including the areas of loan administration, executive management, finance,
operations and planning. Mr. Lese serves on the Loan Committee, the Asset and
Liability Management Committee, and the ORE Committee. Mr. Lese has served as
the Vice President of the Notre Dame Club of Indianapolis and is a member of the
Indiana CPA Society and the Rotary Club of Indianapolis.
Mr. Stilwell has been Senior Vice President, Director of Marketing for Peoples
since 1988. He first came to Peoples in September, 1978. During his 19 years
with Peoples, Mr. Stilwell has been the Assistant Cashier, a branch manager and
the Director of Marketing, a position he has held since 1984. Mr. Stilwell
currently serves as Chairman of the Product and Pricing Committee and the CRA
Committee and as Secretary of the Compliance Council. He also serves as a member
of the Asset/Liability Management Committee and as a director and secretary of
Peoples Investment Services, Inc. Mr. Stilwell is a member of the Indiana
Chapter of the Bank Marketing Association and is a board member of the Community
Bankers Association Insurance Agency and the Indiana Chapter for Drug Free
Youth.
Mr. Young joined Peoples in 1980 and has had more than 20 years of banking
experience, primarily in the areas of lending and trust. He currently serves on
the Trust Policy Committee. Mr. Young is the past Chairman of the Indiana
Bankers Association Trust Committee and Past President of the Central Indiana
Corporate Fiduciaries Association.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires the Company's directors and executive officers and beneficial
owners of more than 10% of the Company's equity securities to file with the SEC
certain reports regarding the ownership of the Company's securities or any
changes in such ownership. Officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it, and/or
written representations from certain reporting persons that no Forms 5 were
required for such persons, the Company believes that, during the fiscal year
ended December 31, 1997, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners with respect to Section 16(a)
of the 1934 Act were complied with.
Item 11. Executive Compensation.
The following table sets forth, for the years ended December 31, 1997, 1996, and
1995, information with respect to William E. ("Mac") McWhirter, the Chief
Executive Officer, Gerald R. Francis, the President, and Charles R. Farber,
Elliot R. Lese, and Terry L. Young, who were the five highest paid executive
officers of the Company whose aggregate compensation and bonus from Peoples
exceeded $100,000:
<TABLE>
<CAPTION>
Annual Compensation
Name and Long-Term
Principal Position Compensation
Securities Underlying All Other
Year Salary(1) Bonus(2) Options/SARs (#) Compensation(5)
<S> <C> <C> <C> <C> <C>
Mac McWhirter....................... 1997 $212,519 $74,632 0 $3,499
President and....................... 1996 186,673 17,425 32,260(3) 500
Chief Executive Officer............. 1995 178,680 5,425 --- 500
Gerald R. Francis................... 1997 $167,363 $39,776 66,000/66,000(6) $1,260
President........................... 1996 101,077 13,856 20,000(4) 3,700
1995 N/A N/A N/A N/A
Charles R. Farber................... 1997 $125,143 $40,824 0 $1,752
Executive Vice President............ 1996 113,779 13,729 20,000(4) 500
1995 112,680 3,379 --- 500
Elliot R. Lese...................... 1997 $90,335 $21,247 632(7) $2,088
Senior Vice President............... 1996 83,807 10,000 7,380(8) 500
1995 80,000 8,300 500
Terry L. Young...................... 1997 $88,907 $20,583 624(7) $1,991
Senior Vice President............... 1996 83,763 11,343 7,280(8) 500
1995 79,000 8,300 500
</TABLE>
(1) Salary figures shown above include directors' fees of $4,000 for each of
Mr. McWhirter, Mr. Farber, and Mr. Francis, and amounts deferred at the
election of the respective officers pursuant to Peoples' Deferred
Compensation Plan, more fully described below, for the year in which
earned. For fiscal year 1997, Mr. McWhirter deferred neither directors fees
nor regular salary, Mr. Francis deferred neither directors fees nor regular
salary, Mr. Farber deferred none of his directors fees and $7,000 of his
regular salary, Mr. Young deferred $1,000 of his salary, and Mr. Lese
$15,000 of his salary.
(2) Bonuses are based on discretionary guidelines established by the Board
Related Affairs Committee and are contingent upon, among other things,
individual performance reviews and the attainment of strategic financial
goals. The bonus figures shown were awarded in the fiscal year shown for
performance in the prior fiscal year pursuant to the Board and Senior
Management Profit Sharing Plan.
(3) Mr. McWhirter's incentive stock option for 7,308 shares and his
non-qualified stock option for 24,952 shares were granted in March 1996 and
became exercisable in September 1996.
(4) Mr. Farber and Mr. Francis were granted stock options for an aggregate of
20,000 shares each in January 1996, which options become exercisable in
three installments. The first installment for 6,666 shares became
exercisable on December 1, 1996, the second installment for 6,666 shares
became exercisable on December 1, 1997, and the third installment for 6,668
shares became exercisable on January 1, 1998.
(5) 401(k) matching contributions for Messrs. McWhirter, Farber, Francis, Lese,
and Young.
(6) In April, 1997, Mr. Francis was granted stock options for 66,000 shares
vesting in three installments. The first installment for 20,000 shares
became exercisable in October 1997 upon the attainment of a $30 share price
for 20 consecutive days. The second installment for 22,000 shares became
exercisable in January 1998 upon the attainment of a $35 share price for 20
consecutive days. The third installment for 24,000 shares will become
exercisable only upon the attainment of a $40 share price for 20
consecutive days. As of March 9, 1998 the third installment has not become
exercisable. In 1997, the Company granted to Mr. Francis a free-standing
stock appreciation award, the value of which is based on 60% of the value
of the difference between the fair market value of the shares subject to
the award at the time of exercise and a base price of $22.63 per share. The
stock appreciation award is granted in three separate installments which
vest and become exercisable upon the achievement of certain stock price
appreciation levels that correspond to the exercisability triggers for Mr.
Francis' non-qualified stock option installments awarded in April, 1997.
The term of the award is 10 years. The first installment became exercisable
in October, 1997 upon the attainment of a $30 per share price for 20
consecutive days.
(7) The incentive stock options held by Mr. Lese and Mr. Young for 632 shares
and 624 shares, respectively, were granted in March 1997 and become
exercisable in two equal installments. The first installment is exercisable
on June 11, 2000 and the second installment is exercisable on June 11,
2002.
(8) The incentive stock options held by Mr. Lese and Mr. Young for 7,380 shares
and 7,280 shares, respectively, were granted in June 1996 and become
exercisable in three equal installments. The first installment is
exercisable on June 11, 1998, the second installment is exercisable on June
11, 2000, and the last installment is exercisable on June 11, 2002.
Stock Option/SAR Grants in Fiscal Year Ended December 31, 1997
<TABLE>
<CAPTION>
Individual Grants
% of Total
Securities Underlying Options/SAR Granted Exercise or Value Using
Options/SAR to Employees in Base Price Expiration Option Pricing
Name Granted (#) Fiscal Year 1996 ($/Sh) Date Model (4)
---- ----------- ---------------- ------ ---- ---------
<S> <C> <C> <C> <C> <C>
Gerald R. Francis (1) 66,000(1) 84.92% $22.63 04/17/07 $584,364
Gerald R. Francis (2) 66,000(2) 100.00%(2) 22.63(2) 04/17/07(2) $350,618(2)
Terry L. Young 624(3) 0.80% 21.75 03/20/07 $5,313
Elliot R. Lese 632(3) 0.81% 21.75 03/20/07 $5,381
</TABLE>
(1) In April, 1997 Mr. Francis was granted stock options for 66,000 shares
vesting in three installments. The first installment became exercisable in
October 1997 upon the attainment of a $30 share price for 20 consecutive
days. The second installment became exercisable in January 1998 upon the
attainment of a $35 share price for 20 consecutive days. The third
installment will become exercisable only upon the attainment of a $40 share
price for 20 consecutive days. As of March 9, 1998 the third installment
has not become exercisable.
(2) In 1997, the Company granted to Mr. Francis a free-standing stock
appreciation award, the value of which is based on 60% of the value of the
difference between the fair market value of the shares subject to the award
at the time of exercise and a base price of $22.63 per share. The stock
appreciation award is granted in three separate installments which vest and
become exercisable upon the achievement of certain stock price appreciation
levels that correspond to the exercisability triggers for Mr. Francis'
non-qualified stock option installments awarded in April, 1997. The term of
the award is 10 years. The first installment became exercisable in October,
1997 upon the attainment of a $30 per share price for 20 consecutive days.
(3) The incentive stock options held by Mr. Lese and Mr. Young for 632 shares
and 624 shares, respectively, were granted in March 1997 and become
exercisable in two equal installments. The first installment is exercisable
on June 11, 2000 and the second installment is exercisable on June 11,
2002.
(4) Options and the SAR award are valued at the date of grant using a standard
option pricing model. The value of the options and the SAR award represent
the value on the date of grant based on the underlying stock price, its
expected volatility, the length of the options or the award, the dividend
rate, and the risk-free rate of return at the time of the grant. The value
of the options and the SAR were computed using volatility of .21225, a
dividend yield of 1.84%, a term of ten years, and a risk-free rate of
return of 7.09%.
The following table sets forth certain information regarding the total number of
stock options held by each of the Named Executive Officers, and the aggregate
value of such stock options, as of December 31, 1997. None of such stock options
had been exercised as of such date.
Aggregated Option/SAR Exercises in Fiscal Year Ended December 31, 1997
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Value of In-the-Money
Acquired on Value Realized Unexercised Options at Unexercised Options at
Name Exercise (#) ($) Fiscal Year-End Fiscal Year-End ($)(5)
---- ------------ --- --------------- ----------------------
<S> <C> <C> <C> <C>
Mac McWhirter --- --- 32,260(1) $751,036
Charles R. Farber --- --- 20,000(2) $471,202
Gerald Francis --- --- 86,000/66,000(3)(2)(6) $1,337,750/$529,452 (6)
Terry Young --- --- 7,904(4) $168,915
Elliot Lese --- --- 8,012(4) $171,227
</TABLE>
(1) Mr. McWhirter's incentive stock option for 7,308 shares and his
non-qualified stock option for 24,952 shares were granted in March 1996 and
became exercisable in September 1996.
(2) Mr. Farber and Mr. Francis were granted stock options in January 1996.
Which become exercisable in three installments. The first installment for
6,666 shares became exercisable on December 1, 1996, the second installment
for 6,666 on December 1, 1997, and the third installment for 6,668 shares
January 1, 1998.
(3) In April Mr. Francis was granted stock options for 66,000 shares vesting in
three installments. The first installment became exercisable in October
1997 upon the attainment of a $30 share price for 20 consecutive days. The
second installment became exercisable in January 1998 upon the attainment
of a $35 share price for 20 consecutive days. The third installment will
become exercisable only upon the attainment of a $40 share price for 20
consecutive days. As of March 9, 1998 the third installment has not become
exercisable.
(4) Incentive stock options held by Mr. Lese and Mr. Young were granted in June
1996 and became exercisable in three equal installments. The first
installment is exercisable on June 11, 1998, the second installment is
exercisable on June 11, 2000, and the last installment is exercisable on
June 11, 2002. Additional options were granted Mr. Lese and Mr. Young in
April of 1997 which are exercisable equally in two installments on June 11,
2000 and June 11, 2002.
(5) Based on the fair market value for the Nonvoting Common Shares on the last
business day of the fiscal year ended December 31, 1997, which was $36 per
share.
(6) Second number in these columns represent number and value attributed to Mr.
Francis' SAR award.
Stock Appreciation Award. In 1997, the Company granted to Mr. Francis a
free-standing stock appreciation award, the value of which is based on 60% of
the value of the difference between the fair market value of the shares subject
to the award at the time of exercise and a base price of $22.63 per share. The
stock appreciation award is granted in three separate installments which vest
and become exercisable upon the achievement of certain stock price appreciation
levels that correspond to the exercisability triggers for Mr. Francis'
non-qualified stock option installments awarded in April, 1997. The term of the
award is 10 years, and the timing of exercise is generally at Mr. Francis'
discretion once an installment has become exercisable. Upon a Change of Control,
as defined in the Plan, the stock appreciation award becomes immediately
exercisable in its entirety. In addition, the first installment becomes
immediately exercisable in its entirety if Mr. Francis' employment with Peoples
is terminated either without Cause or with Good Reason, as defined in Peoples'
employment agreement with Mr. Francis dated as of April 17, 1997. The first
installment expires and is terminated on the date thirty days following
termination of Mr. Francis' employment for any reason other than retirement,
disability or death. In the event of retirement, disability or death, there are
various periods of exercisability for the first installment that are triggered
by the event causing termination. The second and third installments expire
immediately upon Mr. Francis' termination of employment for any reason or cause
if those installments are not then exercisable. The Company accrues its current
obligation with respect to the award for accounting purposes. During 1997, the
Company accrued and expensed $161,000 related to the award. During the first
quarter of 1998, the Company anticipates expensing an additional $174,000
related to the award.
Stock Option Plan. The Company's Board of Directors has adopted the Peoples Bank
Corporation of Indianapolis Stock Option Plan (the "Plan") effective January 1,
1996. The Plan was approved by the shareholders of the Company at the annual
meeting in April, 1996. The purpose of the Plan is to provide to officers and
other key employees of the Company and Peoples a favorable opportunity to
acquire Nonvoting Common Shares, thereby providing them with an increased
incentive to work for the success of the Company and Peoples and better enabling
each such entity to attract and retain capable executive personnel.
The Plan authorizes the granting of both incentive stock options and
non-qualified stock options to officers and other key employees of the Company
and its subsidiaries by a committee of disinterested directors, which is
currently the Board Related Affairs Committee ("BRAC"). Stock options granted
under the Plan will be exercisable at such times (not after ten years and one
day from the date of grant) and at such exercise prices (not less than 85% of
the fair market value per share of the Nonvoting Common Shares at date of grant)
as the BRAC determines and will, except in limited circumstances, terminate if
the grantee's employment terminates prior to exercise. A total of 200,000
Nonvoting Common Shares have been reserved for issuance under the Plan, of which
options for 188,597 Nonvoting Common Shares have been granted to officers and
key employees to date.
During 1997, the BRAC granted an aggregate of 77,722 options to purchase
Nonvoting Common Shares to members of the senior management team, with
expiration dates ranging from March 20, 2007 through September 8, 2007, and at
exercise prices ranging from $21.75 to $26.06 per share. Gerald R. Francis was
awarded incentive stock options for 66,000 shares. Mr. Lese and Mr. Young were
awarded incentive stock options for 632 and 624 shares, respectively. Other
senior officers received options totaling 10,466, collectively, all of which are
incentive stock options. Such options generally become exercisable in
installments over a period of years ranging from 1999 to 2003.
Peoples Bank Corporation of Indianapolis 1998 Stock Option Plan. The Board of
Directors of the Company has adopted the Peoples Bank Corporation of
Indianapolis 1998 Stock Option Plan (the "1998 Plan") effective March 19, 1998.
The purpose of the 1998 Plan is substantially similar to that of the Plan, with
officers and other key employees of the Company and Peoples being eligible to
receive both incentive stock options and non-qualified stock options thereunder.
The terms and conditions of the 1998 Plan are also substantially similar to
those of the Plan, but they incorporate several provisions that make
administration of the 1998 Plan more flexible as a result of certain recent
changes to the rules under Section 16 of the Securities Exchange Act of 1934.
Like the Plan, the 1998 Plan will generally be administered by the BRAC.
However, the 1998 Plan contains special provisions authorizing the full Board of
Directors to make grants on certain occasions and for a special committee to
grant options of less than 1,000 shares to officers who are not subject to
Section 16. The 1998 Plan is subject to approval by the shareholders of the
Company at the annual meeting to be held in April, 1998. To date, no options
have been awarded under the 1998 Plan.
Consulting Agreement. Felix T. McWhirter entered into a consulting agreement
with Peoples on January 15, 1987 for a ten- year term to allow him to serve as a
consultant upon the termination of his full-time active employment on that date.
Mr. Felix T. McWhirter's obligations with Peoples were completed as of January
15, 1997. The terms of his consulting agreement called for payments during the
remainder of his life. Mr. McWhirter currently receives $8,260 monthly, subject
to the following adjustments: (i) a ten percent reduction every five years, and
(ii) an annual adjustment to reflect cost-of-living increases. In the event of
his death, Mr. McWhirter's surviving spouse is entitled to the payments for the
remainder of her life.
Compensation of Directors. All directors of the Company receive a retainer fee
of $4,500 per year. Additionally, outside directors receive a fee of $450 per
board or committee meeting. Board members are also eligible to receive bonuses
pursuant to the Board and Senior Management Profit Sharing Plan, further
discussed below.
Directors Stock Option Plan. The Company's Board of Directors has adopted the
Peoples Bank Corporation of Indianapolis 1996 Directors Stock Option Plan (the
"Directors Plan") effective June 20, 1996. The Directors Plan was approved at
the annual meeting of shareholders held in April, 1997. The purpose of the
Directors Plan is to provide directors of the Company who are not employed by
the Company ("Outside Directors") a favorable opportunity to acquire Nonvoting
Common Shares, thereby better enabling the Company to attract and retain capable
Outside Directors.
The Directors Plan provides for the granting of non-qualified stock options to
Outside Directors. A total of 20,000 Nonvoting Common Shares have been reserved
for issuance under the Directors Plan, of which options for 6,104 Nonvoting
Common Shares have been granted to seven Outside Directors to date. Stock
options granted under the Plan are exercisable for a period beginning on the
date of grant and ending on the day immediately following the tenth year
anniversary of the date of grant, and at an exercise price equal to the fair
market value per share of the Nonvoting Common Shares on the date of grant. The
Directors Plan provides that, on each April 1 thereafter while there are still
shares reserved under the Directors Plan for which options have not been
granted, the Company will grant to each Outside Director who is serving as a
director of the Company on such grant date a non-qualified option to purchase a
number of Nonvoting Common Shares pursuant to a formula based on directors'
fees.
Deferred Compensation Plan. Pursuant to Peoples' Deferred Compensation Plan,
selected employees are given the opportunity to defer irrevocably the receipt of
income in anticipation of future benefits to be received at least 5 years in the
future. The benefits payable under the plan are to be paid from Peoples' general
assets. Peoples maintains insurance policies on the lives of Mac McWhirter,
Charles R. Farber, Gerald R. Francis, Elliot R. Lese, Terry L. Young and all
other plan participants to provide for eventual payment of their deferred
benefits. Peoples is the sole owner and beneficiary of these policies. Peoples
has the right to amend or terminate the plan at any time.
Employment Agreement With Mr. Francis. The Company entered into an employment
agreement with Mr. Francis dated as of April 17, 1997. The term of the agreement
is for an initial term of three years, but may be extended for an additional one
year on each annual anniversary of the effective date unless either party gives
written notice to the other not to extend the term within ninety days prior to
the anniversary. In such a case, no further extension occurs and the agreement
ends two years subsequent to the annual anniversary that immediately follows the
date on which notice not to extend is given. The agreement provides that Mr.
Francis is to receive an annual salary of $185,000, subject to increase from
time to time at the discretion of Peoples. In addition, Mr. Francis is entitled
to participate in all present and future employee benefit, retirement and
compensation plans generally available to employees of Peoples, consistent with
his base compensation and his position as President and Chief Operating Officer
of Peoples. If Mr. Francis is involuntarily separated from Peoples without
cause, he is entitled to receive a severance benefit of one year's salary and
benefits for one year, and the first installment of options granted to him in
April, 1997 becomes immediately exercisable. The agreement provides that in the
event Mr. Francis is terminated following a Change of Control (as defined in the
Plan), he is entitled to receive a severance benefit equal to 299% of his annual
compensation, with such severance benefit calculated in a manner intended to
comply with Section 280G of the Internal Revenue Code of 1986, as amended. Mr.
Francis is entitled to additional perquisites, including vacation benefits,
reimbursement of reasonable business expenses and office space on terms no less
favorable than those in effect prior to the effectiveness of the agreement. The
agreement also provides that, for a period of one year following termination,
Mr. Francis will not compete with Peoples in the financial services industry.
Peoples' obligations under the employment agreement are guaranteed by the
company pursuant to a certain Guaranty Agreement dated as of April 17, 1997.
Profit Sharing Plan. Peoples has adopted the Board and Senior Management Profit
Sharing Plan. Pursuant to the plan, members of senior management and the Board
of Directors are eligible to receive discretionary bonuses based on, among other
factors, profits achieved by Peoples in excess of those budgeted for a given
fiscal year. The schedule serves only as a discretionary guideline and does not
represent a contractual obligation.
401(k) Plan. Employees who have attained age 21 are entitled to participate in
the 401(k) Profit Sharing Plan. The Plan was initiated in 1993. Under the plan,
Peoples makes a matching contribution on behalf of each participating employee
up to 50% of the first 3% and 25% of the next 3%. Vested portions of the
benefits under the 401(k) Plan are payable upon the employee's retirement,
death, disability or other termination of employment. In late 1995, Peoples
amended the 401(k) Plan to permit participants to direct the investment of their
plan account balances in Nonvoting Common Shares.
Pension Plan. The "Peoples Bank & Trust Company Employees' Pension Plan" is a
tax-qualified defined benefit pension plan. People's employees are eligible to
participate in the plan once they have completed one year of service and are 21
years of age. Continued eligibility requires completion of 1,000 hours of
service in a calendar year. Participants are not required or permitted to make
contributions under the plan. An employee's pension benefits are 100% vested
after five years of service.
The plan provides for monthly retirement benefits determined on the basis of the
employee's highest five-year average salary and years of service. Early
retirement, disability and death benefits are also payable under the plan. The
estimated base annual retirement benefits presented on a straight-line annuity
basis payable at normal retirement age (65) under the plan to a person in
specified remuneration and years of service classifications are as follows:
Years of Service
10 20 30 40 50
-- -- -- -- --
Remuneration
$100,000......... $20,000 $40,000 $60,000 $80,000 $100,000
120,000.......... 24,000 48,000 72,000 96,000 120,000
140,000.......... 28,000 56,000 84,000 112,000 140,000
160,000.......... 32,000 64,000 96,000 128,000 160,000
180,000.......... 36,000 72,000 108,000 144,000 180,000
200,000.......... 40,000 80,000 120,000 160,000 200,000
Annual compensation of Mr. McWhirter, Mr. Francis, Mr. Farber, Mr. Lese, and Mr.
Young covered by the Pension Plan is the same as their salary compensation
illustrated in the Annual Compensation Table (excluding directors fees).
Benefits are payable as a monthly life annuity and are not subject to deduction
for Social Security or other offset. The years of service credited to Mr.
McWhirter, Mr. Francis, Mr. Farber, Mr. Lese, and Mr. Young under the Pension
Plan as of December 31, 1997 were 24.50, 1.92, 25.33, 8.01, and 17.58,
respectively.
SERP. Peoples has adopted a Supplemental Executive Retirement Plan ("SERP")
which supplements the amount of benefits otherwise available to Mr. McWhirter,
Mr. Farber, and Mr. Francis under the Pension Plan upon their retirement. Annual
SERP benefits equal 2% of pay per year subject to the maximum of 75% of the
executive's average annual compensation in the three highest years with Peoples,
less the executive's annual benefit payable (i) on a single life basis under the
Pension Plan and (ii) under Social Security. Only Mac McWhirter, Mr. Farber, and
Mr. Francis are SERP participants at this time, but additional key executives
may be added by the Board of Directors. In September, 1997, the Board of
Directors of Peoples approved the Second Amendment and Complete Restatement of
the Peoples Bank & Trust Company Unfunded Supplemental Retirement Plan For a
Select Group of Management Employees in order to clarify certain terms and
conditions of the SERP.
Split-Dollar Insurance Arrangements. Peoples has entered into a Split-Dollar
Insurance Agreement with each of Mr. McWhirter, Mr. Francis and Mr. Farber as an
inducement to each of them to continue his employment with Peoples by assisting
him with personal life insurance needs. Each of these agreements provides that
Peoples is the owner of the life insurance policy subject to agreement and pays
all premiums with respect thereto. Each agreement provides that the death
benefits payable under the terms of the policy entitle the employee to the
lesser of a certain dollar threshold or the total death benefits then available
under the policy, and entitle the bank to receive the death benefits, if any, in
excess of the designated threshold. The threshold amount of benefits in each
case is $250,000 for each of Mr. Francis and Mr. Farber, and $600,000 for Mr.
McWhirter.
Compensation Committee Interlocks and Insider Participation. The Board Related
Affairs Committee of the Board of Directors served as the board's compensation
committee during fiscal 1997. There are no interlocks between the Company's or
Peoples' boards of directors or compensation committee on the one hand and those
of any other company on the other hand.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Shares by (i) each person who is known by the
Company to own beneficially more than 5% of the outstanding Voting Common Shares
(ii) each director and executive officer named in the executive compensation
table, and (iii) all executive officers and directors of the Company as a group
as of March 9, 1998. Except as otherwise indicated, based on information
furnished by such owners, the beneficial owners of the Common Shares listed
below have sole investment and voting power with respect to such Common Shares,
subject to community property laws where applicable.
<PAGE>
<TABLE>
<CAPTION>
Voting Common Shares Nonvoting Common
Name and Address Beneficially Owned Shares Beneficially Owned
of Beneficial Owner and Percentage or Class and Percentage or Class
- - ------------------- ----------------------- -----------------------
<S> <C> <C>
Elbert L. Bradshaw 2,800 3,872 (1)
13843 Driftwood Drive 1.1% 0.1%
Carmel, Indiana 46033
Charles R. Farber --- 20,000 (2)
130 East Market Street0.7%
Indianapolis, Indiana 46204
Gerald R. Francis 103 (10) 72,265 (3)
130 East Market Street 2.5%
Indianapolis, Indiana 46204
Robert B. Hirschman, D.D.S. 2,800 4,872 (1)
5104 Plantation Drive 1.1% 0.2%
Indianapolis, Indiana 46250
Ethan Jackson --- ---%
David W. Knall --- 35,552 (1)
One American Square 1.3%
Suite 2615
Indianapolis, Indiana 46282
Luella M. Martin 24,808 (4) 107,598 (4)
3738 Bay Road. South Drive 9.4% 3.8%
Indianapolis, Indiana 46240
William E. McWhirter 169,930 (5) 34,772 (5)
130 E. Market Street 64.3% 1.2%
Indianapolis, Indiana 46204
Felix T. McWhirter --- 550,705 (6)(1)
130 E. Market Street 19.6%
Indianapolis, Indiana 46204
Mary Ellen Rodgers --- 1,672 (7)(1)
5272 McGavock Road 0.1%
Brentwood, Tennessee 37027
Evans McWhirter Rust 26,440 (8) 338,328 (8)
6917-B East Osborn 10.0% 12.0%
Scottsdale, Arizona 85251
Henry C. Ryder --- 12,372 (9)(1)
11 South Meridian Street 0.4%
Indianapolis, Indiana 46204
Stephen R. West --- 14,680 (1)
4120 North Illinois Street 0.5%
Indianapolis, Indiana 46208
Darrell E. Zink, Jr. --- 250 (10)
All Directors and Executive 175,736 207,018
Officers, as a group (17 persons) 66.5% 7.4%
(footnotes on next page)
</TABLE>
<PAGE>
(1) Includes 872 shares exerciseable under the 1996 Directors Stock Option
Plan.
(2) Includes 20,000 shares subject to an incentive stock option granted under
the Company's Stock Option Plan all of which are currently exercisable.
(3) Includes 62,000 shares subject to an incentive stock option granted under
the Company's Stock Option Plan which are currently exercisable. Also
includes 844 shares held in trusts for the benefit of Mr. Francis' three
children, of which Mr. Francis serves as trustee.
(4) Includes eighty (80) Voting Common Shares and 69,128 shares Non-Voting
Common Shares held by Peoples as trustee for Luella M. Martin. Also
includes 38,470 Non-Voting Common Shares held in trustee by Welsey P.
Martin, husband of Luella M. Martin, as trustee.
(5) Of the Voting Common Shares, 21,148 shares are held by Susan McWhirter,
wife of William E. McWhirter. Of the Nonvoting Common Shares, 530 shares
are held by Elizabeth McWhirter, daughter of William E. McWhirter, 535
shares are held by Julia McWhirter, daughter of William E. McWhirter, and
530 shares are held by Mark McWhirter, son of William E. McWhirter. Also
includes 7,308 Shares subject to an incentive stock option and 24,952
Shares subject to a non-qualified stock option granted under the Company's
Stock Option Plan, which options are currently exercisable in accordance
with their terms.
(6) Includes 364,000 shares held by Peoples as trustee of the Felix M.
McWhirter Trust for Children and Grandchildren. Pursuant to such trust,
Felix T. McWhirter holds voting power and shares with Peoples dispositive
power with respect to the shares. Also includes 98,434 shares held by
Margaret J. McWhirter, Mr. McWhirter's spouse.
(7) Held jointly with spouse.
(8) All Voting Common Shares and 257,128 Nonvoting Common Shares are held in
trust by Evans McWhirter Rust as trustee. Also includes 81,200 Shares held
by Peoples as trustee as to which Mr. Rust disclaims beneficial ownership.
(9) Includes 10,800 shares held by Society National Bank as trustee of Mr.
Ryder's 401 (k) Plan. Also includes 200 shares held in a Charitable
Remainder Trust. Includes 672 shares exerciseable under the 1996 Directors
Stock Option plan.
(10) Less than 0.1%.
Item 13. Certain Relationships and Related Transactions.
From time to time Peoples makes loans to its directors and significant
shareholders. At December 31, 1997, such loans and extensions of credit amounted
to approximately $2,814,000. Such loans and all similar loans or advances
outstanding during any of the three prior years, were made (i) in the ordinary
course of business, (ii) on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and (iii) did not involve more than the normal
risk of collectibility or present other unfavorable features. Peoples does not
generally make any loans to executive officers.
David W. Knall, one of the Company's directors, is a Senior Managing Director of
McDonald & Company Securities, Inc., one of the underwriters in the Company's
initial public offering. From time to time, the Company and Peoples utilize
investment advisory and brokerage services provided by McDonald & Company
Securities, Inc.
Henry C. Ryder, one of the Company's directors, is a partner in the law firm of
Barnes & Thornburg. Such firm provides legal services to the Company and Peoples
on a regular basis. Mr. Ryder will retire from the Board of Directors on April
16, 1998.
Felix T. McWhirter entered into a consulting agreement with Peoples on January
15, 1987 for a ten- year term to allow him to serve as a consultant upon the
termination of his full-time active employment on that date. Mr. Felix T.
McWhirter's obligations with Peoples were completed as of January 15, 1997. The
terms of his consulting agreement called for payments during the remainder of
his life. Mr. McWhirter currently receives $8,260 monthly, subject to the
following adjustments: (i) a ten percent reduction every five years, and (ii) an
annual adjustment to reflect cost-of-living increases. In the event of his
death, Mr. McWhirter's surviving spouse is entitled to the payments for the
remainder of her life.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements -- Included Under Item 8:
Report of Crowe, Chizek and Company LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter ending December 31,
1997.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page 38.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorized.
PEOPLES BANK CORPORATION OF INDIANAPOLIS
By: /s/ William E. McWhirter
------------------------------------
William E. McWhirter
Chairman President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
Signature Title Date
(1) Principal Executive Officer:
By: /s/ William E. McWhirter Chairman, Chief )
William E. McWhirter Executive Officer )
)
(2) Principal Financial/ )
Accounting Officer: )
)
By: /s/ Charles R. Hageboeck Senior Vice President, )
_____________________________ Chief Financial Officer )
Charles R. Hageboeck )
)
)
(3) A Majority of the )
Board of Directors:)
)
/s/ Felix T. McWhirter Director )
- - ----------------------------- )
Felix T. McWhirter)
)
/s/ Elbert L. Bradshaw Director )
- - ----------------------------- )
Elbert L. Bradshaw )
)
/s/ Charles R. Farber Director )
- - ----------------------------- )
Charles R. Farber ) March 31, 1997
)
/s/ Robert B. Hirschman Director )
- - ----------------------------- )
Robert B. Hirschman )
)
/s/ David W. Knall Director )
- - ----------------------------- )
David W. Knall )
)
/s/ William E. McWhirter Director )
- - ----------------------------- )
William E. McWhirter )
)
/s/ Mary Ellen Rodgers Director )
- - ----------------------------- )
Mary Ellen Rodgers )
)
/s/ Henry C. Ryder Director )
- - ----------------------------- )
Henry C. Ryder )
)
/s/ Stephen R. West Director )
- - ----------------------------- )
Stephen R. West )
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
3.1 Registrant's Articles of Incorporation, as
amended *
3.2 Registrant's Code of By-Laws, as amended *
3.3 Form of Share Certificate *
4.1 Articles V, VI, and VII and Sections 1,2, and 4
of Article IX of the Registrant's Articles of
Incorporation respecting the terms of Common
Shares, are incorporated by reference to the
Registrant's Articles of Incorporation filed as
Exhibit 3.1 *
4.2 Articles I and VII of the Registrant's Code of
By-Laws respecting the terms of Common Shares,
are incorporated by reference to the
Registrant's Code of By-Laws filed as Exhibit
3.2 *
10.1 Employment Agreement between Registrant and
Gerald R. Francis, dated April 17, 1997 (10.1)
10.2 Guaranty Agreement between Registrant and
Gerald R. Francis, dated April 17, 1997 (10.2)
10.3 Incentive Stock Option Agreement between
Registrant and Gerald R. Francis, dated April
17, 1997 (10.3)
10.4 Stock Appreciation Award for Gerald R. Francis
(10.4(a))
10.5 Second amendment and complete restatement of
the Registrant's Unfunded Supplemental
Executive Retirement Plan (10.4(b))
10.6 Split Dollar Insurance Agreement between
Registrant and Gerald R. Francis (10.6)
10.7 Split Dollar Insurance Agreement between
Registrant and William E. McWhirter (10.7)
10.8 Split Dollar Insurance Agreement between
Registrant and Charles R. Farber
10.9 Lease Agreement by and between Park 100 Joint
Venture and Peoples Bank & Trust Company dated
November 17, 1989, as amended * (10.1)
10.10 Property Management Agreement between Peoples
Building Corporation and F.C. Tucker Company,
Inc. dated September 30, 1986 *(10.2)
10.11 Consulting Agreement between F. T. McWhirter
and Peoples Bank & Trust Company dated January
15, 1987 *(10.3)
10.12(a) Peoples Bank & Trust Company Executives
Deferred Compensation Plan *(10.4(a))
10.12(b) Peoples Bank & Trust Company Directors
Deferred Fees Plan *(10.4(b))
10.13 Peoples Bank & Trust Company Board and Senior
Management Profit Sharing Plan *(10.6)
10.14 Peoples Bank Corporation of Indianapolis Stock
Option Plan **(10.7)
10.15 Peoples Bank Corporation of Indianapolis
Directors Stock Option Plan ***
21 Subsidiaries of the Registrant
23 Consent of Crowe Chizek
27(a) Financial Data Schedule
27(b) Financial Data Schedule (restating earnings per
share for fiscal year ended December 31, 1996)
* Incorporated by reference to the corresponding exhibit
number (or the exhibit number indicated above in the
right hand column) of the Registrant's registration
statement on Form S-1, effective January 18, 1994, under
the Securities Act of 1933, Reg. No. 33- 71988.
** Incorporated by reference to the corresponding exhibit
number (or the exhibit number indicated above in the
right hand column) of the Registrant's quarterly report
on Form 10-Q for the fiscal quarter ended September 30,
1997.
*** Incorporated by reference to the corresponding exhibit
number (or the exhibit number indicated above in the
right hand column) of the Registrant's annual report
on Form 10-K for the fiscal quarter ended December 31,
1996.
[Crowe Chizek Letterhead]
Consent of Independent Auditors
Board of Directors
Peoples Bank Corporation of Indianapolis
Indianapolis, Indiana
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (Reg. No. 33-98772) of Peoples Bank Corporation of Indianapolis of our
Report of Independent Auditors, dated February 12, 1998, on the consolidated
balance sheets of Peoples Bank Corporation of Indianapolis as of December 31,
1997 and 1996 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 1997, which report is included in Form 10-K of Peoples
Bank Corporation of Indianapolis for the year ended December 31, 1997.
/s/ Crowe, Chizek and Company LLP
March 28, 1998
Indianapolis, Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000796322
<NAME> Peoples Bank Corporation of Indianapolis
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 25,462
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 153,879
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 407,454
<ALLOWANCE> 5,516
<TOTAL-ASSETS> 598,476
<DEPOSITS> 508,311
<SHORT-TERM> 34,380
<LIABILITIES-OTHER> 6,968
<LONG-TERM> 0
<COMMON> 13,982
0
0
<OTHER-SE> 34,835
<TOTAL-LIABILITIES-AND-EQUITY> 598,476
<INTEREST-LOAN> 31,664
<INTEREST-INVEST> 7,335
<INTEREST-OTHER> 730
<INTEREST-TOTAL> 39,729
<INTEREST-DEPOSIT> 17,563
<INTEREST-EXPENSE> 18,119
<INTEREST-INCOME-NET> 21,610
<LOAN-LOSSES> 1,800
<SECURITIES-GAINS> (50)
<EXPENSE-OTHER> 16,469
<INCOME-PRETAX> 9,294
<INCOME-PRE-EXTRAORDINARY> 9,294
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,278
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 1.99
<YIELD-ACTUAL> 7.89
<LOANS-NON> 3,626
<LOANS-PAST> 16
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 17,996
<ALLOWANCE-OPEN> 3,900
<CHARGE-OFFS> 488
<RECOVERIES> 304
<ALLOWANCE-CLOSE> 5,516
<ALLOWANCE-DOMESTIC> 2,362
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,154
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000796322
<NAME> Peoples Bank Corporation of Indianapolis
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<CASH> 32,252
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,589
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 333,374
<ALLOWANCE> 3,900
<TOTAL-ASSETS> 471,478
<DEPOSITS> 411,805
<SHORT-TERM> 10,266
<LIABILITIES-OTHER> 4,058
<LONG-TERM> 0
<COMMON> 15,725
0
0
<OTHER-SE> 29,624
<TOTAL-LIABILITIES-AND-EQUITY> 471,478
<INTEREST-LOAN> 26,211
<INTEREST-INVEST> 5,151
<INTEREST-OTHER> 889
<INTEREST-TOTAL> 32,251
<INTEREST-DEPOSIT> 13,471
<INTEREST-EXPENSE> 14,044
<INTEREST-INCOME-NET> 18,207
<LOAN-LOSSES> 1,125
<SECURITIES-GAINS> (63)
<EXPENSE-OTHER> 14,794
<INCOME-PRETAX> 7,725
<INCOME-PRE-EXTRAORDINARY> 5,409
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,409
<EPS-BASIC> 1.71
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 7.82
<LOANS-NON> 234
<LOANS-PAST> 49
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 12,700
<ALLOWANCE-OPEN> 3,290
<CHARGE-OFFS> 607
<RECOVERIES> 92
<ALLOWANCE-CLOSE> 3,900
<ALLOWANCE-DOMESTIC> 1,900
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,000
</TABLE>
