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, 1997
[ ] 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. [ ]
Aggregate market value of voting stock held by non-affiliates of the
registrant, as of December 26, 1997: $72,968,495.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of December 26, 1997:
3,390,953 shares of Common Stock, par value $1.00 per share
Documents Incorporated by Reference:
Portions of the definitive Proxy Statement for the 1998 Annual Meeting
of Stockholders (Part III) and the Annual Report to Stockholders for the year
ended September 30, 1997 (Parts II and IV).
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 five 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, 1997, the Company had repurchased
25,656 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
six 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.
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 thrift institutions 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.
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 8 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's 1997 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, 1997, 1996, and 1995 refer
to page 6 of Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company's 1997 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, 1997, 1996, and 1995 refer to page 9 of Management's Discussion and Analysis
of Financial Condition and Results of Operations in the Company's 1997 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.
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, 1997, the Bank originated
$62,904,000 of residential loans of which $60,126,065 were five- to 30-year
fixed-rate mortgages and $2,777,935 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, 1997, 1996, and 1995 (in thousands).
September 30,
- --------------------------------------------------------------------------------
1997 1996 1995
- ----------------------- --------------------- ----------------------------------
Fixed Adjustable Fixed Adjustable Fixed Adjustable
- --------- ------------ --------- ------------ ----------- ----------------
$180,631 $59,025 $154,416 $73,159 $133,508 $89,221
75.4% 24.6% 67.9% 32.1% 59.9% 40.1%
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, 1997, the average
contractual maturity of the Bank's portfolio of fixed-rate loans was 11 years
and 4 months, and 19 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.
Commercial Real Estate Loans
Federal laws and regulations permit a federally-chartered savings
institution to make commercial real estate loans. From September 30, 1996, to
September 30, 1997, commercial real estate loans increased from $7,476,884 to
$7,850,076, with the percentage of commercial real estate loans to total loans
remaining at 3.30%. 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 recent
changes in the tax laws. These loans are often at adjustable interest rates that
generally are higher than the rates offered on mortgage loans.
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, 1997. The estimated maturity reflects
contractual terms at September 30, 1997. 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.
Years Ended September 30
-----------------------------------------
1999- 2003 and
1998 2002 thereafter Total
------- -------- ------------ ---------
(In thousands)
Type of Loan:
Construction loans --
residential real estate $ 5,197 $ - $ - $ 5,197
Real estate loans:
Mortgage-residential 57,995 45,860 110,786 214,641
Commercial 3,325 3,375 382 7,082
Installment loans --
consumer 8,701 2,776 1,259 12,736
-------- -------- ----------- ---------
Total $75,218 $52,011 $112,427 $239,656
======== ======== =========== =========
The following table sets forth the estimated maturity of the Bank's loan
portfolio on and after one year from September 30, 1997, in the categories of
fixed rate and adjustable rate.
Cash Flows of Loans
October 1, 1998 and thereafter
- ---------------------------------
Fixed Adjustable Total at September 30, 1997
- ---------------- --------------- --------------------------------
$112,840 $51,598 $164,438
Loan Portfolio Composition
The following table sets forth the composition of the Bank's loan portfolio
by type of security 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.
<TABLE>
1997 1996 1995 1994 1993
------------------- ------------------ ------------------ ----------------- ----------------
TYPE OF SECURITY AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- ------- --------- -------- --------- -------- -------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential:
Single family units $217,528 90.8% $207,028 91.0% $203,211 91.2% $195,525 91.7% $188,135 91.9%
2-4 family units 1,541 0.6% 1,234 0.5% 1,008 0.4% 1,006 0.5% 654 0.3%
Over 4 family units 2,813 1.2% 2,769 1.2% 1,738 0.8% 1,835 0.8% 1,751 0.9%
Commercial real estate 4,269 1.8% 4,006 1.8% 3,696 1.7% 2,729 1.3% 2,344 1.1%
Land acquisition and
development 769 0.3% 702 0.3% 838 0.4% 438 0.2% 560 0.3%
Consumer and other loans 11,915 5.0% 10,959 4.8% 11,337 5.1% 10,931 5.1% 10,441 5.1%
Loans on deposits 821 0.3% 877 0.4% 901 0.4% 860 0.4% 888 0.4%
----------- ------- --------- ------- --------- ------ --------- ------ --------- ------
239,656 100.0% 227,575 100.0% 222,729 100.0% 213,324 100.0% 204,773 100.0%
----------- ------- --------- ------- --------- ------ --------- ------ --------- ------
Less:
Undisbursed portion
of loans 2,444 2,717 2,237 1,971 1,762
Deferred loan fees and
discounts 1,070 959 916 988 893
----------- --------- --------- ---------- ---------
3,514 3,676 3,153 2,959 2,655
----------- --------- --------- ---------- ---------
Total loans receivable 236,142 223,899 219,576 210,365 202,118
Allowance for losses
on loans 887 888 912 1,035 1,025
----------- ---------- --------- ---------- ---------
Net loans $235,255 $223,011 $218,664 $209,330 $201,093
=========== ========== ========= ========== =========
</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
--------------------------------------
1997 1996 1995
---------- ---------- -----------
(Dollars in thousands)
Mortgage loans originated
for the purpose of:
Construction-commercial $ - $ 995 $ -
Construction-residential 9,120 6,582 7,069
Purchase/refinance-commercial 618 1,905 1,910
Purchase/refinance-residential 53,374 51,926 41,376
Consumer and other loans originated 9,462 6,837 9,160
---------- ---------- -----------
Total loans originated 72,574 68,245 59,515
---------- ---------- -----------
Loans purchased - - -
---------- ---------- -----------
72,574 68,245 59,515
---------- ---------- -----------
Principal repayments 60,368 64,146 50,316
---------- ---------- -----------
Other:
Provision for losses on loans 50 9 50
Amortization of loan fees (271) (368) (412)
Loan foreclosures, net 183 111 228
---------- ---------- -----------
(38) (248) (134)
---------- ---------- -----------
Total credits, net 60,330 63,898 50,182
---------- ---------- -----------
Net increases in mortgage and other
loans receivable, net $12,244 $ 4,347 $ 9,333
========== ========== ============
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
------- -------- ---------- ------ ------ --------- ------ ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One to four 31 $1,187 0.54% 8 $298 0.14% 30 $671 0.31%
family
Consumer 18 192 1.51% 9 74 0.58% 14 94 0.74%
==== ========== ==== ======= ==== ========
Total 49 $1,379 0.58% 17 $372 0.16% 44 $765 0.32%
==== ========== ==== ======= ==== ========
</TABLE>
The following table sets forth the Bank's nonperforming assets at
the dates indicated:
At September 30,
------------------------------------------
1997 1996 1995 1994 1993
------ ------- ------- -------- ---------
(Dollars in thousands)
Nonaccrual loans $658 $814 $765 $1,020 $866
Loans past due 90 days and
still accruing 64 88 99 49 87
------ ------- ------- -------- ----------
722 902 864 1,069 953
Real estate owned, net
of allowance - 110 47 25 106
------ ------- ------- -------- ----------
Total nonperforming
assets $722 $1,012 $911 $1,094 $1,059
====== ======= ======= ======== ==========
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
1997, if nonaccrual loans had been current in accordance with their original
terms, approximated $38,000. Interest income recognized on such loans for the
year ended September 30, 1997, approximated $25,000.
The 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, 1997, loan balances were classified by the Bank as
follows:
Loss $ 11,567
Doubtful -0-
Substandard 808,459
Special Mention 605,383
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, 1997, the allowances for losses on loans and real
estate owned were $886,567 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,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
----------------------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable to:
Residential Mortgage Loans $ 9 91.7% $ 19 91.8% $ 42 92.2% $ 20 92.6% $ 177 92.4%
Commercial Real Estate Loans - 3.0% - 3.0% - 2.0% 140 1.3% 140 1.1%
Consumer Loans 2 5.3% - 5.2% 30 5.8% 42 6.1% 15 6.5%
Unallocated 875 868 840 832 693
-----------------------------------------------------------------------------
Total $ 886 100.0% $887 100.0% $912 100.0% $1,034 100.0% $1,025 100.0%
-----------------------------------------------------------------------------
</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) 1997 1996 1995 1994 1993
------ ------ -------- -------- ----------
Balance of loan loss allowance at
beginning of year $887 $912 $1,034 $1,025 $895
Charge-offs
Residential - - 153 5 1
Commercial real estate - - - - -
Commercial - - - - -
Consumer 84 55 47 30 45
------ ------ -------- -------- ----------
Total Charge-offs 84 55 200 35 46
------- ------ -------- -------- ----------
Recoveries
Residential - - - - -
Consumer 33 21 28 21 22
------ ------ -------- -------- ----------
Total Recoveries 33 21 28 21 22
------ ------ -------- -------- ----------
Net Charge-offs (Recoveries) 51 34 172 14 24
Provision for loan losses 50 9 50 23 154
------ ------ -------- -------- ----------
Balance of loan loss allowance at
end of year $886 $887 $ 912 $1,034 $1,025
====== ====== ======== ======== ==========
Ratio of net charge-offs to average
loans outstanding 0.02% 0.02% 0.08% 0.01% 0.02%
<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, 1997, the Bank's ratio of liquid assets to total assets was 13.0%,
which exceeds the regulatory requirement.
At September 30,
-------------------------------------------
1997 1996 1995
------------- ------------- --------------
Interest-bearing deposits and
certificates of deposit (1) $ 8,714,990 $ 7,823,900 $ 8,190,942
U.S. government and federal
agency securities
Held to maturity 8,000,000 13,175,118 26,987,247
Available for sale 19,822,410 20,590,450 6,966,562
Mortgage backed securities
Held to Maturity 498,823 630,503 794,328
Stock in FHLB of Indianapolis 2,062,200 2,004,400 1,941,100
Other
Held to maturity 757,855 455,414 1,158,980
Available for sale 8,645,390 5,295,565 4,103,300
------------- ------------- -------------
Total investments $48,501,668 $49,975,350 $50,142,459
============= ============= =============
- ----------------------------------
(1)In FHLB of Indianapolis ($7,738,990) and insured certficates of deposit
($976,000) at September 30, 1997; in FHLB of Indianapolis at September 30, 1996;
in FHLB of Indianapolis ($7,800,686) and insured certificates of deposit
($390,256) at September 30, 1995.
The following table sets forth information regarding the maturity
distribution of investment securities at September 30, 1997, and the weighted
average yield on those securities.
<TABLE>
At September 30, 1997
----------------------------------------------------------------------
Available for Sale Held to Maturity
---------------------------------- -----------------------------------
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 $ 3,321,375 5.60% $ 3,326,153 $2,075,000 5.37% $2,065,967
Due after one through five years 14,787,543 5.79% 14,823,974 6,290,000 5.36% 6,266,561
Due after five through ten years 5,658,899 7.08% 5,681,031 367,855 5.93% 382,524
Due after ten years 2,015,504 7.70% 2,072,688 25,000 6.50% 25,000
------------- ------------- ------------- -------------
25,783,321 25,903,846 8,757,855 8,740,052
Mortgage-backed securities - - - 498,823 9.58% 523,035
Marketable equity securities 2,563,954 2,563,954 - -
------------- -------------- ------------- -------------
$28,347,275 $28,467,800 $9,256,678 $9,263,087
============= ============== ============= =============
</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, 1997, maturing during the next five years
and thereafter see the Notes to Consolidated Financial Statements in the
Company's 1997 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, 1997
----------------------
3 months or less $ 5,598,526
3-6 months 2,815,865
6-12 months 5,704,785
over 12 months 3,247,415
--------------
Total $17,366,591
==============
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. The Bank had no advances at September 30, 1997. As of September 30, 1996,
and 1995 the Bank had outstanding advances to the FHLB of Indianapolis of -0-
and $1,000,000 respectively.
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
--------------------------------
1997 1996 1995
---------- --------- ----------
Average balance of total borrowings..............$2,412,000 $ 723,000 $ 279,000
Highest month-end balance of total borrowings... 3,292,639 1,000,000 1,000,000
Weighted average interest rate of total borrowings 4.85% 5.83% 5.83%
At September 30
------------------------------
1997 1996 1995
---------- ------- -----------
Advances from FHLB of Indianapolis............... $ - $ - $1,000,000
Reverse Repurchase agreements..................... 3,162,400 - -
----------- ------ -----------
Total borrowings..................................$3,162,400. $ - $1,000,000
=========== ====== ===========
Weighted average interest rate................. 5.31% - 5.83%
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, 1997, the Bank's trust department assets totaled
approximately $43,699,000 including self-directed IRA accounts, and it was
offering a variety of trust services including estate planning. As of that date,
the trust department was administering approximately 765 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 Individual Retirement Accounts ("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, 1997 and 1996, PFSI
recorded total income of $41,094 and $36,851, respectively, with net income for
such periods amounting to $15,538 and $13,411, 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, 1997, the Bank employed 78 persons on a full-time basis
and 8 persons on a part-time basis. A comprehensive employee benefits program is
maintained which provides hospitalization and major medical insurance,
retirement income, life insurance and disability insurance which is provided
under the Bank's pension program. The Bank also maintains an Employee Stock
Ownership Plan for the benefit of its employees which provides for distributions
of an employee's vested portions upon retirement, disability, death or
termination of employment. 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. 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
Federal Reserve Board. 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,
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 current Congress and
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, 1997, of $2,062,200.
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, 1997, the Bank had no advances outstanding. See "Business of the
Company--Deposit Activity and Other Sources of Funds" and "--Borrowings."
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than 4% of its net
withdrawable savings deposits plus short-term borrowings. Monetary penalties may
be imposed for failure to meet 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, 1997, the Bank was in compliance with its QTL
requirement and met the definition of a domestic building and loan association.
Uniform Lending Standards. Under OTS regulations, savings institutions
must adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation and
approval and reporting requirements. The real estate lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators.
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%, (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one to four-family properties, the supervisory
limit is 85%; and (v) for loans secured by other improved property (e.g.,
farmland, completed commercial property and other income-producing property
including nonowner-occupied, one to four-family property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for owner
occupied, one to four-family and home equity loans, the Interagency Guidelines
state that for any such loan with a loan-to-value ratio that equals or exceeds
90% at origination, an institution should require appropriate credit enhancement
in the form of either mortgage insurance or readily marketable collateral.
The Interagency Guidelines state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits, based on the support provided by other credit
factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multifamily and other
non-one to four-family residential properties should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain categories
of loans including loans insured or guaranteed by the U.S. government and its
agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of a state government, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured without
the advancement of new funds, loans that are renewed, refinanced or restructured
in connection with a workout, loans to facilitate sales of real estate acquired
by the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral
Management believes that the Bank's current lending policies conform to the
Interagency Guidelines and that the Interagency Guidelines will have no material
effect on its lending activities.
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).
<PAGE>
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.
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, 1997, the Bank exceeded all regulatory minimum capital
requirements as indicated in the table below.
Dollars in Thousands
Actual Required Excess
Amount % Amount % Amount %
Tangible capital $34,080 12.00% $4,261 1.5% $29,819 10.50%
Core capital 34,080 12.00 8,523 3.0 25,557 9.00
Risk-based capital 34,955 24.67 11,334 8.0 23,621 16.67
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.
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.
<PAGE>
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, 1997, 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, 1997, 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, 1997, 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.
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.
<PAGE>
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 awareness. 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.
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.
Quantitative and Qualitative Disclosures about Market Risks. Since the
assets of Peoples Federal, primarily long-term, fixed rate loans, reprice much
more slowly than its liabilities, Peoples Federal is at risk of losing value and
income in a period of rising interest rates. Due to the lack of customer demand
for adjustable rate loans in the current market, approximately 75% of Peoples
Federal's loan portfolio is made up of fixed rate loans. The Bank attempts to
mitigate the risks of this long-term portfolio by limiting the maturities to 15
years. The Bank also has emphasized the origination of consumer loans and
adjustable rate or balloon rate mortgage loans.
The OTS performs an analysis of Peoples Federal's interest rate risk on a
quarterly basis, based on information reported to them in schedule CMR. The
results of this analysis at September 30, 1997 are presented in the following
table. (dollars in thousands)
Change Net Portfolio Value NPV as % of PV of Assets
--------------------------------------- ---------------------------
in Rates $ Amount $ Change % Change NPV Ratio Change
- ---------- ------------- ------------ ------------ -------------- -----------
+400 bp 22,411 (21,410) -49% 8.39% -651 bp
+300 bp 28,240 (15,581) -36% 10.29% -460 bp
+200 bp 34,003 (9,818) -22% 12.08% -282 bp
+100 bp 39,396 (4,425) -10% 13.66% -123 bp
0 bp 43,821 14.90%
- -100 bp 46,396 2,574 6% 15.55% +66 bp
- -200 bp 47,503 3,682 8% 15.78% +88 bp
- -300 bp 48,959 5,138 12% 6.09% +120 bp
- -400 bp 51,640 7,819 18% 16.73% +184 bp
This chart illustrates, for example, that a 200 basis point (2%) increase in
interest rates would result in a $9.8 million (or 36%) decrease in the net
portfolio value of Peoples Federal's assets. This hypothetical increase in
interest rates would also result in a 282 basis point (or 2.82%) decrease in the
ratio of the net portfolio value to the present value of Peoples Federal's
assets.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
Item 2. Properties
The Bank owns six 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, 1997.
Full Service Net Book
Offices Date Opened Value(1)
---------- ----------- --------
Main Office, Auburn 1973 $177,520
Avilla 1980 131,852
Garrett 1972 59,178
Columbia City 1971 139,929
Kendallville 1941 495,246
LaGrange 1972 180,881
(1) Of real estate at September 30, 1997.
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, 1997, was $1,712,774.
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.
<PAGE>
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, 1997, for the information required by this
Item, which is hereby incorporated by reference.
Item 6. Selected Financial Data
Reference is made to page 12 of the Company's Annual Report to Stockholders
for the year ended September 30, 1997, 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 11 of the Company's Annual Report to
Stockholders for the year ended September 30, 1997, 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 13 to 26 of the Company's Annual Report to
Stockholders for the year ended September 30, 1997, 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 1998 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 6 - 10 of the Company's definitive Proxy
Statement for the 1998 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 1998 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 1998 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, 1997, are filed as part of this
report:
1. Financial Statements
o REPORT OF GEO. S. OLIVE & CO. LLC, INDEPENDENT AUDITORS.
o CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - AS OF SEPTEMBER 30, 1997,
AND 1996.
o CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1997,
1996, AND 1995.
o CONSOLIDATED STATEMENT OF CHANGE IN STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED SEPTEMBER 30, 1997, 1996, AND 1995.
o CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30,
1997, 1996, AND 1995.
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 (1)
10.2(a) Amendment No. 1 to Employment Agreement of Roger J. Wertenberger(1)
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)
Exhibit No. Description of Exhibit
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)
<PAGE>
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.
<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 29, 1997 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 29, 1997 Roger J. Wertenberger,
Chairman of the Board,
Principal Executive Officer,
and Director
December 29, 1997 Maurice F. Winkler III,
President, and Director
December 29, 1997 Deborah K. Stanger,
Vice President-Chief Financial Officer
December 29, 1997 Robert D. Ball, Director
December 29, 1997 Jack L. Buttermore, Director
December 29, 1997 John C. Harvey, Director
December 29, 1997 Douglas D. Marsh, Director
December 29, 1997 Lawrence R. Bowmar, Director
December 29, 1997 John C. Thrapp, Director
<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
CONTENTS
Letter to Stockholders . . . . . . . . 1
Highlights and Stock Information . . .2
Planning Today For a Better Tomorrow .3
Board of Directors and
Executive Officers . . . . . . . . . .4
Branch Managers and Associates . . . .5
Management's Discussion
and Analysis . . . . . . . . . . . . . 6
Selected Consolidated Financial Data 12
Consolidated Financial Statements . .13
Independent Auditor's Report . . . . .27
Statement of Management's
Responsibility . . . . . . . . . . . 28
Corporate Profile . . . . . Inside Cover
Executive Officers of Bancorp
Roger J. Wertenberger
Chairman of the Board and
Chief Executive Officer
Maurice F. Winkler, III
President and
Chief Operating Officer
Carole J. Leins
Corporate Secretary
Independent Auditors
Geo. S. Olive & Co. LLC
201 North Illinois Street
Indianapolis, IN 46204
Legal Counsel
Manatt, Phelps & Phillips
1200 New Hampshire Avenue N.W.
Suite 200
Washington, D.C. 20036
Transfer Agent
Fifth Third Bank
Corporate Trust Administration
38 Fountain Square Plaza
Cincinnati, OH 45263
TEL: 513-579-6016
800-336-6782
FAX: 513-744-6785
CORPORATE PROFILE
Peoples Bancorp (the Company) is a holding company formed in 1990. It's stock
is traded on NASDAQ National Market System under the symbol PFDC.
The Company's primary asset is Peoples Federal Savings Bank of Dekalb ounty(the
Bank). The Bank was formed in 1925 and has grown to assets of more than $290
million.
The Bank's Main office is located in Auburn, Indiana with full service offices
in Avilla, Columbia City, Garrett, Kendallville and LaGrange.
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
Securities 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 46706. As of the
close of business on September 30, 1997, the Company had approximately 1,500
stockholders.
ANNUAL MEETING
The annual meeting of stockholders of Peoples Bancorp will be held Wednesday,
January 14, 1998 at 2:00 p.m. at Greenhurst Country Club, 1740 North Main
Street, Auburn, Indiana 46706.
ABOUT THE COVER
Investing in our customers and the communities we serve" is this year's 1997
Annual Report theme. On the cover: (top left) Richard Lewton, Branch Manager,
delivers mortgage papers to a customer; (top right) Branch Manager, Kay Smith,
working with Hertha Moran, Garrett Librarian, a recipient of donation support;
(lower left) Clark Ream, Branch Manager and long term park board member,
visiting with Kendallville Mayor, Larry McGahen, at the newly landscaped park
garden; (lower right) Branch Manager, Andy Anderson, delivering mortgage
papers with the Scott Gates family in Columbia City.
<PAGE>
TO OUR STOCKHOLDERS:
We are pleased to report net income for the fiscal year of $4,202,192,
an increase of 30% over the $3,212,458 earned during the same period one year
ago. However, we must remember the F.D.I.C. assessment in fiscal 1996 reduced
our after-tax income by approximately $893,000.
Capital now stands at $44.3 million, which gives the Bancorp a net
worth to asset ratio of 15.24%. The return on average assets (ROA) was 1.47%,
and the return on equity (ROE) was 9.69%. Your Board of Directors has taken
steps to improve the ROE, such as renewing the Stock Repurchase Plan. During the
past fiscal year, we repurchased 64,170 shares of common stock at a cost of
$1,360,208. Cash dividends of $0.41 per share ($1,391,751) were paid during the
year. This was the tenth consecutive year that the cash dividends have been
increased.
An investment in Peoples Bancorp continues to be rewarding to
shareholders. A stock split in the form of a stock dividend was declared in
October, 1997. One additional share of common stock was issued for each two
outstanding shares to stockholders of record on November 7, 1997.
Assessing the needs of our market area has led us to several expansion
projects. We expect to have a new ATM and debit card service for our customers
by early 1998, and we are in the process of securing a second banking location
in the Columbia City area. This new location will provide additional convenience
for our customers in that area.
During the past year, Max E. Robart retired as Executive Vice President. Mr.
Robart had been with Peoples since 1984, and his banking career spanned 41
years. We thank him for his years of service, as his influence upon the Bank
will be long felt. Jay Grate was promoted to Vice President of Lending
Operations upon Mr. Robart's retirement. Mr. Grate has worked in the Bank for
the past ten years in several lending areas.
Donald E. Budd was hired in 1997 as Vice President and Trust Officer.
He will service the trust needs of our client base, as well as develop new trust
business for the Bank. Budd has 21 years of experience in the banking industry,
the past six years specializing in trust, estate planning, and investment
services. Mr. Budd was formerly vice president and trust officer of Citizens
Bank of Kentucky.
Effective January 1998,Jack L. Buttermore, a valued and trusted advisor,
will retire from the Board of Directors after 17 years of service. Mr.
Buttermore was first elected to the Board of Peoples Federal Savings Bank in
1980. His wise and valuable contributions have helped guide the Bank to the
position of strength and stability it holds today. Mr. Buttermore will continue
to serve the Bank as a Director Emeritus.
On behalf of the Board of Directors, we would like to thank you--our
stockholders, customers, and fellow employees for your continued confidence and
support.
<PAGE>
Information listed below has been adjusted for stock split
Market Price Dividends
--------------------------
Low High Per Share
------------ ----------- ----------
Fiscal 1996
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
Fiscal 1996
1st QTR $ 13.50 $ 14.83 $0.09
2nd QTR 12.50 13.92 0.09
3rd QTR 12.50 14.00 0.09
4th QTR 12.83 13.50 0.10
The price of PFDC stock traded on NASDAQ on November 25, 1997
was $23.00
This page also included graphs depicting comparisons of total assets, net loans,
stockholder's equity, and dividends per share for the years 1992 through 1997.
<PAGE>
Planing Today for a Better Tomorrow
Peoples Federal produced excellent results in 1997 as this annual report shows,
continuing on its course of achieving customer satisfaction through a sound
offering of products and services. Peoples launched new products to improve
existing services and made plans for changes ahead in 1998, all with an eye
toward improving customer service.
Our promise is to invest in the technology and people necessary to
prepare for the future while maintaining a strong financial picture for the
present. The bank will continue to grow steadily for the long run while
producing results for our stockholders, customers, and the communities we serve
that surpass the competition.
With constant new technology to improve the service we can provide to
our customers, it is truly an exciting time in the banking industry. For 1998,
we plan to continue to build on our strength of local decision making through
the branch network while seeking efficiencies corporate-wide
Initiatives already in progress include:
Introducing Automated Teller (ATM) and Debit Cards;
Establishing a wide-area computer network to electronically link
our branches; and
Implementing a new mortgage processing system.
Peoples Federal is preparing to launch an ATM and debit card service by
early 1998. Customers will be able to tap into the existing network at about
7,000 ATM machines worldwide. Debit cards will give Peoples Federal customers a
convenient way to pay for purchases directly from their checking accounts
without the hassle of writing a check. As an added safety precaution, customers
will be able to add their picture on the card to prevent an unauthorized person
from using the card.
Peoples also plans to install a wide-area network to enable our offices
to work together better by sharing information electronically. The network, to
be completed in `98, will improve communications among the branches, reduce long
distance telephone costs, and most importantly, enhance our customer service.
All of this technology would be wasted if our staff was not ready to
make the most of it. That's why Peoples is also investing in our greatest asset,
our employees, through computer training and product knowledge, so they are
ready to make a smooth transition to the new systems and promote the products.
Peoples continues to gain mortgage customers in each of the areas we
serve sparked by a strong local economy. Whether it is the new Noble Hawk
subdivision in Kendallville, Eagle Glen and Sugar Creek Estates in Columbia
City, Maple Knoll, Maple Glen, and Baltimore Place in Garrett, Hunter's Glen or
the soon-to-be-constructed Bridgewater development in Auburn, all of the areas
Peoples serves are experiencing a new housing surge, which gives us the
opportunity to provide a higher volume of mortgage services. This established
pattern of building is expected to continue for 1998, and Peoples has the
products to serve that market.
While 1998 promises to be a year of exciting improvements, 1997 was
also a year of accomplishments.
A new and dynamic way of presenting checking statements, check imaging,
was fully implemented. The new method of sending our customers images of their
canceled checks along with their statements has been well received. With this
new technology, customers have copies of checks when they need them. All of the
same information as a traditional statement is provided more efficiently with
the added advantage of reducing postage costs.
Peoples celebrated the remodeling of the LaGrange office with an open
house in September. The refurbishing contributes to an efficient, contemporary
facility. We want our customers to enjoy coming to our branches because of the
pleasant atmosphere and friendly service.
Sign improvements were recently made in Avilla, Garrett, and Columbia
City enabling us to promote our new products and special rates. This is
essential to these markets because some customers may not have a daily newspaper
but often drive by the bank.
Expanded and improved training on club checking products, such as Rx
Prescription Advantage and Children's Safety ID Network were added to the club
accounts. The Rx Prescription Advantage provides benefits to checking club
members with discounts at local drugstores by belonging to the plus checking
club. The Safety ID Network enables customers to enter the pictures of children
in a nationwide protection network with a digitized photo and description of a
child by calling a toll-free number. A child's description can be sent anywhere
in the country should the need ever arise.
We're excited about our accomplishments and look forward to the year
ahead, but we'll continue to remember the keystone that has contributed to our
success for more than 70 years: Our commitment is to our customers and the
community.
<PAGE>
This page displayed photographs
of the members of the board Roger J. Wertenberger
of directors, and the Chairman of the Board and Chief Executive
executive officers of the Officer of the Bank, Auburn, Indiana.
bank. 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.
Jack L. Buttermore
Owner of Buttermore Farms, Auburn, Indiana
Director since 1980.
John C. Harvey
Physician, Auburn, Indiana
Director since 1979.
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.
Lloyd M. Cline
Director Emeritus
Jesse A. (Jack) Sanders
Director Emeritus
Russell A. Spice
Director Emeritus
EXECUTIVE OFFICERS OF THE BANK
Roger J. Wertenberger Donald E. Budd
Chief Executive Officer Vice President-Trust Officer
Maurice F. Winkler, III Carole J. Leins
President and Chief Operating Officer Corporate Secretary
Jeffery L Grate Deborah K. Stanger
Vice President-Lending Operations Vice President-Chief
Financial Officer
Herma F. Fields
Vice President-Savings
This page includes a photograph of the Bank's branch managers
ASSOCIATES
Molly Allen o Karyn Alwine o Trisha Arnold o Dewayne Anderson o Trisha Arnold o
Cathy Banet o Vicki Beasley o Cheryl Bherns o Debby Blevins o Lisa Boardman o
Elaine Bolinger o Shane Bowen o Kay Brandon o Susan Branscum o Mona Brown o Don
Budd o Jean Bush o Retha Butler o Michele Carnahan o Chris Coleman o Larry
Cooney o Linda Cummins o Sharleen DeJohn o Herma Fields o Delores Forbes o
Teresa Fox o Mandy Fugate o Scott Gates o Jay Grate o Sheryl Hanes o Bonnie
Harlan o Marilee Harris o Stefanie Harris o CJ Herendeen o Paula Hertsel o
Jennifer Hochstetler o Adina Houser o Courtney Jacobs o Sherry Johnson o Cindy
Jollief o Dixie Jones o Heather Jones o Paula Jones o Heather Kaiser o Mary Ann
Ketzenberger o Rebecca Klingenberger o Lisa LaVergne o Carole Leins o Ann Leis o
Richard Lewton o Helen Lindley o Jodi Manier o Eleanor Manns o Sandra McAfee o
Delara Miller o Gayle Morris o Nadia Mundroff o Donna O'Dell oTrisha Patton o
Linda Plattner oJane Pepple o Kristie Prater o Jenny Pressler o Clark Ream o
Lora Refner o Standing First Row: DeWayne Anderson Karen Reust o Rita Richardson
o Dawn Rieke o Linda Columbia City, Kristie Prater, Avilla, Second Rodebaugh o
Joatta Sayles o Richard Shankle o Monica Row: R. Clark Ream, Kendallville, Kay
Smith Sheets o Kay Shepherd o Diane Slone o Kay Smith o Garrett, Third Row:
Richard Lewton, LaGrange Deborah Stanger o, Brenda Strohm o Cheri Taylor o John
Thrapp o Shalisa Troyer o Patricia Trumbull o Kathy VanAllen o Linda Walker o
Tracy Walker o John Weigel o Mary Welch o Roger Wertenberger o Maury Winkler o
Becky Workman o Monique Zawadzke
Office Locations
Auburn Office--212 West 7th St., Auburn, IN 46706
Avilla Office--105 North Main St., Avilla, IN 46710
Columbia City Office--123-129 S. 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--414-418 S Detroit St., LaGrange, IN 46761
<PAGE>
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, 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 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, 1997, 1996, and 1995.
September 30
-----------------------------
1997 1996 1995
--------- --------- ---------
Weighted average interest rate on:
Loans 8.15% 8.33% 8.17%
Securities 5.89 5.64 5.20
Other interest-earning assets 6.42 6.19 7.19
Combined 7.76 7.85 7.68
Weighted average cost of:
NOW and savings deposits 2.78 2.64 2.61
Certificates of deposit 5.64 5.70 5.59
Borrowings 4.85 5.94 5.73
Combined 4.80 4.79 4.65
Interest rate spread 2.96 3.06 3.03
Net yield on weighted average
interest-earning assets 3.70 3.75 3.70
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, 1997, 1996 and 1995.
At September 30
-------------------------------
1997 1996 1995
---------- --------- --------
Weighted average interest rate on:
Loans 8.34% 8.02% 8.31%
Securities 5.41 5.18 5.19
Other interest-earning assets 6.20 6.81 6.41
Combined 7.89 7.57 7.79
Weighted average cost of:
NOW and savings deposits 2.98 2.80 2.70
Certificates of deposit 5.78 5.72 5.92
Borrowings 5.31 --- 5.83
Combined 4.97 4.89 4.94
Interest rate spread 2.92 2.68 2.85
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, 1997. 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, 1997, 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, 1997
(Dollars in Thousands)
---------------------------------------------------------------------
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
<S> <C> <C> <C> <C> <C> <C>
--------- ------------ ----------- ----------- --------- ---------
Interest earning assets:
Adjustable rate loans $ 15,052 $ 29,351 $ 3,512 $ 6,446 $ - $ 54,361
Fixed rate loans 1,632 2,084 935 3,902 164,006 172,559
Investment securities 11,799 4,881 12,057 9,555 8,147 46,439
Consumer and other loans 1,216 2,571 2,843 3,439 2,667 12,736
--------- ------------ --------- ----------- --------- ---------
Total Assets Subject to Repricing 29,699 38,887 19,347 23,342 174,820 286,095
--------- ------------ --------- ----------- --------- ---------
Liabilities Subject to Repricing:
Certificates of deposit 52,665 52,008 59,385 6,977 - 171,035
N.O.W. and other transaction
accounts 25,670 - - - - 25,670
Passbook accounts 34,564 - - - - 34,564
Money market accounts 10,271 - - - - 10,271
Borrowings 3,162 - 3,162
--------- ------------ ---------- ---------- --------- ----------
Total Liabilities Subject to
to repricing 126,332 52,008 59,385 6,977 - 244,702
-------- ------------ ---------- ---------- --------- ----------
Excess (deficiency) of rate sensitive
assets over rate sensitive
liabilities $(96,633) $ (13,121) $ (40,038) $16,365 $174,820 $41,393
========= ============ =========== =========== ========== ==========
Cumulative excess (deficiency) of rate
sensitive assets over rate
sensitive liabilities $(96,633) $(109,754) $(149,792) $(133,427) $41,393 $41,393
========= ============ =========== =========== ========== ==========
As a % of Total Assets
Subject to Repricing (33.78)% (38.36)% (52.36)% (46.64)% 14.47% 14.47%
</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. 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)
--------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- -------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----------- ---------- --------- ------------- --------- -------- ------------ --------- --------
Interest-earning assets:
Loans(1) $230,278 $ 18,758 8.15% $223,861 $ 18,646 8.33% $218,789 $ 17,877 8.17%
Investment securities 34,992 2,060 5.89 36,655 2,068 5.64 43,261 2,284 5.20
Other interest-earning assets 16,822 1,080 6.42 16,513 1,022 6.19 7,290 524 7.19
----------- ---------- ------------- --------- ---------- ---------
Total interest-earning assets 282,092 21,898 7.76 277,029 21,736 7.85 269,340 20,685 7.68
---------- --------- ---------
Allowance for loan losses (883) (932) (977)
Other assets 3,484 3,796 3,571
----------- ------------- -----------
Total Assets $284,693 $279,893 $271,934
=========== ============= ===========
Interest-bearing liabilities:
NOW and savings deposits $ 70,004 $ 1,949 2.78 $ 70,043 $ 1,846 2.64 $ 72,382 $ 1,892 2.61
Certificates of deposit 166,557 9,402 5.64 163,758 9,341 5.70 157,902 8,819 5.59
Borrowings 2,412 117 4.85 724 43 5.94 279 16 5.73
----------- ---------- ------------- --------- ---------- ---------
Total interest-bearing
liabilities 238,973 11,468 4.80 234,525 11,230 4.79 230,563 10,727 4.65
---------- --------- ---------
Other liabilities 2,358 2,513 1,006
Stockholders' equity 43,362 42,855 40,365
----------- ------------- -----------
Total Liabilities and
Stockholders' equity $284,693 $279,893 $271,934
=========== ============= ===========
Net interest income/spread $ 10,430 2.96 $ 10,506 3.06 $ 9,958 3.03
========== ========= =========
Net yield on interest earning assets 3.70 3.75 3.70
(1) Average balances include nonaccrual balances.
</TABLE>
The Company has supplemented its interest income through purchases of
investment securities when appropriate. Such 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,
---------------------------------------------------------------------------------
1997 vs 1996 1996 vs 1995 1995 vs 1994
---------------------------- -------------------------- --------------------------
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 $457 $(345) $112 $417 $352 $ 769 $1,144 $ 696 $1,840
Mortgage-backed securities (4) - (4) (14) (8) (22) (26) - (26)
Investment securities (86) 82 (4) (371) 177 (194) 274 (84) 190
Other interest-earning assets 20 38 58 581 (83) 498 (267) 258 (9)
-------- ------- ---------- -------- ------- -------- -------- ------- ---------
Total interest income 387 (225) 162 613 438 1,051 1,125 870 1,995
-------- ------- ---------- -------- ------- -------- -------- ------- ---------
Interest expense from:
NOW and savings deposits (1) 104 103 (70) 24 (46) (66) 8 (58)
Certificates of deposit 159 (98) 61 341 181 522 651 1,296 1,947
Borrowings 80 (6) 74 26 1 27 9 - 9
------- ------- ---------- -------- ------- --------- ------- ------- ---------
Total interest expense 238 - 238 297 206 503 594 1,304 1,898
------- ------- ---------- -------- ------- --------- ------- ------- ---------
Net interest income (expense) $149 $(225) $ (76) $316 $232 $ 548 $ 531 $(434) $ 97
======= ======= =========== ======== ======= ========= ======= ======= =========
</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
1.46%, 2.12%, and 1.50% for fiscal years ended September 30, 1997, 1996, and
1995, 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 5%, 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, 1997, the Bank had liquid assets of $43,773,723.
This represents a ratio of liquid assets to total assets of 15.1%.
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 ($7,523,329
at September 30, 1997, all for residential mortgage loans), consumer loan
commitments ($8,808,071 at September 30, 1997, primarily for home equity lines)
and other obligations and expenditures.
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.
During the year ended September 30, 1996, there was a net decrease of
$0.9 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 $4 million. The major sources of cash during the year were the
increase in deposits of $2.3 million and operating activities which provided
$3.8 million.
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.
Results of Operations, Fiscal Year Ended September 30, 1996 Compared to Fiscal
Year Ended September 30, 1995
The Company's net interest income increased to $10,497,586 for the
fiscal year ended September 30, 1996, an increase of $589,987 from 1995. This
increase was a combination of higher interest income partially offset by higher
interest expense. Interest on loans increased $768,543 due to a combination of
higher loan volume and higher rates being charged on loans. Interest income on
securities and other interest earning assets showed an increase of $282,346.
These increases were partially offset by an increase in interest expense of
$502,136 from 1995. This increase was also due to a combination of higher
volumes of deposits and higher rates paid by the Bank on these deposits.
Provision for loan losses decreased $41,234 from $50,058 to $8,824
reflecting an adjustment 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 $10,864 to $640,928 from $630,064 due to
increased service charges on NOW accounts.
Total non-interest expense was $5,930,049, an increase of $1,783,858.
The special assessment from the FDIC accounted for $1,500,870 of this increase.
The balance of the increase was composed of several small increases. Deposit
insurance, excluding the special assessment, increased $13,964 to $531,316 due
to higher volumes of insured deposits.
The effective tax rates for the Company for the years ended 1996 and
1995 were 38.3% and 39.0% 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.
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, and has
planned a program of testing compliance. The Company estimates that the cost to
redevelop, replace or repair its technology will not be material.
Future Accounting Issues
The FASB issued SFAS No. 123 Accounting for Stock- Based Compensation. This
Statement establishes a fair value based method of accounting for stock-based
compensation plans.
The Statement permits a company to continue the accounting for
stock-based compensation prescribed in Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. If a company elects that option,
proforma disclosures of net income (and EPS, if presented) are required in the
footnotes as if the provisions of this Statement had been used to measure
stock-based compensation.
The disclosure requirements of Opinion No. 25 have been superseded by the
disclosure requirements of this Statement.
This Statement is not expected to have a material impact on the
financial statements of the Company.
FASB No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, deals with resolving long-standing
questions about whether transactions should be accounted for as secured
borrowings or as sales. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are considered secured borrowings.
A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange.
This Statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of partial interest, servicing of financial assets, securitization,
transfers or sales type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales," loan syndications and
participation, risk participation in banker's acceptances, factoring
arrangements, transfers of receivables with recourse and extinguishment of
liabilities.
This Statement is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 and
is to be applied prospectively. Earlier or retroactive application is not
permitted.
This Statement is not expected to have a material impact on the
financial statements of the Company.
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 establishesstandards 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
---------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
------------- ------------- ------------- ------------- -------------
Financial Condition Data:
Total assets $290,601,595 $280,011,850 $276,607,771 $266,455,068 $251,116,307
Loans receivable, net 235,255,669 223,011,251 218,663,928 209,330,499 201,092,662
Investments and other
interest-earning assets 46,439,468 47,970,950 47,811,103 44,711,326 43,514,676
Deposits 241,790,139 235,081,440 232,747,018 226,851,009 213,590,085
Borrowed funds 3,162,400 - 1,000,000 - 542,659
Stockholders' equity 44,298,170 42,676,765 41,624,026 38,720,750 36,077,655
For Years ended September 30
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
Operating Data:
Interest income $ 21,897,799 $ 21,736,000 $ 20,685,111 $ 18,689,877 $ 19,298,823
Interest expense 11,467,559 11,229,590 10,727,454 8,829,951 9,146,451
------------- ------------- ------------- ------------- -------------
Net interest income 10,430,240 10,506,410 9,957,657 9,859,926 10,152,372
Provision
for losses on loans 50,000 8,824 50,058 23,746 154,343
------------- ------------- ------------- ------------- -------------
Net interest income
after provision
for losses on loans 10,380,240 10,497,586 9,907,599 9,836,180 9,998,029
Other income 644,164 640,928 630,064 606,722 508,021
Other expenses 4,228,452 5,930,049 4,146,191 4,259,836 4,087,292
------------- ------------- ------------- ------------- -------------
Income before income taxes 6,795,952 5,208,465 6,391,472 6,183,066 6,418,758
Income tax expense 2,593,760 1,996,007 2,492,042 2,424,950 2,571,899
------------- ------------- ------------- ------------- -------------
Net income $ 4,202,192 $ 3,212,458 $ 3,899,430 $ 3,758,116 $ 3,846,859
============= ============= ============= ============= =============
Net income per common share $1.22 $0.91 $1.10 $1.06 $1.09
============= ============= ============= ============= =============
Dividends per common share $0.41 $0.37 $0.31 $0.27 $0.25
============= ============= ============= ============= =============
Other Data:
Average yield on all
interest-earning assets 7.76% 7.85% 7.68% 7.26% 7.96%
Average cost of all interest-
bearing liabilities 4.80 4.79 4.65 4.01 4.40
-------------- ----------- ----------- ------------ -------------
Interest rate spread 2.96% 3.06% 3.03% 3.25% 3.56%
============== =========== =========== ============ =============
Number of full service
banking offices 7 6 6 6 6
Return on assets (net income
divided by average
total assets) 1.47 1.15 1.43 1.45 1.58
Return on equity (net income
divided by average total equity) 9.69 7.50 9.66 10.06 11.10
Dividend payout ratio(dividends
per common share divided by
net income per common share) 33.61 40.66 41.82 25.79 22.70
Equity to assets ratio (average
total equity divided by average
total assets) 15.22 15.37 14.84 14.43 14.21
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Consolidated Balance Sheet
September 30
1997 1996
--------------- ----------------
Assets
Cash and due from banks $ 2,993,154 $ 3,207,845
Interest-bearing deposits 7,738,990 7,823,900
--------------- ----------------
Total cash and cash equivalents 10,732,144 11,031,745
Interest-bearing time deposits 976,000 --
Investment securities
Available for sale 28,467,800 25,886,015
Held to maturity 9,256,678 14,261,035
--------------- -----------------
Total investment securities 37,724,478 40,147,050
Loans 236,142,236 223,898,729
Less: Allowance for loan losses 886,567 887,478
--------------- -----------------
Net loans 235,255,669 223,011,251
Premises and equipment 1,712,774 1,467,764
Federal Home Loan Bank of Indianapolis
stock at cost 2,062,200 2,004,400
Other assets 2,138,330 2,349,640
--------------- ----------------
Total assets $290,601,595 $280,011,850
================ ================
Lbilities
NOW and savings deposits $ 70,539,511 $ 68,344,163
Certificates of deposit 171,250,628 166,737,277
Short-term borrowings 3,162,400 --
Advances by borrowers for taxes
and insurance 1,591 3,450
Other liabilities 1,349,295 2,250,195
--------------- ----------------
Total liabilities 246,303,425 237,335,085
--------------- ----------------
Cmitments and Contingencies
Sckholders' 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--3,391,986 and
3,488,241 3,391,986 3,488,241
Additional paid-in capital 5,263,589 6,527,542
Retained earnings--substantially
restricteded 35,573,293 32,762,852
Net unrealized gain (loss) on secur
available for sale 69,302 (101,870)
--------------- -----------------
Total stockholders' equity 44,298,170 42,676,765
--------------- -----------------
Total liabilities and stockholders
equity $290,601,595 $280,011,850
=============== =================
See notes to consolidated financial statements.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Consolidated Statement of Income
Year Ended September 30
1997 1996 1995
------------- ------------- ------------
Interest Income
Loans $18,758,262 $18,645,609 $17,877,066
Investment securities 2,052,480 2,068,753 2,284,206
Other interest and dividend income 1,087,057 1,021,638 523,839
------------- ------------- ------------
21,897,799 21,736,000 20,685,111
------------- ------------- ------------
Interest Expense
Deposits
NOW and savings deposits 1,948,834 1,845,731 1,892,010
Certificates of deposit 9,401,639 9,340,756 8,819,245
Short-term borrowings 117,086 43,103 16,199
------------- ------------- ------------
11,467,559 11,229,590 10,727,454
------------- ------------- ------------
Net Interest Income 10,430,240 10,506,410 9,957,657
Provision for loan losses 50,000 8,824 50,058
------------- ------------- ------------
Net Interest Income After Provision for
Loan Losses 10,380,240 10,497,586 9,907,599
------------- ------------- ------------
Other Income
Fiduciary activities 54,689 63,089 64,146
Fees and service charges 448,124 445,691 410,179
Other income 141,351 132,148 155,739
------------- ------------- ------------
Total other income 644,164 640,928 630,064
------------- ------------- ------------
Other Expenses
Salaries and employee benefits 2,238,731 2,253,254 2,097,596
Net occupancy expenses 294,372 255,784 254,707
Equipment expenses 229,011 155,863 160,585
Data processing expense 284,328 303,577 294,283
Deposit insurance expense 215,984 2,032,186 517,351
Other expenses 966,026 929,385 821,669
------------- ------------- ------------
Total other expenses 4,228,452 5,930,049 4,146,191
------------- ------------- ------------
Income Before Income Tax 6,795,952 5,208,465 6,391,472
Income tax expense 2,593,760 1,996,007 2,492,042
------------- ------------- ------------
Net Income $ 4,202,192 $ 3,212,458 $ 3,899,430
============= ============= ============
Net Income Per Common Share $1.22 $.91 $1.10
Average Common Shares Outstanding 3,432,177 3,528,675 3,544,157
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) on Total
----------------------------
Number Paid-in Retained Securities Stockholders'
of Shares Amount Capital Earnings Available for Sale Equity
- -------------------------------------------------- ------------- ------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances October 1, 1994 2,363,252 $2,363,252 $8,484,958 $28,052,537 $(179,997) $38,720,750
Exercise of stock options 4,000 4,000 16,000 -- -- 20,000
Repurchase of stock (4,354) (4,354) (77,573) -- (81,927)
Net income for 1995 -- -- -- 3,899,430 -- 3,899,430
Net change in unrealized gain
(loss) on securities available -- -- -- -- 152,480 152,480
for sale
Cash dividends ($0.31 per share) -- -- -- (1,086,707) -- (1,086,707)
-------------- -------------- ------------ ------------- -------------- -----------------
Balances September 30, 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 gain
(loss) on securities -- -- -- -- (74,353) (74,353)
available for sale,
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 171,172 171,172
for sale
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
============== ============= ============= ============= ============= ==================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
Year Ended September 30
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities
Net income $ 4,202,192 $ 3,212,458 $ 3,899,430
Adjustments to reconcile net income to
net cash provided by
operating activities
Provision for loan losses 50,000 8,824 50,058
Depreciation and amortization 255,095 204,083 223,897
Investment securities amortization, net (36,876) (23,481) 35,052
Amortization of deferred loan fees (271,410) (368,361) (412,144)
Deferred income tax 617,401 (385,000) 207,773
Change in
Interest receivable 116,711 (170,033) (216,202)
Interest payable (26,034) (4,603) 111,051
Other adjustments (1,660,388) 1,412,211 21,547
------------ ------------ ------------
Net cash provided by operating activities 3,246,711 3,886,098 3,920,462
------------ ------------ ------------
Investing Activities
Net change in interest-bearing deposits (976,000) 390,256 (373,826)
Purchases of securities available for sale (14,636,858) (22,544,576) (117,678)
Purchases of securities held to maturity (320,000) -- (245,000)
Proceeds from maturities and paydowns
of securities held to maturity 5,342,664 14,688,070 1,262,258
Proceeds from maturities of securities
available for sale 14,929,330 7,620,000 4,000,000
Net change in mutual funds (2,563,954)
Net change in loans (12,205,762) (4,098,609) (9,238,270)
Purchases of premises and equipment (492,605) (65,338) (101,415)
Proceeds from sales of real estate owned 277,254 42,499 235,314
Purchases of Federal Home Loan Bank of
Indianapolis stock (57,800) (63,300) (69,900)
------------ ------------ ------------
Net cash used by investing activities (10,703,731) (4,030,998) (4,648,517)
------------ ------------ ------------
Financing Activities
Net change in
NOW and savings deposits 2,192,329 (2,943,040) (4,773,195)
Certificates of deposit 4,542,405 5,279,885 10,560,392
Short-term borrowings 3,162,400 (1,000,000) 1,000,000
Net change in advances by borrowers for
taxes and insurance (1,859) (76,603) 11,898
Cash dividends (1,377,648) (1,274,539) (1,039,489)
Exercise of stock options -- 17,000 20,000
Repurchase of common stock (1,360,208) (787,500) (81,927)
------------ ------------ ------------
Net cash provided (used) by
financing activities 7,157,419 (784,797) 5,697,679
------------ ------------ ------------
Net Change in Cash and Cash Equivalents (299,601) (929,697) 4,969,624
Cash and Cash Equivalents, Beginning of Year 11,031,745 11,961,442 6,991,818
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $10,732,144 $11,031,745 $11,961,442
============ ============ ============
Additional Cash Flows and Supplementary Information:
Interest paid $11,493,593 $11,231,922 $10,649,528
Income tax paid 1,511,993 2,315,550 2,117,721
</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 and accounts.
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.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
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. 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.
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, 1996 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.
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
shares outstanding during each year. The dilutive effect on earnings per share
from unissued stock option shares is not material.
Reclassifications of certain amounts in the 1996 consolidated financial
statements have been made to conform to the 1997 presentation.
<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, 1997, was
$788,000.
Note 3--Investment Securities
<TABLE>
September 30, 1997
---------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
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 obligation 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
============== ========== =========== =============
</TABLE>
<TABLE>
September 30, 1996
-------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $20,710,594 $36,838 $156,982 $20,590,450
State and municipal obligations 5,346,630 6,981 58,046 5,295,565
-------------- ---------- ----------- -------------
Total available for sale 26,057,224 43,819 215,028 25,886,015
-------------- ---------- ----------- -------------
Held to maturity
Federal agencies 13,175,118 424 156,862 13,018,680
State and municipal obligation 455,414 12,210 -- 467,624
Mortgage-backed securities 630,503 32,809 479 662,833
-------------- ---------- ----------- -------------
Total held to maturity 14,261,035 45,443 157,341 14,149,137
-------------- ---------- ----------- -------------
Total investment securities $40,318,259 $89,262 $372,369 $40,035,152
============== ========== =========== =============
</TABLE>
<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, 1997, 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.
1997
--------------------------------------------------
Held to Maturity Available for Sale
------------------------ -------------------------
Maturity Distributions Amortized Fair Amortized Fair
at September 30 Cost Value Cost Value
----------- ------------ ------------ ------------
Within one year $2,075,000 $2,065,967 $ 3,321,375 $ 3,326,153
One to five years 6,290,000 6,266,561 14,787,543 14,823,974
Five to ten years 367,855 382,524 5,658,899 5,681,031
After ten years 25,000 25,000 2,015,504 2,072,688
----------- ------------ ------------ ------------
8,757,855 8,740,052 25,783,321 25,903,846
Mortgage-backed securities 498,823 523,035 -- --
Marketable equity securities -- 2,563,954 2,563,954
----------- ------------ ------------ ------------
$9,256,678 $9,263,087 $28,347,275 $28,467,800
=========== ============ ============ ============
Securities with a carrying value of $4,037,500 were pledged at September 30,
1997 to secure repurchase agreements. There were no securities pledged at
September 30, 1996.
There were no sales of securities during the year ended September 30, 1997,
1996, or 1995.
Note 4--Loans and Allowance
September 30
1997 1996
-------------- --------------
Real estate loans $221,723,573 $210,541,364
Construction loans 5,196,837 5,197,237
Individuals' loans for household
and other personal expenditures 12,735,795 11,836,185
-------------- --------------
Less: 239,656,205 227,574,786
-------------- --------------
Undisbursed portion of loans 2,443,791 2,717,235
Deferred loan fees and discounts 1,070,178 958,822
-------------- --------------
3,513,969 3,676,057
-------------- --------------
Total loans $236,142,236 $223,898,729
============== ==============
Year Ended September 30 1997 1996 1995
- ------------------------------------------ -------------- ----------------
Allowance for loan losses
Balances, October 1 $887,478 $912,268 $1,034,439
Provision for losses 50,000 8,824 50,058
Recoveries on loans 33,188 21,715 27,851
Loans charged off (84,099) (55,329) (200,080)
-------------- --------------- ----------------
Balances, September 30 $886,567 $887,478 $ 912,268
============== =============== ================
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 114
and No. 118 Accounting by Creditors for Impairment of a Loan and Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures on
October 1, 1995. The adoption of SFAS Nos. 114 and 118 did not have a material
impact on the Company's financial position or results of operations.
Note 5--Premises and Equipment
September 30
1997 1996
-------------------- -----------------
Land $ 356,238 $ 356,238
Buildings 2,565,259 2,561,159
Equipment 1,620,626 1,204,628
-------------------- -----------------
Total cost 4,542,123 4,122,025
Accumulated depreciation (2,829,349) (2,654,261)
-------------------- -----------------
Net $1,712,774 $1,467,764
==================== =================
Note 6--Other Assets and Other Liabilities
September 30
1997 1996
---------------- ------------------
Other assets
Interest receivable
Loans $1,226,393 $1,234,223
Investment securities 566,722 675,603
Foreclosed real estate -- 110,297
Deferred income tax asset -- 100,545
Prepaid expenses and other 345,215 228,972
----------------- --------------------
Total other assets $2,138,330 $2,349,640
================= ====================
Other liabilities
Dividends payable on common stock $ 361,812 $ 347,709
Deferred income tax liability 639,357 --
Accrued deposit insurance premium -- 1,500,872
Accrued expenses and other 348,126 401,614
---------------- ---------------------
Total other liabilities $1,349,295 $2,250,195
================ =====================
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 7--Deposits
September 30
1997 1996
----------------- ----------------------
Demand deposits $ 35,940,976 $ 28,728,351
Savings deposits 34,563,685 39,583,982
Certificates and other time deposits
of $100,000 or more 17,366,591 16,664,414
Other certificates and time deposits 153,668,708 149,828,480
Interest payable 250,179 276,213
----------------- ----------------------
Total deposits $241,790,139 $235,081,440
================= ======================
Certificates and other time deposits maturing in years ending September 30:
1998 $104,673,414
1999 51,082,282
2000 8,302,959
2001 4,127,985
2002 2,848,659
----------------
$171,035,299
================
Note 8--Short-term Borrowings
Securities sold under agreement to repurchase totaling $3,162,400 at September
30, 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 1997 totaled $3,292,639 and the average of such agreements
totaled $2,412,000. The agreements at September 30, 1997 matured on October 1,
1997. There were no outstanding agreements during 1996.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 9--Income Tax
Year Ended September 30
1997 1996 1995
------------- ---------------- ---------------
Income tax expense:
Currently payable:
Federal $1,518,553 $1,809,917 $1,731,032
State 457,806 571,090 553,237
Deferred:
Federal 489,827 (270,000) 186,114
State 127,574 (115,000) 21,659
------------- ---------------- ---------------
Total income tax expense $2,593,760 $1,996,007 $2,492,042
============= ================ ===============
Reconciliation of federal statutory to actual tax expense:
Federal statutory income
tax at 34% $2,310,624 $1,770,878 $2,173,100
Effect of state income taxes 386,351 301,019 379,431
Other, net (103,215) (75,890) (60,489)
------------- ---------------- ---------------
Actual tax expense $2,593,760 $1,996,007 $2,492,042
============= ================ ===============
A cumulative deferred tax liability and asset of $639,357 and $100,545 is
included in other liabilities and other assets at September 30, 1997 and 1996,
respectively. The components of the asset and liability are as follows:
<TABLE>
September 30
1997 1996
-------------- -------------
<S> <C> <C>
Differences in accounting for accrued expenses -- $594,000
Differences in accounting for loan fees $300,842 231,457
Differences in depreciation methods (44,639) (24,389)
Differences in accounting for loan and real estate losses 351,081 351,441
Tax bad debt reserves in excess of base year (964,077) (975,221)
FHLB of Indianapolis stock dividend (78,527) (78,527)
Differences in accounting for pensions and other employee benefits 13,469
Net unrealized (gains) losses on securities available for sale (53,161) 69,340
Other (150,876) (81,025)
-------------- --------------
$(639,357) $100,545
============== ==============
Assets $651,923 $1,259,707
Liabilities 1,291,280) (1,159,162)
-------------- --------------
$(639,357) $ 100,545
============== ==============
</TABLE>
<PAGE>
Retained earnings at September 30, 1997, 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,
1997.
Note 10--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 were as follows:
1997 1996
---------------------------------------
Commitments to extend credit $16,331,400 $11,926,600
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.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 11--Restriction on Dividends
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, 1997, total stockholders'
equity of the Bank was $34,184,090 of which approximately $14,510,000 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, 1997, the Company has repurchased 25,656 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 shareholders of record on November 7, 1997, and will
issue 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.
Note 12--Regulatory Capital
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate actions by the regulatory agencies that, if
undertaken, could have a material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital guidelines
that involve quantitative measures of the Company's and Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
At September 30, 1997, the management of the Bank believes that it meets all
capital adequacy requirements to which it is subject. The most recent
notification from the regulatory agency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. There have been no
conditions or events since that notification that management believes have
changed this categorization.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
September 30, 1997
------------------------------------------------------
Required for Adequate To Be Well
Actual Capital (1) Capitalized(1)
------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (1) (to risk-weighted
assets) $34,955 24.67% $11,334 8.0% $14,167 10.0%
Core capital 1 (to adjusted tangible assets) 34,080 12.00% 8,523 3.0% 17,046 6.0%
Core capital 1 (to adjusted total assets) 34,080 12.00% 8,523 3.0% 14,205 5.0%
(1) As defined by regulatory agencies
</TABLE>
The Bank's tangible capital at September 30, 1997 was $34,080,000, which amount
was 12.00 percent of tangible assets and exceeded the required ratio of 1.5
percent.
Note 13--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 $10,698, $153,848 and $114,070 for
1997, 1996 and 1995. This plan provides pension benefits for substantially all
of the Bank's employees.
The Company has a stock option plan in which 162,000 common shares were reserved
at September 30, 1997, for issuance under the plan. The option exercise price
will 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 are first exercisable is
determined by the Board of Directors, and the terms of the stock options will
not exceed ten years from the date of grant.
The weighted option price at September 30, 1996 and for those options exercised
in 1996 and 1995, was $3.33 per share.
September 30
1997 1996 1995
---------------------------------
Shares under option after restatement for stock split:
Outstanding at beginning of year -- 5,100 11,100
Exercised during the year -- 5,100 6,000
Outstanding and exercisable at end of year -- -- 5,100
=================================
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
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, 1997 and 1996, the Trust owned 50,703 and 49,562 shares of the
Company's common stock, all of which shares have been allocated to employee
accounts. Employees may vote allocated shares, and the trustees may vote
unallocated shares. Plan contributions charged to expense totaled $77,932,
$73,940 and $72,824 for 1997, 1996 and 1995, respectively.
Note 15--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.
Deposits--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
market value.
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
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
1997 1996
---------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 10,732,144 $ 10,732,144 $ 11,031,745 $ 11,031,745
Interest-bearing deposits 976,000 976,000 -- --
Investment securities available for sale 28,467,800 28,467,800 25,886,015 25,886,015
Investment securities held to maturity 9,256,678 9,263,087 14,261,035 14,149,137
Loans 236,142,236 237,213,206 223,898,729 224,376,294
Interest receivable 1,793,115 1,793,115 1,909,826 1,909,826
Stock in FHLB 2,062,200 2,062,200 2,004,400 2,004,400
Liabilities
Deposits 241,539,960 241,467,192 234,805,227 234,919,630
Short-term borrowings 3,162,400 3,162,400 -- --
Interest payable 251,421 251,421 276,304 276,304
Advances by borrowers for taxes and
insurance 1,591 1,591 3,450 3,450
</TABLE>
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 16--Quarterly Results of Operations (Unaudited)
<TABLE>
Average
Provision Common Earnings
Quarter Interest Interest Net Interest For Loan Net Shares Per
Ending Income Expense Income Losses Income Outstanding Share
- ------- ----------- ----------- ------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
=========== =========== ============= =========== ===========
Dec 95 $ 5,426,782 $ 2,855,748 $ 2,571,034 $(36,502) $1,031,209 3,544,347 $0.29
Mar 96 5,511,194 2,800,922 2,710,272 34,739 1,071,819 3,548,097 0.30
Jun 96 5,428,628 2,768,770 2,659,858 17,925 1,027,157 3,522,107 0.29
Sep 96 5,369,396 2,804,150 2,565,246 (7,338) 82,273 3,500,228 0.03
----------- ----------- ------------- ----------- ------------
$21,736,000 $11,229,590 $10,506,410 $ 8,824 $3,212,458
=========== =========== ============= =========== ============
</TABLE>
Note 17--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
1997 1996
--------------- ----------------
Assets
Cash $ 29,525 $ --
Securities purchased from subsidiary
under agreement to resell 4,064,079 4,278,290
Investment in subsidiary 34,184,104 33,123,537
Securities available for sale 6,081,437 5,295,565
Securities held to maturity 215,000 245,000
Interest receivable 87,261 75,925
Other assets 969 6,157
--------------- -----------------
Total assets $44,662,375 $43,024,474
=============== =================
Liabilities
Dividends payable on common stock $ 361,812 $ 347,709
Other 2,393 --
----------------------------------
Total liabilities 364,205 347,709
----------------------------------
Stockholders' equity
Common stock 3,391,986 3,488,241
Additional paid-in capital 5,263,589 6,527,542
Retained earnings 35,573,293 32,762,852
Net unrealized gain (loss) on
securities available for sale 69,302 (101,870)
----------------------------------
44,298,170 42,676,765
----------------------------------
Total liabilities and stockholders' equity $44,662,375 $43,024,474
==================================
<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
Condensed Statement of Income
September 30
1997 1996
----------------------------------
Income
Dividends from subsidiary $3,000,000 $3,500,000
Interest on investments 365,654 296,353
Expenses (57,937) (69,211)
-------------- -----------------
Income before equity in undistributed
income of subsidiary and income
tax expense
3,307,717 3,727,142
Equity in undistributed incom
of subsidiary 927,455 (489,734)
-------------- -----------------
Income before income tax 4,235,172 3,237,408
Income tax expense 32,980 24,950
-------------- -----------------
Net income $4,202,192 $3,212,458
============== =================
Condensed Statement of Cash Flows
<TABLE>
September 30
1997 1996
------------- --------------
<S> <C> <C>
Net cash provided by operating activities $3,294,089 $3,738,114
-------------- ---------------
Cash flows from investing activities:
Purchases of securities available for sale (1,700,919) (2,876,180)
Proceeds from maturities of securities held to maturity 30,000 -
Proceeds from maturities of securities available for sale 930,000 1,620,000
Net change in securities purchased under agreement to resell 214,211 (517,067)
-------------- ---------------
Net cash used by investing activities (526,708) (1,773,247)
-------------- ---------------
Cash flows from financing activities:
Stock options exercised -- 17,000
Stock repurchased (1,360,208) (787,500)
Cash dividends (1,377,648) (1,274,539)
-------------- ---------------
Net cash used by financing activities (2,737,856) (2,045,039)
-------------- ---------------
Net change in cash 29,525 (80,172)
Cash at beginning of year -- 80,172
-------------- ---------------
Cash at end of year $ 29,525 $ --
============== ===============
</TABLE>
<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, 1997 and 1996, 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, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles.
Geo. S. Olive & Co., LLC
Indianapolis, Indiana
October 21, 1997
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
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.
