SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
For Annual and Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to ________
Commission File Number 0-18991
PEOPLES BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1811284
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
212 West 7th Street, Auburn, Indiana 46706
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 925-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, par value $1.00 per share
(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 of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X ]
Aggregate market value of voting stock held by non-affiliates of the
registrant, as of December 23, 1998: $57,426,692.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of December 23, 1998:
3,261,534 shares of Common Stock, par value $1.00 per share
Documents Incorporated by Reference:
Portions of the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders (Part III) and the Annual Report to Stockholders for the year ended
September 30, 1998 (Parts II and IV).
<PAGE>
PART I
Item 1. Business
General
Peoples Bancorp (the "Company") is an Indiana corporation organized in
October, 1990 to become the thrift holding company for Peoples Federal Savings
Bank (the "Bank" or "Peoples Federal"). The Company is the sole shareholder of
Peoples Federal. The Bank conducts business from its main office in Auburn and
in its six full-service offices located in Avilla, Columbia City, Garrett,
Kendallville, and LaGrange, Indiana. Peoples Federal offers a full range of
retail deposit services and lending services to northeastern Indiana. The
Company has no other business activity other than being the holding company for
Peoples Federal.
The Bank was founded in 1925 and chartered by the Federal Home Loan Bank
Board ("FHLBB"), now the Office of Thrift Supervision ("OTS"), in 1937. Since
that time, the Bank has been a member of the Federal Home Loan Bank System
("FHLB System") and the Federal Home Loan Bank of Indianapolis ("FHLB of
Indianapolis"), and its savings accounts are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF"), as administered by the Federal
Deposit Insurance Corporation (the "FDIC").
The Company is a unitary savings and loan holding company subject to
regulation by the OTS. The Company's securities are registered with the
Securities and Exchange Commission ("SEC") pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). As such, the Company is subject to
the information, proxy solicitation, insider trading, and other restrictions and
requirements of the Exchange Act.
In May, 1997, the Board authorized a stock repurchase program. Purchases of
up to 240,000 shares may be made in open market or in privately negotiated
transactions. As of September 30, 1998, the Company had repurchased 136,958
shares.
On a yearly basis, Peoples Federal updates its long-term strategic plan.
This plan includes, among other things, Peoples Federal's commitment to
maintaining a strong capital base and continuing to improve the organization's
return on assets through asset growth and controlling operating expenses.
Continued careful monitoring of Peoples Federal's interest rate risk is also
cited as an important goal. As a result, continued origination of short-term
consumer and installment loans, prime plus equity loans, adjustable rate
mortgage loans, and fixed-rate real estate loans with original terms of 15 years
or less will be emphasized.
The Bank offers a wide range of consumer and commercial financial services.
These services include: consumer demand deposit accounts; NOW accounts; regular
and term savings accounts and savings certificates; residential and commercial
real estate loans; and secured and unsecured consumer loans. The Bank provides
these services through a branch network comprised of seven full-service banking
offices. It also provides credit card services, as well as enhancements to its
loan and deposit products designed to provide customers with added conveniences.
The Bank has historically concentrated its business activities in northeastern
Indiana. The Bank's current strategy is to maintain its branch office network as
well as remain alert to new opportunities.
Over the years, the Bank has broadened its product line and enhanced its
operations in order to accommodate its growth and to meet the vigorous
competition from various financial institutions and other companies or firms
that engage in similar activities.
The Thrift Industry
Thrift institutions are financial intermediaries which historically have
accepted savings deposits from the general public and, to a lesser extent,
borrowed funds from outside sources and invested those deposits and funds
primarily in loans secured by first mortgage liens on residential and other
types of real estate. Such institutions may also invest their funds in various
types of short- and long-term securities. The deposits of thrift institutions
are insured by the SAIF as administered by the FDIC, and these institutions are
subject to extensive regulations. These regulations govern, among other things,
the lending and other investment powers of thrift institutions, including the
terms of mortgage instruments these institutions are permitted to utilize, the
types of deposits they are permitted to accept, and reserve requirements.
<PAGE>
The operations of thrift institutions, including those of the Bank, are
significantly affected by general economic conditions and by related monetary
and fiscal policies of the federal government and regulations and policies of
financial institution regulatory authorities, including the Board of Governors
of the Federal Reserve System and the OTS. Lending activities are influenced by
a number of factors including the demand for housing, conditions in the
construction industry, and availability of funds. Sources of funds for lending
activities include savings deposits, loan principal payments, proceeds from
sales of loans, and borrowings from the Federal Home Loan Banks and other
sources. Savings flows at thrift institutions are influenced by a number of
factors including interest rates on competing investments and levels of personal
income.
Earnings
The Bank's earnings depend primarily on the spread between income from
lending activities and, to a lesser extent, investment activities, and the cost
of money, that is the difference between income from interest-earning assets
such as loans and investments, and interest paid on interest-bearing liabilities
such as deposits and borrowings. The Bank typically engages in long-term
mortgage lending at fixed rates of interest, generally for periods of up to 30
years, while accepting deposits for considerably shorter periods.
Generally, rapidly rising interest rates cause the cost of interest-bearing
liabilities to increase more rapidly than yields on interest-earning assets,
thereby adversely affecting the earnings of many thrift institutions. While the
industry has received expanded lending and borrowing powers in recent years
permitting different types of investments and mortgage loans, including those
with floating or adjustable rates and those with shorter terms, earnings and
operations are still highly influenced by levels of interest rates and financial
market conditions and by substantial investments in long-term mortgage loans.
Competition
The Bank experiences strong competition both in making real estate loans
and in attracting savings deposits. In the past, thrift institutions generally
competed for real estate loans with commercial banks, mortgage banking
companies, insurance companies, and other institutional lenders. Recent
legislative and regulatory actions have increased competition between thrift
institutions and other financial institutions, such as commercial banks, by
expanding the range of services that may be offered such as demand deposits,
trust services, and consumer and commercial lending. The most direct competition
for savings has historically come from other thrift institutions, mutual savings
banks, commercial banks and credit unions. During periods of generally high
interest rates, additional significant competition for savings accounts comes
from corporate and government securities and, more recently, money market mutual
funds. The principal methods generally used by the Bank to attract deposit
accounts include: competitive interest rates, advertising, providing a variety
of financial services, convenient office locations, flexible hours for the
public, and promotions for opening or adding to deposit accounts.
Net Interest Income
Net interest income increases during periods when the spread is widened
between the Bank's weighted average rate at which new loans are originated and
the weighted average cost of interest-bearing liabilities. The Bank's ability to
originate loans is affected by market factors such as interest rates,
competition, consumer preferences, the supply of and demand for housing, and the
availability of funds.
The Bank has supplemented its interest income through purchases of
investments when appropriate. This activity generates positive interest rate
spreads on large principal balances with minimal administrative expense.
<PAGE>
Interest Rate and Volume of Interest-Related Assets and Liabilities
Both changes in rate and changes in the composition of the Bank's
interest-earning assets and interest-bearing liabilities can have a significant
effect on net interest income.
For information regarding the total dollar amount of interest income from
interest-earning assets, the average yields, the amount of interest expense from
interest-bearing liabilities and the average rate, net interest income, interest
rate spread, and the net yield on interest-earning assets, refer to page 9 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's 1998 Annual Report, incorporated herein by
reference.
For information regarding the combined weighted average effective interest
rate earned by the Bank on its loan portfolio and investments, the combined
weighted average effective cost of the Bank's deposits and borrowings, the
interest rate spread of the Bank, and the net yield on combined monthly weighted
average interest-earning assets of the Bank on its loan portfolio and
investments for the fiscal years ending September 30, 1998, 1997, and 1996 refer
to page 6 of Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company's 1998 Annual Report incorporated herein by
reference.
For information concerning the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
the Bank's interest income and expense during the fiscal years ending September
30, 1998, 1997, and 1996 refer to page 10 of Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's 1998
Annual Report incorporated herein by reference.
Market Area
The Bank's market area in northeastern Indiana spans the counties of
DeKalb, Whitley, Noble, and LaGrange. This market area has a population of
approximately 130,000 and consists of a diversified industrial economic base
with an emphasis on the production sector that includes major manufacturers of
international scope. Moreover, the distribution sector, primarily in the
wholesale and retail trades, constitutes a substantial portion of the area's
economy, both in terms of product mix, sales receipts, and employment. The most
rapid growth has occurred in the manufacturing sector, especially in the
production of automotive and electronics products, and in the service sector
with respect to packaging, warehousing, and distribution services.
Lending Activities
General
The Bank has attempted to emphasize investments in adjustable-rate
residential mortgages and consumer loans in its market area. In order to lessen
its risk from interest rate fluctuations, the Bank emphasizes the origination of
interest rate sensitive loan products, such as one year adjustable-rate mortgage
loans, and prime plus equity loans. However, during the current low interest
rate market, customers have preferred fixed rate products. The Bank has reacted
to this trend by offering a new mortgage product of a seven year fixed rate loan
which converts to a one year adjustable product at the end of the seventh year.
In this way, the Bank is offering a fixed rate product to satisfy the customer
demand, but is not locked into low interest rates for a long period of time.
These loans show on the various charts in this 10-K as fixed rate product, since
according to regulatory treatment, they are considered fixed rate until the
repricing period is below five years. Since this is a new product this year,
none of these loans is currently considered adjustable rate for regulatory
reporting purposes.
<PAGE>
Residential Mortgage Loans
A substantial portion of the Bank's lending activity involves the
origination of loans secured by residential real estate, consisting of
single-family dwelling units. The Bank also lends on the security of mid-size
multifamily dwelling units. The residential mortgage loans included in the
Bank's portfolio are primarily conventional fixed-rate loans with a maturity of
up to 30 years.
The Bank also offers adjustable-rate mortgage loans. Currently, these loans
generally have interest rates which adjust (up or down) every year. Currently in
effect is a maximum adjustment of 6% over the life of these loans with a maximum
adjustment of 2% during any given year. Adjustments are based upon an index
established at the time the commitment is issued by the Bank. The index used for
most loans is tied to the applicable United States Treasury security index.
While the addition of adjustable-rate mortgage loans will better enable the Bank
to maintain a positive spread during periods of high interest rates, it is not
expected that adjustments in interest rates on adjustable-rate mortgages will
match precisely changes in the Bank's cost of funds. The majority of the
adjustable rate mortgages originated by the Bank have limitations on the amount
(generally 6%) and frequency of interest rate changes.
During the fiscal year ended September 30, 1998, the Bank originated
$90,939,000 of residential loans of which $89,928,310 were five- to 30-year
fixed-rate mortgages and $1,010,690 were adjustable-rate loans. The rates
offered on the Bank's adjustable-rate residential mortgage loans are generally
competitive with the rates offered by other thrift institutions in the Bank's
market area and are based upon the Bank's cost of funds and the rate of return
the Bank can receive on comparable investments. Fixed-rate loans are originated
only under terms and conditions and using documentation which would permit their
sale in the secondary market and at rates which are generally competitive with
rates offered by other financial institutions in the Bank's market area.
Set forth below are the amounts and percentages of fixed-rate and
adjustable-rate loans (which include consumer loans) in the Bank's portfolio at
September 30, 1998, 1997, and 1996 (in thousands).
September 30,
-----------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- -----------------------
Fixed Adjustable Fixed Adjustable Fixed Adjustable
--------- ------------ ---------- ------------ ---------- ------------
$225,270 $46,740 $180,631 $59,025 $154,416 $73,159
82.8% 17.2% 75.4% 24.6% 67.9% 32.1%
The terms of the residential loans originated by the Bank range from one to
30 years. Experience during recent years reveals that as a result of prepayments
in connection with refinancings and sales of the underlying properties,
residential loans generally remain outstanding for periods substantially shorter
than maturity of the loan contracts. At September 30, 1998, the average
contractual maturity of the Bank's portfolio of fixed-rate loans was 10 years
and 11 months, and 16 years and 4 months with respect to its portfolio of
adjustable-rate loans.
Substantially all of the Bank's residential mortgages include so-called
"due on sale" clauses, which are provisions giving the Bank the right to declare
a loan immediately due and payable in the event that, among other things, the
borrower sells or otherwise disposes of the real property subject to the
mortgage, and the loan is not repaid.
Generally, the Bank will not lend more than 80% of the appraised value of a
residential property which is owner occupied unless the borrower obtains private
mortgage insurance reducing the uninsured portion of the loan to 72% of the
appraised value. If private mortgage insurance is obtained, the Bank's policy is
to lend up to 90% of the appraised value of the property securing the loan. The
Bank applies the same standards to residential loans purchased in the secondary
market.
<PAGE>
Commercial Real Estate Loans
The Bank also originates commercial real estate loans. From September 30,
1997, to September 30, 1998, commercial real estate loans increased from
$7,850,076 to $10,411,049, with the percentage of commercial real estate loans
to total loans increasing from 3.30% to 3.80%. These loans consisted of
construction and permanent loans secured by mortgages on mid-size commercial
real estate. The terms of commercial real estate loans vary from loan to loan
but are usually five-year adjustable-rate loans with terms of 20 to 25 years.
The loan-to-value ratio of commercial real estate loans is generally 75% or
less.
Generally, commercial real estate loans involve greater risk to the Bank
than do residential loans but usually provide for a higher rate of interest and
increased fee income than do residential loans. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. In addition, the payment experience on loans secured by income
producing properties is typically dependent on the successful operation of the
related project and thus may be subject to a great extent to adverse conditions
in the real estate market or in the economy generally.
Construction Loans
The Bank offers residential construction loans both to owner-occupants and
to persons building residential property. Construction loans are usually offered
with fixed rates of interest during construction. Generally, construction loans
have terms ranging from six to 12 months at fixed rates over the construction
period. Practically all residential construction loans are written so as to
become permanent loans at the end of the construction period.
Construction loans involve greater underwriting and default risks to the
Bank than do loans secured by mortgages on existing properties. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value prior to the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the total loan funds required to complete a
project and the related loan-to-value ratios. Should a default occur which
results in foreclosure, the Bank could be negatively impacted in that it would
have to take control of the project and attempt either to arrange for completion
of construction or dispose of the unfinished project.
The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. The Bank carefully considers a wide variety of
factors before originating a construction loan, including the availability of
permanent financing or a takeout commitment to the borrower (which may be
provided by the Bank at market rates); the reputation of the borrower and the
contractor; independent valuations and reviews of cost estimates;
pre-construction sale information; and cash flow projections of the borrower.
Inspections of construction sites are made by the Bank on a timely basis to
verify progress made to date as a further reinforcement of its conservative
lending policy. To reduce the risks inherent in construction lending, the Bank
limits the number of properties which can be constructed on a "speculative" or
unsold basis by a developer at any one time and generally requires the borrower
or its principals to guarantee personally repayment of the loan.
Consumer and Other Loans
Federal laws and regulations permit a federally-chartered savings
institution to make secured and unsecured consumer loans including home equity
loans (loans secured by the equity in the borrower's residence, but not
necessarily for the purpose of improvement), home improvement loans (loans
secured by a residential second mortgage), loans secured by deposit accounts,
educational loans (insured by the State Student Loan Commission of Indiana), and
credit card loans (unsecured). The Bank offers all of these types of loans and
is currently emphasizing home equity loans to take advantage of the adjustable
interest rate feature of this loan versus the mortgage product. These loans also
carry a higher rate of interest than conventional mortgages, thereby increasing
the profit potential while reducing the interest rate risk.
<PAGE>
Loan Portfolio Cash Flows
The following table sets forth the estimated maturity of the Bank's loan
portfolio by type of loan at September 30, 1998. The estimated maturity reflects
contractual terms at September 30, 1998. Contractual principal repayments of
loans do not necessarily reflect the actual term of the Bank's loan portfolio.
The average life of mortgage loans is substantially less than their contractual
terms because of loan prepayments and because of enforcement of "due on sale"
clauses. The average life of mortgage loans tends to increase, however, when
current mortgage loan rates substantially exceed rates on existing mortgage
loans.
Due After
Due in One Year Due After
One Year Through Five
or Less Five Years Years Total
----------- ------------ ------------ --------
(In thousands)
Type of Loan:
Construction loans --
residential real estate $ 6,695 $ - $ - - $ 6,695
Real estate loans:
Mortgage-residential 44,310 52,114 142,349 238,773
Commercial 6,134 4,050 227 10,411
Installment loans --
consumer 10,955 3,950 1,225 16,130
--------- ---------- ----------- ----------
Total $68,094 $60,114 $143,801 $272,009
========= ========== =========== ==========
The following table sets forth the total amount of loans due after one year
from September 30, 1998, which have a fixed rate or an adjustable rate. (Dollars
in thousands)
Loans Due
October 1, 1999 and thereafter
- -------------------------------
Fixed Adjustable Total at September 30, 1998
---------- ------------ -------------------------------
$153,320 $50,595 $203,915
Loan Portfolio Composition
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated. The table includes a reconciliation of
total net loans receivable, after consideration of undisbursed portion of loans,
deferred loan fees and discounts, and allowance for losses on loans.
<PAGE>
<TABLE>
At September 30
1998 1997 1996 1995 1994
------------------ ----------------- ---------------- ---------------- -----------------
TYPE OF LOAN AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
---------- ------- ---------- ------ --------- ------ --------- ------ --------- -------
Residential: (Dollars in thousands)
Single family units $243,858 89.7% $217,528 90.8% $207,028 91.0% $203,211 91.2% $195,525 91.8%
2-4 family units 1,610 0.6% 1,541 0.6% 1,234 0.5% 1,008 0.4% 1,006 0.4%
Over 4 family units 2,687 1.0% 2,813 1.2% 2,769 1.2% 1,738 0.8% 1,835 0.8%
Commercial real estate 6,425 2.4% 4,269 1.8% 4,006 1.8% 3,696 1.7% 2,729 1.3%
Land acquisition and
development 1,299 0.5% 769 0.3% 702 0.3% 838 0.4% 438 0.2%
Consumer and other loans 15,157 5.6% 11,915 5.0% 10,959 4.8% 11,337 5.1% 10,931 5.1%
Loans on deposits 973 0.4% 821 0.3% 877 0.4% 901 0.4% 860 0.4%
---------- ------- ---------- ------ --------- ------ --------- ------ --------- ------
272,009 100.0% 239,656 100.0% 227,575 100.0% 222,729 100.0% 213,324 100.0%
---------- ------- ---------- ------ --------- ------ --------- ------ --------- ------
Less:
Undisbursed portion
of loans 3,081 2,444 2,717 2,237 1,971
Deferred loan fees and
discounts 1,323 1,070 959 916 988
---------- ---------- --------- --------- -----------
4,404 3,514 3,676 3,153 2,959
---------- ---------- --------- ---------- -----------
Total loans receivable 267,605 236,142 223,899 219,576 210,365
Allowance for losses
on loans 947 887 888 912 1,035
---------- ---------- --------- ---------- -----------
Net loans $266,658 $235,255 $223,011 $218,664 $209,330
========== ========== ========= ========== ===========
</TABLE>
Origination, Purchase and Sale of Loans and Loan Concentrations
The Bank originates residential loans in conformity with standard
underwriting criteria to assure maximum eligibility for possible resale in the
secondary market. Although the Bank has authority to lend anywhere in the United
States, it has confined its loan origination activities primarily in the Bank's
service area.
Loan originations are developed from a number of sources, primarily from
referrals from real estate brokers, builders, and existing and walk-in
customers. The Bank also utilizes the services of a loan broker located in Fort
Wayne, Indiana, who is paid on a commission basis (generally 1% of the loan
amount) to originate loans for the Bank.
The Bank's mortgage loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan, and the
adequacy of the value of the property that will secure the loan. Residential and
commercial loans ranging up to $200,000 can be approved by the loan committee of
the Bank. Loans exceeding $200,000 must be approved by the Bank's Board of
Directors. The Bank utilizes independent qualified appraisers approved by the
Board of Directors to appraise the properties securing its loans and requires
title insurance or title opinions so as to insure that the Bank has a valid lien
on the mortgaged real estate. The Bank requires borrowers to maintain fire and
casualty insurance on its secured properties.
The procedure for approval of construction loans is the same as for
residential mortgage loans, except that the appraiser evaluates the building
plans, construction specifications, and estimates of construction costs. The
Bank also evaluates the feasibility of the proposed construction project and the
experience and track record of the developer. In addition, all construction
loans generally require a commitment from a third-party lender or from the Bank
for a permanent long-term loan to replace the construction loan upon completion
of construction.
<PAGE>
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan, and the value of the collateral, if any. Consumer loans must be
approved by a consumer loan officer. Consumer loan originations currently are
being generated primarily through advertising.
Currently, it is the Bank's policy to originate both fixed-rate and
adjustable-rate loans, providing all such loans are eligible for sale in the
secondary market. It is the Bank's intention to hold all originated and
purchased loans in its portfolio and not for sale. Generally, the Bank is not
active in the secondary market.
The following table shows mortgage and other loan origination, purchase,
and repayment activity for the Bank during the periods indicated:
Years Ended September 30
----------------------------------------
1998 1997 1996
---------- ------------ ------------
(Dollars in thousands)
Mortgage loans originated
for the purpose of:
Construction-commercial $ 1,425 $ - $ 995
Construction-residential 8,386 9,120 6,582
Purchase/refinance-commercial 2,324 618 1,905
Purchase/refinance-residential 82,553 53,374 51,926
Consumer and other loans originated 14,463 9,462 6,837
---------- ---------- ----------
Total loans originated 109,151 72,574 68,245
---------- ---------- ----------
Loans purchased - - -
---------- ---------- ----------
109,151 72,574 68,245
---------- ---------- ----------
Loan credits:
Principal repayments 77,980 60,368 64,146
---------- ---------- ----------
Other:
Provision for losses on loans 75 50 9
Amortization of loan fees (380) (271) (368)
Loan foreclosures, net 73 183 111
---------- ---------- ----------
(232) (38) (248)
---------- ---------- ----------
Total credits, net 77,748 60,330 63,898
---------- ---------- ----------
Net increases in mortgage and other
loans receivable, net $ 31,403 $ 12,244 $ 4,347
========== ========== ==========
Interest Rates, Points and Fees
The Bank realizes interest, point, and fee income from its lending
activities. The Bank also realizes income from commitment fees for making
commitments to originate loans, from prepayment and late charges, loan fees,
application fees, and fees for other miscellaneous services.
The Bank accounts for loan origination fees in accordance with the
Statement of Financial Accounting Standards on Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans ("SFAS No. 91") issued
by the Financial Accounting Standards Board (the "FASB"). SFAS No. 91 prohibits
the immediate recognition of loan origination fees as revenues and requires that
such income (net of certain direct loan origination costs) for each loan be
amortized, generally by the interest method, over the estimated life of the loan
as an adjustment of yield.
<PAGE>
Nonperforming Assets
Loans are reviewed on a regular basis and are generally placed on
nonaccrual status when the loans become past due 90 days or more, or when, in
the judgment of management, the probability of collection is deemed to be
insufficient to warrant further accrual. When a loan is placed on a nonaccrual
status, previously accrued but unpaid interest is deducted from interest income.
When the Bank is unable to resolve a delinquency satisfactorily within 45 days
after the loan is past due, it will undertake foreclosure or other proceedings,
as necessary, to minimize any potential loss.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as "real estate owned" until it is sold. When
property is so acquired, it is recorded at the lower of loan balance or fair
market value at the date of acquisition. Periodically, real estate owned is
reviewed to ensure that net realizable value is not less than carrying value,
and any allowance resulting therefrom is charged to operations as a provision
for loss on real estate owned. All costs incurred in maintaining the property
from the date of acquisition are expensed.
The following table reflects the amount of loans in delinquent status as of
the dates indicated:
<TABLE>
Loans Delinquent For
-------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
------------------------- ----------------------- -----------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------ -------- -------- ------ ------ --------- ------ ------- --------
Real estate: (Dollars in thousands)
One to four 28 $1,378 0.56% 6 $171 0.07% 34 $606 0.25%
family
Consumer 20 256 1.59% 5 21 0.13% 6 146 0.91%
------ -------- ------ ------ ------ -------
Total 48 $1,634 0.60% 11 $192 0.07% 40 $752 0.28%
====== ======== ====== ====== ====== =======
</TABLE>
The following table sets forth the Bank's nonperforming assets at the dates
indicated:
At September 30,
---------------------------------------
1998 1997 1996 1995 1994
------ ------- --------- ------ -------
(Dollars in thousands)
Nonaccrual loans $729 $658 $ 814 $765 $1,020
Loans past due 90 days and
still accruing 23 64 88 99 49
------ ------- --------- ------ --------
752 722 902 864 1,069
Real estate owned, net
of allowance - - 110 47 25
------ ------- --------- ------ --------
Total nonperforming
assets $752 $722 $ 1,012 $911 $1,094
====== ======= ========= ====== ========
Consumer loans are placed on nonaccrual generally when the loan exceeds 90
days delinquent or if, in the opinion of management, the possibility of
collecting the loan becomes questionable. Mortgage loans are placed on
nonaccrual generally when the loan exceeds 90 days delinquent; however, if the
loan is below a 25% loan-to-value, management may at their option decide to
accrue interest on the loan, since collection of the loan appears highly likely.
<PAGE>
Interest income that would have been recognized for the year ended
September 30, 1998, if nonaccrual loans had been current in accordance with
their original terms, approximated $39,000. Interest income recognized on such
loans for the year ended September 30, 1998, approximated $24,000. At September
30, 1998, the Bank had no loans which were deemed impaired in accordance with
Statement of Financial Accounting Standards No. 114.
Federal regulations require savings associations to review their assets on
a regular basis and to classify them as: special mention; substandard; doubtful
and loss. Loans classified as special mention are loans which currently do not
expose the Bank to an unusual risk of loss but based on information available
require the attention of management. This classification usually includes loans
secured by unusual collateral, loans with documentary items which are being
addressed by counsel, and relatively large loans where the borrower has had a
history of delinquent payments and the collateral has a cashflow shortfall,
however, the borrower has continued to service the debt.
Loans classified as substandard or doubtful generally represent balances
where the borrower has made several late payments and is unable to bring the
loan current. Substandard loans generally represent situations where the
borrower is attempting to resolve the delinquency in the normal course of
business (i.e., sale of the property or infusion of additional capital). Loans
classified as doubtful represent situations where the borrower has been
unsuccessful in attempts to resolve the delinquency in the normal course of
business. Doubtful loans involve a greater degree of uncertainty regarding
estimate of loss.
Loans classified as loss represent situations where the loan is severely
delinquent. These loans typically involve extensive bankruptcy proceedings or
other unusual circumstances where the debtor contests foreclosure.
Loans classified as special mention, substandard or doubtful do not
necessarily require specific reserves. Individual loan balances may be
classified in one or more categories based on management's analysis and estimate
of the risk underlying each individual situation.
In accordance with the federal regulations, Management continually reviews
the mix and delinquency status of its loan portfolio and classifies those loans
which it deems appropriate.
As of September 30, 1998, loan balances were classified by the Bank as
follows:
Loss $ 25,152
Doubtful -0-
Substandard 872,367
Special Mention 1,326,626
Allowance for Losses on Loans and Real Estate Owned
The allowances for loan and real estate owned losses represent amounts
available to absorb inherent losses in the loan portfolio. Such allowances are
based on management's continuing review of the portfolios, historical
charge-offs, current economic conditions, and such other factors, which in
management's judgment deserve recognition in estimating possible losses. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses. Such agencies may
require additions to the allowances based on their judgment about the
information available to them at the time of their examination. Provisions for
losses are charged to earnings to bring the allowances to levels considered
necessary by management. Losses are charged to the allowances when considered
probable. As of September 30, 1998, the allowances for losses on loans and real
estate owned were $947,008 and $-0- respectively. Management believes that the
allowances are adequate to absorb known and inherent losses in the portfolio. No
assurance can be given, however, that economic conditions which may adversely
affect the Bank's markets or other circumstances will not result in additions to
the allowance for loan losses.
The following table presents an allocation of the Bank's allowance for loan
losses at the dates indicated and the percentage of loans in each category to
total loans.
<PAGE>
<TABLE>
September 30,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- ---------------
Amount % Amount % Amount % Amount % Amount %
------ ------- ------ ------- ------ ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance at end of
period applicable to:
Residential Mortgage Loans $742 91.5% $726 91.7% $594 91.8% $649 92.2% $ 627 92.6%
Commercial Real Estate Loans 121 2.6% 16 3.0% 15 3.0% 13 2.0% 172 1.3%
Consumer Loans 84 5.9% 37 5.3% 47 5.2% 64 5.8% 76 6.1%
Unallocated - 107 231 186 159
------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Total $947 100.0% $886 100.0% $887 100.0% $912 100.0% $1,034 100.0%
------ ------- ------ ------- ------ ------- ------ ------- ------- -------
</TABLE>
The following table is a summary of activity in the Bank's allowance for
loan losses for the periods indicated.
Summary of Loan Loss Experience Years ended September 30,
--------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
------ ------ ------ -------- --------
Balance of loan loss allowance at
beginning of year $886 $887 $912 $1,034 $1,025
Charge-offs
Residential - - - 153 5
Commercial real estate - - - - -
Commercial - - - - -
Consumer 47 84 55 47 30
------ ------ ------ -------- --------
Total Charge-offs 47 84 55 200 35
------ ------ ------ -------- --------
Recoveries
Residential - - - - -
Consumer 33 33 21 28 21
------ ------ ------ -------- --------
Total Recoveries 33 33 21 28 21
------ ------ ------ -------- --------
Net Charge-offs (Recoveries) 14 51 34 172 14
Provision for loan losses 75 50 9 50 23
------ ------ ------ -------- --------
Balance of loan loss allowance at
end of year $947 $886 $887 $ 912 $1,034
====== ====== ====== ======== ========
Ratio of net charge-offs to average
loans outstanding 0.01% 0.02% 0.02% 0.08% 0.01%
<PAGE>
Investment Activities
Federal thrift institutions have authority to invest in various types of
liquid assets, including United States Treasury obligations and securities of
various federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. As a member of the FHLB System, the Bank must
maintain minimum levels of liquid assets specified by the OTS which vary from
time to time. Subject to various regulatory restrictions, federal thrift
institutions may also invest a portion of their assets in certain commercial
paper, corporate debt securities and mutual funds whose assets conform to the
investments that a federal thrift institution is authorized to make directly. At
September 30, 1998, the Bank's ratio of liquid assets to total assets was 8.2%,
which exceeds the regulatory requirement.
The carrying values of the Bank's investment securities, including its
liquid assets, as of the dates indicated are presented on the following table.
At September 30,
-----------------------------------
1998 1997 1996
--------- ---------- ------------
Interest-bearing deposits and (Dollars in thousands)
certificates of deposit (1) $ 718 $ 8,715 $ 7,824
U.S. government and federal
agency securities
Held to maturity 4,000 8,000 13,175
Available for sale 11,287 19,822 20,590
Mortgage backed securities
Held to Maturity 372 499 631
Stock in FHLB of Indianapolis 2,218 2,062 2,004
Other
Held to maturity 696 758 455
Available for sale(2) 10,591 8,646 5,296
--------- --------- ---------
Total investments $29,882 $48,502 $49,975
========= ========= =========
- -----------------------------------
(1) In insured certificates of deposit at September 30, 1998; In FHLB of
Indianapolis ($7,739) and insured certificates of deposit ($976) at
September 30, 1997; in FHLB of Indianapolis at September 30, 1996.
(2) Van Kampen Prime Income Fund $3,784, Van Kampen Senior Income Trust $1,677,
State and Municipal obligations $5,130 at September 30, 1998; Van Kampen
Prime Income Fund $2,564, State and Municipal obligations $6,082 at
September 30, 1997; State and Municipal obligations at September 30, 1996.
The following table sets forth information regarding the maturity
distribution of investment securities at September 30, 1998, and the weighted
average yield on those securities.
<PAGE>
<TABLE>
At September 30, 1998
--------------------------------------------------------------
Available for Sale Held to Maturity
------------------------------ -------------------------------
(Dollars in thousands) Weighted Approximate Weighted Approximate
Amortized Average Fair Amortized Average Fair
Maturity Distribution at September 30: Cost Yield Value Cost Yield Value
<S> <C> <C> <C> <C> <C> <C>
--------- -------- ----------- --------- -------- -----------
Due in one year or less $ 3,453 5.27% $ 3,464 $4,100 5.26% $4,105
Due after one through five years 11,392 6.01% 11,508 486 5.69% 502
Due after five through ten years 1,253 6.21% 1,283 110 6.42% 110
Due after ten years 151 5.63% 162 - -
--------- ----------- --------- -----------
16,249 16,417 4,696 4,717
Mortgage-backed securities - - - 372 9.09% 387
Marketable equity securities 5,461 5,461 - -
--------- ----------- --------- -----------
Total $21,710 $21,878 $5,068 $5,104
========= =========== ========= ===========
</TABLE>
Sources of Funds
General
Deposits have traditionally been the primary source of funds of the Bank
for use in lending and investment activities. In addition to deposits, the Bank
derives funds from loan prepayments and income on earning assets. While income
on earning assets is a relatively stable source of funds, deposit inflows and
outflows can vary widely and are influenced by prevailing interest rates, money
market conditions, and levels of competition.
Deposits
Deposits are attracted principally from within the Bank's primary market
area through the offering of a variety of deposit instruments, including
passbook and statement accounts and certificates of deposit ranging in terms
from three months to five years. Deposit account terms vary, principally on the
basis of the minimum balance required, the time periods the funds must remain on
deposit and the interest rate. The Bank also offers individual retirement
accounts ("IRA's").
The Bank's policies are designed primarily to attract deposits from local
residents rather than to solicit deposits from areas outside its primary market.
The Bank does not accept deposits from brokers due to the volatility and rate
sensitivity of such deposits. Interest rates paid, maturity terms, service fees
and withdrawal penalties are established by the Bank on a periodic basis.
Determination of rates and terms are predicated upon funds acquisition and
liquidity requirements, rates paid by competitors, growth goals and federal
regulations.
A major determinant of the Bank's average cost of funds is the distribution
of the Bank's accounts by interest rate paid. An important indicator of the
Bank's stability of lendable funds is the distribution of the Bank's accounts by
maturity.
For information on the various interest rate categories, the amounts of
certificate accounts at September 30, 1998, maturing during the next five years
and thereafter see the Notes to Consolidated Financial Statements in the
Company's 1998 Annual Report.
The following table lists maturities of certificates of deposits where the
balance of the certificate exceeds $100,000 for the periods indicated. None of
these certificates were brokered deposits.
<PAGE>
At September 30,
-----------------
1998
----------
3 months or less $ 3,045
3-6 months 5,426
6-12 months 5,419
over 12 months 6,234
----------
Total $20,124
===========
Borrowings
As a member of the FHLB System and the FHLB of Indianapolis, the Bank is
eligible to arrange borrowings or advances for various purposes and on various
terms.. As of September 30, 1998 the Bank had outstanding advances to the FHLB
of Indianapolis of $5,000,000. The Bank had no outstanding advances as of
September 30, 1997 and 1996.
Reverse repurchase agreements, another source of borrowing for the Bank,
are retail obligations of the Bank with a maturity of 90 days or less, and are
generally secured with specific investment securities owned by the Bank.
The following tables set forth certain information as to the Bank's
short-term borrowings consisting of FHLB of Indianapolis advances and reverse
repurchase agreements for the periods and at the dates indicated. Average
balances and average interest rates are based on month-end balances.
Years Ended September 30
-------------------------
1998 1997 1996
------- ------- ---------
(Dollars in thousands)
Average balance of short-term borrowings...........$4,166 $2,412 $ 723
Highest month-end balance of total borrowings...... 5,088 3,293 1,000
Weighted average interest rate of total borrowings. 5.21% 4.85% 5.83%
At September 30
-------------------------
1998 1997 1996
------- ------- ---------
Reverse Repurchase agreements..................... 4,203 3,162 -
------- ------- ---------
Total short-term borrowings....................... $4,203 $3,162 $ -
======= ======= =========
Weighted average interest rate.................... 5.22% 5.31% -
Trust Department and Discount Brokerage Services
In October 1984, the FHLB of Indianapolis granted full trust powers to the
Bank, one of the first savings institutions in Indiana to be granted such
powers. As of September 30, 1998, the Bank's trust department assets totaled
approximately $45,368,000 including self-directed Individual Retirement Accounts
("IRA's") , and it was offering a variety of trust services including estate
planning. As of that date, the trust department was administering approximately
770 trust accounts, including estates, guardianships, revocable and irrevocable
trusts, testamentary trusts, and self-directed IRA accounts. The trust
department also offers and administers self-directed IRA's and Simplified
Employee Pension IRA's for small businesses.
<PAGE>
Non-Bank Subsidiary
Peoples Financial Services, Inc. ("PFSI") was organized in 1977 under the
laws of the State of Indiana. It is wholly owned by the Bank and conducts a
general insurance business within the State of Indiana under the name of Peoples
Insurance Agency. During fiscal years ended September 30, 1998 and 1997, PFSI
recorded total income of $97,493 and $41,094, respectively, with net income for
such periods amounting to $50,227 and $15,538, respectively.
Since 1985, the Bank also has offered discount brokerage services to its
customers. In 1996, this service was moved to the service corporation and was
offered through U.S. Clearing Corp. Prior to 1996, another vendor was used. This
service also reduces the expenses of securities transactions for the various
trust accounts administered by the trust department and provides customers with
a convenient and inexpensive means of conducting brokerage transactions.
Employees
As of September 30, 1998, the Bank employed 82 persons on a full-time basis
and 12 persons on a part-time basis. The Bank's employees are not represented by
any collective bargaining group, and management considers its relations with its
employees to be excellent.
REGULATION
General
The Company, as a savings and loan holding company, and the Bank, as a
federally chartered savings association, are subject to extensive regulation by
the OTS and the FDIC. The lending activities and other investments of the Bank
must comply with various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various regulatory
requirements and for safe and sound operations. The FDIC also has the authority
to conduct examinations. The Bank must file reports with the OTS describing its
activities and financial condition and is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve
System. This supervision and regulation is intended primarily for the protection
of depositors and the deposit insurance funds and not for the protection of
stockholders of the Company. Certain of these regulatory requirements are
referred to below or appear elsewhere herein.
In recent years, significant legislative proposals and reforms affecting
the financial services industry have been discussed and evaluated by Congress.
Such proposals include legislation to revise the Glass-Steagall Act, the Bank
Holding Company Act of 1956, as amended, and the Home Owners' Loan Act ("HOLA"),
as amended, to expand permissible activities for banks, principally to
facilitate the convergence of commercial and investment banking. Certain
proposals also sought to expand insurance activities of banks and to eliminate
the thrift charter. In addition, certain proposals seek to limit the powers of
unitary savings and loan holding companies. It is unclear whether any of these
proposals, or any form of them, will be introduced in the next Congress or
become law. Consequently, it is not possible to determine what effect, if any,
they may have on the Company and the Bank.
Regulation of the Company
General. The Company is a unitary savings and loan holding company as
defined by the HOLA. As such, the Company is registered with the OTS and is
subject to OTS regulation, examination, supervision and reporting requirements.
As a subsidiary of a savings and loan holding company, the Bank is subject to
certain restrictions in its dealings with the Company and affiliates thereof.
The Company also is required to file certain reports with, and otherwise comply
with, the rules and regulations of the SEC under the federal securities laws.
<PAGE>
Activities Restrictions. There are generally no restrictions on the
activities of a unitary savings and loan holding company. The broad latitude to
engage in activities under current law can be restricted if the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the OTS
may impose such restrictions as deemed necessary to address such risk including
limiting: (i) payment of dividends by the savings institution; (ii) transactions
between the savings institution and its affiliates; and (iii) any activities of
the savings institution that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also become subject to the activities
restrictions applicable to multiple holding companies and, unless the savings
institution requalifies as a QTL within one year thereafter, register as, and
become subject to, the restrictions applicable to a bank holding company. See
"Regulation of the Bank-Qualified Thrift Lender."
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the OTS, (i) control of any
other savings institution or savings and loan holding company or substantially
all the assets thereof or (ii) more than 5% of the voting shares of a savings
institution or holding company thereof which is not a subsidiary. Under certain
circumstances, a registered savings and loan holding company is permitted to
acquire, with the approval of the OTS, up to 15% of the voting shares of an
undercapitalized savings institution pursuant to a "qualified stock issuance"
without that savings institution being deemed controlled by the holding company.
In order for the shares acquired to constitute a "qualified stock issuance," the
shares must consist of previously unissued stock or treasury shares, the shares
must be acquired for cash, the saving and loan holding company's other
subsidiaries must have tangible capital of at least 6-1/2% of total assets,
there must not be more than one common director or officer between the savings
and loan holding company and the issuing savings institution, and transactions
between the savings institution and the savings and loan holding company and any
of its affiliates must conform to Sections 23A and 23B of the Federal Reserve
Act. Except with the prior approval of the OTS, no director or officer of a
savings and loan holding company or person owning by proxy or otherwise more
than 25% of such company's stock, may also acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
Regulation of the Bank
Federal Home Loan Bank System. The Bank is a member of the FHLB System,
which consists of 12 district Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan
Banks provide a central credit facility primarily for member institutions. As a
member of the FHLB of Indianapolis, the Bank is required to acquire and hold
shares of capital stock in the FHLB of Indianapolis in an amount at least equal
to 1% of the aggregate unpaid principal of its home mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
1/20 of its advances (i.e., borrowings) from the FHLB of Indianapolis, whichever
is greater. The Bank was in compliance with this requirement with an investment
in FHLB of Indianapolis stock at September 30, 1998, of $2,217,700.
The FHLB of Indianapolis serves as a reserve or central bank for its member
institutions within its assigned district. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members secured by certain prescribed collateral in accordance with
policies and procedures established by the FHFB and the Board of Directors of
the FHLB of Indianapolis. Long-term advances may only be made for the purpose of
providing funds for residential housing finance. Members must meet standards of
community investment or service established by the FHLB of Indianapolis in order
to maintain continued access to long-term advances. As of September 30, 1998,
the Bank had advances totaling $5,000,000 outstanding. See "Business of the
Company-Deposit Activity and Other Sources of Funds" and "Borrowings."
Liquidity Requirements. Under OTS regulations, a savings association is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations, and certain other investments) in each calendar quarter
of not less than 4% of either (1) its liquidity base (consisting of certain net
withdrawable accounts plus short-term borrowings) as of the end of the preceding
calendar quarter, or (2) the average daily balance of its liquidity base during
the preceding quarter. This liquidity requirement may be changed from time to
time by the OTS to any amount between 4.0% to 10.0%, depending upon certain
factors, including economic conditions and savings flows of all savings
associations. The Bank maintains liquid assets in compliance with these
regulations. Monetary penalties may be imposed upon an institution for
violations of liquidity requirements.
<PAGE>
Qualified Thrift Lender Test. Savings institutions must meet a qualified
thrift lender ("QTL") test, which test may be met either by maintaining a
specified level of assets in qualified thrift investments as specified in HOLA
or by meeting the definition of a "domestic building and loan association" in
section 7701 of the Internal Revenue Code of 1986, as amended (the "Code"). If
the Bank maintains an appropriate level of certain specified investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL or a domestic
building and loan association, it will continue to enjoy full borrowing
privileges from the FHLB. The required percentage of investments under HOLA is
65% of assets while the Code requires investments of 60% of assets. An
association must be in compliance with the QTL test or definition of domestic
building and loan association on a monthly basis in nine out of every 12 months.
Associations that fail to meet the QTL test will generally be prohibited from
engaging in any activity not permitted for both a national bank and a savings
association. As of September 30, 1998, the Bank was in compliance with its QTL
requirement and met the definition of a domestic building and loan association.
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets. In addition, OTS regulations which impose certain restrictions on
savings associations that have a total risk-based capital ratio that is less
than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0%
or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0%
if the institution is rated Composite 1 under the OTS examination rating
system).
The OTS has adopted an amendment to its risk-based capital requirements
that requires savings institutions with more than a "normal" level of interest
rate risk to maintain additional total capital (the OTS is delaying
implementation of this requirement). A savings institution's interest rate risk
will be measured in terms of the sensitivity of its "net portfolio value" to
changes in interest rates. Net portfolio value is defined, generally, as the
present value of expected cash inflows from existing assets and off-balance
sheet contracts less the present value of expected cash outflows from existing
liabilities. A savings institution will be considered to have a "normal" level
of interest rate risk exposure if the decline in its net portfolio value after
an immediate 200 basis point increase or decrease in market interest rates
(whichever results in the greater decline) is less than 2% of the current
estimated economic value of its assets. A savings institution with a greater
than normal interest rate risk will be required to deduct from total capital,
for purposes of calculating its risk-based capital requirement, an amount (the
"interest rate risk component") equal to one-half the difference between the
institution's measured interest rate risk and the normal level of interest rate
risk, multiplied by the economic value of its total assets.
<PAGE>
The OTS will calculate the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital will be based on
the institution's Thrift Financial Report filed two quarters earlier. In
general, savings institutions with less than $300 million in assets and a
risk-based capital ratio above 12% are exempt from this interest rate risk
component unless the OTS terminates such exemption. Although the Bank qualifies
for the exemption, management believes that based on current financial data, the
Bank would not be deemed to have more than a normal level of interest rate risk.
In addition to generally applicable capital standards for savings
institutions, the Director of the OTS is authorized to establish the minimum
level of capital for a savings institution at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such institution in light of the particular circumstances of the institution.
The Director of the OTS may treat the failure of any savings institution to
maintain capital at or above such level as an unsafe or unsound practice and may
issue a directive requiring any savings institution which fails to maintain
capital at or above the minimum level required by the Director to submit and
adhere to a plan for increasing capital. Such a directive may be enforced in the
same manner as an order issued by the OTS.
At September 30, 1998, the Bank exceeded all regulatory minimum capital
requirements as indicated in the table below.
Dollars in Thousands
Required for Adequate To Be Well
Actual Capital Capitalized
Amount % Amount % Amount %
Tier 1 capital
(to adjusted tangible assets) 35,029 11.76% $8,938 3.0% $17,875 6.00%
Tier 1 capital
(to adjusted total assets) 35,029 11.76 8,938 3.0 14,896 5.00
Risk-based capital
(to risk-weighted assets) 35,951 22.48 12,793 8.0 15,992 10.00
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to the maximum amount permitted by law. Insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC or the institution's primary regulator.
<PAGE>
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system as of December 31, 1995, SAIF members paid within a range of 23
cents to 31 cents per $100 of domestic deposits, depending upon the
institution's risk classification. This risk classification is based on an
institution's capital group and supervisory subgroup assignment. Pursuant to the
Economic Growth and Paperwork Reduction Act of 1996 (the "Act"), the FDIC
imposed a special assessment on SAIF members to capitalize the SAIF at the
designated reserve level of 1.25% as of October 1, 1996. Based on the Bank's
deposits as of March 31, 1995, the date for measuring the amount of the special
assessment pursuant to the Act, at September 30, 1997, the Bank recorded a
pretax expense of $1,500,871 and paid such special assessment on November 27,
1996 to recapitalize the SAIF.
Pursuant to the Act, the Bank pays, in addition to its normal deposit
insurance premium as a member of the SAIF ranging from 0 to 27 basis points as
of October 1, 1996, an amount equal to approximately 6.4 basis points toward the
retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s
to assist in the recovery of the savings and loan industry. Members of the Bank
Insurance Fund ("BIF"), by contrast, pay, in addition to their normal deposit
insurance premium, approximately 1.3 basis points. Under the Act, the FDIC also
is not permitted to establish SAIF assessment rates that are lower than
comparable BIF assessment rates. Beginning no later than January 1, 2000, the
rate paid to retire the Fico Bonds will be equal for members of the BIF and the
SAIF. The Act also provides for the merging of the BIF and the SAIF by January
1, 1999, provided there are no financial institutions still chartered as savings
associations at that time. Should the insurance funds be merged before January
1, 2000, the rate paid by all members of this new fund to retire the Fico Bonds
would be equal.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
the first $54.0 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of September 30, 1998, the Bank met its reserve
requirements.
Dividend Restrictions. Under OTS regulations, the Bank is not permitted to
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the remaining balance of the liquidation account established for
the benefit of certain depositors in connection with the conversion of the Bank
from the mutual to stock form of organization. In addition, the Bank is required
by OTS regulations to give the OTS 30 days' prior notice of any proposed
declaration of dividends to the Company.
OTS regulations impose additional limitations on the payment of dividends
and other capital distributions (including stock repurchases and cash mergers)
by the Bank. Under these regulations, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of: (a)
75% of its net income for the previous four quarters; or (b) up to 100% of its
net income to date during the calendar year plus an amount that would reduce by
50% its surplus capital ratio at the beginning of the calendar year. A savings
institution with total capital in excess of current minimum capital ratio
requirements but not in excess of the fully phased-in requirements (a "Tier 2
Association") is permitted, after notice, to make capital distributions without
OTS approval of up to 75% of its net income for the previous four quarters, less
dividends already paid for such period. A savings institution that fails to meet
current minimum capital requirements (a "Tier 3 Association") is prohibited from
making any capital distributions without the prior approval of the OTS. A Tier 1
Association that has been notified by the OTS that it is in need of more than
normal supervision will be treated as either a Tier 2 or Tier 3 Association.
Except under limited circumstances and with OTS approval, no capital
distributions would be permitted if they would cause the institution to become
undercapitalized. As of September 30, 1998, the Bank was considered a Tier 1
Association under OTS regulations.
Despite the above authority, the OTS may prohibit any savings institution
from making a capital distribution that would otherwise be permitted by the
regulation, if the OTS were to determine that the distribution constituted an
unsafe or unsound practice. Furthermore, under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distributions
if, after making the distribution, it would have: (i) a total risk-based capital
ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0%. See "Prompt Corrective
Regulatory Action."
<PAGE>
Affiliate Restrictions. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings association
may not purchase or invest in securities of an affiliate other than shares of a
subsidiary; a savings association and its subsidiaries may not purchase a
low-quality asset from an affiliate; and covered transactions and certain other
transactions between a savings association or its subsidiaries and an affiliate
must be on terms and conditions that are consistent with safe and sound banking
practices. With certain exceptions, each loan or extension of credit by a
savings association to an affiliate must be secured by collateral with a market
value ranging from 100% to 130% (depending on the type of collateral) of the
amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") decides to treat such subsidiaries
as affiliates. The regulation also requires savings associations to make and
retain records that reflect affiliate transactions in reasonable detail, and
provides that certain classes of savings associations may be required to give
the OTS prior notice of affiliate transactions.
Prompt Corrective Action. The prompt corrective action regulation of the
OTS requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that falls
within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
risk-based capital, leverage capital, and tangible capital ratios are used to
determine an institution's capital classification. At September 30, 1998, the
Bank met the capital requirements of a "well capitalized" institution under
applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept Brokered Deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew, or roll-over Brokered
Deposits.
<PAGE>
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
Community Reinvestment Act and Fair Lending Developments. The Bank is
subject to certain fair lending requirements and reporting obligations involving
home mortgage lending operations and Community Reinvestment Act ("CRA")
activities. The CRA generally requires the federal banking agencies to evaluate
the record of a financial institution in meeting the credit needs of its local
communities, including low- and moderate-income neighborhoods. A savings
association may be subject to substantial penalties and corrective measures for
a violation of certain fair lending laws. The federal banking agencies may take
compliance with such laws and CRA obligations into account when regulating and
supervising other activities.
A savings association's compliance with its CRA obligations is based on a
performance-based evaluation system which bases CRA ratings on an institution's
lending service and investment performance. When a holding company applies for
approval to acquire another financial institution or financial institution
holding company, the OTS will review the assessment of each subsidiary savings
association of the applicant; and such records may be the basis for denying the
application. In February, 1997, the OTS rated the Bank "satisfactory" in
complying with its CRA obligations.
Year 2000 Compliance. In May, 1997, the Federal Financial Institutions
Examination Council issued an interagency statement to the chief executive
officers of all federally supervised financial institutions regarding year 2000
project management awaremess. It is expected that unless financial institutions
address the technology issues relating to the coming of the year 2000, there
will be major disruptions in the operations of financial institutions. The
statement provides guidance to financial institutions, providers of data
services, and all examining personnel of the federal banking agencies regarding
the year 2000 problem. The federal banking agencies intend to conduct year 2000
compliance examinations, and the failure to implement a year 2000 program may be
seen by the federal banking agencies as an unsafe and unsound banking practice.
The OTS has recently established an examination procedure which contains three
catagories of ratings: "Satisfactory," "Needs Improvement," and
"Unsatisfactory." Institutions that receive a year 2000 rating of Unsatisfactory
may be subject to formal enforcement action, supervisory agreements, cease and
desist orders, civil money penalties, or the appointment of a conservator. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues. The Company is currently addressing the year
2000 issue, as more fully discussed in the Company's Annual Report to
Stockholders for the Year Ended September 30, 1998 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Year 2000."
Item 2. Properties
The Bank owns seven full-service banking offices located in Avilla, Auburn,
Columbia City, Garrett, Kendallville and LaGrange, Indiana.
The following table provides certain information with respect to the Bank's
full-service offices at September 30, 1998.
Full Service Net Book
Offices Date Opened Value(1)
Main Office, Auburn 1973 $149,283
Avilla 1980 120,858
Garrett 1972 54,096
Columbia City-Downtown 1971 136,284
Columbia City-North 1998 554,965
Kendallville 1941 472,883
LaGrange 1972 171,010
(1) Of real estate at September 30, 1998.
The Bank owns data processing equipment including computers, terminals and
communications equipment for record keeping purposes. The estimated costs to
make this equipment year 2000 compliant, are not expected to be material.
The total net book value of the Bank's premises and equipment at
September 30, 1998, was $2,396,878.
<PAGE>
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company, the
Bank or any subsidiary is a party or to which any of their property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Reference is made to page 2 of the Company's Annual Report to Stockholders,
for the year ended September 30, 1998, for the information required by this
Item, which is hereby incorporated by reference.
Item 6. Selected Financial Data
Reference is made to page 13 of the Company's Annual Report to Stockholders
for the year ended September 30, 1998, for the information required by this Item
which is hereby incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Reference is made to pages 6 to 12 of the Company's Annual Report to
Stockholders for the year ended September 30, 1998, for the information required
by this Item which is hereby incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to page s 7 and 8 of the Company's Annual Report to
Stockholders for the year ended September 30, 1998, for the information required
by this item which is hereby incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Reference is made to pages 14 to 28 of the Company's Annual Report to
Stockholders for the year ended September 30, 1998, for the information required
by this Item which is hereby incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to pages 2 - 4 of the Company's definitive Proxy
Statement for the 1999 Annual Meeting of Stockholders for the information
required by this Item which is hereby incorporated by reference.
Item 11. Executive Compensation
Reference is made to pages 5 - 10 of the Company's definitive Proxy
Statement for the 1999 Annual Meeting of Stockholders for the information
required by this Item which is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to pages 2 and 5 of the Company's definitive Proxy
Statement for the 1999 Annual Meeting of Stockholders for the information
required by this Item which is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to pages 5 and 6 of the Company's definitive Proxy
Statement for the 1999 Annual Meeting of Stockholders for the information
required by this Item which is hereby incorporated by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) The following consolidated financial statements of Peoples Bancorp and
Its Wholly-owned Subsidiary, included in the Annual Report to Stockholders of
the registrant for the year ended September 30, 1998, are filed as part of this
report:
1. Financial Statements
o REPORT OF OLIVE LLP, INDEPENDENT AUDITORS.
o CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - AS OF SEPTEMBER 30, 1998,
AND 1997.
o CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1998,
1997, AND 1996.
o CONSOLIDATED STATEMENT OF CHANGE IN STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED SEPTEMBER 30, 1998, 1997, AND 1996.
o CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30,
1998, 1997, AND 1996.
o NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable, or the required
information is shown in the consolidated financial statements and notes.
3. Exhibits
Exhibit No. Description of Exhibit
3.1 Articles of Incorporation of Peoples Bancorp (1)
3.2 Bylaws of Peoples Bancorp (1)
10.2 Employment Agreement of Roger J. Wertenberger
10.4 Amended and Restated Stock Option and Stock Grant Plan (2)
10.5 Employee Stock Ownership Plan (1)
10.5(a) First Amendment to Employee Stock Ownership Plan (3)
10.5(b) Second Amendment to Employee Stock Ownership Plan (3)
10.5(c) Third Amendment to Employee Stock Ownership Plan (3)
10.6 Expense and Tax Sharing Agreement between Peoples Bancorp, Peoples
Federal Savings Bank of DeKalb County and Peoples Financial Services,
Inc., dated May 28, 1992 (3)
10.7 New option plan
13 Annual Report to Stockholders
22 Subsidiaries of the Registrant
23 Consent of Auditors
27 Financial Data Schedule (4)
(1) Incorporated by reference to Exhibit bearing the same number in the
Company's Registration Statement of Form S-4 (33-37343) filed with the
Securities and Exchange Commission on October 17, 1990.
(2) Incorporated by reference to Exhibit bearing the same number in the
Company's Annual Report on form 10-K for the year ended September 30, 1991.
(3) Incorporated by reference to Exhibit bearing the same number in the
Company's Annual Report on form 10-K for the year ended September 30, 1992.
(4) For electronic filing purposes only.
The Securities and Exchange Commission maintains a Web sit that contains
reports, proxy and information statements and other information regarding
regeistrants that file electronically with the Commission including the Company.
That address is http://www.sec.gov.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEOPLES BANCORP
December 23, 1998 Roger J. Wertenberger
Chairman of the Board,
Principal Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
December 23, 1998 Roger J. Wertenberger,
Chairman of the Board,
Principal Executive Officer,
and Director
December 23, 1998 Maurice F. Winkler III,
President, and Director
December 23, 1998 Deborah K. Stanger
Vice President-Chief Financial Officer
December 23, 1998 Robert D. Ball, Director
December 23, 1998 Bruce S. Holwerda
December 23, 1998 John C. Harvey, Director
December 23, 1998 Douglas D. Marsh, Director
December 23, 1998 Lawrence R. Bowmar, Director
December 23, 1998 John C. Thrapp, Director
<PAGE>
EXHIBIT 10.2 EMPLOYMENT AGREEMENT OF ROGER J. WERTENBERGER
EMPLOYMENT AGREEMENT
AGREEMENT dated as of this 30th day of November, 1998, by and among PEOPLES
FEDERAL SAVINGS BANK OF DEKALB COUNTY, a savings bank organized under the laws
of the United States (the "Bank") and ROGER J. WERTENBERGER ("Employee").
BACKGROUND
Employee is the Chief Executive Officer and Chairman of the Board of
Directors of the Bank (the "Board"). To ensure the future services of Employee
as Chief Executive Officer and Chairman of the Board, the Bank is entering into
this employment agreement.
In consideration of the mutual covenants and agreements herein contained,
and intending to be legally bound hereby, the parties agree as follows:
1. Term of Employment.
The term of Employee's employment with the Bank shall continue for a one
(1)-year period beginning on the date hereof ("Effective Date"), and ending on
the last day of the month one year from the Effective Date (the "term"). On each
anniversary of the Effective Date, the one (1)-year period may be renewed and
recommenced in its entirety by mutual consent in writing (a copy of which shall
be appended hereto) of the Bank and Employee.
2. Employment and Services.
The Bank agrees to employ Employee during the term of his employment as Chief
Executive Officer of the Bank. The Bank agrees to nominate Employee to
successive terms as Chairman of the Board and to use its best efforts to elect
and re-elect Employee as Chairman of the Board. Employee agrees to accept such
employment, and to devote his time and efforts to the business and affairs of
the Bank, and to use his best efforts to promote the interests of the Bank.
3. Place of Performance.
In connection with his employment by the Bank, Employee shall be based at the
principal executive offices of the Bank, currently located in Auburn, Indiana,
and shall not be required to be absent therefrom on travel status or otherwise
more than 45 days in any calendar year. The Bank shall not, without the written
consent of Employee, relocate or transfer Employee to a location more than 30
miles from Employee's principal residence. The Bank will promptly pay (or
reimburse Employee for) all reasonable moving expenses incurred by Employee
relating to a change of his principal residence in connection with any such
relocation to which Employee has consented and will indemnify Employee against
any loss realized in the sale of his principal residence (defined as the
difference between the actual sale price of such residence and the higher of (a)
Employee's aggregate investment in such residence or (b) the fair market value
of such residence as determined by a real estate appraiser designated by
Employee and reasonably satisfactory to the Bank) in connection with any such
change of residence.
Employee shall be furnished with a private office, and other necessary
secretarial assistance, and with such other facilities, amenities and services
as are, in the reasonable judgment of Employee, appropriate for Employee's
position as Chief Executive Officer of the Bank and adequate for the performance
of his duties hereunder.
4. Compensation.
Subject to the provisions of any agreement between the Bank and Employee
relating to the payment of deferred compensation:
4.1 The Bank shall pay Employee for the services to be rendered by him hereunder
during the term of his employment the following compensation, payable at regular
intervals in accordance with the Bank's normal payroll practices now or
hereafter in effect. During the term of his employment, Employee shall be paid a
base salary (exclusive of any fees paid to Employee as a Director of the Bank)
at the rate of not less than $120,000 over the term of this agreement, subject
to review and upward adjustments as may be deemed appropriate by the Board or
designated committee thereof ("Committee"), should the Agreement be renewed and
recommenced in accordance with paragraph 1. The Board or Committee may, from
time to time, recommend an increase in salary for Employee hereunder, but shall
have no obligation to do so.
4.2 The Bank will, during the term of Employee's employment, reimburse Employee
for all expenses incurred by Employee which the Bank determines to be reasonable
and necessary (in accordance with its normal reimbursement practices now or
hereafter in effect) for Employee to carry out his duties under this Agreement.
4.3 Employee shall attend, at his discretion, those professional meetings,
conventions, and/or similar functions that he deems appropriate and useful for
purposes of keeping abreast of current developments in the industry and/or
promoting the interests of the Bank.
5. Plans and Fringe Benefits.
5.1 During the term of his employment, Employee shall be entitled (a) to
participate in any bonus programs (including, but not limited to Christmas
bonuses), incentive compensation programs, profit sharing plans, retirement
plans, stock option plans and stock purchase plans, now or hereafter in effect,
which are generally made available from time to time to executive officers of
the Bank, and (b) to such other fringe benefits as the Board or the Committee
shall deem appropriate or are otherwise to be made available to executive
employees of the Bank.
5.2 During the term of this Agreement, Employee shall have the use of a new
automobile to be provided by the Bank. The automobile shall be of the type and
make, chosen by Employee, equal to the type and make of automobile generally
provided to the Chief Executive Officer of a financial institution. The Bank
shall pay for the cost of purchasing or leasing, if the Bank determines to lease
the automobile, insuring, maintaining and operating the automobile.
6. Insurance.
The Bank shall, during the term of Employee's employment, provide Employee, at
no cost to him (other than applicable taxes), hospitalization, major medical,
disability and group life insurance.
7. Disability Benefits.
If Employee becomes permanently disabled during the term of his employment and
consequently cannot perform his duties under this Agreement, the Bank
nevertheless shall continue to compensate him under the terms of this Agreement
for one (1) year following disability, less any other payments provided under
any Bank disability plan.
8. Termination by the Bank.
(a) The Bank shall have the right to terminate Employee's employment hereunder,
for cause, upon thirty (30) days written notice to Employee. The term "cause",
as used herein, shall mean termination because of, in the good faith
determination of the Board, the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses), or final
cease-and-desist order, or material breach of any provision of this Agreement.
No act, or failure to act, on the Employee's part shall be considered "willful"
unless he has acted, or failed to act, with an absence of good faith and without
a reasonable belief that his action or failure to act was in the best interest
of the Bank. Notwithstanding the foregoing, (i) the Employee shall not be deemed
to have been terminated for cause unless there shall have been delivered to the
Employee a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the entire membership of the Board at a meeting of the Board
called and held for the purpose (after reasonable notice to the Employee and an
opportunity for the Employee to be heard before the Board), finding that, in the
good faith opinion of the Board, the Employee was guilty of conduct set forth
above in the second sentence of this Subsection 8(a) and specifying the
particulars thereof in detail.
If the Bank exercises its right under this Section 8(a), the Bank shall continue
to pay Employee his salary and all other benefits provided for under this
Agreement for a period of thirty (30) days from the date of the exercise of that
right.
(b) The Bank shall have the right (subject to the limitations of Section 11.1)
to terminate Employee's employment hereunder, without cause, upon the payment to
Employee of the following:
(i) 2.99 times Employee's salary provided for under Section 4.1;
(ii) the bonus provided for under Section 11.2(g) hereof, if any for three
years;
(iii) the insurance provided for under Section 6 hereof for three years;
(iv) the disability benefits provided under Section 7 shall remain in
effect, as if this Agreement was still in full force and effect for
three years;
(v) the benefits provided for under Section 11.2 (c), (d), and (e) of
this Agreement shall become immediately applicable.
(c) Should there occur a "change in control" of the Bank as defined in Section
11.1 of this Agreement, the compensation provisions provided for under Section
8(b)(i) through (v) hereof shall be suspended during the remaining term of this
Agreement, and during such period, if the Bank exercises its right to terminate
without cause the Employee's employment hereunder, such termination shall only
be upon payment to the Employee of the sums provided for as if Employee had
elected to terminate his employment under the provisions of Section 11.1 of this
Agreement and he shall be paid in accordance with Section 11.2 of this
Agreement.
(d) The failure to elect or re-elect or appoint Employee as Chairman of the
Board shall be deemed to be a termination without cause under Sections 8(b) or
(c) of this Agreement.
9. Supervisory Suspension.
If Employee is suspended and/or temporarily prohibited from participating in the
conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(l)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(l)), the
Bank's obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank shall (a) pay Employee all or part of the compensation
withheld while its obligations under this Agreement were suspended and (b)
reinstate (in whole or in part) any of its obligations which were suspended.
10. Supervisory Removal.
If Employee is removed and/or permanently prohibited from participating in the
conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(l)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) and (g)(l)), all
obligations of the Bank under this Agreement shall terminate as of the effective
date of the order, but vested rights of the parties to the Agreement shall not
be affected.
11. Change in Management of the Bank.
11.1 In the event that there are changes in the composition of the Board of the
Bank or Peoples Bancorp, to the extent that current management of the Bank is no
longer in control of the Bank or Peoples Bancorp, except for normal changes in
the composition of the Board as a result of retirements and resignations in the
ordinary course of business and not as a result of a "change in control" (as
defined in this Section) or takeover of the Bank or Peoples Bancorp, Employee
shall have the right to terminate his employment with the Bank upon five (5)
days written notice to the Board, such notice to be delivered to the Board
within one hundred eighty (180) days of the date upon which such "change in
control" is deemed to have occurred; provided, however, that during such one
hundred eighty (180) day period, the Bank may not exercise its right to
terminate Employee without cause pursuant to Paragraph 8(b). The provisions of
this Section 11.1 shall not apply to changes made in connection with a takeover
or merger of the Bank or Peoples Bancorp unanimously approved by the Boards of
the Bank and Peoples Bancorp and the required percentage of the issued and
outstanding capital stock of the Bank and Peoples Bancorp, as required, by the
charter, bylaws and applicable regulations. For the purposes of this Agreement,
a "change in control" ("Change in Control") shall mean a change in control of a
nature that would be required to be reported in response to item 5(f) of
Schedule 14A of Regulation 14A promulgated under the Securities and Exchange Act
of 1934 ("Exchange Act"), except that any merger, consolidation, corporate
reorganizing where the owner of the Bank's or Peoples Bancorp's capital stock
entitled to vote in the election of directors ("Voting Stock") prior to said
combination own seventy-five percent (75%) or more of the resulting entity's
Voting Stock shall not be considered a change in control for the purposes of
this Agreement; provided that, without limitation, such Change in Control shall
be deemed to have occurred if (i) any "person" (as that term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) is or becomes the "beneficial owner" (as
that term is used in Section 13(d) of the Exchange Act), directly or indirectly,
of more than twenty-five percent (25%) of the outstanding Voting Stock of the
Bank or Peoples Bancorp or the successor of either entity; or (ii) during any
period of two (2) consecutive years, individuals who at the beginning of such
period constitute the Board cease, for any reason, to constitute at least a
majority thereof unless the election of each director, who was not a director at
the beginning of the period, was approved by a vote of at least three-quarters
(3/4) of the directors still in office who were directors at the beginning of
the period; or (iii) there shall occur the sale of all, or substantially all, of
the assets of the Bank or Peoples Bancorp.
11.2 If Employee exercises his right under Section 11.1:
(a) The Bank shall pay Employee 2.99 times the salary provided under
Section 4.1 hereof and the Bank shall continue to pay the amounts under Section
5.1 hereof, for a period of three (3) years from the date of exercise of that
right.
(b) The Bank shall transfer to Employee, at no cost to Employee, all of its
right, title and interest to the automobile provided Employee under Section 5.2
hereof, or shall make lease payments for the remaining term of the lease, if
any, and shall pay the insurance thereon for a period of three (3) years from
the date of exercise of that right or on any substitute automobile purchased by
Employee during the three (3)-year period.
(c) The Bank shall fund fully all unfunded benefits as may be applicable to
Employee under any Bank retirement plan for which Employee shall be, at the time
of such termination, a participant.
(d) To the extent that Employee's rights under any profit-sharing,
retirement or other plan, are not fully vested under said plan at the time of
his termination of employment under Section 11.1, the Bank shall provide
Employee with a benefit equal to the value of his forfeited rights and provide
Employee with a benefit equal to the value of any benefits which would have
accrued on behalf of Employee had he remained in the service of the Bank during
the period for which payments are provided for under this Section as if he was
employed by the Bank during this period.
(e) Upon a Change in Control, all stock options granted to Employee by
Peoples Bancorp shall become immediately exercisable with respect to all or any
portion of the shares covered thereby, regardless of whether such options are
otherwise exercisable, and all service period restrictions on stock grants
awarded to Employee shall lapse so as to permit the transfer of all stock
subject to such grants. The Bank shall reimburse Employee for any federal income
tax liability incurred by Employee in connection with the exercise of such
options and/or the lapse of any service period restrictions on stock grants
which would not have otherwise been incurred by Employee in the absence of such
options and grants becoming immediately available upon a Change in Control, such
reimbursement to be submitted to the Executive within ten (10) days of written
notification to the Bank by Employee of the exact amount of such additional tax
liability. To the extent any option granted to Employee, which is unexercised at
such time, cannot otherwise be exercised during the entire three (3)-year period
immediately following termination of Employee's employment, the Bank shall
provide Employee with an equivalent benefit.
(f) The Bank shall also continue to provide the benefits as provided under
Section 6 of this Agreement for a period of three (3) years from the date of
exercise of that right.
(g) At the end of each fiscal year of the Bank or portion thereof during
the entire three (3)-year period immediately following Employee's termination of
employment, Employee shall be paid an annual bonus of one percent (1%) of
Peoples Bancorp pre-tax profits on a consolidated basis (including the pre-tax
profits of the Bank) as computed by Peoples Bancorp's independent certified
public accountants in accordance with generally accepted accounting principles.
In no event shall the bonus to be paid pursuant to this paragraph (g) be in
excess of two hundred percent (200%) of the base salary of Employee provided for
in Section 4.1, as increased either by the Board or the Committee. For years in
which this Agreement is not in effect for the Bank's entire fiscal year,
Employee's compensation under this paragraph (g) shall be pro-rated to the
extent that this Agreement is in effect. Payment to Employee pursuant to this
Section shall be made within sixty (60) days after the close of the Bank's
fiscal year.
(h) This section 11 shall be interpreted and administered so that Employee
shall receive no compensation or other benefits subject to the excise tax
imposed by Section 4999 of the Code taking into account this Agreement and all
other plans, agreements or arrangements involving the Employee, the Bank, the
Company and/or their respective affiliates (including, but not limited to, any
stock option or incentive plan or restricted stock plan). The determination by
the Bank that any compensation or other benefits would cause the excise tax
imposed by section 4999 to apply shall be final and conclusive. In the event the
Bank determines that compensation or other benefits under this Agreement or any
such plans, agreements or arrangements must be reduced in order to avoid
imposition of the excise tax, the Bank shall decide which benefits will be
reduced and by how much, provided, however, that the Bank shall offer the
Employee an opportunity or consult with the Bank about said decision prior to
making the decision.
12. Waivers Not to be Continued.
Any waiver by a party of any breach of this Agreement by another party shall not
be construed as a continuing waiver or as a consent to any subsequent breach by
the other party.
13. Notices.
All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed, certified or registered mail, return receipt requested, with postage
prepaid, to the following addresses or to such other address as either party may
designate by like notice.
A) If to the Bank, to:
Peoples Federal Savings Bank of DeKalb County
212 West 7th Street
Auburn, Indiana 46706
B) If to Employee, to:
Roger J. Wertenberger
Peoples Federal Savings Bank of DeKalb County
212 West 7th Street
Auburn, Indiana 46706
C) with a copy to:
Edward L. Lublin, Esq.
Manatt, Phelps & Phillips, LLP
1501 M Street, N.W.
Suite 700
Washington, D.C. 20005
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
14. Unauthorized Disclosure.
During the period of his employment hereunder, Employee shall not, except as
required by any court, supervisory authority or administrative agency, without
the written consent of the Board or a person authorized thereby, disclose to any
person, other than an employee of the Bank or a person to whom disclosure is
reasonably necessary or appropriate in connection with the performance by
Employee of his duties as an executive of the Bank, any confidential information
obtained by him while in the employ of the Bank provided, however, that
confidential information shall not include any information known generally to
the public (other than as a result of unauthorized disclosure by Employee).
Unless Employee terminates his employment hereunder pursuant to Section 11.1
hereof, for the period ending two years following the termination of employment
hereunder, Employee shall not disclose any confidential information of the type
described above except as required by any court, supervisory authority or
administrative agency or as determined by him to be reasonably necessary in
connection with any business or activity in which he is then engaged.
15. Arbitration.
Any dispute or controversy arising or in connection with this Agreement shall be
settled exclusively by arbitration in the State of Indiana in accordance with
the rules of the American Arbitration Association then in effect.
Notwithstanding the pendency of any such dispute or controversy, the Bank will
continue to pay Employee's full compensation in effect when the notice giving
rise to the dispute was given (including, but no limited to, base salary and
installments under this Agreement) and continue Employee as a participant in all
compensation, benefit and insurance plans in which Employee was participating
when the notice giving rise to the dispute was given, until the dispute is
finally resolved. Judgment may be entered on the arbitrator's award in any court
of competent jurisdiction.
16. Estate Benefit.
Any monetary payment or benefit to be funded by the payment of money required to
be paid to Employee upon a termination of Employee's employment under Sections
9, 11, and 12 of this Agreement shall be paid to the estate or legal
representative of Employee if he is deceased.
17. Regulators' Termination.
17.1 All obligations under this Agreement may be terminated, except to the
extent determined that the continuation of the Agreement is necessary for the
continued operation of the Bank: (a) by the Director of the Office of Thrift
Supervision at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
Federal Deposit Insurance Act; or (b) by the Director of the Office of Thrift
Supervision at the time such Director approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by such
Director to be in an unsafe and unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
17.2 If the Bank is in default (as defined in Section3(x)(l) of the Federal
Deposit Insurance Act), all obligations under this Agreement shall terminate as
of the date of default, except that such termination shall not effect any vested
rights of the parties hereto.
18. General Provisions.
18.1 This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof, and supersedes and replaces all prior
agreements between the Bank and the parties with the exception of any agreement
between the Bank and Employee relating to the payment of deferred compensation.
No amendment, waiver or termination of any of the provisions hereof shall be
effective unless in writing and signed by the party against whom it is sought to
be enforced. Any written amendment, waiver or termination hereof executed by the
Bank and Employee (or his estate) shall be binding upon them and upon all other
Persons, without the necessity of securing the consent of any other Person, and
no Person shall be deemed to be a third party beneficiary under this Agreement.
18.2 "Person" as used in this Agreement means a natural person, joint
venture, corporation, sole proprietorship, trust, estate, partnership,
cooperative, association, non-profit organization or any other legally
cognizable entity.
18.3 This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same Agreement.
18.4 Except as otherwise expressly set forth herein, no failure on the part
of any party hereto to exercise and no delay in exercising any right, power or
remedy hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or remedy hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
18.5 The headings of the sections of this Agreement have been inserted for
convenience of reference only and shall in no way restrict or modify any of the
terms or provisions hereof.
18.6 This Agreement shall be governed and construed and the legal
relationships of the parties determined in accordance with the laws of the State
of Indiana applicable to contracts executed and to be performed solely in the
State of Indiana.
19. Peoples Bancorp Guarantee
Peoples Bancorp hereby guarantees the terms, conditions, and obligations of this
agreement for the Bancorp and the Bank.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first mentioned.
PEOPLES FEDERAL SAVINGS
BANK OF DEKALB COUNTY
BY:___________________________________
[CORPORATE SEAL]
ATTEST:_______________________________
PEOPLES BANCORP
[CORPORATE SEAL]
BY:____________________________________
ATTEST:________________________________
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
CONTENTS
Letter to Stockholders..........................1
Highlights and Stock Information................2
Our Mission to Help Customers...................3
Board of Directors and Executive Officers.......4
Branch Managers and Mission Statement...........5
Management's Discussion And Analysis............6
Selected Consolidated Financial Data...........13
Consolidated Financial Statements..............14
Independent Auditor's Report...................29
Statement of Management's Responsibility.......29
Corporate Profile....................Inside Cover
Executive Officers of Bancorp
Roger J. Wertenberger Maurice F. Winkler, III John E. Weigel, III
Chairman of the Board and President and Corporate Secretary
Chief Executive Officer Chief Operating Officer
Independent Auditors
Olive LLP
201 North Illinois Street
Indianapolis, IN 46204
Legal Counsel Transfer Agent
Manatt, Phelps & Phillips Fifth Third Bank
1200 New Hampshire Avenue N.W. Corporate Trust Services
Suite 200 38 Fountain Square Plaza
Washington, D.C. 20036 Cincinnati, OH 45263
TEL: 513-579-5320
800-837-2755
ANNUAL MEETING
The annual meeting of stockholders of Peoples Bancorp will be held Wednesday,
January, 13, 1999 at 2:00 p.m. at Greenhurst Country Club, 1740 North Main
Street, Auburn, Indiana 47606.
CORPORATE PROFILE
Peoples Bancorp (the Company) is a holding company formed in 1990. Its stock is
traded on NASDAQ National Market System under the symbol PFDC.
The Company's primary asset is Peoples Federal Savings Bank of DeKalb County
(the Bank). The Bank was formed in 1925 and has grown to assets of more than
$300 million.
The Bank's main office is located in Auburn, Indiana with full service offices
in Avilla, Columbia City, Garrett, Kendallville and LaGrange. A second office
was opened in Columbia City in April, 1998.
The Bank's financial services include mortgages, trusts, consumer banking, and
individual retirement accounts.
The Bank is a member of the Federal Home Loan Bank System, and its deposits are
insured by the Federal Deposit Insurance Corp.
CORPORATE INFORMATION
Form 10-K Report
A copy of the Company's 10-K, including financial statements as filed with the
Seurities and Exchange Commission, will be furnished without charge to
stockholders of the Company upon written request to the Secretary, Peoples
Bancorp, 212 West 7th Street, P.O. Box 231, Auburn, Indiana 47606. As of the
close of business on September 30, 1998, the company had approximately 1,500
stockholders.
ABOUT THE COVER
Pictured are five accomplishments of Peoples Federal in 1998:
(Top left) Vice President-Lending, Jay Grate, with local developer, Dave Graber,
at the Parade of Homes' Peoples Choice Award winner financed by Peoples Federal.
(Top right) One of the ATM's installed in April.
(Left middle)Kristie Prater, taking a construction application from a customer,
Sue Shankle, for a new mortgage. Evening and weekend appointments have been a
popular service.
(Right middle) Branch Manager, Andy Anderson, making a contribution to Beth Went
of the Whitley Memorial Hospital Building Fund in Columbia City.
(Lower right) A view of the new Columbia City office of Peoples opened in April.
<PAGE>
To Our Stockholders and Friends
Peoples Bancorp and its subsidiary, Peoples Federal Savings Bank had record
earnings of $4,206,695 or $1.25 per share, up from $1.22 last fiscal year. While
the increase was modest we consider it an accomplishment due to the start up
expenses of a new branch in Columbia City and the four new Automatic Teller
Machines put into service in 1998.
Other accomplishments this year include:
Assets increased $14,335,186 and now total $304,936,781.
$1,507,566 was paid in cash dividends to stockholders. The eleventh consecutive
year cash dividends have been increased.
The mortgage loan officers closed $99,899,634 in mortgage loans during fiscal
'98.
Loan totals reached a new high of $267,605,591, an increase of $31,463,355 or
13.3%.
Return on average assets was approximately 1.4% in fiscal '98, which we believe
will exceed many of our peer group.
$2,354,093 of earnings was used to repurchase 111,302 of Peoples Bancorp shares,
in keeping with our long-term plan for stockholder enhancement.
Deposits and repurchase agreements increased nearly $7.8 million dollars in
fiscal '98.
We feel that our opportunities to increase our services in Northeastern Indiana
will be enhanced by the mega banking mergers taking place in our area. The
strengths of Peoples Federal are the experienced and dedicated local staff and
our ability to make decisions on a local basis. The staff at Peoples has been
meeting the financial services needs of Northeastern Indiana for over 75 years.
Effective January, 1999, Robert D. Ball, a valued and trusted friend of the Bank
will retire from the Board of Directors after 27 years of service. His wise and
valuable contributions guided this bank through the stock conversion in 1987 and
many other major decisions made over the years. Mr. Ball will continue to serve
the bank as Director Emeritus.
Much has been written about the year 2000 problem for software and computers. We
have already replaced the majority of our computers and have identified the
potential problems. Peoples expects to be year 2000 compliant well before the
new millennium.
On behalf of the Board of Directors and the employees of Peoples, we wish to
thank you for your continued confidence and support.
Roger J. Wertenberger Maurice F. Winkler, III
Chairman & Chief Executive Officer President & Chief Operating Officer
<PAGE>
FINANCIAL HIGHLIGHTS
1998 1997
---------- ----------
(dollars in thousands except per share data)
Operating Results:
Net Interest Income $ 10,867 $ 10,430
Provision for Loan Losses 75 50
Dividends Per Share 0.45 0.41
Average Equity to Average Assets 15.08% 15.22%
At Year End:
Assets 304,937 290,602
Loans 267,606 236,142
Allowance for Loan Losses 947 887
Deposits 248,545 241,790
Stockholders' Equity 44,671 44,298
Book Value Per Share 13.62 13.06
Common Stock Information
Information listed below has been adjusted for stock split
Market Price Dividends
---------------------------
Low High Per Share
-------- ------- ----------
Fiscal 1998
1st QTR $20.83 $25.00 $0.11
2nd QTR 21.50 23.25 0.11
3rd QTR 21.13 23.00 0.11
4th QTR 20.13 22.75 0.12
Fiscal 1997
1st QTR $12.83 $13.67 $0.10
2nd QTR 13.00 15.33 0.10
3rd QTR 14.50 15.33 0.10
4th QTR 14.67 21.17 0.11
The price of PFDC stock traded on NASDAQ on November 30, 1998
was $20.62
(This page includes 4 graphs showing Total Assets, Net Loans, Book Value per
Share, and Dividends per share for the last 5 years.)
<PAGE>
Our Mission is to Help Customers Reach Their Goals
As a strong, local bank, our mission is to serve our customers as
individuals. Peoples realize that our customers have many different goals -- the
dream of their first home, saving for retirement, or providing educational
assistance for their children. Peoples and its staff have provided personal
service for 73 years to northeastern Indiana. The Bank has been growing and
adding services, but has no plans to leave our roots to become a nationwide
bank. Peoples goal is to help others reach their goals as we live and work in
the communities we serve.
As a step in that direction, Peoples launched new products to improve
existing services and made plans for changes ahead in 1999, all with an eye
toward improving customer service.
In the past year, our service has grown and improved with the successful
introduction of the ATM/Debit card network. Four machines have been in operation
since May. Photo identification on debit cards has been added to protect against
theft and this part of our business will grow as we market the cards to more
people.
Many customers have brought their mortgage business to Peoples Federal this
past year. We like to think that we are opening doors; Opening doors to families
buying their first homes, opening doors to people who've had to struggle just to
get access to mortgage credit and opening doors for customers by encouraging
them to save and plan for the future with products like trusts, IRA's, and
certificates of deposit. Our Home Savings Program has provided down payment
assistance in cooperation with Federal Home Loan Bank. Our figures in this
report show increases in loans. This has been accomplished by adding a more
efficient mortgage servicing system, providing evening and weekend appointments
with a mobile loan originator, and extra effort through loan officers who help
our customers open doors to the dream of home ownership.
I would like to recount the recent story of the Brian Chandler family of
Kendallville who recently purchased a home. They used the Home Pilot Savings
program which provided a 2 for 1 match of dollars up to $5,000 maximum for down
payment assistance. During the required home inspection, the furnace was
determined to be defective and emitting carbon monoxide and gas fumes. Words
cannot convey their appreciation as a possible tragedy was avoided for Brian and
his wife, Andrea. Good solid counseling and following all the requirements
helped newlyweds steer clear of a possible tragedy.
A second Peoples branch was opened in Columbia City this April that
provides personalized service, a new ATM machine, and expanded drive-up
facilities. Our theory is that customers need to be able to talk with the local
banker instead of following the megabank trend of transferring their people out
of branch locations. Peoples has promoted three experienced loan officers this
year and added one additional officer to keep up with expanding business. This
new Columbia City office will continue to enable us to expand market share in
the Columbia City market.
Peoples Federal is also a bank that partners with local organizations to
reinvest in the communities we serve and from which we draw deposits. The
primary responsibility of banks is to engage in the business of banking
prudently and for productive purposes. Some of the organizations that benefited
last year are Habitat for Humanity in several counties; Whitley County Hospital;
Peabody Library; Little League baseball teams; softball teams; and basketball
teams. We also have established Peoples Charitable Foundation that has awarded
scholarships to deserving area students. Peoples Federal strives to meet the
objective as an integral part of their communities, because it is the
responsibility of a good corporate citizen.
A key part of our corporate philosophy of community banking is that we can
operate best with the empowerment of local managers whom customers know and
trust. As we face increased competition from megabanks, we are confident that
local management will remain profitable by addressing expense control,
exercising good credit judgment, and assisting our customers individually. We
are excited to face the new millennium with a staff that believes in community
participation, both financially and through volunteerism.
Our region continues to enjoy a low inflation rate, one of the lowest
unemployment rates in the state and nation, and sound economic development of
the region in which we do business. The prospects for continued economic health
look bright. We stand ready to do our part by maintaining a well capitalized
bank with a strong balance sheet.
This report to our shareholders shows that Peoples has been successfully
serving individuals in small to medium size markets and that community banking
is the most consistently profitable type. Our mission remains to help customers
reach their goals.
<PAGE>
Picture of Board of Directors Picture of Maury & Bruce Holwerda
Directors:
Roger J. Wertenberger
Chairman of the Board and Chief Executive
Officer of the Bank, Auburn, Indiana.
Director since 1954.
Robert D. Ball
Former principal owner of Ball Brass and
Aluminum Foundry, Inc., Auburn, Indiana
Director since 1982.
Lawrence R. Bowmar
Retired Vice President-Consumer Loans of
the Bank, Auburn, Indiana
Director from 1974-1992 and 1993-present.
John C. Harvey
Physician, Auburn, Indiana
Director since 1979.
Bruce S. Holwerda
Vice President and Chief Operating Officer
Ambassador Steel Corp., Auburn, Indiana
Director since 1998.
Douglas D. Marsh
Chairman of the Board, Applied
Innovations, Inc., Chicago, Illinois
President, Bridgewater Golf Co., Auburn, Indiana
Associate, Auburn Realty, Auburn, Indiana
Director since 1982.
John C. Thrapp
Attorney, Thrapp & Thrapp,
Kendallville, Indiana
Director since 1990.
Maurice F. Winkler, III
President and Chief Operating Officer
of the Bank, Auburn, Indiana
Director since 1993.
Jack L. Buttermore
Director Emeritus
Lloyd M. Cline
Director Emeritus
Jesse A. (Jack) Sanders
Director Emeritus
Russell A. Spice
Director Emeritus
Picture of Executive Officers
EXECUTIVE OFFICERS OF THE BANK
Roger J. Wertenberger Carole J. Leins
Chief Executive Officer Vice President-Service Corporation
Maurice F. Winkler, III Donald E. Budd
President and Chief Operating Vice President-Trust Officer
Officer
Jeffery L. Grate Deborah K. Stanger
Vice President-Lending Operations Vice President-Chief
Financial Officer
Herma F. Fields John E. Weigel, III
Vice President-Savings Compliance Officer
<PAGE>
OFFICE LOCATIONS:
Auburn Office-212 West 7th St., Auburn, IN 47606
Avilla Office-105 North Main St., Avilla, IN 47610
Columbia City Downtown Office-123-129 S. Main St., Columbia City, IN 46725
Columbia City North Office-507 N. Main St., Columbia City, IN 46725
Garrett Office-1212 S. Randolph St., Garrett, IN 46738
Kendallville Office-116 W. Mitchell St., Kendallville, IN 46755
LaGrange Office-114-118 S. Detroit St., LaGrange, IN 46761
This page includes a picture of branch managers, Richard Lewton, LaGrange,
Dewayne Anderson, Columbia City, Brenda Strohm, Garrett, Cindy Jollief, Avilla,
Clark Ream, Kendallville, and April Haynes, Columbia City North.
Peoples Federal Philosophy of Community Banking
Peoples Federal Savings Bank believes in community banking. Peoples serves
individuals and small to medium-sized businesses in its market areas. We believe
that community banking is the most consistently profitable type of banking.
Peoples believes that community banking operates best with empowerment of
local management you know and trust.
Peoples emphasizes funding of its assets with retail core deposits
generated in its branches and main office. Peoples does not use brokered
deposits and believes borrowings should be kept to a minimum.
Peoples is a secured local lender and always emphasizes credit quality over
asset growth. The costs of poor credit far outweigh the benefits of unwise asset
growth.
Peoples believes it is essential to be well-capitalized with a strong
balance sheet. Capital is the cushion against poor economic times and errors in
credit judgment.
Peoples is very expense control oriented. A profitable community bank must
be a low-cost provider of services.
Peoples is very sales oriented and believes in sharing profits with the
community and with all employees
Peoples places a high priority on the development of technology to enhance
productivity, customer service and new products. Properly applied technology
reduces costs and enhances services. Peoples is committed to providing extra
services through convenient access, innovative products and good customer
relations. Many of our customers bank with us because we are convenient.
Peoples encourages open employee communications. Peoples promotes from
within whenever possible and places the highest priority on honesty, integrity
and ethical behavior.
Peoples believes in community participation, both financially and through
volunteerism.
Peoples practices affirmative action and does not discriminate against
anyone in employment or the extension of credit.
Peoples Federal is committed to providing affordable housing for low income
people. Several programs are in place with the Federal Home Loan Bank of
Indianapolis ("FHLB") to assist our low income customers with their housing
needs.
<PAGE>
Management's Discussion and Analysis of Financial Conditions and Results of
Operations:
General
Peoples Bancorp (the "Company") is an Indiana corporation organized in
October, 1990 to become the thrift holding company for Peoples Federal Savings
Bank (the "Bank"). The Company is the sole stockholder of Peoples Federal. The
Bank conducts business from its main office in Auburn and in its six
full-service offices located in Avilla, Columbia City, Garrett, Kendallville,
and LaGrange, Indiana. Peoples Federal offers a full range of retail deposit
services and lending services to northeastern Indiana. The Company's primary
business activity is being the holding company for Peoples Federal.
Historically, the principal business of savings banks, including Peoples
Federal, has consisted of attracting deposits from the general public and making
loans secured by residential real estate. Peoples Federal's net earnings are
contingent on the difference or spread between the interest earned on its loans
and investments and the interest paid on its consumer deposits and borrowings.
The Bank is also significantly affected by prevailing economic conditions,
government policies, regulations, interest rates, and local competition.
The Company's earnings are primarily dependent upon the earnings of the
Bank. Interest income is a function of the balance of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amounts of deposits and
borrowings outstanding during the same period and the rates paid on such
deposits and borrowings. Peoples Federal's earnings are also affected by gains
and losses on sales of loans and investments, provisions for loan losses,
service charges, income from subsidiary activities, operating expenses and
income taxes.
On a yearly basis, The Bank updates its long-term strategic plan. This plan
includes, among other things, Peoples Federal's commitment to maintaining a
strong capital base and continuing to improve the organization's return on
assets through asset growth and controlling operating expenses. Continued
careful monitoring of Peoples Federal's interest rate risk is also cited as an
important goal. As a result, continued origination of short-term consumer and
installment loans, prime plus equity loans, adjustable rate mortgage loans, and
fixed-rate real estate loans with original terms of 15 years or less will be
emphasized.
The following table sets forth the weighted average yield on
interest-earning assets and the weighted average rate on interest- bearing
liabilities for the years ending September 30, 1998, 1997, and 1996.
September 30
-------------------------
1998 1997 1996
-------- ------- --------
Weighted average interest rate on:
Loans 8.03% 8.15% 8.33%
Securities 6.02 5.89 5.64
Other interest-earning assets 6.58 6.42 6.19
Combined 7.75 7.76 7.85
Weighted average cost of:
NOW and savings deposits 2.85 2.78 2.64
Certificates of deposit 5.62 5.64 5.70
Borrowings 5.21 4.85 5.94
Combined 4.79 4.80 4.79
Interest rate spread 2.96 2.96 3.06
Net yield on weighted average
interest-earning assets 3.67 3.70 3.75
The following table sets forth the weighted average yield on
interest-earning assets and the weighted average rate of interest- bearing
liabilities at September 30, 1998, 1997 and 1996.
At September 30
-----------------------
1998 1997 1996
------- ------- -------
Weighted average interest rate on:
Loans 7.98% 8.34% 8.02%
Securities 5.61 5.41 5.18
Other interest-earning assets 5.01 6.20 6.81
Combined 7.76 7.89 7.57
Weighted average cost of:
NOW and savings deposits 2.78 2.98 2.80
Certificates of deposit 5.72 5.78 5.72
Borrowings 5.22 5.31 ---
Combined 4.84 4.97 4.89
Interest rate spread 2.92 2.92 2.68
Asset and Liability Management
Peoples Federal, like other savings banks, is subject to interest rate risk
to the degree that its interest-bearing liabilities, primarily deposits with
short and medium-term maturities, mature or reprice more rapidly than its
interest-earning assets. Although having liabilities that mature or reprice more
frequently on average than assets will be beneficial in times of declining
interest rates, such an asset/liability structure will result in lower net
income during periods of rising interest rates, unless offset by other factors
such as noninterest income.
Historically, all of Peoples Federal's real estate loans were made at fixed
rates. More recently, the Bank has adopted an asset and liability management
plan that calls for the origination of residential mortgage loans and other
loans with adjustable interest rates, the origination of 15-year or less
residential mortgage loans with fixed rates, and the maintenance of investments
with short to medium terms.
<PAGE>
The following table illustrates the projected maturities and the repricing
mechanisms of the major asset and liability categories of Peoples Federal as of
September 30, 1998. Maturity and repricing dates have been stated to reflect the
contractual maturity and repricing dates. The information presented in the
following table is derived from information that is provided to the OTS in
"Schedule CMR: Maturity and Rate" filed as part of Peoples Federal's September
30, 1998, quarterly report. The data contained in the following report is the
contractual repricing information and does not contain any assumptions regarding
repricing.
<TABLE>
At September 30, 1998
(Dollars in Thousands)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 Months More than 3 Months Over
Period to maturity or repricing or Less Thru 1 Year 1-3 Years 3-5 Years 5 Years Total
------------ ------------ ------------ ------------ ------------ ------------
Interest earning assets:
Adjustable rate loans $ - $34,779 $ 4,355 $ 77 $ - $ 39,211
Fixed rate loans 2,881 6,609 2,110 4,925 199,644 216,169
Investment securities 9,961 3,781 4,532 7,463 1,927 27,664
Consumer and other loans 8,723 1,707 2,000 2,238 1,462 16,130
------------ ------------ ------------ ------------ ------------ ------------
Total Assets Subject to Repricing 21,565 46,876 12,997 14,703 203,033 299,174
------------ ------------ ------------ ------------ ------------ ------------
Liabilities Subject to Repricing:
Certificates of deposit 60,242 47,817 57,106 7,707 - 172,872
N.O.W. and other transaction
accounts 27,407 - - - - 27,407
Passbook accounts 34,949 - - - - 34,949
Money market accounts 13,034 - - - - 13,034
Borrowings 5,203 1,000 - 1,000 2,000 9,203
------------ ------------ ------------ ------------ ------------ ------------
Total Liabilities Subject to Repricing 140,835 48,817 57,106 8,707 2,000 257,465
------------ ------------ ------------ ------------ ------------ ------------
Excess (deficiency) of rate sensitive
assets over rate sensitive liabilities $(119,270) $ (1,941) $ (44,109) $ 5,996 $201,033 $ 41,709
============ ============ ============ ============ ============ ============
Cumulative excess (deficiency) of rate
sensitive assets over rate sensitive $(119,270) $(121,211) $(165,320) $(159,324) $ 41,709 $ 41,709
liabilities ============= ============ ============ ============ ============ ============
As a % of Total Assets Subject
to Repricing (39.87)% (40.52)% (55.26)% (53.25)% 13.94% 13.94%
</TABLE>
A negative interest rate gap leaves Peoples Federal's earnings vulnerable
to periods of rising interest rates because during such periods, the interest
expense paid on liabilities will generally increase more rapidly than the
interest income earned on assets. Conversely, in a falling interest rate
environment, the total expense paid on liabilities will generally decrease more
rapidly than the interest income earned on assets. A positive interest rate gap
will have the opposite effect. The Company's management believes that the Bank's
interest rate gap in recent periods has generally been maintained within an
acceptable range in view of the prevailing interest rate environment.
The OTS has proposed a regulation, which uses a net market value
methodology to measure the interest rate risk exposure of thrift institutions.
Under this OTS regulation, an institution's "normal" level of interest rate risk
in the event of an assumed change in interest rates is a decrease in the
institution's NPV in an amount not exceeding 2% of the present value of its
assets. Thrift institutions with over $300 million in assets or less than a 12%
risk-based capital ratio are required to file OTS Schedule CMR. Data from
Schedule CMR is used by the OTS to calculate changes in NPV (and the related
"normal" level of interest rate risk) based upon certain interest rate changes
(discussed below). Institutions which do not meet either of the filing
requirements are not required to file OTS Schedule CMR, but may do so
voluntarily. Under the proposed regulation, institutions which must file are
required to take a deduction (the interest rate risk capital component) from
their total capital available to calculate their risk-based capital requirement
if their interest rate exposure is greater than "normal". The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Presented below, as of September 30, 1998 and 1997, is an analysis
performed by the OTS of Peoples Federal's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 400 basis points. At September
30, 1198 and 1997, 2% of the present value of Peoples Federal's assets were
approximately $6.2 million and $5.8 million. Because the interest rate risk of a
200 basis point decrease in market rates (which was greater than the interest
rate risk of a 200 basis point increase) was $7.5 million at September 30, 1998
and $9.8 million at September 30, 1997, Peoples Federal would have been required
to make a deduction from its total capital available to calculate its risk based
capital requirement if the OTS's regulation had been enacted. The decrease in
interest rate risk from 1997 to 1998 is due to an improved match of expected
cash flows from assets and liabilities.
<PAGE>
Intrerest RateRisk As of September 30, 1998
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- ------------ ------------- --------- ------------ --------
+400 bp 24,386 (18,384) -43% 8.62% (529)
+300 bp 29,960 (12,811) -30% 10.33% (357)
+200 bp 35,253 (7,517) -18% 11.88% (203)
+100 bp 39,709 (3,061) -7% 13.11% (79)
0 bp 42,770 - 0% 13.91% -
- -100 bp 44,320 1,550 4% 14.26% 35
- -200 bp 46,360 3,590 8% 14.73% 82
- -300 bp 49,198 6,428 15% 15.40% 149
- -400 bp 52,160 9,390 22% 16.08% 217
Intrerest RateRisk As of September 30, 1997
Changes Market Value
in Rates $ Amount $ Change % Change NPV Ratio Change
- --------- ------------ ------------- --------- ----------- ----------
+400 bp 22,411 (21,410) -49% 8.39% (651)
+300 bp 28,240 (15,581) -36% 10.29% (460)
+200 bp 34,003 (9,818) -22% 12.08% (282)
+100 bp 39,396 (4,425) -10% 13.66% (123)
0 bp 43,821 - 0% 14.90% -
- -100 bp 46,396 2,574 6% 15.55% 66
- -200 bp 47,503 3,682 8% 15.78% 88
- -300 bp 48,959 5,138 12% 16.09% 120
- -400 bp 51,640 7,819 18% 16.73% 184
In evaluating the Bank's exposure to interest rate risk, certain
shortcomings, inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and liabilities
may have similar maturities or period s to repricing, they may react in
different degrees to changes in market interest rates. Also, the interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels could deviate significantly from those
assumed in calculating the table. Finally, the ability of may borrowers to
service their debt may decrease in the event of an interest rate increase. As a
result, the actual effect of changing interest rates may differ from that
presented in the foregoing table.
Interest Income
Net interest income decreases during periods when the spread is narrowed
between the Bank's weighted average rate at which new loans are originated and
its weighted average cost of liabilities. In addition, the Bank's ability to
originate and sell mortgage loans is affected by market factors such as interest
rates, competition, consumer preferences, the supply of and demand for housing,
and the availability of funds.
<PAGE>
The following table sets forth the weighted average yields earned on the
Bank's assets and the weighted average interest rates paid on the Bank's
liabilities.
<TABLE>
Years ended September 30
(Dollars in Thousands)
------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
- ----------- ----------- --------- ------ ------------ --------- ------ ----------- -------- -------
Interest-earning assets:
Loans(1) $252,520 $20,266 8.03% $230,278 $18,758 8.15% $223,861 $18,646 8.33%
Investment securities(2) 33,665 2,025 6.02 34,992 2,060 5.89 36,655 2,068 5.64
Other interest-earning assets 10,069 663 6.58 16,822 1,080 6.42 16,513 1,022 6.19
---------- ---------- ----------- --------- ----------- --------
Total interest-earning assets 296,254 22,954 7.75 282,092 21,898 7.76 277,029 21,736 7.85
---------- --------- --------
Allowance for loan losses (906) (883) (932)
Other assets 4,291 3,484 3,796
---------- ----------- -----------
Total Assets $299,639 $284,693 $279,893
========== =========== ===========
Interest-bearing liabilities:
NOW and savings deposits $ 74,516 $ 2,124 2.85 $ 70,004 $ 1,949 2.78 $ 70,043 $1,846 2.64
Certificates of deposit 171,963 9,670 5.62 166,557 9,402 5.64 163,758 9,341 5.70
Borrowings 5,623 293 5.21 2,412 117 4.85 724 43 5.94
---------- ---------- ------------ --------- ----------- --------
Total interest-bearing
liabilities 252,102 12,087 4.79 238,973 11,468 4.80 234,525 11,230 4.79
---------- --------- ---------
Other liabilities 2,332 2,358 2,513
Stockholders' equity 45,205 43,362 42,855
---------- ------------ -----------
Total Liabilities and
Stockholders' equity $299,639 $284,693 $279,893
========== ============ ===========
Net interest income/spread $10,867 2.96 $10,430 2.96 $10,506 3.06
========== ========== =========
Net yield on interest earning assets 3.67 3.70 3.75
(1) Average balances include nonaccrual balances.
(2) Yield on investment securities is computed based on amortized cost.
</TABLE>
Investments include US Government securities, including those issued and
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA"), and the Government National Mortgage
Association ("GNMA"), and state and local obligations. This activity (a)
generates positive interest rate spreads on large principal balances with
minimal administrative expense; (b) lowers the credit risk of the Bank's loan
portfolio as a result of the guarantees of full payment of principal and
interest by FHLMC, FNMA, and GNMA; (c) enables the Bank to use securities as
collateral for financings in the capital markets; and (d) increases the
liquidity of the Bank.
In addition to changes in interest rates, changes in volume can have a
significant effect on net interest income. The following table describes the
extent to which changes in interest rates and changes in volume of interest
related assets and liabilities have affected Peoples Federal's interest income
and expense for the periods indicated. For the purposes of this table, changes
attributable to both rate and volume which cannot be separated have been
allocated proportionately to the change due to volume and the change due to
rate.
<PAGE>
<TABLE>
Years ended September 30,
------------------------------------------------------------------------------------
1998 vs 1997 1997 vs 1996 1996 vs 1995
--------------------------- --------------------------- ----------------------------
Increase Increase Increase
(Decrease) Total (Decrease) Total (Decrease) Total
Due to Increase Due to Increase Due to Increase
--------------- ---------------- ----------------
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------- -------- ---------- -------- ------- ---------- -------- ------- -----------
Interest income from:
Loans $1,779 $(271) $1,508 $453 $(345) $108 $403 $344 $ 747
Investment securities (83) 48 (35) (86) 82 (4) (371) 177 (194)
Other interest-earning assets (445) 28 (417) 20 38 58 581 (83) 498
-------- ------- ---------- -------- ------- ---------- -------- ------- -----------
Total interest income 1,251 (195) 1,056 387 (225) 162 613 438 $1,051
-------- ------- ---------- -------- ------- ---------- -------- ------- -----------
Interest expense from:
NOW and savings deposits 126 49 175 (1) 104 103 (70) 24 (46)
Certificates of deposit 301 (33) 268 159 (98) 61 341 181 522
Borrowings 167 9 176 80 (6) 74 26 1 27
-------- ------- ---------- -------- ------- ---------- -------- ------- -----------
Total interest expense 594 25 619 238 - 238 297 206 503
-------- ------- ---------- -------- ------- ---------- -------- ------- -----------
Net interest income (expense) $ 657 $(220) $ 437 $149 $(225) $(76) $316 $232 $ 548
======== = ===== ========== ======== ======= ========== ======== ======= ===========
</TABLE>
Operating Expense
While operating expenses have increased, the increases have been due in
large part to the expansion of the Bank's operations. The increases, with the
exception of increased FDIC premiums, are service related and consist of the
following: appraisal and legal fees in connection with loan originations, data
processing due to automating manual systems; and start up costs for new
services. Operating expenses as a percentage of the Bank's total assets were
1.57%, 1.46%, and 2.12% for fiscal years ended September 30, 1998, 1997, and
1996, respectively. However, the ratio for 1996 includes the special assessment
by the FDIC to recapitalize the SAIF. Without this assessment, the ratio for
1996 would have been 1.58%.
The Bank continuously seeks to reduce operating expenses. In this regard,
the budget committee of the Board of Directors monitors the Bank's current
operating budget on at least a quarterly basis to ascertain that expense levels
remain within projected ranges and to establish competitive, as opposed to
aggressive, rates for the Bank's various deposit accounts. The Bank's efforts to
contain operating expense also include underwriting policies that attempt to
reduce potential losses and conservative expansion of personnel.
Liquidity and Capital Resources
The standard measure of liquidity for savings banks is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year. The minimum required ratio is currently set by
OTS regulation at 4%, of which 1% must be comprised of short-term investments
(i.e., generally with a term of less than one year). Liquid assets consist of
cash and eligible investments, which include certain United States Treasury
obligations, securities of various federal agencies, certificates of deposit at
insured banks, federal funds, and bankers' acceptances. At September 30, 1998,
the Bank had liquid assets of $24,313,208. This represents a ratio of liquid
assets to total assets of 8.2%.
The primary internal sources of funds for operations are principal and
interest payments on loans and new deposits. In addition, if greater liquidity
is required, the Bank can borrow from the FHLB. In the opinion of management,
the Bank's liquid assets are adequate to meet mortgage commitments ($6,746,620
at September 30, 1998, all for residential mortgage loans), consumer loan
commitments ($13,612,380 at September 30, 1998, primarily for home equity lines)
and other obligations and expenditures.
During the year ended September 30, 1998 cash and cash equivalents
decreased over $7.1 million. This decrease was used to fund an increase in loans
of $31.5 million. The balance of the increase was funded by a decrease in
investment securities of $10.8 million, and increases in deposits of $6.8
million and borrowings of $6.0 million. Operations provided $4.2 million.
During the year ended September 30, 1997, there was a net decrease of $0.3
million in cash and cash equivalents. This decrease was primarily due to lower
levels of cash on hand this year versus last. The loan portfolio increased
approximately $12 million. The major sources of cash during the year were the
increase in deposits of $6.7 million, the increase in borrowed funds of $3.2
million, securities maturities of $2.7 million which were not reinvested, and
operating activities which provided $3.2 million.
<PAGE>
Results of Operations, Fiscal Year Ended September 30, 1998 Compared to Fiscal
Year Ended September 30, 1997
The Company's net interest income increased to $10,792,316 for the fiscal
year ended September 30, 1998, an increase of $412,076 over the previous year.
The increase was primarily attributable to the increased volume of loans this
year versus last. The increase in loan income was partially offset by increased
interest expense due to higher volumes of deposits, and higher borrowing volumes
necessary to fund the loans. Interest expense increased $619,706 to $12,087,265.
Provision for loan losses increased $24,621 to $74,621 reflecting
adjustments due to management's continuing review of its earning asset
portfolio. Management's review of its loan portfolio is based on historical
information, review of specific loans, and general economic conditions.
Other income increased $113,518 to $757,682. This increase was a
combination of higher fiduciary fees collected this year, and gains on
securities sold.
Total non-interest expense for the year was $4,746,908, an increase of
$518,456. This increase consisted of increased salaries and benefits of
$270,147, equipment and occupancy expense of $173,995, and data processing
expense of $118,963. These increases were caused by the addition of a second
branch in Columbia City, and the addition of four ATM machines during this year.
Deposit insurance expense decreased $65,625 due to the lower premium rate being
in effect for the entire fiscal year.
The effective tax rate for the Company for the years ended September 30,
1998 and 1997 was 38.2%
Results of Operations, Fiscal Year Ended September 30, 1997 Compared to Fiscal
Year Ended September 30, 1996
The Company's net interest income decreased $117,346 to $10,380,240. This
decrease was a combination of higher interest income and higher interest
expense. Interest on loans increased $112,653 due to higher volumes partially
offset by lower rates charged on the loans. Interest on securities remained
stable at $2,052,480. While security volumes decreased during the year, the
decrease was offset by higher rates earned on these investments. Other interest
income increased slightly due to a combination of higher rates and higher
volumes. Interest expense increased $237,969 due to a combination of higher
rates paid on DDA and savings products, and higher volumes on certificate of
deposit accounts and short term borrowings.
Provision for loan losses increased $41,176 from $8,824 to $50,000
reflecting adjustments due to management's continuing review of its earning
asset portfolio. Management's review of its loan portfolio is based on
historical information, review of specific loans, and general economic
conditions.
Other income remained steady at $644,164 as compared to $640,928 last year.
Total non-interest expense was $4,228,452, a decrease of $1,701,597. The
biggest component of the decrease was deposit insurance expense. Last year the
Company was assessed a special charge of $1,500,870 to cover the SAIF fund
recapitalization. After the special assessment, deposit insurance premiums
decreased from 23 basis points to 6.3 basis points per $100 of insured deposits
effective January 1, 1997. This accounted for an additional savings of $315,332
over the previous year. This savings was partially offset by increased occupancy
and equipment expense of $111,736 due to the installation of the check imaging
system and other capital improvements made during the year.
The effective tax rates for the Company for the years ended 1997 and 1996
were 38.2% and 38.3% respectively.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial condition and operating results in
terms of historical dollars or fair value without considering changes in the
relative purchasing power of money over time due to inflation.
Virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or with
the same magnitude as the prices of goods and services, since such prices are
affected by inflation. In a volatile interest rate environment, liquidity and
the maturity structure of the Bank's assets and liabilities are critical to the
maintenance of acceptable performance levels.
Year 2000
The Company has an ongoing program to ensure that its operational and
financial systems will not be adversely affected by year 2000 software failures.
They have begun testing mission critical software and hardware applications, and
expect to be finished with this testing process well in advance of December 31,
1999. Software and hardware which has been deemed not to be year 2000 compliant
has, or is being replaced. While the Company believes it is taking all
appropriate steps to assure year 2000 compliance, it is dependent on vendor
compliance to some extent. The Company is requiring its systems and software
vendors to represent that the services and products provided are, or will be,
year 2000 compliant. The Company estimates that the cost to redevelop, replace
or repair its technology will not have a material impact on its financial
results.
In addition to possible expenses related to our own systems and those of
our service providers, we could incur losses if Year 2000 problems affect any of
our depositors or borrowers. Such problems could include delayed loan payments
due to Year 2000 problems affecting any of our significant borrowers or
impairing the payroll systems of large employers in our market area. Because our
loan portfolio to individual borrowers is diversified and our market area does
not depend significantly upon one employer or industry, we do not expect any
such Year 2000 related difficulties that may affect our depositors and borrowers
to significantly affect our net earnings or cash flow.
Future Accounting Issues
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, establishing 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. It requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This Statement
does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement.
<PAGE>
SFAS No. 130 also requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
The Statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
Disclosures about Segments of an Enterprise. In June 1997, the FASB issued
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishing standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
SFAS No. 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. This Statement need not be
applied to interim financial statements in the initial year of its application,
but comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods in the
second year of application.
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
September 30
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $304,936,781 $290,601,595 $280,011,850 $276,607,771 $266,455,068
Loans receivable, net 266,658,583 235,255,669 223,011,251 218,663,928 209,330,499
Investments and other
interest-earning assets 27,664,033 46,439,468 47,970,950 47,811,103 44,711,326
Deposits 248,545,280 241,790,139 235,081,440 232,747,018 226,851,009
Borrowed funds 9,202,653 3,162,400 - 1,000,000 -
Stockholders' equity 44,670,627 44,298,170 42,676,765 41,624,026 38,720,750
For Year Ended September 30
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
Operating Data:
Interest income $ 22,954,202 $ 21,897,799 $ 21,736,000 $ 20,685,111 $ 18,689,877
Interest expense 12,087,265 11,467,559 11,229,590 10,727,454 8,829,951
------------- ------------- ------------- ------------- -------------
Net interest income 10,866,937 10,430,240 10,506,410 9,957,657 9,859,926
Provision
for losses on loans 74,621 50,000 8,824 50,058 23,746
------------- ------------- ------------- ------------- -------------
Net interest income
after provision
for losses on loans 10,792,316 10,380,240 10,497,586 9,907,599 9,836,180
Other income 757,682 644,164 640,928 630,064 606,722
Other expenses 4,746,908 4,228,452 5,930,049 4,146,191 4,259,836
------------- ------------- ------------- ------------- -------------
Income before income taxes 6,803,090 6,795,952 5,208,465 6,391,472 6,183,066
Income tax expense 2,596,395 2,593,760 1,996,007 2,492,042 2,424,950
------------- ------------- ------------- ------------- -------------
Net income $ 4,206,695 $ 4,202,192 $ 3,212,458 $ 3,899,430 $ 3,758,116
============= ============= ============= ============= =============
Net income per common share $1.25 $1.22 $0.91 $1.10 $1.06
============= ============= ============= ============= =============
Dividends per common share $0.45 $0.41 $0.37 $0.31 $0.27
============= ============= ============= ============= =============
Other Data:
Average yield on all interest-
earning assets 7.75% 7.76% 7.85% 7.68% 7.26%
Average cost of all interest-
bearing liabilities 4.79 4.80 4.79 4.65 4.01
------------- ------------ ------------- ------------- -------------
Interest rate spread 2.96% 2.96% 3.06% 3.03% 3.25%
============= ============ ============= ============= =============
Number of full service
banking offices 7 7 6 6 6
Return on assets (net income
divided by average total
assets) 1.40 1.47 1.15 1.43 1.45
Return on equity (net income
divided by average total
equity) 9.31 9.69 7.50 9.66 10.06
Dividend payout ratio (dividends
per common share divided by
net income per common share) 36.00 33.61 40.66 41.82 25.79
Equity to assets ratio (average
total equity divided by average
total assets) 15.08 15.22 15.37 14.84 14.43
</TABLE>
<PAGE>
Peoples Bancorp and Subsidiary
Consolidated Balance Sheet
September 30
1998 1997
-------------- --------------
Assets
Cash and due from banks $ 3,567,625 $ 2,993,154
Interest-bearing deposits - 7,738,990
-------------- --------------
Total cash and cash equivalents 3,567,625 10,732,144
Interest-bearing time deposits 718,000 976,000
Investment securities
Available for sale 21,877,758 28,467,800
Held to maturity 5,068,275 9,256,678
-------------- --------------
Total investment securities 26,946,033 37,724,478
Loans 267,605,591 236,142,236
Less: Allowance for loan losses 947,008 886,567
-------------- --------------
Net loans 266,658,583 235,255,669
Premises and equipment 2,396,878 1,712,774
Federal Home Loan Bank of Indianapolis stock,
at cost 2,217,700 2,062,200
Other assets 2,431,962 2,138,330
-------------- --------------
Total assets $304,936,781 $290,601,595
============== ==============
Liabilities
Bank overdraft $ 1,171,306 $ -
NOW and savings deposits 75,428,503 70,539,511
Certificates of deposit 173,116,777 171,250,628
Short-term borrowings 4,202,653 3,162,400
Long-term debt 5,000,000 -
Advances by borrowers for taxes and insurance 998 1,591
Other liabilities 1,345,917 1,349,295
-------------- --------------
Total liabilities 260,266,154 246,303,425
-------------- --------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $1 par value
Authorized and unissued-5,000,000 shares
Common stock, $1 par value
Authorized-7,000,000 shares
Issued and outstanding-3,280,684 and
3,391,986 shares 3,280,684 3,391,986
Additional paid-in capital 3,020,798 5,263,589
Retained earnings-substantially restricted 38,272,422 35,573,293
Net unrealized gain on securities available
for sale 96,723 69,302
-------------- --------------
Total stockholders' equity 44,670,627 44,298,170
-------------- --------------
Total liabilities and stockholders'
equity $304,936,781 $290,601,595
============== ==============
See notes to consolidated financial statements.
<PAGE>
Peoples Bancorp and Subsidiary
Consolidated Statement of Income
Year Ended September 30
1998 1997 1996
------------- ------------- -------------
Interest Income
Loans $20,271,263 $18,758,262 $18,645,609
Investment securities 1,793,778 2,052,480 2,068,753
Other interest and dividend income 889,161 1,087,057 1,021,638
------------- ------------- -------------
22,954,202 21,897,799 21,736,000
------------- ------------- -------------
Interest Expense
Deposits
NOW and savings deposits 2,124,060 1,948,834 1,845,731
Certificates of deposit 9,669,669 9,401,639 9,340,756
Short-term borrowings 198,113 117,086 43,103
Long-term debt 95,423 - -
------------- ------------- -------------
12,087,265 11,467,559 11,229,590
------------- ------------- -------------
Net Interest Income 10,866,937 10,430,240 10,506,410
Provision for loan losses 74,621 50,000 8,824
------------- ------------- -------------
Net Interest Income After Provision for
Loan Losses 10,792,316 10,380,240 10,497,586
------------- ------------- -------------
Other Income
Fiduciary activities 98,246 54,689 63,089
Fees and service charges 455,089 448,124 445,691
Other income 204,347 141,351 132,148
------------- ------------- -------------
Total other income 757,682 644,164 640,928
------------- ------------- -------------
Other Expenses
Salaries and employee benefits 2,508,878 2,238,731 2,253,254
Net occupancy expenses 319,856 294,372 255,784
Equipment expenses 377,522 229,011 155,863
Data processing expense 403,291 284,328 303,577
Deposit insurance expense 150,359 215,984 2,032,186
Other expenses 987,002 966,026 929,385
------------- ------------- -------------
Total other expenses 4,746,908 4,228,452 5,930,049
------------- ------------- -------------
Income Before Income Tax 6,803,090 6,795,952 5,208,465
Income tax expense 2,596,395 2,593,760 1,996,007
------------- ------------- -------------
Net Income $ 4,206,695 $ 4,202,192 $ 3,212,458
============= ============= =============
Basic Earnings per Share $1.25 $1.22 $.91
Diluted Earnings per Share 1.25 1.22 .91
See notes to consolidated financial statements.
<PAGE>
<TABLE>
Peoples Bancorp and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
Net Unrealized
Common Stock Additional Gain (Loss) Total
-------------------- on Securities
Number Paid-in Retained Available Stockholders'
of Shares Amount Capital Earnings for Sale Equity
--------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances October 1, 1995 2,362,898 $2,362,898 $8,423,385 $30,865,260 $(27,517) $41,624,026
Exercise of stock options 3,400 3,400 13,600 - - 17,000
Repurchase of stock (40,804) (40,804) (746,696) - - (787,500)
Net income for 1996 - - - 3,212,458 - 3,212,458
Net change in unrealized
loss on securities
available for sale, - - - - (74,353) (74,353)
Cash dividends
($0.37 per share) - - - (1,314,866) - (1,314,866)
--------- ---------- ---------- ----------- ----------- ------------
Balances September 30, 1996 2,325,494 2,325,494 7,690,289 32,762,852 (101,870) 42,676,765
Repurchase of stock (64,170) (64,170)(1,296,038) - - (1,360,208)
Net income for 1997 - - - 4,202,192 - 4,202,192
Stock split 1,130,662 1,130,662 (1,130,662) - - --
Net change in unrealized
gain (loss) on securities
available for sale - - - - 171,172 171,172
Cash dividends
($0.41 per share) - - - (1,391,751) - (1,391,751)
--------- ---------- ---------- ----------- ----------- ------------
Balances September 30, 1997 3,391,986 3,391,986 5,263,589 35,573,293 69,302 44,298,170
Repurchase of stock (111,302) (111,302)(2,242,791) - - (2,354,093)
Net income for 1998 - - - 4,206,695 - 4,206,695
Net change in unrealized
gain on securities
available for sale - - - - 27,421 27,421
Cash dividends
($0.45 per share) - - - (1,507,566) - (1,507,566)
--------- ---------- ---------- ----------- ----------- ------------
Balances September 30, 1998 3,280,684 $3,280,684 $3,020,798 $38,272,422 $ 96,723 $44,670,627
========= ========== ========== =========== =========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
Peoples Bancorp and Subsidiary
Consolidated Statement of Cash Flows
Year Ended September 30
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Operating Activities
Net income $4,206,695 $ 4,202,192 $ 3,212,458
Adjustments to reconcile net income to
net cash provided by operating
activities
Provision for loan losses 74,621 50,000 8,824
Depreciation and amortization 381,035 255,095 204,083
Investment securities accretion, net (40,769) (36,876) (23,481)
Amortization of deferred loan fees (379,997) (271,410) (368,361)
Gain on sale of investment securities (73,541) - -
Change in
Deferred income tax (138,060) 617,401 (385,000)
Interest receivable 44,804 116,711 (170,033)
Interest payable 32,522 (26,034) (4,603)
Other adjustments 81,608 (1,435,368) 1,412,211
------------ ------------ -------------
Net cash provided by operating activities 4,188,918 3,471,711 3,886,098
------------ ------------ -------------
Investing Activities
Net change in interest-bearing deposits 258,000 (976,000) 390,256
Purchases of securities available for sale (3,625,859) (14,636,858) (22,544,576)
Purchases of securities held to maturity - (320,000) -
Proceeds from maturities and paydowns of
securities held to maturity 4,203,955 5,342,664 14,688,070
Proceeds from maturities and paydowns of
securities available for sale 10,597,951 14,929,330 7,620,000
Proceeds from sale of security available for sale 2,661,344 - -
Net change in mutual funds (2,896,947) (2,563,954) -
Net change in loans (31,212,564) (12,205,762) (4,098,609)
Purchases of premises and equipment (1,079,132) (492,605) (65,338)
Proceeds from sale of equipment 13,993 - -
Proceeds from sales of real estate owned 115,026 277,254 42,499
Purchases of Federal Home Loan Bank of
Indianapolis stock (155,500) (57,800) (63,300)
Other investing activities (337,500) (225,000) -
------------ ------------ -------------
Net cash used by investing activities (21,457,233) (10,928,731) (4,030,998)
------------ ------------ -------------
Financing Activities
Net change in
NOW and savings deposits 4,885,569 2,192,329 (2,943,040)
Certificates of deposit 1,837,050 4,542,405 5,279,885
Short-term borrowings 1,040,253 3,162,400 (1,000,000)
Net change in advances by borrowers for
taxes and insurance (593) (1,859) (76,603)
Net change in bank overdraft 1,171,306 - -
Proceeds from Federal Home Loan Bank advances 5,000,000 - -
Cash dividends (1,475,696) (1,377,648) (1,274,539)
Exercise of stock options - - 17,000
Repurchase of common stock (2,354,093) (1,360,208) (787,500)
------------ ------------ -------------
Net cash provided (used) by financing activities 10,103,796 7,157,419 (784,797)
------------ ------------ -------------
Net Change in Cash and Cash Equivalents (7,164,519) (299,601) (929,697)
Cash and Cash Equivalents, Beginning of Year 10,732,144 11,031,745 11,961,442
------------ ------------ -------------
Cash and Cash Equivalents, End of Year $3,567,625 $10,732,144 $11,031,745
============ ============ =============
Additional Cash Flows and Supplementary Information:
Interest paid $12,054,743 $11,493,593 $11,231,922
Income tax paid 2,612,502 1,511,993 2,315,550
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Peoples Bancorp ("Company"), its wholly
owned subsidiary, Peoples Federal Savings Bank of DeKalb County ("Bank"), and
the Bank's wholly owned subsidiary, Peoples Financial Services, Inc. ("Peoples
Financial") conform to generally accepted accounting principles and reporting
practices followed by the thrift industry. The more significant of the policies
are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a federal thrift
charter and provides full banking services, including trust services. As a
federally chartered thrift, the Bank is subject to the regulation of the Office
of Thrift Supervision ("OTS")and the Federal Deposit Insurance Corporation.
The Bank generates mortgage and consumer loans and receives deposits from
customers located primarily in DeKalb County, Indiana and surrounding counties.
The Bank's loans are generally secured by specific items of collateral including
real property and consumer assets.
Consolidation-The consolidated financial statements include the accounts of the
Company, the Bank and Peoples Financial after elimination of all material
intercompany transactions.
Investment Securities-Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity and marketable equity securities
are classified as available for sale. Securities available for sale are carried
at fair value with unrealized gains and losses reported separately, net of tax,
in stockholders' equity. The Company holds no securities for trading.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Allowance for loan and real estate losses are maintained to absorb loan and real
estate losses based on management's continuing review and evaluation of the loan
and real estate portfolios and its judgment as to the impact of economic
conditions on the portfolios. The evaluation by management includes
consideration of past loss experience, changes in the composition of the
portfolios, the current condition and amount of loans and foreclosed real estate
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses and the
valuation of real estate is based on estimates that are particularly susceptible
to significant changes in the economic environment and market conditions.
Management believes that, as of September 30, 1998 the allowance for loan losses
and carrying value of foreclosed real estate are adequate based on information
currently available. A worsening or protracted economic decline in the area
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using accelerated and straight-line methods based
principally on the estimated useful lives of the assets. Maintenance and repairs
are expensed as incurred while major additions and improvements are capitalized.
Gains and losses on dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula.
Foreclosed real estate is carried at the lower of cost or fair value less
estimated selling costs. When foreclosed real estate is acquired, any required
adjustment is charged to the allowance for loan losses. All subsequent activity
is included in current operations.
Pension plan costs are based on actuarial computations and charged to current
operations. The funding policy is to pay at least the minimum amounts required
by ERISA.
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to or greater than the fair value of the shares at the date
of grant. The Company accounts for and will continue to account for stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for the stock
option grants.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiaries.
Earnings per share have been computed based upon the weighted average common and
common equivalent shares outstanding during each year.
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Note 2 - Restriction On Cash
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at September 30, 1998, was
$858,000.
Note 3 - Investment Securities
September 30, 1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- -------- ------------
Available for sale
Federal agencies $11,202,286 $ 84,130 $ - $11,286,416
State and municipal obligations 5,046,357 84,753 669 5,130,441
Marketable equity securities 5,460,901 - - 5,460,901
------------- ---------- -------- ------------
Total available for sale 21,709,544 168,883 669 21,877,758
------------- ---------- -------- ------------
Held to maturity
Federal agencies 4,000,000 4,374 313 4,004,061
State and municipal obligations 695,993 16,723 - 712,716
Mortgage-backed securities 372,282 14,511 - 386,793
------------- ---------- -------- ------------
Total held to maturity 5,068,275 35,608 313 5,103,570
------------- ---------- -------- ------------
Total investment securities $26,777,819 $204,491 $982 $26,981,328
============= ========== ======== ============
September 30, 1997
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- -------- ------------
Available for sale
Federal agencies $19,699,605 $164,200 $ 41,395 $19,822,410
State and municipal obligations 6,083,716 28,999 31,279 6,081,436
Marketable equity securities 2,563,954 - - 2,563,954
------------- ---------- -------- ------------
Total available for sale 28,347,275 193,199 72,674 28,467,800
------------- ---------- -------- ------------
Held to maturity
Federal agencies 8,000,000 312 32,814 7,967,498
State and municipal obligations 757,855 14,699 - 772,554
Mortgage-backed securities 498,823 24,212 - 523,035
------------- ---------- -------- ------------
Total held to maturity 9,256,678 39,223 32,814 9,263,087
------------- ---------- -------- ------------
Total investment securities $37,603,953 $232,422 $105,488 $37,730,887
============= ========== ======== ============
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
The amortized cost and fair value of securities held to maturity and available
for sale at September 30, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
1998
-----------------------------------------------------
Held to Maturity Available for Sale
-----------------------------------------------------
Maturity Distributions Amortized Fair Amortized Fair
at September 30 Cost Value Cost Value
------------ ------------ ------------- -------------
Within one year $4,100,000 $4,105,168 $ 3,452,896 $ 3,463,476
One to five years 485,993 501,609 11,392,063 11,508,461
Five to ten years 110,000 110,000 1,253,111 1,282,884
After ten years - - 150,573 162,036
------------ ------------ ------------- -------------
4,695,993 4,716,777 16,248,643 16,416,857
Mortgage-backed securities 372,282 386,793 - -
Marketable equity securities - - 5,460,901 5,460,901
------------ ------------ ------------- -------------
$5,068,275 $5,103,570 $21,709,544 $21,877,758
============ ============ ============= =============
Securities with a carrying value of $7,545,000 and $4,037,500 were pledged at
September 30, 1998 and 1997 to secure Federal Home Loan Bank advances and
repurchase agreements.
Proceeds from sales of securities available for sale during 1998 were
$2,661,344. Gross gains of $74,900 and gross losses of $1,359 were realized on
those sales. There were no sales of securities during the years ended
September 30, 1997 or 1996. The income tax expense on the security gains for the
year ended September 30, 1998 was $29,130.
There were no sales of securities held to maturity.
Note 4 - Loans and Allowance
September 30
1998 1997
-------------- --------------
Real estate loans $247,758,749 $221,723,573
Construction loans 8,120,336 5,196,837
Individuals' loans for
household and other personal expenditures 16,130,224 12,735,795
-------------- --------------
272,009,309 239,656,205
-------------- --------------
Less:
Undisbursed portion of loans 3,080,628 2,443,791
Deferred loan fees and discounts 1,323,090 1,070,178
-------------- --------------
4,403,718 3,513,969
-------------- --------------
Total loans $267,605,591 $236,142,236
============== ==============
Year Ended September 30 1998 1997 1996
----------- ---------- ----------
Allowance for loan losses
Balances, October 1 $886,567 $887,478 $912,268
Provision for losses 74,621 50,000 8,824
Recoveries on loans 32,769 33,188 21,715
Loans charged off (46,949) (84,099) (55,329)
----------- ---------- ----------
Balances, September 30 $947,008 $886,567 $887,478
=========== ========== ==========
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Note 5 - Premises and Equipment
September 30
1998 1997
------------ ------------
Land $ 356,238 $ 356,238
Buildings 3,135,359 2,565,259
Equipment 2,104,172 1,620,626
------------ ------------
Total cost 5,595,769 4,542,123
Accumulated depreciation (3,198,891) (2,829,349)
------------ ------------
Net $2,396,878 $1,712,774
============ ============
Note 6 - Other Assets and Other Liabilities
September 30
1998 1997
------------ ------------
Other assets
Interest receivable
Loans $1,355,042 $1,226,393
Investment securities 393,269 566,722
Prepaid expenses and other 683,651 345,215
------------ ------------
Total other assets $2,431,962 $2,138,330
============ ============
Other liabilities
Dividends payable on common stock $ 393,682 $ 361,812
Deferred income tax liability 519,626 639,357
Accrued expenses and other 432,609 348,126
------------ ------------
Total other liabilities $1,345,917 $1,349,295
============ ============
Note 7 - Deposits
September 30
1998 1997
-------------- ---------------
Demand deposits $ 40,440,817 $ 35,940,976
Savings deposits 34,949,413 34,563,685
Certificates and other time deposits
of $100,000 or more 20,124,050 17,366,591
Other certificates and time deposits 152,748,299 153,668,708
Interest payable 282,701 250,179
-------------- ---------------
$248,545,280 $241,790,139
============== ===============
Certificates and other time deposits maturing in years ending September 30:
1999 $108,059,189
2000 50,337,906
2001 6,767,822
2002 4,005,284
2003 3,702,148
--------------
$172,872,349
==============
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Note 8 - Short-term Borrowings
September 30
1998 1997
------------ -----------
============ ===========
Securities sold under agreement to repurchase totaling $4,202,653 and $3,162,400
at September 30, 1998 and 1997, consist of obligations of the Company to other
parties. The obligations are secured by investment securities and such
collateral is held by a safekeeping agent. The maximum amount of outstanding
agreements at any month-end during 1998 totaled $5,087,941 and the average of
such agreements totaled $4,165,800. The agreements at September 30, 1998 matured
on October 1, 1998.
Note 9 - Long-Term Debt
Long-term debt at September 30, 1998 totaling $5,000,000 consisted of Federal
Home Loan Bank advances at variable rates maturing at various dates through
May 5, 2008. The Federal Home Loan Bank advances are secured by investment
securities totaling $5,500,000. Advances are subject to restrictions or
penalties in the event of repayment.
Maturities in years ending September 30:
1999 $2,000,000
2000 -
2001 -
2002 -
2003 1,000,000
Thereafter 2,000,000
------------
$5,000,000
============
Note 10 - Income Tax
Year Ended September 30
1998 1997 1996
------------ ------------ ------------
Income tax expense
Currently payable
Federal $2,054,730 $1,518,553 $1,809,917
State 679,725 457,806 571,090
Deferred
Federal (110,448) 489,827 (270,000)
State (27,612) 127,574 (115,000)
------------ ------------ ------------
Total income tax expense $2,596,395 $2,593,760 $1,996,007
============ ============ ============
Reconciliation of federal statutory to actual tax expense
Federal statutory income
tax at 34% $2,313,044 $2,310,624 $1,770,878
Tax exempt interest (104,677) (94,100) (73,214)
Nondeductible expenses 4,600 3,931 1,988
Effect of state income taxes 430,395 386,351 301,019
Effective of low income
housing credits (15,482) - -
Other (31,485) (13,046) (4,664)
------------ ------------ ------------
Actual tax expense $2,596,395 $2,593,760 $1,996,007
============ ============ ============
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
A cumulative net deferred tax liability is included in other liabilities. The
components of the liability are as follows:
September 30
1998 1997
------------ ------------
Assets
Allowance for loan losses $375,015 $351,081
Loan fees 444,889 300,842
------------ ------------
Total assets 819,904 651,923
------------ ------------
Liabilities
Depreciation 68,493 44,639
State income tax 47,773
Other 109,170 150,876
Tax bad debt reserves in excess of base year 964,077 964,077
FHLB of Indianapolis stock dividend 78,527 78,527
Net unrealized gains on securities
available for sale 71,490 53,161
------------ ------------
Total liabilities 1,339,530 1,291,280
------------ ------------
$(519,626) $(639,357)
============ ============
Retained earnings at September 30, 1998, include approximately $6,778,000 for
which no deferred income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions as of June 30, 1988
for tax purposes only. Reduction of amounts so allocated for purposes other than
tax bad debt losses or adjustments arising from carryback of net operating
losses would create income for tax purposes only, which income would be subject
to the then current corporate income tax rate. The unrecorded deferred income
tax liability on the above amount was approximately $2,300,000 at September 30,
1998.
Note 11 - Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying consolidated financial statements. The Banks'
exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit is represented by the
contractual or notional amount of those instruments. The Bank uses the same
credit policies in making such commitments as it does for instruments that are
included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk at
September 30, 1998 and 1997 consisted of commitments to extend credit totaling
$20,359,000 and $16,331,400, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include residential real estate,
income-producing commercial properties, or other assets of the borrower.
The Bank has employment agreements with two officers which include provisions
for payment to them of three years' salary in the event of their termination in
connection with any change in ownership or control of the Company, other than by
agreement. The agreements have terms of three years which may be extended
annually for successive periods of one year.
The Company and subsidiary are also subject to possible claims and lawsuits
which arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate determination of such possible
claims or lawsuits will not have a material adverse effect on the consolidated
financial position of the Company.
Note 12 - Dividends and Capital Restrictions
The Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders. The OTS regulations provide that a savings
association which meets fully phased-in capital requirements and is subject only
to "normal supervision" may pay out, as a dividend, 100 percent of net income to
date over the calendar year and 50 percent of surplus capital existing at the
beginning of the calendar year without supervisory approval but with 30 days
prior notice to the OTS. Any additional amount of capital distributions would
require prior regulatory approval. At September 30, 1998, total stockholder's
equity of the Bank was $35,077,292 of which approximately $14,898,000 was
available for the payment of dividends to the Company.
In 1997, the Company's board of directors approved the repurchase of up to
240,000 of the Company's outstanding shares of common stock ("1997 Plan"). Such
purchases will be made subject to market conditions in the open market or block
transactions. At September 30, 1998, the Company has repurchased 136,958 shares
of its outstanding stock under the 1997 Plan.
On October 4, 1997, the Company authorized a three-for-two stock split in the
form of a stock dividend to stockholders of record on November 7, 1997, and
issued an additional 1,130,662 shares of the Company's common stock. All
references in the accompanying consolidated financial statements to per share
amounts have been restated to reflect the stock split.
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Note 13 - Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and are assigned to a capital category. The
assigned capital category is largely determined by three ratios that are
calculated according to the regulations: total risk adjusted capital, Tier 1
capital, and Tier 1 leverage ratios. The ratios are intended to measure capital
relative to assets and credit risk associated with those assets and off-balance
sheet exposures of the entity. The capital category assigned to an entity can
also be affected by qualitative judgments made by regulatory agencies about the
risk inherent in the entity's activities that are not part of the calculated
ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At September 30, 1998, the Bank
is categorized as well capitalized and met all subject capital adequacy
requirements. There are not conditions or events since September 30, 1998 that
management believes have changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
September 30, 1998
---------------------------------------------------
Required for Adequate To Be Well
Actual Capital(1) Capitalized(1)
----------------- ------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- ------- ----- ------- --------
Total risk-based capital(1)
(to risk-weighted assets) $35,951 22.48% $12,793 8.0% $15,992 10.0%
Tier 1 capital(1)
(to adjusted tangible assets) 35,029 11.76% 8,938 3.0% 17,875 6.0%
Tier 1 capital(1)
(to adjusted total assets) 35,029 11.76% 8,938 3.0% 14,896 5.0%
September 30, 1997
-------------------------------------------------
Required for Adequate To Be Well
Actual Capital (1) Capitalized (1)
--------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------- ------- -------- ------- -------- -------
Total risk-based capital(1)
(to risk-weighted $34,955 24.67% $11,334 8.0% $14,167 10.0%
assets)
Tier 1 capital(1)
(to adjusted tangible assets) 34,080 12.00% 8,523 3.0% 17,046 6.0%
Tier 1 capital(1)
(to adjusted total assets) 34,080 12.00% 8,523 3.0% 14,205 5.0%
(1) As defined by regulatory agencies
The Bank's tangible capital at September 30, 1998 was $35,029,000, which amount
was 11.76 percent of tangible assets and exceeded the required ratio of 1.5
percent.
Note 14 - Employee Benefit Plans
The Bank is a participant in a pension fund known as the Financial Institutions
Retirement Fund ("FIRF"). This plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer. According
to FIRF administrators, the market value of the fund's assets exceeded the value
of vested benefits in the aggregate as of June 30, 1997, the date of the latest
actuarial valuation. Pension expense was $3,884, $10,698 and $153,848 for 1998,
1997 and 1996. This plan provides pension benefits for substantially all of the
Bank's employees.
The Company has established an employee stock ownership plan ("ESOP") covering
substantially all employees of the Company. The ESOP is designed to enable
eligible employees to acquire Company common stock. The cost of the ESOP is
borne by the Company through annual contributions to an employee stock ownership
trust ("Trust") in amounts determined annually by the Board of Directors. Shares
of common stock acquired by the ESOP are to be allocated to each participating
employee and held until the employee's termination, retirement or death. At
September 30, 1998 and 1997, the Trust owned 51,623 and 50,703 shares of the
Company's common stock, of which 50,823 and 50,703 have been allocated to
employee accounts. Employees may vote allocated shares, and the trustees may
vote unallocated shares. Plan contributions charged to expense totaled $86,233,
$77,932 and $73,940 for 1998, 1997 and 1996, respectively.
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Note 15 - Stock Option Plan
The Company had a stock option plan, which expired in January 1998. The exercise
price of each option could not be less than the fair market value of the common
stock on the date of the grant of the option. The date on which the options were
first exercisable was determined by the Board of Directors, and the terms of the
stock options will not exceed ten years from the date of grant.
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the year ended September 30, 1998, 1997 and
1996.
September 30
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ -------- ------ ----------
Options Outstanding,
beginning of year - - 5,100 $3.33
Exercised - - 5,100
------ ------ ------
Outstanding,
end of year - - -
====== ====== ======
Options exercisable
at year end - - -
Weighted-average fair value of options
granted during the year $- $- $-
Note 16 - Earnings Per Share
Earnings per share (EPS) were computed as follows:
Year Ended September 30, 1998
--------------------------------
Weighted Average Per-Share
Income Shares Amount
---------- ----------- ---------
Basic Earnings Per Share
Net income available to common stockholders $4,206,695 3,370,468 $1.25
Effect of Dilutive Securities
Stock options - - -
---------- ----------- --------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $4,206,695 3,370,468 $1.25
========== =========== =========
Year Ended September 30, 1997
--------------------------------
Weighted Average Per-Share
Income Shares Amount
---------- ----------- ---------
Basic and Diluted Earnings Per Share
Net income available to common stockholders $4,202,192 3,432,177 $1.22
Effect of Dilutive Securities
Stock options - - -
---------- ----------- ---------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $4,202,192 3,432,177 $1.22
========== =========== =========
Year Ended September 30, 1996
--------------------------------
Weighted Average Per-Share
Income Shares Amount
---------- ----------- ---------
Basic and Diluted Earnings Per Share
Net income available to common stockholders $3,212,458 3,528,675 $ 0.91
Effect of Dilutive Securities
Stock options - 3,080 -
---------- ----------- ---------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversions $3,212,458 3,531,755 $ 0.91
========== =========== =========
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Note 17 - Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents-The fair value of cash and cash equivalents
approximates carrying value.
Interest-bearing Deposits-The fair value of interest-bearing time deposits
approximates carrying value.
Securities and Mortgage-backed Securities-Fair values are based on quoted market
prices.
Loans-For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other loans is estimated using discounted cash flow
analyses using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Interest Receivable/Payable-The fair values of interest receivable/payable
approximate carrying values.
FHLB Stock-Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Deposit-The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
Short-term borrowings-The fair value of short-term borrowings approximates
carrying value.
Federal Home Loan Bank advances-The fair value of these borrowings is estimated
using a discounted cash flow calculation, based on current rates for similar
advances.
Advances by Borrowers for Taxes and Insurance-The fair value of advances by
borrowers for taxes and insurance approximates carrying value.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
September 30
1998 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 3,567,625 $ 3,567,625 $ 10,732,144 $ 10,732,144
Interest-bearing deposits 718,000 718,000 976,000 976,000
Investment securities available for sale 21,877,758 21,877,758 28,467,800 28,467,800
Investment securities held to maturity 5,068,275 5,103,570 9,256,678 9,263,087
Loans 267,605,591 276,023,000 236,142,236 237,213,200
Interest receivable 1,748,311 1,748,311 1,793,115 1,793,115
Stock in FHLB 2,217,700 2,217,700 2,062,200 2,062,200
Investment in Limited Partnership 562,500 562,500 225,000 225,000
Liabilities
Bank overdraft 1,171,306 1,171,306 - -
Deposits 248,262,579 249,793,299 241,539,960 241,467,192
Short-term borrowings 4,202,653 4,202,653 3,162,400 3,162,400
Federal Home Loan Bank advances 5,000,000 4,963,000 - -
Interest payable 282,701 282,701 250,179 250,179
Advances by borrowers for taxes and
insurance 998 998 1,591 1,591
</TABLE>
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Note 18 - Quarterly Results of Operations (Unaudited)
Provision For Average Earnings
Quarter Interest Interest Net Interest Loan Net Shares Per
Ending Income Expense Income Losses Income Outstanding Share
- ------- ----------- ----------- ----------- ------- --------- ---------- ------
Dec 97 $ 5,643,863 $ 3,004,754 $ 2,639,109 $ 5,121 $1,025,188 3,391,460 $0.30
Mar 98 5,725,235 2,967,025 2,758,210 2,542 1,120,265 3,382,787 0.33
Jun 98 5,778,664 3,035,049 2,743,615 34,253 1,005,684 3,368,281 0.30
Sep 98 5,806,440 3,080,437 2,726,003 32,705 1,055,558 3,353,829 0.32
----------- ----------- ----------- -------- ---------
$22,954,202 $12,087,265 $10,866,937 $74,621 $4,206,695
=========== =========== =========== ======= ==========
Dec 96 $ 5,385,443 2,811,494 $ 2,573,949 $11,315 $ 943,729 3,468,419 $0.27
Mar 97 5,329,118 2,803,134 2,525,984 (485) 1,034,761 3,444,413 0.30
Jun 97 5,562,104 2,874,152 2,687,952 22,700 1,093,103 3,414,836 0.32
Sep 97 5,621,134 2,978,779 2,642,355 16,470 1,130,599 3,398,987 0.33
----------- ----------- ----------- ------- ----------
$21,897,799 $11,467,559 $10,430,240 $50,000 $4,202,192
=========== =========== =========== ======= ==========
Note 19 - Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company.
Condensed Balance Sheet
September 30
1998 1997
------------- ------------
Assets
Cash $ 45,597 $ 29,525
Securities purchased from subsidiary
under agreement to resell 4,189,956 4,064,079
Investment in subsidiary 35,077,294 34,184,104
Securities available for sale 5,535,658 6,081,437
Securities held to maturity 185,000 215,000
Interest receivable 74,869 87,261
Other assets 969
------------- ------------
Total assets $45,108,374 $44,662,375
============= ============
Liabilities
Dividends payable on common stock $ 393,682 $ 361,812
Other 44,065 2,393
------------- ------------
Total liabilities 437,747 364,205
------------- ------------
Stockholders' equity
Common stock 3,280,684 3,391,986
Additional paid-in capital 3,020,798 5,263,589
Retained earnings 38,272,422 35,573,293
Net unrealized gain on securities available for sale 96,723 69,302
------------- ------------
44,670,627 44,298,170
------------- ------------
Total liabilities and stockholders' equity $45,108,374 $44,662,375
============= ============
<PAGE>
Peoples Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Condensed Statement of Income
Year Ended September 30
1998 1997
------------ ------------
Income
Dividends from subsidiary $3,000,000 $3,000,000
Interest on investments 412,548 365,654
Expenses (84,142) (57,937)
------------ ------------
Income before equity in undistributed income
of subsidiary and income tax expense 3,328,406 3,307,717
Equity in undistributed income of subsidiary 915,439 927,455
------------ ------------
Income before income tax 4,243,845 4,235,172
Income tax expense 37,150 32,980
------------ ------------
Net income $4,206,695 $4,202,192
============ ============
Condensed Statement of Cash Flows
Year Ended September 30
1998 1997
------------ ------------
Net cash provided by operating activities $3,339,173 $3,294,089
------------ ------------
Cash flows from investing activities
Purchases of securities available for sale (628,859) (1,700,919)
Proceeds from maturities of securities
held to maturity 30,000 30,000
Proceeds from maturities and calls of
securities available for sale 1,381,016 930,000
Net change in mutual fund (405,217) -
Proceeds from sale of securities
available for sale 255,625 -
Net change in securities purchased
under agreement to resell (125,877) 214,211
------------ ------------
Net cash provided (used) by investing activities 506,688 (526,708)
------------ ------------
Cash flows from financing activities
Stock repurchased (2,354,093) (1,360,208)
Cash dividends (1,475,696) (1,377,648)
------------ ------------
Net cash used by financing activities (3,829,789) (2,737,856)
------------ ------------
Net change in cash 16,072 29,525
Cash at beginning of year 29,525 -
------------ ------------
Cash at end of year $ 45,597 $ 29,525
============ ============
<PAGE>
Independent Auditor's Report
To the Stockholders and
Board of Directors
Peoples Bancorp
Auburn, Indiana
We have audited the consolidated balance sheet of Peoples Bancorp and subsidiary
as of September 30, 1998 and 1997, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Peoples
Bancorp and subsidiary as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
Olive, LLP
Indianapolis, Indiana
October 19, 1998
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The management of Peoples Bancorp is responsible for the preparation and
integrity of the consolidated financial statements and all other information
presented in this annual report. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis and therefore, include estimates based on management's
judgment and estimates.
Management maintains a system of internal controls to meet its responsibility
for reliable financial information and the protection of assets. This system
includes proper segregation of duties, the establishment of appropriate policies
and procedures, and careful selection, training and supervision of qualified
personnel. In addition, both independent auditors and management periodically
review the system of internal controls and report their findings to the Audit
Committee of the Board of Directors.
The Committee is composed of non-management directors and meets periodically
with the independent auditors and management to review their respective
activities and responsibilities. Each has free and separate access to the
Committee to discuss accounting, financial reporting, internal control and audit
matters.
Management recognized that the cost of a system of internal controls should not
exceed the benefits derived and that there are inherent limitations to be
considered in the potential effectiveness of any system. However, management
believes that the Company's system of internal controls provides reasonable
assurance that financial information is reliable and that assets and customer
deposits are protected.
Roger J. Wertenberger
Chief Executive Officer
Maurice F. Winkler III
President
Deborah K. Stanger
Chief Financial Officer
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
Peoples Federal Savings
Bank of DeKalb County United States of America
and its subsidiary
Peoples Financial Services Inc. Indiana
<PAGE>
PEOPLES BANCORP DEFINITIVE PROXY STATEMENT FOR THE
1999 ANNUAL MEETING OF STOCKHOLDERS
PEOPLES BANCORP
212 West Seventh Street o Auburn, Indiana 46706-1723
Phone: (219)925-2500 o Fax: (219)925-1733
December 11, 1998
Dear Stockholder,
You are cordially invited to attend the Annual Meeting of Stockholders of
Peoples Bancorp, the holding company for Peoples Federal Savings Bank of DeKalb
County (Bank). The meeting will be held at the Greenhurst Country Club, located
at 1740 North Main Street, Auburn, Indiana 46706, on Wednesday, January 13,
1999, at 2:00 p.m. local time.
As described in the accompanying materials, the stockholders are being asked at
the annual meeting to elect two Directors, approve the appointment of the
Company's independent auditors, and approve the Bank's Stock Option and Grant
Plan. During the meeting, members of the Company's management will also report
on operations and other matters affecting the Company, and will be available to
respond to stockholders' questions.
Your vote is very important regardless of the number of shares you own. On
behalf of the Board of Directors, I urge you to mark, sign, and date your proxy
card today and return it in the envelope provided, even if you plan to attend
the Annual Meeting. This will not prevent you from voting in person, but will
ensure that your vote is counted if you are unable to attend.
Your continued support of and interest in Peoples Bancorp is sincerely
appreciated.
Sincerely,
Roger J. Wertenberger
Chairman of the Board
<PAGE>
PEOPLES BANCORP
212 West 7th Street
Auburn, Indiana 46706
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on January 13, 1999
NOTICE IS HEREBY GIVEN that the annual meeting of the stockholders of
Peoples Bancorp (the "Company"), will be held at the Greenhurst Country Club,
1740 North Main Street, Auburn, Indiana, on Wednesday, January 13, 1999, at 2:00
p.m., local time (the "Meeting"), for the following purposes:
1. To elect two directors.
2. To approve the appointment of Olive LLP, independent certified public
accountants, as the auditors of the Company for the fiscal year ending
September 30, 1999.
3. To approve the Company's 1998 Stock Option and Incentive Plan.
Execution of a proxy in the form enclosed also permits the proxy holder to
vote, in his or her sole discretion, upon such other business as may properly
come before the Meeting or any adjournment thereof. As of the date of mailing,
the Board of Directors is not aware of any other matters that may come before
the Meeting.
The Board of Directors has selected November 30, 1998, as the record date
for the Meeting. Only those stockholders of the Company of record at the close
of business on that date will be entitled to notice of and to vote at the
Meeting or any adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
John E. Weigel, III
Corporate Secretary
Auburn, Indiana
December 11, 1998
<PAGE>
PEOPLES BANCORP
212 West Seventh Street
Auburn, Indiana 46706
Annual Meeting of Stockholders
PROXY STATEMENT
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Peoples Bancorp (the "Company"), for use at
the annual meeting of the stockholders of the Company to be held on Wednesday,
January 13, 1999, and at any adjournments thereof (the "Meeting"). The Annual
Report to Stockholders for the fiscal year ended September 30, 1998, and a form
of proxy to be voted at the meeting are being furnished to stockholders with
this Proxy Statement. The approximate date of mailing of this proxy statement is
December 11, 1998.
The close of business on November 30, 1998, has been selected as the record
date for the determination of stockholders entitled to notice of and to vote at
the annual meeting. On that date, 3,267,684 shares of the Company's Common
Stock, par value $1.00 per share, were outstanding. Stockholders will be
entitled to one vote for each share of the Company's Common Stock held by them
of record at the close of business on the record date on any matter that may be
presented for consideration and action by the stockholders.
A plurality of the votes cast by stockholders in person or by proxy at the
annual meeting will be necessary for approval of Proposal 1 described herein. A
majority of the votes cast by stockholders in person or by proxy at the annual
meeting will be necessary for approval of Proposal 2 and Proposal 3 described
herein.
All valid proxies received in response to this solicitation will be voted
in accordance with the instructions indicated thereon by the stockholders giving
such proxies. If no instructions are given, signed proxies will be voted in
favor of the election of the directors named in this proxy statement and in
favor of Proposals 2 and 3. Abstentions and broker non-votes (shares as to which
a broker indicates that it does not have authority to vote) are counted for the
purpose of determining the presence of a quorum for the transaction of business
at the annual meeting. Abstentions and broker non-votes will have no effect on
the outcome of the proposals presented herein, since such actions do not
represent votes cast by stockholders.
The Board of Directors does not know of any business, other than that
described herein, to be presented for action at the annual meeting. However, if
any other business is properly presented before the annual meeting and may
properly be voted upon, the proxies solicited hereby will be voted on such
matters in accordance with the best judgment of the proxy holders named therein.
Any stockholder has the power to revoke his proxy at any time before it is voted
at the annual meeting by giving written notice of such revocation (including the
filing of a duly executed proxy bearing a later date) to John E. Weigel III, the
Secretary of Peoples Bancorp, 212 West 7th Street, Auburn, Indiana 46706, or
upon request if the stockholder is present at the Meeting and chooses to vote in
person.
PROPOSAL 1
ELECTION OF DIRECTORS
Two directors will be elected at the meeting to serve for a three-year
period. Unless authority is withheld, all proxies received in response to this
solicitation will be voted for the election of the nominees listed below. Each
nominee has indicated a willingness to serve if elected. However, if any nominee
becomes unable to serve, the proxies received in response to this solicitation
will be voted for a replacement nominee selected in accordance with the best
judgment of the proxy holders named therein.
<PAGE>
The Board of Directors unanimously recommends that stockholders vote "FOR"
each of the named nominees to the Company's Board of Directors.
The following table lists the directors and their terms for both the Bank
and the Company. The table also sets forth the number of shares of the Company's
Common Stock beneficially owned by the directors of the Company and by the
directors and executive officers of the Company as a group as of November 30,
1998.
NOMINEES FOR ELECTION AS DIRECTORS
Shares of
Present Common Stock Percent
Name Position Since Term Expires Beneficially Owned of Class (1)
NOMINEES FOR THREE YEAR TERM:
John C. Thrapp Director 1990 1999 47,853(2) 1.46%
Roger J. Wertenberger C.E.O. 1990 1999 135,586(3) 4.13
and Chairman
of The Board
DIRECTORS CONTINUING IN OFFICE:
Douglas D. Marsh Director 1990 2000 25,500(4) 0.78
Lawrence R. Bowmar Director 1990* 2000 18,875(5) 0.58
Maurice F. Winkler III Director1993 2000 53,008(6) 1.62
and President
Bruce S. Holwerda Director 1998 2001 1,500(7) 0.05
John C. Harvey Director 1990 2001 49,229(8) 1.50
All executive officers and directors of the
Company and Bank as a group (13 persons) 425,648 12.97%
*Mr. Bowmar retired from the Board in July, 1993 after having served as a
director of the Company since 1990. He was reelected to the Board in 1994.
1. Computed based upon a total of 3,280,684 issued and outstanding shares of
Common Stock as of September 30, 1998.
2. Of the shares owned by Mr. Thrapp, 32,594 shares are held by Mr. Thrapp
with sole voting and investment power, 642 shares are held in the ESOP for
the benefit of Mr. Thrapp, and 14,617 are held by Mr. Thrapp's wife with
sole voting and investment power.
3. Of the shares owned by Mr. Wertenberger, 77,658 shares are held by Mr.
Wertenberger with sole voting and investment power, 6,928 shares are held
in the ESOP for the benefit of Mr. Wertenberger, 48,000 shares are held by
Mr. Wertenberger's wife with sole voting and investment power, and 3,000
shares are held jointly by Mr. Wertenberger's wife and mother-in-law with
shared voting and investment power.
4. Of the shares owned by Mr. Marsh, 16,500 shares are held by Mr. Marsh with
sole voting and investment power and 9,000 shares are held by Mr. Marsh's
wife with sole voting and investment power.
5. All of the shares owned by Mr. Bowmar are held with sole voting and
investment power.
6. Of the shares owned by Mr. Winkler, 27,151 are held by Mr. Winkler with
sole voting and investment power, 19,742 shares are held by Mr. Winkler's
wife with sole voting and investment power, 2,974 shares are held in the
ESOP for the benefit of Mr. Winkler, and 3,141 shares are controlled by Mr.
Winkler as Trustee under a Trust for the benefit of his children, for which
he has sole voting and investment power.
<PAGE>
7. All of the shares owned by Mr. Holwerda are owned jointly with Mr.
Holwerda's wife with shared voting and investment power.
8. Of the shares owned by Dr. Harvey, 45,485 shares are held by Dr. Harvey
with sole voting and investment power and 3,744 shares are held by Dr.
Harvey's wife with sole voting and investment power.
The business experience during the past five years of each of the directors is
as follows:
Mr. Wertenberger, 66, has served as a director of the Bank since joining
the Bank in 1954. Mr. Wertenberger became President of the Bank in January 1964
and Chairman of the Board in January 1979. Mr. Wertenberger serves as a director
and CEO of Peoples Financial Services, Inc., the Bank's service corporation
subsidiary ("Peoples Financial"). Mr. Wertenberger became President, Director,
and Chairman of the Board of Peoples Bancorp upon its inception in 1990.
Effective October 1, 1996, Mr. Wertenberger relinquished the title of president
for Peoples Bancorp, Peoples Federal Savings Bank, and Peoples Financial
Services Inc. and remained CEO for those organizations.
Mr. Bowmar, 70, has served as a director of the Bank from 1974 to 1993 and
was the Bank's Vice President-Consumer Loans from 1986 until his retirement in
1993. In 1993 Mr. Bowmar resigned from the Board of Directors to fulfill an
assignment with the Peace Corps in Romania. Mr. Bowmar was reelected to the
Board in 1994. Mr. Bowmar is currently retired.
Mr. Holwerda, 50, was elected a director of the Bank in 1998. Mr. Holwerda
is co-owner of Ambassador Steel Corporation Auburn, Indiana, and serves as Vice
President and Chief Operating Officer, positions he has held since 1990. Mr.
Holwerda has worked at Ambassador Steel in various capacities since 1979.
Dr. Harvey, 67, has served as a director of the Bank since 1979. He is a
self-employed physician engaged in private practice in Auburn, Indiana. Dr.
Harvey also serves as a director of Peoples Financial .
Mr. Thrapp, 64, served as a director and officer of First Federal Savings
and Loan Association of Kendallville which merged with the Bank in August 1990.
Since 1962, Mr. Thrapp has been an attorney with the firm of Thrapp & Thrapp in
Kendallville, Indiana.
Mr. Marsh, 57, has served as a director of the Bank since 1982. He
currently serves as Chairman of the Board of Applied Innovations Inc. in
Chicago, Illinois, President of Bridgewater Golf Club in Auburn, Indiana,
Regional Director Excel Communications in Dallas, Texas, and Associate of Auburn
Reality in Auburn, Indiana. From 1991 to 1996, Mr. Marsh served as Vice
President of Sales for Superior Chaircraft, which is a division of JSJ Seating
Corporation, Belton, Texas. From 1976 to 1991, Mr. Marsh served as President and
Chief Executive Officer of Garrett Industries of Hudson, Indiana. Mr. Marsh also
serves as a director of Peoples Financial.
Mr. Winkler, 42, was appointed to the Board of Directors of the Bank and
Company in June 1993. Mr. Winkler joined the Bank as an accountant in 1979. From
1981 to 1985, he served as the Bank's Controller and in December 1985 became
Vice President-Operations. From May 1987 to September 1996, Mr. Winkler assumed
responsibilities as the Bank's Vice President-Finance. Mr. Winkler is the
son-in-law of Roger J. Wertenberger. Mr. Winkler also serves as Treasurer of
Peoples Bancorp and as a director of Peoples Financial. Mr. Winkler assumed the
duties of President and Chief Operating Officer of Peoples Bancorp, Peoples
Federal Savings Bank, and Peoples Financial Services, Inc. in October 1996.
<PAGE>
Executive Officers of the Company Who Are Not Directors
John E. Weigel III, 38, joined the Bank in 1993 as Internal
Auditor/Compliance Officer, and Mr. Weigel was appointed Corporate Secretary of
the Bank and of Peoples Bancorp in May 1998. Prior to his employment at the
Bank, Mr. Weigel was a Bank Examiner with the Department of Treasury from 1985
to 1993.
Corporate Governance and Other Matters
The Board of Directors of the Company held twelve meetings during the
fiscal year ended September 30, 1998. All directors have attended at least 75%
of all Board of Directors' and committee meetings. Four regular members of the
Board of Directors are members of the Executive Committee, which is permitted to
act with any three members present in the absence of regularly scheduled Board
meetings. The Executive Committee exercises all the authority of the Board of
Directors to the extent permitted by the Company's Bylaws. The Executive
Committee consists of Roger J. Wertenberger, Chairman, Maurice F. Winkler, John
C. Thrapp, Douglas D. Marsh, and John C. Harvey. This Committee meets when
needed and held no meetings during the fiscal year ended September 30, 1998. The
Board of Directors has standing Budget, Audit, and Nominating Committees.
The Budget Committee establishes policies and objectives relating to
compensation, reviews compensation costs, and recommends salaries, bonuses, and
ESOP contributions for all employees and executive officers. The members of the
Budget Committee are: Robert D. Ball, Chairman, John C. Harvey, Douglas D.
Marsh, and John C. Thrapp. The Budget Committee held four meetings during the
fiscal year ended September 30, 1998.
The Audit Committee reviews and approves the scope of the audit procedures
employed by the Company's independent auditors and meets with the auditors to
discuss the results of their examination of the Company's financial statements.
The Committee reviews the operations of the Company's internal audits performed
by management and the results of its audit procedures. In addition, the
Committee reviews all reports prepared in connection with the Company's annual
examinations by the regulatory authorities. The members of the Audit Committee
are: John C. Harvey, Chairman, Lawrence R. Bowmar and Robert D. Ball. The
Committee held one meeting during the fiscal year ended September 30, 1998.
The Nominating Committee meets when director vacancies occur and recommends
individuals for nomination to the Company's Board of Directors and to the
governing bodies of its subsidiary corporations. The Nominating Committee
consists of the Board of Directors. The Committee held one meeting during the
fiscal year ended September 30, 1998. The Nominating Committee does not consider
nominees recommended by stockholders. Under the Company's Bylaws, however,
nominations may be made by stockholders and voted upon at an annual meeting if
made in writing and delivered to the Secretary of the Company at least 20 days
prior to the date of the annual meeting. No nominations for directors except
those made by the Nominating Committee or by the stockholders in accordance with
the Bylaws shall be voted upon at the annual meeting.
Securities Ownership of Certain Beneficial Owners
There are no persons known to the Company who own beneficially more than 5%
of the Company's common stock as of November 30, 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of equity securities of the Company. Officers, directors
and greater than 10% shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
<PAGE>
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 30, 1998, all
Section 16(a) filing requirements applicable to the Company's officers and
directors were complied with, subject to the following exceptions: Form 4 for
Jeffrey L. Grate reporting a purchase on June 4, 1998, was filed late.
Transactions With Certain Related Persons
The Bank has followed the policy of offering loans to the Company's and the
Bank's directors, officers and employees for the financing of their principal
residences. These loans are made in the ordinary course of business on
substantially the same terms and collateral, including interest rates, as those
of comparable transactions prevailing at the time and do not involve more than
the normal risk of collectibility or present other unfavorable features. The
Bank grants consumer loans to directors, officers, and employees at rates and
terms applicable to its other customers.
The Bank has 13 executive officers and directors, and the aggregate total
of loans outstanding to these individuals as of September 30, 1998, was
$969,812.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth summary information concerning compensation
paid or accrued by the Company to or on behalf of the Company's Chief Executive
Officer. No other executive officers of the Company had an annual salary and
bonus that exceeded $100,000 during each of the last three fiscal years.
Summary Compensation Table
Annual Compensation
-------------------------------
All Other
Name and Principal Position Year Salary Bonus Compensation(1) Compensation(2)
Roger J. Wertenberger 1998 $120,000 $6,000 $12,000 $6,000
Chairman and
Chief Executive Officer 1997 121,000 6,050 10,800 6,050
1996 118,000 5,900 10,800 5,900
(1) The amount shown represents director's fees. Does not include personal use
of an automobile provided by the Bank, which use was valued at
approximately $2,000 for each of the periods indicated.
(2) The amount shown represents that portion of the Bank's ESOP contribution
allocated to the account of Mr. Wertenberger.
Option Exercises and Holdings
On May 19, 1987, the Bank's Board of Directors adopted a Stock Option Plan
(the "Option Plan") which permits the granting of incentive and non-qualified
stock options. Stockholders approved the Option Plan on January 13, 1988. In
December, 1991, the Bank's Board of Directors authorized the amendment and
restatement of the Option Plan to provide for the issuance of the Company's
Common Stock, rather than the Bank's stock, upon exercise of options, and the
Company's Board of Directors consented to this action. Further, in December
1991, the Bank's Board of Directors adopted amendments to the Option Plan, which
did not require stockholder approval, to conform the Option Plan to the new
rules of the Securities and Exchange Commission under Section 16 of the
Securities Exchange Act of 1934.
<PAGE>
Under the Option Plan, options for a maximum of 200,000 shares, after
adjustment for the 1993 stock split, and subject to future adjustments, could
have been granted pursuant to the Option Plan. Under the Option Plan, the Board
of Directors, in its sole discretion, could have granted options to employees,
officers and consultants who were common law employees of the Company or the
Bank at a price not less than 100% of the fair market value of the Company's
Common Stock on the date of the grant. Options expired on such dates as the
Board of Directors or Stock Option Committee determined, but not later than 10
years from the date of grant. No options were granted to any executive officers
of the Bank or the Company during fiscal year 1997, and the Option Plan expired
in May, 1997. As of September 30, 1998, no options were outstanding.
During fiscal 1998, the Company's Chief Executive Officer, Roger J.
Wertenberger, did not own or exercise any stock options of the Company.
Defined Benefit Pension Plan
The Bank maintains a defined benefit pension plan (the "Retirement Plan")
for all eligible employees (the "Participants"). In order to be eligible to
participate, an employee must attain age 21 and complete 1,000 hours of credited
service during an eligibility computation period. The Retirement Plan is funded
solely by Bank contributions and generally provides for vested benefits to
Participants with 100% vesting after five years of credited service. Total
Retirement Plan expenses for the fiscal year ended September 30, 1998, were
$3,884. At September 30, 1998, the Retirement Plan was fully funded.
A Participant's benefit at normal retirement age (65) is dependent upon his
total years of credited service and his average annual salary for the five
consecutive years of highest salary during credited service. However, the
benefit so determined is subject to proportionate reduction for credited service
of fewer than 30 years at normal retirement age, and is also subject to
actuarial reduction for commencement of benefit payment prior to normal
retirement age. The Retirement Plan also provides a death benefit payment in the
event of death prior to retirement.
The table below shows estimated annual benefits (computed on the normal
life annuity basis) payable under the Company's Retirement Plan to any employee
upon retirement in 1998 at age 65 after selected periods of service. There is no
benefit reduction for Social Security or other offset amounts. As of
September 30, 1998, Roger J. Wertenberger had 44 years of credited service.
Remuneration Years of Service
- --------------------------------------------------------------------------------
10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years
50,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000
75,000 15,000 22,500 30,000 37,500 45,000 52,500 60,000 67,500
100,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
150,000 30,000 45,000 60,000 75,000 90,000 105,000 120,000 135,000
200,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000
250,000 50,000 75,000 100,000 125,000 150,000 175,000 200,000 225,000
Employee Stock Ownership Plan
On November 15, 1988, the Board of Directors of the Bank adopted an
Employee Stock Ownership Plan (the "ESOP") which was approved by the
stockholders on January 11, 1989. The ESOP invests primarily in the common stock
of the Company ("Peoples Stock") which, along with other ESOP assets, is held in
trust by Norwest Bank, Fort Wayne, Indiana, as trustee pursuant to a trust
agreement. The trustee is authorized to invest in and hold up to 100% of the
trust in Peoples Stock but is not required to hold a minimum percentage of ESOP
assets in Peoples Stock. The trustee is also authorized to invest in other
securities, such as certificates of deposit, equity stocks, bonds and other
investments.
<PAGE>
From time to time, the ESOP purchases shares of Peoples Stock in open
market transactions. These purchases are made at prices which do not exceed the
fair market value of Peoples Stock. To purchase such Stock, the ESOP is
authorized to borrow funds from an unrelated third-party lender secured by the
purchased shares. Any such loan is to be repaid with funds from the Bank's
contributions to the ESOP and earnings on ESOP assets. The ESOP has not borrowed
funds as of September 30, 1998. Contributions from the Bank to the ESOP are made
out of net operating profits in amounts established by the Board of Directors in
its sole discretion. Such contributions may be made either in cash or in shares
of Peoples Stock.
The ESOP is administered by a committee appointed by the Board of Directors
(the "Committee"). The Committee directs the trustee as to investments that may
be made by the ESOP and loans that may be incurred for the purchase of shares of
Peoples Stock. The members of the Committee are Robert D. Ball, John C. Thrapp,
Douglas D. Marsh and Dr. John C. Harvey.
The ESOP maintains an account for each participant in the ESOP which is
credited annually with his or her allocable shares of Peoples Stock purchased by
the trust, any forfeitures of Peoples Stock (i.e., that portion of a
participant's account that does not vest in and is not paid to a participant who
resigns or is dismissed from the employ of the Bank) and any stock dividends on
Peoples Stock allocated to the participant's account. The amount credited to
each participant's account equals that proportion of the Company's total
contribution plus all forfeitures that such participant's annual compensation
bears to the total annual compensation of all participants for that year. All
participants must be employed on the last day of the plan year (September 30) to
be entitled to share in an allocation for that plan year. Any shares purchased
by the trust with borrowed funds are held in a suspense account and allocated
proportionately to participant accounts as payments of principal and interest
are made on the loan. With respect to shares of Peoples Stock allocated to a
participant's account, each participant is entitled to direct the trustee as to
the manner of voting such shares. If the Participant fails to so direct the
trustee, such unvoted shares will be voted by the trustee only upon instructions
from the Committee. Similarly, unallocated shares will be voted by the trustee
only upon instructions from the Committee. In either case, the voting of unvoted
or unallocated shares is in the Committee's sole discretion.
Any full-time employee of the Bank who has attained the age of 18 is
eligible to become a participant in the ESOP. Each participant becomes vested in
20% of his or her account balance after three years of service and becomes
vested in an additional 20% for each subsequent year of service until fully
vested after seven years of service. Distributions from the ESOP upon
retirement, disability, death or termination of employment may be in the form of
cash or Peoples Stock.
Adoption of the ESOP may be considered an anti-takeover device, since the
ESOP may become the owner of a sufficient percentage of the total outstanding
common stock of the Company so that the vote of the trustee (or of plan
participants) may serve as a defense in a hostile takeover.
As of September 30, 1998, the ESOP held 51,623 shares (1.57%) of the
Company's stock, all of which has been allocated to participant accounts. The
plan contributions charged to ESOP expense totaled $86,233 during the fiscal
year ended September 30, 1998. The ESOP also incurred expenses of $4,698 which,
under the terms of the ESOP, were paid by the Bank.
Insurance Plans
The Bank's officers and employees are provided with hospitalization, major
medical, life, accidental death and dismemberment insurance and long-term
disability insurance under group plans which are available generally and on the
same basis to all full-time employees.
<PAGE>
Bonus Plan
The Bank has a bonus plan for all employees of the Bank. The plan does not
apply to employees of subsidiaries or affiliates of the Bank. Under the plan,
bonus money is made available to the extent of the net profits of the Bank up to
10% of an employee's base annual salary as defined in the plan. The
determination of the amount of a bonus to be paid under the plan is made by the
Board of Directors in its sole discretion, after consideration and
recommendation by the Budget Committee, based on profitability of the Bank.
During the fiscal year ended September 30, 1998, bonuses under this plan
aggregating $96,517 were paid to employees of the Bank. Amounts allocated under
the bonus plan are included in the Summary Compensation Table.
Employment Agreement
The Bank entered into a new employment agreement with Mr. Wertenberger,
President, Chief Executive Officer, and Chairman of the Board of the Bank (the
"Executive"). This employment agreement is intended to ensure that the Bank will
be able to maintain a stable and competent management base.
The employment agreement provides for a one-year term which may be renewed
on an annual basis upon mutual written consent of the Executive and the Bank.
The Bank has agreed to pay the Executive a base salary of $120,000. The
agreement provides that the Executive's base salary will be reviewed annually
upon the renewal of the agreement.
In addition to the base salary, the agreement provides for, among other
things, participation in stock benefit plans and other fringe benefits
applicable to personnel of the Bank or as otherwise determined by the Board of
Directors to be appropriate. In the event the Bank chooses to terminate the
Executive's employment for any reasons other than for cause (as defined in the
agreement), or in the event of the Executive's resignation from the Bank upon a
change in control (as defined in the agreement), the Executive would be entitled
to receive, among other things, an amount equal to (i) 2.99 times the base
compensation, (ii) 1% of the pre-tax profits of the Company on a consolidated
basis for three years, (iii) the continuation of certain insurance and
disability benefits for three years after termination, (iv) the vesting of all
stock and retirement benefits, including the funding of all unfunded benefits.
As of September 30, 1998, such payments and benefits upon the occurrence of a
termination without cause or a change in control are estimated to have a value
of approximately $600,000. However, the Executive is not entitled to any amounts
to the extent the Executive is subject to an excise tax because such severance
benefits constitute "excess parachute payments," defined in the Internal Revenue
Code of 1986, as amended (the "Code"). In general, under the Code, and "excess
parachute payment" is the amount by which payments contingent on a change in
ownership or control exceed three times the employee's average annual
compensation over five years.
Although the above-described employment agreement could increase the cost
of any acquisition of control of the Company or the Bank, management of the
Company and the Bank do not believe that the terms thereof would have a
significant anti-takeover effect.
Director CompensationCompensation
Directors do not receive any fees for serving as directors of the Company.
Directors of the Bank currently receive $12,000 per year. For the fiscal year
ended September 30, 1998, directors' fees totaled $96,000. In addition,
Directors Emeritus of the Bank are paid for each meeting at a monthly fee equal
to the fee they received at the time of retirement from the Board. For the
fiscal year ended September 30, 1998, Director Emeritus fees totaled $31,800.
<PAGE>
Directors are also eligible to receive awards under the Company's 1998
Stock Option and Incentive Plan. See "Proposal 3 - Approval of Peoples Bancorp
1998 Stock Option and Incentive Plan."
Report of the Budget Committee
The Budget Committee of the Bank establishes policies and objectives
relating to compensation, reviews compensation costs, and recommends salaries
and bonuses for all employees and executive officers. All decisions of the
Budget Committee are subject to approval by the full Board of Directors. In
fiscal 1998, the Board of Directors made no modifications to the Budget
Committee's compensation recommendations. In recommending the salaries of the
executive officers, the Budget Committee has access to and reviews compensation
data for comparable financial institutions. The officers are also evaluated as
to their performance during the year and compared to the Bank's performance.
In making recommendations with respect to executive compensation, the
Budget Committee attempts to achieve the following objectives while furthering a
policy of cost containment by controlling expenses:
1. Provide compensation comparable to that which is offered by other similarly
situated financial institutions in order to attract and retain talented
executives who are critical to the Company's success;
2. reward executive officers based upon their ability to achieve both short-
and long-term strategic goals and to enhance shareholder value; and
3. align the interests of the executive officers with the long-term interests
of the stockholders by granting stock options and making ESOP
contributions.
At the present time, the Company's executive compensation program is
comprised of base salary, annual incentive bonuses and long-term incentive
bonuses in the form of ESOP contributions. Reasonable base salaries are awarded
based on salaries paid by comparable financial institutions and individual
performance. Annual incentive bonuses are tied to the Company's net income
performance for the current fiscal year. The ESOP has a direct relation to the
long-term enhancement of shareholder value. These plans are designed to motivate
the employee to increase shareholder value.
For fiscal year 1998, the Budget Committee recommended, and the Board of
Directors approved, a salary of $120,000 and a bonus of $6,000 for Mr.
Wertenberger. In addition, Mr. Wertenberger received long-term compensation in
the form of a $6,000 allocation to his account under the ESOP. In recommending
the salary and bonus amounts for Mr. Wertenberger, the Budget Committee
considered the Bank's financial performance, Mr. Wertenberger's operational
performance, and levels of executive compensation at comparable financial
institutions. Although Mr. Wertenberger's compensation is below the median level
for the Bank's peer group, the Budget Committee believes that the compensation
awarded is consistent with the Bank's efforts to reward performance and control
expenses.
Dated: September 15, 1998 BUDGET COMMITTEE
Robert D. Ball Douglas D. Marsh
Jack L. Buttermore John C. Thrapp
John C. Harvey
<PAGE>
Compensation Committee Interlocks and Insider Participation
No person who served as a member of the Budget Committee during the 1998
fiscal year has ever been an officer or employee of the Company or any of its
subsidiaries, except for John Thrapp, who serves as Asst. Trust Officer of the
Bank. During the 1998 fiscal year, no executive officer of the Company or the
Bank served as a director or member of the compensation committee of another
entity, one of whose directors or executive officers served as a director or
member of the Budget Committee of the Company or the Bank.
Performance GraphGraph
The following graph compares the yearly percentage change in the Company's
cumulative total shareholder return on the Common Stock with (i) the cumulative
total return of the NASDAQ market index and (ii) the cumulative total return of
the SNL Midwest Thrift Index comprised of all mid-west publicly traded savings
and loan associations and savings and loan holding companies over the periods
indicated. The graph assumes an initial investment of $100 and reinvestment of
dividends. The graph is not necessarily indicative of future price performance.
COMPARISON OF THE FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
PEOPLES BANCORP, THE NASDAQ MARKET INDEX, AND THE SNL MIDWEST THRIFT INDEX
(A graph is displayed here comparing Peoples Bancorp, NASDAQ for the entire
United States, and the SNL Midwest Thrift index. It is not deemed incorporated
in this proxy statement.)
The graph shall not be deemed incorporated by reference by any general statement
incorporating by reference this Proxy Statement into any filing under the
Securities Act or under the Exchange Act, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
<PAGE>
PROPOSAL 2
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed the firm of Olive LLP, independent
certified public accountants, to audit the consolidated financial statements of
the Company for the fiscal year ending September 30, 1999. A proposal to approve
the appointment of Olive LLP, will be presented to the Company's stockholders at
the Meeting. Representatives of Olive LLP, are expected to be present at the
Meeting and to be available to respond to appropriate questions. The
representatives will also be provided an opportunity to make a statement, if
they desire.
The Board of Directors unanimously recommends that stockholders vote "FOR"
the appointment of Geo. S. Olive & Co.
PROPOSAL 3
APPROVAL OF PEOPLES BANCORP 1998 STOCK OPTION AND INCENTIVE PLAN
Summary of Plan
General. The Board of Directors of the Company recently adopted the Peoples
Bancorp 1998 Stock Option and Incentive Plan (the "1998 Plan"). Pursuant to the
1998 Plan, officers, directors, employees and consultants of the Company, the
Bank, and its affiliates are eligible to receive shares of Common Stock or other
securities or benefits with a value derived from the value of the Common Stock.
The purpose of the 1998 Plan is to enable the Company to attract, retain
and motivate officers, directors, employees and consultants by providing for or
increasing their proprietary interest in the Company and, in the case of
non-employee directors, to attract such directors and further align their
interests with those of the Company's shareholders by providing or increasing
their proprietary interests in the Company.
The maximum number of shares of Common Stock that may be issued pursuant to
awards granted under the Bank Incentive Plan will be 200,000 (subject to
adjustment to prevent dilution). As of the date of this proxy statement, no
shares of Common Stock were subject to awards under the 1998 plan.
The Board of Directors believes the 1998 Plan is beneficial to the Company,
the Bank, and the Company's shareholder and prospective shareholders. The 1998
Plan is subject to approval of the holders of a majority of the issued and
outstanding shares of the Company, subject to any required changes of any
regulatory agency.
The Company intends to register the Common Stock reserved for issuance
under the 1998 Plan with the SEC prior to issuing any Common Stock upon exercise
thereof.
Administration.
The 1998 Plan is administered by a committee of two or more directors
appointed by the Board of Directors of the Company (the "1998 Plan Committee").
The 1998 Plan Committee has full and final authority to select the recipients of
awards and to grant such awards. Subject to the provisions of the 1998 Plan, the
1998 Plan Committee has a wide degree of flexibility in determining the terms
and conditions of awards and the number of shares to be issued pursuant thereto,
including conditioning the receipt or vesting of awards upon the achievement by
the Bank and the Company of specified performance criteria. The expenses of
administering the 1998 Plan are borne by the Company.
<PAGE>
Terms of Awards. The 1998 Plan authorizes the 1998 Plan Committee to award
options to purchase Common Stock or stock appreciation rights. A stock
appreciation right is a right to receive the appreciation in value, or a portion
of the appreciation in value, of a specified number of shares of Common Stock.
An award granted under the 1998 Plan may include a provision accelerating the
receipt of benefits upon the occurrence of specified events, such as a change of
control of the Company or a dissolution, liquidation, merger, reclassification,
sale of substantially all of the property and assets of the Company or the Bank
or other significant corporate transactions. The Committee may grant options
that either are intended to be incentive stock options or non-incentive stock
options. Awards to consultants and non-employee directors may only be
non-incentive stock options.
Subject to limitations imposed by law, the Board of Directors may amend or
terminate the 1998 Plan at any time and in any manner. However, no such
amendment or termination may deprive the recipient of an award previously
granted under the 1998 Plan of any rights thereunder without his consent.
Awards may not be granted under the 1998 Plan after the tenth anniversary
of the adoption of the 1998 Plan. Although any award that was duly granted on or
prior to such date may thereafter be exercised or settled in accordance with its
terms, no shares of Common Stock may be issued pursuant to any award after the
twentieth anniversary of the adoption of the 1998 Plan.
Federal Income Tax Consequences
The following discussion is only a summary of the material federal income
tax consequences of the awards that may that may be made under the 1998 Plan,
and is based on existing federal law (including administrative regulations and
rulings) which is subject to change, in some cases retroactively. This
discussion is also qualified by the particular circumstances of individual
participants, which may substantially alter or modify the federal income tax
consequences herein discussed. In addition, the following discussion does not
address state, local or foreign income taxes or any taxes other than income
taxes.
Incentive Stock Options. Generally under present law, when an option
qualifies as an incentive stock option under Section 422 of the Code: (i) an
optionee will not recognize taxable income either upon the grant or the exercise
of the option, (ii) any gain or loss upon a qualifying disposition of the shares
acquired by the exercise of the option will be treated as capital gain or loss,
and (iii) no deduction will be allowed to the Company for federal income tax
purposes in connection with the grant or exercise of an incentive stock option
or a qualifying disposition of the shares. A disposition by an optionee of stock
acquired upon exercise of an incentive stock option will constitute a qualifying
disposition if it occurs more than two years after the grant of the option, and
one year after the transfer of the shares to the optionee. If such stock is
disposed of by the optionee before the expiration of those time limits, the
transfer may be a "disqualifying disposition," in which case the optionee will
recognize ordinary income equal to the lesser of (i) the aggregate fair market
value of the shares as of the date of exercise less the option price, or (ii)
the amount realized on the disqualifying disposition less the option price. The
Company would become entitled to a corresponding deduction, subject to
satisfaction of any applicable withholding or reporting obligations. Ordinary
income from a disqualifying disposition will constitute ordinary compensation
income. Any gain in addition to the amount reportable as ordinary income on a
"disqualifying disposition" generally will be capital gain. The Company does not
obtain a deduction to the extent gain on disposition of the shares is capital
gain.
Upon the exercise of an incentive stock option, the difference between the
fair market value of the stock subject to the exercised option on the date of
exercise and the option exercise price is treated as an adjustment to taxable
income in that taxable year for alternative minimum tax purposes, as are a
number of other items specified by the Code. Such adjustments (along with tax
preference items) form the basis for the alternative minimum tax (presently at
graduated rates for individuals), which may apply depending on the amount of the
computed "regular tax" of the employee for that year. Under certain
circumstances the amount of alternative minimum tax is allowed as a carryforward
credit against regular tax liability in subsequent years. The Company does not
obtain a deduction due to an optionee's incurrence of the alternative minimum
tax.
<PAGE>
Non-Incentive Stock Options. n the case of stock options which do not
qualify as an incentive stock option (non-incentive stock options), no income
generally is recognized by the optionee at the time of the grant of the option.
Under present law the optionee generally will recognize ordinary income at the
time the non-incentive stock option is exercised equal to the aggregate fair
market value of the shares acquired less the option price. Ordinary income from
a non-incentive stock option will constitute compensation for which withholding
or reporting may be required under federal and state law.
Subject to special rules applicable when an optionee uses stock of the
Company to exercise an option, shares acquired upon exercise of a non-incentive
stock option will have a tax basis equal to their fair market value on the
exercise date or other relevant date on which ordinary income is recognized and
the holding period for the shares generally will begin on the date of exercise
or such other relevant date. Upon subsequent disposition of the shares, the
optionee generally will recognize capital gain or loss. Provided the shares are
held by the optionee for more than one year prior to disposition, such gain or
loss will be long-term capital gain or loss.
The Company will generally be entitled to a deduction equal to the ordinary
income (i.e., compensation) portion of the gain recognized by the optionee in
connection with the exercise of a non-incentive stock option provided that the
Company complies with any applicable withholding or reporting requirements of
federal and state law. The Company does not obtain a deduction with respect to
the capital gain on disposition of the shares.
Options to Non-Employee Directors. These options are non-incentive stock
options for tax purposes, and the tax rules applicable to them are the same as
the rules for non-incentive stock options described above. However, because the
optionees are not employees, income tax withholding would not be required in
order for the Company to qualify for its income tax deduction.
Stock Appreciation Rights (SARs). A recipient of a stock appreciation right
will be taxed (and the Company will receive a corresponding deduction) when the
recipient exercises the stock appreciation right. Income generated by such
exercise will be ordinary compensation income and will be measured by the amount
of cash received or the then-current fair market value of the stock received
upon such event. The Company will have a withholding or reporting obligation.
Restriction on Deductions. Not every amount paid as compensation for
services is currently deductible. For example, depending upon the services
rendered, some compensation payments must be capitalized or added to inventory
costs. Two other restrictions potentially applicable to deductions for executive
compensation payments are the restriction on deduction of so-called "excess
parachute payments" and the Code Section 162(m) deduction limit of $1,000,000
per year for certain executive compensation. Whether any such restrictions will
apply to specific payments of compensation by the Company cannot be predicted at
this time.
The description herein is intended to highlight and summarize the material
terms of the 1998 Plan. For further information , shareholders are referred to a
copy of the 1998 Plan which is attached hereto as Annex I.
The Board of Directors unanimously recommends that stockholders vote "FOR"
the approval of Peoples Bancorp 1998 Stock Option and Incentive Plan.
<PAGE>
COSTS OF SOLICITATION
The costs of this proxy solicitation will be paid by the Company. To the
extent necessary, proxies may be solicited by personnel of the Company in person
or by telephone, telegram or other means. Company personnel will not receive any
additional compensation for solicitation of proxies unless such solicitation
requires such persons to work overtime. If deemed necessary, the Company may
retain a proxy solicitation firm. The Company will request record holders of
shares beneficially owned by others to forward this proxy statement and related
materials to the beneficial owners of such shares and will reimburse such record
holders for their reasonable expenses incurred therewith.
FORM 10-K ANNUAL REPORT
THE COMPANY WILL PROVIDE (WITHOUT CHARGE) TO ANY STOCKHOLDER SOLICITED
HEREBY A COPY OF ITS 1998 ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION UPON THE WRITTEN REQUEST OF SUCH STOCKHOLDER. REQUESTS
SHOULD BE DIRECTED TO THE COMPANY'S SECRETARY, 212 WEST 7TH STREET, AUBURN,
INDIANA 46706.
OTHER MATTERS
The management does not know of any other matters to be presented for
action by the stockholders at the annual meeting. If, however, any other matters
not now known are properly brought before the meeting, the persons named in the
accompanying proxy will vote such proxy in accordance with their judgment on
such matters.
STOCKHOLDERS' PROPOSALS
All proposals of stockholders to be presented for consideration at the next
annual meeting and included in the proxy statement must be received by the
Company no later than October 12, 1999.
December 11, 1998 PEOPLES BANCORP
<PAGE>
PEOPLES BANCORP
1998 STOCK OPTION AND INCENTIVE PLAN
1. Purpose of the Plan.
The purpose of this Peoples Bancorp 1998 Stock Option and Incentive Plan
(the "Plan") is to advance the interests of the Company through providing select
key Employees and Directors of the Company and its Affiliates with the
opportunity to acquire shares of Common Stock. By encouraging such stock
ownership, the Bank seeks to attract, retain, and motivate the best available
personnel for positions of substantial responsibility and to provide additional
incentive to Directors and key Employees of the Company or any Affiliate to
promote the success of the business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary corporation"
of the Company, as such terms are defined in Section 424(e) and (f),
respectively, of the Code, and any other subsidiary corporations of a
parent corporation of the Company.
(b) "Agreement" shall mean a written agreement entered into in accordance with
Paragraph 5(c).
(c) "Award" shall mean collectively, Options and SARs, unless the context
clearly indicates a different meaning.
(d) "Bank" shall mean Peoples Federal Savings Bank of DeKalb County, a wholly
owned subsidiary of the Company.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean the Stock Option Committee appointed by the Board in
accordance with Paragraph 5(a) hereof.
(h) "Common Stock" shall mean the common stock, par value $1.00 per share, of
the Company.
(i) "Company" shall mean Peoples Bancorp.
(j) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the
case of sick leave, military leave, or any other leave of absence approved
by the Company or in the case of transfers between payroll locations of the
Company or between the Company, an Affiliate, or a successor.
<PAGE>
(k) "Control" shall have the meaning ascribed to such term in 12 C.F.R. Part
574. "Change in Control" shall mean: (i) the sale of all, or a material
portion, of the assets of the Company; (ii) a merger or recapitalization in
the Company whereby the Company is not the surviving entity; (iii) an
acquisition of Control of the Company as defined in 12 C.F.R. 574.3 or as
otherwise defined by the Office of Thrift Supervision, or any successor
regulation or agency thereto; or (vi) the acquisition, directly or
indirectly, of the beneficial ownership (within the meaning of that term as
it is used in Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder) of
twenty-five percent (25%) or more of the outstanding voting securities of
the Company by any person, entity, or group. A Change in Control shall be
deemed to have occurred upon the execution of any agreement or document the
effect of which will result in a Change in Control. This definition shall
not apply to the purchase of Shares by underwriters in connection with a
public offering of securities of the Company, or the purchase of shares of
up to 25% of any class of securities of the Company by a tax-qualified
employee stock benefit plan which is exempt from the approval requirements
of 12 C.F.R. Part 574. The term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization, or any other
form of entity not listed. The decision of the Committee as to whether a
Change in Control has occurred shall be conclusive and binding.
(l) "Director" shall mean any member of the Board, and any member of the board
of directors of any Affiliate that the Board has by resolution designated
as being eligible for participation in this Plan. "Non-employee Director"
shall have the meaning set forth in Rule 16b-3.
(m) "Effective Date" shall mean the date specified in Paragraph 15 hereof.
(n) "Employee" shall mean any person employed by the Company, the Bank, or an
Affiliate who is an employee for federal tax purposes.
(o) "Exercise Price" shall mean the price per Optioned Share at which an Option
may be exercised.
(p) "ISO" means an option to purchase Common Stock which meets the requirements
set forth in the Plan, and which is intended to be and is identified as an
"incentive stock option" within the meaning of Section 422 of the Code.
(q) "Market Value" shall mean the fair market value of the Common Stock, as
determined under Paragraph 7(b) hereof.
(r) "Measurement Price" shall mean the price of the Common Stock to be utilized
to determine the extent of stock appreciation. The Measurement Price as to
any particular SAR shall not be less than the Market Value on the date of
grant.
<PAGE>
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be and is
not identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Award granted pursuant to
this Plan.
(v) "Participant" shall mean any key Employee or other person who receives an
Award pursuant to the Plan.
(w) "Plan" shall mean this Peoples Bancorp 1998 Stock Option and Incentive
Plan.
(x) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
(y) "Share" shall mean one share of Common Stock.
(z) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, of a
specified number of shares of Common Stock.
3. Term of the Plan and Awards.
(a) Term of the Plan. The Plan shall continue in effect for a term of 10 years
from the Effective Date or the date the Plan is adopted by the Board
(whichever period ends earlier), unless sooner terminated pursuant to
Paragraph 17 hereof. No Award shall be granted under the Plan after such
ten year term.
(b) Term of Awards. The term of each Award granted under the Plan shall be
established by the Committee, but shall not exceed 10 years; provided,
however, that in the case of an Employee who owns Shares representing more
than 10% of the outstanding Common Stock at the time an ISO is granted, the
term of such ISO shall not exceed five years, subject to the provisions of
Section 8(e) hereof.
4. Shares Subject to the Plan.
(a) General Rule. Except as otherwise required by the provisions of Paragraph
12 hereof, the aggregate number of Shares deliverable pursuant to Awards
shall not exceed 200,000. Such Shares may either be authorized but unissued
Shares or Shares held in treasury. If any Awards should expire, become
unexercisable, or be forfeited for any reason without having been exercised
or becoming vested in full, the Optioned Shares shall, unless the Plan
shall have been terminated, be available for the grant of additional Awards
under the Plan.
(b) Special Rule for SARs. The number of Shares with respect to which a SAR is
granted, but not the number of Shares which the Company delivers or could
deliver to an Employee or individual upon exercise of a SAR, shall be
charged against the aggregate number of Shares remaining available under
the Plan; provided, however, that in the case of a SAR granted in
conjunction with an option, under circumstances in which the exercise of
the SAR results in termination of the Option and vice versa, only the
number of Shares subject to the Option shall be charged against the
aggregate number of Shares remaining available under the Plan. The Shares
involved in an Option as to which option rights have terminated by reason
of the exercise of a related SAR, as provided in Paragraph 10 hereof, shall
not be available for the grant of further Options under the Plan.
<PAGE>
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the
Committee, which shall be composed solely of two (2) or more Non-employee
Directors. Members of the Committee shall serve at the pleasure of the
Board. In the absence at any time of a duly appointed Committee, the Plan
shall be administered by the members of the Board.
(b) Powers of the Committee. Except as limited by the express provisions of the
Plan or by resolutions adopted by the Board, the Committee shall have sole
and complete authority and discretion, subject to compliance with
applicable regulations of the Office of Thrift Supervision (i) to select
Participants and grant Awards, (ii) to determine the form and content of
Awards to be issued in the form of Agreements under the Plan, (iii) to
interpret the Plan, (iv) to prescribe, amend and rescind rules and
regulations relating to the Plan, and (v) to make other determinations
necessary or advisable for the administration of the Plan. The Committee
shall have and may exercise such other power and authority as may be
delegated to it by the Board from time to time. A majority of the entire
Committee shall constitute a quorum and the action of a majority of the
members present at any meeting of the committee at which a quorum is
present, or acts approved in writing by a majority of the Committee without
a meeting, shall be deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement containing
such provisions as may be approved by the Committee. Each such Agreement
shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement,
shall be bound by the terms and restrictions of the Plan and of such
Agreement. The terms of each such Agreement shall be in accordance with the
Plan, but each Agreement may include such additional provisions and
restrictions determined by the Committee, in its discretion, subject to
compliance with applicable regulations, provided that such additional
provisions and restrictions are not inconsistent with the terms of the
Plan. In particular, the Committee shall set forth in each Agreement (i)
the Exercise Price of an Option or SAR, (ii) the number of Shares subject
to, and the expiration date of, the Award, (iii) the manner, time, and rate
(cumulative or otherwise) of exercise or vesting of such Award, (iv) the
restrictions, if any, to be placed upon such Award, or upon Shares which
may be issued upon exercise of such Award, and (v) whether the Option is
intended to be an ISO or a Non-ISO.
The Chairman of the Committee and such other Directors and officers as
shall be designated by the Committee are hereby authorized to execute Agreements
on behalf of the Company and to cause them to be delivered to the recipients of
Awards.
<PAGE>
(d) Effect of the Committee's Decisions. All decisions, determinations, and
interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
(e) Indemnification. In addition to such other rights of indemnification as
they may have, the members of the Committee shall be indemnified by the
Company in connection with any claim, action, suit, or proceeding relating
to any action taken or failure to act under or in connection with the Plan
or any Award, granted hereunder to the full extent provided for under the
Certificate of Incorporation of the Company with respect to the
indemnification of Directors.
6. Grant of Options.
(a) General Rule. On and after the Effective Date, key Employees and
Non-employee Directors shall be eligible to receive discretionary grants of
Options (or other Awards) pursuant to the Plan; provided that such grant
shall not be made to an Employee or Non-employee Director whose Continuous
Service terminates on or before the date of grant.
(b) The Option granted to the optionee hereunder (i) shall become vested and
exercisable in accordance with the Agreement regarding such Option, (ii)
shall have a term of not more than 10 years from the date of the Award, and
(iii) shall be subject to the general rule set forth in Paragraph 8(c) with
respect to the effect of an optionee's termination of Continuous Service on
the Optionee's right to exercise his or her Options.
(c) Special Rules for ISOs.
(1) The Option granted to the optionee hereunder (i) shall become vested and
exercisable, on a cumulative basis, with respect to 20% of the Optioned
Shares upon each of the first five anniversary dates of the date of grant,
provided that vesting shall not occur on a particular date if the
Optionee's Continuous Service has terminated on or before such date and
(ii) shall have a term of 10 years from the date of the Award.
(2) The aggregate Market Value, as of the date the Option is granted, of the
Shares with respect to which ISOs are exercisable for the first time by an
Employee during any calendar year (under all incentive stock option plans,
as defined in Section 422 of the Code, of the Company or any present or
future Affiliate) shall not exceed $100,000. Notwithstanding the foregoing,
the Committee may grant Options in excess of the foregoing limitations, in
which case such Options granted in excess of such limitation shall be
Options which are Non-ISOs.
7. Exercise Price for Options and Measurement Price for SARs.
(a) Limits on Committee Discretion. The Exercise Price as to any particular
Option and the Measurement Price for any particular SAR shall not be less
than 100% of the Market Value of the Optioned Shares on the date of grant
without taking into account any restrictions on the Optioned Shares. In the
case of an Employee who owns Shares representing more than 10% of the
Company's outstanding Shares of Common Stock at the time an ISO is granted,
the Exercise Price shall not be less than 110% of the Market Value of the
Optioned Shares at the time the ISO is granted.
<PAGE>
(b) Standards for Determining Exercise Price or Measurement Price. If the
Common Stock is listed on a national securities exchange (including
the Nasdaq National Market or SmallCap System) on the date in
question, then the Market Value per Share shall be the average of the
highest and lowest selling prices on such exchange on such date, or if
there were no sales on such date, then the Exercise Price or
Measurement Price shall be the mean between the bid and asked prices
on such date. If the Common Stock is traded otherwise than on a
national securities exchange on the date in question, then the Market
Value per Share shall be the mean between the bid and asked prices on
such date, or, if there is no bid and asked prices on such date, then
on the next prior business day on which there was bid and asked
priced. If no such bid and asked prices are available, then the Market
Value per Share shall be its fair market value as determined by the
Committee, in its sole and absolute discretion.
8. Exercise of Options.
(a) Generally. Subject to (e) below, any Option granted hereunder shall be
exercisable at such times and under such conditions as shall be
permissible under the terms of the Plan and of the Agreement granted
to a Participant. An Option may not be exercised for a fractional
Share.
(b) Procedure for Exercise. A Participant may exercise Options, subject to
provisions relative to its termination and limitations on its
exercise, only by (1) written notice of intent to exercise the option
with respect to a specified number of Shares, and (2) payment to the
Company (contemporaneously with delivery of such notice) in cash, in
Common Stock, or a combination of cash and Common Stock, of the amount
of the Exercise Price for the number of Shares with respect to which
the option is then being exercised. Each such notice (and payment
where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at the
Company's executive offices. Common Stock utilized in full or partial
payment of the Exercise Price for options shall be valued at its
Market Value at the date of exercise.
(c) Period of Exercisability. Except to the extent otherwise provided in
more restrictive terms of an Agreement, an Option may be exercised by
a Participant only with respect to the vested portion of such Option
and only while a Participant is an Employee or Director that has
maintained Continuous Service from the date of the grant of the
Option, or within three months after termination of such Continuous
Service (but not later than the date on which the Option would
otherwise expire), except if the Employee's or Director's Continuous
Service terminates by reason of:
(1) "Just Cause" which for purposes hereof shall have the meaning set
forth in any unexpired employment agreement between the Participant
and the Company, the Bank, and/or an Affiliate (and, in the absence of
any such agreement, shall mean termination because of the Employee's
or Director's personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule,
or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order), then the Participant's rights to
exercise such Option shall expire on the date of such termination;
<PAGE>
(2) death, then all Options of the deceased Participant shall become
immediately exercisable and may be exercised within two years from the
date of the Participant's death (but not later than the date on which
the Option would otherwise expire) by the personal representatives of
the Participant's estate or person or persons to whom the
Participant's rights under such Option shall have passed by will or by
laws of descent and distribution;
(3) Permanent and Total Disability (as such term is defined in Section
22(e)(3) of the Code), then all Options of the disabled Participant
shall become immediately exercisable and may be exercised within one
year from the date of such Permanent and Total Disability, but not
later than the date on which the Option would otherwise expire.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the
effective date thereof, shall be final and conclusive on all persons
affected thereby.
(e) Vesting of all Options shall cease immediately upon the termination of
employment or directorship of an optionee. The vesting schedule for
ISOs set forth in Section 6(c)(1) of this Plan is the most rapid
vesting permitted under the Plan for ISOs, except in the case of death
or disability (which shall be governed by Paragraphs 8(c)(2) and (3)
above) or a change in control (which shall be governed by Paragraph
11).
9. Grants of Options to Non-Employee Directors
(a) Grants. Notwithstanding any other provisions of this Plan, each
Non-employee Director on the Effective Date is elegible to receive, on
and after said date, Non-ISOs to purchase Shares. Such Non-ISOs shall
have an Exercise Price per Share equal to the Market Value of a Share
on the date of grant.
Each Director who joins the Board after the Effective Date and who is a
Non-employee Director shall be eligible to receive, on and after the date of
joining the Board, a discretionary grant of Non-ISOs in accordance with Section
6 of the Plan at an Exercise Price per Share equal to the Market Value of a
Share on the date of grant.
(b) Terms of Exercise. Options received under the provisions of this
Paragraph may be exercised in accordance with Paragraph 8 above.
10. SARs (Stock Appreciation Rights)
(a) Granting of SARs. In its sole discretion, subject to compliance with
applicable regulations, the Committee may from time to time grant SARs
to Employees either in conjunction with, or independently of, any
Options granted under the Plan. A SAR granted in conjunction with an
Option may be an alternative right wherein the exercise of the Option
terminates the SAR to the extent of the number of shares purchased
upon exercise of the Option and, correspondingly, the exercise of the
SAR terminates the Option to the extent of the number of Shares with
respect to which the SAR is exercised. Alternatively, a SAR granted in
conjunction with an Option may be an additional right wherein both the
SAR and the Option may be exercised. A SAR may not be granted in
conjunction with an ISO under circumstances in which the exercise of
the SAR affects the right to exercise the ISO or vice versa, unless
the SAR, by its terms, meets all of the following requirements:
<PAGE>
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference between the Exercise
Price of the ISO and the Market Value of the Shares subject to the ISO
at the time the SAR is exercised;
(3) The SAR is transferable only when the ISO is transferable, and under
the same conditions;
(4) The SAR may be exercised only when the ISO may be exercised; and
(5) The SAR may be exercised only when the Market Value of the Shares
subject to the ISO exceeds the Exercise Price of the ISO.
(b) Timing of Exercise. Any election by a Participant to exercise SARs
shall be made during the period beginning on the 3rd business day
following the release for publication of quarterly or annual financial
information and ending on the 12th business day following such date.
This condition shall be deemed to be satisfied when the specified
financial data is first made publicly available. In no event, however,
may a SAR be exercised within the six-month period following the date
of its grant.
The provisions of Paragraphs 8(c) and 8(e) regarding the period of
exercisability and vesting of Options are incorporated by reference herein, and
shall determine the period of exercisability and vesting of SARs.
(c) Exercise of SARs. A SAR granted hereunder shall be exercisable at such
times and under such conditions as shall be permissible under the
terms of the Plan and of the Agreement granted to a Participant,
provided that a SAR may not be exercised for a fractional Share. Upon
exercise of a SAR, the Participant shall be entitled to receive,
without payment to the Company except for applicable withholding
taxes, an amount equal to the excess of (or, in the discretion of the
Committee if provided in the Agreement, a portion of) the excess of
the then aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the aggregate
Measurement Price of such number of Optioned Shares. This amount shall
be payable by the Company, in the discretion of the Committee, in cash
or in Shares valued at the then Market Value thereof, or any
combination thereof.
<PAGE>
(d) Procedure for Exercising SARs. To the extent not inconsistent
herewith, the provisions of Paragraph 8(b) as to the procedure for
exercising Options are incorporated by reference, and shall determine
the procedure for exercising SARs.
11. Change in Control.
All outstanding Awards shall become immediately exercisable in the event of
a Change in Control of the Company, as determined by the Committee in its sole
discretion. In the event of a Change in Control, the Committee and the Board of
Directors, at their discretion, will take one or a combination of the following
actions to be effective as of the date of such Change in Control:
(1) provide that such Awards shall be assumed, or equivalent Awards shall
be substituted ("Substitute Awards") by the acquiring or succeeding
corporation (or an Affiliate thereof), provided that (a) any such
Substitute Award exchanged for ISOs shall meet the requirements of
Section 424(a) of the Code, and (b) the shares of stock issuable upon
the exercise of such Substitute Award shall constitute securities
registered in accordance with the Securities Act of 1933, as amended
("Securities Act"), or such securities shall be exempt from such
registration in accordance with Sections 3(a)(2) or 3(a)(5) of the
Securities Act, or
(2) provide that the Participants will receive upon the consummation of
the Change in Control transaction a cash payment for each Award
surrendered equal to the difference between (1) the Market Value of
the consideration to be received for each share of Common Stock in the
Change in Control transaction times the number of Shares subject to a
surrendered Award, and (2) the aggregate exercise price of such
surrendered Awards. Awards to which the Committee or the Board has
determined to provide a cash payment in lieu of the Award pursuant to
this section shall be and become, upon the Change in Control the right
to receive the cash payment only and shall cease to be an Award.
The individual agreements concerning Awards under this Plan or other
agreements between Participants and the Company, the Bank, and/or any Affiliate
thereof, may provide restrictions on Awards in the case of a Change in Control
in order to avoid adverse tax results under Section 280G and/or Section 4999 of
the Code.
12. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of
shares subject to outstanding Awards (and the Exercise Price thereof
in the case of Options and the Measurement Price in the case of SARs),
shall be proportionately adjusted for any increase, decrease, change,
or exchange of Shares for a different number or kind of shares or
other securities of the Company which results from a merger,
consolidation, recapitalization, reorganization, reclassification,
stock dividend, split-up, combination of shares, or similar event in
which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
<PAGE>
(b) Special Rule for ISOs. Any adjustment made pursuant to subparagraph
(a) hereof shall be made in such a manner as not to constitute a
modification, within the meaning of Section 424(h) of the Code, of
outstanding ISOs.
(c) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this
Paragraph, a Participant becomes entitled to new, additional, or
different shares of stock or securities, such new, additional, or
different shares of stock or securities shall thereupon be subject to
all of the conditions and restrictions that were applicable to the
Shares pursuant to the Award before the adjustment was made.
(d) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any
class, or of securities convertible into Shares or stock of another
class, for cash or property or for labor or services either upon
direct sale or upon the exercise of rights or warrants to subscribe
therefor, shall not affect, and no adjustment shall be made with
respect to, the number, class, Exercise Price, or Measurement Price of
Shares then subject to Awards or reserved for issuance under the Plan.
13. Non-Transferability of Awards.
Awards may not be sold, pledged, assigned, hypothecated, transferred, or
disposed of in any manner other than by will or by the laws of descent and
distribution, or pursuant to the terms of a "qualified domestic relations order"
(within the meaning of Section 414(p) of the Code and the regulations and
rulings thereunder). An Award may be exercised only by a Participant, the
Participant's personal representative, or a permitted transferee.
14. Time of Granting Awards.
The date of grant of an Award shall, for all purposes, be the later of the
date on which the Committee makes the determination of granting such Award, and
the Effective Date. Notice of the determination shall be given to each
Participant to whom an Award is so granted within a reasonable time after the
date of such grant.
15. Effective Date.
The Plan shall become effective immediately upon its approval by the Board;
provided, however, that the Plan shall be approved by a favorable vote of
stockholders owning at least a majority of the Shares cast at a meeting duly
held in accordance with applicable laws within 12 months of the adoption of the
Plan by the Board. If such approval of stockholders is not obtained within 12
months of the adoption of the Plan, all ISOs granted pursuant to the Plan shall
become Non-ISOs.
16. Modification of Awards.
At any time, and from time to time, the Board may authorize the Committee
to direct execution of an instrument providing for the modification of any
outstanding Award, provided no such modification shall confer on the holder of
said Award any right or benefit which could not be conferred on such person by
the grant of a new Award at such time, or impair the Award without the consent
of the holder of the Award.
<PAGE>
17. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan, subject to
compliance with applicable regulations, and, with respect to any Shares at the
time not subject to Awards, suspend or terminate the Plan; provided that the
provisions of Paragraph 9 may not be amended more than once every six months
(other than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder).
Shareholder approval must be obtained for any amendment of the Plan that
would change the number of Shares subject to the Plan (except in accordance with
Section 13 above), change the category of persons eligible to be Participants,
or materially increase the benefits under the Plan.
No amendment, suspension, or termination of the Plan shall, without the
consent of any affected holders of an Award, alter or impair any rights or
obligations under any Award theretofore granted.
18. Conditions upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not be
issued with respect to any Award unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended,
the rules and regulations promulgated thereunder, any applicable state
securities law, and the requirements of any stock exchange upon which
the Shares may then be listed. The Plan is intended to comply with
Rule 16b-3, and any provision of the Plan which the Committee
determines in its sole and absolute discretion to be inconsistent with
said Rule shall, to the extent of such inconsistency, be inoperative
and null and void, and shall not affect the validity of the remaining
provisions of the Plan. The Committee shall have the power to amend
the Plan to conform the Plan with Rule 16b-3.
(b) Special Circumstances. The inability of the Company to obtain approval
from any regulatory body or authority deemed by the Company's counsel
to be necessary to the lawful issuance and sale of any Shares
hereunder shall relieve the Company of any liability in respect of the
non-issuance or sale of such Shares. As a condition to the exercise of
an option or SAR, the Company may require the person exercising the
Option or SAR to make such representations and warranties as may be
necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the discretionary
authority, subject to compliance with applicable regulations, to
impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority
to impose a right of first refusal or to establish repurchase rights
or both of these restrictions.
<PAGE>
19. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
20. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options and/or
SARs shall be subject to the Participant's satisfaction of all applicable
federal, state, and local income and employment tax withholding obligations. The
Committee, in its discretion, may permit the Participant to satisfy the
obligation, in whole or in part, by irrevocably electing to have the Company
withhold Shares, or to deliver to the Company Shares that the Participant
already owns, having a value equal to the amount required to be withheld. The
value of Shares to be withheld, or delivered to the Company, shall be based on
the Market Value of the Shares on the date the amount of tax to be withheld is
to be determined. As an alternative, the Company may retain, or sell without
notice, a number of such Shares sufficient to cover the amount required to be
withheld.
21. No Employment or Other Rights.
In no event shall an Employee's or Director's eligibility to participate or
participation in the Plan create or be deemed to create any legal or equitable
right of the Employee, Director, or any other party to continue service with the
Company, the Bank, or any Affiliate of such corporations. Except to the extent
provided in Paragraphs 6(b) and 9(a), no Employee or Director shall have a right
to be granted an Award or, having received an Award, the right to again be
granted an Award. However, an Employee or Director who has been granted an Award
may, if otherwise eligible, be granted an additional Award or Awards.
22. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of
the State of Indiana, except to the extent that federal law shall be deemed to
apply.
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